OF BUILDING
THE FUTURE
WE IMAGINE
S HAR EHO LDE R L E T TE R
TO OUR
SHAREHOLDERS
OVER 160 YEARS, our success has hinged on
two things: delivering outstanding service safely
and reliably, and imagining how we can grow
for the future. These strategies served us well
in 2018, contributing to another strong year.
Our 1,200 employees have built on this legacy with dedication, expertise
and creative thinking. It was a year of key investments in our natural gas
distribution system — which is one of the most modern in the nation; of
anticipating customers’ needs to drive conversions and install natural gas in
our largest multifamily development to date; and of building on our founda-
tion for the future by taking action on our low-carbon initiative, reorganizing
into our new holding company and diversifying into the water business.
(cid:44)(cid:87)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:68)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:404)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:79)(cid:72)(cid:69)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:20)(cid:25)(cid:19)(cid:87)(cid:75)
anniversary on January 7, 2019. Since 1859, NW Natural Gas Company
has grown from serving 49 street lighting customers in Portland, Oregon,
to providing natural gas service to approximately two million people in
Oregon and Washington through 750,000 meters, and distributing water
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(cid:58)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:80)(cid:88)(cid:70)(cid:75)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:20)(cid:25)(cid:3)(cid:71)(cid:72)(cid:70)(cid:68)(cid:71)(cid:72)(cid:86)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:75)(cid:72)(cid:79)(cid:71)(cid:3)(cid:73)(cid:68)(cid:86)(cid:87)(cid:3)
to core principles that are embedded in who we are. The innovative
thinking that inspired our founders to invest in a frontier community
and allowed us to transition from manufactured gas to natural gas. The
commitment to safety that drove us to replace all our cast iron and bare
steel pipe. The unwavering service ethic that delivers the highest level
of care to our customers. And the committment to creating long-term
shareholder value.
We know the values
and principles that
have made us
successful in our
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be critical as we
create the next
chapter in our
history.
President and CEO David Anderson
at the New York Stock Exchange on
NW Natural’s 160th Anniversary.
1
S H A R E H O L D E R L E T T E R
2018
HIGHLIGHTS
• Reported 2018 consolidated net income of $64.6 million
or $2.24 per share, compared to a net loss of $1.93 per
share for 2017 and adjusted 2017 consolidated net income1
of $2.24 per share.
• Added over 12,500 new natural gas meters for an annual
growth rate of 1.7 percent.
•(cid:3) (cid:41)(cid:76)(cid:79)(cid:72)(cid:71) (cid:87)(cid:75)(cid:72) (cid:403)(cid:85)(cid:86)(cid:87) (cid:58)(cid:68)(cid:86)(cid:75)(cid:76)(cid:81)(cid:74)(cid:87)(cid:82)(cid:81) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79) (cid:85)(cid:68)(cid:87)(cid:72) (cid:70)(cid:68)(cid:86)(cid:72) (cid:76)(cid:81) (cid:68) (cid:71)(cid:72)(cid:70)(cid:68)(cid:71)(cid:72) (cid:87)(cid:82)
recover costs and investments made to support our fastest
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• (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:72)(cid:71) (cid:82)(cid:89)(cid:72)(cid:85) (cid:7)(cid:21)(cid:19)(cid:19) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81) (cid:82)(cid:73) (cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79) (cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86) (cid:87)(cid:82)
support the natural gas utility’s growth, system reliability
and improvements.
1 Adjusted 2017 consoli-
dated EPS is a non-GAAP
measure and excludes
the noncash effects of the
Gill Ranch impairment
of $192.5 million pre-tax
(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:82)(cid:81)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:403)(cid:87)
from tax reform of $21.4
million recognized in 2017.
See Financial Overview on
page 8 for reconciliation.
•(cid:3) (cid:53)(cid:68)(cid:81)(cid:78)(cid:72)(cid:71) (cid:403)(cid:85)(cid:86)(cid:87) (cid:68)(cid:80)(cid:82)(cid:81)(cid:74) (cid:79)(cid:68)(cid:85)(cid:74)(cid:72) (cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) (cid:76)(cid:81) (cid:87)(cid:75)(cid:72) (cid:58)(cid:72)(cid:86)(cid:87) (cid:76)(cid:81) (cid:87)(cid:75)(cid:72)
J.D. Power Gas Utility Residential Customer Satisfaction
(cid:54)(cid:87)(cid:88)(cid:71)(cid:92) (cid:68)(cid:81)(cid:71) (cid:87)(cid:75)(cid:76)(cid:85)(cid:71) (cid:76)(cid:81) (cid:87)(cid:75)(cid:72) (cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17) (cid:58)(cid:72) (cid:68)(cid:79)(cid:86)(cid:82) (cid:72)(cid:68)(cid:85)(cid:81)(cid:72)(cid:71) (cid:87)(cid:75)(cid:72) (cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:86)(cid:87)
(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85) (cid:86)(cid:68)(cid:87)(cid:76)(cid:86)(cid:73)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81) (cid:86)(cid:70)(cid:82)(cid:85)(cid:72) (cid:68)(cid:80)(cid:82)(cid:81)(cid:74) (cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) (cid:76)(cid:81) (cid:87)(cid:75)(cid:72) (cid:58)(cid:72)(cid:86)(cid:87) (cid:76)(cid:81) (cid:87)(cid:75)(cid:72)
J.D. Power Gas Utility Business Customer Satisfaction Study.
• (cid:38)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71) (cid:87)(cid:75)(cid:72) (cid:403)(cid:85)(cid:86)(cid:87) (cid:50)(cid:85)(cid:72)(cid:74)(cid:82)(cid:81) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79) (cid:85)(cid:68)(cid:87)(cid:72) (cid:70)(cid:68)(cid:86)(cid:72) (cid:76)(cid:81) (cid:86)(cid:76)(cid:91) (cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:15)
(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:76)(cid:81)(cid:74) (cid:76)(cid:81) (cid:68)(cid:81) (cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92) (cid:7)(cid:20)(cid:19) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81) (cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:16)(cid:87)(cid:68)(cid:91) (cid:81)(cid:72)(cid:87)
(cid:69)(cid:72)(cid:81)(cid:72)(cid:403)(cid:87) (cid:87)(cid:82) (cid:87)(cid:75)(cid:72) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92) (cid:68)(cid:81)(cid:71) (cid:68) (cid:71)(cid:72)(cid:70)(cid:79)(cid:76)(cid:81)(cid:72) (cid:76)(cid:81) (cid:50)(cid:85)(cid:72)(cid:74)(cid:82)(cid:81) (cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)
customer rates of 2.1 percent when combined with the
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• Reduced residential natural gas customer rates in
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(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79) (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85) (cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:76)(cid:72)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74) (cid:68) (cid:26)(cid:17)(cid:21) (cid:83)(cid:72)(cid:85)(cid:70)(cid:72)(cid:81)(cid:87) (cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)
starting Nov. 1, 2018.
• Completed key aspects of the North Mist gas storage
(cid:72)(cid:91)(cid:83)(cid:68)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81) (cid:15) (cid:82)(cid:81)(cid:72) (cid:82)(cid:73) (cid:87)(cid:75)(cid:72) (cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:86)(cid:87) (cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:86) (cid:76)(cid:81) (cid:82)(cid:88)(cid:85) (cid:75)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:92)(cid:17)
• Reorganized into a holding company structure to allow us to
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(cid:72)(cid:91)(cid:83)(cid:68)(cid:81)(cid:71) (cid:82)(cid:88)(cid:85) (cid:90)(cid:68)(cid:87)(cid:72)(cid:85) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:17)
• (cid:38)(cid:79)(cid:82)(cid:86)(cid:72)(cid:71) (cid:82)(cid:85) (cid:86)(cid:76)(cid:74)(cid:81)(cid:72)(cid:71) (cid:90)(cid:68)(cid:87)(cid:72)(cid:85) (cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86) (cid:87)(cid:75)(cid:68)(cid:87) (cid:86)(cid:72)(cid:85)(cid:89)(cid:72) (cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)
43,000 people through 17,000 connections.
• Increased dividends paid for the 63rd consecutive year,
one of the longest dividend increase records of any
company on the NYSE.
CORPORATE
PROFILE
NW NATURAL HOLDINGS
(NYSE: NWN)
is headquartered in
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a regulated natural gas
distribution company,
(cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:15) (cid:86)(cid:72)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79) (cid:90)(cid:68)(cid:87)(cid:72)(cid:85)
distribution companies through
(cid:76)(cid:87)(cid:86) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:15) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)
(cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:15) (cid:68)(cid:81)(cid:71) (cid:82)(cid:87)(cid:75)(cid:72)(cid:85) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)
interests and activities.
(cid:49)(cid:58)(cid:3)(cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:403)(cid:72)(cid:79)(cid:71)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:76)(cid:70)(cid:76)(cid:68)(cid:81)(cid:3)(cid:38)(cid:68)(cid:85)(cid:76)(cid:3)(cid:61)(cid:76)(cid:80)(cid:80)(cid:72)(cid:85)(cid:80)(cid:68)(cid:81)(cid:3)
(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:17)
3
S HAR EHOLD E R L E T TE R
NW NATURAL GAS
Investing in Safety
As a core value, safety is our greatest
responsibility to our customers, our
employees and the communities
we serve.
In 2018, we strengthened the safety
and capacity of our pipeline system
by investing in reinforcement projects
in our fastest growing service
territory, Clark County, Washington
and in Eugene, Oregon. We also
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gas (LNG) facilities in Portland and
Newport to ensure we can continue
to serve customers on the coldest
winter days, and we completed
inline inspections of our pipelines
to support transmission integrity.
(cid:49)(cid:58)(cid:3)(cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:403)(cid:72)(cid:79)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:90)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)
to meet rigorous safety metrics,
responding to damages and odors
within tight time frames. Field
employees regularly complete
scenario-based training at our
state-of-the-art training center
in Sherwood, Oregon, where they
update their skills, get hands-on
experience and practice responding
to a natural gas emergency. Last
year, we also hosted a number of
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responders in our service territory.
To better enable the company to
continue to operate after an earth-
quake, NW Natural will move in
2020 to a headquarters that is being
built to be operational after a seismic
event. And as part of our facilities
master plan, we continue to upgrade
or replace our other facilities with
seismic resiliency, safety and
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Today, our safety investments extend
beyond our pipelines and facilities
to technologies and expertise that
are critical to protecting our online
systems infrastructure and enhanc-
ing cybersecurity.
4
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(cid:48)(cid:68)(cid:85)(cid:70)(cid:82)(cid:80)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:70)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)
(cid:76)(cid:81)(cid:3)(cid:54)(cid:75)(cid:72)(cid:85)(cid:90)(cid:82)(cid:82)(cid:71)(cid:15)(cid:3)(cid:50)(cid:85)(cid:72)(cid:74)(cid:82)(cid:81)(cid:17)
Driving Growth
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in 2018. In Oregon, where nearly 90 percent of our customers are
located, we saw job and wage growth, low unemployment and strong
in-migration during the past year.
The economic expansion led to strong construction of single-family
homes, and continued development of multifamily buildings in cities
that are focusing on urban density. In 2018, we achieved a 50 percent
year-over-year increase in multifamily meters, which included our
largest individually metered multifamily project to date, installing
natural gas to 385 units in a new development in Northwest Portland.
760,000
UTILITY METERS AT YEAR-END
With a 63 percent residential market share in our service territory,
we also continue to focus on data-driven marketing to proactively target
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proprietary web-based tool, we are able to validate a customer’s interest
in natural gas and easily determine if service is currently available to
their home. We can also
identify neighborhoods
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main extensions and
analyze the cost of
conversion for prospec-
tive customers to ease
the conversion process.
Last year, we converted
over 3,500 meters to
natural gas.
640,000
660,000
680,000
700,000
720,000
740,000
620,000
600,000
580,000
2014
2015
RESIDENTIAL
2016
COMMERCIAL
2017
2018
INDUSTRIAL
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(cid:21)(cid:19)(cid:20)(cid:27)(cid:17)(cid:3)(cid:49)(cid:58)(cid:3)(cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:81)(cid:82)(cid:90)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:90)(cid:82)
(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:72)(cid:82)(cid:83)(cid:79)(cid:72)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:26)(cid:24)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:80)(cid:72)(cid:87)(cid:72)(cid:85)(cid:86)(cid:17)
With a strong economy
and these innovative
tools, we added over
12,500 new meters to
the natural gas system
for an annual growth
rate of 1.7 percent
in 2018.
Number One in Affordability and Customer Satisfaction
Natural gas commodity prices continue to decline nationally, making
natural gas the most affordable fuel choice and boosting our competitive
position and customer satisfaction. In the typical home we serve, natural
gas offers a price advantage of up to 70 percent over an electric or oil
furnace and about a 30 percent advantage over a heat pump.
In November 2018, we were able to pass cost savings on to customers
for the fourth year in a row. The typical Oregon residential customer’s
rates declined by 2.1 percent, even after incorporating the initial increase
from the Oregon general rate case order in 2018. Washington residential
customers saw rates drop 7.2 percent.
Our cost advantage, coupled with high-quality service, continues to
resonate with customers. For the sixth year in a row, customers ranked
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Residential Customer Satisfaction Study. We earned the third highest
score in the nation— the 14th time in 17 years that we scored in the top
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annual business study.
These results are a testament to our customer-centric culture, and I’m
very proud of all of our employees who live our service ethic every day.
Working Productively with Regulators
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After 10 months of review with stakeholders, the Public Utility Commission
of Oregon (PUC) ordered an overall $23.4 million revenue requirement
increase from previous rates effective Nov. 1, 2018. The commission also
approved a $300 million increase in rate base from the last Oregon rate
case in 2012, bringing our total rate base to $1.186 billion.
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(cid:55)(cid:68)(cid:91)(cid:3)(cid:38)(cid:88)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:45)(cid:82)(cid:69)(cid:86)(cid:3)(cid:36)(cid:70)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:56)(cid:38)(cid:3)(cid:85)(cid:88)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:403)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)
NW Natural of about $10 million after-tax.
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2008. We requested an $8.3 million increase to base rates to cover our
costs to operate and maintain the natural gas distribution system in
our fast-growing Washington service territory. Since 2008, Washington
customer rates have declined nearly 40 percent due to lower natural gas
prices. The Washington Public Utility Commission and other stakeholders
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(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:72)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:39)(cid:72)(cid:70)(cid:17)(cid:3)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:17)
Building the Future
With just a single pipeline serving our region, our Mist gas storage facility
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role in ensuring reliable service to our customers since 1989. The value
of this facility was once again proven in October 2018, when a major
pipeline incident in Canada disrupted natural gas service in Canada and
Washington. The Mist facility was a critical resource that allowed us to
serve our customers, as well as other local utilities.
We believe natural gas storage is a crucial asset that can also help our
region transition to a low-carbon future. Stable energy from storage can
S H A R E H O L D E R L E T T E R
be drawn on any time, allowing the
region to integrate more wind and
solar power into the grid while
ensuring reliability. That’s why we
are expanding our storage capacity
with the North Mist project. The
expansion includes providing
about 2.5 billion cubic feet of
available storage, an additional
compressor station and a new
dedicated 13-mile pipeline to
connect NW Natural’s facility to
Portland General Electric’s (PGE)
Port Westward industrial park. PGE
can draw on the facility rapidly to
integrate more wind power into
the grid, knowing they have 24/7
reliable natural gas backup.
To date, we’ve completed the
pipeline and all aspects of
the operation and are in the
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on this one-of-a-kind facility.
We expect the expansion to be in
service by spring 2019, with an
estimated cost of $149 million.
This investment will immediately
be rate-based under an estab-
lished tariff schedule already
approved by the PUC.
The facility is contracted to PGE
for an initial 30-year period, with
renewal options of up to 50 years
beyond that.
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5
S HAR EHOLD E R L E T TE R
CAPITAL EXPENDITURES
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natural gas.
Renewable natural gas is produced from organic materials like wood,
food, agricultural and even human waste. As these materials decom-
pose, they produce methane that can be captured and conditioned to
pipeline quality.
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nearly 50 billion cubic feet of renewable natural gas technical potential
in our state— equivalent to all of Oregon’s residential gas throughput.
This resource gives us a great opportunity to reduce the carbon
intensity of our product and help our communities solve their waste
problems in the process. To that end, we are pleased to be working on
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gas onto our system.
In 2018, a study commissioned by NW Natural and conducted by inde-
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explored how our region could meet dramatic emission reduction goals.
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getting to an 80 percent carbon reduction goal by 2050 will be challenging
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resources, electrifying passenger vehicles, and aggressively developing
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closer look has been taken at how energy needs can be met to serve
homes and businesses on the coldest winter days in the region.
The new research shows that by adding 25 percent renewable natural
gas into the existing natural gas system and delivering it to heat homes,
the region can achieve its climate goals without a substantial build out
of new power plants.
We believe the results validate NW Natural is on the right path by
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natural gas in our supply mix, and by exploring cutting-edge technol-
ogies like Power to Gas.
We look forward to continuing to work with our regulators and other
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$250
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$150
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$50
$0
2014
2015
2016
2017
2018
CUSTOMER
GROWTH
SAFETY AND
RELIABILITY
OTHER
NORTH
MIST
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Creating a
Low-Carbon Future
Environmental stewardship is one of
NW Natural’s core values, and it is
vital to the communities we serve.
Our drive to reduce our carbon
footprint began in the 1980s when
we started replacing our cast iron
and bare steel pipe to create a
tighter system with lower emissions.
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U.S. utilities to adopt a rate struc-
ture that encourages energy
conservation and to institute a
carbon offset program for our
customers. When the North Mist
project comes online in 2019,
we will play a key role in integrating
more renewables into our region’s
energy supply.
But we know we can do even more
to address climate change. That’s
why we launched NW Natural’s Low
Carbon Pathway initiative, setting a
voluntary goal of 30 percent carbon
emissions savings by 2035.
Our plan to reach our goal includes
initiatives within our own operations,
with our customers and in the
transportation sector. Over the past
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opportunities to reduce emissions
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our operations and in our customers’
6
S H A R E H O L D E R L E T T E R
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NW NATURAL WATER
Diversifying into Water
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investment opportunities.
In addition, our core competencies of customer service, developing
and managing critical distribution infrastructure safety and reliably,
environmental stewardship, and constructive regulatory engagement
can be leveraged in the water business.
Executing a Disciplined Strategy
Since 2017, our subsidiary NW Natural Water has acquired four
water distribution utilities, adding about 7,400 connections that serve
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we announced our largest acquisition to date, which would add 9,400
water and wastewater connections in Sunriver, Oregon. This acquisition
is another meaningful step for our growing water business and adds
wastewater expertise to our portfolio.
Once outstanding transactions close, we will have invested nearly
$70 million in the water sector. These acquisitions are expected to be
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We believe the water sector has tremendous investment potential
in the coming years as aging infrastructure will need to be replaced.
We intend to continue our disciplined and focused approach in pursuing
our water strategy.
IMAGINING THE FUTURE
Over the last 160 years, we’ve risen to meet the energy needs of a region
that has evolved from its pioneer roots to a thriving hub for innovation in
technology, engineering and sportswear.
While a lot has changed since 1859, our values and focus on delivering
outstanding service safely and reliably to our customers has been
unwavering.
As we imagine and create our next 160 years, we will hold fast to our
core principles, innovative thinking, commitment to safety, and dedication
to customers and shareholders.
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(cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:41)(cid:68)(cid:79)(cid:79)(cid:86)(cid:3)
(cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:17)
(cid:44)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:72)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3)(cid:92)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:403)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:17)
We look forward to working on your behalf in the year ahead, and for
many years to come.
(cid:39)(cid:68)(cid:89)(cid:76)(cid:71)(cid:3)(cid:43)(cid:17)(cid:3)(cid:36)(cid:81)(cid:71)(cid:72)(cid:85)(cid:86)(cid:82)(cid:81)
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:403)(cid:70)(cid:72)(cid:85)
7
WASHINGTON
ASTORIA
MIST
STORAGE
VANCOUVER
PORTLAND
THE DALLES
TRAINING
CENTER
LINCOLN CITY
NEWPORT
SALEM
ALBANY
EUGENE
OREGON
COOS BAY
KEY
NW NATURAL SERVICE TERRITORY
TRAINING CENTER
REGIONAL RESOURCE CENTER
STORAGE
HEADQUARTERS
Cascadia
Water Company
WASHINGTON
Gem State
Water
Company
Salmon Valley
Water Company
Sunriver Water and
Wastewater Companies
IDAHO
OREGON
Falls Water
Company
FINANCIAL
OVERVIEW
KEY HIGHLIGHTS
(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:403)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:11)(cid:7)(cid:19)(cid:19)(cid:19)(cid:12)(cid:29)
2018
2017
Operating revenues
Net income from continuing operations
Net income (loss)
Adjusted net income
706,143
67,311
64,569
64,569
755,038
72,073
(55,623)
64,4702
COMMON STOCK
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:71)(cid:68)(cid:87)(cid:68)(cid:3)(cid:11)(cid:19)(cid:19)(cid:19)(cid:12)(cid:29)
Average shares outstanding–diluted
Year-end shares outstanding
(cid:51)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:68)(cid:3)(cid:11)(cid:7)(cid:12)(cid:29)
(cid:39)(cid:76)(cid:79)(cid:88)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)
Adjusted diluted earnings
(cid:39)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)
Book value at year-end
Market value at year-end
28,873
28,880
2.24
2.24
1.89
26.41
60.46
28,753
28,736
(1.93)
2.242
1.88
25.85
59.65
NATURAL GAS DISTRIBUTION OPERATING HIGHLIGHTS
Gas deliveries (000 therms)
Margin1 ($000)
(cid:39)(cid:72)(cid:74)(cid:85)(cid:72)(cid:72)(cid:3)(cid:71)(cid:68)(cid:92)(cid:86)
Meters at year-end
Employees at year-end
WATER OPERATING HIGHLIGHTS
Connections at year-end
Employees at year-end
1,128,203
383,696
2,313
750,421
1,167
1,240,293
392,632
3,114
737,874
1,146
7,400
16
-
-
DIVIDENDS PAID ON COMMON STOCK (per share)
Payment date
February
May
August
November
Total dividends paid
$0.4725
0.4725
0.4725
0.4750
$1.8925
$0.4700
0.4700
0.4700
0.4725
$1.8825
2018 NATURAL GAS DISTRIBUTION MARGIN
(cid:11)(cid:37)(cid:92)(cid:3)(cid:38)(cid:79)(cid:68)(cid:86)(cid:86)(cid:12)
NATURAL GAS DISTRIBUTION MARGIN
(cid:11)(cid:76)(cid:81)(cid:3)(cid:7)(cid:19)(cid:19)(cid:19)(cid:12)
DIVIDENDS PAID PER SHARE
(cid:11)(cid:7)(cid:12)
8.0%
27.1%
64.9%
COMMERCIAL
INDUSTRIAL
RESIDENTIAL
$395,000
$390,000
$385,000
$380,000
$375,000
$370,000
$365,000
$360,000
$355,000
$350,000
2014
2015
2016
2017
2018
$1.90
$1.85
$1.80
$1.75
$1.70
$1.65
$1.60
$1.55
2014
2015
2016
2017
2018
Margins from residential and commercial meters
(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:28)(cid:21)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:3)(cid:80)(cid:68)(cid:85)(cid:74)(cid:76)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:17)
(cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:42)(cid:68)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:85)(cid:74)(cid:76)(cid:81)(cid:3)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:7)(cid:27)(cid:17)(cid:28)
million to $383.7 million in 2018.
Annual dividends paid per share in 2018 increased
for the 63rd consecutive year. The current indicated
annual dividend is $1.90 per share.
1 References to the margin refer to natural gas distribution segment.
2 (cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:51)(cid:54)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:42)(cid:36)(cid:36)(cid:51)(cid:3)(cid:403)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:42)(cid:76)(cid:79)(cid:79)(cid:3)(cid:53)(cid:68)(cid:81)(cid:70)(cid:75)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:20)(cid:28)(cid:21)(cid:17)(cid:24)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:82)(cid:85)(cid:3)(cid:7)(cid:20)(cid:23)(cid:20)(cid:17)(cid:24)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3)(cid:7)(cid:21)(cid:20)(cid:17)(cid:23)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:403)(cid:87)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:80)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:72)(cid:73)(cid:82)(cid:85)(cid:80)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:68)(cid:79)(cid:70)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:69)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:73)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:25)(cid:17)(cid:24)(cid:8)(cid:17)(cid:3)(cid:40)(cid:51)(cid:54)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:68)(cid:79)(cid:70)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)
using 28.8 million diluted shares.
8
N W N AT U R A L H O L D I N G S & N W N AT U R A L B O A R D S O F D I R E CTO R S
DAVID H. ANDERSON
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:68)(cid:81)(cid:71) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)
(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79) (cid:43)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:86)
(cid:68)(cid:81)(cid:71) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)
TIMOTHY P. BOYLE
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:68)(cid:81)(cid:71) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)
(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15) (cid:38)(cid:82)(cid:79)(cid:88)(cid:80)(cid:69)(cid:76)(cid:68) (cid:54)(cid:83)(cid:82)(cid:85)(cid:87)(cid:86)(cid:90)(cid:72)(cid:68)(cid:85)
Company
MARTHA L. “STORMY”
BYORUM
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72) (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15)
Cori Investment Advisors, LLC
JOHN D. CARTER
Chairman of the Board,
Schnitzer Steel Industries, Inc.
MARK S. DODSON
(cid:41)(cid:82)(cid:85)(cid:80)(cid:72)(cid:85) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)
(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:15) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)
C. SCOTT GIBSON
President, Gibson Enterprises
TOD R. HAMACHEK
Chairman of the Board,
(cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79) (cid:43)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:86)
(cid:68)(cid:81)(cid:71) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)
JANE L. PEVERETT
Former President and Chief
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72) (cid:50)(cid:73)(cid:403)(cid:70)(cid:72)(cid:85)(cid:15) (cid:37)(cid:85)(cid:76)(cid:87)(cid:76)(cid:86)(cid:75) (cid:38)(cid:82)(cid:79)(cid:88)(cid:80)(cid:69)(cid:76)(cid:68)
Transmission Corporation
KENNETH THRASHER
Chairman of the Board,
Compli Corporation
MALIA H. WASSON
(cid:41)(cid:82)(cid:85)(cid:80)(cid:72)(cid:85) (cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)
Vice President of Commercial
Banking, U.S. Bank
CHARLES A. WILHOITE
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:76)(cid:81)(cid:74) (cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:15) (cid:58)(cid:76)(cid:79)(cid:68)(cid:80)(cid:72)(cid:87)(cid:87)(cid:72)
Management Associates, Inc.
STEVEN E. WYNNE
Independent Director,
(cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)
N W N AT U R A L S E N I O R M A N A G E M E N T
DAVID H. ANDERSON 1
President and
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72) (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
FRANK BURKHARTSMEYER1
Senior Vice President and
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79) (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
LEA ANNE DOOLITTLE
Senior Vice President and
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:36)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72) (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
JAMES DOWNING
Vice President and
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81) (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
SHAWN M. FILIPPI 1,2
Vice President, Chief Compliance
(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85) (cid:68)(cid:81)(cid:71) (cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72) (cid:54)(cid:72)(cid:70)(cid:85)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)
KIMBERLY HEITING
(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85) (cid:57)(cid:76)(cid:70)(cid:72) (cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87) (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
(cid:68)(cid:81)(cid:71) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74) (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
JON HUDDLESTON
Vice President Engineering and
(cid:56)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92) (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
THOMAS J. IMESON
Vice President Public Affairs
JUSTIN B. PALFREYMAN 2
Vice President, Strategy and
Business Development, and
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79) (cid:58)(cid:68)(cid:87)(cid:72)(cid:85)
MELINDA ROGERS
(cid:57)(cid:76)(cid:70)(cid:72) (cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73) (cid:43)(cid:88)(cid:80)(cid:68)(cid:81)
(cid:53)(cid:72)(cid:86)(cid:82)(cid:88)(cid:70)(cid:72)(cid:86) (cid:68)(cid:81)(cid:71) (cid:39)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:87)(cid:92) (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
LORI L. RUSSELL
Vice President Utility Services
MARDILYN SAATHOFF1
Senior Vice President,
Regulation and General Counsel
BRODY J. WILSON1,2
Vice President,
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Controller and Treasurer
1 (cid:36)(cid:79)(cid:86)(cid:82) (cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:86) (cid:68)(cid:87) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79) (cid:43)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:86)(cid:17)
2 (cid:36)(cid:79)(cid:86)(cid:82) (cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:86) (cid:68)(cid:87) (cid:49)(cid:58) (cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79) (cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:17)
9
CORPORAT E IN FOR MATION
NOTICE OF
ANNUAL MEETING
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meeting, you will need to detach and retain the admission ticket attached to your proxy card mailed or emailed to you with the notice of the annual
meeting and the proxy statement. As space is limited, you may bring only one guest to the meeting. If you hold your stock through a broker,
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cation will be required for both you and your guest to enter the meeting.
Dividend reinvestment
and direct stock purchase plan
Participants may make an initial invest-
ment in company stock and common
shareholders of record may reinvest all or
part of their dividends in additional shares
under the company’s plan. Cash purchases
may also be made. Participants in the plan
bear the cost of brokerage fees and com-
missions for shares purchased on the open
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A prospectus will be sent upon request.
COMPARISON OF FIVE-YEAR
CUMULATIVE TOTAL RETURN
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$250
$200
$150
$100
$50
$0
2013
2014
2015
2016
2017
2018
NWN
S&P UTILITIES INDEX
S&P 500 INDEX
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(cid:90)(cid:68)(cid:86)(cid:3)(cid:20)(cid:19)(cid:17)(cid:28)(cid:25)(cid:8)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:3)(cid:9)(cid:3)(cid:51)(cid:82)(cid:82)(cid:85)(cid:267)(cid:86)(cid:3)
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Scheduled dividend payment dates
Subject to Board approval, the following
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February 15, 2019
May 15, 2019
August 15, 2019
November 15, 2019
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he was not aware of any violation by the
company of NYSE’s corporate governance
listing standards, and the company had
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Commission (SEC), as exhibits 31.1 and
31.2 to its Annual Report on Form 10-K
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(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:403)(cid:70)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)
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the company certifying the quality of the
company’s public disclosure. For the year
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31.1 and 31.2 to the Form 10-K included in
this Annual Report.
Contact the NW Natural Holdings Board
Concerns may be directed to the
nonmanagement directors by writing to
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c/o Corporate Secretary.
Forward-looking statements
The statements made in this Annual Report
that are not purely historical, including
statements regarding plans, goals, strat-
egies, success, opportunities, dividends,
(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3)(cid:403)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)(cid:3)(cid:403)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:15)(cid:3)
future events, performance, stability,
continuation of past practices, future
demand or preference for gas, the future
of clean energy and the role of natural
gas in it, renewable natural gas, power to
gas, commodity costs, customer rates and
service, competitive position, revenues,
customer and business growth, capital
expenditures, Mist storage expansion
project, including but not limited to cost
and timelines, emergency preparedness,
cybersecurity, system reliability, safety,
business continuity, environmental
stewardship, regulatory proceedings
and actions, including, but not limited to
our rate case and the timing and results
thereof, rate recovery, effects of regula-
tory mechanisms, the regional economy,
water utility strategy, planned acquisitions
and integration thereof, operating plans
of third parties, technology development,
multifamily sector, system modernization
(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:73)(cid:403)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:72)(cid:74)(cid:76)(cid:86)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)
are forward-looking statements within the
“safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995.
NW Natural’s actual results could differ
materially from those anticipated in these
forward-looking statements as a result of
risks and uncertainties, including those
described in the attached report on Form
10-K. For a more complete description of
these risks and uncertainties, please refer
(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:403)(cid:79)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:38)(cid:3)(cid:82)(cid:81)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:86)(cid:3)(cid:20)(cid:19)(cid:16)(cid:46)
and 10-Q.
Request for publications
The following publications may be obtained
without charge by contacting the Corporate
(cid:54)(cid:72)(cid:70)(cid:85)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)(cid:3)(cid:68)(cid:87)(cid:3)(cid:49)(cid:58)(cid:3)(cid:49)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:267)(cid:86)(cid:3)(cid:68)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:29)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)
Report; Form 10-K; Form 10-Q; Form
8-Ks; Corporate Governance Standards;
(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:30)(cid:3)(cid:38)(cid:82)(cid:71)(cid:72)(cid:3)
of Ethics; and Board Committee Charters.
(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:403)(cid:79)(cid:76)(cid:81)(cid:74)(cid:86)
made with the SEC, are also available on
our website at nwnaturalholdings.com.
(cid:50)(cid:88)(cid:85)(cid:3)(cid:54)(cid:40)(cid:38)(cid:3)(cid:403)(cid:79)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)
the SEC’s website (sec.gov).
PRODUCED BY NW NATURAL’S CORPORATE COMMUNICATIONS
PHOTO CREDITS: (cid:36)(cid:49)(cid:39)(cid:60)(cid:3)(cid:37)(cid:36)(cid:56)(cid:40)(cid:53) - page 5, North Mist expansion pipeline; (cid:39)(cid:36)(cid:47)(cid:40)(cid:3)(cid:43)(cid:40)(cid:36)(cid:39)(cid:53)(cid:44)(cid:38)(cid:46) - page 3, service technician;
page 4, construction employee; (cid:42)(cid:36)(cid:53)(cid:60)(cid:3)(cid:48)(cid:36)(cid:55)(cid:50)(cid:54)(cid:50) (cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:25)(cid:15)(cid:3)(cid:38)(cid:49)(cid:42)(cid:3)(cid:403)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:30)(cid:3)(cid:53)(cid:50)(cid:37)(cid:37)(cid:44)(cid:40)(cid:3)(cid:48)(cid:38)(cid:38)(cid:47)(cid:36)(cid:53)(cid:36)(cid:49) - page 9, select
portraits; (cid:50)(cid:55)(cid:43)(cid:40)(cid:53)(cid:3)(cid:16)(cid:3)(cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:21)(cid:15)(cid:3)(cid:39)(cid:68)(cid:89)(cid:76)(cid:71)(cid:3)(cid:36)(cid:81)(cid:71)(cid:72)(cid:85)(cid:86)(cid:82)(cid:81)(cid:15)(cid:3)(cid:70)(cid:82)(cid:88)(cid:85)(cid:87)(cid:72)(cid:86)(cid:92)(cid:3)(cid:49)(cid:60)(cid:54)(cid:40)(cid:3)(cid:274)(cid:3)PRINTING: (cid:39)(cid:82)(cid:81)(cid:81)(cid:72)(cid:79)(cid:79)(cid:72)(cid:92)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:82)(cid:79)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
10
Form 10-K
Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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 1-38681
Commission file number 1-15973
NORTHWEST NATURAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
Oregon
(State or other jurisdiction of
incorporation or organization)
82-4710680
(I.R.S. Employer
Identification No.)
Oregon
(State or other jurisdiction of
incorporation or organization)
93-0256722
(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
Securities registered pursuant to Section 12(b) of the Act:
Registrant Title of each class
Name of each exchange on which registered
Northwest Natural Holding Company Common Stock
New York Stock Exchange
Northwest Natural Gas Company None
None
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
NORTHWEST NATURAL HOLDING COMPANY Yes[ X ] No[ ]
NORTHWEST NATURAL GAS COMPANY Yes[ ] No[ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
NORTHWEST NATURAL HOLDING COMPANY Yes[ ] No[ X ]
NORTHWEST NATURAL GAS COMPANY Yes[ ] No[ X ]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ X ]
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 [ X ]
Accelerated Filer [ ]
Non-accelerated Filer [ ]
Smaller Reporting Company [ ]
Emerging Growth Company [ ]
Large Accelerated Filer [ ]
Accelerated Filer [ ]
Non-accelerated Filer [ X ]
Smaller Reporting 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 ]
As of the end of the second quarter of 2018, the aggregate market value of the shares of Common Stock of Northwest Natural
Gas Company (based upon the closing price of these shares on the New York Stock Exchange on June 29, 2018) held by non-
affiliates was $1,814,276,842.
At February 22, 2019, 28,896,471 shares of Northwest Natural Holding Company's Common Stock (the only class of Common
Stock) were outstanding and 28,844,190 shares of Northwest Natural Gas Company's Common Stock (the only class of
Common Stock) were outstanding, all of which were held by Northwest Natural Holding Company.
This combined Form 10-K 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 meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is
therefore filing this report with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Northwest Natural Holding Company's Proxy Statement, to be filed in connection with the 2019 Annual Meeting of
Shareholders, are incorporated by reference in Part III.
TABLE OF CONTENTS
Glossary of Terms
Forward-Looking Statements
PART I
Item 1.
Business
Overview
Natural Gas Distribution
Other
Environmental Matters
Employees
Executive Officers of the Registrant
Available Information
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Item 6.
Item 7.
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
EXHIBIT INDEX
SIGNATURES
Page
1
4
5
5
5
9
10
11
11
11
13
22
23
23
23
24
25
26
57
59
118
118
118
119
121
121
122
122
122
122
123
128
GLOSSARY OF TERMS AND ABBREVIATIONS
AFUDC
Allowance for Funds Used During Construction
AOCI / AOCL
Accumulated Other Comprehensive Income (Loss)
ASC
ASU
Accounting Standards Codification
Accounting Standards Update as issued by the FASB
Average Weather
The 25-year average of heating degree days based on temperatures established in our last Oregon
general rate case
Bcf
CNG
CODM
Billion cubic feet, a volumetric measure of natural gas, where one Bcf is roughly equal to 10 million
therms
Compressed Natural Gas
Chief Operating Decision Maker. For accounting purposes, an individual or group of individuals
responsible for the allocation of resources and assessing the performance of the entity's business
units
Core Utility Customers Residential, commercial, and industrial customers receiving firm service from the utility
Cost of Gas
CPUC
Decoupling
Demand Cost
EBITDA
EE/CA
Encana
The delivered cost of natural gas sold to customers, including the cost of gas purchased or withdrawn/
produced from storage inventory or reserves, gains and losses from gas commodity hedges, pipeline
demand costs, seasonal demand cost balancing adjustments, regulatory gas cost deferrals and
Company gas use
California Public Utilities Commission, the entity that regulates our California gas storage business at
the Gill Ranch facility with respect to rates and terms of service, among other matters
A billing rate mechanism, also referred to as a conservation tariff, which is designed to allow a utility to
encourage industrial and small commercial customers to conserve energy while not adversely
affecting its earnings due to reductions in sales volumes
A component in core utility customer rates representing the cost of securing firm pipeline capacity,
whether the capacity is used or not
Earnings before interest, taxes, depreciation and amortization, a non-GAAP financial measure
Engineering Evaluation / Cost Analysis
Encana Oil & Gas (USA) Inc.
Energy Corp
Northwest Energy Corporation, a wholly-owned subsidiary of NW Natural
EPA
EPS
FASB
FERC
Environmental Protection Agency
Earnings per share
Financial Accounting Standards Board
Federal Energy Regulatory Commission; the entity regulating interstate storage services offered by
the Mist gas storage facility
Firm Service
Natural gas service offered to customers under contracts or rate schedules that will not be disrupted
to meet the needs of other customers
FMBs
First Mortgage Bonds
General Rate Case
A periodic filing with state or federal regulators to establish billing rates for utility customers
GHG
Gill Ranch
Gill Ranch Facility
GTN
Greenhouse gases
Gill Ranch Storage, LLC, a wholly-owned subsidiary of NWN Gas Storage
Underground natural gas storage facility near Fresno, California, with 75% owned by Gill Ranch and
25% owned by PG&E
Gas Transmission Northwest, LLC which owns a transmission pipeline serving California and the
Pacific Northwest
Heating Degree Days
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
HATFA
Highway and Transportation Funding Act of 2014
Interruptible Service
Natural gas service offered to customers (usually large commercial or industrial users) under
contracts or rate schedules that allow for interruptions when necessary to meet the needs of firm
service customers
Interstate Storage
Services
The portion of the Mist gas storage facility not used to serve NGD, instead serving utilities, gas
marketers, electric generators, and large industrial users
IPUC
IRP
Public Utility Commission of Idaho; the entity that regulates NW Holdings' Idaho water business with
respect to rates and terms of service, among other matters
Integrated Resource Plan
1
KB
LNG
MAP-21
Moody's
NAV
NGD
Kelso-Beaver Pipeline, of which 10% is owned by KB Pipeline Company, a subsidiary of NNG
Financial
Liquefied Natural Gas, the cryogenic liquid form of natural gas. To reach a liquid form at atmospheric
pressure, natural gas must be cooled to approximately negative 260 degrees Fahrenheit
A federal pension plan funding law called the Moving Ahead for Progress in the 21st Century Act, July
2012
Moody's Investors Service, Inc., credit rating agency
Net Asset Value
Natural Gas Distribution, a segment of NW Natural Holdings and NW Natural Gas Company that
provides regulated natural gas distribution services to residential, commercial, and industrial
customers in Oregon and Southwest Washington
NGD Margin
A financial measure consisting of NGD operating revenues less the associated cost of gas, franchise
taxes, and environmental recoveries
NNG Financial
NNG Financial Corporation, a wholly-owned subsidiary of NW Holdings
NOL
NRD
NW Holdings
NW Natural
NWN Energy
Net Operating Loss
Natural Resource Damages
Northwest Natural Holding Company
Northwest Natural Gas Company, a wholly-owned subsidiary of NW Holdings
NW Natural Energy, LLC, a wholly-owned subsidiary of NW Holdings
NWN Gas Reserves
NWN Gas Reserves LLC, a wholly-owned subsidiary of Energy Corp
NWN Gas Storage
NW Natural Gas Storage, LLC, a wholly-owned subsidiary of NWN Energy
ODEQ
OPEIU
OPUC
PBGC
PG&E
PGA
Oregon Department of Environmental Quality
Office and Professional Employees International Union Local No. 11, AFL-CIO, which is also referred
to as the Union representing NW Natural's bargaining unit employees
Public Utility Commission of Oregon; the entity that regulates our Oregon natural gas and water utility
businesses with respect to rates and terms of service, among other matters; the OPUC also regulates
the Mist gas storage facility's intrastate storage services
Pension Benefit Guaranty Corporation
Pacific Gas & Electric Company; 25% owner of the Gill Ranch Facility
Purchased Gas Adjustment, a regulatory mechanism which adjusts natural gas customer rates to
reflect changes in the forecasted cost of gas and differences between forecasted and actual gas costs
from the prior year
Portland General
Portland General Electric; primary customer of the North Mist gas storage expansion
PHMSA
PRP
RI/FS
ROD
ROE
ROR
S&P
U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration
Potentially Responsible Parties
Remedial Investigation / Feasibility Study
Record of Decision
Return on Equity, a measure of corporate profitability, calculated as net income or loss divided by
average common stock equity. Authorized ROE refers to the equity rate approved by a regulatory
agency for use in determining utility revenue requirements
Rate of Return, a measure of return on utility rate base. Authorized ROR refers to the rate of return
approved by a regulatory agency and is generally discussed in the context of ROE and capital
structure
Standard & Poor's, a credit rating agency and division of The McGraw-Hill Companies, Inc.
Sales Service
Service provided whereby a customer purchases both natural gas commodity supply and
transportation from the utility
SEC
SRRM
TCJA
Therm
TWH
TWP
U.S. Securities and Exchange Commission
Site Remediation and Recovery Mechanism, a billing rate mechanism for recovering prudently
incurred environmental site remediation costs allocable to Oregon through customer billings, subject
to an earnings test
The Tax Cuts and Jobs Act enacted on December 22, 2017
The basic unit of natural gas measurement, equal to one hundred thousand British thermal units
Trail West Holdings, LLC, 50% owned by NWN Energy
Trail West Pipeline, LLC, a subsidiary of TWH
TransCanada
TransCanada Pipelines Limited, owner of TransCanada American Investments, Ltd., a 50% owner of
TWH, and GTN
2
Transportation Service Service provided whereby a customer purchases natural gas directly from a supplier but pays the
utility to transport the gas over its distribution system to the customer’s facility
U.S. GAAP
Accounting principles generally accepted in the United States of America
WARM
WUTC
An Oregon billing rate mechanism applied to natural gas residential and commercial customers to
adjust for temperature variances from average weather
Washington Utilities and Transportation Commission, the entity that regulates our Washington natural
gas and water utility businesses with respect to rates and terms of service, among other matters
3
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, including restructuring
as a holding company;
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;
pipeline capacity, demand, location, and reliability;
adequacy of property rights and headquarter
development;
technology implementation and cybersecurity practices;
competition;
procurement and development of gas 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 supplies;
effects of new or anticipated changes in critical accounting
policies or estimates;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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•
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•
•
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•
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•
approval and adequacy of regulatory deferrals;
effects and efficacy of regulatory mechanisms; and
environmental, regulatory, litigation and insurance costs
and recoveries, and timing thereof.
Forward-looking statements are based on our current
expectations and assumptions regarding our business, the
economy, and other future conditions. Because forward-
looking statements relate to the future, they are subject to
inherent uncertainties, risks, and changes in circumstances
that are difficult to predict. Our actual results may differ
materially from those contemplated by the forward-looking
statements. We therefore caution you against relying on any
of these forward-looking statements. They are neither
statements of historical fact nor guarantees or assurances
of future performance. Important factors that could cause
actual results to differ materially from those in the forward-
looking statements are discussed at Item 1A., "Risk Factors"
of Part I and Item 7. and Item 7A., "Management’s
Discussion and Analysis of Financial Condition and Results
of Operations" and "Quantitative and Qualitative Disclosures
About Market Risk", respectively, of Part II of this report.
Any forward-looking statement made in this report speaks
only as of the date on which it is made. Factors or events
that could cause actual results to differ may emerge from
time to time, and it is not possible for us to predict all of
them. We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new
information, future developments or otherwise, except as
may be required by law.
4
incorporated in Oregon in 1910, and began doing business
as NW Natural in 1997. NW Natural's natural gas
distribution activities are reported in the natural gas
distribution (NGD) segment, formerly titled and reported as
the utility segment. All other business activities, including
certain gas storage activities, water businesses, and other
investments and activities are aggregated and reported as
"other" at their respective registrant.
In addition, NW Holdings has reported discontinued
operations results related to the pending sale of Gill Ranch
Storage, LLC (Gill Ranch). NW Natural Gas Storage, LLC
(NWN Gas Storage), currently an indirect wholly-owned
subsidiary of NW Holdings, entered into a Purchase and
Sale Agreement during the second quarter of 2018 that
provides for the sale of all membership interests in Gill
Ranch. Gill Ranch owns a 75% interest in the natural gas
storage facility located near Fresno, California known as the
Gill Ranch Gas Storage Facility. Pacific Gas and Electric
Company (PG&E) owns the remaining 25% interest in the
Gill Ranch Gas Storage Facility.
NATURAL GAS DISTRIBUTION (NGD) SEGMENT
Both NW Holdings and NW Natural have one reportable
segment, the NGD segment, which is conducted by NW
Natural. The NGD business purchases and distributes
natural gas through approximately 750,000 meters in
Oregon and southwest Washington. Approximately 89% of
customers are located in Oregon and 11% are located in
southwest Washington.
NW Natural has been allocated an exclusive service territory
by the OPUC and WUTC, which includes the major
population centers in western Oregon, including the
Portland metropolitan area, most of the Willamette Valley,
the Coastal area from Astoria to Coos Bay, and portions of
Washington along the Columbia River. Portland serves as
one of the largest ports on the West Coast and is a key
distribution center. Major businesses located in NW
Natural's service territory include retail, manufacturing, and
high-technology industries.
Customers
The NGD business serves residential, commercial, and
industrial customers with no individual customer accounting
for more than 10% of NW Natural or NW Holdings revenues.
On an annual basis, residential and commercial customers
typically account for approximately 60% of NGD volumes
delivered and approximately 90% of margin. Industrial
customers largely account for the remaining volumes and
margin.
PART I
FILING FORMAT
This annual report on Form 10-K is a combined report being
filed by two separate registrants: Northwest Natural Holding
Company (NW Holdings), and Northwest Natural Gas
Company (NW Natural). Except where the content clearly
indicates otherwise, any reference in the report to "we," "us"
or "our" is to the consolidated entity of NW Holdings and all
of its subsidiaries, including NW Natural, which is a distinct
SEC registrant that is a wholly-owned subsidiary of NW
Holdings. Each of NW Holdings' subsidiaries is a separate
legal entity with its own assets and liabilities. Information
contained herein relating to any individual registrant or its
subsidiaries is filed by such registrant on its own behalf.
Each registrant makes representations only as to itself and
its subsidiaries and makes no other representation
whatsoever as to any other company.
Part II - Item 8. Financial statements and supplementary
data in this Annual Report on Form 10-K includes separate
financial statements (i.e. balance sheets, statements of
comprehensive income, statements of cash flows, and
statements of equity) for NW Holdings and NW Natural, in
that order. References in this discussion to the "Notes" are
to the Notes to the Consolidated Financial Statements in
Item 8 of this report. The Notes to the Consolidated
Financial Statements are presented on a combined basis for
both entities except where expressly noted otherwise. All
Items other than Part II - Item 8. are combined for the
reporting companies.
ITEM 1. BUSINESS
OVERVIEW
On October 1, 2018, we completed a reorganization into a
holding company structure. 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 Holdings is a holding company headquartered in
Portland, Oregon and owns NW Natural, NW Natural Water
Company (NW Water), and other businesses and activities.
NW Natural is NW Holdings’ largest subsidiary.
NW Natural distributes natural gas to residential,
commercial, and industrial customers in Oregon and
southwest Washington. NW Natural and its predecessors
have supplied gas service to the public since 1859, was
5
The following table presents summary meter information for
the NGD segment as of December 31, 2018:
For residential and small to mid-size commercial customers,
the NGD business competes primarily with providers of
electricity, fuel oil, and propane.
Residential
Commercial
Industrial
Other
Total
Number of
Meters
% of
Volumes
% of
Margin (1)
680,134
69,259
1,028
N/A
37%
22%
41%
N/A
65%
27%
8%
—%
750,421
100%
100%
(1) NGD margin is also affected by other items, including
miscellaneous services, gains or losses from our gas cost
incentive sharing mechanism, and other service fees.
Generally, residential and commercial customers purchase
both their natural gas commodity (gas sales) and natural
gas delivery services (transportation services) from the NGD
business. Industrial customers also purchase transportation
services, but may buy the gas commodity either from NW
Natural or directly from a third-party gas marketer or
supplier. Gas commodity cost is primarily a pass-through
cost to customers; therefore, profit margins are not
materially affected by an industrial customer's decision to
purchase gas from NW Natural or from third parties.
Industrial and large commercial customers may also select
between firm and interruptible service levels, with firm
services generally providing higher profit margins compared
to interruptible services.
To help manage gas supplies, industrial tariffs are designed
to provide some certainty regarding industrial customers'
volumes by requiring an annual service election, special
charges for changes between elections, and in some cases,
a minimum or maximum volume requirement before
changing options.
Customer growth rates for natural gas utilities in the Pacific
Northwest historically have been among the highest in the
nation due to lower market saturation as natural gas
became widely available as a residential heating source
after other fuel options. We estimate natural gas was in
approximately 63% of single-family residential homes in NW
Natural's service territory in 2018. Customer growth in our
region comes mainly from the following sources: single-
family housing, both new construction and conversions;
multifamily housing new construction; and commercial
buildings, both new construction and conversions. Single-
family new construction has consistently been our strongest
performing source of growth. Continued customer growth is
closely tied to the comparative price of natural gas to
electricity and fuel oil and the economic health of Portland,
Oregon and Vancouver, Washington. We believe there is
potential for continued growth as natural gas is a preferred
energy source due to its affordable, reliable, and clean
qualities.
Competitive Conditions
In its service areas, the NGD business has no direct
competition from other natural gas distributors. However, it
competes with other forms of energy in each customer
class. This competition among energy suppliers is based on
price, efficiency, reliability, performance, preference, market
conditions, technology, federal, state, and local energy
policy, and environmental impacts.
6
In the industrial and large commercial markets, the NGD
business competes with all forms of energy, including
competition from wholesale natural gas marketers. In
addition, large industrial customers could bypass NW
Natural's natural gas distribution system by installing their
own direct pipeline connection to the interstate pipeline
system. NW Natural has designed custom transportation
service agreements with several large industrial customers
to provide transportation service rates that are competitive
with the customer’s costs of installing their own pipeline.
Seasonality of Business
The NGD business is seasonal in nature due to higher gas
usage by residential and commercial customers during the
cold winter heating months. Other categories of customers
experience similar seasonality in their usage but to a lesser
extent.
Regulation and Rates
The NGD business is subject to regulation by the OPUC
and WUTC. These regulatory agencies authorize rates and
allow recovery mechanisms to provide the opportunity to
recover prudently incurred capital and operating costs from
customers, while also earning a reasonable return on
investment for investors. In addition, the OPUC and WUTC
also regulate the system of accounts and issuance of
securities by NW Natural.
NW Natural files general rate cases and rate tariff requests
periodically with the OPUC and WUTC to establish
approved rates, an authorized ROE, an overall rate of return
on rate base (ROR), an authorized capital structure, and
other revenue/cost deferral and recovery mechanisms.
NW Natural is also regulated by the FERC. Under NW
Natural's Mist interstate storage certificate with FERC, NW
Natural is required to file either a petition for rate approval or
a cost and revenue study every five years to change or
justify maintaining the existing rates for the interstate
storage service.
For further discussion on our most recent general rate
cases, see Part II, Item 7, "Results of Operations—
Regulatory Matters—Regulation and Rates".
Gas Supply
NW Natural strives to secure sufficient, reliable supplies of
natural gas to meet the needs of customers at the lowest
reasonable cost, while maintaining price stability and
managing gas purchase costs prudently. This is
accomplished through a comprehensive strategy focused on
the following items:
• Reliability - ensuring gas resource portfolios are
sufficient to satisfy customer requirements under
extreme cold weather conditions;
• Diverse Supply - providing diversity of supply sources;
• Diverse Contracts - maintaining a variety of contract
durations, types, and counterparties; and
• Cost Management and Recovery - employing prudent
gas cost management strategies.
Reliability
The effectiveness of the natural gas distribution system
ultimately rests on whether reliable service is provided to
NGD customers. To ensure effectiveness, the NGD
business has developed a risk-based methodology in which
it uses a planning standard to serve the highest firm sales
demand day in any year with 99% certainty.
The projected maximum design day firm NGD customer
sendout is approximately 10.0 million therms. Of this total,
the NGD business is currently capable of meeting about
56% of requirements with gas from storage located within or
adjacent to the service territory, while the remaining supply
requirements would come from gas purchases under firm
gas purchase contracts and recall agreements.
To supplement near-term natural gas supplies, NW Natural
can segment transportation capacity, if needed. Pipeline
segmentation is a natural gas transportation mechanism
under which a shipper can leverage its firm pipeline
transportation capacity by separating it into multiple
segments with alternate delivery routes. The reliability of
service on these alternate routes will vary depending on the
constraints of the pipeline system. For those segments with
acceptable reliability, segmentation provides a shipper with
increased flexibility and potential cost savings compared to
traditional pipeline service. Since 2014, the NGD business
has relied on segmentation of firm pipeline transportation
capacity that flows from Stanfield, Oregon to various points
south of Molalla, Oregon.
We believe gas supplies would be sufficient to meet existing
NGD firm customer demand in the event of maximum
design day weather conditions.
The following table shows the sources of supply projected to
be used to satisfy the design day sendout for the 2018-2019
winter heating season:
Therms in millions
Sources of NGD supply:
Firm supply purchases
Mist underground storage (NGD only)
Company-owned LNG storage
Off-system storage contract
Pipeline segmentation capacity
Recall agreements
Peak day citygate deliveries
Therms
Percent
3.4
3.1
1.9
0.5
0.6
0.4
0.1
34%
31%
19%
5%
6%
4%
1%
Total
10.0
100%
The OPUC and WUTC have IRP processes in which utilities
define different growth scenarios and corresponding
resource acquisition strategies in an effort to evaluate
supply and demand resource requirements, consider
uncertainties in the planning process and the need for
flexibility to respond to changes, and establish a plan for
providing reliable service at the least cost.
NW Natural files a full IRP biennially for Oregon and
Washington with the OPUC and the WUTC, respectively,
and files updates between filings. The OPUC acknowledges
NW Natural's action plan; whereas the WUTC provides
notice that the IRP has met the requirements of the
Washington Administrative Code. OPUC acknowledgment
of the IRP does not constitute ratemaking approval of any
specific resource acquisition strategy or expenditure.
However, the Commissioners generally indicate that they
would give considerable weight in prudence reviews to
actions consistent with acknowledged plans. The WUTC
has indicated the IRP process is one factor it will consider in
a prudence review. For additional information see Part II,
Item 7, "Results of Operations—Regulatory Matters".
Diversity of Supply Sources
NW Natural purchases gas supplies primarily from the
Alberta and British Columbia provinces of Canada and
multiple receipt points in the U.S. Rocky Mountains to
protect against regional supply disruptions and to take
advantage of price differentials. For 2018, 61% of gas
supply came from Canada, with the balance primarily
coming from the U.S. Rocky Mountain region. We believe
gas supplies available in the western United States and
Canada are adequate to serve NGD customer requirements
for the foreseeable future. NW Natural continues to evaluate
the long-term supply mix based on projections of gas
production and pricing in the U.S. Rocky Mountain region as
well as other regions in North America. Additionally, the
extraction of shale gas has increased the availability of gas
supplies throughout North America for the foreseeable
future.
NW Natural supplements firm gas supply purchases with
gas withdrawals from gas storage facilities, including
underground reservoirs and LNG storage facilities. Storage
facilities are generally injected with natural gas during the
off-peak months in the spring and summer, and the gas is
withdrawn for use during peak demand months in the winter.
The following table presents the storage facilities available
for NGD business supply:
Maximum
Daily
Deliverability
(therms in
millions)
Designed
Storage
Capacity
(Bcf)
3.1
0.5
0.6
1.3
5.5
10.6
1.1
1.0
0.6
13.3
Gas Storage Facilities
Owned Facility
Mist, Oregon(1)
Contracted Facility
Jackson Prairie, Washington(2)
LNG Facilities
Owned Facilities
Newport, Oregon
Portland, Oregon
Total
(1) The Mist gas storage facility has a total maximum daily
deliverability of 5.4 million therms and a total designed storage
capacity of about 16.0 Bcf, of which 3.1 million therms of daily
deliverability and 10.6 Bcf of storage capacity are reserved for
NGD business customers.
(2) The storage facility is located near Chehalis, Washington and
is contracted from Northwest Pipeline, a subsidiary of The
Williams Companies.
The Mist facility serves NGD segment customers and is also
used for non-NGD purposes, primarily for contracts with gas
storage customers, including utilities and third-party
marketers. Under regulatory agreements with the OPUC
7
and WUTC, gas storage at Mist can be developed in
advance of NGD customer needs but is subject to recall
when needed to serve such customers as their demand
increases. When storage capacity is recalled for NGD
purposes it becomes part of the NGD segment. In 2018, the
NGD business did not recall additional deliverability or
associated storage capacity to serve customer needs.
In addition, pipeline capacity and supply resources from
certain NW Natural customers may be recalled if needed to
meet high demand requirements.
Diverse Contract Durations and Types
NW Natural has a diverse portfolio of short-, medium-, and
long-term firm gas supply contracts and a variety of contract
types including firm and interruptible supplies as well as
supplemental supplies from gas storage facilities.
The portfolio of firm gas supply contracts typically includes
the following gas purchase contracts: year-round and
winter-only baseload supplies; seasonal supply with an
option to call on additional daily supplies during the winter
heating season; and daily or monthly spot purchases.
During 2018, a total of 743 million therms were purchased
under contracts with durations outlined in the chart below:
Contract Duration (primary term)
Long-term (one year or longer)
Short-term (more than one month, less than one
year)
Spot (one month or less)
Total
Percent of
Purchases
28%
27
45
100%
Gas supply contracts are renewed or replaced as they
expire. During 2018, no individual supplier provided over
10% of the NGD business gas supply requirements.
Gas Cost Management
The cost of gas sold to NGD customers primarily consists of
the following items, which are included in annual PGA rates:
gas purchases from suppliers; charges from pipeline
companies to transport gas to our distribution system; gas
storage costs; gas reserves contracts; and gas commodity
derivative contracts.
The NGD business employs a number of strategies to
mitigate the cost of gas sold to customers. The primary
strategies for managing gas commodity price risk include:
•
negotiating fixed prices directly with gas suppliers;
•
negotiating financial derivative contracts that: (1)
effectively convert floating index prices in physical gas
supply contracts to fixed prices (referred to as
commodity price swaps); or (2) effectively set a ceiling
or floor price, or both, on floating index priced physical
supply contracts (referred to as commodity price
options such as calls, puts, and collars);
buying physical gas supplies at a set price and injecting
the gas into storage for price stability and to minimize
pipeline capacity demand costs; and
investing in gas reserves for longer term price stability.
See Note 12 for additional information about our gas
reserves.
•
•
NW Natural also contracts with an independent energy
marketing company to capture opportunities regarding
storage and pipeline capacity when those assets are not
serving the needs of NGD business customers. Asset
management activities provide opportunities for cost of gas
savings for customers and incremental revenues for NW
Natural through regulatory incentive-sharing mechanisms.
These activities, net of the amount shared, are included in
other for segment reporting purposes.
Gas Cost Recovery
Mechanisms for gas cost recovery are designed to be fair
and reasonable, with an appropriate balance between the
interests of customers and NW Natural. In general, natural
gas distribution rates are designed to recover the costs of,
but not to earn a return on, the gas commodity sold. Risks
associated with gas cost recovery are minimized by
resetting customer rates annually through the PGA and
aligning customer and shareholder interests through the use
of sharing, weather normalization, and conservation
mechanisms in Oregon. See Part II, Item 7, "Results of
Operations—Regulatory Matters" and "Results of
Operations—Business Segments—Natural Gas Distribution
Operations—Cost of Gas."
Transportation of Gas Supplies
NW Natural's gas distribution system is reliant on a single,
bi-directional interstate transmission pipeline to bring gas
supplies into the natural gas distribution system. Although
dependent on a single pipeline, the pipeline’s gas flows into
the Portland metropolitan market from two directions: (1) the
north, which brings supplies from the British Columbia and
Alberta supply basins; and (2) the east, which brings
supplies from Alberta as well as the U.S. Rocky Mountain
supply basins.
NW Natural incurs monthly demand charges related to firm
pipeline transportation contracts. These contracts are multi-
year contracts with expirations ranging from 2019 to 2060.
The largest pipeline agreements are with Northwest
Pipeline. NW Natural actively works with Northwest Pipeline
and others to renew contracts in advance of expiration to
ensure gas transportation capacity is sufficient to meet
customer needs.
Rates for interstate pipeline transportation services are
established by FERC within the U.S. and by Canadian
authorities for services on Canadian pipelines.
As mentioned above, the service territory is dependent on a
single pipeline for its natural gas supply. In October 2018, a
critical natural gas pipeline in western Canada experienced
a rupture and gas supply to the Pacific Northwest was
disrupted. NW Natural was able to serve firm NGD business
customers during the incident with natural gas from the Mist
storage facility and realignment of other supplies. Pipeline
disruptions, replacement projects, and long-term projected
natural gas demand in our region underscore the need for
pipeline transportation diversity. In addition, there are
potential industrial projects in the region, which could
increase the demand for natural gas and the need for
additional pipeline capacity and diversity.
8
Currently, there are various interstate pipeline projects
proposed, including the Trail West pipeline in which NW
Holdings has an interest, that could meet the forecasted
demand growth for NW Natural and the region. However,
the location of any future pipeline project will likely depend
on the location of committed industrial projects. NW
Holdings and NW Natural will continue to evaluate and
closely monitor the currently prospected projects to
determine the best option for our customers. NW Holdings
has an equity investment in Trail West Holdings, LLC
(TWH), which is developing plans to build the Trail West
pipeline. This pipeline would connect TransCanada
Pipelines Limited’s (TransCanada) Gas Transmission
Northwest (GTN) interstate transmission line to NW
Natural's natural gas distribution system. If constructed, this
pipeline would provide another transportation path for gas
purchases from Alberta and the U.S. Rocky Mountains in
addition to the one that currently moves gas through the
Northwest Pipeline system.
Gas Distribution
The primary goals of gas distribution operations are safety
and reliability of the system, which entails building and
maintaining a safe pipeline distribution system.
Safety and the protection of employees, customers, and the
public at large are, and will remain, top priorities. NW
Natural constructs, operates, and maintains the pipeline
distribution system and storage operations with the goal of
ensuring natural gas is delivered and stored safely, reliably,
and efficiently.
NW Natural has one of the most modern distribution
systems in the country with no identified cast iron pipe or
bare steel main. The final known bare steel was removed
from the system in 2015 and cast iron pipe removal was
completed in 2000. Since the 1980s, NW Natural has taken
a proactive approach to replacement programs and
partnered with the OPUC and WUTC on progressive
regulation to further safety and reliability efforts for the
distribution system. In the past, NW Natural had a cost
recovery program in Oregon that encompassed programs
for bare steel replacement, transmission pipeline integrity
management, and distribution pipeline integrity
management as appropriate. For discussion on current
regulatory programs, see Part II, Item 7, "Results of
Operations—Regulatory Matters".
Natural gas distribution businesses will continue to be
subject to greater federal and state regulation in the future
due to pipeline incidents involving other companies.
Additional operating and safety regulations from the U.S.
Department of Transportation’s Pipeline and Hazardous
Materials Safety Administration (PHMSA) are currently
under development. In 2016, PHMSA issued proposed
regulations to update safety requirements for natural gas
transmission pipelines. Final regulations are anticipated to
be issued in 2019. Current proposed regulations indicate a
15-year timeline for implementation of compliance
requirements. NW Natural will continue to work diligently
with industry associations as well as federal and state
regulators to ensure the safety of the system and
compliance with new laws and regulations. The costs
associated with compliance with federal, state, and local
rules are expected to be recovered in rates.
9
North Mist Gas Storage Expansion Project
In Oregon, there is a need to integrate intermittent
resources, such as wind and solar, into the power system
with policymakers committing to the elimination of coal-fired
electric generation and moving toward a 50% renewable
electricity standard by 2040. Flexible natural gas-fired
electric generation facilities and associated gas storage are
necessary to support the integration of renewable
resources. In 2016, NW Natural began expanding its gas
storage facility near Mist, Oregon to provide innovative 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. Natural gas storage enables
generation to adjust quickly when renewable energy, such
as wind and solar, rises and falls.
This expansion project will be dedicated solely to Portland
General Electric (Portland General), a local electric
company, to support their 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 expansion project includes a new reservoir providing up
to 2.5 Bcf of available storage, an additional compressor
station with design capacity of 120,000 dekatherms of gas
per day, no-notice service that can be drawn on rapidly, and
a 13-mile pipeline to connect to Portland General's gas
plants at Port Westward. The expansion project is
considered part of the NGD segment and has an estimated
cost of approximately $149 million, with a targeted in-service
date during the spring of 2019. See additional discussion in
Part II, Item 7 "Financial Condition—Cash Flows—Investing
Activities".
When the expansion is placed into service, 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 and
forecasted operating expenses.
While there are additional expansion opportunities in the
Mist storage field, further development is not contemplated
at this time and any expansion would be based on market
demand, project execution, cost effectiveness, available
financing, receipt of future permits, and other rights.
OTHER
Certain businesses and activities of NW Holdings and NW
Natural are aggregated and reported as other for segment
reporting purposes. These include the following businesses
and activities aggregated and reported as other under NW
Holdings:
• water businesses and water acquisition activities;
•
an equity method investment in TWH, a joint venture to
build and operate a gas transmission pipeline in
Oregon. TWH is owned 50% by NWN Energy, a wholly-
owned subsidiary of NW Holdings, and 50% by
TransCanada American Investments Ltd., an indirect
wholly-owned subsidiary of TransCanada Corporation;
•
•
a minority interest in the Kelso-Beaver Pipeline held by
our wholly-owned subsidiary NNG Financial
Corporation (NNG Financial); and
holding company and corporate activities as well as
adjustments made in consolidation.
Additionally, the following businesses and activities are
aggregated and reported as other under NW Natural, a
wholly owned subsidiary of NW Holdings:
•
5.4 Bcf of the Mist gas storage facility contracted to
utilities and third-party marketers;
natural gas asset management activities; and
appliance retail center operations.
•
•
WATER. During 2018, NW Water completed the purchase of
four privately-owned regulated water utilities serving
approximately 22,000 people through 7,400 connections in
the Pacific Northwest. Several additional acquisition
agreements for privately-owned water utilities have been
signed, the largest of which is a water and wastewater
business in Sunriver, Oregon serving 9,400 connections.
These pending transactions are subject to public utility
commission approvals and are expected to close during
2019.
MIST GAS STORAGE. The Mist gas storage facility began
operations in 1989. It is a 16 Bcf facility with 10.6 Bcf used
to provide gas storage for the NGD business. The remaining
5.4 Bcf of the facility is contracted with other utilities and
third-party marketers with these results reported in other.
The overall facility consists of seven depleted natural gas
reservoirs, 22 injection and withdrawal wells, a compressor
station, dehydration and control equipment, gathering lines,
and other related facilities. The capacity at Mist serving
other utilities and third-party marketers provides multi-cycle
gas storage services to customers in the interstate and
intrastate markets. The interstate storage services are
offered under a limited jurisdiction blanket certificate issued
by FERC. Under NW Natural's interstate storage certificate
with FERC, NW Natural is required to file either a petition for
rate approval or a cost and revenue study every five years
to change or justify maintaining the existing rates for the
interstate storage service. Intrastate firm storage services in
Oregon are offered under an OPUC-approved rate schedule
as an optional service to certain eligible customers. Gas
storage revenues from the 5.4 Bcf are derived primarily from
firm service customers who provide energy-related services,
including natural gas distribution, electric generation, and
energy marketing. The Mist facility benefits from limited
competition as there are few storage facilities in the Pacific
Northwest region. Therefore, NW Natural is able to acquire
high value, multi-year contracts.
ASSET MANAGEMENT ACTIVITES. NW Natural contracts
with an independent energy marketing company to provide
asset management services, primarily through the use of
natural gas commodity exchange agreements and natural
gas pipeline capacity release transactions. The results of
these activities are included in other, except for the asset
management revenues allocated to NGD business
customers pursuant to regulatory agreements, which are
reported in the NGD segment.
ENVIRONMENTAL MATTERS
Properties and Facilities
NW Natural owns, or previously owned, properties and
facilities that are currently being investigated that may
require environmental remediation and are subject to
federal, state, and local laws and regulations related to
environmental matters. These laws and regulations may
require expenditures over a long time frame to address
certain environmental impacts. Estimates of liabilities for
environmental costs are difficult to determine with precision
because of the various factors that can affect their ultimate
disposition. These factors include, but are not limited to, the
following:
•
•
the complexity of the site;
changes in environmental laws and regulations at the
federal, state, and local levels;
the number of regulatory agencies or other parties
involved;
new technology that renders previous technology
obsolete, or experience with existing technology that
proves ineffective;
the ultimate selection of a particular technology;
the level of remediation required;
variations between the estimated and actual period of
time that must be dedicated to respond to an
environmentally-contaminated site; and
the application of environmental laws that impose joint
and several liabilities on all potentially responsible
parties.
•
•
•
•
•
•
NW Natural has received recovery of a portion of such
environmental costs through insurance proceeds, seeks the
remainder of such costs through customer rates, and
believes recovery of these costs is probable. In Oregon, NW
Natural has a mechanism to recover expenses, subject to
an earnings test and allocation rules. See Part II, Item 7,
"Results of Operations—Rate Matters—Rate Mechanisms—
Environmental Costs", Note 2, and Note 17.
Greenhouse Gas Matters
We recognize our businesses are likely to be affected by
requirements to address greenhouse gas emissions. Future
federal, state or local requirements may seek to limit
emissions of greenhouse gases, including both carbon
dioxide (CO2) and methane. These potential laws and
regulations may require certain activities to reduce
emissions and/or increase the price paid for energy based
on its carbon content.
Current federal rules require the reporting of greenhouse
gas emissions. In September 2009, the Environmental
Protection Agency (EPA) issued a final rule requiring the
annual reporting of greenhouse gas emissions from certain
industries, specified large greenhouse gas emission
sources, and facilities that emit 25,000 metric tons or more
of CO2 equivalents per year. NW Natural began reporting
emission information in 2011. Under this reporting rule, local
natural gas distribution companies like NW Natural are
required to report system throughput to the EPA on an
annual basis. The EPA also has required additional
greenhouse gas reporting regulations to which NW Natural
is subject, requiring the annual reporting of fugitive
emissions from operations.
10
The Oregon and Washington legislatures and governors
continue to consider various greenhouse gas reduction
proposals and initiatives. For example, the Oregon
legislature will be considering a cap and trade bill during the
2019 legislative session that could create a declining cap on
greenhouse gas emissions emitted by a wide variety of
emission sources, including electric and natural gas utilities,
and would require those entities with a compliance
obligation to hold permits, or allowances, to emit
greenhouse gas emissions on a per ton basis. While there is
uncertainty regarding the extent of the legislation, potential
compliance costs, and cost sharing impacts of these and
other similar proposals, NW Natural currently expects to be
able to recover compliance costs associated with this type
of legislation in rates.
The state of Washington's Department of Ecology (DOE)
enacted the Clean Air Rule (CAR) in 2016, which capped
the maximum greenhouse gas emissions allowed from
stationary sources, such as natural gas utilities. For gas
distribution utilities, the production of emissions from usage
by their customers was considered to be production of
emissions attributable to the utility. In December 2017, a
Washington State Court ruled that the DOE lacked
legislative authority to regulate non-emitting sources, such
as local distribution companies. The DOE has appealed the
ruling and oral arguments for the appeal are expected to
take place during 2019.
The outcome of these or any additional federal, state or
local climate change policy developments cannot be
determined at this time, but these initiatives could produce a
number of results including new regulations, legal actions,
additional charges to fund energy efficiency activities, or
other regulatory actions. The adoption and implementation
of any regulations limiting emissions of greenhouse gases
could require NW Natural to incur compliance costs
associated with our customers’ use, resulting in an increase
in the prices charged to those customers and in a potential
decline in the demand for natural gas over time.
With environmental stewardship as one of our core values,
we continue to take proactive steps to address greenhouse
gas emissions in our region and the communities we serve.
We believe NW Natural and its modern pipeline system has
an important role to play in helping the Pacific Northwest
move to a low-carbon, renewable-energy future.
We intend to vigorously pursue our role in a low-carbon
future, and believe we are positioned to do so. Currently,
NW Natural delivers more energy in Oregon than any other
utility, and use of natural gas by our Sales and
Transportation customers’ accounts for approximately 8% of
Oregon’s greenhouse gas emissions according to the State
of Oregon Department of Environmental Quality In-
Boundary GHG Inventory Preliminary 2015 Figures. Sales
of natural gas to residential and commercial customers -
customers NW Natural procures gas for - accounts for
approximately 5% of the state’s emissions. Using this as a
starting baseline, in 2017, NW Natural initiated a multi-
pronged, multi-year core utility strategy to deliver greater
emission reductions. Key components of this strategy
include energy efficiency and the continued adoption of the
company’s voluntary Smart Energy carbon offset program.
NW Natural is also actively pursuing the potential to procure
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renewable natural gas for our customers, and is engaging in
longer-term efforts to explore the development of renewable
hydrogen through power to gas.
EMPLOYEES
At December 31, 2018, our workforce consisted of the
following:
NW Natural:
Unionized Employees(1)
Non-Unionized Employees
Total NW Natural
Other Entities:
Water Company Employees
Other
Total Other Entities
Total Employees
635
532
1,167
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15
31
1,198
(1) Members of the Office and Professional Employees
International Union (OPEIU) Local No. 11, AFL-CIO.
NW Natural's labor agreement with members of OPEIU
covers wages, benefits, and working conditions. On May 22,
2014, NW Natural's unionized employees ratified a labor
agreement (Joint Accord) that extends to November 30,
2019, and thereafter from year to year unless either party
serves notice of its intent to negotiate modifications to the
collective bargaining agreement.
Certain subsidiaries may receive services from employees
of other subsidiaries. When such services involve regulated
entities, those entities receiving services reimburse the
entity providing services pursuant to shared services
agreements.
EXECUTIVE OFFICERS OF THE REGISTRANTS
For information concerning executive officers, see Part III,
Item 10.
AVAILABLE INFORMATION
NW Holdings and NW Natural file annual, quarterly and
current reports and other information with the Securities and
Exchange Commission (SEC). The SEC maintains an
Internet site where reports, proxy statements, and other
information filed can be read, copied, and requested online
at its website (www.sec.gov). In addition, we make
available, free of charge, on our website
(www.nwnaturalholdings.com), our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) and proxy
materials filed under Section 14 of the Securities Exchange
Act of 1934, as amended (Exchange Act), as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. We have included our
website address as an inactive textual reference only.
Information contained on our website is not incorporated by
reference into this annual report on Form 10-K.
NW Holdings and NW Natural have adopted a Code of
Ethics for all employees, officers, and directors that is
available on our website. We intend to disclose revisions
and amendments to, and any waivers from, the Code of
Ethics for officers and directors on our website. Our
Corporate Governance Standards, Director Independence
Standards, charters of each of the committees of the Board
of Directors, and additional information about NW Holdings
and NW Natural are also available at the website. Copies of
these documents may be requested, at no cost, by writing or
calling Shareholder Services, NW Natural, One Pacific
Square, 220 N.W. Second Avenue, Portland, Oregon 97209,
telephone 503-226-4211 ext. 2402.
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ITEM 1A. RISK FACTORS
NW Holdings’ and NW Natural’s business and financial
results are subject to a number of risks and uncertainties,
many of which are not within our control, which could
adversely affect our business, financial condition, and
results of operations. Additional risks and uncertainties that
are not currently known to us or that are not currently
believed by us to be material may also harm our
businesses, financial condition, and results of operations.
When considering any investment in NW Holdings’ or NW
Natural’s securities, investors should carefully consider the
following information, as well as information contained in the
caption "Forward-Looking Statements", Item 7A, and our
other documents filed with the SEC. This list is not
exhaustive and the order of presentation does not reflect
management’s determination of priority or likelihood.
Additionally, our listing of risk factors that primarily affects
one of our businesses does not mean that such risk factor is
inapplicable to our other businesses.
Risks Related to our Business Generally
REGULATORY RISK. Regulation of NW Holdings’ and NW
Natural’s regulated businesses, including changes in the
regulatory environment, failure of regulatory authorities to
approve rates which provide for timely recovery of costs and
an adequate return on invested capital, or an unfavorable
outcome in regulatory proceedings may adversely impact
NW Holdings’ and NW Natural’s financial condition and
results of operations.
The OPUC and WUTC have general regulatory authority
over NW Natural’s gas and NW Holdings’ water utility
businesses in Oregon and Washington, respectively,
including: the rates charged to customers; authorized rates
of return on rate base, including ROE; the amounts and
types of securities our regulated utility companies, like NW
Natural, may issue; services our regulated utility companies
provide and the manner in which they provide them; the
nature of investments our utility companies make; and,
deferral and recovery of various expenses, including, but not
limited to, pipeline replacement, environmental remediation
costs, commodity hedging expense, transactions with
affiliated interests, certain employee benefit expenses such
as pension, weather adjustment mechanisms, and other
matters. The OPUC and WUTC also regulate actions
investors may take with respect to our utility companies, NW
Natural and NW Holdings. Similarly, FERC has regulatory
authority over NW Natural’s interstate storage services, and
the CPUC has regulatory authority over NW Holdings’ Gill
Ranch storage operations. Additionally, expansion of our
businesses, including into water or other sectors, could
result in regulation by other regulatory authorities. For
example, NW Holdings’ has acquired a water utility business
in Idaho that is correspondingly subject to regulatory
authority of the IPUC.
The prices the OPUC, WUTC, IPUC, and possible future
regulators allow us to charge for retail service, and the
maximum FERC-approved rates FERC authorizes us to
charge for interstate storage and related transportation
services, are the most significant factors affecting both NW
Natural’s and NW Holdings’ financial position, results of
operations and liquidity. The OPUC, WUTC, IPUC and
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possible future regulators have the authority to disallow
recovery of costs they find imprudently incurred or otherwise
disallowed. Additionally, the rates allowed may be
insufficient for recovery of costs incurred. We expect to
continue to make expenditures to expand, improve and
operate our gas and water utility distribution and gas
storage systems. Regulators can find such expansions or
improvements of expenditures were not prudently incurred,
and deny recovery. Additionally, while the OPUC, WUTC
and IPUC have established an authorized rate of return for
our utility businesses through the ratemaking process, the
regulatory process does not provide assurance that we will
be able to achieve the earnings level authorized. Moreover,
in the normal course of business we may place assets in
service or incur higher than expected levels of operating
expense before rate cases can be filed to recover those
costs-this is commonly referred to as regulatory lag. The
failure of any regulatory commission to approve requested
rate increases on a timely basis to recover increased costs
or to allow an adequate return could adversely impact NW
Holdings’ or NW Natural’s financial condition and results of
operations.
As companies with regulated utility businesses, we
frequently have dockets open with our regulators. The
regulatory proceedings for these dockets typically involve
multiple parties, including governmental agencies,
consumer advocacy groups, and other third parties. Each
party has differing concerns, but all generally have the
common objective of limiting amounts included in rates. We
cannot predict the timing or outcome of these deferred
proceedings or the effects of those outcomes on NW
Holdings’ and NW Natural’s results of operations and
financial condition.
ENVIRONMENTAL LIABILITY RISK. Certain of NW Natural’s,
and possibly NW Holdings’, properties and facilities may
pose environmental risks requiring remediation, the costs of
which are difficult to estimate and which could adversely
affect NW Holdings’ and NW Natural’s financial condition,
results of operations, and cash flows.
NW Natural owns, or previously owned, properties that
require environmental remediation or other action. NW
Holdings or NW Natural may now, or in the future, own other
properties that require environmental remediation or other
action. NW Natural and NW Holdings accrue all material
loss contingencies relating to these properties. A regulatory
asset at NW Natural has been recorded for estimated costs
pursuant to a Deferral Order from the OPUC and WUTC. In
addition to maintaining regulatory deferrals, NW Natural
settled with most of its historical liability insurers for only a
portion of the costs it has incurred to date and expects to
incur in the future. To the extent amounts NW Natural
recovered from insurance are inadequate and it is unable to
recover these deferred costs in utility customer rates, NW
Natural would be required to reduce its regulatory assets
which would result in a charge to earnings in the year in
which regulatory assets are reduced. In addition, in Oregon,
the OPUC approved the SRRM, which limits recovery of
deferred amounts to those amounts which satisfy an annual
prudence review and an earnings test that requires NW
Natural to contribute additional amounts toward
environmental remediation costs above approximately $10
million in years in which NW Natural earns above its
authorized ROE. To the extent NW Natural earns more than
its authorized ROE in a year, it would be required to cover
environmental expenses greater than the $10 million with
those earnings that exceed its authorized ROE. The OPUC
ordered a review of the SRRM in 2018 or when we obtain
greater certainty of environmental costs, whichever occurs
first. We submitted information for review in 2018, and
believe we could be subject to further review. These
ongoing prudence reviews, the earnings test, or the periodic
review could reduce the amounts NW Natural is allowed to
recover, and could adversely affect NW Holdings’ or NW
Natural’s financial condition, results of operations and cash
flows.
Moreover, we may have disputes with regulators and other
parties as to the severity of particular environmental
matters, what remediation efforts are appropriate, and the
portion of the costs NW Natural or NW Holdings should
bear. We cannot predict with certainty the amount or timing
of future expenditures related to environmental
investigations, remediation or other action, the portions of
these costs allocable to NW Natural or NW Holdings, or
disputes or litigation arising in relation thereto.
Environmental liability estimates are based on current
remediation technology, industry experience gained at
similar sites, an assessment of probable level of
responsibility, and the financial condition of other potentially
responsible parties. However, it is difficult to estimate such
costs due to uncertainties surrounding the course of
environmental remediation, the preliminary nature of certain
site investigations, and the application of environmental
laws that impose joint and several liabilities on all potentially
responsible parties. These uncertainties and disputes
arising therefrom could lead to further adversarial
administrative proceedings or litigation, with associated
costs and uncertain outcomes, all of which could adversely
affect NW Holdings’ or NW Natural’s financial condition,
results of operations and cash flows.
ENVIRONMENTAL REGULATION COMPLIANCE RISK. NW
Holdings and NW Natural are subject to environmental
regulations for our ongoing businesses, compliance with
which could adversely affect our operations or financial
results.
NW Holdings and NW Natural are subject to laws,
regulations and other legal requirements enacted or
adopted by federal, state and local governmental authorities
relating to protection of the environment, including those
legal requirements that govern discharges of substances
into the air and water, the management and disposal of
hazardous substances and waste, groundwater quality and
availability, plant and wildlife protection, and other aspects
of environmental regulation. For example, our natural gas
operations are subject to reporting requirements to the EPA
and the ODEQ regarding greenhouse gas emissions. These
and other current and future additional environmental
regulations could result in increased compliance costs or
additional operating restrictions, which may or may not be
recoverable in customer rates or through insurance. If these
costs are not recoverable, they could have an adverse effect
on NW Holdings’ or NW Natural’s financial condition and
results of operations.
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GLOBAL CLIMATE CHANGE RISK. Future legislation,
regulation or other initiatives (including ballot initiatives) to
address global climate change may expose NW Holdings
and NW Natural to regulatory and financial risk. Additionally,
our businesses may be subject to physical risks associated
with climate change, all of which could adversely affect NW
Holdings’ or NW Natural’s financial condition, results of
operations and cash flows.
There are a number of international, federal and state
legislative and regulatory initiatives being proposed and
adopted in an attempt to measure, control or limit the effects
of global warming and climate change, including
greenhouse gas emissions such as carbon dioxide and
methane. For example, there are current legislative efforts in
Oregon, Washington, and other states in which we operate
to cap or otherwise restrict the maximum GHGs an entity
may emit without reduction efforts or other undertakings.
Such current or future legislation, regulation or other
initiatives (including ballot initiatives) could impose on our
natural gas businesses operational requirements, additional
charges to fund energy efficiency initiatives, or levy a tax
based on carbon content. Such initiatives could result in us
incurring additional costs to comply with the imposed
restrictions, provide a cost advantage to energy sources
other than natural gas, reduce demand for natural gas,
impose costs or restrictions on end users of natural gas,
impact the prices we charge our customers, impose
increased costs on us associated with the adoption of new
infrastructure and technology to respond to such
requirements, and may impact cultural perception of our
services or products negatively, diminishing the value of our
brand, all of which could adversely affect NW Holdings’ or
NW Natural’s business practices, financial condition and
results of operations.
Climate change may cause physical risks, including an
increase in sea level, intensified storms, water scarcity and
changes in weather conditions, such as changes in
precipitation, average temperatures and extreme wind or
other climate conditions. A significant portion of the nation’s
gas infrastructure is located in areas susceptible to storm
damage that could be aggravated by wetland and barrier
island erosion, which could give rise to gas supply
interruptions and price spikes.
These and other physical changes could result in
disruptions to natural gas production and transportation
systems potentially increasing the cost of gas and affecting
our natural gas businesses’ ability to procure gas to meet
customer demand. These changes could also affect our
distribution systems resulting in increased maintenance and
capital costs, disruption of service, regulatory actions and
lower customer satisfaction. Similar disruptions could occur
in NW Holdings’ water utility businesses. Additionally, to the
extent that climate change adversely impacts the economic
health or weather conditions of our service territory directly,
it could adversely impact customer demand or our
customers' ability to pay. Such physical risks could have an
adverse effect on NW Holdings’ or NW Natural’s financial
condition, results of operations, and cash flows.
STRATEGIC TRANSACTION RISK. NW Holdings’ and NW
Natural’s ability to successfully complete strategic
transactions, including merger, acquisition, divestiture, joint
venture, business development projects or other strategic
transactions is subject to significant risks, including the risk
that required regulatory or governmental approvals may not
be obtained, risks relating to unknown problems or liabilities
or problems or liabilities undisclosed to us, and the risk that
for these or other reasons, we may be unable to achieve
some or all of the benefits that we anticipate from such
transactions, which could adversely affect NW Holdings’ or
NW Natural’s financial condition, results of operations, and
cash flows.
From time to time, NW Holdings and NW Natural have
pursued and may continue to pursue strategic transactions
including merger, acquisition, divestiture, joint venture,
business development projects or other strategic
transactions, including the entry by NW Holdings into the
water sector through the acquisition of a number of water
utilities and a water services company, with NW Holdings’
continuing to seek other such opportunities to acquire
additional water companies. Any such transactions involve
substantial risks, including the following:
•
•
•
•
•
purchase or sale transactions that are contracted
for may fail to close for a variety of reasons;
acquired businesses or assets may not produce
revenues, earnings or cash flow at anticipated
levels;
acquired businesses or assets could have,
environmental, permitting, or other problems for
which contractual protections prove inadequate;
there may be difficulties in integration or operation
costs of new businesses;
there may be liabilities that were not disclosed to
us, that exceed our estimates, or for which our
rights to indemnification from the seller are limited;
• we may be unable to obtain the necessary
regulatory or governmental approvals to close a
transaction, such approvals may be granted
subject to terms that are unacceptable to us, or we
may be unable to achieve anticipated regulatory
treatment of any such transaction, or such benefits
may be delayed or not occur at all; or
• we may agree to sell assets for a price that is less
than the book value of those assets.
One of more of these conditions could affect NW Holdings’
and NW Natural’s financial condition, results of operations,
and cash flows.
BUSINESS DEVELOPMENT RISK. NW Holdings’ and NW
Natural’s business development projects may encounter
unanticipated obstacles, costs, changes or delays that could
result in a project becoming impaired, which could
negatively impact NW Holdings’ or NW Natural’s financial
condition, results of operations and cash flows.
Business development projects involve many risks. We are
currently engaged in several business development
projects, including, but not limited to, NW Holdings’ early
planning and development stages for a regional pipeline in
Oregon, and NW Natural’s expansion of its gas storage
facility at Mist. We may also engage in other business
development projects such as investments in additional
long-term gas reserves, CNG refueling stations, RNG
projects, or projects in the water sector. These projects may
not be successful. Additionally, we may not be able to obtain
required governmental permits and approvals to complete
our projects in a cost-efficient or timely manner, potentially
resulting in delays or abandonment of the projects. We
could also experience issues such as: startup and
construction delays; construction cost overruns; disputes
with contractors; the inability to negotiate acceptable
agreements such as rights-of-way, easements, construction,
gas supply or other material contracts; changes in customer
demand or commitment; public opposition to projects;
changes in market prices; and operating cost increases.
Additionally, we may be unable to finance our business
development projects at acceptable interest rates or within a
scheduled time frame necessary for completing the project.
One or more of these events could result in the project
becoming impaired, and such impairment could have an
adverse effect on NW Holdings’ or NW Natural’s financial
condition and results of operations.
JOINT PARTNER RISK. Investing in business development
projects through partnerships, joint ventures or other
business arrangements affects our ability to manage certain
risks and could adversely impact NW Holdings’ or NW
Natural’s financial condition, results of operations and cash
flows.
We use joint ventures and other business arrangements to
manage and diversify the risks of certain development
projects, including NW Holdings’ Trail West pipeline and Gill
Ranch Facility and NW Natural’s gas reserves agreements.
NW Holdings or NW Natural may acquire or develop part-
ownership interests in other projects in the future, including
but not limited to, in the water sector. Under these
arrangements, we may not be able to fully direct the
management and policies of the business relationships, and
other participants in those relationships may take action
contrary to our interests, including making operational
decisions that could negatively affect our costs and
liabilities. In addition, other participants may withdraw from
the project, divest important assets, become financially
distressed or bankrupt, or have economic or other business
interests or goals that are inconsistent with ours. For
example, in January 2019, Pacific Gas & Electric Company,
which owns the remaining 25 percent of the Gill Ranch
Facility (75 percent of which is owned by NW Holdings),
filed for bankruptcy protection. While NW Holdings will
monitor that bankruptcy proceeding, and take appropriate
actions in an attempt to protect its interests, it does not
control, and cannot predict, the outcome of such
proceedings and the impact, if any, of the proceeding on the
operations of Gill Ranch or the planned sale by NW
Holdings’ of its interest in Gill Ranch.
NW Natural’s gas reserves arrangements, which operate as
a hedge backed by physical gas supplies, involve a number
of risks, including: gas production that is significantly less
than the expected volumes, or no gas volumes; operating
costs that are higher than expected; changes in the
consolidated tax position or tax laws that could affect NW
Natural’s ability to take, or the timing of, certain tax benefits
that impact the financial outcome of this transaction;
inherent risks of gas production, including disruption to
15
operations or a complete shut-in of the field; and one or
more participants in one of these gas reserves
arrangements acting contrary to NW Natural’s interests. In
addition, while the cost of the original gas reserves venture
is currently included in customer rates and additional wells
under that arrangement are recovered at specific costs, the
occurrence of one or more of these risks could affect NW
Natural’s ability to recover this hedge in rates. Further, new
gas reserves arrangements have not been approved for
inclusion in rates, and regulators may ultimately determine
to not include all or a portion of future transactions in rates.
The realization of any of the above mentioned situations
could adversely impact NW Holdings’ or NW Natural’s
financial condition, results of operations and cash flows.
OPERATING RISK. Transporting and storing natural gas
involves numerous risks that may result in accidents and
other operating risks and costs, some or all of which may
not be fully covered by insurance, and which could
adversely affect NW Holdings’ or NW Natural’s financial
condition, results of operations and cash flows.
NW Holdings and NW Natural are subject to all of the risks
and hazards inherent in the businesses of gas distribution
and storage, and water distribution, including:
•
earthquakes, floods, storms, landslides and other
severe weather incidents and natural hazards;
leaks, losses or contamination of natural gas by other
chemicals or compounds or by or of local water as a
result of the malfunction of equipment or facilities;
damages from third parties, including construction, farm
and utility equipment or other surface users;
operator errors;
negative performance by our storage reservoirs,
facilities, or wells that could cause us to fail to meet
expected or forecasted operational levels or contractual
commitments to our customers;
problems maintaining, or the malfunction of, pipelines,
wellbores and related equipment and facilities that form
a part of the infrastructure that is critical to the operation
of our gas distribution and storage facilities;
collapse of underground storage caverns;
operating costs that are substantially higher than
expected;
•
•
•
•
•
•
•
•
• migration of natural gas through faults in the rock or to
some area of the reservoir where existing wells cannot
drain the gas effectively, resulting in loss of the gas;
blowouts (uncontrolled escapes of gas from a pipeline
or well) or other accidents, fires and explosions; and
risks and hazards inherent in the drilling operations
associated with the development of the gas storage
facilities, and wells.
•
These risks could result in personal injury or loss of human
life, damage to and destruction of property and equipment,
pollution or other environmental damage, breaches of our
contractual commitments, and may result in curtailment or
suspension of operations, which in turn could lead to
significant costs and lost revenues. Further, because our
pipeline, storage and distribution facilities are in or near
populated areas, including residential areas, commercial
business centers, and industrial sites, any loss of human life
or adverse financial outcomes resulting from such events
could be significant. Additionally, we may not be able to
maintain the level or types of insurance we desire, and the
16
insurance coverage we do obtain may contain large
deductibles or fail to cover certain hazards or cover all
potential losses. The occurrence of any operating risks not
covered by insurance could adversely affect NW Holdings’
or NW Natural’s financial condition, results of operations
and cash flows.
BUSINESS CONTINUITY RISK. NW Holdings and NW Natural
may be adversely impacted by local or national disasters,
pandemic illness, terrorist activities, cyber-attacks or data
breaches, and other extreme events to which we may not be
able to promptly respond, which could adversely affect NW
Holdings’ or NW Natural’s operations or financial condition.
Local or national disasters, pandemic illness, terrorist
activities, cyber-attacks and data breaches, and other
extreme events are a threat to our assets and operations.
Companies in critical infrastructure industries may face a
heightened risk due to exposure to acts of terrorism,
including physical and security breaches of our information
technology infrastructure in the form of cyber-attacks. These
attacks could target or impact our technology or mechanical
systems that operate our distribution, transmission or
storage facilities and result in a disruption in our operations,
damage to our system and inability to meet customer
requirements. In addition, the threat of terrorist activities
could lead to increased economic instability and volatility in
the price of natural gas or other necessary commodities that
could affect our operations. Threatened or actual national
disasters or terrorist activities may also disrupt capital or
bank markets and our ability to raise capital or obtain debt
financing, or impact our suppliers or our customers directly.
Local disaster or pandemic illness could result in part of our
workforce being unable to operate or maintain our
infrastructure or perform other tasks necessary to conduct
our business. A slow or inadequate response to events may
have an adverse impact on our operations and earnings.
We may not be able to maintain sufficient insurance to cover
all risks associated with local and national disasters,
pandemic illness, terrorist activities and other events.
Additionally, large scale natural disasters or terrorist attacks
could destabilize the insurance industry making insurance
we do have unavailable, which could increase the risk that
an event could adversely affect NW Holdings’ or NW
Natural’s operations or financial results.
HOLDING COMPANY DIVIDEND RISK. As a holding company,
NW Holdings depends on its operating subsidiaries,
including NW Natural, to meet financial obligations and the
ability of NW Holdings to pay dividends on its common stock
is dependent on the receipt of dividends and other
payments from its subsidiaries, including NW Natural.
As a holding company, NW Holdings’ only significant assets
are the stock and membership interests of its operating
subsidiaries, which at this time is primarily NW Natural. NW
Holdings’ direct and indirect subsidiaries are separate and
distinct legal entities, managed by their own boards of
directors, and have no obligation to pay any amounts to
their respective shareholders, whether through dividends,
loans or other payments. The ability of these companies to
pay dividends or make other distributions on their common
stock is subject to, among other things: their results of
operations, net income, cash flows and financial condition,
as well as the success of their business strategies and
general economic and competitive conditions; the prior
rights of holders of existing and future debt securities and
any future preferred stock issued by those companies; and
any applicable legal restrictions.
In addition, the ability of NW Holdings’ subsidiaries to pay
upstream dividends and make other distributions is subject
to applicable state law and regulatory restrictions. Under the
OPUC and WUTC regulatory approvals for the holding
company formation, if NW Natural ceases to comply with
credit and capital structure requirements approved by the
OPUC and WUTC, it will not, with limited exceptions, be
permitted to pay dividends to NW Holdings. Under the
OPUC and WUTC orders authorizing the holding company
reorganization, NW Natural may not pay dividends or make
distributions to NW Holdings if NW Natural’s credit ratings
and common equity levels fall below specified ratings and
levels. If NW Natural’s long-term secured credit ratings are
below A- for S&P and A3 for Moody’s, dividends may be
issued so long as NW Natural’s common equity is 45% or
above. If NW Natural’s long-term secured credit ratings are
below BBB for S&P and Baa2 for Moody’s, dividends may
be issued so long as NW Natural’s common equity is 46%
or above. Dividends may not be issued if NW Natural’s long-
term secured credit ratings fall to BB+ or below for S&P or
Ba1 or below for Moody’s, or if NW Natural’s common equity
is below 44%. In each case, with the common equity level to
be determined on a preceding or projected 13-month basis.
EMPLOYEE BENEFIT RISK. The cost of providing pension
and postretirement healthcare benefits is subject to changes
in pension assets and liabilities, changing employee
demographics and changing actuarial assumptions, which
may have an adverse effect on NW Holdings’ or NW
Natural’s financial condition, results of operations and cash
flows.
Until NW Natural closed the pension plans to new hires,
which for non-union employees was in 2006 and for union
employees was in 2009, it provided pension plans and
postretirement healthcare benefits to eligible full-time utility
employees and retirees. About half of NW Natural’s current
utility employees were hired prior to these dates, and
therefore remain eligible for these plans. Other businesses
we acquire may also have pension plans. The costs of NW
Natural, or the other applicable businesses we may acquire,
for providing such benefits is subject to change in the
market value of the pension assets, changes in employee
demographics including longer life expectancies, increases
in healthcare costs, current and future legislative changes,
and various actuarial calculations and assumptions. The
actuarial assumptions used to calculate our future pension
and postretirement healthcare expenses may differ
materially from actual results due to significant market
fluctuations and changing withdrawal rates, wage rates,
interest rates and other factors. These differences may
result in an adverse impact on the amount of pension
contributions, pension expense or other postretirement
benefit costs recorded in future periods. Sustained declines
in equity markets and reductions in bond rates may have a
material adverse effect on the value of the pension fund
assets and liabilities. In these circumstances, NW Natural
may be required to recognize increased contributions and
pension expense earlier than it had planned to the extent
that the value of pension assets is less than the total
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anticipated liability under the plans, which could have a
negative impact on NW Holdings’ and NW Natural’s financial
condition, results of operations and cash flows.
WORKFORCE RISK. NW Holdings’ and NW Natural’s
businesses are heavily dependent on being able to attract
and retain qualified employees and maintain a competitive
cost structure with market-based salaries and employee
benefits, and workforce disruptions could adversely affect
NW Holdings’ or NW Natural’s operations and results.
NW Holdings’ and NW Natural’s ability to implement our
business strategy and serve our customers is dependent
upon our continuing ability to attract and retain talented
professionals and a technically skilled workforce, and being
able to transfer the knowledge and expertise of our
workforce to new employees as our largely older workforce
retires. We expect that a significant portion of our workforce
will retire within the current decade, which will require that
we attract, train and retain skilled workers to prevent loss of
institutional knowledge or skills gaps. Without an
appropriately skilled workforce, our ability to provide quality
service and meet our regulatory requirements will be
challenged and this could negatively impact NW Holding’s
and NW Natural’s earnings. Additionally, a majority of NW
Natural workers are represented by the OPEIU Local No.11
AFL-CIO, and are covered by a collective bargaining
agreement that extends to November 30, 2019. Disputes
with the union representing NW Natural employees over
terms and conditions of their agreement, or failure to timely
and effectively renegotiate the agreement, could result in
instability in our labor relationship and work stoppages that
could impact the timely delivery of gas and other services
from our utility and storage facilities, which could strain
relationships with customers and state regulators and cause
a loss of revenues. The collective bargaining agreements
may also limit our flexibility in dealing with NW Natural’s
workforce, and the ability to change work rules and
practices and implement other efficiency-related
improvements to successfully compete in today’s
challenging marketplace, which may negatively affect NW
Holdings’ and NW Natural’s financial condition and results of
operations.
LEGISLATIVE, COMPLIANCE AND TAXING AUTHORITY RISK.
NW Holdings and NW Natural are subject to governmental
regulation, and compliance with local, state and federal
requirements, including taxing requirements, and
unforeseen changes in or interpretations of such
requirements could affect NW Holdings’ or NW Natural’s
financial condition and results of operations.
NW Holdings and NW Natural are subject to regulation by
federal, state and local governmental authorities. We are
required to comply with a variety of laws and regulations
and to obtain authorizations, permits, approvals and
certificates from governmental agencies in various aspects
of our business. Significant changes in federal, state, or
local governmental leadership can accelerate or amplify
changes in existing laws or regulations, or the manner in
which they are interpreted or enforced. For example, the
current U.S. presidential administration has made numerous
leadership changes at federal administrative agencies since
the 2016 U.S. presidential election. Moreover, the U.S.
Congress and the U.S. presidential administration may
make substantial changes to fiscal, tax, regulation and other
federal policies. The current U.S. presidential administration
has called for and implemented significant changes to U.S.
fiscal policies, U.S. trade, healthcare, immigration, foreign,
and government regulatory policy. To the extent the U.S.
Congress or U.S. presidential administration implements
changes to U.S. policy, those changes may impact, among
other things, the U.S. and global economy, international
trade and relations, unemployment, immigration, corporate
taxes, healthcare, the U.S. regulatory environment, inflation
and other areas. In addition, foreign governments may
implement changes to their policies, in response to changes
to U.S. policy or otherwise. Although we cannot predict the
impact, if any, of these changes to our businesses, they
could adversely affect NW Holdings’ or NW Natural’s
financial condition and results of operations. Until we know
what policy changes are made and how those changes
impact our businesses and the business of our competitors
over the long term, we will not know if, overall, we will
benefit from them or be negatively affected by them.
Though we cannot predict changes in laws, regulations, or
enforcement, we expect there to continue to be a number of
significant changes. We cannot predict with certainty the
impact of any future revisions or changes in interpretations
of existing regulations or the adoption of new laws and
regulations. Additionally, any failure to comply with existing
or new laws and regulations could result in fines, penalties
or injunctive measures that could affect operating assets.
For example, under the Energy Policy Act of 2005, the
FERC has civil authority under the Natural Gas Act to
impose penalties for current violations of in excess of $1
million per day for each violation. In addition, as the
regulatory environment for our businesses increases in
complexity, the risk of inadvertent noncompliance may also
increase. Changes in regulations, the imposition of
additional regulations, and the failure to comply with laws
and regulations could negatively influence NW Holdings’ or
NW Natural’s operating environment and results of
operations.
Additionally, changes in federal, state or local tax laws and
their related regulations, or differing interpretations or
enforcement of applicable law by a federal, state or local
taxing authority, could result in substantial cost to us and
negatively affect our results of operations. Tax law and its
related regulations and case law are inherently complex and
dynamic. Disputes over interpretations of tax laws may be
settled with the taxing authority in examination, upon appeal
or through litigation. Our judgments may include reserves
for potential adverse outcomes regarding tax positions that
have been taken that may be subject to challenge by taxing
authorities. Changes in laws, regulations or adverse
judgments and the inherent difficulty in quantifying potential
tax effects of business decisions may negatively affect NW
Holdings’ or NW Natural’s financial condition and results of
operations.
In this regard, the Tax Cuts and Jobs Act of 2017 was
approved by the U.S. Congress on December 20, 2017 and
signed into law by the U.S. President on December 22,
2017. This legislation makes significant changes to the U.S.
Internal Revenue Code. Such changes include a reduction
in the corporate tax rate from 35% to 21% and limitations on
certain corporate deductions and credits, among other
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changes. Certain of these changes may negatively affect
NW Holdings’ and NW Natural’s financial condition and
results of operations.
There is uncertainty as to how our regulators will reflect the
impact of the legislation in rates. The resulting ratemaking
treatment may negatively affect NW Holdings’ or NW
Natural’s financial condition and results of operations.
SAFETY REGULATION RISK. NW Holdings and NW Natural
may experience increased federal, state and local regulation
of the safety of our systems and operations, which could
adversely affect NW Holdings’ or NW Natural’s operating
costs and financial results.
The safety and protection of the public, our customers and
our employees is and will remain our top priority. We are
committed to consistently monitoring and maintaining our
distribution systems and storage operations to ensure that
natural gas is acquired, stored and delivered safely, reliably
and efficiently. Given recent high-profile natural gas
explosions, leaks and accidents in other parts of the country
involving both distribution systems and storage facilities, we
anticipate that the natural gas industry may be the subject of
even greater federal, state and local regulatory oversight.
For example, in 2016, the Protecting our Infrastructure of
Pipelines and Enhancing Safety Act (PIPES Act) was signed
into law increasing regulations for natural gas storage
pipelines and underground storage facilities. Similarly, in
2016, California passed legislation directing the Department
of Oil, Gas and Geothermal Resources (DOGGR) to
develop regulations affecting gas storage operations.
DOGGR has issued regulations which require certain
integrity testing and tubing for wells at the Gill Ranch Facility
within the next 7 years.
We intend to work diligently with industry associations and
federal and state regulators to seek to ensure compliance
with these and other new laws. We expect there to be
increased costs associated with compliance, and those
costs could be significant. If these costs are not recoverable
in our customer rates, they could have a negative impact on
NW Holdings’ and NW Natural’s operating costs and
financial results.
HEDGING RISK. NW Natural’s risk management policies and
hedging activities cannot eliminate the risk of commodity
price movements and other financial market risks, and its
hedging activities may expose it to additional liabilities for
which rate recovery may be disallowed, which could result in
an adverse impact on NW Holdings’ and NW Natural’s
operating revenues, costs, derivative assets and liabilities
and operating cash flows.
NW Natural’s gas purchasing requirements expose it to
risks of commodity price movements, while its use of debt
and equity financing exposes it to interest rate, liquidity and
other financial market risks. NW Natural attempts to manage
these exposures with both financial and physical hedging
mechanisms, including its gas reserves transactions which
are hedges backed by physical gas supplies. While NW
Natural has risk management procedures for hedging in
place, they may not always work as planned and cannot
entirely eliminate the risks associated with hedging.
Additionally, NW Natural’s hedging activities may cause it to
incur additional expenses to obtain the hedge. NW Natural
does not hedge its entire interest rate or commodity cost
exposure, and the unhedged exposure will vary over time.
Gains or losses experienced through hedging activities,
including carrying costs, generally flow through NW
Natural’s PGA mechanism or are recovered in future
general rate cases. However, the hedge transactions NW
Natural enters into for utility purposes are subject to a
prudence review by the OPUC and WUTC, and, if found
imprudent, those expenses may be, and have been
previously, disallowed, which could have an adverse effect
on NW Holdings’ or NW Natural’s financial condition and
results of operations.
In addition, NW Natural’s actual business requirements and
available resources may vary from forecasts, which are
used as the basis for its hedging decisions, and could cause
its exposure to be more or less than anticipated. Moreover,
if NW Natural’s derivative instruments and hedging
transactions do not qualify for regulatory deferral and it does
not elect hedge accounting treatment under U.S. GAAP, NW
Holdings’ or NW Natural’s results of operations and financial
condition could be adversely affected.
NW Natural also has credit-related exposure to derivative
counterparties. Counterparties owing NW Natural or its
subsidiaries money or physical natural gas commodities
could breach their obligations. Should the counterparties to
these arrangements fail to perform, NW Natural may be
forced to enter into alternative arrangements to meet its
normal business requirements. In that event, NW Holdings’
or NW Natural’s financial results could be adversely
affected. Additionally, under most of NW Natural’s hedging
arrangements, any downgrade of its senior unsecured long-
term debt credit rating could allow its counterparties to
require NW Natural to post cash, a letter of credit or other
form of collateral, which would expose NW Natural to
additional costs and may trigger significant increases in
borrowing from its credit facilities or equity contribution
needs from NW Holdings, if the credit rating downgrade is
below investment grade. Further, based on current
interpretations, NW Natural is not considered a "swap
dealer" or "major swap participant" in 2019, so NW Natural
is exempt from certain requirements under the Dodd-Frank
Act. If NW Natural is unable to claim this exemption, it could
be subject to higher costs for its derivatives activities, and
such higher costs could have a negative impact on NW
Holdings’ and NW Natural’s operating costs and financial
results.
INABILITY TO ACCESS CAPITAL MARKET RISK. NW Holdings’
or NW Natural’s inability to access capital, or significant
increases in the cost of capital, could adversely affect NW
Holdings’ or NW Natural’s financial condition and results of
operations.
NW Holdings’ and NW Natural’s ability to obtain adequate
and cost effective short-term and long-term financing
depends on maintaining investment grade credit profiles as
well as the existence of liquid and stable financial markets.
NW Holdings relies on access to equity and bank markets to
finance equity contributions to subsidiaries and other
business requirements. NW Natural relies on access to
capital and bank markets, including commercial paper and
bond markets, to finance its operations, construction
19
expenditures and other business requirements, and to
refund maturing debt that cannot be funded entirely by
internal cash flows. Disruptions in capital markets could
adversely affect our ability to access short-term and long-
term financing. Our access to funds under committed credit
facilities, which are currently provided by a number of
banks, is dependent on the ability of the participating banks
to meet their funding commitments. Those banks may not
be able to meet their funding commitments if they
experience shortages of capital and liquidity. Disruptions in
the bank or capital financing markets as a result of
economic uncertainty, changing or increased regulation of
the financial sector, or failure of major financial institutions
could adversely affect NW Holdings’ and NW Natural’s
access to capital and negatively impact our ability to run our
businesses and make strategic investments.
NW Natural is currently rated by S&P and Moody’s and a
negative change in its credit ratings, particularly below
investment grade, could adversely affect its cost of
borrowing and access to sources of liquidity and capital.
Such a downgrade could further limit its access to borrowing
under available credit lines. Additionally, downgrades in its
current credit ratings below investment grade could cause
additional delays in NW Natural's ability to access the
capital markets while it seeks supplemental state regulatory
approval, which could hamper its ability to access credit
markets on a timely basis. NW Holdings' credit profile is
largely supported by NW Natural’s credit ratings and any
negative change in NW Natural’s credit ratings would likely
negatively impact NW Holdings’ access to sources of
liquidity and capital and cost of borrowing. A credit
downgrade to NW Natural, or resulting negative impact on
NW Holdings, could also require additional support in the
form of letters of credit, cash or other forms of collateral and
otherwise adversely affect NW Holdings' or NW Natural’s
financial condition and results of operations.
REPUTATIONAL RISKS. Customers', legislators', and
regulators' opinions of NW Holdings and NW Natural are
affected by many factors, including system reliability and
safety, protection of customer information, rates, media
coverage, and public sentiment. To the extent that
customers, legislators, or regulators have or develop a
negative opinion of our businesses, NW Holdings’ and NW
Natural’s financial positions, results of operations and cash
flows could be adversely affected.
A number of factors can affect customer satisfaction
including: service interruptions or safety concerns due to
failures of equipment or facilities or from other causes, and
our ability to promptly respond to such failures; our ability to
safeguard sensitive customer information; the timing and
magnitude of rate increases; and volatility of rates.
Customers', legislators', and regulators' opinions of us can
also be affected by media coverage, including the
proliferation of social media, which may include information,
whether factual or not, that damages our brand and
reputation.
If customers, legislators, or regulators have or develop a
negative opinion of us and our services, this could result in
increased regulatory oversight and could affect the returns
on common equity we are allowed to earn. Additionally,
negative opinions about us could make it more difficult for
us to achieve favorable legislative or regulatory outcomes.
Negative opinions could also result in sales volumes
reductions or increased use of other sources of energy. Any
of these consequences could adversely affect NW Holdings’
or NW Natural’s financial position, results of operations and
cash flows.
RELIANCE ON TECHNOLOGY RISK. NW Holdings’ and NW
Natural’s efforts to integrate, consolidate and streamline
each of their operations has resulted in increased reliance
on technology, the failure or security breach of which could
adversely affect NW Holdings’ or NW Natural’s financial
condition and results of operations.
Over the last several years NW Holdings and NW Natural
have undertaken a variety of initiatives to integrate,
standardize, centralize and streamline operations. These
efforts have resulted in greater reliance on technological
tools such as, at NW Natural: an enterprise resource
planning system, an automated dispatch system, an
automated meter reading system, a customer information
system, a web-based ordering and tracking system, and
other similar technological tools and initiatives. The failure of
any of these or other similarly important technologies, or our
inability to have these technologies supported, updated,
expanded or integrated into other technologies, could
adversely impact operations. We take precautions to protect
our systems, but there is no guarantee that the procedures
we have implemented to protect against unauthorized
access to secured data and systems are adequate to
safeguard against all security breaches. Our businesses
could experience breaches of security pertaining to sensitive
customer, employee, and vendor information maintained by
us in the normal course of business, which could adversely
affect our reputation, diminish customer confidence, disrupt
operations, materially increase the costs we incur to protect
against these risks, and subject us to possible financial
liability or increased regulation or litigation, any of which
could adversely affect NW Holdings’ or NW Natural’s
financial condition and results of operations.
Furthermore, we rely on information technology systems in
the operation of our businesses. There are various risks
associated with these systems, including hardware and
software failure, communications failure, data distortion or
destruction, unauthorized access to data, misuse of
proprietary or confidential data, unauthorized control
through electronic means, programming mistakes and other
inadvertent errors or deliberate human acts. In particular,
cyber security attacks, data breaches, terrorism or other
malicious acts could damage, destroy or disrupt all of our
business systems. Any failure of information technology
systems could result in a loss of operating revenues, an
increase in operating expenses and costs to repair or
replace damaged assets. As these potential cyber security
attacks become more common and sophisticated, we could
be required to incur costs to strengthen our systems or
obtain specific insurance coverage against potential losses.
REGULATORY ACCOUNTING RISK. In the future, NW
Holdings or NW Natural may no longer meet the criteria for
continued application of regulatory accounting practices for
all or a portion of our regulated operations.
If we can no longer apply regulatory accounting, we could
be required to write off our regulatory assets and precluded
from the future deferral of costs not recovered through rates
at the time such amounts are incurred, even if we are
expected to recover these amounts from customers in the
future.
GAS PRICE RISK. Higher natural gas commodity prices and
volatility in the price of gas may adversely affect NW
Natural’s NGD business, whereas lower gas price volatility
may adversely affect NW Natural’s and NW Holdings’ gas
storage business, in each case negatively affecting NW
Holdings’ and NW Natural’s results of operations and cash
flows.
The cost of natural gas is affected by a variety of factors,
including weather, changes in demand, the level of
production and availability of natural gas supplies,
transportation constraints, availability and cost of pipeline
capacity, federal and state energy and environmental
regulation and legislation, natural disasters and other
catastrophic events, national and worldwide economic and
political conditions, and the price and availability of
alternative fuels. At NW Natural, the cost we pay for natural
gas is generally passed through to customers through an
annual PGA rate adjustment. If gas prices were to increase
significantly, it would raise the cost of energy to NW
Natural’s customers, potentially causing those customers to
conserve or switch to alternate sources of energy.
Significant price increases could also cause new home
builders and commercial developers to select alternative
energy sources. Decreases in the volume of gas NW
Natural sells could reduce NW Holdings or NW Natural’s
earnings, and a decline in customers could slow growth in
future earnings. Additionally, because a portion (10% or
20%) of any difference between the estimated average PGA
gas cost in rates and the actual average gas cost incurred is
recognized as current income or expense, higher average
gas costs than those assumed in setting rates can adversely
affect NW Holdings’ and NW Natural’s operating cash flows,
liquidity and results of operations. Additionally,
notwithstanding NW Natural’s current rate structure, higher
gas costs could result in increased pressure on the OPUC
or the WUTC to seek other means to reduce NW Natural’s
rates, which also could adversely affect NW Holdings’ and
NW Natural’s results of operations and cash flows.
Higher gas prices may also cause NW Natural to experience
an increase in short-term debt and temporarily reduce
liquidity because it pays suppliers for gas when it is
purchased, which can be in advance of when these costs
are recovered through rates. Significant increases in the
price of gas can also slow collection efforts as customers
experience increased difficulty in paying their higher energy
bills, leading to higher than normal delinquent accounts
receivable resulting in greater expense associated with
collection efforts and increased bad debt expense.
Conversely, storage businesses benefit from price volatility,
which impacts the level of demand for services and the
rates that can be charged for storage services. Largely due
to the abundant supply of natural gas made available by
hydraulic fracturing techniques, natural gas prices have
dropped significantly to levels that are near historic lows. If
prices and volatility remain low or decline further, then the
20
demand for storage services, and the prices that we will be
able to charge for those services, may decline or be
depressed for a prolonged period of time. Prices below the
costs to operate a storage facility could result in a decision
to shut-in all or a portion of the facility. A sustained decline in
these prices or a shut-in of all or a portion of the facility
could have an adverse impact on NW Holdings’ or NW
Natural’s financial condition, results of operations and cash
flows.
IMPAIRMENT OF LONG-LIVED ASSETS OR GOODWILL RISK.
Impairments of the value of long-lived assets or goodwill
could have a material effect on NW Holdings’ or NW
Natural’s financial condition, or results of operations.
NW Holdings and NW Natural review the carrying value of
long-lived assets whenever events or changes in
circumstances indicate the carrying amount of the assets
might not be recoverable. The determination of
recoverability is based on the undiscounted net cash flows
expected to result from the operation of such assets.
Projected cash flows depend on the future operating costs
and projected revenues associated with the asset. In 2017,
NW Natural recognized a $192.5 million impairment of long-
lived assets at the Gill Ranch Facility as of December 31,
2017. We review our other long-lived assets to determine if
an impairment analysis is necessary.
We review the carrying value of goodwill annually or
whenever events or changes in circumstances indicate that
such carrying value may not be recoverable. A goodwill
impairment analysis begins with a qualitative analysis of
events and circumstances. If the qualitative assessment
indicates that the carrying value may be at risk, we will
perform a quantitative assessment and recognize a goodwill
impairment for any amount in which the fair value of a
reporting unit exceeds its fair value. Any impairment charge
taken with respect to our long-lived assets or goodwill could
be material and could have a material effect on NW
Holdings’ or NW Natural’s financial condition and results of
operations.
CUSTOMER GROWTH RISK. NW Holdings’ and NW Natural’s
NGD margin, earnings and cash flow may be negatively
affected if we are unable to sustain customer growth rates in
our NGD segment.
NW Natural’s NGD margins and earnings growth have
largely depended upon the sustained growth of its
residential and commercial customer base due, in part, to
the new construction housing market, conversions of
customers to natural gas from other energy sources and
growing commercial use of natural gas. The last recession
slowed new construction. While new home construction has
resumed and the multi-family composition has been higher
than its pre-recession pace, overall construction has not
returned to the pre-recession pace, and there are
predictions of an impending new recessionary cycle.
Insufficient growth in these markets, for economic, political
or other reasons could adversely affect NW Holdings’ or NW
Natural’s utility margin, earnings and cash flows.
RISK OF COMPETITION. Our NGD business is subject to
increased competition which could negatively affect NW
Holdings’ or NW Natural’s results of operations.
21
In the residential and commercial markets, NW Natural’s
NGD business competes primarily with suppliers of
electricity, fuel oil, and propane. In the industrial market, NW
Natural competes with suppliers of all forms of energy.
Competition among these forms of energy is based on price,
efficiency, reliability, performance, market conditions,
technology, environmental impacts and public perception.
Technological improvements in other energy sources such
as heat pumps, batteries or other alternative technologies
could erode NW Natural’s competitive advantage. If natural
gas prices rise relative to other energy sources, or if the
cost, environmental impact or public perception of such
other energy sources improves relative to natural gas, it
may negatively affect NW Natural’s ability to attract new
customers or retain our existing residential, commercial and
industrial customers, which could have a negative impact on
our customer growth rate and NW Holdings’ and NW
Natural’s results of operations.
Our natural gas storage operations compete primarily with
other storage facilities and pipelines. Natural gas storage is
an increasingly competitive business, with the ability to
expand or build new storage capacity in California, the U.S.
Rocky Mountains and elsewhere in the United States and
Canada. Increased competition in the natural gas storage
business could reduce the demand for our natural gas
storage services, drive prices down for our storage
business, and adversely affect our ability to renew or
replace existing contracts at rates sufficient to maintain
current revenues and cash flows, which could adversely
affect NW Holdings’ and NW Natural’s financial condition,
results of operations and cash flows.
RELIANCE ON THIRD PARTIES TO SUPPLY NATURAL GAS
RISK. NW Natural relies on third parties to supply the natural
gas in its NGD segment, and limitations on NW Natural’s
ability to obtain supplies, or failure to receive expected
supplies for which it has contracted, could have an adverse
impact on NW Holdings’ or NW Natural’s financial results.
NW Natural’s ability to secure natural gas for current and
future sales depends upon its ability to purchase and
receive delivery of supplies of natural gas from third parties.
NW Natural, and in some cases, its suppliers of natural gas,
does not have control over the availability of natural gas
supplies, competition for those supplies, disruptions in those
supplies, priority allocations on transmission pipelines, or
pricing of those supplies. Additionally, third parties on whom
NW Natural relies may fail to deliver gas for which it has
contracted. For example, on October 9, 2018, a 36-inch
pipeline near Prince George, British Columbia owned by
Enbridge ruptured, disrupting natural gas flows from Canada
into Washington while the ruptured pipeline and an adjacent
pipeline were assessed and the ruptured pipeline was
repaired. Once repaired, pressurization levels for those
pipelines were reduced for assessment and testing. If NW
Natural is unable or limited in its ability to obtain natural gas
from its current suppliers or new sources, it may not be able
to meet customers' gas requirements and would likely incur
costs associated with actions necessary to mitigate service
disruptions, both of which could significantly and negatively
impact NW Holdings’ and NW Natural’s results of
operations.
located in Washington where it does not have a weather
normalization mechanism. These effects could have an
adverse effect on NW Holdings’ and NW Natural’s financial
condition, results of operations and cash flows.
CUSTOMER CONSERVATION RISK. Customers’ conservation
efforts may have a negative impact on NW Holdings’ and
NW Natural’s revenues.
An increasing national focus on energy conservation,
including improved building practices and appliance
efficiencies may result in increased energy conservation by
customers. This can decrease NW Natural’s sales of natural
gas and adversely affect NW Holdings’ or NW Natural’s
results of operations because revenues are collected mostly
through volumetric rates, based on the amount of gas sold.
In Oregon, NW Natural has a conservation tariff which is
designed to recover lost utility margin due to declines in
residential and small commercial customers’ consumption.
However, NW Natural does not have a conservation tariff in
Washington that provides it this margin protection on sales
to customers in that state. Similar conservation risks exist
for water utilities. Customers’ conservation efforts may have
a negative impact on NW Holding’s and NW Natural’s
financial condition, revenues and results of operations.
Risks Related Primarily to NW Holdings' Water
Sector Businesses
NEW WATER SECTOR BUSINESS. NW Holdings has entered
the water sector through the acquisition of a number of
water companies. Water businesses are subject to a
number of risks in addition to the risks described above.
Although the water businesses are not currently expected to
materially contribute to the results of operations of NW
Holdings, these businesses are subject to risks, in addition
to those described above that could adversely affect their
results of operations, including:
•
contamination of water supplies, including water
provided to customers;
interruptions in water supplies and droughts;
conservation efforts by customers;
regulatory requirements; and
•
•
•
• weather conditions.
Significant losses, liabilities or impairments arising from
these businesses may adversely affect NW Holdings'
financial position or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved staff comments.
SINGLE TRANSPORTATION PIPELINE RISK. NW Natural
relies on a single pipeline company for the transportation of
gas to its service territory, a disruption of which could
adversely impact its ability to meet customers’ gas
requirements, which could significantly and negatively
impact NW Holdings’ and NW Natural’s results of
operations.
NW Natural’s distribution system is directly connected to a
single interstate pipeline, which is owned and operated by
Northwest Pipeline. The pipeline’s gas flows are bi-
directional, transporting gas into the Portland metropolitan
market from two directions: (1) the north, which brings
supplies from the British Columbia and Alberta supply
basins; and (2) the east, which brings supplies from the
Alberta and the U.S. Rocky Mountain supply basins. If there
is a rupture or inadequate capacity in the pipeline, NW
Natural may not be able to meet its customers’ gas
requirements and we would likely incur costs associated
with actions necessary to mitigate service disruptions, both
of which could significantly and negatively impact NW
Holdings’ and NW Natural’s results of operations.
THIRD PARTY PIPELINE RISK. NW Holdings’ and NW
Natural’s gas storage businesses depend on third-party
pipelines that connect our storage facilities to interstate
pipelines, the failure or unavailability of which could
adversely affect NW Holdings’ or NW Natural’s financial
condition, results of operations and cash flows.
Our gas storage facilities are reliant on the continued
operation of a third-party pipeline and other facilities that
provide delivery options to and from our storage facilities.
Because we do not own all of these pipelines, their
operations are not within our control. If the third-party
pipeline to which we are connected were to become
unavailable for current or future withdrawals or injections of
natural gas due to repairs, damage to the infrastructure, lack
of capacity or other reasons, our ability to operate efficiently
and satisfy our customers’ needs could be compromised,
thereby potentially having an adverse impact on NW
Holdings’ or NW Natural’s financial condition, results of
operations and cash flows.
WEATHER RISK. Warmer than average weather may have a
negative impact on our revenues and results of operations.
We are exposed to weather risk in our natural gas business,
primarily at NW Natural. A majority of NW Natural’s gas
volume is driven by gas sales to space heating residential
and commercial customers during the winter heating
season. Current NW Natural rates are based on an
assumption of average weather. Warmer than average
weather typically results in lower gas sales. Colder weather
typically results in higher gas sales. Although the effects of
warmer or colder weather on utility margin in Oregon are
expected to be mitigated through the operation of NW
Natural’s weather normalization mechanism, weather
variations from normal could adversely affect utility margin
because NW Natural may be required to purchase more or
less gas at spot rates, which may be higher or lower than
the rates assumed in its PGA. Also, a portion of NW
Natural’s Oregon residential and commercial customers
(usually less than 10%) have opted out of the weather
normalization mechanism, and 11% of its customers are
22
municipal streets or alleys pursuant to franchise or
occupation ordinances, in county roads or state highways
pursuant to agreements or permits granted pursuant to
statute, or on lands of others pursuant to easements
obtained from the owners of such lands. These properties
are used by entities that are aggregated and reported as
other under NW Holdings.
We consider all of our properties currently used in our
operations, both owned and leased, to be well maintained,
in good operating condition, and, along with planned
additions, adequate for our present and foreseeable future
needs.
ITEM 3. LEGAL PROCEEDINGS
Other than the proceedings disclosed in Note 17, we have
only nonmaterial litigation in the ordinary course of
business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 2. PROPERTIES
NW Natural's Natural Gas Distribution Properties
NW Natural's natural gas pipeline system consists of
approximately 20,000 miles of distribution and transmission
mains located in its service territory in Oregon and
Washington. In addition, the pipeline system includes
service pipelines, meters and regulators, and gas regulating
and metering stations. Natural gas pipeline mains are
located in municipal streets or alleys pursuant to franchise
or occupation ordinances, in county roads or state highways
pursuant to agreements or permits granted pursuant to
statute, or on lands of others pursuant to easements
obtained from the owners of such lands. NW Natural also
holds permits for the crossing of numerous navigable
waterways and smaller tributaries throughout our entire
service territory.
NW Natural owns service building facilities in Portland,
Oregon, as well as various satellite service centers,
garages, warehouses, and other buildings necessary and
useful in the conduct of its business. Resource centers are
maintained on owned or leased premises at convenient
points in the distribution system to provide service within
NW Natural's service territory. NW Natural also owns LNG
storage facilities in Portland and near Newport, Oregon.
NW Natural also leases office space in Portland for its
corporate headquarters, which expires on May 31, 2020. In
anticipation of the expiration of the current lease, NW
Natural executed an extensive search and evaluation
process that focused on seismic preparedness, safety,
reliability, the least cost to our customers, and a continued
commitment to our employees and the communities we
serve. In October 2017, NW Natural entered into a 20-year
operating lease agreement for a new headquarters in
Portland. Payments under the new lease are expected to
commence in 2020.
NW Natural's Mortgage and Deed of Trust (Mortgage) is a
first mortgage lien on substantially all of the property
constituting our natural gas distribution plant balances.
These properties are used in the NGD segment.
NW Natural's Natural Gas Storage Properties
NW Natural holds leases and other property interests in
approximately 12,000 net acres of underground natural gas
storage in Oregon and easements and other property
interests related to pipelines associated with these facilities.
NW Natural owns rights to depleted gas reservoirs near
Mist, Oregon that are continuing to be developed and
operated as underground gas storage facilities. NW Natural
also holds all future storage rights in certain other areas of
the Mist gas field in Oregon in addition to other leases and
property interests.
A portion of these properties are used in the NGD segment.
NWN Water's Distribution Properties
We own and maintain water pipelines and hold related
leases and other property interests in Oregon, Washington,
and Idaho, associated with water distribution entities that
were acquired during 2018. Pipelines are located in
23
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
NW Holdings' common stock is listed and trades on the New York Stock Exchange under the symbol NWN.
There is no established public trading market for NW Natural's common stock.
As of February 22, 2019, there were 4,950 holders of record of NW Holdings' common stock and NW Holdings was the sole
holder of NW Natural's common stock.
The following table provides information about purchases of NW Holdings' equity securities that are registered pursuant to
Section 12 of the Securities Exchange Act of 1934 during the quarter ended December 31, 2018:
Period
Balance forward
10/01/18-10/31/18
11/01/18-11/30/18
12/01/18-12/31/18
Total
Issuer Purchases of Equity Securities
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)
2,124,528
$
16,732,648
— $
1,147
—
1,147
—
69.02
—
—
—
—
—
—
—
2,124,528
$
16,732,648
(1) During the quarter ended December 31, 2018, no shares of NW Holdings common stock were purchased on the open market to meet the
requirements of our Dividend Reinvestment and Direct Stock Purchase Plan. However, 1,147 shares of NW Holdings common stock were
purchased on the open market to meet the requirements of share-based compensation programs. During the quarter ended December 31,
2018, no shares of NW Holdings common stock were accepted as payment for stock option exercises pursuant to the NW Natural Restated
Stock Option Plan.
(2) During the quarter ended December 31, 2018, no shares of NW Holdings common stock were repurchased pursuant to the Board-Approved
share repurchase program. In October 2018, we received NW Holdings Board Approval to extend the repurchase program through May
2019. For more information on this program, see Note 5.
24
ITEM 6. SELECTED FINANCIAL DATA
NORTHWEST NATURAL HOLDING COMPANY
For the year ended December 31,
In thousands, except per share data
2018
2017
2016
2015
2014
Operating revenues
$
706,143
$
755,038
$
668,173
$
717,888
$
747,251
Earnings from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
67,311
(2,742)
64,569
72,073
(127,696)
(55,623)
62,419
(3,524)
58,895
60,026
(6,323)
53,703
66,006
(7,314)
58,692
Earnings from continuing operations per share of
common stock:
Basic
Diluted
Loss from discontinued operations per share of
common stock:
Basic
Diluted
Earnings (Loss) per share of common stock:
Basic
Diluted
Dividends paid per share of common stock
$
$
$
2.34
$
2.33
2.51
$
2.51
2.26
$
2.25
2.19
$
2.19
(0.10) $
(4.45) $
(0.13) $
(0.23) $
(0.09)
(4.44)
(0.13)
(0.23)
2.24
$
(1.94) $
2.13
$
1.96
$
2.24
1.89
(1.93)
1.88
2.12
1.87
1.96
1.86
2.43
2.42
(0.27)
(0.26)
2.16
2.16
1.85
Total assets, end of period
$
3,242,662
$
3,039,746
$
3,079,801
$
3,069,410
$
3,056,326
Total equity
Long-term debt(1)
762,634
706,247
742,776
683,184
850,497
679,334
780,972
569,445
767,321
593,095
(1) Excludes $20 million of long-term debt in 2014 associated with our discontinued operations.
NORTHWEST NATURAL GAS COMPANY
For the year ended December 31,
In thousands, except per share data
2018
2017
2016
2015
2014
Operating revenues
$
705,571
$
755,038
$
667,949
Earnings from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
68,049
(1,723)
66,326
71,720
(127,343)
(55,623)
$
$
717,664
60,511
$
$
62,835
(3,940) $
(6,808) $
58,895
$
53,703
$
747,027
66,504
(7,812)
58,692
Total assets, end of period
$
3,192,736
$
3,043,676
Total equity
Long-term debt(1)
715,668
704,134
742,776
683,184
$
$
$
3,081,470
850,497
679,334
$
$
$
3,072,100
780,972
569,445
$
$
$
3,063,712
767,321
593,095
(1) Excludes $20 million of long-term debt in 2014 associated with Gill Ranch discontinued operations.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Holdings is a holding company headquartered in
Portland, Oregon and owns NW Natural, NWN Water, and
other businesses and activities. NW Natural is NW
Holdings’ largest subsidiary.
NW Natural's natural gas distribution activities are reported
in the natural gas distribution (NGD) segment, formerly
titled and reported as the utility segment. All other business
activities, including certain gas storage activities, water
businesses, and other investments and activities are
aggregated and reported as other at their respective
registrant. References in this discussion to "Notes" are to
the Notes to the Consolidated Financial Statements in Item
8 of this report.
In addition, NW Holdings has reported discontinued
operations results related to the pending sale of Gill Ranch
Storage, LLC (Gill Ranch). NW Natural Gas Storage, LLC
(NWN Gas Storage), currently an indirect wholly-owned
subsidiary of NW Holdings, entered into a Purchase and
Sale Agreement during the second quarter of 2018 that
provides for the sale of all membership interests in Gill
Ranch. Gill Ranch owns a 75% interest in the natural gas
storage facility located near Fresno, California known as
the Gill Ranch Gas Storage Facility. Pacific Gas and
Electric Company (PG&E) owns the remaining 25% interest
in the Gill Ranch Gas Storage Facility. For more
information, see "Results of Operations - Pending Sale of
Gill Ranch Storage" below.
The following is management’s assessment of NW
Holdings' and NW Natural's financial condition, including
the principal factors that affect results of operations. The
discussion covers the years ended December 31, 2018,
2017, and 2016 and refers to the consolidated results of
NW Holdings, the substantial majority of which consist of
the operating results of NW Natural. When significant
activity exists at NW Holdings that does not exist at NW
Natural, additional disclosure has been provided.
NW Holdings' direct and indirect wholly-owned subsidiaries
include:
26
• 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;
Cascadia Water, LLC (Cascadia);
NW Natural Water of Oregon, LLC (NWN Water of
Oregon);
NW Natural Water of Washington, LLC (NWN
Water of Washington);
NW Natural Water of Idaho, LLC (NWN Water of
Idaho); and
Gem State Water Company, LLC (Gem State)
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
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
or exclude the effects of certain items, which are non-GAAP
financial measures. We present net income or loss and
earnings or loss per share adjusted for certain items along
with the U.S. GAAP measures to illustrate their magnitude
on ongoing business and operational results. Although the
excluded amounts are properly included in the
determination of net income or loss and earnings or loss
per share under U.S. GAAP, we believe the amount and
nature of these items make period to period comparisons of
operations difficult or potentially confusing. We use such
non-GAAP financial 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. Reconciliations of the non-GAAP financial
measures to their closest U.S. GAAP measure used in
subsequent sections of Item 7 are provided below.
NON-GAAP RECONCILIATIONS
NW HOLDINGS
In millions, except per share data
Net income from continuing operations
Adjustments:
Regulatory environmental disallowance(1)
Tax effects of 2017 TCJA remeasurement(2)
Tax effects of non-GAAP adjustment
Adjusted net income from continuing operations
NGD segment net income from continuing operations
Adjustments:
Regulatory environmental disallowance(1)
Tax effects of 2017 TCJA remeasurement(2)
Tax effects of non-GAAP adjustment
Adjusted NGD segment net income from continuing operations
Other net income from continuing operations
Adjustments:
Tax effects of 2017 TCJA remeasurement(2)
Adjusted other net income from continuing operations
NW NATURAL
In millions
Net income from continuing operations
Adjustments:
Regulatory environmental disallowance(1)
Tax effects of 2017 TCJA remeasurement(2)
Tax effects of non-GAAP adjustment
Adjusted net income from continuing operations
NGD segment net income from continuing operations
Adjustments:
Regulatory environmental disallowance(1)
Tax effects of 2017 TCJA remeasurement(2)
Tax effects of non-GAAP adjustment
Adjusted NGD segment net income from continuing operations
Other net income from continuing operations
Adjustments:
Tax effects of 2017 TCJA remeasurement(2)
Adjusted other net income from continuing operations
Note: Totals may not foot due to rounding.
2018
2017
2016
Amount
Per Share
Amount
Per Share
Amount
Per Share
$
67.3
$
2.33
$
72.1
$
2.51
$
62.4
$
2.25
—
—
—
67.3
57.5
—
—
—
57.5
9.8
—
9.8
$
$
$
$
$
—
—
—
—
(3.4)
—
2.33
$
68.7
1.99
$
60.5
—
—
—
—
1.0
—
1.99
$
61.5
0.34
$
11.6
$
$
$
$
—
(0.12)
—
3.3
—
(1.3)
2.39
$
64.4
2.10
$
54.6
—
0.03
—
3.3
—
(1.3)
2.13
$
56.6
0.41
$
7.9
$
$
$
$
—
(4.4)
(0.15)
—
0.34
$
7.2
$
0.26
$
7.9
$
2018
Amount
2017
Amount
2016
Amount
68.0
$
71.7
$
—
—
—
68.0
57.5
—
—
—
57.5
10.6
—
$
$
$
$
10.6
$
—
(3.0)
—
68.7
60.5
—
1.0
—
61.5
11.2
$
$
$
$
(4.0)
7.2
$
0.12
—
(0.05)
2.32
1.96
0.12
—
(0.05)
2.03
0.29
—
0.29
62.8
3.3
—
(1.3)
64.8
54.6
3.3
—
(1.3)
56.6
8.3
—
8.3
$
$
$
$
$
$
$
$
$
$
$
(1) Regulatory environmental disallowance of $3.3 million in 2016 includes $2.8 million recorded in NGD other income (expense), net and $0.5
million recorded in NGD operations and maintenance expense. The tax effect of the adjustment is calculated using the combined federal and
state statutory rate in effect at the time of 39.5%. NW Holdings' EPS amounts for the 2016 adjustment are calculated using diluted shares of
27.8 million, as shown on the NW Holdings Consolidated Statements of Comprehensive Income.
(2) Non-cash TCJA benefit (expense) associated with continuing operations of $3.4 million was recorded in income tax expense (benefit) in the
fourth quarter of 2017 as a result of the federal tax rate changing from 35% to 21% effective December 22, 2017. The majority of this benefit
was recorded at NW Natural. NW Holdings EPS amounts are calculated using diluted shares of 28.8 million as shown on the NW Holdings
Consolidated Statements of Comprehensive Income. The TCJA impacts in the NGD segment and other may not correlate exactly to the
consolidated amount due to rounding. See Note 10 for additional information on the TCJA.
27
EXECUTIVE SUMMARY
We manage our business and strategic initiatives with a
long-term view of providing service safely and reliably to our
customers, working with regulators on key policy initiatives,
and remaining focused on growing our businesses. See
"2019 Outlook" below for more information. Highlights for
the year include:
•
added over 12,500 natural gas customers in 2018 for
an annual growth rate of 1.7% at December 31, 2018;
invested $215 million in NGD distribution systems and
facilities for growth and reliability;
completed key components of the North Mist Gas
Storage Expansion Project and continue to target an in-
service date during the spring of 2019;
•
•
•
• NW Natural ranked first in the West in the 2018 J.D.
Power Gas Utility Residential Customer Satisfaction
Study and Gas Utility Business Customer Satisfaction
Study;
completed key aspects of NW Natural's Oregon general
rate case and filed for a general rate increase in
Washington for the first time in a decade;
completed four water distribution acquisitions with
several more pending, the largest of which is a water
and wastewater business in Sunriver, Oregon. Once
pending transactions close, our water business is
expected to serve 18,000 connections; and
delivered increasing dividends for the 63rd consecutive
year to shareholders.
•
•
Key financial highlights for NW Holdings include:
In millions, except per share data
Amount
Per Share
Amount
Per Share
Amount
Per Share
2018
2017
2016
Net income from continuing operations
Loss from discontinued operations, net of tax
Consolidated net income (loss)
Adjusted net income from continuing operations(1)
Natural gas distribution margin
Key financial highlights for NW Natural include:
In millions, except per share data
Net income from continuing operations
Loss from discontinued operations, net of tax
Consolidated net income (loss)
$
$
$
$
$
$
67.3 $
2.33
$
72.1 $
2.51
$
62.4 $
2.25
(2.7)
(0.09)
(127.7)
(4.44)
(3.5)
(0.13)
64.6 $
67.3 $
383.7
2.24
2.33
$
$
$
(55.6) $
(1.93) $
58.9 $
68.7 $
2.39
392.6
$
$
64.4 $
376.6
2.12
2.32
2018
Amount
2017
Amount
2016
Amount
68.0
$
(1.7)
66.3
$
71.7
$
(127.3)
(55.6) $
62.8
(3.9)
58.9
Adjusted net income from continuing operations(1)
64.8
(1) See the Non-GAAP Reconciliations table at the beginning of Item 7 for a reconciliation of this non-GAAP financial measure to its closest U.S.
68.7
68.0
$
$
$
GAAP measure.
2018 COMPARED TO 2017. NW Holdings' and NW Natural's
net income from continuing operations were $67.3 million
and $68.0 million, respectively, in 2018 compared to $72.1
million and $71.7 million, respectively, in 2017. The
decrease was primarily due to the benefit associated with
the TCJA deferred income tax remeasurement in 2017.
Excluding the benefit in 2017 associated with the TCJA
remeasurement, NW Holdings adjusted net income from
continuing operations decreased $1.4 million. See the Non-
GAAP reconciliations at the beginning of Item 7 for
additional information. The decrease was primarily due to
the following factors, all of which were driven by activity at
NW Natural:
•
an $8.9 million decrease in NGD segment margin
primarily due to the deferral of excess revenue
associated with the federal income tax rate decrease as
a result of the TCJA;
a $4.3 million increase in operations and maintenance
expense driven by general payroll and benefits
•
•
•
•
increases as well as increases in professional services
and contract labor;
a $4.1 million increase in depreciation and amortization
primarily due to additional capital expenditures; and
a $3.3 million decrease in other income (expense), net
primarily due to an increase in pension and
postretirement benefit expense, partially offset by an
increase in the equity portion of AFUDC; partially offset
by
a $20.2 million decrease in income tax expense due to
the decrease in the federal income tax rate as a result
of the TCJA and lower pretax earnings.
2017 COMPARED TO 2016. NW Holdings' and NW Natural's
net income from continuing operations were $72.1 million
and $71.7 million, respectively, in 2017 compared to $62.4
million and $62.8 million, respectively, in 2016. The increase
included a $3.4 million benefit due to the deferred income
tax balance remeasurement associated with the TCJA in
2017 and a $3.3 million pre-tax regulatory environmental
disallowance in 2016.
28
Excluding the impact of these items, NW Holdings adjusted
net income from continuing operations increased $4.3
million. See the Non-GAAP reconciliations at the beginning
of Item 7 for additional information. The increase was
primarily due to the following factors, all of which were
driven by activity at NW Natural:
•
a $16.0 million increase in NGD segment margin
primarily due to customer growth and effects of colder
than average weather in 2017 compared to warmer
than average weather in 2016; and
a $6.9 million increase in other income (expense), net
primarily due an increase in the equity portion of
AFUDC; partially offset by
a $15.7 million increase in operations and maintenance
expense driven by higher NGD segment payroll and
benefits increases, as well as increased NGD segment
safety equipment upgrade costs; and
a $1.0 million decrease in revenues from asset
management agreements for Mist storage and
transportation capacity.
•
•
•
29
2019 OUTLOOK
Our 2019 goals leverage our resources and history of innovation to continue meeting the evolving needs of customers,
regulators, and shareholders. Our near-term outlook is centered on the following long-term strategic objectives:
Delivering Our Products
Ensure Safe and Reliable Service
Provide a Superior Customer Experience
Grow Our Businesses
Enable NW Natural Growth
Lead in a Low-Carbon Future
Advance Constructive Legislative Policies and Regulation
Integrate and Grow our Water Businesses
SAFETY AND RELIABILITY. Delivering our products safely
and reliably to customers is our first priority. During 2019,
NW Natural will maintain its vigilant focus on safety and
emergency response through hands-on scenario-based
training for employees, third-party contractors, and local
authorities. To ensure the reliability, resiliency, and safety of
NW Natural's infrastructure, we intend to continue to invest
in the maintenance and necessary upgrades of our pipeline
system, including completing projects to replace end-of-life
equipment at our Mist storage facility, renovating several
resource centers, and supporting growth and reliability in
Oregon and southwest Washington. Safety also includes
NW Holdings' and NW Natural's vigilance in maintaining
and seeking to strengthen cybersecurity defenses and
preparing for large-scale emergency events, such as
seismic hazards.
SUPERIOR CUSTOMER EXPERIENCE. NW Natural has a
legacy of providing excellent customer service and a long-
standing dedication to continuous improvement, which has
resulted in consistently high rankings in the J.D. Power and
Associates customer satisfaction studies. In 2019, we will
strive to enhance our customers' experience to meet their
evolving expectations by prioritizing improvements to
technology and internal processes which supports our
customers' frequent interactions and highest value
touchpoints.
POLICIES AND REGULATION. We remain committed to
working constructively with policymakers and regulators to
provide the best outcomes for both our customers and
stakeholders. At NW Natural, we are working closely with
the Oregon commission and other stakeholders on several
significant items, including the best way to return benefits
from the TCJA to NW Natural customers and complete its
Oregon general rate case, which we filed in December
2017. With regard to Washington regulation, NW Natural
filed a general rate case with Washington in December
2018 and will seek to work productively with parties in an
effort to conclude that case in 2019. NW Natural will
continue working with the EPA and other stakeholders on
an environmentally protective and cost effective clean-up
for the Portland Harbor Superfund Site. Finally, we are
engaged in policy discussions both in Oregon and
Washington at the state and community level to build
support for a constructive role for natural gas in a low-
carbon future.
NW NATURAL GROWTH. Natural gas is the preferred energy
choice in NW Natural's service territory given its efficient,
affordable, and reliable qualities. We are focused on
leveraging these key attributes to capitalize on our region's
strong economic growth. We continue to grow our market
share in the single-family residential sector and capture
new commercial customers as well as multifamily or mixed-
use developments. In addition, one of the largest and most
innovative capital projects in the history of NW Natural, the
North Mist Gas Storage Expansion, is expected to be
completed and begin supporting the integration of
renewables into the electric grid in 2019. We will continue to
look for opportunities to serve and grow with our
communities.
LOW-CARBON PATHWAY. We are deeply committed to a
clean energy future. It's why NW Natural launched a low-
carbon initiative to reduce emissions in the customers and
communities NW Natural serves by leveraging modern
pipeline systems in new ways, working closely with
customers, policymakers and regulators, and embracing
cutting-edge technology. NW Natural partnered with the
City of Portland to bring renewable natural gas (RNG) onto
its system. We expect the entire project to be operational in
2019 with several other RNG projects underway for
completion this year or in 2020. To further understand the
role of natural gas in a low-carbon future, NW Natural
engaged a premier environmental consultant to complete a
deep decarbonization study. The study outlines how natural
gas can help achieve crucial emission reductions of 80% by
2050. We will continue helping our customers reduce and
offset their consumption as we support the development of
renewable natural gas supply and explore other cutting
edge solutions to lower the carbon intensity of natural gas,
such as power to gas.
INTEGRATE AND GROW WATER. NW Water began its
expansion into the water business more than a year ago
with a focus on water sector investments that fit our
conservative risk profile and core competencies. In 2019
we plan to close our largest acquisition to date in Sunriver,
Oregon that serves approximately 9,400 water and
wastewater connections. Once all outstanding transactions
are closed, NW Water will serve 18,000 connections and
have invested nearly $70 million in the water sector.
30
DIVIDENDS
NW Holdings dividend highlights include:
Per common share
Dividends paid
2018
2017
2016
$ 1.8925
$ 1.8825
$ 1.8725
In January 2019, the NW Holdings' Board of Directors
declared a quarterly dividend on NW Holdings common
stock of $0.4750 per share, payable on February 15, 2019,
to shareholders of record on January 31, 2019, reflecting an
indicated annual dividend rate of $1.90 per share.
See "Financial Condition - Liquidity and Capital Resources"
for more information regarding the NW Holdings and NW
Natural dividend policies and regulatory conditions on NW
Natural dividends to its parent, NW Holdings.
31
RESULTS OF OPERATIONS
Regulatory Matters
Regulation and Rates
NATURAL GAS DISTRIBUTION. NW Natural's natural gas
distribution business is subject to regulation by the OPUC
and WUTC with respect to, among other matters, rates and
terms of service, systems of accounts, and issuances of
securities by NW Natural. In 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 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 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, NWN Gas Storage 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 18 for more information.
Most Recent General Rate Cases
OREGON. Effective November 1, 2012, through October 31,
2018, the OPUC authorized rates to customers based on an
ROE of 9.5%, an overall rate of return of 7.78%, and a
capital structure of 50% common equity and 50% long-term
debt.
Effective November 1, 2018, the OPUC authorized rates to
customers based on an ROE of 9.4%, an overall rate of
return of 7.317%, and a capital structure of 50% common
equity and 50% long-term debt. For additional information,
see "Regulatory Proceeding Updates" below.
WASHINGTON. Effective January 1, 2009, 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.
On December 31, 2018, NW Natural filed a general rate
case in Washington requesting an ROE of 10.3%, an overall
rate of return of 7.63%, and a capital structure of 49.5%
common equity, 49.5% long-term debt, and 1% short-term
debt. For additional information, see "Regulatory
Proceeding Updates" below.
FERC. NW Natural is required under its Mist interstate
storage certificate authority and rate approval orders to file
every five years either a petition for rate approval or a cost
and revenue study to change or justify maintaining the
existing rates for its interstate storage services. In January
2018, various state parties filed a request with the FERC to
adjust the revenue requirements of public utilities to reflect
the recent reduction in the federal corporate income tax rate
and other impacts resulting from the TCJA. In July 2018, the
FERC issued an order finalizing its regulations regarding the
effect of the TCJA. The new regulations required NW
Natural to file a petition for rate approval or a cost and
revenue study to reflect the new federal corporate income
tax rate within thirty days of the rate effective date of NW
Natural's Oregon rate case. 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 became
effective 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.
Regulatory Proceeding Updates
During 2018, NW Natural was involved in the regulatory
activities discussed below.
INTERSTATE STORAGE AND OPTIMIZATION 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 General Rate Case" below.
HOLDING COMPANY REORGANIZATION. In February 2017,
NW Natural filed applications with the OPUC, WUTC, and
CPUC for approval to reorganize under a holding company
structure. In 2017, the OPUC and WUTC approved NW
Natural's applications subject to certain restrictions or "ring-
fencing" provisions applicable to NW Natural, the company
that currently engages, and would continue to engage, in
NGD business operations. During the second quarter of
2018, NW Natural received approval to reorganize into a
holding company structure from the CPUC. On October 1,
2018, we completed the reorganization to a holding
company structure. Effective November 1, 2018 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, NW Natural will be required to provide an annual
$500,000 credit to Oregon customers and a $55,000 credit
32
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.
OREGON GENERAL RATE CASE. On October 26, 2018, the
OPUC issued an order regarding NW Natural's general rate
case originally filed in December 2017 and approved the
following items:
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. For it to be effective, the OPUC must issue
an Order. See "Regulatory Proceeding Updates-Oregon
General Rate Case" below for more information.
NW Natural expects to work 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. Since we initiated our water strategy in
December 2017, we have entered into the following
agreements which require or required regulator approval:
•
•
•
•
•
•
Salmon Valley Water Company — We received
regulatory approval for this Welches, Oregon
acquisition in September 2018, and the transaction
closed in November 2018.
Falls Water Company — We received regulatory
approval for this Idaho Falls, Idaho acquisition in
July 2018 from the IPUC and closed the
transaction in September 2018.
Lehman Enterprises, Inc. and Sea View Water
LLC — We received regulatory approval from the
WUTC for these Whidbey Island, Washington
acquisitions in October 2018 and closed the
transaction in November 2018.
Sunriver Water, LLC and Sunriver
Environmental, LLC — We filed an application for
regulatory approval from the OPUC for the
Sunriver Water, LLC acquisition in October 2018
and anticipate receiving regulatory approval in
2019. Sunriver Environmental, LLC is not under the
OPUC's jurisdiction. The transaction is expected to
close in the first half of 2019.
Spirit Lake East Water Company and Lynnwood
Water - We filed an application for regulatory
approval from the IPUC for these Coeur d'Alene,
Idaho acquisitions in February 2019.
Estates Water Systems Inc. and Monterra Inc -
We filed an application for regulatory approval from
the WUTC for these Sequim, Washington
acquisitions in February 2019.
The acquisitions described above are expected to, upon the
closing of the Sunriver transaction, represent approximately
$70 million of aggregate investment.
•
Annual revenue requirement increase of $23.4
million or 3.72% over NW Natural's revenue from
existing rates, which includes approximately $12.1
million that would otherwise be recovered under
the conservation tariff deferral;
• Capital structure of 50% debt and 50% equity;
• Return on equity of 9.4%;
• Cost of capital of 7.317%;
• Rate base of $1.186 billion, or an increase of $300
million since the last rate case in 2012;
• Commencing November 1, 2018, ASC 715 pension
expenses for the qualified pension plan will be
recovered through rates with an increase of $8.1
million to revenue requirement for a total of $11.9
million; and
The sharing of asset management revenues
related to NGD business pipeline and storage
assets will be 90%/10% with 90% being credited to
customers. Previously customers received 67% of
these revenues.
•
The rate changes listed above went into effect on November
1, 2018.
In addition to the items above, the OPUC issued an order on
October 26, 2018, to freeze NW Natural's pension balancing
account as of October 31, 2018. The order directed NW
Natural and the other parties to the rate case to engage in
further regulatory proceedings extending the general rate
case docket to resolve open issues with respect to the
recovery of the pension balancing account, and treatment of
the 10-month deferral period benefits associated with the
TCJA. On February 4, 2019, NW Natural, OPUC Staff,
Oregon Citizen’s Utility Board (CUB), and the Alliance of
Western Energy Customers (AWEC), which comprise all of
the parties to the 2018 Oregon rate case, filed with the
OPUC a joint stipulation addressing remaining items related
to NW Natural's pension balancing account and the return of
deferred TCJA benefits to customers (Settlement). The
Settlement is subject to the review and approval of the
OPUC. For it to be effective, the OPUC must issue an
Order, which may approve or deny the terms of the
Settlement or be issued under the OPUC's own terms.
Under the Settlement, the stipulating parties agree that NW
Natural properly recorded the remeasurement of regulated
NGD excess deferred income taxes pursuant to the effects
of the TCJA, and agree that all of NW Natural’s TCJA-
related dockets will be resolved in accordance with the
terms of the Settlement. Under the Settlement, NW Natural
would return excess deferred income taxes pursuant to the
TCJA as follows: (i) an annual credit to base rates of $3.4
million; (ii) a credit of $3.0 million per year for five years to
sale customers; (iii) a credit to customers' benefit of $5.44
million of deferred income taxes, and $7.07 million of TCJA
benefits deferred between January 1, 2018 and October 31,
2018, reflected as a reduction to NW Natural’s pension
balancing account, described below. As a result of these
returns and credits, NW Natural’s rate base is expected to
increase by approximately $15.38 million, and the revenue
requirement is expected to increase approximately $1.43
33
Finally, NW Natural is requesting that the WUTC review
costs allocable to Washington related to environmental
remediation expenses and consider a mechanism for
recovery of these costs. The requested costs are estimated
to be approximately 3.32% of total costs associated with
those sites related to serving Washington customers.
NW Natural's filing will be reviewed by the WUTC and other
stakeholders. The process is anticipated to take up to 11
months. NW Natural has requested that the new rates 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 OPUC regulations, NW
Natural is required to file a depreciation study every five
years to update or justify maintaining the existing
depreciation rates. In December 2016, NW Natural filed the
required depreciation study with the OPUC. In September
2017, the parties to the docket filed a settlement with the
Commission requesting approval of updated depreciation
rates. In January 2018, 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 were 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 to
financial results.
million. If NW Natural files a general rate case within five
years of the date of the Order implementing the Settlement,
this revenue requirement may be adjusted as part of that
general rate case.
As to the future operation and timing of rate recovery of
amounts reflected in NW Natural’s pension balancing
account, under the Settlement, the stipulating parties agree
that, effective October 31, 2018, NW Natural would: (i)
reduce the amount of the frozen pension balancing account
by $10.5 million, and apply $12.51 million of the Company’s
deferred TCJA benefits, for a total reduction of the pension
balancing account of approximately $23.01 million; and (ii)
reduce the interest rate on the pension balancing account
from NW Natural’s authorized rate of return of 7.317 percent
to 4.3 percent. NW Natural would then collect the remainder
of the pension balancing account balance over ten years in
a customer tariff of $7.3 million per year beginning on the
rate effective date. If the Settlement is approved, NW
Natural expects to recognize an after-tax charge to earnings
of approximately $6.7 million in the quarter in which an order
is issued.
The Settlement is subject to the review and approval of the
OPUC with a decision and order expected in March 2019,
and new rates expected to be effective April 1, 2019.
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% long-term debt, 1.0%
short-term debt, and 49.5% common equity;
• Return on equity of 10.3%;
• Cost of capital of 7.63%; and
• Rate base of $186.5 million, an increase of $58.7
million since the last rate case.
The filing also includes a proposal to return federal tax
reform benefits to customers related to the TCJA. NW
Natural estimates the total liability for tax reform benefits
allocated to Washington customers to be approximately
$20.2 million, which is comprised of a historical deferred
liability of $18.1 million primarily related to property, plant,
and equipment and an expected $2.1 million associated with
interim tax benefits accumulated from January 1, 2018 to
November 30, 2019. NW Natural is requesting that the
$18.1 million historical deferral be credited to rates in
compliance with the TCJA guidance, which is currently at a
rate of approximately $0.5 million annually for the first five
years, and which would be reviewed and adjusted in year
five for the next five years. NW Natural is requesting that the
interim $2.1 million tax benefit be returned 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.
34
Rate Mechanisms
During 2018, NW Natural's approved rates and recovery
mechanisms for each service area included:
OR
WA
2012 Rate
Case
2018 Rate
Case
(effective
11/1/2018)
2009 Rate
Case
9.5%
7.8%
9.4%
7.3%
10.1%
8.4%
Authorized Rate
Structure:
ROE
ROR
Debt/Equity Ratio
50%/50% 50%/50%
49%/51%
Key Regulatory
Mechanisms:
PGA
Gas Cost Incentive
Sharing
Decoupling
WARM
Environmental Cost
Deferral
Environmental Cost
Recovery (SRRM)
Pension Balancing
Interstate Storage and
Asset Management
Sharing
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
PURCHASED GAS ADJUSTMENT. Rate changes are
established for NW Natural each year under PGA
mechanisms in Oregon and Washington to reflect changes
in the expected cost of natural gas commodity purchases.
The PGA filings and filings coincident with the PGA 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.
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 49% in financial swap
and option contracts and 26% in physical gas supplies for
Oregon and Washington.
As of December 31, 2018, NW Natural is also hedged in
future gas years at approximately 17% for the 2019-20 gas
year and between 1% and 8% 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, NW Natural filed its annual PGA and
received OPUC and WUTC approval in October 2018. PGA
rate changes were effective November 1, 2018. Rates
between states can vary due to different rate structures and
mechanisms. Oregon residential customers' rates declined
2.1% from the combined effect of the PGA and Oregon rate
case and Washington residential customers' rates declined
by 7.2%. 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 Natural
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 and estimated gas costs,
respectively. For the 2017-18 and 2018-19 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, it selected the 90%
deferral option. The ROE threshold is subject to adjustment
annually based on movements in long-term interest rates.
For calendar years 2016, 2017, and 2018, the ROE
threshold was 11.06%, 10.66%, and 10.48%, respectively.
There were no refunds required for 2016 and 2017. NW
Natural does not expect a refund for 2018 based on results,
and NW Natural anticipates filing its 2018 earnings test in
May 2019.
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.
35
The net investment under the original agreement earns a
rate of return.
for about 11% of total customers. See "Business Segments
—Natural Gas Distribution" below.
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 have the opportunity
to participate in additional wells in 2016, 2017, or 2018.
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. See "Regulatory
Proceeding Updates—Washington General Rate Case"
above.
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. This weather normalization mechanism was
reauthorized in the 2012 Oregon general rate case without
an expiration date. Residential and commercial customers in
Oregon are allowed to opt out of the weather normalization
mechanism, and as of December 31, 2018, 8% of eligible
customers had opted out. NW Natural does not have a
weather normalization mechanism approved for residential
and commercial customers in Washington, which account
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. NW Natural
has a 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.
Under the SRRM collection process, there are three types of
deferred environmental remediation expense:
•
Pre-review - This class of costs represents remediation
spend that has not yet been deemed prudent by the
OPUC. Carrying costs on these remediation expenses
are recorded at NW Natural's authorized cost of capital.
NW Natural anticipates the prudence review for annual
costs and approval of the earnings test prescribed by
the OPUC to occur by the third quarter of the following
year.
Post-review - This class of costs represents
remediation spend that has been deemed prudent and
allowed after applying the earnings test, but is not yet
included in amortization. NW Natural earns a carrying
cost on these amounts at a rate equal to the five-year
treasury rate plus 100 basis points.
Amortization - This class of costs represents amounts
included in current customer rates for collection and is
generally calculated as one-fifth of the post-review
deferred balance. NW Natural earns a carrying cost
equal to the amortization rate determined annually by
the OPUC, which approximates a short-term borrowing
rate. NW Natural included $6.1 million 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 and
separately amortizes an equal and offsetting amount of the
deferred regulatory asset balance through the
environmental remediation operating expense line shown
separately in the operating expenses section of the
Consolidated Statements of Comprehensive Income (Loss).
See Note 17 for more information on our environmental
matters.
The SRRM earnings test is an annual review of adjusted
NGD ROE compared to authorized NGD ROE. For 2018,
the first ten months will be 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.
36
See "Regulatory Proceeding Updates-Oregon General Rate
Case" above. Pension expense deferrals, excluding interest,
were $10.3 million, $6.5 million, and $6.3 million in 2018,
2017 and 2016, respectively.
INTERSTATE STORAGE AND OPTIMIZATION 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.
The following table presents the credits to NGD customers:
In millions
Oregon
Washington
2018
2017
2016
$
11.7
$
11.7
$
1.0
1.0
9.4
1.0
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. See "Regulatory Matters—Rate
Mechanisms" above.
The NGD business is seasonal in nature due to higher gas
usage by residential and commercial customers during the
cold winter heating months. Other categories of customers
experience 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.
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, the total amount transferred to post-review
is recoverable through the SRRM. To the extent more than
authorized ROE is earned in a year, the amount transferred
to post-review would be reduced by those earnings that
exceed its authorized ROE.
For 2018, NW Natural has performed this test, which is
anticipated to be submitted to the OPUC in May 2019, and
no earnings test adjustment is expected for 2018.
The WUTC has also previously authorized the deferral of
environmental costs, 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
portion of these regulatory assets no longer meet the criteria
for continued application of regulatory accounting, then NW
Natural would be required to write-off the net unrecoverable
balances against earnings in the period such a
determination was made.
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. On October 26,
2018, the OPUC issued an order to freeze NW Natural's
pension balancing account as of October 31, 2018. The
order directed NW Natural and the other parties to the 2018
Oregon rate case to engage in further regulatory
proceedings extending the general rate case docket to
resolve open issues with respect to the recovery of the
pension balancing account. On February 4, 2019, NW
Natural and the other parties to the rate case filed a joint
stipulation with the OPUC outlining a resolution to the issue.
37
deferred income tax balances associated with the TCJA in
2017 and the after-tax $2.0 million regulatory disallowance
in 2016. Excluding these items, adjusted NGD net income
increased $4.9 million, or $0.10 per share. See the Non-
GAAP reconciliations at the beginning of Item 7 for
additional information.
The primary factors contributing to this increase in adjusted
NGD net income were as follows:
•
a $16.0 million increase in NGD margin primarily due
to:
•
•
•
a $6.8 million increase from customer growth;
partially offset by;
a $2.7 million decrease from gains in gas cost
incentive sharing due to actual gas prices being
lower than those estimated in the 2016-2017 PGA,
but not by the same magnitude as in the prior
period;
a portion of the remaining increase was due to the
effects of colder than average weather in 2017
compared to warmer than average weather in
2016.
•
•
•
a $2.2 million increase in other income (expense), net,
primarily due to an increase in the equity portion of
AFUDC in 2017; partially offset by
a $10.4 million increase in operations and maintenance
expense driven largely from payroll and benefits due to
increased headcount, general salary increases, and
increased safety equipment update costs; and
a $3.4 million increase in depreciation expense
primarily due to additional capital expenditures.
Total natural gas sold and delivered in 2017 increased 14%
over 2016 primarily due to the impact of weather that was
48% colder than the prior period and 15% colder than
average.
NGD segment highlights include:
Dollars and therms in millions,
except EPS data
NGD net income
Adjusted NGD net income(1)
EPS - NGD segment
Adjusted EPS - NGD
segment(1)
2018
2017
2016
$
57.5
$
60.5
$
57.5
1.99
1.99
61.5
2.10
2.13
54.6
56.6
1.96
2.03
Gas sold and delivered (in
therms)
NGD margin(2)
$ 376.6
(1) See the Non-GAAP Reconciliations table at the beginning of Item
7 for a reconciliation of this non-GAAP financial measure to its
closest U.S. GAAP measure.
$ 392.6
$ 383.7
1,128
1,240
1,085
(2) See Natural Gas Distribution Margin Table below for additional
detail.
2018 COMPARED TO 2017. NGD net income was $57.5
million in 2018 compared to $60.5 million in 2017. NGD net
income in 2017 includes a $1.0 million loss from the
remeasurement of deferred income tax balances due to the
enactment of the TCJA. Excluding this item, adjusted NGD
net income decreased $4.0 million, or $0.14 per share. See
the NW Holdings non-GAAP reconciliations at the beginning
of Item 7 for additional information.
The primary factors contributing to the decrease in adjusted
NGD net income were as follows:
•
a $8.9 million decrease in natural gas distribution
margin primarily due to:
a $7.9 million decrease due to revenues collected
and deferred in association with the TCJA; partially
offset by
a $4.8 million increase from customer growth; and
the majority of the remaining decrease was due to
the effects of warmer than average weather in
2018 compared to colder than average weather in
2017, partially offset by higher rates from the 2018
Oregon general rate case effective November 1,
2018.
•
•
•
•
a $6.0 million increase in operations and maintenance
expense driven largely from payroll and benefits due to
increased headcount, general salary increases, and
increased professional services and contract labor
expense;
a $4.2 million decrease in other income (expense), net,
primarily due to increases in pension non-service
component costs, partially offset by increases in the
equity portion of AFUDC in 2018; and
a $4.0 million increase in depreciation expense
primarily due to additional capital expenditures; partially
offset by
a $20.0 million decrease in income tax expense
primarily due to the reduction in the federal statutory tax
rate from the TCJA and lower pretax income.
Total natural gas sold and delivered in 2018 decreased 9%
over 2017 primarily due to the impact of weather that was
26% warmer than the prior period and 15% warmer than
average.
2017 COMPARED TO 2016. NGD net income was $60.5
million in 2017 compared to $54.6 million in 2016, which
includes the $1.0 million loss from the remeasurement of
38
NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues,
and cost of sales:
In thousands, except degree day and customer data
2018
2017
2016
Favorable/(Unfavorable)
2018 vs.
2017
2017 vs.
2016
NGD volumes (therms):
Residential and commercial sales
Industrial sales and transportation
661,163
467,040
740,369
499,924
609,222
475,774
(79,206)
(32,884)
Total NGD volumes sold and delivered
1,128,203
1,240,293
1,084,996
(112,090)
131,147
24,150
155,297
NGD operating revenues:
Residential and commercial sales
Industrial sales and transportation
Other revenues
Less: Revenue taxes(1)
Total NGD operating revenues
Less: Cost of gas
Less: Environmental remediation expense
Less: Revenue taxes(1)
NGD margin
NGD margin:(2)
Residential and commercial sales
Industrial sales and transportation
Miscellaneous revenues
Gain from gas cost incentive sharing
Other margin adjustments(3)
NGD margin
Degree days(4)
Average(5)
Actual
Percent colder (warmer) than average weather(5)
NGD Meters - end of period:
Residential meters
Commercial meters
Industrial meters
$ 621,782
$ 684,214
$ 604,390
$ (62,432)
$
79,824
58,713
153
—
680,648
255,743
11,127
30,082
63,925
3,872
19,069
732,942
325,019
15,291
—
59,386
3,812
17,111
650,477
260,588
13,298
—
383,696
392,632
376,591
(5,212)
(3,719)
(19,069)
(52,294)
69,276
4,164
(30,082)
(8,936)
4,539
60
1,958
82,465
(64,431)
(1,993)
—
16,041
$ 352,710
$ 355,736
$ 338,060
$
(3,026)
$
17,676
30,817
5,542
(27)
(5,346)
31,847
30,989
3,865
1,237
(53)
3,796
3,960
(214)
(1,030)
1,677
(1,264)
(5,293)
858
69
(2,723)
161
$ 383,696
$ 392,632
$ 376,591
$
(8,936)
$
16,041
2,714
2,313
2,705
3,114
2,716
2,098
9
(26)%
(11)
48%
(15)%
15%
(23)%
680,134
668,803
656,855
69,259
1,028
68,050
1,021
67,278
1,013
11,331
1,209
7
11,948
772
8
Total number of meters
750,421
737,874
725,146
12,547
12,728
NGD Meter growth:
Residential meters
Commercial meters
Industrial meters
Total meter growth
1.7 %
1.8 %
0.7 %
1.7 %
1.8%
1.1%
0.8%
1.8%
(1)
The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and
all related amendments on January 1, 2018. This change had no impact on NGD margin results. For additional information, see Note 2.
(2) Amounts reported as margin for each category of meters are operating revenues, which are net of revenue taxes, less cost of gas and
environmental remediation expense.
(3) Other margin adjustments include revenue deferrals of $7.9 million for the year ended December 31, 2018 associated with the decline of
the U.S. federal corporate income tax rate.
(4) Heating degree days are units of measure reflecting temperature-sensitive consumption of natural gas, calculated by subtracting the
average of a day's high and low temperatures from 59 degrees Fahrenheit.
(5) Average weather represents the 25-year average of heating degree days. Through October 31, 2018, average weather is calculated over
the period 1986 - 2010, as determined in NW Natural's 2012 Oregon general rate case, and beginning November 1, 2018, average weather
is calculated over the period May 31, 1992 through May 30, 2017, as determined in NW Natural's 2018 Oregon general rate case.
39
Residential and Commercial Sales
The primary factors that impact results of operations in the
residential and commercial markets are customer growth,
seasonal weather patterns, energy prices, competition from
other energy sources, and economic conditions in our
service areas. The impact of weather on margin is
significantly reduced through NW Natural's weather
normalization mechanism in Oregon; approximately 81% of
NW Natural's total customers are covered under this
mechanism. The remaining customers either opt out of the
mechanism or are located in Washington, which does not
have a similar mechanism in place. For more information on
the weather mechanism, see "Regulatory Matters—Rate
Mechanisms—Weather Normalization Mechanism" above.
NGD residential and commercial sales highlights include:
In millions
Volumes (therms):
Residential sales
Commercial sales
Total volumes
Operating revenues:
2018
2017
2016
411.7
249.5
661.2
465.2
275.2
740.4
379.2
230.0
609.2
Residential sales
$
418.4
$
455.9
$
404.3
million in natural gas distribution margin as a result of sales
volume increases of 131.2 million therms, or 22%, due to
customer growth and the effects of colder than average
weather in 2017 compared to warmer than average weather
in the prior period.
Industrial Sales and Transportation
Industrial customers have the option of purchasing sales or
transportation services. Under the sales service, the
customer buys the gas commodity. Under the transportation
service, the customer buys the gas commodity directly from
a third-party gas marketer or supplier. The NGD gas
commodity cost is primarily a pass-through cost to
customers; therefore, NGD profit margins are not materially
affected by an industrial customer's decision to purchase
gas from third parties. Industrial and large commercial
customers may also select between firm and interruptible
service options, with firm services generally providing higher
profit margins compared to interruptible services. To help
manage gas supplies, industrial tariffs are designed to
provide some certainty regarding industrial customers'
volumes by requiring an annual service election which
becomes effective November 1, special charges for
changes between elections, and in some cases, a minimum
or maximum volume requirement before changing options.
203.3
228.3
200.1
NGD industrial sales and transportation highlights include:
$
621.7
$
684.2
$
604.4
In millions
2018
2017
2016
Commercial sales
Total operating
revenues
NGD margin:
Residential:
Sales
Alternative revenues:
Weather normalization
Decoupling
Amortization of
alternative revenue
Total residential NGD
margin
Commercial:
Sales
Alternative revenues:
Weather normalization
Decoupling
Amortization of
alternative revenue
Total commercial NGD
margin
$
240.0
$
262.1
$
223.2
7.6
(0.6)
1.9
(11.9)
(2.4)
—
12.7
0.8
—
248.9
247.8
236.7
103.7
101.5
87.2
2.4
7.3
(4.6)
11.1
(9.6)
—
5.0
9.2
—
103.8
108.0
101.4
Total NGD margin
$
352.7
$
355.8
$
338.1
2018 COMPARED TO 2017. The primary factors contributing
to changes in the residential and commercial markets were
decreases of $62.5 million in operating revenue and $3.1
million in NGD margin as a result of sales volume decreases
of 79.2 million therms, or 11%, due to warmer than average
weather in 2018 compared to colder than average weather
in the prior period, partially offset by customer growth.
2017 COMPARED TO 2016. The primary factors contributing
to changes in the residential and commercial markets were
increases of $79.8 million in operating revenue and $17.7
40
Volumes (therms):
Industrial - firm sales
35.3
35.7
33.8
Industrial - firm
transportation
Industrial - interruptible
sales
Industrial - interruptible
transportation
Total volumes
NGD margin:
Industrial - sales and
transportation
162.7
167.7
156.9
50.6
55.1
50.4
218.4
467.0
241.4
499.9
234.7
475.8
$
30.8
$
31.8
$
31.0
2018 COMPARED TO 2017. Industrial sales and transportation
volumes decreased by 32.9 million therms and NGD margin
decreased $1.0 million due to lower usage from warmer
than average weather in 2018 compared to colder than
average weather in 2017.
2017 COMPARED TO 2016. Industrial sales and transportation
volumes increased by 24.1 million therms and NGD margin
increased $0.8 million due to higher usage from colder than
average weather in 2017 compared to warmer than average
weather in 2016, and increased usage from higher
production load.
Other NGD Revenues
Other NGD revenues include miscellaneous fee income as
well as regulatory revenue adjustments, which reflect
current period deferrals to and prior year amortizations from
regulatory asset and liability accounts, except for gas cost
deferrals which flow through cost of gas. Decoupling and
other regulatory amortizations from prior year deferrals are
included in revenues from residential, commercial, and
industrial firm customers.
Other NGD revenue highlights include:
In millions
2018
2017
2016
Other NGD revenues
$
5.5
$
3.9
$
3.8
Other NGD revenue increased $1.6 million in 2018
compared to 2017 due to increases in entitlement and
curtailment revenue due to system restrictions for certain
industrial and commercial customers as a result of a
Canadian pipeline event in October 2018 that disrupted gas
supply. Other NGD revenues remained flat between 2017
and 2016.
Cost of Gas
Cost of gas as reported by the NGD segment includes gas
purchases, gas withdrawn from storage inventory, gains and
losses from commodity hedges, pipeline demand costs,
seasonal demand cost balancing adjustments, regulatory
gas cost deferrals, gas reserves costs, and company gas
use. The OPUC and WUTC generally require natural gas
commodity costs to be billed to customers at the actual cost
incurred, or expected to be incurred. Customer rates are set
each year so that if cost estimates were met the NGD
business would not earn a profit or incur a loss on gas
commodity purchases; however, in Oregon we have the
incentive sharing mechanism described under "Regulatory
Matters—Rate Mechanisms—Purchased Gas Adjustment"
above. In addition to the PGA incentive sharing mechanism,
gains and losses from hedge contracts entered into after
annual PGA rates are effective for Oregon customers are
also required to be shared and therefore may impact net
income. Further, NW Natural also has a regulatory
agreement whereby it earns a rate of return on its
investment in the gas reserves acquired under the original
agreement with Encana and includes gas from the amended
gas reserves agreement at a fixed rate of $0.4725 per
therm, which are also reflected in NGD margin. See
"Application of Critical Accounting Policies and Estimates—
Accounting for Derivative Instruments and Hedging
Activities" below.
Cost of gas highlights include:
Dollars and therms in millions
2018
2017
2016
Cost of gas
$ 255.7
$ 325.0
$ 260.6
Volumes sold (therms)
747
831
693
Average cost of gas (cents
per therm)
Gain from gas cost incentive
sharing
$
0.34
$
0.39
$
0.38
—
1.2
4.0
2018 COMPARED TO 2017. Cost of gas decreased $69.3
million, or 21%, primarily due to the 10% decrease in
volumes sold due to warmer than average weather in 2018
compared to colder than average weather in 2017, and
lower average cost of gas collected from customers,
partially offset by customer growth.
2017 COMPARED TO 2016. Cost of gas increased $64.4
million, or 25%, primarily due to the 20% increase in
volumes sold due to colder than average weather in 2017
compared to warmer than average weather in 2016, and
customer growth.
41
The effect on net income from NW Natural's gas cost
incentive sharing mechanism resulted in a slight margin loss
in 2018 and margin gains of $1.2 million and $4.0 million for
2017 and 2016, respectively. In 2018, actual prices closely
aligned with estimated prices included in customer rates. In
2017 and 2016, actual prices were lower than the estimated
prices included in customer rates due to warmer than
average weather nationally, which resulted in lower national
natural gas commodity prices. For a discussion of the gas
cost incentive sharing mechanism, see "Regulatory Matters
—Rate Mechanisms—Purchased Gas Adjustment" above.
Other
Other activities aggregated and reported as other at NW
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 13 for further details on our
investment in TWH.
At Mist, NW Natural provides gas storage services to
customers in the interstate and intrastate markets using
storage capacity that has been developed in advance of
NGD customers’ requirements. Pre-tax income from gas
storage at Mist and asset management services is subject
to revenue sharing with NGD customers.
Under this regulatory incentive sharing mechanism, NW
Natural retains 80% of pre-tax income from Mist gas storage
services and asset management services when the
underlying costs of the capacity being used are not included
in NGD business rates. The remaining 20% is credited to a
deferred regulatory account for credit to NGD customers.
Through October 2018, when the capacity used was
included in NGD rates, NW Natural retained 33% of pre-tax
income with the remaining 67% credited to a deferred
regulatory account for credit to NGD customers. In
conjunction with the Oregon rate case, effective November
2018 NW Natural retains 10% of pre-tax income from such
storage and asset management services and 90% is
credited to NGD business customers. See "Regulatory
Matters-Regulatory Proceeding Updates" above for
information regarding an open docket related to this
incentive sharing mechanism.
The following table presents the results of activities
aggregated and reported as other for both NW Holdings and
NW Natural:
In millions, except EPS data
2018
2017
2016
NW Natural other - net income
$
10.6
$ 11.2
$
8.3
Other NW Holdings activity
NW Holdings other - net income
EPS - NW Holdings - other
(0.8)
9.8
0.34
0.4
11.6
0.41
(0.4)
7.9
0.29
Delinquent customer receivable balances continue to
remain at historically low levels. Bad debt expense as a
percent of revenues was 0.1% for 2018, 2017, and 2016.
Depreciation and Amortization
Depreciation and amortization highlights include:
The significant drivers of changes in other net income
discussed below apply to both NW Holdings and NW
Natural.
2018 COMPARED TO 2017. Other net income decreased
compared to the prior period primarily due to $4.2 million in
higher income tax expense driven by $4.4 million in income
tax benefits recognized in 2017 from the enactment of the
TCJA, partially offset by a $2.8 million increase in revenues
from asset management agreements for Mist storage and
transportation capacity.
2017 COMPARED TO 2016. Other net income increased
primarily due to a gain associated with the TCJA deferred
taxes remeasurement, partially offset by a decrease in
revenues from asset management agreements for Mist
storage and transportation capacity.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
In millions
NW Natural
2018
2017
2016
$ 155.2
$ 152.2
$ 136.0
Other NW Holdings
operations and maintenance
1.5
0.2
0.7
NW Holdings
$ 156.7
$ 152.4
$ 136.7
The significant drivers of changes in operations and
maintenance expenses discussed below apply to both NW
Holdings and NW Natural.
2018 COMPARED TO 2017. Operations and maintenance
expense increased $4.3 million and $3.0 million for NW
Holdings and NW Natural, respectively, primarily due to the
following factors:
•
a $3.4 million increase in NGD payroll and benefits due
to increased headcount and general salary increases;
and
a $3.2 million increase in NGD non-payroll costs
primarily due to increases in general professional
services and contract labor.
•
2017 COMPARED TO 2016. Operations and maintenance
expense increased $15.7 million and $16.2 million for NW
Holdings and NW Natural, respectively, primarily due to the
following factors:
•
a $7.3 million increase in NGD payroll and benefits due
to increased headcount and general salary increases;
and
a $1.0 million increase in safety equipment upgrade
costs.
•
In millions
NW Natural
2018
2017
2016
$
85.0
$
81.0
$
77.6
Other NW Holdings
depreciation and amortization
0.2
0.1
—
NW Holdings
$
85.2
$
81.1
$
77.6
The significant drivers of changes in depreciation and
amortization discussed below apply to both NW Holdings
and NW Natural.
2018 COMPARED TO 2017. Depreciation and amortization
expense increased by $4.1 million and $4.0 million for NW
Holdings and NW Natural, respectively, primarily due to
NGD plant additions that included investments in natural
gas transmission and distribution systems supporting
customer growth, safety, reliability, facility upgrades, and
enhanced technology.
2017 COMPARED TO 2016. Depreciation and amortization
expense increased by $3.5 million and $3.4 million for NW
Holdings and NW Natural, respectively, primarily due to
NGD plant additions that included investments in natural
gas transmission and distribution systems, storage facilities,
and technology.
Other Income (Expense), Net
Other income (expense), net highlights include:
In millions
2018
2017
2016
Pension and other
postretirement costs other than
service costs
Equity portion of AFUDC
Gains from company-owned life
insurance
Net interest income (expense)
on deferred regulatory accounts
Other non-operating
NW Natural total other income
(expense), net
$
(9.1) $
(6.1) $
(7.0)
4.1
1.7
1.7
(2.0)
2.7
2.5
2.0
(1.3)
$
(3.6) $
(0.2) $
—
1.7
(0.1)
(1.6)
(7.0)
(0.2)
Other NW Holdings activity
—
(0.1)
NW Holdings total other income
(expense), net
$
(3.6) $
(0.3) $
(7.2)
The significant drivers of changes in Other income
(expense) discussed below apply to both NW Holdings and
NW Natural.
2018 COMPARED TO 2017. Other income (expense), net,
decreased $3.3 million and $3.4 million at NW Holdings and
NW Natural, respectively, primarily due to a $3.0 million
increase in pension and other postretirement non-service
costs and $0.8 million lower gains from company-owned life
insurance, partially offset by a $1.4 million increase in the
equity portion of AFUDC.
42
2017 COMPARED TO 2016. Other income (expense), net,
increased $6.9 million and $6.8 million at NW Holdings and
NW Natural, respectively, primarily due to the January 2016
Order from the OPUC, which resulted in a pre-tax $2.8
million interest disallowance in 2016, an increase of $2.7
million in the equity portion of AFUDC, and $0.8 million in
higher gains from company-owned life insurance.
In addition to fluctuations in other income (expense), net
reported above, from 2011 through October 31, 2018, NW
Natural had OPUC approval to defer certain pension costs
in excess of what was recovered in customer rates, with the
majority of such costs being non-service component costs
reflected within other income (expense), net. This pension
cost deferral was recorded to a regulatory balancing
account, which stabilized the amount of other income
(expense), net each year. Total pension cost deferrals,
excluding interest, were $10.3 million, $6.5 million, and $6.3
million for the years ended December 31, 2018, 2017 and
2016, respectively. As a result, increased pension costs had
a minimal effect on other income (expense), net in 2018,
2017, and 2016, with the increase principally related to the
costs allocated to NW Natural's Washington operations,
which were not covered by the pension balancing account.
On October 26, 2018, the OPUC issued an order to freeze
NW Natural's pension balancing account as of October 31,
2018. The order directed NW Natural and the other parties
to the rate case to engage in further regulatory proceedings
extending the general rate case docket to resolve open
issues with respect to the recovery of the pension balancing
account. On February 4, 2019, NW Natural and the other
parties to the rate case filed a joint stipulation with the
OPUC outlining a resolution to the issue. See Note 9 and
"Regulatory Matters—Regulatory Proceeding Updates—
Oregon General Rate Case".
Interest Expense, Net
Interest expense, net highlights include:
In millions
NW Natural
2018
2017
2016
$
37.0
$
37.5
$
38.1
Other NW Holdings interest
expense
0.1
—
—
NW Holdings
$
37.1
$
37.5
$
38.1
The significant drivers of changes in interest expense, net
discussed below apply to both NW Holdings and NW
Natural.
2018 COMPARED TO 2017. Interest expense, net of amounts
capitalized decreased $0.4 million and $0.5 million at NW
Holdings and NW Natural, respectively, primarily due to a
$2.3 million increase in the interest-related portion of
AFUDC, partially offset by increased commercial paper
interest expenses of $1.6 million.
2017 COMPARED TO 2016. Interest expense, net of amounts
capitalized, decreased $0.6 million at both NW Holdings and
NW Natural primarily due to a $2.1 million increase in the
interest-related portion of AFUDC, partially offset by
increased interest expense of $1.5 million due to the
issuance of long-term debt in December 2016 and August
2017.
Income Tax Expense
NW Holdings income tax expense highlights include:
In millions
2018
2017
2016
Income tax expense
$ 24.2
$ 41.0
$ 43.0
Effects of non-GAAP
adjustments(1)
Effects from the TCJA(1)
—
—
—
3.4
1.3
—
Adjusted income tax expense
$ 24.2
$ 44.4
$ 44.3
Effective tax rate
Adjusted effective tax rate
26.4%
26.4%
36.3%
39.3%
40.8%
40.8%
(1) See the Non-GAAP Reconciliations table at the beginning of Item
7 for a reconciliation of this non-GAAP financial measure to its
closest U.S.GAAP measure.
NW Natural income tax expense highlights include:
In millions
2018
2017
2016
Income tax expense
$ 24.5
$ 41.5
$ 43.3
Effects of non-GAAP
adjustments(1)
Effects from the TCJA(1)
—
—
—
3.0
1.3
—
Adjusted income tax expense
$ 24.5
$ 44.5
$ 44.6
Effective tax rate
Adjusted effective tax rate
26.4%
26.4%
36.6%
39.3%
40.8%
40.8%
(1) See the Non-GAAP Reconciliations table at the beginning of Item
7 for a reconciliation of this non-GAAP financial measure to its
closest U.S.GAAP measure.
The significant drivers of changes in Income tax expense
discussed below apply to both NW Holdings and NW
Natural.
2018 COMPARED TO 2017. The effective tax rate decreased
by 9.9% and 10.2% at NW Holdings and NW Natural,
respectively, primarily due to a decline in the statutory
income tax rate from 39.5% to 26.5% as a result of the
TCJA enactment in 2017. Income tax expense decreased
due to the TCJA and lower pre-tax income, partially offset by
a benefit of $3.4 million recognized in 2017 at NW Holdings
and a benefit of $3.0 million recognized in 2017 at NW
Natural from the remeasurement of deferred tax balances
upon the TCJA enactment date. Excluding the impact of the
2017 remeasurement benefits of $3.4 million and $3.0
million at NW Holdings and NW Natural, respectively, the
adjusted effective tax rate decreased 12.9% at both NW
Holdings and NW Natural due to the statutory tax rate
declining from the TCJA. See the Non-GAAP reconciliations
at the beginning of Item 7 for additional information.
2017 COMPARED TO 2016. The effective tax rate decreased
by 4.5% and 4.2% at NW Holdings and NW Natural,
respectively. Excluding the tax benefits associated with the
TCJA enactment in 2017 of $3.4 million and $3.0 million at
NW Holdings and NW Natural, respectively, and the $1.3
million tax effects of non-GAAP adjustments in 2016 at both
NW Holdings and NW Natural, the adjusted effective tax
rate decreased 1.5% at both NW Holdings and NW Natural.
See the Non-GAAP reconciliations at the beginning of Item
43
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, which is expected in 2019.
Short-term liquidity for Gill Ranch is supported by cash
balances, internal cash flow from operations, equity
contributions from its parent company, and, if
necessary, additional external financing.
FINANCIAL CONDITION
Capital Structure
One of our long-term goals is to maintain a strong and
balanced consolidated capital structure, while maintaining a
long-term target capital structure at NW Natural of 50%
common stock and 50% long-term debt to align to
allocations prescribed by NW Natural's regulators. 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.
Achieving our 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:
Common stock equity
Long-term debt
Short-term debt, including current
maturities of long-term debt
Total
December 31,
2018
2017
44.4%
47.1%
41.1
14.5
43.3
9.6
100.0%
100.0%
7 for additional information. The adjusted effective tax rate
decreased primarily as a result of AFUDC equity income
and increased stock-based compensation deductions in
2017.
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.
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 subject to
termination by either party if the transaction has not closed
by June 20, 2019, subject to automatic extension for six
months if the CPUC has not issued an order approving the
transaction by that date.
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 expected to rule
on the settlement agreement within 90 days of its filing, but
may grant further time for public comment. We expect an
order on this matter by the end of June.
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 18 for more
44
NW Natural's consolidated capital structure was as follows:
Common stock equity
Long-term debt
Short-term debt, including current
maturities of long-term debt
Total
December 31,
2018
2017
42.9%
47.1%
42.2
14.9
43.3
9.6
100.0%
100.0%
During 2018, changes to NW Holdings' and NW Natural's
capital structures were primarily due to increases in short
term debt at NW Natural partially offset by lower net
proceeds from long-term debt activity at NW Natural. See
further discussion below in "Cash Flows — Financing
Activities".
Liquidity and Capital Resources
At December 31, 2018 and December 31, 2017, NW
Holdings had approximately $12.6 million and $3.5 million,
and NW Natural had approximately $7.9 million and $3.1
million of cash and cash equivalents, respectively. In order
to maintain sufficient liquidity during periods when capital
markets are volatile, NW Holdings and NW Natural may
elect to maintain higher cash balances and add short term
borrowing capacity. NW Holdings and NW Natural may also
pre-fund their respective capital expenditures when long-
term fixed rate environments are attractive.
NW Holdings
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%.
At December 31, 2018, 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.
Natural Gas Distribution Segment
For the NGD business segment, short-term borrowing
requirements typically peak during colder winter months
when the NGD business borrows money to cover the lag
between natural gas purchases and bill collections from
customers. Short-term liquidity for the NGD business is
primarily provided by cash balances, internal cash flow from
operations, proceeds from the sale of commercial paper
notes, as well as available cash from multi-year credit
facilities, short-term credit facilities, company-owned life
insurance policies, the sale of long-term debt, and equity
contributions from NW Holdings. NW Natural's long-term
debt and contributions from NW Holdings are primarily used
to finance NGD capital expenditures, refinance maturing
debt, and provide temporary funding for other general
corporate purposes of the NGD business.
Based on 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
45
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. As of December 31, 2018, NW Natural has
Board authorization to issue up to $325 million of additional
FMBs and OPUC approval to issue up to $25 million of
additional long-term debt for approved purposes.
In the event senior unsecured long-term debt ratings are
downgraded, or outstanding derivative positions exceed a
certain credit threshold, counterparties under derivative
contracts could require NW Natural to post cash, a letter of
credit, or other forms of collateral, which could expose NW
Natural to additional cash requirements and may trigger
increases in short-term borrowings while in a net loss
position. NW Natural was not required to post collateral at
December 31, 2018. However, if the credit risk-related
contingent features underlying these contracts were
triggered on December 31, 2018, assuming long-term debt
ratings dropped to non-investment grade levels, NW Natural
could have been required to post $4.5 million in collateral
with our counterparties. See "Credit Ratings" below and
Note 15.
Other items that may have a significant impact on NW
Natural's liquidity and capital resources include NW
Natural's pension contribution requirements and
environmental expenditures.
PENSION CONTRIBUTION. NW Natural expects to make
contributions to its company-sponsored defined benefit plan,
which is closed to new employees, over the next several
years until the plan is fully funded under the Pension
Protection Act rules, including the rules issued under the
Moving Ahead for Progress in the 21st Century Act
(MAP-21) and the Highway and Transportation Funding Act
of 2014 (HATFA). See "Application of Critical Accounting
Policies—Accounting for Pensions and Postretirement
Benefits" below.
BONUS DEPRECIATION. Fifty percent bonus depreciation
was available for a large portion of our capital expenditures
in 2016 and 2017 for both federal and Oregon taxes. This
reduced taxable income and provided cash flow benefits.
However, due to the enactment of the TCJA on December
22, 2017, bonus depreciation is eliminated for regulated
NGD-business property acquired after December 31, 2017.
Accordingly, we do not anticipate similar cash flow benefits
related to bonus depreciation in the future.
ENVIRONMENTAL EXPENDITURES. NW Natural expects to
continue using cash resources to fund environmental
liabilities. In 2015, NW Natural received an Order from the
OPUC regarding the SRRM mechanism and began
recovering amounts through NGD business rates in
November 2015. In addition, the OPUC issued a
subsequent Order regarding SRRM implementation in
January 2016. See Note 17, and "Results of Operations—
Regulatory Matters—Environmental Costs" above.
Based on several factors, including current credit ratings,
NW Natural's commercial paper program, current cash
reserves, committed credit facilities, and an expected ability
to issue long-term debt and receive equity contributions
from NW Holdings, NW Natural believes its liquidity is
sufficient to meet anticipated near-term cash requirements,
including all contractual obligations, investing, and financing
activities as discussed in "Contractual Obligations" and
"Cash Flows" below.
NW NATURAL DIVIDEND POLICY. The declarations and
amount of future dividends to NW Holdings will depend
upon earnings, cash flows, financial condition, the
satisfaction of OPUC and WUTC regulatory ring-fencing
restrictions, and other factors. The amount and timing of
dividends payable on common stock is subject to approval
of the NW Natural Board of Directors.
OFF-BALANCE SHEET ARRANGEMENTS. Except for certain
lease and purchase commitments, NW Holdings and NW
Natural have no material off-balance sheet financing
arrangements. See "Contractual Obligations" below.
In October 2017, NW Natural entered into a 20-year
operating lease agreement for a new headquarters location
in Portland, Oregon. The existing headquarters lease
expires in 2020 and after an extensive search and
evaluation process with a focus on seismic preparedness,
safety, reliability, least cost to customers and a continued
commitment to NW Natural's employees and the
communities NW Natural serves, NW Natural executed a
new lease for suitable commercial office space in Portland,
Oregon. Payments under the lease are expected to
commence in 2020 and total estimated base rent payments
over the life of the lease are approximately $160 million. NW
Natural has the option to extend the term of the lease for
two additional seven-year periods.
Additionally, the lease was analyzed in consideration of
build-to-suit lease accounting guidance with the conclusion
that NW Natural is the accounting owner of the asset during
construction. As a result, NW Natural recognized $25.5
million and $0.5 million during 2018 and 2017, respectively,
in property, plant and equipment and an obligation in other
non-current liabilities for the same amount on its
consolidated balance sheet. These accounting transactions
are non-cash in nature, and as such, are not included in the
cash flow analysis and capital expenditures forecasts below,
and have no impact on short-term liquidity. When the new
lease accounting standard became effective for NW
Holdings and NW Natural in 2019, the associated build-to-
suit asset and liability were de-recognized in accordance
with the new standard. See Note 2 for more information on
the impacts of the new lease standard.
46
Contractual Obligations
The following table shows contractual obligations from continuing operations at December 31, 2018 by maturity and type of
obligation:
In millions
NW Natural
Short-term debt maturities
Long-term debt maturities
Interest on long-term debt
Postretirement benefit payments(1)
Operating leases
Gas purchases(2)
Gas pipeline capacity commitments
Other purchase commitments(3)
Other long-term liabilities(4)
NW Natural Total
NW Holdings
Payments Due in Years Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
$
217.5
$
— $
— $
— $
— $
— $
30.0
36.7
25.1
5.4
144.5
82.7
—
17.3
559.2
75.0
31.0
26.1
4.8
2.8
80.2
2.1
—
60.0
29.9
27.0
7.1
2.3
66.7
0.6
—
—
28.2
27.8
7.2
—
61.1
0.1
—
90.0
27.3
28.7
7.3
—
60.6
—
—
484.7
275.8
159.4
149.9
—
580.0
—
—
217.5
739.7
428.9
294.1
181.7
149.6
931.3
2.8
17.3
222.0
193.6
124.4
213.9
1,649.8
2,962.9
Short- and long-term obligations(5)
0.4
0.3
0.3
0.3
0.3
1.4
3.0
NW Holdings Total
$
559.6
$
222.3
$
193.9
$
124.7
$
214.2
$
1,651.2
$
2,965.9
(1) Postretirement benefit payments primarily consists of two NW Natural items: (1) estimated pension and other postretirement plan payments,
which are funded by plan assets and future cash contributions, and (2) required payments to the Western States multiemployer pension
plan due to our withdrawal from the plan in December 2013. See Note 9.
(2) Gas purchases include contracts which use price formulas tied to monthly index prices. The commitment amounts presented incorporate
the December 2018 first of month index price for each supply basin from which gas is purchased. For a summary of gas purchase and gas
pipeline capacity commitments, see Note 16.
(3) Other purchase commitments primarily consist of remaining balances under existing purchase orders.
(4) Other long-term liabilities includes accrued vacation liabilities for management employees and deferred compensation plan liabilities for
executives and directors. The timing of these payments are uncertain; however, these payments are unlikely to all occur in the next 12
months.
(5) Short- and long-term obligations include short- and long-term debt obligations and other immaterial liabilities.
In addition to known contractual obligations listed in the
above table, NW Natural has also recognized liabilities for
future environmental remediation or action. The exact timing
of payments beyond 12 months with respect to those
liabilities cannot be reasonably estimated due to numerous
uncertainties surrounding the course of environmental
remediation and the preliminary nature of site investigations.
See Note 17 for a further discussion of environmental
remediation cost liabilities.
At December 31, 2018, 635 of NW Natural's natural gas
distribution employees were members of the Office and
Professional Employees International Union (OPEIU) Local
No. 11. In May 2014, our union employees ratified a new
labor agreement (Joint Accord) that expires on November
30, 2019, and thereafter from year to year unless either
party serves notice of its intent to negotiate modifications to
the collective bargaining agreement. The remaining terms of
Joint Accord include the following items: a scheduled 3%
wage increase effective December 1 each year with the
potential for up to an additional 3% per year based on wage
inflation at or above 4%. The Joint Accord also maintains
competitive health benefits, including a 15% to 20%
premium cost sharing by employees, a 401(k) contribution
of 4% for employees hired after our pension plan was
closed on December 31, 2009, and a 401(k) match of 50%
of the first 6% of savings, and other flexibility provisions
benefiting the Company.
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 commercial paper
programs and separate bank facilities. 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 December 31, 2018 and 2017, NW Holdings had short-
term debt outstanding of $217.6 million and $54.2 million,
respectively, and NW Natural had short-term debt
outstanding of $217.5 million and $54.2 million, respectively.
47
The weighted average interest rate on commercial paper
outstanding at December 31, 2018 and 2017 was 3.0% and
1.9%, respectively.
NW Holdings had $2.8 million of letters of credit issued and
outstanding, separate from the aforementioned credit
agreement, at December 31, 2018.
Credit Agreements
NW Holdings
In October 2018, NW Holdings entered into a $100 million
credit agreement, with a feature that allows it to request
increases in the total commitment amount, up to a maximum
of $150 million. The maturity date of the agreement is
October 2, 2023, with available extension of commitments
for two additional one-year periods, subject to lender
approval.
All lenders under the NW Holdings credit agreement are
major financial institutions with committed balances and
investment grade credit ratings as of December 31, 2018 as
follows:
NW Natural
In October 2018, NW Natural entered into a new multi-year
credit agreement for unsecured revolving loans totaling
$300 million, with a feature that allows NW Natural to
request increases in the total commitment amount, up to a
maximum of $450 million. The maturity date of the
agreement is October 2, 2023 with an available extension of
commitments for two additional one-year periods, subject to
lender approval. NW Natural concurrently terminated its
prior credit agreement upon the closing of the new
agreement.
All lenders under the NW Natural credit agreement are
major financial institutions with committed balances and
investment grade credit ratings as of December 31, 2018 as
follows:
In millions
Lender rating, by category
Loan Commitment
In millions
AA/Aa
A/A1
Total
$
$
100
—
100
Lender rating, by category
Loan Commitment
AA/Aa
A/A1
Total
$
$
300
—
300
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 NW Holdings credit agreement permits the issuance of
letters of credit in an aggregate amount of up to $40 million.
The principal amount of borrowings under the credit
agreement is due and payable on the maturity date. The
credit agreement requires NW Holdings to maintain a
consolidated indebtedness to total capitalization ratio of
70% or less. Failure to comply with this covenant would
entitle the lenders to terminate their lending commitments
and accelerate the maturity of all amounts outstanding. NW
Holdings was in compliance with this covenant at December
31, 2018, with a consolidated indebtedness to total
capitalization ratio of 55.6%.
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.
Based on credit market conditions, it is possible one or more
lending commitments could be unavailable to NW Natural if
the lender defaulted due to lack of funds or insolvency;
however, NW Natural does not believe this risk to be
imminent due to the lenders' strong investment-grade credit
ratings.
The NW Natural credit agreement permits the issuance of
letters of credit in an aggregate amount of up to $60 million.
The principal amount of borrowings under the credit
agreement is due and payable on the maturity date. There
were no outstanding balances under this credit agreement
or the prior credit agreement at December 31, 2018 or 2017.
The credit agreement requires NW Natural to maintain a
consolidated indebtedness to total capitalization ratio of
70% or less. Failure to comply with this covenant would
entitle the lenders to terminate their lending commitments
and accelerate the maturity of all amounts outstanding. NW
Natural was in compliance with this covenant at December
31, 2018 and 2017, with consolidated indebtedness to total
capitalization ratios of 57.1% and 52.9%, 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 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.
48
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:
Commercial paper (short-term debt)
Senior secured (long-term debt)
Senior unsecured (long-term debt)
Corporate credit rating
Ratings outlook
S&P
Moody's
A-1
AA-
n/a
A+
P-2
A1
A3
n/a
Stable
Negative
The above credit ratings and ratings outlook are dependent
upon a number of factors, both qualitative and quantitative,
and are subject to change at any time. The disclosure of or
reference to these credit ratings is not a recommendation to
buy, sell or hold NW Holdings or NW Natural securities.
Each rating should be evaluated independently of any other
rating.
As part of the ring-fencing conditions agreed upon with the
OPUC and WUTC in connection with the holding company
reorganization, NW Holdings and NW Natural are required
to maintain separate credit ratings, long-term debt ratings,
and preferred stock ratings, if any.
Long-Term Debt
The following NW Natural debentures were retired in the
periods indicated:
In millions
NW Natural First Mortgage Bonds
Years Ended December 31,
2018
2017
2016
Series 5.15% due 2016
$ — $ — $
Series 7.00% due 2017
Series 6.60% due 2018
Series 1.55% due 2018
Total
—
22
75
97
$
40
—
—
40
$
$
25
—
—
—
25
Bankruptcy Ring-fencing Restrictions
As part of the ring-fencing conditions agreed upon with the
OPUC and WUTC in connection with the holding company
reorganization, NW Natural is required to have one director
who is independent from NW Natural management and from
NW Holdings and to issue one share of NW Natural
preferred stock to an independent third party. NW Natural
was in compliance with both of these ring-fencing provisions
as of December 31, 2018. NW Natural may file a voluntary
petition for bankruptcy only if approved unanimously by the
Board of Directors of NW Natural, including the independent
director, and by the holder of the preferred share.
Cash Flows
Operating Activities
Changes in our operating cash flows are primarily affected
by net income or loss, changes in working capital
requirements, and other cash and non-cash adjustments to
operating results.
Operating activity highlights include:
NW Holdings
In millions
2018
2017
2016
Cash provided by operating
activities
$ 168.8
$ 206.7
$ 222.1
NW Natural
In millions
2018
2017
2016
Cash provided by operating
activities
$ 173.5
$ 206.5
$ 222.2
The significant drivers of changes in cash provided by
operating activities discussed below apply to both NW
Holdings and NW Natural.
2018 COMPARED TO 2017. The significant factors
contributing to the $37.9 million and $33.0 million decreases
in NW Holdings and NW Natural cash flow provided by
operating activities, respectively, were as follows:
•
a decrease of $31.5 million in cash flow benefits from
changes in deferred gas cost balances primarily due to
higher gas prices in the fourth quarter of 2018 and
lower current year PGA rates reflecting over-collections
of certain fixed costs from customers in the prior year
when weather was colder than average;
a decrease of $12.6 million due to $27.4 million income
taxes paid in 2018 due to the elimination of bonus
depreciation as a result of the TCJA, compared to
income taxes paid of $14.8 million in 2017; partially
offset by
a net increase of $10.2 million from changes in working
capital related to receivables, inventories, and accounts
payable reflecting warmer than average weather in
2018 compared to the prior period; and
an increase of $3.9 million due to a decrease in
contributions paid to qualified defined benefit pension
plans
•
•
•
2017 COMPARED TO 2016. The significant factors
contributing to the $15.4 million and $15.7 million decreases
in NW Holdings and NW Natural cash flows provided by
operating activities, respectively, were as follows:
•
a decrease of $21.9 million due to $14.8 million income
taxes paid in 2017 compared to a refund of $7.2 million
in 2016 as a result of the enactment of bonus
depreciation in December 2015;
a decrease of $5.0 million due to an increase in
contributions paid to qualified defined benefit pension
plans; and
a net decrease of $12.2 million from changes in working
capital related to receivables, inventories, and accounts
payable reflecting colder than average weather in 2017
compared to the prior period; partially offset by
•
•
49
Mist Gas Storage Expansion Project as well as customer
growth, system reinforcement, technology, and facilities.
NW NATURAL
2018 COMPARED TO 2017. The $24.3 million increase in cash
used in investing activities was primarily due to NW
Natural's initial cash contribution of $20 million to its then
subsidiary, and now parent, NW Holdings, in addition to
continued capital expenditures primarily related to NW
Natural's North Mist Gas Storage Expansion Project as well
as customer growth, system reinforcement, technology, and
facilities.
2017 COMPARED TO 2016. The $77.6 million increase in cash
used in investing activities was primarily due to higher
capital expenditures primarily related to NW Natural's North
Mist Gas Storage Expansion Project as well as customer
growth, system reinforcement, technology, and facilities.
The operating subsidiaries of NW Holdings invest in capital
expenditures to maintain and enhance the safety and
integrity of their distribution systems, to expand the reach or
capacity of those assets, and improve the efficiency of
operations.
CAPITAL EXPENDITURES. 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 to $910 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. 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.
NW Holdings' wholly-owned water subsidiaries expect to
invest in their facilities to support growth and upgrade their
systems with $30 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.
•
an increase of $27.3 million in cash flow benefits from
changes in deferred gas cost balances primarily due to
the $19.4 million gas cost savings credited to
customers in 2016 that did not occur in 2017.
During the year ended December 31, 2018, NW Natural
contributed $15.5 million to its qualified defined benefit
pension plan, compared to $19.4 million for 2017 and $14.5
million for 2016. The amount and timing of future
contributions will depend on market interest rates and
investment returns on the plans’ assets. See Note 9.
Bonus depreciation of 50% was available for a large portion
of capital expenditures for federal and Oregon purposes in
2016 and 2017. This reduced our taxable income and
provided cash flow benefits. Bonus depreciation for 2015
was not enacted until December 18, 2015, and was
extended retroactively back to January 1, 2015 of the
respective year. As a result, estimated income tax payments
were made throughout 2015 without the benefit of bonus
depreciation for the year. This delayed the cash flow benefit
of bonus depreciation until refunds could be requested and
received. We received refunds of federal income tax
overpayments of $7.9 million during 2016. As a result of the
enactment of the TCJA on December 22, 2017, bonus
depreciation was eliminated for NGD business property
acquired after December 31, 2017. Accordingly, we do not
anticipate similar cash flow benefits related to bonus
depreciation in the future.
We have lease and purchase commitments relating to our
operating activities that are financed with cash flows from
operations. For information on cash flow requirements
related to leases and other purchase commitments, see
“Financial Condition—Contractual Obligations” above and
Note 16.
Investing Activities
Investing activity highlights include:
NW Holdings
In millions
2018
2017
2016
Total cash used in investing
activities
$ (217.5) $ (214.2) $ (136.6)
Capital expenditures
(214.6)
(213.3)
(138.4)
NW Natural
In millions
2018
2017
2016
Total cash used in investing
activities
$ (238.5) $ (214.2) $ (136.6)
Capital expenditures
(214.3)
(213.3)
(138.4)
NW HOLDINGS
2018 COMPARED TO 2017. The $3.3 million increase in cash
used in investing activities was primarily due to continued
capital expenditures primarily related to NW Natural's North
Mist Gas Storage Expansion Project as well as customer
growth, system reinforcement, technology, and facilities.
2017 COMPARED TO 2016. The $77.6 million increase in cash
used in investing activities was primarily due to higher
capital expenditures primarily related to NW Natural's North
50
For 2019, capital expenditures are estimated, on an accrual
basis, to be as follows:
In millions
NGD
One-Year Outlook
2019
Low
High
Core capital expenditures
$
150 $
165
Significant projects:
Growth & reliability
Facilities & technology
North Mist expansion
Total projects
Total NGD
Other
Total
15
42
18
75
225
5
25
57
18
100
265
5
$
230 $
270
Required funds for the investments are expected to be
internally generated and/or financed with long-term debt or
equity, as appropriate.
Financing Activities
Financing activity highlights include:
NW Holdings
In millions
2018
2017
2016
Total cash provided by (used
in) financing activities
$
57.8
$
Change in short-term debt
Change in long-term debt
163.3
(47.0)
7.4
0.9
$
(86.2)
(216.7)
60.0
125.0
Change in common stock
issued, net
—
—
52.8
NW Natural
In millions
2018
2017
2016
Total cash provided by (used
in) financing activities
$
69.8
$
Change in short-term debt
Change in long-term debt
163.3
(47.0)
7.4
0.9
$
(86.2)
(216.7)
60.0
125.0
Change in common stock
issued, net
—
—
52.8
NW HOLDINGS
2018 COMPARED TO 2017. The $50.4 million increase in cash
provided by financing activities was primarily due to $162.4
million higher short-term debt issuances, partially offset by
$107.0 million lower net proceeds from long-term debt
activity in 2018.
2017 COMPARED TO 2016. The $93.6 million increase in cash
provided by financing activities was primarily due to $217.6
million lower repayments of short-term debt compared to the
prior period, partially offset by $65.0 million lower net
proceeds from long-term debt activity in 2017 and $52.8
million of common stock proceeds in 2016.
NW NATURAL
2018 COMPARED TO 2017. The $62.4 million increase in cash
provided by financing activities was primarily due to
increases in short term debt issuances of $162.4 million,
partially offset by $107.0 million lower net proceeds from
long-term debt activity in 2018. NW Natural cash provided
by financing activities was $12.0 million higher in
comparison to NW Holdings primarily due to the payment of
the November 15, 2018 dividend to NW Holdings
shareholders using NW Holdings funds.
2017 COMPARED TO 2016.The $93.6 million increase in cash
provided by financing activities was primarily due to $217.6
million lower repayments of short-term debt compared to the
prior period, partially offset by $65 million lower net
proceeds from long-term debt activity in 2017 and $52.8
million of common stock proceeds in 2016.
Pension Cost and Funding Status of Qualified
Retirement Plans
NW Natural's pension costs are determined in accordance
with accounting standards for compensation and retirement
benefits. See “Application of Critical Accounting Policies and
Estimates – Accounting for Pensions and Postretirement
Benefits” below. Pension expense for NW Natural's qualified
defined benefit plan, which is allocated between operations
and maintenance expenses, capital expenditures, and
through October 31, 2018, the deferred regulatory balancing
account, totaled $20.7 million in 2018, an increase of $2.6
million from 2017. The fair market value of pension assets in
this plan decreased to $257.8 million at December 31, 2018
from $287.9 million at December 31, 2017. The decrease
was due to a loss on plan assets of $25.9 million and benefit
payments of $19.7 million, offset by $15.5 million in
employer contributions.
Contributions made to NW Natural's company-sponsored
qualified defined benefit pension plan are based on actuarial
assumptions and estimates, tax regulations, and funding
requirements under federal law. The qualified defined
benefit pension plan was underfunded by $162.4 million at
December 31, 2018. NW Natural plans to make
contributions during 2019 of $11.0 million. See Note 9 for
further pension disclosures.
Contingent Liabilities
Loss contingencies are recorded as liabilities when it is
probable that a liability has been incurred and the amount of
the loss is reasonably estimable in accordance with
accounting standards for contingencies. See “Application of
Critical Accounting Policies and Estimates” below. At
December 31, 2018, NW Natural's total estimated liability
related to environmental sites was $128.7 million. See Note
17 and "Results of Operations—Regulatory Matters—Rate
Mechanisms—Environmental Costs" above.
NW Holdings is not currently party to any direct claims or
litigation, though in the future it may be subject to claims
and litigation arising in the ordinary course of business.
New Accounting Pronouncements
For a description of recent accounting pronouncements that
may have an impact on our financial condition, results of
operations, or cash flows, see Note 2.
51
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
used different assumptions. Our most critical estimates and
judgments for both NW Holdings and NW Natural include
accounting for:
• regulatory accounting;
• revenue recognition;
• derivative instruments and hedging activities;
• pensions and postretirement benefits;
• income taxes;
• environmental contingencies; and
• impairment of long-lived assets and goodwill.
Management has discussed its current estimates and
judgments used in the application of critical accounting
policies with the Audit Committees of the Boards of NW
Holdings and NW Natural. Within the context of critical
accounting policies and estimates, management is not
aware of any reasonably likely events or circumstances that
would result in materially different amounts being reported.
Regulatory Accounting
The NGD segment is regulated by the OPUC and WUTC,
which establish the rates and rules governing services
provided to customers, and, to a certain extent, set forth
special accounting treatment for certain regulatory
transactions. In general, the same accounting principles as
non-regulated companies reporting under U.S. GAAP are
used. However, authoritative guidance for regulated
operations (regulatory accounting) requires different
accounting treatment for regulated companies to show the
effects of such regulation. For example, NW Natural
accounts for the cost of gas using a PGA deferral and cost
recovery mechanism, which is submitted for approval
annually to the OPUC and WUTC. See "Results of
Operations—Regulatory Matters—Rate Mechanisms—
Purchased Gas Adjustment" above. There are other
expenses and revenues that the OPUC or WUTC may
require NW Natural to defer for recovery or refund in future
periods. Regulatory accounting requires NW Natural to
account for these types of deferred expenses (or deferred
revenues) as regulatory assets (or regulatory liabilities) on
the balance sheet. When the recovery of these regulatory
assets from, or refund of regulatory liabilities to, customers
is approved, NW Natural recognizes the expense or
revenue on the income statement at the same time the
adjustment to amounts included in rates charged to
customers.
The conditions that must be satisfied to adopt the accounting
policies and practices of regulatory accounting include:
•
•
an independent regulator sets rates;
the regulator sets the rates to cover specific costs of
delivering service; and
the service territory lacks competitive pressures to reduce
rates below the rates set by the regulator.
•
Because NW Natural's NGD operations satisfy all three
conditions, NW Natural continues to apply regulatory
accounting to NGD operations. Future accounting changes,
regulatory changes, or changes in the competitive
environment could require NW Natural to discontinue the
application of regulatory accounting for some or all of our
regulated businesses. This would require the write-off of
those regulatory assets and liabilities that would no longer
be probable of recovery from or refund to customers.
Based on current accounting and regulatory competitive
conditions, NW Natural believes it is reasonable to expect
continued application of regulatory accounting for NGD
activities. Further, it is reasonable to expect the recovery or
refund of NW Natural's regulatory assets and liabilities at
December 31, 2018 through future customer rates. If it is
determined that all or a portion of these regulatory assets or
liabilities no longer meet the criteria for continued
application of regulatory accounting, then NW Natural would
be required to write-off the net unrecoverable balances
against earnings in the period such determination is made.
The net balance in regulatory asset and liability accounts
was a net liability of $245.3 million and a net liability of
$217.7 million as of December 31, 2018 and 2017,
respectively. See Note 2 for more detail on regulatory
balances.
Revenue Recognition
Revenues, which are derived primarily from the sale,
transportation, and storage of natural gas, are recognized
upon the delivery of gas commodity or services rendered to
customers.
Accrued Unbilled Revenue
For a description of the policy regarding accrued unbilled
revenue, most of which relates to the NGD business at NW
Natural, see Note 2. The following table presents changes in
key metrics if the estimated percentage of unbilled volume
at December 31 was adjusted up or down by 1%:
In millions
Unbilled revenue increase (decrease)(1)
Margin increase (decrease)(1)
$
Net income before tax increase
(decrease)(1)
2018
Up 1%
Down 1%
$
0.8
0.1
0.1
(0.8)
(0.1)
(0.1)
(1)
Includes impact of regulatory mechanisms including decoupling
mechanism and excludes the impact of unbilled revenue from water
services.
Derivative Instruments and Hedging Activities
NW Natural's gas acquisition and hedging policies set forth
guidelines for using financial derivative instruments to
support prudent risk management strategies. These policies
specifically prohibit the use of derivatives for trading or
speculative purposes. Financial derivative contracts are
52
utilized to hedge a portion of natural gas sale requirements.
These contracts include swaps, options, and combinations
of option contracts. NW Natural primarily uses these
derivative financial instruments to manage commodity price
variability. A small portion of NW Natural's derivative
hedging strategy involves foreign currency exchange
contracts.
Derivative instruments are recorded on the balance sheet at
fair value. If certain regulatory conditions are met, then the
derivative instrument fair value is recorded together with an
offsetting entry to a regulatory asset or liability account
pursuant to regulatory accounting, and no unrealized gain or
loss is recognized in current income or loss. See
"Regulatory Accounting" above for additional information.
The gain or loss from the fair value of a derivative
instrument subject to regulatory deferral is included in the
recovery from, or refund to, NGD business customers in
future periods. If a derivative contract is not subject to
regulatory deferral, then the accounting treatment for
unrealized gains and losses is recorded in accordance with
accounting standards for derivatives and hedging which is
either in current income or loss or in accumulated other
comprehensive income or loss (AOCI or AOCL). Derivative
contracts outstanding at December 31, 2018, 2017 and
2016 were measured at fair value using models or other
market accepted valuation methodologies derived from
observable market data. Estimates of fair value may change
significantly from period-to-period depending on market
conditions and prices. These changes may have an impact
on results of operations, but the impact would largely be
mitigated due to the majority of derivative activities being
subject to regulatory deferral treatment. For more
information on derivative activity and associated regulatory
treatment, see Note 2 and Note 15.
The following table summarizes the amount of losses
realized from commodity price transactions for the last three
years:
In millions
2018
2017
2016
NGD business net loss on:
Commodity Swaps
$
7.4
$
7.8
$
26.9
Realized losses from commodity hedges shown above were
recorded as increases to cost of gas and were, or will be,
included in annual PGA rates.
Pensions and Postretirement Benefits
NW Natural maintains a qualified non-contributory defined
benefit pension plan, non-qualified supplemental pension
plans for eligible executive officers and certain key
employees, and other postretirement employee benefit
plans covering certain non-union employees. NW Natural
also has a qualified defined contribution plan (Retirement K
Savings Plan) for all eligible employees. Only the qualified
defined benefit pension plan and Retirement K Savings Plan
have plan assets, which are held in qualified trusts to fund
the respective retirement benefits. The qualified defined
benefit retirement plan for union and non-union employees
was closed to new participants several years ago. Non-
union and union employees hired or re-hired after
December 31, 2006 and 2009, respectively, and employees
of certain NW Holdings subsidiaries are provided an
53
enhanced Retirement K Savings Plan benefit. The
postretirement Welfare Benefit Plan for non-union
employees was also closed to new participants several
years ago.
Net periodic pension and postretirement benefit costs
(retirement benefit costs) and projected benefit obligations
(benefit obligations) are determined using a number of key
assumptions including discount rates, rate of compensation
increases, retirement ages, mortality rates and an expected
long-term return on plan assets. See Note 9.
Accounting standards also require balance sheet
recognition of unamortized actuarial gains and losses and
prior service costs in AOCI or AOCL, net of tax. However,
the retirement benefit costs related to qualified defined
benefit pension and postretirement benefit plans are
generally recovered in rates charged to NGD customers,
which are set based on accounting standards for pensions
and postretirement benefit expenses. As such, NW Natural
received approval from the OPUC to recognize the
unamortized actuarial gains and losses and prior service
costs as a regulatory asset or regulatory liability based on
expected rate recovery, rather than including it as AOCI or
AOCL under common equity. See "Regulatory Accounting"
above and Note 2, "Industry Regulation".
In 2011, NW Natural received regulatory approval from the
OPUC and began deferring a portion of pension expense
above or below the amount set in rates to a regulatory
balancing account on the balance sheet. On October 26,
2018, the OPUC issued an order to freeze NW Natural's
pension balancing account as of October 31, 2018. The
order directed NW Natural and the other parties to the rate
case to engage in further regulatory proceedings extending
the general rate case docket to resolve open issues with
respect to the recovery of the pension balancing account.
On February 4, 2019, NW Natural and the other parties to
the rate case filed a joint stipulation with the OPUC outlining
a resolution to the issue. See "Regulatory Matters-
Regulatory Proceeding Updates-Oregon General Rate
Case" for more information. At December 31, 2018, the
cumulative amount deferred for future pension cost recovery
was $74.2 million, including accrued interest. The regulatory
balancing account includes the recognition of accrued
interest on the account balance at NW Natural's authorized
rate of return, with the equity portion of this interest deferred
until amounts are collected in rates.
A number of factors, as discussed above, are considered in
developing pension and postretirement benefit assumptions.
For the December 31, 2018 measurement date, NW Natural
reviewed and updated:
•
the weighted-average discount rate assumptions for
pensions increased from 3.52% for 2017 to 4.20% for
2018, and our weighted-average discount rate
assumptions for other postretirement benefits increased
from 3.44% for 2017 to 4.13% for 2018. The new rate
assumptions were determined for each plan based on a
matching of benchmark interest rates to the estimated
cash flows, which reflect the timing and amount of
future benefit payments. Benchmark interest rates are
drawn from the FTSE Above Median Curve, which
consists of high quality bonds rated AA- or higher by
S&P or Aa3 or higher by Moody’s;
•
•
•
•
the expected annual rate of future compensation
increases, which was updated to a range of 3.25% to
3.5% at December 31, 2018;
the expected long-term return on qualified defined
benefit plan assets, which remained unchanged at a
rate of 7.50%;
the mortality rate assumptions were updated from
RP-2006 mortality tables for employees and healthy
annuitants with a fully generational projection using
scale MP-2017 to RP-2014 mortality tables using scale
MP-2018, which contributed to the decrease of our
projected benefit obligation; and
other key assumptions, which were based on actual
plan experience and actuarial recommendations.
At December 31, 2018, the net pension liability (benefit
obligations less market value of plan assets) for NW
Natural's qualified defined benefit plan increased $0.7
million compared to 2017. The increase in the net pension
liability is primarily due to the $30.1 million decrease in plan
assets, partially offset by a $29.5 million decrease in the
pension benefit obligation. The liability for non-qualified
plans decreased $1.3 million, and the liability for other
postretirement benefits decreased $0.8 million in 2018.
The expected long-term rate of return on plan assets is
determined by averaging the expected earnings for the
target asset portfolio. In developing expected return,
historical actual performance and long-term return
projections are analyzed, which gives consideration to the
current asset mix and target asset allocation.
NW Natural believes its pension assumptions are
appropriate based on plan design and an assessment of
market conditions. The following shows the sensitivity of
retirement benefit costs and benefit obligations to changes
in certain actuarial assumptions:
Change in
Assumption
(0.25)%
Impact on
2018
Retirement
Benefit
Costs
Impact on
Retirement
Benefit
Obligations
at Dec. 31,
2018
$
$
1.5
0.1
—
13.4
0.8
0.8
(0.25)%
0.7
N/A
Dollars in millions
Discount rate:
Qualified defined
benefit plans
Non-qualified plans
Other
postretirement
benefits
Expected long-term
return on plan assets:
Qualified defined
benefit plans
In July 2012, President Obama signed MAP-21 into law.
This legislation changed several provisions affecting
pension plans, including temporary funding relief and
Pension Benefit Guaranty Corporation (PBGC) premium
increases, which reduces the level of minimum required
contributions in the near-term but generally increases
contributions in the long-run as well as increasing the
operational costs of running a pension plan. Prior to
MAP-21, interest rates based on a 24-month average yield
of investment grade corporate bonds (also referred to as
"segment rate") were used to calculate minimum
contribution requirements. MAP-21 established a new
minimum and maximum corridor for segment rates based on
a 25-year average of bond yields, which resulted in lower
minimum contributions requirements than those under
previous regulations. In August 2014, HATFA was signed
and extended funding relief for an additional five years.
Income Taxes
Valuation Allowances
Deferred tax assets are recognized to the extent that these
assets are believed to be more likely than not to be realized.
In making such a determination, available positive and
negative evidence is considered, including future reversals
of existing taxable temporary differences, projected future
taxable income, tax-planning strategies, and results of
recent operations. NW Holdings and NW Natural have
determined that all recorded deferred tax assets are more
likely than not to be realized as of December 31, 2018. See
Note 10.
Uncertain Tax Benefits
The calculation of tax liabilities involves dealing with
uncertainties in the application of complex tax laws and
regulations in the jurisdictions in which we operate. A tax
benefit from a material uncertain tax position will only be
recognized when it is more likely than not that the position,
or some portion thereof, will be sustained upon examination,
including resolution of any related appeals or litigation
processes, on the basis of the technical merits. NW
Holdings and NW Natural participate in the Compliance
Assurance Process (CAP) with the Internal Revenue
Service (IRS). Under the CAP program companies work
with the IRS to identify and resolve material tax matters
before the federal income tax return is filed each year. No
reserves for uncertain tax benefits were recorded during
2018, 2017, or 2016. See Note 10.
Tax Legislation
When significant proposed or enacted changes in income
tax rules occur we consider whether there may be a material
impact to our financial position, results of operations, cash
flows, or whether the changes could materially affect
existing assumptions used in making estimates of tax
related balances.
On December 22, 2017, H.R.1 - An Act to provide for
reconciliation pursuant to titles II and V of the concurrent
resolution on the budget for fiscal year 2018, also known as
the Tax Cuts and Jobs Act (TCJA), was enacted. The TCJA
lowers the U.S. federal corporate income tax rate to 21%
from the existing maximum rate of 35%, effective for our tax
year beginning January 1, 2018. The TCJA includes specific
provisions related to regulated public utilities that generally
provide for the continued deductibility of interest expense
and the elimination of bonus depreciation. Certain rate
normalization requirements for accelerated cost recovery
benefits related to regulated plant balances also continue.
See Note 10 for more information on how we are impacted
by the TCJA.
The reduced U.S. corporate income tax rate had a material
impact on our financial statements in 2017. As a result of the
reduction of the U.S. corporate income tax rate to 21%, U.S.
GAAP requires deferred tax assets and liabilities be
54
revalued as of the date of enactment, with resulting tax
effects accounted for in the reporting period of enactment.
We recorded a net revaluation of deferred tax asset and
liability balances of $196.4 million as of December 31, 2017,
utilizing the reduced federal rate of 21% expected to apply
when these temporary differences are realized or settled,
based upon balances in existence at the date of enactment.
This revaluation had no impact on our 2017 cash flows.
With respect to other tax legislation, the final tangible
property regulations applicable to all taxpayers were issued
on September 13, 2013 and were generally effective for
taxable years beginning on or after January 1, 2014. In
addition, procedural guidance related to the regulations was
issued under which taxpayers may make accounting
method changes to comply with the regulations. We have
evaluated the regulations and do not anticipate any material
impact. However, unit-of-property guidance applicable to
natural gas distribution networks has not yet been issued
and is expected in the near future. We will further evaluate
the effect of these regulations after this guidance is issued,
but believe the current method is materially consistent with
the new regulations and do not expect this additional
guidance to have a material effect on our financial
statements.
Regulatory Matters
Regulatory tax assets and liabilities are recorded to the
extent it is probable they will be recoverable from, or
refunded to, customers in the future. At December 31, 2018
and 2017, NW Natural had net regulatory income tax assets
of $21.4 million and $22.2 million, respectively, representing
future rate recovery of deferred tax liabilities resulting from
differences in NGD plant financial statement and tax bases
and NGD plant removal costs. These regulatory assets are
currently being recovered through customer rates. In 2017,
the regulatory asset balance, and its associated deferred tax
liability, were both reduced by $17.4 million as a result of the
TCJA revaluation to reflect the lower corporate income tax
rate. At December 31, 2018 and 2017, regulatory income
tax assets of $2.3 million and $0.9 million, respectively, were
recorded by NW Natural, representing probable future rate
recovery of deferred tax liabilities resulting from the equity
portion of AFUDC. In 2017, the regulatory asset balance,
and its associated deferred tax liability, were both reduced
by $0.8 million as a result of the TCJA revaluation to reflect
the lower corporate income tax rate.
On December 29, 2017, NW Natural filed applications with
the OPUC and WUTC seeking authorization to defer the
overall net benefits of NGD resulting from the TCJA. On the
same day, Staff of the OPUC filed an application seeking
deferral of changes in NW Natural’s federal tax obligations
resulting from the TCJA. On January 8, 2018, the WUTC
issued a statement acknowledging receipt of NW Natural’s
application and indicating their intention to incorporate the
impact into future rate case proceedings.
At December 31, 2018 and 2017, regulatory liability
balances, representing the estimated net benefit to NGD
customers resulting from the change in deferred taxes as a
result of the TCJA, of $217.1 million and $213.3 million,
respectively, were recorded by NW Natural. These balances
include a gross up for income taxes of $57.5 and $56.5
million, respectively.
55
The TCJA includes specific guidance for determining the
shortest time period over which the portion of this regulatory
liability resulting from accelerated cost recovery of NGD
plant may accrue to the benefit of customers to avoid
incurring federal normalization penalties. However, it is
anticipated that until such time that customers receive the
direct benefit of this regulatory liability, the balance, net of
the additional gross up for income taxes, will continue to
provide an indirect benefit to customers by reducing the
NGD rate base which determines customer rates for
service. It is not possible at this time to determine when the
final resolution of these regulatory proceedings will occur,
and as result, this regulatory liability is classified as non-
current. On February 4, 2019, NW Natural and the parties to
the 2018 Oregon rate case filed a joint stipulation
addressing the return of net tax benefits to customers. See
"Regulatory Matters-Regulatory Proceeding Updates-
Oregon General Rate Case" for more information.
NGD rates in effect for Oregon through October 31, 2018
and for Washington through December 31, 2018 included
an allowance to provide for the recovery of the anticipated
provision for income taxes incurred as a result of providing
regulated services. The provision for income taxes during
these periods included an allowance for federal income
taxes determined by utilizing the pre-TCJA federal corporate
income tax rate of 35 percent. NW Natural recorded an
additional regulatory liability representing the deferral of
NGD’s net benefit from a lower provision for income taxes
due to the newly enacted 21 percent federal corporate
income tax rate, including a gross up for income taxes. As of
December 31, 2018, a regulatory liability of $8.2 million,
including accrued interest, was recorded to reflect this
revenue deferral.
Environmental Contingencies
Environmental liabilities are accounted for in accordance
with accounting standards under the loss contingency
guidance when it is probable that a liability has been
incurred and the amount of the loss is reasonably estimable.
Amounts recorded for environmental contingencies take
numerous factors into consideration, including, among other
variables, changes in enacted laws, regulatory orders,
estimated remediation costs, interest rates, insurance
proceeds, participation by other parties, timing of payments,
and the input of legal counsel and third-party experts.
Accordingly, changes in any of these variables or other
factual circumstances could have a material impact on the
amounts recorded for our environmental liabilities. For a
complete discussion of environmental accounting policies
refer to Note 2. For a discussion of current environmental
sites and liabilities refer to Note 17. In addition, for
information regarding the regulatory treatment of these
costs and NW Natural's regulatory recovery mechanism,
see "Results of Operations—Regulatory Matters—Rate
Mechanisms—Environmental Costs" above.
Impairment of Long-Lived Assets and Goodwill
Long-lived assets
We review the carrying value of long-lived assets whenever
events or changes in circumstances indicate the carrying
amount of the assets might not be recoverable. Factors that
would necessitate an impairment assessment of long-lived
assets include a significant adverse change in the extent or
liabilities, respectively, and, the results of Gill Ranch are
presented separately from the results of continuing
operations, net of tax, as discontinued operations for the
consolidated results of NW Holdings in all periods
presented. The expenses included in the results of
discontinued operations within the consolidated results of
NW Holdings are the direct operating expenses incurred by
Gill Ranch that may be reasonably segregated from the
costs of our continuing operations. See "Results of
Operations - Pending Sale of Gill Ranch Storage" above,
Note 4, and Note 18 for additional information.
Goodwill
In a business combination, goodwill is initially measured as
any excess of the acquisition-date fair value of the
consideration transferred over the acquisition-date fair value
of the net identifiable assets acquired.
The carrying value of goodwill is reviewed annually during
the fourth quarter using balances as of October 1, or
whenever events or changes in circumstance indicate that
such carrying values may not be recoverable.
NW Holdings and NW Natural early-adopted ASU 2017-04,
"Simplifying the Test for Goodwill Impairment" in the third
quarter of 2018. The ASU removes Step 2 from the goodwill
impairment test and under the amended guidance an entity
should perform its annual goodwill impairment test by
comparing the fair value of a reporting unit with its carrying
amount and recognize an impairment charge for the amount
in which the carrying amounts exceed the fair value of the
reporting unit. In accordance with the updated guidance per
ASU 2017-04, NW Holdings' and NW Natural's policy for
goodwill assessments begins with a qualitative analysis in
which events and circumstances are evaluated, including
macroeconomic conditions, industry and market conditions,
regulatory environments, and the overall financial
performance of the reporting unit. If the qualitative
assessment indicates that the carrying value may be at risk
of recoverability, a quantitative evaluation is performed to
measure the carrying value against the fair value of the
reporting unit. This evaluation may involve the assessment
of future cash flows and other subjective factors for which
uncertainty exists and could impact the estimation of future
cash flows. These factors include, but are not limited to, the
amount and timing of future cash flows, future growth rates,
and the discount rate. Unforeseen events and changes in
circumstances or market conditions could adversely affect
these estimates, which could result in an impairment
charge. A qualitative assessment was performed during the
fourth quarter of 2018 which indicated a quantitative
assessment was not required; thus, no goodwill impairment
was recorded. See Note 2 and Note 14 for additional
information.
manner in which the asset is used, a significant adverse
change in legal factors or business climate that could affect
the value of the asset, or a significant decline in the
observable market value or expected future cash flows of
the asset, among others.
When such factors are present, we assess the recoverability
by determining whether the carrying value of the asset will
be recovered through expected future cash flows. An asset
is determined to be impaired when the carrying value of the
asset exceeds the expected undiscounted future cash flows
from the use and eventual disposition of the asset. If an
impairment is indicated, we record an impairment loss for
the difference between the carrying value and the fair value
of the long-lived assets. Fair value is estimated using
appropriate valuation methodologies, which may include an
estimate of discounted cash flows.
In the fourth quarter of 2017, we recognized a non-cash pre-
tax impairment of long-lived assets at the Gill Ranch Facility
of $192.5 million. We determined circumstances existed that
indicated the carrying value of the assets may not be
recoverable. Those circumstances included the completion
of a comprehensive strategic review process that evaluated
various alternatives including a potential sale, as well as
contracting for available storage at lower than anticipated
values for the coming storage year. Given these
considerations, management was required to re-evaluate
the estimated cash flows from our interests in the Gill Ranch
Facility, and determined that those estimated cash flows
were no longer sufficient to cover the carrying value of the
assets.
We used the income approach to estimate fair value, using
the estimated future net cash flows. We also compared the
results of the income approach to our own recent sale
experience and recent market comparable transactions in
order to estimate fair value. Many factors and assumptions
impact the net cash flows used. The most significant and
uncertain estimates included our forecast of gas storage
pricing, our ability to successfully identify and contract with
higher-value customers in and/or near the northern
California market that Gill Ranch serves, and exploring the
possibility of providing energy storage services such as
compressed gas energy storage (CGES). After completing
the strategic evaluation, which included a potential sale in
the fourth quarter of 2017, we lowered our views of a near-
term market recovery and decreased the likelihood
associated with contracting with higher-value customers.
These changes were the most significant estimates that
caused our cash flow projections to decrease to a point
where they were no longer sufficient to cover the carrying
value of the asset.
On June 20, 2018, NWN Gas Storage, NW Holdings'
wholly-owned subsidiary, entered into a Purchase and Sale
Agreement that provides for the sale by NWN Gas Storage
of all of the membership interests in Gill Ranch. As a result
of our strategic shift away from California gas storage
operations and the significance of Gill Ranch's financial
results in 2017, we concluded that the pending sale of Gill
Ranch qualifies as assets and liabilities held for sale and
discontinued operations. As such, the assets and liabilities
associated with Gill Ranch have been classified as
discontinued operations assets and discontinued operations
56
Natural's commodity-related demand and reservation
charges paid in Canadian dollars. Notional amounts under
foreign currency forward contracts were $6.9 million and
$7.7 million as of December 31, 2018 and 2017,
respectively. If all of the foreign currency forward contracts
had been settled on December 31, 2018, a loss of $0.3
million would have been realized. See Note 15.
Credit Risk
Credit Exposure to Natural Gas Suppliers
Certain gas suppliers have either relatively low credit ratings
or are not rated by major credit rating agencies. To manage
this supply risk, NW Natural purchases gas from a number
of different suppliers at liquid exchange points. NW Natural
evaluates and monitors suppliers’ creditworthiness and
maintains the ability to require additional financial
assurances, including deposits, letters of credit, or surety
bonds, in case a supplier defaults. In the event of a
supplier’s failure to deliver contracted volumes of gas, the
NGD business would need to replace those volumes at
prevailing market prices, which may be higher or lower than
the original transaction prices. NW Natural expects these
costs would be subject to its PGA sharing mechanism
discussed above. Since most of NW Natural's commodity
supply contracts are priced at the daily or monthly market
index price tied to liquid exchange points, and NW Natural
has adequate storage flexibility, NW Natural believes it is
unlikely a supplier default would have a material adverse
effect on its financial condition or results of operations.
Credit Exposure to Financial Derivative Counterparties
Based on estimated fair value at December 31, 2018, NW
Natural's overall credit exposure relating to commodity
contracts is considered immaterial as it reflects amounts
owed to financial derivative counterparties (see table
below). However, changes in natural gas prices could result
in counterparties owing NW Natural money. Therefore, NW
Natural's financial derivatives policy requires counterparties
to have at least an investment-grade credit rating at the time
the derivative instrument is entered into and specific limits
on the contract amount and duration based on each
counterparty’s credit rating. Due to potential changes in
market conditions and credit concerns, NW Natural
continues to enforce strong credit requirements. NW Natural
actively monitors and manages derivative credit exposure
and places counterparties on hold for trading purposes or
requires cash collateral, letters of credit, or guarantees as
circumstances warrant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
NW Holdings and NW Natural are exposed to various forms
of market risk including commodity supply risk, commodity
price risk, interest rate risk, foreign currency risk, credit risk
and weather risk. The following describes NW Holdings' and
NW Natural's exposure to these risks, as applicable.
Commodity Supply Risk
NW Natural enters into spot, short-term, and long-term
natural gas supply contracts, along with associated pipeline
transportation contracts, to manage commodity supply risk.
Historically, NW Natural has arranged for physical delivery
of an adequate supply of gas, including gas in Mist storage
and off-system storage facilities, to meet expected
requirements of core NGD customers. NW Natural's long-
term gas supply contracts are primarily index-based and
subject to monthly re-pricing, a strategy that is intended to
substantially mitigate credit exposure to physical gas
counterparties. Absolute notional amounts under physical
gas contracts related to open positions on derivative
instruments were 472.3 million therms and 520.3 million
therms as of December 31, 2018 and 2017, respectively.
Commodity Price Risk
Natural gas commodity prices are subject to market
fluctuations due to unpredictable factors including weather,
pipeline transportation congestion, drilling technologies,
market speculation, and other factors that affect supply and
demand. Commodity price risk is managed with financial
swaps and physical gas reserves from a long-term
investment in working interests in gas leases operated by
Jonah Energy. These financial hedge contracts and gas
reserves volumes are generally included in NW Natural's
annual PGA filing for recovery, subject to a regulatory
prudence review. Notional amounts under financial
derivative contracts were $77.7 million and $108.1 million as
of December 31, 2018 and 2017, respectively. The fair value
of financial swaps as of December 31, 2018 was an
unrealized loss of $7.8 million with future cash outflows of
$2.8 million in 2019, $2.5 million in 2020, and $2.5 million in
2021.
Interest Rate Risk
NW Holdings and NW Natural are exposed to interest rate
risk primarily associated with new debt financing needed to
fund capital requirements, including future contractual
obligations and maturities of long-term and short-term debt.
Interest rate risk is primarily managed through the issuance
of fixed-rate debt with varying maturities. NW Holdings and
NW Natural may also enter into financial derivative
instruments, including interest rate swaps, options and other
hedging instruments, to manage and mitigate interest rate
exposure. NW Holdings and NW Natural did not have any
interest rate swaps outstanding as of December 31, 2018 or
2017.
Foreign Currency Risk
The costs of certain pipeline and off-system storage
services purchased from Canadian suppliers are subject to
changes in the value of the Canadian currency in relation to
the U.S. currency. Foreign currency forward contracts are
used to hedge against fluctuations in exchange rates for NW
57
commercial customers, which is intended to stabilize the
recovery of NGD business fixed costs and reduce
fluctuations in customers’ bills due to colder or warmer than
average weather. Customers in Oregon are allowed to opt
out of the weather normalization mechanism. As of
December 31, 2018, approximately 8% of Oregon
customers had opted out. In addition to the Oregon
customers opting out, Washington residential and
commercial customers account for approximately 11% of
our total customer base and are not covered by weather
normalization. The combination of Oregon and Washington
customers not covered by a weather normalization
mechanism is 19% of all residential and commercial
customers. See "Results of Operations—Regulatory Matters
—Rate Mechanisms—WARM" above.
The following table summarizes NW Natural's overall
financial swap and option credit exposure, based on
estimated fair value, and the corresponding counterparty
credit ratings. The table uses credit ratings from S&P and
Moody’s, reflecting the higher of the S&P or Moody’s rating
or a middle rating if the entity is split-rated with more than
one rating level difference:
In millions
AAA/Aaa
AA/Aa
A/A
BBB/Baa
Total
Financial Derivative Position by Credit Rating
Unrealized Fair Value Gain (Loss)
2018
2017
$
$
$
— $
(6.3) $
(1.5)
—
(7.8) $
—
(9.0)
(13.3)
—
(22.3)
In most cases, NW Natural also mitigates the credit risk of
financial derivatives by having master netting arrangements
with counterparties which provide for making or receiving
net cash settlements. Generally, transactions of the same
type in the same currency that have settlement on the same
day with a single counterparty are netted and a single
payment is delivered or received depending on which party
is due funds.
Additionally, NW Natural has master contracts in place with
each derivative counterparty that include provisions for
posting or calling for collateral. Generally, NW Natural can
obtain cash or marketable securities as collateral with one
day’s notice. Various collateral management strategies are
used to reduce liquidity risk. The collateral provisions vary
by counterparty but are not expected to result in the
significant posting of collateral, if any. NW Natural has
performed stress tests on the portfolio and concluded the
liquidity risk from collateral calls is not material. Derivative
credit exposure is primarily with investment grade
counterparties rated AA-/Aa3 or higher. Contracts are
diversified across counterparties to reduce credit and
liquidity risk.
At December 31, 2018, financial derivative credit risk on a
volumetric basis was geographically concentrated 33% in
the United States and 67% in Canada, based on
counterparties' location. At December 31, 2017, financial
derivative credit risk on a volumetric basis was
geographically concentrated 36% in the United States and
64% in Canada with our counterparties.
Credit Exposure to Insurance Companies
Credit exposure to insurance companies for loss or damage
claims could be material. NW Holdings and NW Natural
regularly monitor the financial condition of insurance
companies who provide general liability insurance policy
coverage to NW Holdings, NW Natural, their predecessors,
and their subsidiaries.
Weather Risk
NW Natural has a weather normalization mechanism in
Oregon; however, it is exposed to weather risk primarily
from NGD business operations. A large percentage of NGD
margin is volume driven, and current rates are based on an
assumption of average weather. NW Natural's weather
normalization mechanism in Oregon is for residential and
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
1.
2.
3.
4.
5.
Management's Reports on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Statements of Comprehensive Income (Loss) of Northwest Natural Holding Company for the
Years Ended December 31, 2018, 2017, and 2016
Consolidated Balance Sheets of Northwest Natural Holding Company at December 31, 2018 and 2017
Consolidated Statements of Shareholders’ Equity of Northwest Natural Holding Company for the Years Ended
December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows of Northwest Natural Holding Company for the Years Ended
December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income (Loss) of Northwest Natural Gas Company for the Years
Ended December 31, 2018, 2017, and 2016
Consolidated Balance Sheets of Northwest Natural Gas Company at December 31, 2018 and 2017
Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company for the Years Ended
December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows of Northwest Natural Gas Company for the Years Ended December
31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
Quarterly Financial Information
Supplementary Data for the Years Ended December 31, 2018, 2017, and 2016:
Financial Statement Schedules
Schedule I - Condensed Financial Information of Northwest Natural Holding Company
Schedule II – Valuation and Qualifying Accounts and Reserves of Northwest Natural Holding Company and
Northwest Natural Gas Company
Page
60
62
64
65
67
68
69
70
72
73
74
111
113
117
Supplemental Schedules Omitted
All other schedules are omitted because of the absence of the conditions under which they are required or because the required
information is included elsewhere in the financial statements.
59
NW HOLDINGS MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NW Holdings management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. NW Holdings' internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the
United States of America (GAAP). NW Holdings' internal control over financial reporting includes those policies and procedures
that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
involving company assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of
management and the NW Holdings Board of Directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of
NW Holdings' assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
NW Holdings management assessed the effectiveness of NW Holdings' internal control over financial reporting as of December
31, 2018. In making this assessment, NW Holdings management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on NW Holdings management's assessment and those criteria, NW Holdings management has concluded that it
maintained effective internal control over financial reporting as of December 31, 2018.
The effectiveness of internal control over financial reporting as of December 31, 2018 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this
annual report.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
March 1, 2019
60
NW NATURAL MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NW Natural management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. NW Natural's internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the
United States of America (GAAP). NW Natural's internal control over financial reporting includes those policies and procedures
that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
involving company assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of
management and the NW Natural Board of Directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of
NW Natural's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
NW Natural management assessed the effectiveness of NW Natural's internal control over financial reporting as of December
31, 2018. In making this assessment, NW Natural management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on NW Natural management's assessment and those criteria, NW Natural management has concluded that it maintained
effective internal control over financial reporting as of December 31, 2018.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
March 1, 2019
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Northwest Natural Holding Company:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Northwest Natural Holding Company and its subsidiaries
(the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income (loss),
of shareholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2018, including the
related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated
financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on
the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all
material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March 1, 2019
We have served as the Company’s auditor since 1997.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of Northwest Natural Gas Company:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Northwest Natural Gas Company and its subsidiaries (the
“Company”) as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income (loss), of
shareholder’s equity, and of cash flows for each of the three years in the period ended December 31, 2018, including the related
notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on
a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March 1, 2019
We have served as the Company’s auditor since 1997.
63
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
2018
2017
2016
$ 706,143
$ 755,038
$ 668,173
324,795
152,358
15,291
30,639
—
260,588
136,723
13,298
29,243
—
81,053
77,604
—
—
604,136
150,902
(295)
37,526
517,456
150,717
(7,151)
38,136
113,081
105,430
255,519
156,698
11,127
32,172
30,082
85,156
3,227
573,981
132,162
(3,601)
37,059
91,502
24,191
67,311
41,008
72,073
(2,742)
(127,696)
64,569
(55,623)
43,011
62,419
(3,524)
58,895
476
774
(2,059)
(744)
572
955
$
65,819
$ (57,110) $
59,106
28,803
28,873
28,669
28,753
27,647
27,779
$
$
$
$
2.34
2.33
$
2.51
2.51
2.26
2.25
(0.10) $
(4.45) $
(0.09)
(4.44)
(0.13)
(0.13)
2.24
2.24
$
(1.94) $
(1.93)
2.13
2.12
In thousands, except per share data
Operating revenues
Operating expenses:
Cost of gas
Operations and maintenance
Environmental remediation
General taxes
Revenue taxes
Depreciation and amortization
Other operating expenses
Total operating expenses
Income from operations
Other income (expense), net
Interest expense, net
Income before income taxes
Income tax expense
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Other comprehensive income (loss):
Change in employee benefit plan liability, net of taxes of ($166) for 2018, $735 for
2017, and $452 for 2016
Amortization of non-qualified employee benefit plan liability, net of taxes of ($278)
for 2018, ($374) for 2017, and ($624) for 2016
Comprehensive income (loss)
Average common shares outstanding:
Basic
Diluted
Earnings from continuing operations per share of common stock:
Basic
Diluted
Loss from discontinued operations per share of common stock:
Basic
Diluted
Earnings (loss) per share of common stock:
Basic
Diluted
See Notes to Consolidated Financial Statements
64
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable
Accrued unbilled revenue
Allowance for uncollectible accounts
Regulatory assets
Derivative instruments
Inventories
Gas reserves
Income taxes receivable
Other current assets
Discontinued operations - current assets
Total current assets
Non-current assets:
Property, plant, and equipment
Less: Accumulated depreciation
Total property, plant, and equipment, net
Gas reserves
Regulatory assets
Derivative instruments
Other investments
Goodwill
Other non-current assets
Discontinued operations - non-current assets
Total non-current assets
Total assets
As of December 31,
2018
2017
$
12,633
$
66,970
57,827
(977)
41,930
9,001
44,149
16,647
6,000
28,472
13,269
295,921
3,472
66,236
62,381
(956)
45,781
1,735
47,577
15,704
—
24,949
3,057
269,936
3,414,490
3,204,635
993,118
960,477
2,421,372
2,244,158
66,197
371,786
725
63,558
8,954
14,149
—
84,053
356,608
1,306
66,363
—
6,505
10,817
2,946,741
2,769,810
$
3,242,662
$
3,039,746
See Notes to Consolidated Financial Statements
65
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
Liabilities and equity:
Current liabilities:
Short-term debt
Current maturities of long-term debt
Accounts payable
Taxes accrued
Interest accrued
Regulatory liabilities
Derivative instruments
Other current liabilities
Discontinued operations - current liabilities
Total current liabilities
Long-term debt
Deferred credits and other non-current liabilities:
Deferred tax liabilities
Regulatory liabilities
Pension and other postretirement benefit liabilities
Derivative instruments
Other non-current liabilities
Discontinued operations - non-current liabilities
Total deferred credits and other non-current liabilities
Commitments and contingencies (see Note 16 and Note 17)
Equity:
Common stock - no par value; authorized 100,000 shares; issued and outstanding 28,880
and 28,736 at December 31, 2018 and 2017, respectively
Retained earnings
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
See Notes to Consolidated Financial Statements
As of December 31,
2018
2017
$
217,620
$
29,989
115,878
11,023
7,306
47,436
12,381
54,492
12,959
509,084
706,247
280,463
611,560
221,886
3,025
147,763
—
54,200
96,703
111,021
18,883
6,773
34,013
18,722
39,942
1,593
381,850
683,184
270,526
586,093
223,333
4,649
135,292
12,043
1,264,697
1,231,936
457,640
312,182
(7,188)
762,634
448,865
302,349
(8,438)
742,776
$
3,242,662
$
3,039,746
66
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands
Balance at December 31, 2015
Comprehensive income
Dividends on common stock, $1.87 per share
Stock-based compensation
Shares issued pursuant to equity based plans
Issuance of common stock, net of issuance costs
Balance at December 31, 2016
Comprehensive income (loss)
Dividends on common stock, $1.88 per share
Stock-based compensation
Shares issued pursuant to equity based plans
Balance at December 31, 2017
Comprehensive income
Dividends on common stock, $1.89 per share
Stock-based compensation
Shares issued pursuant to equity based plans
Cash purchase of shares for business combination
Value of shares transferred for business combination
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Equity
$
383,144
$
404,990
$
(7,162) $
780,972
—
—
58,895
(51,624)
2,924
6,358
52,761
445,187
—
—
2,882
796
448,865
—
—
3,020
5,175
(7,945)
8,525
—
—
—
412,261
(55,623)
(54,289)
—
—
302,349
64,569
(54,736)
—
—
—
—
211
—
—
—
—
(6,951)
(1,487)
—
—
—
(8,438)
1,250
—
—
—
—
—
59,106
(51,624)
2,924
6,358
52,761
850,497
(57,110)
(54,289)
2,882
796
742,776
65,819
(54,736)
3,020
5,175
(7,945)
8,525
Balance at December 31, 2018
$
457,640
$
312,182
$
(7,188) $
762,634
See Notes to Consolidated Financial Statements
67
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by operations:
Depreciation and amortization
Regulatory amortization of gas reserves
Deferred income taxes
Qualified defined benefit pension plan expense
Contributions to qualified defined benefit pension plans
Deferred environmental expenditures, net
Regulatory disallowance of prior environmental cost deferrals
Amortization of environmental remediation
Regulatory revenue deferral from the TCJA
Other
Changes in assets and liabilities:
Receivables, net
Inventories
Income and other taxes
Accounts payable
Interest accrued
Deferred gas costs
Other, net
Discontinued operations
Cash provided by operating activities
Investing activities:
Capital expenditures
Other
Discontinued operations
Cash used in investing activities
Financing activities:
Repurchases related to stock-based compensation
Proceeds from stock options exercised
Proceeds from common stock issued
Long-term debt issued
Long-term debt retired
Change in short-term debt
Cash dividend payments on common stock
Stock purchases related to acquisitions
Other
Cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Interest paid, net of capitalization
Income taxes paid (refunded)
See Notes to Consolidated Financial Statements
68
Year Ended December 31,
2018
2017
2016
$ 64,569
$ (55,623) $ 58,895
85,156
16,684
14,356
8,108
81,053
16,353
(52,414)
5,364
77,604
15,525
32,056
5,274
(15,540)
(19,430)
(14,470)
(14,528)
(13,716)
(10,469)
—
—
11,127
15,291
7,929
1,596
181
3,207
(16,904)
16,792
526
—
2,102
3,282
5,600
6,734
1,092
807
3,287
13,298
—
2,846
(6,395)
16,565
9,467
12,028
93
(14,395)
17,122
(10,204)
552
(4,093)
(645)
197,180
11,727
5,020
168,771
206,704
222,147
(214,636)
(213,325)
(138,357)
(3,390)
573
(577)
(270)
2,882
(1,154)
(217,453)
(214,172)
(136,629)
—
1,546
—
(2,034)
4,819
—
(1,042)
8,404
52,760
50,000
100,000
150,000
(97,000)
(40,000)
(25,000)
163,274
900
(216,735)
(51,311)
(53,957)
(51,508)
(7,951)
—
—
(715)
(2,309)
(3,087)
57,843
7,419
(86,208)
9,161
3,472
(49)
3,521
$ 12,633
$
3,472
$
(690)
4,211
3,521
$ 35,324
$ 34,787
$ 36,023
27,370
14,780
(7,157)
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
In thousands
Operating revenues
Operating expenses:
Cost of gas
Operations and maintenance
Environmental remediation
General taxes
Revenue taxes
Depreciation and amortization
Other operating expenses
Total operating expenses
Income from operations
Other income (expense), net
Interest expense, net
Income before income taxes
Income tax expense
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Other comprehensive income (loss):
Year Ended December 31,
2018
2017
2016
$ 705,571
$ 755,038
$ 667,949
325,019
152,180
15,291
30,602
—
260,588
135,979
13,298
29,222
—
81,024
77,575
—
—
604,116
150,922
(198)
37,526
516,662
151,287
(7,041)
38,136
113,198
106,110
255,743
155,225
11,127
32,086
30,082
84,986
3,223
572,472
133,099
(3,599)
36,992
92,508
24,459
68,049
41,478
71,720
(1,723)
(127,343)
66,326
(55,623)
43,275
62,835
(3,940)
58,895
Change in employee benefit plan liability, net of taxes of ($166) for 2018, $735 for
2017, and $452 for 2016
Amortization of non-qualified employee benefit plan liability, net of taxes of ($278)
for 2018, ($374) for 2017, and ($624) for 2016
Comprehensive income (loss)
476
774
(2,059)
(744)
572
955
$
67,576
$ (57,110) $
59,106
See Notes to Consolidated Financial Statements
69
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable
Accrued unbilled revenue
Receivables from affiliates
Allowance for uncollectible accounts
Regulatory assets
Derivative instruments
Inventories
Gas reserves
Other current assets
Discontinued operations - current assets
Total current assets
Non-current assets:
Property, plant, and equipment
Less: Accumulated depreciation
Total property, plant, and equipment, net
Gas reserves
Regulatory assets
Derivative instruments
Other investments
Other non-current assets
Discontinued operations - non-current assets
Total non-current assets
Total assets
As of December 31,
2018
2017
$
7,947
$
66,824
57,773
4,166
(975)
41,930
9,001
44,126
16,647
25,347
—
3,110
66,236
62,381
266
(956)
45,781
1,735
47,577
15,704
24,862
7,170
272,786
273,866
3,410,439
3,204,260
992,855
960,285
2,417,584
2,243,975
66,197
371,786
725
49,922
13,736
—
84,053
356,608
1,306
52,654
6,505
24,709
2,919,950
2,769,810
$
3,192,736
$
3,043,676
See Notes to Consolidated Financial Statements
70
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
Liabilities and equity:
Current liabilities:
Short-term debt
Current maturities of long-term debt
Accounts payable
Payables to affiliates
Taxes accrued
Interest accrued
Regulatory liabilities
Derivative instruments
Other current liabilities
Discontinued operations - current liabilities
Total current liabilities
Long-term debt
Deferred credits and other non-current liabilities:
Deferred tax liabilities
Regulatory liabilities
Pension and other postretirement benefit liabilities
Derivative instruments
Other non-current liabilities
Discontinued operations - non-current liabilities
Total deferred credits and other non-current liabilities
Commitments and contingencies (see Note 16 and Note 17)
Equity:
Common stock
Retained earnings
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
As of December 31,
2018
2017
$
217,500
$
29,989
114,937
523
10,990
7,273
47,436
12,381
53,027
—
494,056
704,134
294,739
611,560
221,886
3,025
147,668
—
54,200
96,703
110,354
3,664
18,844
6,773
34,013
18,722
39,942
2,565
385,780
683,184
287,388
586,093
223,333
4,649
135,205
(4,732)
1,278,878
1,231,936
226,452
496,404
(7,188)
715,668
448,865
302,349
(8,438)
742,776
$
3,192,736
$
3,043,676
See Notes to Consolidated Financial Statements
71
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
In thousands
Common Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Equity
Balance at December 31, 2015
$
383,144
$
404,990
$
(7,162) $
Comprehensive income
Dividends on common stock
Stock-based compensation
Shares issued pursuant to equity based plans
Issuance of common stock, net of issuance costs
Balance at December 31, 2016
Comprehensive income (loss)
Dividends on common stock
Stock-based compensation
Shares issued pursuant to equity based plans
Balance at December 31, 2017
Comprehensive income
Dividends on common stock
Stock-based compensation(1)
Shares issued pursuant to equity based plans(1)
Transfer of investments to NW Holdings as of
October 1, 2018
—
—
2,924
6,358
52,761
445,187
—
—
2,882
796
448,865
—
—
2,161
3,075
58,895
(51,624)
—
—
—
412,261
(55,623)
(54,289)
—
—
302,349
66,326
(41,035)
—
—
(227,649)
168,764
211
—
—
—
—
(6,951)
(1,487)
—
—
—
(8,438)
1,250
—
—
—
—
Balance at December 31, 2018
$
226,452
$
496,404
$
(7,188) $
(1) Stock-based compensation is based on stock awards of NW Natural to be issued in shares of NW Holdings.
See Notes to Consolidated Financial Statements
780,972
59,106
(51,624)
2,924
6,358
52,761
850,497
(57,110)
(54,289)
2,882
796
742,776
67,576
(41,035)
2,161
3,075
(58,885)
715,668
72
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by operations:
Depreciation and amortization
Regulatory amortization of gas reserves
Deferred income taxes
Qualified defined benefit pension plan expense
Contributions to qualified defined benefit pension plans
Deferred environmental expenditures, net
Regulatory disallowance of prior environmental cost deferrals
Amortization of environmental remediation
Regulatory revenue deferral from the TCJA
Other
Changes in assets and liabilities:
Receivables, net
Inventories
Income and other taxes
Accounts payable
Interest accrued
Deferred gas costs
Other, net
Discontinued operations
Cash provided by operating activities
Investing activities:
Capital expenditures
Other
Discontinued operations
Cash used in investing activities
Financing activities:
Repurchases related to stock-based compensation
Proceeds from stock options exercised
Proceeds from common stock issued
Long-term debt issued
Long-term debt retired
Change in short-term debt
Cash dividend payments on common stock
Other
Discontinued operations
Cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Interest paid, net of capitalization
Income taxes paid (refunded)
See Notes to Consolidated Financial Statements
73
Year Ended December 31,
2018
2017
2016
$ 66,326
$ (55,623) $ 58,895
84,986
16,684
12,330
8,108
(15,540)
(14,528)
—
11,127
7,929
883
(3,920)
3,212
(7,854)
13,937
500
(14,395)
539
3,184
173,508
81,024
16,353
15,894
5,364
(19,430)
(13,716)
—
15,291
—
2,003
3,215
5,601
6,730
3,332
807
17,122
(3,855)
126,371
206,483
77,575
15,525
30,772
5,274
(14,470)
(10,469)
3,287
13,298
—
2,745
(6,319)
16,565
9,467
10,822
93
(10,204)
12,342
7,041
222,239
(214,328)
(3,517)
(20,617)
(238,462)
(213,325)
(577)
(270)
(214,172)
(138,357)
2,882
(1,154)
(136,629)
—
1,368
—
50,000
(97,000)
163,300
(38,387)
(1,539)
(7,951)
69,791
4,837
3,110
7,947
(2,034)
4,819
—
100,000
(40,000)
900
(53,957)
(2,309)
—
7,419
(270)
3,380
3,110
(1,042)
8,404
52,760
150,000
(25,000)
(216,735)
(51,508)
(3,087)
—
(86,208)
(598)
3,978
3,380
$
$
$
$ 35,305
27,350
$ 34,787
14,780
$ 36,023
(7,157)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
On October 1, 2018, we completed a reorganization into a
holding company structure. In this reorganization,
shareholders of NW Natural (the predecessor publicly held
parent company) became shareholders of NW Holdings on
a one-for-one basis; maintaining the same number of shares
and ownership percentage as held in NW Natural
immediately prior to the reorganization. NW Natural became
a wholly-owned subsidiary of NW Holdings. Additionally,
certain subsidiaries of NW Natural were transferred to NW
Holdings. This reorganization was accounted for as a
transaction among entities under common control. As
required under accounting guidance, these subsidiaries are
presented in this report as discontinued operations in the
consolidated results of NW Natural. See Note 18 for
additional information.
The accompanying consolidated financial statements
represent the respective, consolidated results and 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 natural gas distribution activities are reported
in the natural gas distribution (NGD) segment, formerly titled
and reported as the utility 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 business activities, including certain gas storage
activities, water businesses, and other investments and
activities are aggregated and reported as other at their
respective registrant.
In addition, NW Holdings has reported discontinued
operations results related to the pending sale of Gill Ranch
Storage, LLC (Gill Ranch).
NW 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);
• 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;
74
Cascadia Water, LLC (Cascadia);
NW Natural Water of Oregon, LLC (NWN Water of
Oregon);
NW Natural Water of Washington, LLC (NWN
Water of Washington); and
NW Natural Water of Idaho, LLC (NWN Water of
Idaho); and
Gem State Water Company, LLC (Gem State)
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 NWN
Financial's investment in Kelso-Beaver Pipeline and NWN
Energy's investment in Trail West Holdings, LLC (TWH),
which is 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.
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 18 for
additional information. Additionally, we reevaluated
reportable segments and concluded that the remaining gas
storage activities no longer meet the requirements to be
separately reported as a segment. Interstate Storage
Services is now reported in Other under NW Natural 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. Note 4 and Note 18 provide information regarding
reportable segments and discontinued operations,
respectively.
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. 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.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United
States of America (U.S. GAAP) requires management to
make estimates and assumptions that affect reported
amounts in the consolidated financial statements and
accompanying notes. Actual amounts could differ from those
estimates, and changes would most likely be reported in
future periods. Management believes the estimates and
assumptions used are reasonable.
Industry Regulation
NW Holdings' principal business is to operate as a holding
company for NW Natural, NWN Water and its other
subsidiaries.
NW Natural's principal business is the distribution of natural
gas, which is regulated by the OPUC and WUTC. NW
Natural also has natural gas storage services, which are
regulated by the FERC, and to a certain extent by the OPUC
and WUTC. Additionally, certain NW Holdings' subsidiaries
own water businesses, which are regulated by the OPUC,
WUTC, or IPUC. Accounting records and practices of the
regulated businesses conform to the requirements and
uniform system of accounts prescribed by these regulatory
authorities in accordance with U.S. GAAP. The businesses in
which customer rates are regulated by the OPUC, WUTC,
IPUC, and FERC have approved cost-based rates which are
intended to allow such businesses to earn a reasonable
return on invested capital.
In applying regulatory accounting principles, we capitalize or
defer certain costs and revenues as regulatory assets and
liabilities pursuant to orders of the OPUC, WUTC, or 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.
At December 31, NW Natural deferred the following amounts
as regulatory assets and liabilities:
In thousands
Current:
Regulatory Assets
2018
2017
Unrealized loss on derivatives(1)
$ 12,381
$ 18,712
Gas costs
Environmental costs(2)
Decoupling(3)
Income taxes
Other(4)
Total current
Non-current:
Unrealized loss on derivatives(1)
Pension balancing(5)
Income taxes
Pension and other postretirement
benefit liabilities
Environmental costs(2)
Gas costs
Decoupling(3)
Other(4)
2,873
5,601
9,140
2,218
9,717
154
6,198
11,227
2,218
7,272
$ 41,930
$ 45,781
$
3,025
$
4,649
74,173
19,185
60,383
19,991
174,993
179,824
76,149
72,128
9,978
2,545
11,738
84
3,970
15,579
Total non-current
$ 371,786
$ 356,608
In thousands
Current:
Gas costs
Unrealized gain on derivatives(1)
Decoupling(3)
Other(4)
Total current
Non-current:
Gas costs
Unrealized gain on derivatives(1)
Decoupling(3)
Income taxes(6)
Accrued asset removal costs(7)
Other(4)
Regulatory Liabilities
2018
2017
$ 17,182
$ 14,886
8,740
2,264
1,674
322
19,250
17,131
$ 47,436
$ 34,013
$
$
552
725
—
4,630
1,306
957
225,408
380,464
4,411
213,306
360,929
4,965
$ 611,560
Total non-current
$ 586,093
(1) Unrealized gains or losses on derivatives are non-cash items
and, therefore, do not earn a rate of return or a carrying
charge. These amounts are recoverable through natural gas
distribution 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 17 for a description of environmental costs.
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(3)
This deferral represents the margin adjustment resulting from
differences between actual and expected volumes.
(4) Balances consist of deferrals and amortizations under
approved regulatory mechanisms and typically earn a rate of
return or carrying charge.
(5) Refer to footnote (1) of the Net Periodic Benefit Cost table in
Note 9 for information regarding the deferral of pension
expenses.
This balance represents estimated amounts associated with
the Tax Cuts and Jobs Act. See Note 10.
(6)
(7) Estimated costs of removal on certain regulated properties are
collected through rates. See "Accounting Policies—Plant,
Property, and Accrued Asset Removal Costs" below.
The amortization period for NW Natural's regulatory assets
and liabilities ranges from less than one year to an
indeterminable period. Regulatory deferrals for gas costs
payable are generally amortized over 12 months beginning
each November 1 following the gas contract year during
which the deferred gas costs are recorded. Similarly, most
other regulatory deferred accounts are amortized over 12
months. However, certain regulatory account balances, such
as income taxes, environmental costs, pension liabilities,
and accrued asset removal costs, are large and tend to be
amortized over longer periods once NW Natural has agreed
upon an amortization period with the respective regulatory
agency.
We believe all costs incurred and deferred at December 31,
2018 are prudent. All regulatory assets and liability are
reviewed annually for recoverability, or more often if
circumstances warrant. If it is determined that all or a portion
of these regulatory assets or liabilities no longer meet the
criteria for continued application of regulatory accounting,
then NW Natural would be required to write-off the net
unrecoverable balances in the period such determination is
made.
Environmental Regulatory Accounting
See Note 17 for information about the SRRM and OPUC
orders regarding implementation.
New Accounting Standards
NW Holdings and NW Natural 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 the
consolidated financial position or results of operations.
Recently Adopted Accounting Pronouncements
STOCK COMPENSATION. On May 10, 2017, the FASB
issued ASU 2017-09, "Stock Compensation - Scope of
Modification Accounting." The purpose of the amendment is
to provide clarity, reduce diversity in practice, and reduce the
cost and complexity when applying the guidance in Topic
718, related to a change to the terms or conditions of a
share-based payment award. Specifically, an entity would
not apply modification accounting if the fair value, vesting
conditions, and classification of the awards are the same
immediately before and after the modification. The
amendments in this update were effective beginning
January 1, 2018, and will be applied prospectively to any
award modified on or after the adoption date. The adoption
did not have a material impact to the financial statements or
disclosures of NW Holdings or NW Natural.
RETIREMENT BENEFITS. On March 10, 2017, the FASB
issued ASU 2017-07, "Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Post Retirement
Benefit Cost." The ASU requires entities to disaggregate
current service cost from the other components of net
periodic benefit cost and present it with other current
compensation costs for related employees in the income
statement. Additionally, the other components of net periodic
benefit costs are to be presented elsewhere in the income
statement and outside of income from operations if that
subtotal is presented. Only the service cost component of
the net periodic benefit cost is eligible for capitalization. The
amendments in this update were effective beginning January
1, 2018. Upon adoption, the ASU required that changes to
the income statement presentation of net periodic benefit
cost be applied retrospectively, while changes to amounts
capitalized must be applied prospectively. As such, the
interest cost, expected return on assets, amortization of prior
service costs, and other costs have been reclassified from
operations and maintenance expense to other income
(expense), net on the consolidated statements of
comprehensive income for the years ended December 31,
2017 and 2016. We did not elect the practical expedient
which would have allowed for the reclassification of amounts
disclosed previously in the pension and other postretirement
benefits footnote disclosure as the basis for applying
retrospective presentation. As mentioned above, on a
prospective basis, the other components of net periodic
benefit cost will not be eligible for capitalization.
The retrospective presentation requirement related to the
other components of net periodic benefit cost affected the
operations and maintenance expense and other income
(expense), net lines on the NW Natural consolidated
statements of comprehensive income. For the years ended
December 31, 2017 and 2016, $5.6 million and $6.6 million
of expense was reclassified from operations and
maintenance expense and included in other income
(expense), net, respectively.
GOODWILL. On January 26, 2017, the FASB issued ASU
2017-04, "Simplifying the Test for Goodwill Impairment." The
ASU removes Step 2 from the goodwill impairment test and
under the amended guidance an entity should perform its
annual goodwill impairment test by comparing the fair value
of a reporting unit with its carrying amount and recognize an
impairment charge for the amount in which the carrying
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amounts exceed the fair value of the reporting unit. The
amendments in this standard are effective beginning January
1, 2020 and early adoption is permitted for interim or annual
goodwill impairment tests performed after January 1, 2017.
ASU 2017-04 was early adopted in the third quarter ended
September 30, 2018. The adoption of this ASU did not
materially affect the financial statements or disclosures of
NW Holdings or NW Natural and is currently not applicable
to NW Natural.
STATEMENT OF CASH FLOWS. On August 26, 2016, the
FASB issued ASU 2016-15, "Classification of Certain Cash
Receipts and Cash Payments." The ASU adds guidance
pertaining to the classification of certain cash receipts and
payments on the statement of cash flows. The purpose of
the amendment is to clarify issues that have been creating
diversity in practice. The amendments in this standard were
effective beginning January 1, 2018, and the adoption did
not have a material impact to financial statements or
disclosures as our historical practices and presentation were
consistent with the directives of this ASU for NW Holdings
and NW Natural.
FINANCIAL INSTRUMENTS. On January 5, 2016, the FASB
issued ASU 2016-01, "Financial Instruments - Overall:
Recognition and Measurement of Financial Assets and
Financial Liabilities." The ASU enhances the reporting model
for financial instruments, which includes amendments to
address aspects of recognition, measurement, presentation,
and disclosure. The new standard was effective beginning
January 1, 2018, and the adoption did not materially impact
the financial statements or disclosures of NW Holdings or
NW Natural.
REVENUE RECOGNITION. On May 28, 2014, the FASB
issued ASU 2014-09 "Revenue From Contracts with
Customers." The underlying principle of the guidance
requires entities to recognize revenue depicting the transfer
of goods or services to customers at amounts the entity is
expected to be entitled to in exchange for those goods or
services. The ASU also prescribes a five-step approach to
revenue recognition: (1) identify the contract(s) with the
customer; (2) identify the separate performance obligations
in the contract(s); (3) determine the transaction price; (4)
allocate the transaction price to separate performance
obligations; and (5) recognize revenue when, or as, each
performance obligation is satisfied. The guidance also
requires additional disclosures, both qualitative and
quantitative, regarding the nature, amount, timing and
uncertainty of revenue and cash flows.
The new accounting standard and all related amendments
were effective beginning January 1, 2018. The accounting
standard was applied to all contracts using the modified
retrospective method. The new standard is primarily
reflected in the consolidated statements of comprehensive
income and Note 6. The implementation of the new revenue
standard did not result in changes to how NW Holdings and
NW Natural currently recognize revenue, and therefore, no
cumulative effect or adjustment to the opening balances of
retained earnings was required. The implementation did
result in changes to the disclosures and presentation of
revenues and expenses. The comparative information for
prior years has not been restated. There is no material
77
impact to the financial results of NW Holdings or NW Natural
and no significant changes to our control environment due to
the adoption of the new revenue standard on an ongoing
basis.
As previously discussed, the adoption of the new revenue
standard did not impact the consolidated balance sheets or
statements of cash flows but did result in changes to the
presentation of the consolidated statements of
comprehensive income for NW Holdings and NW Natural.
Had the adoption of the new revenue standard not occurred,
operating revenues for the year ended December 31, 2018
would have been $676.0 million for NW Holdings, compared
to the reported amount of $706.1 million under the new
revenue standard. Similarly, absent the impact of the new
revenue standard, operating expenses would have been
$543.9 million for NW Holdings, compared to the reported
amount of $574.0 million under the new revenue standard
for the year ended December 31, 2018. The effect of the
change was an increase in both operating revenues and
operating expenses of $30.1 million at NW Holdings and NW
Natural for the year ended December 31, 2018; due to the
change in presentation of revenue taxes. As part of the
adoption of the new revenue standard, we evaluated the
presentation of revenue taxes under the new guidance and
across our peer group and concluded that the gross
presentation of revenue taxes provides the greatest level of
consistency and transparency. Prior to the adoption of the
new revenue standard, a portion of revenue taxes was
presented net in operating revenues and a portion was
recorded directly on the balance sheet. During year ended
December 31, 2018, $30.1 million in revenue taxes for NW
Holdings and NW Natural was recognized in operating
revenues and operating expenses. In comparison, for the
years ended December 31, 2017 and 2016, $32.2 million
and $28.3 million was recognized in revenue taxes for NW
Holdings and NW Natural, of which $19.1 million and $17.1
million were recorded in operating revenues and $13.1
million and $11.2 million were recorded on the consolidated
balance sheets, respectively. The change in presentation of
revenue taxes had no impact on NGD margin, net income or
earnings per share.
Recently Issued Accounting Pronouncements
CLOUD COMPUTING. On August 29, 2018, the FASB
issued ASU 2018-15, "Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract." The purpose of the
amendment is to align the requirements for capitalizing
implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-
use software. The amendments in this update are effective
beginning January 1, 2020. Early adoption is permitted. The
amended guidance can be applied either retrospectively or
prospectively to all implementation costs incurred after the
date of adoption. We are currently assessing the effect of
this standard on NW Holdings' and NW Natural's financial
statements and disclosures.
RETIREMENT BENEFITS. On August 28, 2018, the FASB
issued ASU 2018-14, "Changes to the Disclosure
Requirements for Defined Benefit Plans." The purpose of the
amendment is to modify the disclosure requirements for
defined benefit pension and other postretirement plans. The
amendments in this update are effective for the year ended
December 31, 2020. Early adoption is permitted. The
amended presentation and disclosure guidance should be
applied retrospectively. We are currently assessing the effect
of this standard on NW Holdings' and NW Natural's
disclosures.
FAIR VALUE MEASUREMENT. On August 28, 2018, the
FASB issued ASU 2018-13, "Changes to the Disclosure
Requirements for Fair Value Measurement." The purpose of
the amendment is to modify the disclosure requirements for
fair value measurements. The amendments in this update
are effective beginning January 1, 2020. Early adoption is
permitted. The amendments on changes in unrealized gains
and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value
measurements and the narrative description of
measurement uncertainty should be applied prospectively.
All other amendments should be applied retrospectively. We
are currently assessing the effect of this standard on NW
Holdings' and NW Natural's disclosures.
ACCUMULATED OTHER COMPREHENSIVE INCOME. On
February 14, 2018, the FASB issued ASU 2018-02, "Income
Statement—Reporting Comprehensive Income:
Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income." This update was issued in
response to concerns from certain stakeholders regarding
the current requirements under U.S. GAAP that deferred tax
assets and liabilities are adjusted for a change in tax laws or
rates, and the effect is to be included in income from
continuing operations in the period of the enactment date.
This requirement is also applicable to items in accumulated
other comprehensive income where the related tax effects
were originally recognized in other comprehensive income.
The adjustment of deferred taxes due to the new corporate
income tax rate enacted through the TCJA on December 22,
2017 recognized in income from continuing operations
causes the tax effects of items within accumulated other
comprehensive income (referred to as stranded tax effects)
to not reflect the appropriate tax rate. The amendments in
this update allow a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax
effects resulting from the TCJA and require certain
disclosures about stranded tax effects. The amendments in
this update are effective beginning January 1, 2019, and
should be applied either in the period of adoption or
retrospectively to each period in which the effect of the
change in the federal corporate income tax rate in the TCJA
is recognized. The reclassification allowed in this update is
elective, and we are currently assessing whether we will
make the reclassification. This update is not expected to
have a material impact on the financial condition of NW
Holdings or NW Natural.
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
78
assessment of hedge effectiveness. The guidance also
amends the recognition and presentation of the effect of
hedging instruments and includes other simplifications of
hedge accounting. The amendments in this update are
effective beginning January 1, 2019. Early adoption is
permitted. The amended presentation and disclosure
guidance is required prospectively. We do not anticipate the
adoption of this standard to have a material impact on NW
Holdings' and NW Natural's financial statements and
disclosures.
LEASES. On February 25, 2016, the FASB issued ASU
2016-02, "Leases," which revises the existing lease
accounting guidance. Pursuant to the new standard, lessees
will be required to recognize all leases, including operating
leases that are greater than 12 months at lease
commencement, on the balance sheet and record
corresponding right-of-use assets and lease liabilities.
Lessor accounting will remain substantially the same under
the new standard. Quantitative and qualitative disclosures
are also required for users of the financial statements to
have a clear understanding of the nature of NW Natural's
leasing activities. On July 30, 2018, the FASB approved an
optional alternative transition approach that would allow
entities to apply the transition requirements on the effective
date of the standard. Additionally, on January 25, 2018, the
FASB issued ASU 2018-01, "Land Easement Practical
Expedient for Transition to Topic 842", to address the costs
and complexity of applying the transition provisions of the
new lease standard to land easements. This ASU provides
an optional practical expedient to not evaluate existing or
expired land easements that were not previously accounted
for as leases under the current lease guidance. The standard
and associated ASUs were effective for us beginning
January 1, 2019.
We elected the alternative prospective transition approach
for adoption of ASC 842 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”). 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 current 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; rather, 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
leased headquarters, which expires in 2020. Upon adoption,
NW Holdings expects to record a right-of-use lease asset
and an associated lease liability of approximately $7.3
million, of which $7.0 million is expected to be recorded at
NW Natural.
In October 2017, NW Natural entered into a 20-year
operating lease agreement commencing in 2020 for the 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,
we expect to de-recognized the build-to-suit asset and
liability balances of $26.0 million as of December 31, 2018
that were recorded under ASC 840 within property, plant and
equipment and other non-current liabilities in the
consolidated balance sheet. Refer to Note 16 for current
lease commitments.
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. We are currently assessing the effect of this standard
on the financial statements and disclosures of NW Holdings
and NW Natural.
Accounting Policies
The accounting policies discussed below apply to both NW
Holdings and NW Natural.
Plant, Property, and Accrued Asset Removal Costs
Plant and property are stated at cost, including capitalized
labor, materials, and overhead. In accordance with
regulatory accounting standards, the cost of acquiring and
constructing long-lived plant and property generally includes
an allowance for funds used during construction (AFUDC) or
capitalized interest. AFUDC represents the regulatory
financing cost incurred when debt and equity funds are used
for construction (see “AFUDC” below). When constructed
assets are subject to market-based rates rather than cost-
based rates, the financing costs incurred during construction
are included in capitalized interest in accordance with U.S.
GAAP, not as regulatory financing costs under AFUDC.
In accordance with long-standing regulatory treatment, our
depreciation rates consist of three components: one based
on the average service life of the asset, a second based on
the estimated salvage value of the asset, and a third based
on the asset’s estimated cost of removal. We collect, through
rates, the estimated cost of removal on certain regulated
properties through depreciation expense, with a
corresponding offset to accumulated depreciation. These
removal costs are non-legal obligations as defined by
regulatory accounting guidance. Therefore, we have
included these costs as non-current regulatory liabilities
rather than as accumulated depreciation on our consolidated
balance sheets. In the rate setting process, the liability for
removal costs is treated as a reduction to the net rate base
on which the NGD business has the opportunity to earn its
allowed rate of return.
The costs of NGD plant retired or otherwise disposed of are
removed from NGD plant and charged to accumulated
depreciation for recovery or refund through future rates.
Gains from the sale of regulated assets are generally
deferred and refunded to customers. For assets not related
to NGD, we record a gain or loss upon the disposal of the
property, and the gain or loss is recorded in operating
79
income or loss in the consolidated statements of
comprehensive income.
The provision for depreciation of NGD property, plant, and
equipment is recorded under the group method on a straight-
line basis with rates computed in accordance with
depreciation studies approved by regulatory authorities. The
weighted-average depreciation rate for NGD assets in
service was approximately 2.8% for 2018, 2017, and 2016,
reflecting the approximate weighted-average economic life of
the property. This includes 2018 weighted-average
depreciation rates for the following asset categories: 2.7%
for transmission and distribution plant, 2.1% for gas storage
facilities, 4.5% for general plant, and 3.1% for intangible and
other fixed assets.
AFUDC. Certain additions to NGD plant include AFUDC,
which represents the net cost of debt and equity funds used
during construction. AFUDC is calculated using actual
interest rates for debt and authorized rates for ROE, if
applicable. If short-term debt balances are less than the total
balance of construction work in progress, then a composite
AFUDC rate is used to represent interest on all debt funds,
shown as a reduction to interest charges, and on ROE
funds, shown as other income. While cash is not
immediately recognized from recording AFUDC, it is realized
in future years through rate recovery resulting from the
higher NGD cost of service. Our composite AFUDC rate was
5.2% in 2018, 5.5% in 2017, and 0.7% in 2016.
IMPAIRMENT OF LONG-LIVED ASSETS. We review the
carrying value of long-lived assets whenever events or
changes in circumstances indicate the carrying amount of
the assets may not be recoverable. Factors that would
necessitate an impairment assessment of long-lived assets
include a significant adverse change in the extent or manner
in which the asset is used, a significant adverse change in
legal factors or business climate that could affect the value of
the asset, or a significant decline in the observable market
value or expected future cash flows of the asset, among
others.
When such factors are present, we assess the recoverability
by determining whether the carrying value of the asset will
be recovered through expected future cash flows. An asset
is determined to be impaired when the carrying value of the
asset exceeds the expected undiscounted future cash flows
from the use and eventual disposition of the asset. If an
impairment is indicated, we record an impairment loss for the
difference between the carrying value and the fair value of
the long-lived assets. Fair value is estimated using
appropriate valuation methodologies, which may include an
estimate of discounted cash flows.
In the fourth quarter of 2017, a non-cash pre-tax impairment
of long-lived assets at the Gill Ranch Facility of $192.5
million was recognized. The income approach was used to
estimate fair value, using the estimated future net cash
flows. We also compared the results of the income approach
to our own recent sale experience and recent market
comparable transactions in order to estimate fair value. The
Gill Ranch Facility was originally included in the gas storage
segment, which has since been eliminated, and is now
included in discontinued operations. We determined
circumstances existed that indicated the carrying value of
the assets may not be recoverable. Those circumstances
included the completion of a comprehensive strategic review
process that evaluated various alternatives including a
potential sale, as well as contracting for available storage at
lower than anticipated values for the coming storage year.
Given these considerations, management re-evaluated the
estimated cash flows from our interests in the Gill Ranch
Facility, and determined that those estimated cash flows
were no longer sufficient to cover the carrying value of the
assets. The results of Gill Ranch have been presented as a
discontinued operation for NW Holdings and NW Natural on
the consolidated statements of comprehensive income and
cash flows, and the assets and liabilities associated with Gill
Ranch have been classified as discontinued operations
assets and liabilities on the consolidated balance sheets.
See Note 18 for additional information.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand plus highly liquid
investment accounts with original maturity dates of three
months or less. At December 31, 2018 and 2017, NW
Holdings had outstanding checks of approximately $2.7
million and $4.8 million, respectively, substantially all of
which is recorded at NW Natural. These balances are
included in accounts payable in the NW Holdings and NW
Natural balance sheets.
Revenue Recognition and Accrued Unbilled Revenue
Revenues, derived primarily from the sale and transportation
of natural gas, are recognized upon delivery of the gas
commodity or service to customers. Revenues include
accruals for gas or water delivered but not yet billed to
customers based on estimates of deliveries from meter
reading dates to month end (accrued unbilled revenue).
Accrued unbilled revenue is dependent upon a number of
factors that require management’s judgment, including total
natural gas receipts and deliveries, customer use of natural
gas or water by billing cycle, and weather factors. Accrued
unbilled revenue is reversed the following month when
actual billings occur. NW Holdings' accrued unbilled revenue
at December 31, 2018 and 2017 was $57.8 million and
$62.4 million, respectively, substantially all of which is
accrued unbilled revenue at NW Natural.
Revenues not related to NGD are derived primarily from
Interstate Storage Services, asset management activities at
the Mist gas storage facility, and other investments and
business activities. At the Mist underground storage facility,
revenues are primarily firm service revenues in the form of
fixed monthly reservation charges. In addition, we also have
asset management service revenue from an independent
energy marketing company that optimizes commodity,
storage, and pipeline capacity release transactions. Under
this agreement, guaranteed asset management revenue is
recognized using a straight-line, pro-rata methodology over
the term of each contract. Revenues earned above the
guaranteed amount are recognized as they are earned.
Revenue Taxes
Revenue-based taxes are primarily franchise taxes, which
are collected from customers and remitted to taxing
authorities. In 2018, revenue taxes are included in operating
expenses in the statements of comprehensive income for
NW Holdings and NW Natural. In 2017 and 2016, revenue
taxes are included in operating revenues in the statements
of comprehensive income for NW Holdings and NW Natural.
All revenue taxes are recorded at NW Natural and were
$30.1 million, $19.1 million, and $17.1 million for 2018, 2017,
and 2016, respectively.
Accounts Receivable and Allowance for Uncollectible
Accounts
Accounts receivable consist primarily of amounts due for
natural gas sales and transportation services to NGD
customers, plus amounts due for gas storage services. At
NW Holdings and NW Natural we establish allowances for
uncollectible accounts (allowance) for trade receivables,
including accrued unbilled revenue, based on the aging of
receivables, collection experience of past due account
balances including payment plans, and historical trends of
write-offs as a percent of revenues. A specific allowance is
established and recorded for large individual customer
receivables when amounts are identified as unlikely to be
partially or fully recovered. Inactive accounts are written-off
against the allowance after they are 120 days past due or
when deemed uncollectible. Differences between the
estimated allowance and actual write-offs will occur based
on a number of factors, including changes in economic
conditions, customer creditworthiness, and natural gas
prices. The allowance for uncollectible accounts is adjusted
quarterly, as necessary, based on information currently
available.
Inventories
NGD gas inventories, which consist of natural gas in storage
for NGD, are stated at the lower of average cost or net
realizable value. The regulatory treatment of these
inventories provides for cost recovery in customer rates.
NGD gas inventories injected into storage are priced in
inventory based on actual purchase costs, and those
withdrawn from storage are charged to cost of gas during the
current period they are withdrawn at the weighted-average
inventory cost.
Gas storage inventories, which primarily represent
inventories at the Gill Ranch Facility and are included in
Discontinued operations - current assets on the consolidated
balance sheets, mainly consist of natural gas received as
fuel-in-kind from storage customers. Gas storage inventories
are valued at the lower of average cost or net realizable
value. Cushion gas is not included in inventory balances, is
recorded at original cost, and is classified as a long-term
plant asset.
Materials and supplies inventories consist of inventories both
related to and unrelated to NGD and are stated at the lower
of average cost or net realizable value.
80
NW Natural's NGD and gas storage inventories totaled $29.9
million and $36.7 million at December 31, 2018 and 2017,
respectively. At December 31, 2018 and 2017, NW Holdings'
materials and supplies inventories, which are comprised
primarily of NW Natural's materials and supplies, totaled
$14.2 million and $10.9 million, respectively.
Gas Reserves
Gas reserves are payments to acquire and produce natural
gas reserves. Gas reserves are stated at cost, adjusted for
regulatory amortization, with the associated deferred tax
benefits recorded as liabilities on the balance sheet. The
current portion is calculated based on expected gas
deliveries within the next fiscal year. NW Natural recognizes
regulatory amortization of this asset on a volumetric basis
calculated using the estimated gas reserves and the
estimated therms extracted and sold each month. The
amortization of gas reserves is recorded to cost of gas along
with gas production revenues and production costs. See
Note 12.
Derivatives
NW Natural's derivatives are measured at fair value and
recognized as either assets or liabilities on the balance
sheet. Changes in the fair value of the derivatives are
recognized currently in earnings unless specific regulatory or
hedge accounting criteria are met. Accounting for derivatives
and hedges provides an exception for contracts intended for
normal purchases and normal sales for which physical
delivery is probable. In addition, certain derivative contracts
are approved by regulatory authorities for recovery or refund
through customer rates. Accordingly, the changes in fair
value of these approved contracts are deferred as regulatory
assets or liabilities pursuant to regulatory accounting
principles. NW Natural's financial derivatives generally
qualify for deferral under regulatory accounting. NW
Natural's index-priced physical derivative contracts also
qualify for regulatory deferral accounting treatment.
Derivative contracts entered into for NGD requirements after
the annual PGA rate has been set and maturing during the
PGA year are subject to the PGA incentive sharing
mechanism. In Oregon, NW Natural participates in a PGA
sharing mechanism under which it is required to select either
an 80% or 90% deferral of higher or lower gas costs such
that the impact on current earnings from the gas cost sharing
is either 20% or 10% of gas cost differences compared to
PGA prices, respectively. For the PGA years in Oregon
beginning November 1, 2018, 2017, and 2016, NW Natural
selected the 90%, 90%, and 90% deferral of gas cost
differences, respectively. In Washington, 100% of the
differences between the PGA prices and actual gas costs are
deferred. See Note 15.
NW Natural's financial derivatives policy sets forth the
guidelines for using selected derivative products to support
prudent risk management strategies within designated
parameters. NW Natural's objective for using derivatives is to
decrease the volatility of gas prices, earnings, and cash
flows without speculative risk. The use of derivatives is
permitted only after the risk exposures have been identified,
are determined not to exceed acceptable tolerance levels,
and are determined necessary to support normal business
activities. NW Natural does not enter into derivative
81
instruments for trading purposes. All derivatives for NW
Holdings are currently held at NW Natural.
Fair Value
In accordance with fair value accounting, we use the
following fair value hierarchy for determining inputs for our
debt, pension plan assets, and derivative fair value
measurements:
•
Level 1: Valuation is based on quoted prices for identical
instruments traded in active markets;
Level 2: Valuation is based on quoted prices for similar
instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and
model-based valuation techniques for which all
significant assumptions are observable in the market;
and
Level 3: Valuation is generated from model-based
techniques that use significant assumptions not
observable in the market. These unobservable
assumptions reflect our own estimates of assumptions
market participants would use in valuing the asset or
liability.
•
•
When developing fair value measurements, it is our policy to
use quoted market prices whenever available or to maximize
the use of observable inputs and minimize the use of
unobservable inputs when quoted market prices are not
available. Fair values are primarily developed using industry-
standard models that consider various inputs including: (a)
quoted future prices for commodities; (b) forward currency
prices; (c) time value; (d) volatility factors; (e) current market
and contractual prices for underlying instruments; (f) market
interest rates and yield curves; (g) credit spreads; and (h)
other relevant economic measures. NW Natural considers
liquid points for natural gas hedging to be those points for
which there are regularly published prices in a nationally
recognized publication or where the instruments are traded
on an exchange.
Goodwill
NW Holdings, through its wholly-owned subsidiary NWN
Water and NW Water's wholly-owned subsidiaries, has
completed various acquisitions that resulted in the
recognition of goodwill. Goodwill is measured as the excess
of the acquisition-date fair value of the consideration
transferred over the acquisition-date fair value of the net
identifiable assets assumed. Adjustments are recorded
during the measurement period to finalize the allocation of
the purchase price. The carrying value of goodwill is
reviewed annually during the fourth quarter using balances
as of October 1, or whenever events or changes in
circumstance indicate that such carrying values may not be
recoverable. The goodwill assessment policy begins with a
qualitative analysis in which events and circumstances are
evaluated, including macroeconomic conditions, industry and
market conditions, regulatory environments, and overall
financial performance of the reporting unit. If the qualitative
assessment indicates that the carrying value may be at risk
of recoverability, a quantitative evaluation is performed to
measure the carrying value of the goodwill against the fair
value of the reporting unit. The reporting unit is determined
primarily based on current operating segments and the level
of review provided by the Chief Operating Decision Maker
(CODM) and/or segment management on the operating
probable liabilities can be estimated and no amount within
the range is more likely than another, it is our policy to
accrue at the low end of the range. Accordingly, due to
numerous uncertainties surrounding the course of
environmental remediation and the preliminary nature of
several site investigations, in some cases, it may not be
possible to reasonably estimate the high end of the range of
possible loss. In those cases, the nature of the potential loss
and the fact that the high end of the range cannot be
reasonably estimated is disclosed. See Note 17.
Subsequent Events
We monitor significant events occurring after the balance
sheet date and prior to the issuance of the financial
statements to determine the impacts, if any, of events on the
financial statements to be issued. We do not have any
subsequent events to report.
segment's financial results. Reporting units are evaluated
periodically for changes in the corporate environment.
As of December 31, 2018, NW Holdings had goodwill of $9.0
million. All of NW Holdings' goodwill was acquired in 2018
through the business combinations completed by NWN
Water and its wholly-owned subsidiaries. No impairment
charges were recorded as a result of the fourth quarter
goodwill impairment assessment.
Income Taxes
We account for income taxes under the asset and liability
method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of events that have been included in the
financial statements. Under this method, deferred tax assets
and liabilities are determined on the basis of the differences
between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect of
a change in tax rates on deferred tax assets and liabilities is
recognized in income in the enactment date period unless,
for NW Natural, a regulatory Order specifies deferral of the
effect of the change in tax rates over a longer period of time.
For NW Natural, deferred income tax assets and liabilities
are also recognized for temporary differences where the
deferred income tax benefits or expenses have previously
been flowed through in the ratemaking process of the NGD
business. Regulatory tax assets and liabilities are recorded
on these deferred tax assets and liabilities to the extent it is
believed they will be recoverable from or refunded to
customers in future rates.
Deferred investment tax credits on NGD plant additions,
which reduce income taxes payable, are deferred for
financial statement purposes and amortized over the life of
the related plant.
Interest and penalties related to unrecognized tax benefits, if
any, are recognized within income tax expense and accrued
interest and penalties are recognized within the related tax
liability line in the consolidated balance sheets. No accrued
interest or penalties for uncertain tax benefits have been
recorded. See Note 10.
Environmental Contingencies
Loss contingencies are recorded as liabilities when it is
probable a liability has been incurred and the amount of the
loss is reasonably estimable in accordance with accounting
standards for contingencies. Estimating probable losses
requires an analysis of uncertainties that often depend upon
judgments about potential actions by third parties. Accruals
for loss contingencies are recorded based on an analysis of
potential results.
With respect to environmental liabilities and related costs,
estimates are developed based on a review of information
available from numerous sources, including completed
studies and site specific negotiations. NW Natural's policy is
to accrue the full amount of such liability when information is
sufficient to reasonably estimate the amount of probable
liability. When information is not available to reasonably
estimate the probable liability, or when only the range of
82
3. EARNINGS PER SHARE
Basic earnings or loss per share are computed using NW
Holdings' net income or loss and the weighted average
number of common shares outstanding for each period
presented. Diluted earnings per share are computed in the
same manner, except it uses 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. Antidilutive stock awards are excluded
from the calculation of diluted earnings or loss per common
share.
NW Holdings' diluted earnings or loss per share are calculated as follows:
In thousands, except per share data
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Average common shares outstanding - basic
Additional shares for stock-based compensation plans (See Note 7)
Average common shares outstanding - diluted
Earnings (loss) from continuing operations per share of common stock:
Basic
Diluted
Loss from discontinued operations per share of common stock:
Basic
Diluted
Earnings (loss) per share of common stock:
Basic
Diluted
Additional information:
Antidilutive shares
4. SEGMENT INFORMATION
We primarily operate in one reportable business segment,
which is NW Natural's local gas distribution business and is
referred to as the NGD segment. 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, 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 NGD, which are aggregated and reported as other and
described below for each entity.
No individual customer accounts for over 10% of NW
Holdings' or NW Natural's operating revenues.
Natural Gas Distribution
The NGD 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. With regulated utility operations, NW Natural is
responsible for building and maintaining a safe and reliable
pipeline distribution system, purchasing sufficient gas
supplies from producers and marketers, contracting for firm
83
$
$
$
$
$
$
$
$
2018
2017
2016
67,311
$
72,073
$
(2,742)
(127,696)
64,569
$
(55,623) $
28,803
70
28,873
28,669
84
28,753
2.34
2.33
$
$
2.51
2.51
$
$
(0.10) $
(0.09) $
(4.45) $
(4.44) $
2.24
2.24
$
$
(1.94) $
(1.93) $
2
13
62,419
(3,524)
58,895
27,647
132
27,779
2.26
2.25
(0.13)
(0.13)
2.13
2.12
5
and interruptible transportation of gas over interstate
pipelines to bring gas from the supply basins into its service
territory, and re-selling the gas to customers subject to
rates, terms, and conditions approved by the OPUC or
WUTC. NGD also includes taking customer-owned gas and
transporting it from interstate pipeline connections, or city
gates, to the customers’ end-use facilities for a fee, which is
approved by the OPUC or WUTC. Approximately 89% of
NGD customers are located in Oregon and 11% in
Washington. On an annual basis, residential and
commercial customers typically account for around 60% of
total NGD volumes delivered and around 90% of NGD
margin. Industrial customers largely account for the
remaining volumes and NGD margin. A small amount of the
margin is also derived from miscellaneous services, gains
or losses from an incentive gas cost sharing mechanism,
and other service fees.
Industrial sectors served by NW Natural include: pulp,
paper, and other forest products; the manufacture of
electronic, electrochemical and electrometallurgical
products; the processing of farm and food products; the
production of various mineral products; metal fabrication
and casting; the production of machine tools, machinery,
and textiles; the manufacture of asphalt, concrete, and
rubber; printing and publishing; nurseries; and government
and educational institutions.
In addition to NW Natural's local gas distribution business,
the NGD segment also includes the portion of the Mist
underground storage facility used to serve NGD customers,
the North Mist gas storage expansion in Oregon, and NWN
Gas Reserves, which is a wholly-owned subsidiary of
Energy Corp.
NW Natural
NW Natural activities included in Other includes 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. Historically, under the
Oregon sharing mechanism, NW Natural retained 80% of
the pre-tax income from these services when the costs of
the capacity were not included in NGD rates, or 33% of the
pre-tax income when the costs have been included in these
rates. The remaining 20% and 67%, respectively, were
recorded to a deferred regulatory account for crediting back
to NGD customers. After November 1, 2018 NW Natural
retains 10% of the pre-tax income when the costs have
been included in these rates,
and the remaining 90% is recorded to a deferred regulatory
account for crediting back to NGD customers.
NW Holdings
NW Holdings' activities included in Other includes all
remaining activities not associated with NW Natural,
specifically NWN Water, which consolidates the water
operations and is pursuing other investments in the water
sector itself and through its wholly-owned subsidiaries,
NWN Gas Storage, a wholly-owned subsidiary of NWN
Energy, NWN Energy's equity investment in TWH, which is
pursuing development of a cross-Cascades transmission
pipeline project (TWP), and other pipeline assets in NNG
Financial. For more information on TWP, see Note 13.
Other also includes corporate revenues and expenses that
cannot be allocated to other operations.
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 segments of
continued operations. See Note 18 for information
regarding discontinued operations for NW Holdings and
NW Natural.
In thousands
2018
Operating revenues
Depreciation and amortization
Income (loss) from operations
Net income (loss) from continuing operations
Capital expenditures
Total assets at December 31, 2018(2)
2017
Operating revenues
Depreciation and amortization
Income (loss) from operations
Net income from continuing operations(1)
Capital expenditures
Total assets at December 31, 2017(2)
2016
Operating revenues
Depreciation and amortization
Income (loss) from operations
Net income (loss) from continuing operations(3)
Capital expenditures
Total assets at December 31, 2016(2)
(1)
NGD
Other
(NW Natural)
NW Natural
Other
(NW Holdings)
NW Holdings
$
680,648
$
24,923
$
705,571
$
83,732
118,095
57,491
212,323
3,141,969
1,254
15,004
10,558
2,005
50,767
84,986
133,099
68,049
214,328
572
170
(937)
(738)
308
$
706,143
85,156
132,162
67,311
214,636
3,192,736
36,657
3,229,393
$
732,942
$
22,096
$
755,038
$
— $
755,038
79,734
138,450
60,509
211,672
2,961,326
1,290
12,472
11,211
1,653
50,471
81,024
150,922
71,720
213,325
29
(20)
353
—
81,053
150,902
72,073
213,325
3,011,797
14,075
3,025,872
$
650,477
$
17,472
$
667,949
$
224
$
668,173
76,289
137,178
54,567
138,074
2,806,627
1,286
14,109
8,268
283
48,719
77,575
151,287
62,835
138,357
29
(570)
(416)
—
77,604
150,717
62,419
138,357
2,855,346
14,040
2,869,386
Includes $1.0 million of tax expense in NGD, $4.0 million of tax benefit in Other (NW Natural), and $0.4 million of tax benefit in Other (NW
Holdings) from the TCJA remeasurement for the year ended December 31, 2017.
(2) Total assets for NW Holdings exclude assets related to discontinued operations of $13.3 million, $13.9 million and $210.4 million as of
December 31, 2018, 2017, and 2016, respectively. Total assets for NW Natural exclude assets related to discontinued operations of $31.9
million and $226.1 million as of December 31, 2017, and 2016, respectively.
Includes $2.0 million in 2016 of after-tax regulatory environmental disallowance charges in NGD.
(3)
84
Natural Gas Distribution Margin
NGD margin is a financial measure used by the CODM,
consisting of NGD operating revenues, reduced by the
associated cost of gas, environmental recovery revenues,
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 recovery revenues represent collections
received from customers through the environmental
recovery mechanism in Oregon. These collections are
offset by the amortization of environmental liabilities, which
is presented as environmental remediation expense in
operating expenses. Revenue taxes are collected from
NGD customers and remitted to taxing authorities. The
collections from customers are offset by the expense
recognition of the obligation to the taxing authority. By
subtracting cost of gas, environmental remediation
expense, and revenue taxes from NGD operating revenues,
NGD margin provides a key metric used by the CODM in
assessing the performance of the NGD segment.
The following table presents additional segment information concerning NGD margin:
In thousands
NGD margin calculation:
NGD operating revenues
Less: NGD cost of gas
Environmental remediation expense
Revenue taxes(1)
NGD margin
2018
2017
2016
$
680,648
$
732,942
$
255,743
11,127
30,082
325,019
15,291
—
650,477
260,588
13,298
—
$
383,696
$
392,632
$
376,591
(1)
The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and
all related amendments on January 1, 2018. This change had no impact on NGD margin results as revenue taxes were previously
presented net in NGD operating revenue. For additional information, see Note 2.
5. COMMON STOCK
As part of the reorganization of NW Holdings and NW
Natural into a holding company structure effective October
1, 2018, NW Natural shareholders automatically became
shareholders of NW Holdings on a one-for-one share basis
with the same number of shares and same relative
ownership percentage in NW Holdings as was held in NW
Natural immediately prior to the reorganization.
As of December 31, 2018, NW Holdings had 100 million
shares of common stock authorized. As of December 31,
2018 and 2017, NW Natural had 100 million shares of
common stock authorized. As of December 31, 2018, NW
Holdings had 24,339 shares reserved for issuance of
common stock under the Employee Stock Purchase Plan
(ESPP) and 394,204 shares reserved for issuance under
the Dividend Reinvestment and Direct Stock Purchase Plan
(DRPP). At NW Holdings' election, shares sold through the
DRPP may be purchased in the open market or through
original issuance of shares reserved for issuance under the
DRPP.
The Restated Stock Option Plan (SOP) was terminated with
respect to new grants in 2012; however, options granted
before the Restated SOP was terminated remain
outstanding until the earlier of their expiration, forfeiture, or
exercise. Options are now exercisable for shares of NW
Holdings common stock. There were 55,938 options
outstanding at December 31, 2018, which were granted
prior to termination of the plan.
During November 2016, NW Natural completed an equity
issuance consisting of an offering of 880,000 shares of
common stock along with a 30-day option for the
underwriters to purchase an additional 132,000 shares. The
offering closed on November 16, 2016 and resulted in a
total issuance of 1,012,000 shares as both the initial offering
and the underwriter option were fully executed. All shares
were issued on November 16, 2016 at an offering price of
$54.63 per share and resulted in total net proceeds of $52.8
million.
Stock Repurchase Program
NW Holdings has a share repurchase program under which
it may purchase its common shares on the open market or
through privately negotiated transactions. NW Holdings
currently has Board authorization through May 2019 to
repurchase up to an aggregate of the greater of 2.8 million
shares or $100 million. No shares of common stock were
repurchased pursuant to this program during the year ended
December 31, 2018. Since the plan’s inception in 2000
under NW Natural, a total of 2.1 million shares have been
repurchased at a total cost of $83.3 million.
The following table summarizes the changes in the number
of shares of NW Holdings' common stock issued and
outstanding:
In thousands
Balance, December 31, 2015
Sales to employees under ESPP
Stock-based compensation
Equity Issuance
Balance, December 31, 2016
Sales to employees under ESPP
Stock-based compensation
Balance, December 31, 2017
Sales to employees under ESPP
Stock-based compensation
Sales to shareholders under DRPP
Balance, December 31, 2018
85
Shares
27,427
18
173
1,012
28,630
18
88
28,736
19
64
61
28,880
6. REVENUE
The following table presents disaggregated revenue from continuing operations:
In thousands
Natural gas sales
Gas storage revenue, net
Asset management revenue, net
Appliance retail center revenue
Other revenue
Revenue from contracts with customers
670,662
Alternative revenue
Leasing revenue
8,989
997
Year ended December 31, 2018
NGD
Other
(NW Natural)
NW Natural
Other
(NW Holdings)
NW Holdings
$
670,662
$
— $
670,662
$
— $
—
—
—
—
10,780
8,548
5,595
—
24,923
—
—
10,780
8,548
5,595
—
695,585
8,989
997
—
—
—
572
572
—
—
670,662
10,780
8,548
5,595
572
696,157
8,989
997
Total operating revenues
$
680,648
$
24,923
$
705,571
$
572
$
706,143
NW Natural's revenue represents substantially all of NW
Holdings' revenue and is recognized for both registrants
when the obligation to customers is satisfied and in the
amount expected to be received in exchange for
transferring goods or providing services. Revenue from
contracts with customers contain 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 per a set price agreed upon in the
contract or dependent on regulatory tariffs. Customer
accounts are settled on a monthly basis or paid at time of
sale and based on historical experience. It is probable that
we will collect substantially all of the consideration to which
we are entitled.
NW Holdings and NW Natural do not have any material
contract assets, as net accounts receivable and accrued
unbilled revenue balances are unconditional and only
involve the passage of time until such balances are billed
and collected. NW Holdings and NW Natural do not have
any material contract liabilities.
Revenue-based taxes are primarily franchise taxes, which
are collected from NGD customers and remitted to taxing
authorities. Beginning January 1, 2018, revenue taxes are
included in operating revenues with an equal and offsetting
expense recognized in operating expenses in the
consolidated statements of comprehensive income.
Natural Gas Distribution
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
86
revenue balance is based on estimates of deliveries during
the period from the last meter reading and management
judgment is required for a number of factors used in this
calculation, including customer use and weather factors.
We applied the significant financing practical expedient and
have not adjusted the consideration NW Natural expects to
receive from NGD customers for the effects of a significant
financing component as all payment arrangements are
settled annually. Due to the election of the right to invoice
practical expedient, we do not disclose the value of
unsatisfied performance obligations as of December 31,
2018.
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
rental revenue for small leases of property owned for NGD
to third parties. The majority of the 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.
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 the optimization 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 December 31, 2018, unrecognized revenue for the
fixed component of the transaction price related to gas
storage and asset management revenue was
approximately $56.0 million. Of this amount, approximately
$14.1 million will be recognized in 2019, $11.7 million in
2020, $10.7 million in 2021, $7.0 million in 2022, $5.8
million in 2023, and $6.7 million thereafter. The amounts
presented here are calculated using current contracted
rates. On October 12, 2018, NW Natural filed a rate petition
with FERC for revised maximum cost-based rates, which
incorporated the new federal corporate income tax rate.
The revised rates became effective November 1, 2018.
Appliance retail center revenue. NW Natural owns and
operates an appliance store that is open to the public,
7. 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 ESPP, and a Restated SOP.
Long Term Incentive Plan
The LTIP is intended to provide a flexible, competitive
compensation program for eligible officers and key
employees. Under the LTIP, shares of NW Holdings
common stock are authorized for equity incentive grants in
the form of stock, restricted stock, restricted stock units,
stock options, or performance shares. An aggregate of
1,100,000 shares were authorized for issuance as of
December 31, 2018. Shares awarded under the LTIP may
be purchased on the open market or issued as original
shares.
Of the 1,100,000 shares of common stock authorized for
LTIP awards at December 31, 2018, there were 574,787
shares available for issuance under any type of award. This
assumes market, performance, and service-based grants
currently outstanding are awarded at the target level. There
were no outstanding grants of restricted stock or stock
options under the LTIP at December 31, 2018 or 2017. The
LTIP stock awards are compensatory awards for which
compensation expense is based on the fair value of stock
awards, with expense being recognized over the
performance and vesting period of the outstanding awards.
Forfeitures are recognized as they occur.
87
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 distribution 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
December 31, 2018.
Performance Shares
Since the LTIP’s inception in 2001, performance shares,
which incorporate market, performance, and service-based
factors, have been granted annually with three-year
performance periods. The following table summarizes
performance share expense information:
Dollars in thousands
Estimated award:
2016-2018 grant(3)
Actual award:
2015-2017 grant
2014-2016 grant
Shares(1)
Expense
During Award
Year(2)
Total
Expense
for Award
28,218
$
598
$
1,413
18,304
31,388
(346)
168
1,169
1,685
(1)
In addition to common stock shares, a participant also
receives a dividend equivalent cash payment equal to the
number of shares of common stock received on the award
payout multiplied by the aggregate cash dividends paid per
share during the performance period.
(3)
(2) Amount represents the expense recognized in the third year of
the vesting period noted above. For the 2015-2017 grant,
targets were not met and expense was reversed during 2017
that had been previously recognized.
This represents the estimated number of shares to be
awarded as of December 31, 2018 as certain performance
share measures have been achieved. Amounts are subject to
change with final payout amounts authorized by the Board of
Directors in February 2019.
The aggregate number of performance shares granted and
outstanding at the target and maximum levels were as
follows:
Dollars in
thousands
Performance
Period
2016-18
2017-19
2018-20
Total
Performance Share
Awards Outstanding
2018
Target
Maximum
Expense
Cumulative
Expense
December
31, 2018
24,421
31,372
—
48,842
$
598
$
62,744
—
458
—
1,413
1,400
—
55,793
111,586
$
1,056
For the 2016-2018 performance period, performance share
awards are based on EPS and Return on Invested Capital
(ROIC) factors and a total shareholder return (TSR factor)
relative to the Dow Jones U.S. Gas Distribution peer group
over the three-year performance period. Additionally, these
plans are based on performance results achieved relative to
specific core and non-core strategies (strategic factor). For
the 2017-2019 performance period, performance share
awards are based on the achievement of EPS and ROIC
factors, which can be modified by a TSR factor relative to
the performance of the Russell 2500 Utilities Index over the
three-year performance period and a growth modifier based
on accumulative EBITDA measure. For the 2018-2020
performance period, performance share awards are based
on the achievement of a three-year ROIC threshold that
must be met and a cumulative EPS factor, which can be
modified by a TSR factor relative to the performance of the
Russell 2500 Utilities Index over the three-year performance
period. The 2018-2020 performance period allows for one of
the performance factors to remain variable until the first
quarter of the third year of the award period. As the
performance factor will not be approved until the first quarter
of 2020, there is not a mutual understanding of the award’s
key terms and conditions between NW Natural and the
participants as of December 31, 2018, and therefore, no
expense was recognized for the 2018-2020 performance
period. NW Natural will calculate the grant date fair value
and recognize expense once the final performance factor
has been approved. If the target was achieved for the 2018
award, NW Holdings would grant 34,702 shares in the first
quarter of 2020.
Compensation expense is recognized in accordance with
accounting standards for stock-based compensation and
calculated based on performance levels achieved and an
estimated fair value using the Monte-Carlo method. The
weighted-average grant date fair value of nonvested shares
at December 31, 2018 and 2017 was $57.05 and $56.40 per
share, respectively. The weighted-average grant date fair
value of shares vested during the year was $56.23 per
share and there were no performance shares granted during
the year for accounting purposes. As of December 31, 2018,
there was $1.1 million of unrecognized compensation
expense related to the nonvested portion of performance
awards expected to be recognized through 2019.
Restricted Stock Units
In 2012, RSUs began being granted under the LTIP instead
of stock options under the Restated SOP. 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. Upon vesting, the RSU holder is issued
one share of common stock plus a cash payment equal to
the total amount of dividends paid per share between the
grant date and vesting date of that portion of the RSU. The
fair value of an RSU is equal to the closing market price of
NW Holdings' common stock on the grant date. During
2018, total RSU expense was $1.8 million compared to $1.6
million in 2017 and $1.5 million in 2016. As of December 31,
2018, there was $3.1 million of unrecognized compensation
cost from grants of RSUs, which is expected to be
recognized over a period extending through 2023.
Information regarding the RSU activity is summarized as
follows:
Number
of
RSUs
Weighted -
Average
Price Per
RSU
Nonvested, December 31, 2015
88,587
$
Granted
Vested
Forfeited
Nonvested, December 31, 2016
Granted
Vested
Forfeited
Nonvested, December 31, 2017
Granted
Vested
Forfeited
40,271
(29,488)
(9,397)
89,973
32,168
(35,341)
(2,278)
84,522
32,450
(32,689)
(1,603)
Nonvested, December 31, 2018
82,680
$
44.78
54.36
45.56
44.59
48.85
60.51
47.07
53.78
53.90
57.59
50.75
59.95
56.47
Restated Stock Option Plan
The NW Natural Restated SOP was terminated for new
option grants in 2012; however, options granted before the
plan terminated remain outstanding until the earlier of their
expiration, forfeiture, or exercise and are now exercisable
for shares of NW Holdings common stock. Any new grants
of stock options will be made under NW Holdings' LTIP,
however, no option grants have been awarded since 2012
and all stock options were vested as of December 31, 2015.
Options under the Restated SOP were granted to officers
and key employees designated by a committee of the Board
of Directors. All options were granted at an option price
equal to the closing market price on the date of grant and
may be exercised for a period of up to 10 years and seven
days from the date of grant. Option holders may exchange
shares they have owned for at least six months, valued at
the current market price, to purchase shares at the option
price.
88
Information regarding the Restated SOP activity is
summarized as follows:
Weighted -
Average
Price Per
Share
Intrinsic
Value
(In millions)
Option
Shares
Balance outstanding,
December 31, 2015
352,688
$
44.00
$
Exercised
Forfeited
Balance outstanding,
December 31, 2016
Exercised
Forfeited
Balance outstanding
and exercisable,
December 31, 2017
Exercised
Expired
Balance outstanding
and exercisable,
December 31, 2018
(172,525)
—
180,163
(88,275)
(200)
91,688
(35,450)
(300)
43.61
n/a
44.38
44.33
41.15
44.43
43.61
43.29
55,938
$
44.96
$
0.9
During 2018, cash of $1.5 million was received for stock
options exercised and $0.2 million related tax benefit was
recognized. The weighted-average remaining life of options
exercisable and outstanding at December 31, 2018 was
1.69 years.
8. DEBT
2.3
2.0
n/a
2.8
1.8
n/a
1.4
0.8
n/a
Employee Stock Purchase Plan
NW Holdings' ESPP allows employees of NW Holdings, NW
Natural and certain designated subsidiaries to purchase
common stock at 85% of the closing price on the trading day
immediately preceding the initial offering date, which is set
annually. Each eligible employee may purchase up to
$21,205 worth of stock through payroll deductions over a
period defined by the Board of Directors, with shares issued
at the end of the subscription period.
Stock-Based Compensation Expense
Stock-based compensation expense is recognized as
operations and maintenance expense or is capitalized as
part of construction overhead at the entity at which the
award recipient is employed. The following table
summarizes the NW Holdings' financial statement impact,
substantially all of which was recorded at NW Natural, of
stock-based compensation under the LTIP, Restated SOP
and ESPP:
In thousands
2018
2017
2016
Operations and maintenance
expense, for stock-based
compensation
$ 2,489 $ 2,354 $ 2,370
Income tax benefit
(659)
(930)
(924)
Net stock-based compensation
effect on net income (loss)
$ 1,830 $ 1,424 $ 1,446
Amounts capitalized for stock-based
compensation
$
531 $
528 $
554
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 carrying cost of commercial paper approximates fair
value using Level 2 inputs, due to the short-term nature of
the notes. See Note 2 for a description of the fair value
hierarchy. At December 31, 2018, NW Natural's commercial
paper had a maximum remaining maturity of 46 days and an
average remaining maturity of 22 days.
Credit Agreements
NW Holdings
In October 2018, NW Holdings entered into 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, with available extensions of commitments
for two additional one-year periods, subject to lender
approval.
The primary source of short-term liquidity for NW Natural is
from the sale of commercial paper and bank loans. NW
Natural has a commercial paper program, and NW Holdings
and NW Natural have separate bank facilities. 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. NW
Natural's commercial paper is sold through two commercial
banks under an issuing and paying agency agreement and
is supported by one or more unsecured revolving credit
facilities. See “Credit Agreements” below.
At December 31, 2018 and 2017, NW Holdings had short-
term debt outstanding of $217.6 million and $54.2 million,
respectively, substantially all of which was recorded at NW
Natural and was comprised primarily of NW Natural's
commercial paper. The weighted average interest rate of
commercial paper outstanding at December 31, 2018 and
2017 was 3.0% and 1.9%, respectively.
89
The new credit agreement also requires NW Natural to
maintain credit ratings with S&P and Moody’s and notify the
lenders of any change in NW Natural's senior unsecured
debt ratings or senior secured debt ratings, as applicable, by
such rating agencies. A change in NW Natural's debt ratings
by S&P or Moody’s is not an event of default, nor is the
maintenance of a specific minimum level of debt rating a
condition of drawing upon the new credit agreement. Rather,
interest rates on any loans outstanding under the new credit
agreement are tied to debt ratings and therefore, a change
in the debt rating would increase or decrease the cost of any
loans under the new credit agreement when ratings are
changed.
Long-Term Debt
NW Natural's issuance of FMBs, which includes NW
Natural's medium-term notes, under the Mortgage and Deed
of Trust (Mortgage) is limited by eligible property, adjusted
net earnings, and other provisions of the Mortgage. The
Mortgage constitutes a first mortgage lien on substantially
all of NW Natural's NGD property.
Maturities and Outstanding Long-Term Debt
Retirement of long-term debt for each of the annual periods
through December 31, 2023 and thereafter are as follows:
In thousands
2019
2020
2021
2022
2023
Thereafter
Long-term debt
maturities
$
30,000
75,000
60,000
—
90,000
484,700
The NW Holdings 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 December
31, 2018.
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.
There were no outstanding balances and no letters of credit
issued or outstanding under the NW Holdings agreement at
December 31, 2018. NW Holdings had $2.8 million of letters
of credit issued and outstanding, separate from the
aforementioned credit agreement, at December 31, 2018.
NW Natural
In October 2018, NW Natural entered into a new multi-year
credit agreement for unsecured revolving loans totaling
$300.0 million, with a feature that allows NW Natural to
request increases in the total commitment amount, up to a
maximum of $450.0 million. The maturity date of the
agreement is October 2, 2023 with available extensions of
commitments for two additional one-year periods, subject to
lender approval. The new credit agreement is substantially
similar to the prior credit agreement which was terminated
upon the closing of the New Credit Agreement. The new
credit agreement permits the issuance of letters of credit in
an aggregate amount of up to $60.0 million. The principal
amount of borrowings under the credit agreement is due
and payable on the maturity date. There were no
outstanding balances under NW Natural's prior credit
agreement or the new credit agreement and no letters of
credit issued or outstanding at December 31, 2018 and
2017.
NW Natural's prior credit agreement and the new credit
agreement require NW Natural to maintain a consolidated
indebtedness to total capitalization ratio of 70% or less.
Failure to comply with this covenant would entitle the
lenders to terminate their lending commitments and
accelerate the maturity of all amounts outstanding. NW
Natural was in compliance with this covenant at December
31, 2018 and 2017.
90
The following table presents debt outstanding as of
December 31:
In thousands
NW Natural
First Mortgage Bonds:
6.600% Series due 2018
1.545% Series due 2018
8.310% Series due 2019
7.630% Series due 2019
5.370% Series due 2020
9.050% Series due 2021
3.176% Series due 2021
3.542% Series due 2023
5.620% Series due 2023
7.720% Series due 2025
6.520% Series due 2025
7.050% Series due 2026
3.211% Series due 2026
7.000% Series due 2027
2.822% Series due 2027
6.650% Series due 2027
6.650% Series due 2028
7.740% Series due 2030
7.850% Series due 2030
5.820% Series due 2032
5.660% Series due 2033
5.250% Series due 2035
4.000% Series due 2042
4.136% Series due 2046
3.685% Series due 2047
4.110% Series due 2048
Less: current maturities
$
2018
2017
— $
—
10,000
20,000
75,000
10,000
50,000
50,000
40,000
20,000
10,000
20,000
35,000
20,000
25,000
19,700
10,000
20,000
10,000
30,000
40,000
10,000
50,000
40,000
75,000
50,000
739,700
30,000
22,000
75,000
10,000
20,000
75,000
10,000
50,000
50,000
40,000
20,000
10,000
20,000
35,000
20,000
25,000
19,700
10,000
20,000
10,000
30,000
40,000
10,000
50,000
40,000
75,000
—
786,700
97,000
Total long-term debt
$ 709,700
$ 689,700
Other NW Holdings Entities:
Long-term debt obligations
$
2,113
$
—
NW Holdings:
Long-term debt, gross
Less: current maturities
Total long-term debt
$ 741,813
$ 786,700
30,000
97,000
$ 711,813
$ 689,700
First Mortgage Bonds
In September 2018, NW Natural issued $50.0 million of
FMBs with a coupon rate of 4.110%, due in 2048.
In September 2017, NW Natural issued $100.0 million of
FMBs consisting of $25.0 million with a coupon rate of
2.822% and a maturity date in 2027 and $75.0 million with a
coupon rate of 3.685% and a maturity date in 2047.
Retirements of Long-Term Debt
In March 2018, NW Natural retired $22.0 million of FMBs
with a coupon rate of 6.600%, and retired $75.0 million of
FMBs with a coupon rate of 1.545% in December 2018.
In August 2017, NW Natural retired $40.0 million of FMBs
with a coupon rate of 7.000%.
Fair Value of Long-Term Debt
NW Holdings' and NW Natural's outstanding debt does not
trade in active markets. The fair value of debt is estimated
using 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.
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:
In thousands
Gross long-term debt
Unamortized debt
issuance costs
Carrying amount
Estimated fair value
December 31,
2018
2017
739,700
$
786,700
(5,577)
734,123
760,222
$
$
(6,813)
779,887
853,339
$
$
$
9. 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.
Effective January 1, 2007 and 2010, the qualified defined
benefit pension plans and postretirement benefits for non-
union employees and union employees, respectively, were
closed to new participants.
Non-union and union employees hired or re-hired after
December 31, 2006 and 2009, respectively, and employees
of NW Natural subsidiaries are provided an enhanced
Retirement K Savings Plan benefit.
91
The following table provides a reconciliation of the changes in NW Natural's benefit obligations and fair value of plan assets, as
applicable, for NW Natural's pension and other postretirement benefit plans, excluding the Retirement K Savings Plan, and a
summary of the funded status and amounts recognized in NW Holdings' and NW Natural's consolidated balance sheets as of
December 31:
In thousands
Reconciliation of change in benefit obligation:
Obligation at January 1
Service cost
Interest cost
Net actuarial (gain) loss
Benefits paid(1)
Obligation at December 31
Reconciliation of change in plan assets:
Fair value of plan assets at January 1
Actual return on plan assets
Employer contributions
Benefits paid(1)
Fair value of plan assets at December 31
Funded status at December 31
Postretirement Benefit Plans
Pension Benefits
Other Benefits
2018
2017
2018
2017
$
486,289
$
457,839
$
28,927
$
29,395
7,185
16,991
(32,979)
(21,918)
7,090
18,111
34,829
(31,580)
282
964
(327)
(1,674)
341
1,141
(213)
(1,737)
$
455,568
$
486,289
$
28,172
$
28,927
$
287,925
$
257,714
$
(25,925)
17,715
(21,918)
40,308
21,483
(31,580)
— $
—
1,674
(1,674)
257,797
$
287,925
$
— $
—
—
1,737
(1,737)
—
(197,771) $
(198,364) $
(28,172) $
(28,927)
$
$
(1)
In 2017, NW Natural completed a partial buy-out of its qualified defined benefit pension plan in which $9.3 million of plan assets and $8.7
million of liabilities were transferred to an insurer to provide annuities for buy-out plan participants.
NW Natural's qualified defined benefit pension plan had a projected benefit obligation of $420.2 million and $449.7 million at
December 31, 2018 and 2017, respectively, and fair values of plan assets of $257.8 million and $287.9 million, respectively. The
plan had an accumulated benefit obligation of $385.9 million and $410.3 million at December 31, 2018 and 2017, respectively.
The following table presents amounts realized through regulatory assets or in other comprehensive loss (income) for the years
ended December 31:
Regulatory Assets
Other Comprehensive Loss (Income)
Pension Benefits
Other Postretirement Benefits
Pension Benefits
In thousands
2018
2017
2016
2018
2017
2016
2018
2017
2016
Net actuarial loss (gain)
$ 14,261
$ 12,177
$ 14,005
$
(327) $
(214) $
(1,488) $
(677) $
2,777
$
(1,196)
Settlement Loss
Amortization of:
Prior service cost
Actuarial loss
—
—
—
—
—
—
(42)
(127)
(230)
(18,761)
(14,802)
(13,238)
468
(448)
468
(696)
468
(705)
—
—
—
—
(1,052)
(946)
Total
$ (4,542) $ (2,752) $
537
$
(307) $
(442) $
(1,725) $
(1,729) $
1,831
$
193
—
1,386
383
The following table presents amounts recognized in regulatory assets and accumulated other comprehensive loss (AOCL) at
December 31:
In thousands
Prior service cost (credit)
Net actuarial loss
Total
Regulatory Assets
AOCL
Pension Benefits
Other Postretirement Benefits
Pension Benefits
2018
2017
2018
2017
2018
2017
$
$
7
$
49
$
(1,738) $
(2,206) $
— $
170,535
175,035
6,189
6,964
11,537
170,542
$
175,084
$
4,451
$
4,758
$
11,537
$
—
13,266
13,266
92
The following table presents amounts recognized by NW Holdings and NW Natural in AOCL and the changes in AOCL related to
NW Natural's non-qualified employee benefit plans:
In thousands
Beginning balance
Amounts reclassified to AOCL
Amounts reclassified from AOCL:
Amortization of actuarial losses
Total reclassifications before tax
Tax expense (benefit)
Total reclassifications for the period
Ending balance
In 2019, NW Natural will amortize an estimated $13.7 million
from regulatory assets to net periodic benefit costs,
consisting of $14.2 million of actuarial losses offset by $0.5
million of prior service credits. A total of $0.6 million will be
amortized from AOCL to earnings related to actuarial losses
in 2019.
The assumed discount rate for NW Natural's pension plan
and other postretirement benefit plans was determined
independently based on the FTSE Above Median Curve
(discount rate curve), which uses high quality corporate
bonds rated AA- or higher by S&P or Aa3 or higher by
Moody’s. The discount rate curve was applied to match the
estimated cash flows in each of the plans to reflect the
timing and amount of expected future benefit payments for
these plans.
The assumed expected long-term rate of return on plan
assets for NW Natural's qualified pension plan was
developed using a weighted-average of the expected
returns for the target asset portfolio. In developing the
expected long-term rate of return assumption, consideration
was given to the historical performance of each asset class
in which the plan’s assets are invested and the target asset
allocation for plan assets.
The investment strategy and policies for qualified pension
plan assets held in the retirement trust fund were approved
by the NW Natural Retirement Committee, which is
composed of senior management with the assistance of an
outside investment consultant. The policies set forth the
guidelines and objectives governing the investment of plan
assets. Plan assets are invested for total return with
appropriate consideration for liquidity, portfolio risk, and
return expectations. All investments are expected to satisfy
the prudent investments rule under the Employee
Retirement Income Security Act of 1974. The approved
asset classes may include cash and short-term investments,
fixed income, common stock and convertible securities,
absolute and real return strategies, and real estate. Plan
assets may be invested in separately managed accounts or
in commingled or mutual funds. Investment re-balancing
takes place periodically as needed, or when significant cash
flows occur, in order to maintain the allocation of assets
within the stated target ranges. The retirement trust fund is
not currently invested in NW Holdings or NW Natural
securities.
93
Year Ended December 31,
2018
2017
(8,438) $
642
1,052
1,694
(444)
1,250
(7,188) $
(6,951)
(2,794)
946
(1,848)
361
(1,487)
(8,438)
$
$
The following table presents the NW Natural pension plan
asset target allocation at December 31, 2018:
Asset Category
Long government/credit
U.S. large cap equity
Non-U.S. equity
Absolute return strategies
U.S. small/mid cap equity
Real estate funds
High yield bonds
Emerging markets equity
Emerging market debt
Target Allocation
20%
18
18
12
10
7
5
5
5
Non-qualified supplemental defined benefit plan obligations
were $35.4 million and $36.6 million at December 31, 2018
and 2017, respectively. These plans are not subject to
regulatory deferral, and the changes in actuarial gains and
losses, prior service costs, and transition assets or
obligations are recognized in AOCL, net of tax until they are
amortized as a component of net periodic benefit cost.
These are unfunded, non-qualified plans with no plan
assets; however, a significant portion of the obligations is
indirectly funded with company and trust-owned life
insurance and other assets.
Other postretirement benefit plans are unfunded plans but
are subject to regulatory deferral. The actuarial gains and
losses, prior service costs, and transition assets or
obligations for these plans are recognized as a regulatory
asset.
Net periodic benefit costs consist of service costs, interest
costs, the expected returns on plan assets, and the
amortization of gains and losses and prior service costs.
The gains and losses are the sum of the actuarial and asset
gains and losses throughout the year and are amortized
over the average remaining service period of active
participants. The asset gains and losses are based in part
on a market-related valuation of assets. The market-related
valuation reflects differences between expected returns and
actual investment returns with the differences recognized
over a two-year period from the year in which they occur,
thereby reducing year-to-year net periodic benefit cost
volatility.
The service cost component of net periodic benefit cost for NW Natural pension and other postretirement benefit plans is
recognized in operations and maintenance expense in the consolidated statements of comprehensive income. The other non-
service cost components are recognized in other income (expense), net in the consolidated statements of comprehensive
income. The following table provides the components of net periodic benefit cost for NW Natural's pension and other
postretirement benefit plans for the years ended December 31:
In thousands
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service costs
Amortization of net actuarial loss
Settlement expense
Net periodic benefit cost
Amount allocated to construction
Amount deferred to regulatory balancing account
Pension Benefits
Other Postretirement Benefits
2018
2017
2016
2018
2017
2016
$
7,185
$
7,090
$
7,083
$
16,991
(20,639)
43
19,813
—
23,393
(2,764)
(10,314)
18,111
18,399
(20,433)
(20,054)
127
15,748
—
20,643
(6,597)
(6,542)
231
14,624
193
20,476
(5,746)
(6,252)
282
964
—
(468)
448
—
1,226
(98)
—
$
341
$
1,141
—
(468)
696
—
1,710
(587)
—
391
1,175
—
(468)
705
—
1,803
(600)
—
Net amount charged to expense
$
10,315
$
7,504
$
8,478
$
1,128
$
1,123
$
1,203
Net periodic benefit costs are reduced by amounts capitalized to NGD plant based on 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. On October 26, 2018 the OPUC ordered that the balancing account be frozen as of October 31,
2018, with recovery subject to future proceedings. Effective November 1, 2018 the OPUC authorized an additional $8.1 million to
be included in rates for defined benefit pension plan expenses.
The following table provides the assumptions used in measuring periodic benefit costs and benefit obligations for the years
ended December 31:
Pension Benefits
Other Postretirement Benefits
2018
2017
2016
2018
2017
2016
Assumptions for net periodic benefit cost:
Weighted-average discount rate
3.51%
3.99%
4.17%
3.44%
3.85%
4.00%
Rate of increase in compensation
3.25-4.5%
3.25-4.5%
3.25-4.5%
Expected long-term rate of return
7.50%
7.50%
7.50%
n/a
n/a
n/a
n/a
n/a
n/a
Assumptions for year-end funded status:
Weighted-average discount rate
4.20%
3.52%
4.00%
4.13%
3.44%
3.85%
Rate of increase in compensation
3.25-3.5%
3.25-4.5%
3.25-4.5%
Expected long-term rate of return
7.50%
7.50%
7.50%
n/a
n/a
n/a
n/a
n/a
n/a
Mortality assumptions are reviewed annually and are
updated for material changes as necessary. In 2018,
mortality rate assumptions were updated from RP-2006
mortality tables for employees and healthy annuitants with a
fully generational projection using scale MP-2017 to
RP-2014 mortality tables using scale MP-2018, which
partially offset increases of the projected benefit obligation.
The assumed annual increase in health care cost trend
rates used in measuring other postretirement benefits as of
December 31, 2018 was 6.75%. These trend rates apply to
both medical and prescription drugs. Medical costs and
prescription drugs are assumed to decrease gradually each
year to a rate of 4.75% by 2025.
Assumed health care cost trend rates can have a significant
effect on the amounts reported for the health care plans;
however, other postretirement benefit plans have a cap on
the amount of costs reimbursable by NW Natural.
A one percentage point change in assumed health care cost
trend rates would have the following effects:
In thousands
1% Increase
1% Decrease
Effect on net periodic
postretirement health care
benefit cost
Effect on the accumulated
postretirement benefit obligation
$
43
$
(39)
622
(560)
94
The following table provides information regarding employer
contributions and benefit payments for NW Natural's
qualified pension plan, non-qualified pension plans, and
other postretirement benefit plans for the years ended
December 31, and estimated future contributions and
payments:
In thousands
Pension Benefits
Other Benefits
$
21,483
$
Employer Contributions:
2017
2018
2019 (estimated)
Benefit Payments:
2016
2017
2018
Estimated Future Benefit Payments:
2019
2020
2021
2022
2023
2024-2028
17,715
13,318
20,959
31,580
21,918
22,699
23,622
24,516
25,316
26,074
145,917
1,737
1,674
1,787
1,732
1,737
1,674
1,787
1,846
1,930
1,941
1,993
9,628
Employer Contributions to Company-Sponsored
Defined Benefit Pension Plans
NW Natural makes contributions to its qualified defined
benefit pension plans based on actuarial assumptions and
estimates, tax regulations, and funding requirements under
federal law. The Pension Protection Act of 2006 (the Act)
established funding requirements for defined benefit plans.
The Act establishes a 100% funding target over seven years
for plan years beginning after December 31, 2008. In 2012
the Moving Ahead for Progress in the 21st Century Act
(MAP-21) legislation changed several provisions affecting
pension plans, including temporary funding relief and
Pension Benefit Guaranty Corporation (PBGC) premium
increases, which reduces the level of minimum required
contributions in the near-term but generally increases
contributions in the long-run and increases the operational
costs of running a pension plan. In 2014, the Highway and
Transportation Funding Act (HATFA) was signed and
extended funding relief for an additional five years.
The qualified defined benefit pension plan was underfunded
by $162.4 million at December 31, 2018. Including the
impacts of MAP-21 and HATFA, NW Natural made cash
contributions totaling $15.5 million to its qualified defined
benefit pension plan for 2018. During 2019, NW Natural
expects to make contributions of approximately $11.0 million
to this plan.
Multiemployer Pension Plan
In addition to the NW Natural-sponsored defined benefit
plans presented above, prior to 2014 NW Natural
contributed to a multiemployer pension plan for its NGD
union employees known as the Western States Office and
Professional Employees International Union Pension Fund
(Western States Plan). The plan's employer identification
number is 94-6076144. Effective December 22, 2013, NW
95
Natural withdrew from the plan, which was a noncash
transaction. Vested participants will receive all benefits
accrued through the date of withdrawal. As the plan was
underfunded at the time of withdrawal, NW Natural was
assessed a withdrawal liability of $8.3 million, plus interest,
which requires NW Natural to pay $0.6 million each year to
the plan for 20 years beginning in July 2014. The cost of the
withdrawal liability was deferred to a regulatory account on
the balance sheet.
Payments were $0.6 million for 2018, and as of December
31, 2018 the liability balance was $6.8 million. For 2017 and
2016, contributions to the plan were $0.6 million and $0.6
million, respectively, which was approximately 4% to 6% of
the total contributions to the plan by all employer
participants in those years.
Defined Contribution Plan
NW Natural's Retirement K Savings Plan is a qualified
defined contribution plan under Internal Revenue Code
Sections 401(a) and 401(k). NW Natural contributions
totaled $6.5 million, $5.4 million, and $4.6 million for 2018,
2017, and 2016, respectively. The Retirement K Savings
Plan includes an Employee Stock Ownership Plan.
Deferred Compensation Plans
NW Natural's supplemental deferred compensation plans for
eligible officers and senior managers are non-qualified
plans. These plans are designed to enhance the retirement
savings of employees and to assist them in strengthening
their financial security by providing an incentive to save and
invest regularly.
Fair Value
Below is a description of the valuation methodologies used
for assets measured at fair value. In cases where NW
Natural's pension plan is invested through a collective trust
fund or mutual fund, the fund's market value is utilized.
Market values for investments directly owned are also
utilized.
U.S. EQUITY. These are non-published net asset value (NAV)
assets. The non-published NAV assets consist of
commingled trusts where NAV is not published but the
investment can be readily disposed of at NAV or market
value. The underlying investments in this asset class
includes investments primarily in U.S. common stocks.
INTERNATIONAL/GLOBAL EQUITY. These are Level 1 and
non-published NAV assets. The Level 1 asset is a mutual
fund, and the non-published NAV assets consist of
commingled trusts where the NAV/unit price is not published
but the investment can be readily disposed of at the NAV/
unit price. The mutual funds has a readily determinable fair
value, including a published NAV, and the commingled trusts
are valued at unit price. This asset class includes
investments primarily in foreign equity common stocks.
LIABILITY HEDGING. These are non-published NAV assets.
The non-published NAV assets consist of commingled trusts
where NAV is not published but the investment can be
readily disposed of at NAV or market value. The underlying
investments in this asset class include long duration fixed
income investments primarily in U.S. treasuries, U.S.
government agencies, municipal securities, mortgage-
backed securities, asset-backed securities, as well as U.S.
and international investment-grade corporate bonds.
OPPORTUNISTIC. These are non-published NAV assets
consisting of commingled trusts where the investments can
be readily disposed of at unit price, and a hedge fund of
funds where the valuation is not published. This hedge fund
of funds is winding down. Based on recent dispositions, NW
Natural believes the remaining investment is fairly valued.
The hedge fund of funds is valued at the weighted average
value of investments in various hedge funds, which in turn
are valued at the closing price of the underlying securities.
This asset class includes investments in emerging market
debt, leveraged loans, REITs, high yield bonds, a
commodities fund, and a hedge fund of funds.
ABSOLUTE RETURN STRATEGY. This is a non-published
NAV asset consisting of a hedge fund of funds where the
valuation is not published. This hedge fund of funds is
winding down. Based on recent dispositions, NW Natural
believes the remaining investment is fairly valued. The
hedge fund of funds is valued at the weighted average value
of investments in various hedge funds, which in turn are
valued at the closing price of the underlying securities. This
asset class primarily includes investments in common
stocks and fixed income securities.
CASH AND CASH EQUIVALENTS. These are Level 1 and non-
published NAV assets. The Level 1 assets consist of cash in
U.S. dollars, which can be readily disposed of at face value.
The non-published NAV assets represent mutual funds
without published NAV's but the investment can be readily
disposed of at the NAV. The mutual funds are valued at the
NAV of the shares held by the plan at the valuation date.
The preceding valuation methods may produce a fair value
calculation that is not indicative of net realizable value or
reflective of future fair values. Although we believe these
valuation methods are appropriate and consistent with other
market participants, the use of different methodologies or
assumptions to determine the fair value of certain
investments could result in a different fair value
measurement at the reporting date.
Investment securities are exposed to various financial risks
including interest rate, market, and credit risks. Due to the
level of risk associated with certain investment securities, it
is reasonably possible that changes in the values of NW
Natural's investment securities will occur in the near term
and such changes could materially affect NW Natural's
investment account balances and the amounts reported as
plan assets available for benefit payments.
The following tables present the fair value of NW Natural's plan assets, including outstanding receivables and liabilities, of NW
Natural's retirement trust fund:
In thousands
Investments
US equity
International / Global equity
Liability hedging
Opportunistic
Cash and cash equivalents
Total investments
Investments
US equity
International / Global equity
Liability hedging
Opportunistic
Cash and cash equivalents
Total investments
Receivables:
Accrued interest and dividend income
Due from broker for securities sold
Total receivables
Liabilities:
Due to broker for securities purchased
December 31, 2018
Level 1
Level 2
Level 3
Non-Published
NAV(1)
Total
$
— $
— $
— $
85,233
$
24,994
—
—
—
—
—
—
—
—
—
—
—
70,017
45,659
23,186
8,707
85,233
95,011
45,659
23,186
8,707
$
24,994
$
— $
— $
232,802
$
257,796
December 31, 2017
Level 1
Level 2
Level 3
Non-Published
NAV(1)
Total
$
— $
— $
— $
98,375
$
98,375
21,211
—
—
82
—
—
—
—
—
—
—
—
84,818
53,981
23,895
5,533
106,029
53,981
23,895
5,615
$
21,293
$
— $
— $
266,602
$
287,895
December 31,
2018
2017
$
$
$
1
—
1
$
$
— $
30
—
30
—
Total investment in retirement trust
287,925
(1) The fair value for these investments is determined using Net Asset Value per share (NAV) as of December 31, as a practical expedient, and
therefore they are not classified within the fair value hierarchy. These investments primarily consist of institutional investment products, for
which the NAV is generally not publicly available.
257,797
$
$
96
10. INCOME TAX
The following table provides a reconciliation between income taxes calculated at the statutory federal tax rate and the provision
for income taxes reflected in the NW Holdings and NW Natural statements of comprehensive income or loss for December 31:
Dollars in thousands
2018
2017
2016
2018
2017
2016
Income taxes at federal statutory rate
$ 19,222
$ 39,578
$ 36,901
$ 19,434
$ 39,624
$ 37,137
NW Holdings
NW Natural
Increase (decrease):
State income tax, net of federal
Differences required to be flowed-through by regulatory
commissions
Effect of the TCJA
Deferred tax rate differential post-TCJA
Other, net
4,927
5,066
4,844
4,982
5,072
4,858
1,302
—
(76)
2,357
(3,376)
—
2,357
1,302
—
—
—
(75)
2,357
(2,956)
—
2,357
—
—
(1,184)
(2,617)
(1,091)
(1,184)
(2,619)
(1,077)
Total provision for income taxes
$ 24,191
$ 41,008
$ 43,011
$ 24,459
$ 41,478
$ 43,275
Effective tax rate
26.4%
36.3%
40.8%
26.4%
36.6%
40.8%
The NW Holdings and NW Natural effective income tax
rates for 2018 compared to 2017 changed primarily as a
result of the lower federal corporate income tax rate
provided for by the TCJA. The effective tax rates for 2017
compared to 2016 changed primarily as a result of the lower
federal corporate income tax rate provided for by the TCJA
and NW Natural's increased benefits from the equity portion
of AFUDC and excess tax benefits related to stock based
compensation.
The provision for current and deferred income taxes consists of the following at December 31:
In thousands
Current
Federal
State
Deferred
Federal
State
NW Holdings
NW Natural
2018
2017
2016
2018
2017
2016
$
8,953
$
19,345
$
10,042
$
9,127
$
19,304
$
10,158
3,785
12,738
9,001
2,452
11,453
5,963
25,308
13,869
1,831
15,700
3,116
13,158
25,473
4,380
29,853
3,846
12,973
9,025
2,461
11,486
5,956
25,260
14,371
1,847
16,218
3,131
13,289
25,581
4,405
29,986
Income tax provision
$
24,191
$
41,008
$
43,011
$
24,459
$
41,478
$
43,275
The following table summarizes the tax effect of significant items comprising NW Holdings and NW Natural's deferred income tax
balances recorded at December 31:
In thousands
Deferred tax liabilities:
Plant and property
Pension and postretirement obligations
Income tax regulatory asset
Other
Total deferred income tax liabilities
Deferred income tax assets:
Income tax regulatory liability
Alternative minimum tax credit carryforward
Total deferred income tax assets
Total net deferred income tax liabilities
NW Holdings
NW Natural
2018
2017(1)
2018
2017
$
288,385
$
278,735
$
303,186
$
296,113
27,135
21,403
1,061
23,352
22,209
2,766
27,135
21,402
537
23,352
22,209
2,250
$
337,984
$
327,062
$
352,260
$
343,924
$
$
$
57,469
$
56,470
$
57,469
$
56,470
52
66
52
66
57,521
280,463
$
$
56,536
270,526
$
$
57,521
294,739
$
$
56,536
287,388
(1)
Amounts have been reclassified among categories to conform to current period presentation.
97
At December 31, 2018 and 2017, regulatory income tax
assets of $19.1 million and $21.3 million, respectively, were
recorded by NW Natural, a portion of which is recorded in
current assets. These regulatory income tax assets primarily
represent future rate recovery of deferred tax liabilities,
resulting from differences in NGD plant financial statement
and tax bases and NGD plant removal costs, which were
previously flowed through for rate making purposes and to
take into account the additional future taxes, which will be
generated by that recovery. These deferred tax liabilities,
and the associated regulatory income tax assets, are
currently being recovered through customer rates. At
December 31, 2018 and 2017, regulatory income tax assets
of $2.3 million and $0.9 million, respectively, were recorded
by NW Natural, representing future recovery of deferred tax
liabilities resulting from the equity portion of AFUDC.
At December 31, 2018 and 2017, deferred tax assets of
$57.5 million and $56.5 million, respectively, were recorded
by NW Natural representing the future income tax benefit
associated with the excess deferred income tax regulatory
liability recorded as a result of the lower federal corporate
income tax rate provided for by the TCJA. At December 31,
2018 and 2017, regulatory liability balances representing the
net tax benefit of the change in deferred taxes as a result of
the TCJA of $217.1 million and $213.3 million, respectively,
were recorded by NW Natural.
NW Natural’s natural gas utility rates include an allowance
to provide for the recovery of the anticipated provision for
income taxes incurred as a result of providing regulated
services. As a result of the 21 percent federal corporate
income tax rate enacted in 2017, NW Natural recorded an
additional regulatory liability in 2018 reflecting the estimated
net reduction in the provision for income taxes. This revenue
deferral is based on the estimated net benefit to customers
and includes a gross-up for income taxes. As of December
31, 2018, a regulatory liability of $8.2 million, including
accrued interest, was recorded to reflect this estimated
revenue deferral.
NW Holdings and NW Natural assess the available positive
and negative evidence to estimate if sufficient taxable
income will be generated to utilize their respective existing
deferred tax assets. Based upon this assessment, NW
Holdings and NW Natural determined that it is more likely
than not that all of their respective deferred tax assets
recorded as of December 31, 2018 will be realized.
Uncertain tax positions are accounted for in accordance with
accounting standards that require an assessment of the
anticipated settlement outcome of material uncertain tax
positions taken in a prior year, or planned to be taken in the
current year. Until such positions are sustained, the
uncertain tax benefits resulting from such positions would
not be recognized. No reserves for uncertain tax positions
were recorded as of December 31, 2018, 2017, or 2016.
NW Holdings files a consolidated U.S. federal income tax
return that includes NW Natural. Income tax expense is
allocated on a separate company basis.
The federal income tax returns for tax years 2014 and
earlier are closed by statute. The IRS Compliance
Assurance Process (CAP) examination of the 2015, and
98
2016 tax years have been completed. There were no
material changes to these returns as filed. The 2017 and
2018 tax years are currently under IRS CAP examination.
Our 2019 CAP application has been accepted by the IRS.
Under the CAP program, NW Holdings and NW Natural
work with the IRS to identify and resolve material tax
matters before the tax return is filed each year.
As of December 31, 2018, income tax years 2015 through
2018 remain open for state examination. The State of
Oregon is currently examining the Oregon corporate income
tax returns for tax years 2015, 2016, and 2017. No material
changes are anticipated as a result of this examination.
U.S. Federal TCJA Matters
On December 22, 2017, the TCJA was enacted and lowered
the U.S. federal corporate income tax rate to 21% from the
existing maximum rate of 35%, effective for the tax year
beginning January 1, 2018. The TCJA included specific
provisions related to regulated public utilities that provided
for the continued deductibility of interest expense and the
elimination of bonus tax depreciation for property both
acquired and placed in service on or after January 1, 2018.
Under pre-TCJA law, business interest was generally
deductible in the determination of taxable income. The TCJA
imposed a new limitation on the deductibility of net business
interest expense in excess of approximately 30 percent of
adjusted taxable income. Taxpayers operating in the trade
or business of a regulated utility are excluded from these
new interest expense limitations. Proposed U.S. Treasury
Regulations were published in November of 2018 which
provide a de minimis rule whereby if 90 percent or more of a
taxpayer's adjusted asset basis is allocable to regulated
utility activities, then all of the business interest expense of
that taxpayer is deemed to be excepted business interest of
the regulated utility activity and is thereby not limited under
the TCJA. As a result of the de minimis rule, NW Holdings
and NW Natural anticipate that business interest expense
will not be limited under the TCJA.
The TCJA generally provides for immediate full expensing
for qualified property both acquired and placed in service
after September 27, 2017 and before January 1, 2023. This
would generally provide for accelerated cost recovery for
capital investments. However, the definition of qualified
property excludes property used in the trade or business of
a regulated utility. Proposed U.S. Treasury Regulations were
published in August of 2018 which indicated that bonus tax
depreciation would not be available for regulated utility
activity assets acquired and placed in service by NW
Holdings or NW Natural on or after January 1, 2018, but
bonus tax depreciation would be available for regulated
utility activity assets acquired and placed in service by NW
Holdings or NW Natural before January 1, 2018.
The SEC staff previously issued Staff Accounting Bulletin
118, which provided guidance on accounting for the tax
effects of the TCJA. SAB 118 provided a measurement
period that should not extend beyond one year from the
TCJA enactment date for companies to complete the
accounting for the TCJA under ASC 740. To the extent that
a company’s accounting for certain income tax effects of the
TCJA was incomplete but a reasonable estimate could be
made, a company would record a provisional estimate in the
financial statements. NW Natural previously disclosed that
due to uncertainties with respect to the availability of bonus
tax depreciation for regulated utility activity assets under the
TCJA that the effects of bonus tax depreciation for assets
placed in service after September 27, 2017 but before
January 1, 2018 had not been recorded. The determination
to exclude all assets placed in service after September 27,
2017 but before January 1, 2018 from bonus tax
depreciation was provisional as provided for under SAB 118.
As a result of the Proposed Regulations on bonus tax
depreciation published in August of 2018, NW Natural
revised the provisional estimate of deferred taxes and
11. PROPERTY, PLANT, AND EQUIPMENT
The following table sets forth the major classifications of
property, plant, and equipment and accumulated
depreciation at December 31:
In thousands
NW Natural:
NGD plant in service
NGD work in progress
Less: Accumulated depreciation
NGD plant, net
Other plant in service
Other construction work in progress
Less: Accumulated depreciation
Other plant, net(1)
2018
2017
$3,134,122
$2,975,217
204,978
974,252
159,924
942,879
2,364,848
2,192,262
66,009
5,330
18,603
52,736
64,997
4,122
17,406
51,713
Total property, plant, and equipment
$2,417,584
$2,243,975
Other (NW Holdings):
Other plant in service
Less: Accumulated depreciation
Other plant, net(1)
NW Holdings:
$
4,051
$
263
3,788
375
192
183
Total property, plant, and equipment
$2,421,372
$2,244,158
NW Natural and NW Holdings:
income taxes payable to reflect the effects of bonus tax
depreciation for assets placed in service after September
27, 2017 but before January 1, 2018. In the third quarter,
NW Natural recognized increases to prepaid income tax of
$7.4 million, deferred income tax liability of $4.1 million, and
regulatory liability of $3.3 million. In the fourth quarter, NW
Natural recognized additional increases to prepaid income
tax of $0.5 million, deferred income tax liability of $0.3
million, and regulatory liability of $0.2 million. The
accounting for income tax effects of the TCJA is now
complete.
Accumulated depreciation does not include the accumulated
provision for asset removal costs of $380.5 million and
$360.9 million at December 31, 2018 and 2017,
respectively. These accrued asset removal costs are
reflected on the balance sheet as regulatory liabilities. See
Note 2. During 2018 and 2017, no equipment was acquired
under capital leases.
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.
The weighted average depreciation rate for NGD assets
was 2.8% during 2018, 2017, and 2016. The weighted
average depreciation rate for assets not related to NGD was
2.2% in 2018, 1.9% in 2017, and 2.0% in 2016.
Capital expenditures in accrued liabilities
(1) NW Natural's 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 18 for further discussion.
23,676
$
$
34,761
99
12. GAS RESERVES
NW Natural has invested $188 million through the gas
reserves program in the Jonah Field located in Wyoming as
of December 31, 2018. Gas reserves are stated at cost, net
of regulatory amortization, with the associated deferred tax
benefits recorded as liabilities in the consolidated balance
sheets. The investment in gas reserves provides long-term
price protection for 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.
NW Natural entered into the original agreements with
Encana in 2011 under which NW Natural holds working
interests in certain sections of the Jonah Field. Gas
produced in these sections is sold at prevailing market
prices, and revenues from such sales, net of associated
operating and production costs and amortization, are
credited to the NGD cost of gas. 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.
In March 2014, NW Natural amended the original gas
reserves agreement in order to facilitate Encana's proposed
sale of its interest in the Jonah field to Jonah Energy. Under
the amendment, NW Natural ended the drilling program
with Encana, but increased its working interests in its
assigned sections of the Jonah field. NW Natural also
retained the right to invest in new wells with Jonah Energy.
Under the amended agreement there is still the option to
invest in additional wells on a well-by-well basis with drilling
costs and resulting gas volumes shared at NW Natural's
amended proportionate working interest for each well in
13. INVESTMENTS
Investments include financial investments in life insurance
policies, and equity method investments in certain
partnerships and limited liability companies. The following
table summarizes other investments at December 31:
In thousands
2018
2017
2018
2017
NW Holdings
NW Natural
Investments in life
insurance policies
Investments in gas
pipeline
Other
Total other
investments
$ 49,922
$ 50,792
$49,922
$ 50,792
13,571
13,669
65
1,902
—
—
—
1,862
$ 63,558
$ 66,363
$49,922
$ 52,654
Investment in Life Insurance Policies
NW Natural has invested in key person life insurance
contracts to provide an indirect funding vehicle for certain
long-term employee and director benefit plan liabilities. The
amount in the above table is reported at cash surrender
value, net of policy loans.
which it invests. NW Natural elected to participate in some
of the additional wells drilled in 2014, but did not participate
in additional wells since 2014. However, there may be the
opportunity to participate in more wells in the future.
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.
Gas reserves acted to hedge the cost of gas for
approximately 6%, 6% and 8% of NGD gas supplies for the
years ended December 31, 2018, 2017, and 2016
respectively.
The following table outlines NW Natural's net gas reserves
investment at December 31:
In thousands
2018
2017
Gas reserves, current
$ 16,647
$
15,704
Gas reserves, non-current
170,660
171,832
Less: Accumulated amortization
Total gas reserves(1)
Less: Deferred taxes on gas reserves
104,463
82,844
20,071
87,779
99,757
22,712
Net investment in gas reserves
$ 62,773
$
77,045
(1) The net investment in additional wells included in total gas
reserves was $4.8 million and $5.8 million at December 31,
2018 and 2017, 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.
Investments in Gas Pipeline
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 on 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
December 31, 2018 and 2017.
100
Impairment Analysis
Investments in nonconsolidated entities accounted for under
the equity method are reviewed for impairment at each
reporting period and following updates to our corporate
planning assumptions. If it is determined a loss in value is
other than temporary, a charge is recognized for the
difference between the investment’s carrying value and its
estimated fair value. Fair value is based on quoted market
prices when available or on the present value of expected
future cash flows. Differing assumptions could affect the
timing and amount of a charge recorded in any period.
In 2011, TWP withdrew its original application with the
FERC for a proposed natural gas pipeline in Oregon and
informed FERC that it intended to re-file an application to
reflect changes in the project scope aligning the project with
the region’s current and future gas infrastructure needs.
TWP continues working with customers in the Pacific
14. 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. Falls Water became a wholly-owned
subsidiary of NWN Water and marked its first acquisition in
the water services 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 serves approximately 5,300
connections.
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,
15. 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
Northwest to further understand their gas transportation
needs and determine the commercial support for a revised
pipeline proposal. A new FERC certificate application is
expected to be filed to reflect a revised scope based on
these regional needs.
NW Holdings' equity investment was not impaired at
December 31, 2018 as the fair value of expected cash flows
from planned development exceeded NW Holdings'
remaining equity investment of $13.4 million at December
31, 2018. However, if NW Holdings learns that the project is
not viable or will not go forward, it could be required to
recognize a maximum charge of up to approximately $13.4
million based on the current amount of the equity
investment, net of cash and working capital at TWP. NW
Holdings will continue to monitor and update the impairment
analysis as required.
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 goodwill of $6.4 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. No intangible assets aside from
goodwill were acquired. See Note 2 for goodwill impairment
information.
Other Acquisitions
During 2018, in addition to the Falls Water acquisition,
NWN Water completed three 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.
As a result of all acquisitions completed, total goodwill was
$9.0 million as of December 31, 2018.
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
101
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:
In thousands
Natural gas (in therms):
Financial
Physical
Foreign exchange
At December 31,
2018
2017
408,850
429,100
472,275
520,268
$ 6,936
$ 7,669
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 the 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 year 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.
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:
In thousands
Benefit (expense) to cost of gas
Operating revenues
Amounts deferred to regulatory accounts on balance sheet
Total gain (loss) in pre-tax earnings
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. Net gains of $7.4 million and net
losses of $7.8 million were realized for the years ended
December 31, 2018 and 2017, respectively, from the
settlement of natural gas financial derivative contracts.
Realized gains and losses are recorded in cost of gas,
deferred through regulatory accounts, and amortized
through customer rates in the following year.
Credit Risk Management of Financial Derivatives
Instruments
No collateral was posted with or by NW Natural
counterparties as of December 31, 2018 or 2017. 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 2018 or 2017. The collateral call exposure is set forth
December 31, 2018
December 31, 2017
Natural gas
commodity
Foreign
exchange
Natural gas
commodity
Foreign
exchange
$
$
(1,239) $
1,660
(284) $
—
(26,000) $
(1,021)
(211)
210
$
284
26,665
— $
(356) $
107
—
(107)
—
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 on current commodity financial swap and option
contracts outstanding, which reflect unrealized losses of
$7.8 million at December 31, 2018, we have estimated the
level of collateral demands, with and without potential
adequate assurance calls, using current gas prices and
various credit downgrade rating scenarios for NW Natural as
follows:
Credit Rating Downgrade Scenarios
(Current
Ratings)
A+/A3
BBB+/
Baa1
BBB/
Baa2
BBB-/
Baa3
Specu-
lative
$
— $ — $ — $(3,940) $ (6,059)
—
—
— (3,940)
(4,452)
In thousands
With
Adequate
Assurance
Calls
Without
Adequate
Assurance
Calls
102
NW Natural's financial derivative instruments are subject to
master netting arrangements; however, they are presented
on a gross basis in NW Natural's 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.
spreads, bond market credit spreads, financial condition,
government actions, and market news. A Monte-Carlo
simulation model is used to estimate the change in credit
and liquidity risk from the volatility of natural gas prices. The
results of the model are used to establish earnings-at-risk
trading limits. NW Natural's credit risk for all outstanding
financial derivatives at December 31, 2018 extends to
October 31, 2021.
If netted by counterparty, NW Natural's derivative position
would result in an asset of $3.6 million and a liability of $9.3
million as of December 31, 2018, and an asset of $2.9
million and a liability of $23.3 million as of December 31,
2017.
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. NW Natural
utilizes master netting arrangements through International
Swaps and Derivatives Association contracts to minimize
this risk along with collateral support agreements with
counterparties based on their credit ratings. In certain
cases, NW Natural requires guarantees or letters of credit
from counterparties to meet its minimum credit requirement
standards.
NW Natural's financial derivatives policy requires
counterparties to have a certain investment-grade credit
rating at the time the derivative instrument is entered into,
and the policy specifies limits on the contract amount and
duration based on each counterparty’s credit rating. NW
Natural does not speculate with derivatives; instead,
derivatives are used to hedge exposure above risk tolerance
limits. Any increase in market risk created by the use of
derivatives should be offset by the exposures they modify.
We actively monitor NW Natural's derivative credit exposure
and place counterparties on hold for trading purposes or
require other forms of credit assurance, such as letters of
credit, cash collateral, or guarantees as circumstances
warrant. The ongoing assessment of counterparty credit risk
includes consideration of credit ratings, credit default swap
We could become materially exposed to credit risk with one
or more of our counterparties if natural gas prices
experience a significant increase. If a counterparty were to
become insolvent or fail to perform on its obligations, we
could suffer a material loss; however, we would expect such
a loss to be eligible for regulatory deferral and rate recovery,
subject to a prudence review. All of our existing
counterparties currently have investment-grade credit
ratings.
Fair Value
In accordance with fair value accounting, non-performance
risk is included in calculating fair value adjustments. This
includes a credit risk adjustment based on the credit
spreads of NW Natural's counterparties when it is in an
unrealized gain position, or on NW Natural's own credit
spread when it is in an unrealized loss position. The inputs
in the valuation models include natural gas futures, volatility,
credit default swap spreads, and interest rates. Additionally,
the assessment of non-performance risk is generally derived
from the credit default swap market and from bond market
credit spreads. The impact of the credit risk adjustments for
all outstanding derivatives was immaterial to the fair value
calculation at December 31, 2018. As of December 31, 2018
and 2017, the net fair value was a liability of $5.7 million and
a liability of $20.3 million, respectively, using significant
other observable, or Level 2, inputs. No Level 3 inputs were
used in the derivative valuations, and there were no
transfers between Level 1 or Level 2 during the years ended
December 31, 2018 and 2017.
103
16. COMMITMENTS AND CONTINGENCIES
Leases
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
2019
2020
2021
2022
2023
Thereafter
Total
Minimum lease
payments
$
$
5,368
4,812
7,077
7,223
7,304
149,881
181,665
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 lease in 2020.
Payments under the new lease are expected to commence
in 2020. Total estimated base rent payments over the life of
the lease are approximately $160 million and have been
included in the table above. There is an option to extend the
term of the lease for two additional seven-year periods.
Additionally, the lease was analyzed under the lease
standard in effect at the time of signing in consideration of
build-to-suit lease accounting implications, and NW Natural
concluded that it was the accounting owner of the asset
during construction. As a result, NW Natural recognized
$26.0 million and $0.5 million in property, plant and
equipment and an obligation in other non-current liabilities
for the same amount in its consolidated balance sheet at
December 31, 2018 and 2017, respectively.
17. ENVIRONMENTAL MATTERS
Gas Purchase and Pipeline Capacity Purchase and
Release Commitments
NW Natural has signed agreements providing for the
reservation of firm pipeline capacity under which it is
required to make fixed monthly payments for contracted
capacity. The pricing component of the monthly payment is
established, subject to change, by U.S. or Canadian
regulatory bodies. In addition, NW Natural has entered into
long-term sale agreements to release firm pipeline capacity.
NW Natural also enters into short-term and long-term gas
purchase agreements.
The aggregate amounts of these agreements were as
follows at December 31, 2018:
In thousands
2019
2020
2021
2022
2023
Thereafter
Total
Less: Amount
representing
interest
Total at present
value
Gas
Purchase
Agreements
Pipeline
Capacity
Purchase
Agreements
Pipeline
Capacity
Release
Agreements
$
144,500
$
78,449
$
2,776
2,313
—
—
—
149,589
76,613
66,656
61,075
60,619
580,022
923,434
4,272
3,560
—
—
—
—
7,832
1,314
201,224
183
$
148,275
$
722,210
$
7,649
Total payments for fixed charges under capacity purchase
agreements were $82.6 million for 2018, $85.3 million for
2017, and $85.0 million for 2016. Included in the amounts
were reductions for capacity release sales of $4.3 million for
2018, $4.5 million for 2017, and $4.5 million for 2016. In
addition, per-unit charges are required to be paid based on
the actual quantities shipped under the agreements. In
certain take-or-pay purchase commitments, annual
deficiencies may be offset by prepayments subject to
recovery over a longer term if future purchases exceed the
minimum annual requirements.
Environmental Matters
Refer to Note 17 for a discussion of environmental
commitments and contingencies.
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 mechanism in place to collect 96.68% of
remediation costs from Oregon customers, and NW Natural
is allowed to defer environmental remediation costs
allocated to customers in Washington annually until they are
reviewed for prudence at a subsequent proceeding.
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
104
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.
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 at December 31:
In thousands
Portland Harbor site:
Gasco/Siltronic Sediments
Other Portland Harbor
Gasco/Siltronic Upland site
Central Service Center site
Front Street site
Oregon Steel Mills
Total
Current Liabilities
Non-Current Liabilities
2018
2017
2018
2017
$
5,117
$
2,683
$
44,351
$
45,346
2,600
13,983
10
11,402
—
1,949
13,422
25
1,009
—
6,273
44,830
—
3
179
4,163
47,835
—
10,757
179
$
33,112
$
19,088
$
95,636
$
108,280
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 sites. NW Natural is one of over
one hundred PRPs to the Superfund site. In January 2017,
the EPA issued its Record of Decision, which selects the
remedy for the clean-up of the Portland Harbor site
(Portland Harbor ROD). The Portland Harbor ROD
estimates the present value total cost at approximately
$1.05 billion with an accuracy between -30% and +50% of
actual costs.
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 the issuance of the Portland Harbor ROD, NW
Natural has not modified any of the recorded liabilities at this
time.
NW Natural manages its liability related to the Superfund
site as two distinct remediation projects, the Gasco/Siltronic
Sediments and Other Portland Harbor projects.
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
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
105
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-up range from
$49.5 million to $350 million. NW Natural has recorded a
liability of $49.5 million for the sediment clean-up, which
reflects the low end of the range. At this time, we believe
sediments at this site represent the largest portion of NW
Natural's 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-up costs
(including downstream petroleum contamination), for which
allocations among the PRPs have not yet been determined.
NW Natural and other parties have signed a cooperative
agreement with the Portland Harbor Natural Resource
Trustee council to participate in a phased NRD assessment
to estimate liabilities to support an early restoration-based
settlement of NRD claims. One member of this Trustee
council, the Yakama Nation, withdrew from the council in
2009, and in 2017, filed suit against NW Natural and 29
other parties seeking remedial costs and NRD assessment
costs associated with the Portland Harbor, 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 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
Magistrate Judge has recommended granting NW Natural
and certain other defendants' motion to stay the case. NW
Natural has recorded a liability for NRD claims which is at
the low end of the range of the potential liability; the high
end of the range cannot be reasonably estimated at this
time. The NRD liability is not included in the aforementioned
range of costs provided in the Portland Harbor ROD.
GASCO UPLANDS SITE. 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-Up 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, 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.
106
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 costs. NW Natural cannot
estimate the high end of the range at this time due to the
uncertainty associated with the duration of the operation of
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 cannot 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, a 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
$0.9 million for additional studies and design costs as well
as regulatory oversight throughout the clean-up. NW Natural
plans to complete the remedial design in early 2019 and
expects to construct the remedy during 2019.
NW Natural received total environmental insurance
proceeds of approximately $150.0 million as a result of
settlements from litigation that was dismissed in July 2014.
Under the 2015 OPUC Order, one-third of the Oregon
allocated proceeds were applied to costs deferred through
2012 with the remaining two-thirds applied to costs at a rate
of $5.0 million per year plus interest over the following 20
years. NW Natural accrues interest on the insurance
proceeds in the customer’s favor at a rate equal to the five-
year treasury rate plus 100 basis points. As of December
31, 2018, NW Natural has applied $73.2 million of insurance
proceeds to prudently incurred remediation costs allocated
to Oregon.
The following table presents information regarding the total
regulatory asset deferred as of December 31:
In thousands
Deferred costs and interest (1)
Accrued site liabilities (2)
2018
2017
$
41,883
$
45,546
128,369
126,950
Insurance proceeds and interest
(88,502)
(94,170)
Total regulatory asset deferral(1)
$
81,750
$
78,326
5,601
76,149
6,198
72,128
Current regulatory assets(3)
Long-term regulatory assets(3)
(1)
Includes pre-review and post-review deferred costs, amounts
currently in amortization, and interest, net of amounts collected
from customers.
(2) Excludes 3.32% of the Front Street site liability, or $0.4 million
in 2018 and $0.4 million in 2017, as the OPUC only allows
recovery of 96.68% of costs for those sites allocable to
Oregon, including those that historically served only Oregon
customers.
(3) Environmental costs relate to specific sites approved for
regulatory deferral by the OPUC and WUTC. In Oregon, NW
Natural earns a carrying charge on cash amounts paid,
whereas amounts accrued but not yet paid do not earn a
carrying charge until expended. NW Natural also accrues a
carrying charge on insurance proceeds for amounts owed to
customers. In Washington, a carrying charge related to
deferred amounts will be determined in a future proceeding.
Current environmental costs represent remediation costs
management expects to collect from customers in the next 12
months. Amounts included in this estimate are still subject to a
prudence and earnings test review by the OPUC and do not
include the $5.0 million tariff rider. The amounts allocable to
Oregon are recoverable through 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), 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 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.
Oregon Steel Mills site. Refer to the “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. In the February 2015 Order establishing the SRRM
(2015 Order), the OPUC addressed outstanding issues
related to the SRRM, which required NW Natural to forego
the collection of $15 million out of approximately $95 million
in total environmental remediation expenses and associated
carrying costs.
As a follow-up to the 2015 Order, the OPUC issued an
additional Order in January 2016 (2016 Order) regarding the
SRRM implementation in which the OPUC: (1) disallowed
the recovery of $2.8 million of interest earned on the
previously disallowed environmental expenditure amounts;
(2) clarified the state allocation of 96.68% of environmental
remediation costs for all environmental sites allocable to
Oregon; and (3) confirmed NW Natural's treatment of $13.8
million of expenses put into the SRRM amortization account
was correct and in compliance with prior OPUC orders. As a
result of the 2016 Order, NW Natural recognized a $3.3
million non-cash charge in the first quarter, of which $2.8
million is reflected in other income and expense, net and
$0.5 million is included in operations and maintenance
expense.
COLLECTIONS FROM OREGON CUSTOMERS. Under the
SRRM collection process there are three types of deferred
environmental remediation expense:
• Pre-review - This class of costs represents remediation
spend that has not yet been deemed prudent by the
OPUC. Carrying costs on these remediation expenses are
recorded at NW Natural's authorized cost of capital. NW
Natural anticipates the prudence review for annual costs
and approval of the earnings test prescribed by the OPUC
to occur by the third quarter of the following year.
• Post-review - This class of costs represents remediation
spend that has been deemed prudent and allowed after
applying the earnings test, but is not yet included in
amortization. NW Natural earns a carrying cost on these
amounts at a rate equal to the five-year treasury rate plus
100 basis points.
• Amortization - This class of costs represents amounts
included in current customer rates for collection and is
generally calculated as one-fifth of the post-review
deferred balance. NW Natural earns a carrying cost equal
to the amortization rate determined annually by the
OPUC, which approximates a short-term borrowing rate.
In addition to the collection amount noted above, the Order
also provides for the annual collection of $5.0 million from
Oregon customers through a tariff rider. As NW Natural
collects amounts from customers, it recognizes these
collections as revenue and separately amortizes an equal
and offsetting amount of its deferred regulatory asset
balance through the environmental remediation operating
expense line shown separately in the operating expense
section of the income statement.
107
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 its future
remediation costs, to consider whether adjustments to the
mechanism may be appropriate. NW Natural filed an update
with the OPUC in March 2018 and recommended no
changes.
WASHINGTON DEFERRAL. In Washington, cost recovery
and carrying charges on amounts deferred for costs
associated with services provided to Washington customers
will be determined in a future proceeding.
Legal Proceedings
NW Holdings is not currently party to any direct claims or
litigation, though in the future it may be subject to claims
and litigation arising in the ordinary course of business.
NW Natural is subject to claims and litigation arising in the
ordinary course of business. 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.
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. 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.
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.
OREGON STEEL MILLS SITE. In 2004, NW Natural was
served with a third-party complaint by the Port of Portland
(the Port) in a Multnomah County Circuit Court case,
Oregon Steel Mills, Inc. v. The Port of Portland. The Port
alleges that in the 1940s and 1950s petroleum wastes
generated by NW Natural's predecessor, Portland Gas &
Coke Company, and 10 other third-party defendants, were
disposed of in a waste oil disposal facility operated by the
United States or Shaver Transportation Company on
property then owned by the Port and now owned by Evraz
Oregon Steel Mills. The complaint seeks contribution for
unspecified past remedial action costs incurred by the Port
regarding the former waste oil disposal facility as well as a
declaratory judgment allocating liability for future remedial
action costs. No date has been set for trial. In August 2017,
the case was stayed pending outcome of the Portland
Harbor allocation process or other mediation. Although the
final outcome of this proceeding cannot be predicted with
certainty, NW Natural and NW Holdings do not expect the
ultimate disposition of this matter will have a material effect
on NW Natural's or NW Holdings' financial condition, results
of operations, or cash flows.
For additional information regarding other commitments and
contingencies, see Note 16.
We expect the transaction to close in 2019. The closing of
the transaction is subject to approval by the CPUC,
satisfaction of representations, warranties and covenants of
the Agreement, and other customary closing conditions. 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 expected to rule
on the settlement agreement within 90 days of its filing, but
may grant further time for public comment. We expect an
order on this matter by the end of June.
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 separate 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 our
continuing operations.
108
The following table presents the carrying amounts of the
major components of Gill Ranch that are classified as
discontinued operations assets and liabilities on NW
Holdings' consolidated balance sheets:
The following table presents the operating results of Gill
Ranch, which was historically reported within the gas
storage segment, and is presented net of tax on NW
Holdings' consolidated statements of comprehensive
income:
In thousands
Assets:
NW Holdings
Discontinued Operations
2018
2017
Accounts receivable
$
Inventories
Other current assets
390
685
333
$
2,126
396
535
Property, plant, and equipment
11,621
10,816
Less: Accumulated depreciation
Other non-current assets
Discontinued operations -
current assets
Discontinued operations - non-
current assets
Total discontinued operations
assets
7
247
—
1
13,269
3,057
—
10,817
$
13,269
$
13,874
Liabilities:
Accounts payable
Other current liabilities
$
873
307
$
1,287
306
Other non-current liabilities
11,779
12,043
Discontinued operations -
current liabilities
Discontinued operations - non-
current liabilities
12,959
1,593
—
12,043
Total discontinued operations
liabilities
13,636
(1) The total assets and liabilities of Gill Ranch are classified as
current as of December 31, 2018 because it is probable that
the sale will be completed within one year.
12,959
$
$
In thousands, except per
share data
Revenues
Expenses
Operations and
maintenance
General taxes
Depreciation and
amortization
Other expenses and
interest
Impairment expense
NW Holdings Discontinued
Operations
2018
2017
2016
$
3,579
$
7,135
$
7,794
5,771
479
430
609
—
7,245
1,373
6,643
1,295
4,525
4,685
975
192,478
992
—
Total expenses
7,289
206,596
13,615
Loss from discontinued
operations before income
tax
Income tax benefit(1)
Loss from discontinued
operations, net of tax
Loss from discontinued
operations per share of
common stock:
(3,710)
(199,461)
(968)
(71,765)
(5,821)
(2,297)
$
(2,742) $(127,696) $
(3,524)
Basic
Diluted
$
$
(0.10) $
(4.45) $
(0.09) $
(4.44) $
(0.13)
(0.13)
(1)
2017 income tax benefit includes approximately $18 million of
tax benefit from the enactment of the TCJA. The TCJA was
enacted December 22, 2017 and resulted in the federal tax
rate changing from 35% to 21%.
109
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:
In thousands, except per
share data
Revenues
Expenses
Operations and
maintenance
General taxes
Depreciation and
amortization
Other expenses and
interest
Impairment expense
Total expenses
Loss from discontinued
operations before
income tax
Income tax benefit(1)
Loss from discontinued
operations, net of tax
(1)
NW Natural Discontinued Operations
2018
2017
2016
$
3,016
$
7,360
$
8,018
4,151
448
420
342
—
5,361
7,423
1,410
7,387
1,317
4,555
4,714
650
192,478
206,516
1,097
—
14,515
(2,345)
(199,156)
(622)
(71,813)
(6,497)
(2,557)
$
(1,723) $ (127,343) $
(3,940)
2017 income tax benefit includes approximately $18 million of
tax benefit from the enactment of the TCJA. The TCJA was
enacted December 22, 2017 and resulted in the federal tax
rate changing from 35% to 21%.
NW Natural
As part 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.
See Note 1 for additional information. 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 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
2017
$
$
$
In thousands
Assets:
Cash
Accounts receivable
Intercompany receivables
Inventories
Other current assets
Property, plant, and equipment
Less: Accumulated depreciation
Other investments
Other non-current assets
Discontinued operations -
current assets
Discontinued operations - non-
current assets
Total discontinued operations
assets
Liabilities:
Accounts payable
Intercompany payables
Other current liabilities
Deferred tax liabilities
Other non-current liabilities
Discontinued operations -
current liabilities
Discontinued operations - non-
current liabilities
Total discontinued operations
liabilities
$
362
2,126
3,664
396
622
11,191
192
13,710
—
7,170
24,709
31,879
1,954
266
345
(16,862)
12,130
2,565
(4,732)
(2,167)
110
NORTHWEST NATURAL HOLDING COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
NW Holdings
Quarter ended(1)
In thousands, except per share data
March 31
June 30
September 30
December 31
2018
Operating revenues
Net income (loss) from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Average common shares outstanding:
Basic
Diluted
Earnings (loss) from continuing operations per share of
common stock:
Basic
Diluted
Loss from discontinued operations per share of common
stock:
Basic
Diluted
Earnings (loss) per share of common stock:
Basic
Diluted
2017
Operating revenues
Net income (loss) from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Average common shares outstanding:
Basic
Diluted
Earnings (loss) from continuing operations per share of
common stock:
Basic
Diluted
Loss from discontinued operations per share of common
stock:
Basic
Diluted
Earnings (loss) per share of common stock:
Basic
Diluted
$
263,635
$
124,567
$
91,239
$
42,011
(474)
41,537
28,753
28,803
1.46
1.46
(0.02)
(0.02)
1.44
1.44
(339)
(659)
(998)
28,791
28,791
(0.01)
(0.01)
(0.02)
(0.02)
(0.03)
(0.03)
(11,144)
(650)
(11,794)
28,815
28,815
(0.39)
(0.39)
(0.02)
(0.02)
(0.41)
(0.41)
$
295,724
$
134,476
$
86,212
$
41,397
(1,087)
40,310
28,633
28,723
1.45
1.44
(0.04)
(0.04)
1.41
1.40
4,075
(1,346)
2,729
28,648
28,717
0.14
0.14
(0.04)
(0.04)
0.10
0.10
(7,887)
(608)
(8,495)
28,678
28,678
(0.28)
(0.28)
(0.02)
(0.02)
(0.30)
(0.30)
226,702
36,783
(959)
35,824
28,851
28,940
1.27
1.27
(0.03)
(0.03)
1.24
1.24
238,626
34,488
(124,655)
(90,167)
28,716
28,797
1.20
1.20
(4.34)
(4.33)
(3.14)
(3.13)
(1) Quarterly earnings (loss) per share are based upon the average number of common shares outstanding during each quarter. Variations in
earnings between quarterly periods are due primarily to the seasonal nature of our business.
111
NORTHWEST NATURAL GAS COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In thousands
2018
Operating revenues
Net income (loss) from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
2017
Operating revenues
Net income (loss) from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
NW Natural
Quarter ended
March 31
June 30
September 30
December 31
$
263,635
$
124,563
$
91,227
$
42,014
(477)
41,537
(271)
(727)
(998)
(11,275)
(519)
(11,794)
$
295,668
$
134,420
$
86,157
$
41,438
(1,128)
40,310
4,072
(1,343)
2,729
(7,876)
(619)
(8,495)
226,146
37,581
—
37,581
238,793
34,086
(124,253)
(90,167)
112
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF NORTHWEST NATURAL
HOLDING COMPANY
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(PARENT COMPANY ONLY)
In thousands
Operating expenses:
Operations and maintenance
Total operating expenses
Loss from operations
Earnings from investment in subsidiaries, net of tax
Other income (expense), net
Interest expense, net
Income before income taxes
Income tax expense (benefit)
Net income
See Notes to Condensed Financial Statements
Inception through
December 31,
2018
$
$
838
838
(838)
36,469
36
53
35,614
(225)
35,839
113
As of December 31,
2018
$
$
$
$
4,011
2,796
6,000
3,078
15,885
754,971
65
310
755,346
771,231
168
9,166
32
9,366
(1)
7
7
739,722
22,137
761,859
771,231
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
In thousands
Assets:
Current assets:
Cash and cash equivalents
Receivables from affiliates
Income taxes receivable
Other current assets
Total current assets
Non-current assets:
Investments in subsidiaries
Other investments
Other non-current assets
Total non-current assets
Total assets
Liabilities and equity:
Current liabilities:
Accounts payable
Payables to affiliates
Interest accrued
Total current liabilities
Long-term debt
Deferred credits and other non-current liabilities:
Deferred tax liabilities
Total deferred credits and other non-current liabilities
Equity:
Common stock
Retained earnings
Total equity
Total liabilities and equity
See Notes to Condensed Financial Statements
114
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
In thousands
Operating activities:
Net income
Adjustments to reconcile net income to cash used in operations:
Equity in earnings of subsidiaries, net of tax
Deferred income taxes
Other
Changes in assets and liabilities:
Receivables, net
Income and other taxes
Accounts payable
Interest accrued
Other, net
Cash used in operating activities
Investing activities:
Contributions to subsidiaries
Cash used in investing activities
Financing activities:
Cash dividend payments on common stock
Capital contributions
Other
Cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See Notes to Condensed Financial Statements
Inception through
December 31,
2018
$
35,839
(36,469)
7
15
(585)
(9,034)
9,304
32
(44)
(935)
(1,804)
(1,804)
(12,923)
20,000
(327)
6,750
4,011
—
4,011
$
115
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
NW Holdings is an energy services holding company that
conducts substantially all of its business operations through
its subsidiaries, particularly NW Natural. These condensed
financial statements and related footnotes have been
prepared in accordance with Rule 12-04, Schedule I of
Regulation S-X. These financial statements, in which NW
Holdings' subsidiaries have been included using the equity
method, should be read in conjunction with the
consolidated financial statements and notes thereto of NW
Holdings included in Item 8 of this Form 10-K.
Equity earnings of subsidiaries included earnings from NW
Natural of $36.5 million for the year ended December 31,
2018.
2. DEBT
For information concerning NW Holdings' debt obligations,
see Note 8 to the consolidated financial statements
included in Item 8 of this report.
116
NORTHWEST NATURAL HOLDING COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A
COLUMN B
COLUMN C
Additions
COLUMN D
COLUMN E
Deductions
In thousands (year ended December 31)
2018
Reserves deducted in balance sheet from
assets to which they apply:
Allowance for uncollectible accounts
2017
Reserves deducted in balance sheet from
assets to which they apply:
Allowance for uncollectible accounts
2016
Reserves deducted in balance sheet from
assets to which they apply:
Allowance for uncollectible accounts
$
$
$
Balance at
beginning of
period
Charged to
costs and
expenses
Charged to
other accounts
Net write-offs
Balance at end
of period
956
$
680
$
— $
659
$
977
1,290
$
865
$
— $
1,199
$
956
870
$
1,246
$
— $
826
$
1,290
NORTHWEST NATURAL GAS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A
COLUMN B
COLUMN C
Additions
COLUMN D
COLUMN E
Deductions
In thousands (year ended December 31)
2018
Reserves deducted in balance sheet from
assets to which they apply:
Allowance for uncollectible accounts
2017
Reserves deducted in balance sheet from
assets to which they apply:
Allowance for uncollectible accounts
2016
Reserves deducted in balance sheet from
assets to which they apply:
Allowance for uncollectible accounts
$
$
$
Balance at
beginning of
period
Charged to
costs and
expenses
Charged to
other accounts
Net write-offs
Balance at end
of period
956
$
678
$
— $
659
$
975
1,290
$
865
$
— $
1,199
$
956
870
$
1,246
$
— $
826
$
1,290
117
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 internal control over financial reporting that occurred
during the quarter ended December 31, 2018 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., Exhibit 31b.,
Exhibit 31c. and Exhibit 31d. should be considered in light
of, and read together with, the information set forth in this
Item 9(a).
ITEM 9B. OTHER INFORMATION
None.
118
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The "Information Concerning Nominees and Continuing Directors", "Corporate Governance", and "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in NW Holdings' definitive Proxy Statement for the 2019 Annual Meeting of
Shareholders is hereby incorporated by reference.
PART III
Name
David H. Anderson*
Age at
Dec. 31, 2018
57
Frank H. Burkhartsmeyer*
Lea Anne Doolittle(3)
James R. Downing
Shawn M. Filippi*
Kimberly A. Heiting
Jon G. Huddleston
Thomas J. Imeson(4)
Justin Palfreyman
Melinda B. Rogers
Lori Russell
MardiLyn Saathoff*
David A. Weber
Brody J. Wilson*
54
63
49
46
49
56
68
40
53
59
62
59
39
EXECUTIVE OFFICERS
Positions held during last five years(1)
Chief Executive Officer and President(2) (2016- ); Chief Operating Officer and
President (2015-2016); Executive Vice President and Chief Operating Officer
(2014-2015); Executive Vice President Operations and Regulation (2013-2014);
Senior Vice President and Chief Financial Officer (2004-2013).
Senior Vice President and Chief Financial Officer(2) (2017- ); President and
Chief Executive Officer of Renewables, Avangrid Renewables (2015-2017);
Senior Vice President of Finance, Iberdrola Renewables Holdings, Inc.
(2012-2015).
Senior Vice President and Chief Administrative Officer (2013-2018); Senior Vice
President (2008-2013).
Vice President and Chief Information Officer (2017- ); Chief Information Officer,
WorleyParsons (America's Division) (2016-2017); Executive Service Delivery
Manager for SAP, British Petroleum (2011-2015).
Vice President, Chief Compliance Officer and Corporate Secretary(2) (2016- );
Vice President and Corporate Secretary (2015-2016); Senior Legal Counsel
(2011-2014); Assistant Corporate Secretary (2010-2014).
Senior Vice President, Operations and Chief Marketing Officer (2018- ); Senior
Vice President, Communications and Chief Marketing Officer (2018); Vice
President, Communications and Chief Marketing Officer (2015-2018); Chief
Marketing & Communications Officer (2013-2014); Chief Corporate
Communications Officer (2011-2013).
Vice President, Engineering and Utility Operations (2018- ); Senior Director,
Utility Operations (2014-2018); Director, Utility Operations (2013-2014); Process
Director (2007-2013).
Vice President of Public Affairs (2014- ); Director of Public Affairs, Port of
Portland (2006-2014).
Vice President, Strategy and Business Development (2017- );Vice President,
Business Development (2016-2017); Director, Power, Energy and Infrastructure
Group, Lazard, Freres & Co. (2009-2016).
Vice President, Chief Human Resources and Diversity Officer (2018- ); Senior
Director of Human Resources (2018); Senior Manager, Organizational
Effectiveness and Talent Acquisition (2015-2017); Senior Associate, Plan B
(2014-2015); Director, Executive Development Center, Willamette University
(2011-2015).
Vice President, Utility Services (2016- ); Utility Field Operations Director
(2013-2016); Serve Customer Process Director (2008-2013).
Senior Vice President, Regulation and General Counsel(5) (2016- ); Senior Vice
President and General Counsel (2015-2016); Vice President, Legal, Risk and
Compliance (2013-2014); Deputy General Counsel (2010-2013); Chief
Governance Officer and Corporate Secretary (2008-2014).
President and Chief Executive Officer, NW Natural Gas Storage, LLC and Gill
Ranch Storage, LLC (2011- ).
Vice President, Chief Accounting Officer, Controller and Treasurer(2) (2017- );
Chief Financial Officer (Interim), Treasurer, Chief Accounting Officer and
Controller (2016-2017); Chief Accounting Officer, Controller and Assistant
Treasurer (2016); Controller (2013-2015); Acting Controller (2013); Accounting
Director (2012-2013).
119
DIRECTOR (NORTHWEST NATURAL GAS COMPANY ONLY)**
Name
Steven E. Wynne
Age at
Dec. 31, 2018
66
Positions held during last five years(1)
Executive Vice President, Moda, Inc., a privately-held healthcare insurance
company (2012- ); Director, FLIR Systems, Inc. (1999- ); Director, JELD-WEN
Holding Inc. (2012- ); Director, Pendleton Woolen Mills, Inc. (2013- ); Director,
Lone Rock Resources, Inc. (2016- ); Director, Citifyd Inc. (2013- ); Trustee,
Willamette University (1999- ); Trustee, Portland Center Stage (2012- );
Executive Vice President, JELD-WEN, Inc. (2011-2012); President and Chief
Executive Officer, SBI International, Ltd. (2004-2007); Partner, Ater Wynne LLP
(2001-2002; 2003-2004); President and Chief Executive Officer, Adidas
(1995-2000)
Mr. Wynne’s senior management experience with a variety of companies, board
service on a number of public and private companies and longstanding legal
practice in the areas of corporate finance, securities and mergers and
acquisitions qualify him to provide insight and guidance in the areas of corporate
governance, strategic planning, enterprise risk management, finance and
operations.
* Executive Officer of Northwest Natural Holding Company and Northwest Natural Gas Company.
** Director of Northwest Natural Gas Company only. All other directors of Northwest Natural Gas Company are also directors of Northwest
Natural Holding Company, and information regarding all directors concurrently serving on the Board of Directors of Northwest Natural Gas
Company and Northwest Natural Holding Company will be incorporated by reference to our definitive Proxy Statement for the 2019 Annual
Meeting of Shareholders.
(1) Unless otherwise specified, all positions held at Northwest Natural Gas Company.
(2) Position held at Northwest Natural Holding Company (beginning March 2018) and Northwest Natural Gas Company.
(3) Ms. Doolittle retired effective December 31, 2018.
(4) Mr. Imeson announced his intention to retire effective April 1, 2019. The Board of Directors appointed Kathryn Williams to become Vice
President of Public Affairs effective April 1, 2019.
(5) Ms. Saathoff is Senior Vice President and General Counsel of Northwest Natural Holding Company (beginning March 2018) and Senior Vice
President, Regulation and General Counsel of Northwest Natural Gas Company.
Each executive officer serves successive annual terms; present terms end at the 2019 annual meeting. There are no family
relationships among our executive officers, directors or any person chosen to become one of our officers or directors. NW
Holdings and NW Natural have adopted a Code of Ethics (Code) applicable to all employees, officers, and directors that is
available on our website at www.nwnaturalholdings.com. We intend to disclose on our website at www.nwnaturalholdings.com
any amendments to the Code or waivers of the Code for executive officers and directors.
120
ITEM 11. EXECUTIVE COMPENSATION
The information concerning "Executive Compensation",
"Report of the Organization and Executive Compensation
Committee", and "Compensation Committee Interlocks and
Insider Participation" contained in NW Holdings' definitive
Proxy Statement for the 2019 Annual Meeting of
Shareholders is hereby incorporated by reference.
Information related to Executive Officers as of December
31, 2018 is reflected in Part III, Item 10, above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of February 22, 2019, NW Holdings owned 100% of the outstanding common stock of NW Natural.
The following table sets forth information regarding compensation plans under which equity securities of NW Holdings are
authorized for issuance as of December 31, 2018 (see Note 7 to the Consolidated Financial Statements):
Plan Category
Equity compensation plans approved by security holders:
LTIP (1)(2)
Restated Stock Option Plan
Employee Stock Purchase Plan
Equity compensation plans not approved by security holders:
Executive Deferred Compensation Plan (EDCP)(3)
Directors Deferred Compensation Plan (DDCP)(3)
Deferred Compensation Plan for Directors and Executives (DCP)(4)
Total
(a)
(b)
(c)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
173,175
55,938
$
20,022
1,063
41,069
194,205
485,472
n/a
44.96
60.07
n/a
n/a
n/a
574,787
—
204,317
n/a
n/a
n/a
779,104
(1) Awards may be granted under the LTIP as Performance Share Awards, Restricted Stock Units, or stock options. Shares issued pursuant to
Performance Share Awards and Restricted Stock Units under the LTIP do not include an exercise price, but are payable when the award
criteria are satisfied. The number of shares shown in column (a) include 82,680 Restricted Stock Units and 90,495 Performance Share
Awards, reflecting the number of shares to be issued as performance share awards under outstanding Performance Share Awards if target
performance levels are achieved. If the maximum awards were paid pursuant to the Performance Share Awards outstanding at December
31, 2018, the number of shares shown in column (a) would increase by 90,495 shares, reflecting the maximum share award of 200% of
target, and the number of shares shown in column (c) would decrease by the same amount of shares. No stock options or other types of
award have been issued under the LTIP.
The number of shares shown in column (c) includes shares that are available for future issuance under the LTIP as Restricted Stock Units,
Performance Share Awards, or stock options at December 31, 2018.
(2)
(3) Prior to January 1, 2005, deferred amounts were credited, at the participant’s election, to either a “cash account” or a “stock account.” If
deferred amounts were credited to stock accounts, such accounts were credited with a number of shares of NW Natural (now NW Holdings)
common stock based on the purchase price of the common stock on the next purchase date under our Dividend Reinvestment and Direct
Stock Purchase Plan, and such accounts were credited with additional shares based on the deemed reinvestment of dividends. Cash
accounts are credited quarterly with interest at a rate equal to Moody’s Average Corporate Bond Yield plus two percentage points, subject to
a 6% minimum rate. At the election of the participant, deferred balances in the stock accounts are payable after termination of Board service
or employment in a lump sum, in installments over a period not to exceed 10 years in the case of the DDCP, or 15 years in the case of the
EDCP, or in a combination of lump sum and installments. Amounts credited to stock accounts are payable solely in shares of common stock
and cash for fractional shares, and amounts in the above table represent the aggregate number of shares credited to participant's stock
accounts. We have contributed common stock to the trustee of the Umbrella Trusts such that the Umbrella Trusts hold approximately the
number of shares of common stock equal to the number of shares credited to all participants’ stock accounts.
(4) Effective January 1, 2005, the EDCP and DDCP were closed to new participants and replaced with the DCP. The DCP continues the basic
provisions of the EDCP and DDCP under which deferred amounts are credited to either a “cash account” or a “stock account.” Stock
accounts represent a right to receive shares of NW Holdings common stock on a deferred basis, and such accounts are credited with
additional shares based on the deemed reinvestment of dividends. Effective January 1, 2007, cash accounts are credited quarterly with
interest at a rate equal to Moody’s Average Corporate Bond Yield. Our obligation to pay deferred compensation in accordance with the
terms of the DCP will generally become due on retirement, death, or other termination of service, and will be paid in a lump sum or in
installments of five, 10, or 15 years as elected by the participant in accordance with the terms of the DCP. Amounts credited to stock
accounts are payable solely in shares of common stock and cash for fractional shares, and amounts in the above table represent the
aggregate number of shares credited to participants' stock accounts. We have contributed common stock to the trustee of the Supplemental
Trust such that this trust holds approximately the number of common shares equal to the number of shares credited to all participants' stock
accounts. The right of each participant in the DCP is that of a general, unsecured creditor of the Company.
121
The information captioned “Beneficial Ownership of Common Stock by Directors and Executive Officers” and "Security
Ownership of Common Stock of Certain Beneficial Owners" contained in NW Holdings' definitive Proxy Statement for the 2019
Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information captioned "Transactions with Related
Persons" and "Corporate Governance" in NW Holdings'
definitive Proxy Statement for the 2019 Annual Meeting of
Shareholders is hereby incorporated by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
NW Holdings
The information captioned "2018 and 2017 Audit Firm Fees"
in NW Holdings’ definitive Proxy Statement for the 2019
Annual Meeting of Shareholders is hereby incorporated by
reference.
NW Natural
The following table shows the fees and expenses of NW
Natural, paid or accrued for the integrated audits of the
consolidated financial statements and other services
provided by NW Natural's independent registered public
accounting firm, PricewaterhouseCoopers LLP, for fiscal
years 2018 and 2017:
In thousands
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
2018
2017
$
1,379
$
1,262
30
34
4
115
35
3
$
1,447
$
1,415
AUDIT FEES. This category includes fees and expenses for
services rendered for the integrated audit of the
consolidated financial statements included in the Annual
Report on Form 10-K and the review of the quarterly
financial statements included in the Quarterly Reports on
Form 10-Q. The integrated audit includes the review of our
internal control over financial reporting in compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley Act). In addition, amounts include fees for services
routinely provided by the auditor in connection with
regulatory filings, including issuance of consents and
comfort letters relating to the registration of Company
securities and assistance with the review of documents filed
with the SEC.
AUDIT-RELATED FEES. This category includes fees for
assurance and related services that are reasonably related
to the performance of the audit or review of our financial
statements and internal control over financial reporting,
including fees and expenses related to consultations for
financial accounting and reporting, in addition to fees for
EPA assurance letters.
TAX FEES. This category includes fees for tax compliance,
and review services rendered for NW Natural's income tax
returns.
ALL OTHER FEES. This category relates to services other
than those described above. The amount reflects payments
for accounting research tools in each of 2018 and 2017, and
educational seminars in 2018.
PRE-APPROVAL POLICY FOR AUDIT AND NON-AUDIT
SERVICES. The Audit Committee of NW Natural approved
or ratified 100 percent of 2018 and 2017 services for audit,
audit-related, tax services and all other fees, including audit
services relating to compliance with Section 404 of the
Sarbanes-Oxley Act. The chair of the Audit Committee of
NW Natural is authorized to pre-approve non-audit services
between meetings of the Audit Committee and must report
such approvals at the next Audit Committee meeting.
PART IV
ITEM 16. FORM 10-K SUMMARY
None.
ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a) The following documents are filed as part of this exhibit
99.1:
1. A list of all Financial Statements and Supplemental
Schedules is incorporated by reference to Item 8.
2. List of Exhibits filed:
Reference is made to the Exhibit Index
commencing on the following page.
122
NORTHWEST NATURAL HOLDING COMPANY
NORTHWEST NATURAL GAS COMPANY
Exhibit Index to Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2018
Exhibit Number Document
*2a.
*2b.
*3a.
*3b.
*3c.
*3d.
*4a.
*4b.
*4c.
*4d.
*4e.
*4f.
*4g.
Agreement and Plan of Merger by and among Northwest Natural Gas Company, Northwest Natural Holding
Company, and NWN Merger Sub, Inc., dated as of March 7, 2018 (incorporated by reference to Exhibit 2 to the
Current Report on Form 8-K dated March 13, 2018, File No. 1-15973).
Amendment to Agreement and Plan of Merger between Northwest Natural Gas Company, Northwest Natural Holding
Company, and NWN Merger Sub, Inc., dated September 26, 2018 (incorporated by reference to Exhibit 2.1(b) to the
Form 8-K dated October 1, 2018, File No. 1-38681).
Amended and Restated Articles of Incorporation of Northwest Natural Holding Company (incorporated by reference
to Exhibit 3.1 to the Form 8-K dated October 1, 2018, File No. 1-38681).
Amended and Restated Articles of Incorporation of Northwest Natural Gas Company (incorporated by reference to
Exhibit 3.3 to the Form 8-K dated October 1, 2018, File No. 1-15973).
Amended and Restated Bylaws of Northwest Natural Holding Company (incorporated by reference to Exhibit 3.2 to
the Form 8-K dated October 1, 2018, File No. 1-38681).
Bylaws of Northwest Natural Gas Company (incorporated by reference to Exhibit 3.1 to the Form 8-K filed
December 22, 2017, File No. 1-15973).
Copy of Mortgage and Deed of Trust of Northwest Natural Gas Company, dated as of July 1, 1946 (Mortgage and
Deed of Trust), to Bankers Trust (to whom Deutsche Bank Trust Company Americas is the successor), Trustee
(incorporated by reference to Exhibit 7(j) in File No. 2-6494); and copies of Supplemental Indentures Nos. 1 through
14 to the Mortgage and Deed of Trust, dated respectively, as of June 1, 1949, March 1, 1954, April 1, 1956, February
1, 1959, July 1, 1961, January 1, 1964, March 1, 1966, December 1, 1969, April 1, 1971, January 1, 1975, December
1, 1975, July 1, 1981, June 1, 1985 and November 1, 1985 (incorporated by reference to Exhibit 4(d) in File No.
33-1929); Supplemental Indenture No. 15 to the Mortgage and Deed of Trust, dated as of July 1, 1986 (filed as
Exhibit 4(c) in File No. 33-24168); Supplemental Indentures Nos. 16, 17 and 18 to the Mortgage and Deed of Trust,
dated, respectively, as of November 1, 1988, October 1, 1989 and July 1, 1990 (incorporated by reference to Exhibit
4(c) in File No. 33-40482); Supplemental Indenture No. 19 to the Mortgage and Deed of Trust, dated as of June 1,
1991 (incorporated by reference to Exhibit 4(c) in File No. 33-64014).
Supplemental Indenture No. 20 to the Mortgage and Deed of Trust, dated as of June 1, 1993 (incorporated by
reference to Exhibit 4a.(1) to Form 10-K for year ended December 31, 1993, File No. 0-00994).
Supplemental Indenture No. 21 to the Mortgage and Deed of Trust, dated as of October 15, 2012 (incorporated by
reference to Exhibit 4.1 to Form 8-K dated October 26, 2012, File No. 1-15973).
Supplemental Indenture No. 22 to the Mortgage and Deed of Trust, dated as of November 1, 2016 (incorporated by
reference to Exhibit 4.1 to Form 10-Q for the quarter ended September 30, 2016, File No. 1-15973).
Supplemental Indenture No. 23 to the Mortgage and Deed of Trust, dated as of September 1, 2018 (incorporated by
reference to Exhibit 4(a) to Form 8-K dated September 10, 2018, File No. 1-15973).
Copy of Indenture, dated as of June 1, 1991, between Northwest Natural Gas Company and Bankers Trust Company
(to whom Deutsch Bank Trust Company Americas is successor), Trustee, relating to Northwest Natural Gas
Company's Unsecured Debt Securities (incorporated by reference to Exhibit 4(e) in File No. 33-64014).
Credit Agreement, dated as of October 2, 2018, among Northwest Natural Holding Company and the lenders party
thereto, with JPMorgan Chase Bank, N.A. as administrative agent and Bank of America, N.A., U.S. Bank National
Association, and Wells Fargo Bank, National Association, as co-syndication agents (incorporated by reference to
Exhibit 4.1 to Form 8-K dated October 3, 2018, File No. 1-38681).
123
*4h.
Credit Agreement, dated as of October 2, 2018, among Northwest Natural Gas Company and the lenders party
thereto, with JPMorgan Chase Bank, N.A. as administrative agent and Bank of America, N.A., U.S. Bank National
Association, and Wells Fargo Bank, National Association, as co-syndication agents (incorporated by reference to
Exhibit 4.1 to Form 8-K dated October 3, 2018, File No. 1-15973).
*10
Purchase and Sale Agreement dated June 20, 2018, between NW Natural Gas Storage LLC and SENSA Holdings
LLC (incorporated by reference to Exhibit 10 to Form 10-Q for the quarter ended June 30, 2018, File No. 1-15973).
21
Subsidiaries of Northwest Natural Holding Company.
23a.
Consent of PricewaterhouseCoopers LLP - NW Holdings.
23b.
Consent of PricewaterhouseCoopers LLP - NW Natural.
31a.
31b.
31c.
31d.
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.
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.
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.
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.
**32a.
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.
**32b.
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 Extensible Business Reporting Language (XBRL):
(i) Consolidated Statements of Income;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Cash Flows; and
(iv) Related notes.
Executive Compensation Plans and Arrangements:
*10a.
Executive Supplemental Retirement Income Plan, 2018 Restatement (incorporated herein by reference to Exhibit
10.6 to the Form 8-K dated October 1, 2018, File No. 1-38681).
*10b.
Supplemental Executive Retirement Plan, 2018 Restatement (incorporated herein by reference to Exhibit 10.7 to the
Form 8-K dated October 1, 2018, File No. 1-38681).
*10c.
Northwest Natural Gas Company Supplemental Trust, effective January 1, 2005, restated as of October 1, 2018
(incorporated by reference to Exhibit 10.9 to the Form 8-K dated October 1, 2018, File No. 1-38681).
*10d.
Northwest Natural Gas Company Umbrella Trust for Directors, effective January 1, 1991, restated as of October 1,
2018 (incorporated by reference to Exhibit 10.11 to the Form 8-K dated October 1, 2018, File No. 1-38681).
*10e.
Northwest Natural Gas Company Umbrella Trust for Executives, effective January 1, 1988, restated as of October 1,
2018 (incorporated by reference to Exhibit 10.10 to the Form 8-K dated October 1, 2018, File No. 1-38681).
124
*10f.
Restated Stock Option Plan, as amended effective December 14, 2006 (incorporated by reference to Exhibit 10c. to
Form 10-K for 2006, File No. 1-15973).
*10g.
Form of Restated Stock Option Plan Agreement (incorporated by reference to Exhibit 10h. to Form 10-K for 2009,
File No. 1-15973).
*10h.
Executive Deferred Compensation Plan, effective as of January 1, 1987, restated as of October 1, 2018
(incorporated by reference to Exhibit 10.4 to the Form 8-K dated October 1, 2018, File No. 1-38681).
*10i.
*10j.
Directors Deferred Compensation Plan, effective June 1, 1981, restated as of October 1, 2018 (incorporated by
reference to Exhibit 10.5 to the Form 8-K dated October 1, 2018, File No. 1-38681).
Deferred Compensation Plan for Directors and Executives, effective January 1, 2005, restated as of October 1, 2018
(incorporated by reference to Exhibit 10.3 to the Form 8-K dated October 1, 2018, File No. 1-38681).
10k.
Intentionally omitted.
10l.
Form of Indemnity Agreement as entered into between Northwest Natural Gas Company and each director and
certain executive officers.
10m.
Form of Indemnity Agreement as entered into between Northwest Natural Holding Company and each director and
certain executive officers.
*10n.
Non-Employee Directors Stock Compensation Plan, as amended effective December 15, 2005 (incorporated by
reference to Exhibit 10.2 to Form 8-K dated December 16, 2005, File No. 1-15973).
*10o.
Executive Annual Incentive Plan, effective January 1, 2017 (incorporated by reference to Exhibit 10o. to Form 10-K
for 2016, File No. 1-15973).
*10p.
Executive Annual Incentive Plan, effective January 1, 2018, as amended and restated effective October 1, 2018
(incorporated by reference to Exhibit 10.8 to the Form 8-K dated October 1, 2018, File No. 1-38681).
10q.
Executive Annual Incentive Plan, effective January 1, 2019.
*10r.
Form of Change in Control Severance Agreement between Northwest Natural Gas Company and each executive
officer, as amended and restated as of October 1, 2018 (incorporated by reference to Exhibit 10.2 to the Form 8-K
dated October 1, 2018, File No. 1-38681).
*10s.
Northwest Natural Gas Company Long Term Incentive Plan, as amended and restated effective May 24, 2012
(incorporated by reference to Exhibit 10r to Form 10-K for 2012, File No. 1-15973).
*10t.
Northwest Natural Gas Company Long Term Incentive Plan, as amended and restated effective May 25, 2017
(incorporated by reference to Exhibit 10s to Form 10-K for 2017, File No. 1-15973).
*10u.
Northwest Natural Holding Company Long Term Incentive Plan, as amended and restated as of October 1, 2018
(incorporated by reference to Exhibit 10.1 to the Form 8-K dated October 1, 2018, File No. 1-38681).
*10v.
Form of Long Term Incentive Award Agreement under the Long Term Incentive Plan (2016-2018) (incorporated by
reference to Exhibit 10w. to Form 10-K for 2015, File No. 1-15973).
*10w.
Form of Long Term Incentive Award Agreement under the Long Term Incentive Plan between Northwest Natural Gas
Company and an Executive Officer (2016-2018) (incorporated by reference to Exhibit 10x. to Form 10-K for 2015,
File No. 1-15973).
*10x.
Form of Long Term Incentive Award Agreement under Long Term Incentive Plan (2017-2019) (incorporated by
reference to Exhibit 10x. to Form 10-K for 2016, File No. 1-15973).
125
*10y.
Form of Performances Share Long Term Incentive Agreement under Long Term Incentive Plan (2018-2020)
(incorporated by reference to Exhibit 10y. to Form 10-K for 2017, File No. 1-15973).
10z.
Form of Long Term Incentive Award Agreement under Long Term Incentive Plan (2019-2021).
*10aa.
Form of Consent dated December 14, 2006 entered into by each executive officer with respect to amendments to the
Executive Supplemental Retirement Income Plan, the Supplemental Executive Retirement Plan and certain change
in control severance agreements (incorporated by reference to Exhibit 10.1 to Form 8-K dated December 19, 2006,
File No. 1-15973).
*10bb.
Consent to Amendment of Deferred Compensation Plan for Directors and Executives, dated February 28, 2008
entered into by each executive officer (incorporated by reference to Exhibit 10bb to Form 10-K for 2007, File No.
1-15973).
10cc.
Form of Restricted Stock Unit Award Agreement under Long Term Incentive Plan (2019).
*10dd.
Form of Restricted Stock Unit Award Agreement under Long Term Incentive Plan (2018) (incorporated by reference
to Exhibit 10bb. to Form 10-K for 2017, File No. 1-15973).
*10ee.
Corrected Form of Restricted Stock Unit Award Agreement under Long Term Incentive Plan (2017) (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2017, File No. 1-15973).
*10ff.
Form of Restricted Stock Unit Award Agreement under Long Term Incentive Plan (2016) (incorporated by reference
to Exhibit 10bb. to Form 10-K for 2015, File No. 1-15973).
*10gg.
Form of Amendment to Restricted Stock Unit Award Agreements (2013, 2014 and 2015) (incorporated by reference
to Exhibit 10cc to Form 10-K for 2016, File No. 1-15973).
*10hh.
Form of Restricted Stock Unit Award Agreement under the Long Term Incentive Plan (2013, 2014 and 2015)
(incorporated by reference to Exhibit 10aa. to Form 10-K for 2012, File No. 1-15973).
10ii.
Form of Director Restricted Stock Unit Award Agreement under Long Term Incentive Plan (2018).
*10jj.
Form of Director Restricted Stock Unit Award Agreement under the Long Term Incentive Plan (2017) (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2017, File No 1-15973).
*10kk.
*10ll.
Severance Agreement between Northwest Natural Gas Company and an executive officer, dated August 1, 2016
(incorporated by reference to Exhibit 10.1 to Form 8-K dated July 29, 2016, File No. 1-15973).
Form of Restricted Stock Unit Award Agreement between Northwest Natural Gas Company and an executive officer
dated as of July 27, 2016 (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30,
2016, File No. 1-15973).
*10mm. Form of Severance Agreement between Northwest Natural Gas Company and an executive officer, dated May 17,
2017 (incorporated by reference to Exhibit 10.1 to Form 8-K dated April 24, 2017, File No. 1-15973).
*10nn.
Form of Special Restricted Stock Unit Agreement between Northwest Natural Gas Company and an executive
officer, dated May 17, 2017 (incorporated by reference to Exhibit 10.2 to Form 8-K dated April 24, 2017, File No.
1-15973).
*10oo.
Form of Hire-On Bonus Agreement between Northwest Natural Gas Company and an executive officer, dated May
17, 2017 (incorporated by reference to Exhibit 10.3 to Form 8-K dated April 24, 2017, File No. 1-15973).
*10pp.
Form of Special Retention Restricted Stock Unit Agreement between Northwest Natural Gas Company and an
executive officer, dated September 30, 2016 (incorporated by reference to Exhibit 10qq. to Form 10-K for 2017, File
No. 1-15973).
126
*10qq.
Form of Hire-On Bonus Agreement between Northwest Natural Gas Company and an executive officer, dated
September 30, 2016 (incorporated by reference to Exhibit 10rr. to Form 10-K for 2017, File No. 1-15973).
*10rr.
Cash Retention Agreement between Northwest Natural Gas Company and an executive officer, dated as of March 1,
2018 (incorporated by reference to Exhibit 10ss. to Form 10-K for 2017, File No. 1-15973).
10ss.
Annual Incentive Plan for NW Natural Gas Storage, LLC, as amended effective January 1, 2019.
*10tt.
Long Term Incentive Plan for NW Natural Gas Storage, LLC, as amended effective January 1, 2016 (incorporated by
reference to Exhibit 10pp. to Form 10-K for 2016, File No. 1-15973).
*Incorporated herein by reference as indicated
**Pursuant to Item 601(b)(32)(ii) of Regulation S-K, this certificate is not being "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
127
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 HOLDING COMPANY
By: /s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
Date: March 1, 2019
NORTHWEST NATURAL GAS COMPANY
By: /s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
Date: March 1, 2019
128
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated. The signatures of each of the undersigned shall be
deemed to relate only to matters having reference to the below named company and its subsidiaries.
NORTHWEST NATURAL HOLDING COMPANY
Signature
Title
Date
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
Principal Executive Officer and Director
March 1, 2019
/s/ Frank H. Burkhartsmeyer
Principal Financial Officer
March 1, 2019
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
/s/ Brody J. Wilson
Principal Accounting Officer
March 1, 2019
Brody J. Wilson
Vice President, Treasurer, Chief Accounting Officer
and Controller
/s/ Timothy P. Boyle
Timothy P. Boyle
/s/ Martha L. Byorum
Martha L. Byorum
/s/ John D. Carter
John D. Carter
/s/ Mark S. Dodson
Mark S. Dodson
/s/ C. Scott Gibson
C. Scott Gibson
/s/ Tod R. Hamachek
Tod R. Hamachek
/s/ Jane L. Peverett
Jane L. Peverett
/s/ Kenneth Thrasher
Kenneth Thrasher
/s/ Malia H. Wasson
Malia H. Wasson
/s/ Charles A. Wilhoite
Charles A. Wilhoite
Director
Director
Director
Director
)
)
)
)
)
)
)
)
)
)
)
)
Director
March 1, 2019
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Director
Director
Director
Director
Director
129
NORTHWEST NATURAL GAS COMPANY
Signature
Title
Date
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
Principal Executive Officer and Director
March 1, 2019
/s/ Frank H. Burkhartsmeyer
Principal Financial Officer
March 1, 2019
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
/s/ Brody J. Wilson
Principal Accounting Officer
March 1, 2019
Brody J. Wilson
Vice President, Treasurer, Chief Accounting Officer
and Controller
/s/ Timothy P. Boyle
Timothy P. Boyle
/s/ Martha L. Byorum
Martha L. Byorum
/s/ John D. Carter
John D. Carter
/s/ Mark S. Dodson
Mark S. Dodson
/s/ C. Scott Gibson
C. Scott Gibson
/s/ Tod R. Hamachek
Tod R. Hamachek
/s/ Jane L. Peverett
Jane L. Peverett
/s/ Kenneth Thrasher
Kenneth Thrasher
/s/ Malia H. Wasson
Malia H. Wasson
/s/ Charles A. Wilhoite
Charles A. Wilhoite
/s/ Steven E. Wynne
Steven E. Wynne
Director
Director
Director
Director
Director
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Director
March 1, 2019
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Director
Director
Director
Director
Director
130
EXHIBIT 21
SUBSIDIARIES OF NORTHWEST NATURAL HOLDING COMPANY
an Oregon Corporation
Name of Subsidiary
Jurisdiction Organized
Northwest Natural Gas Company (dba NW Natural)
Oregon
Northwest Energy Corporation(1)
NWN Gas Reserves LLC(1)
Gill Ranch Storage, LLC
NW Natural Energy, LLC
NW Natural Gas Storage, LLC
NNG Financial Corporation
Trail West Holdings, LLC
Trail West Pipeline, LLC
BL Credit Holdings, LLC
Northwest Biogas, LLC
KB Pipeline Company
NW Natural Water Company, LLC
NW Natural Water of Oregon, LLC
NW Natural Water of Washington, LLC
Cascadia Water, LLC
NW Natural Water of Idaho, LLC
Gem State Water Company, LLC
Falls Water Co., Inc.
Salmon Valley Water Company
(1)
Subsidiary of Northwest Natural Gas Company
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Delaware
Delaware
Delaware
Oregon
Oregon
Oregon
Oregon
Washington
Washington
Idaho
Idaho
Idaho
Oregon
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form on S-8 (Nos. 333-187005-01,
333-180350-01, 333-134973-01, 333-100885-01, 333-139819-01, 333-221347-01 and 333-227687) and Form S-3 (No.
333-227662) of Northwest Natural Holding Company of our report dated March 1, 2019 relating to the financial statements,
financial statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
EXHIBIT 23a
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March 1, 2019
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-214425) and Form
S-3 (No. 333-227662-01) of Northwest Natural Gas Company of our report dated March 1, 2019 relating to the financial
statements and financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March 1, 2019
EXHIBIT 23b
CERTIFICATION
I, David H. Anderson, certify that:
EXHIBIT 31a
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Northwest Natural Gas
Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
CERTIFICATION
I, Frank H. Burkhartsmeyer, certify that:
EXHIBIT 31b
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Northwest Natural Gas
Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
CERTIFICATION
I, David H. Anderson, certify that:
EXHIBIT 31c
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Northwest Natural Holding
Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
CERTIFICATION
I, Frank H. Burkhartsmeyer, certify that:
EXHIBIT 31d
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Northwest Natural Holding
Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
NORTHWEST NATURAL GAS COMPANY
Certificate Pursuant to Section 906
of Sarbanes – Oxley Act of 2002
EXHIBIT 32a
Each of the undersigned, DAVID H. ANDERSON, Chief Executive Officer, and FRANK H. BURKHARTSMEYER, the Chief
Financial Officer, of NORTHWEST NATURAL GAS COMPANY (the Company), DOES HEREBY CERTIFY that:
The Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the Report) fully complies with
1.
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
Information contained in the Report fairly presents, in all material respects, the financial condition and results of
2.
operations of the Company.
IN WITNESS WHEREOF, each of the undersigned has caused this instrument to be executed this 1st day of March 2019.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to
Northwest Natural Gas Company and will be retained by Northwest Natural Gas Company and furnished to the Securities and
Exchange Commission or its staff upon request.
EXHIBIT 32b
NORTHWEST NATURAL HOLDING COMPANY
Certificate Pursuant to Section 906
of Sarbanes – Oxley Act of 2002
Each of the undersigned, DAVID H. ANDERSON, Chief Executive Officer, and FRANK H. BURKHARTSMEYER, the Chief
Financial Officer, of NORTHWEST NATURAL HOLDING COMPANY (the Company), DOES HEREBY CERTIFY that:
The Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the Report) fully complies with
1.
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
Information contained in the Report fairly presents, in all material respects, the financial condition and results of
2.
operations of the Company.
IN WITNESS WHEREOF, each of the undersigned has caused this instrument to be executed this 1st day of March 2019.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to
Northwest Natural Holding Company and will be retained by Northwest Natural Holding Company and furnished to the Securities
and Exchange Commission or its staff upon request.
I N VI N VI N VI N VN V E S TE S TE S TE S TS O RO RO ROO RR A N DA N DA N DA N DNN S H AS H AS H AS H AS H AH AS H A R E HR E HR E HR E HE O L DOO L DO L DO L DOO
E RE RE RE RE RRR I N FI N FI N FI N FNN FO R MO R MO R MO R MR AT IAT IAT IAT IT O NO NO NO N
The Astoria-Megler Bridge in
NW Natural’s service territory.
INVESTOR AND SHAREHOLDER
INFORMATION
STOCK TRANSFER AGENT
AND REGISTRAR
For common stock:
American Stock Transfer
& Trust Company
(cid:25)(cid:21)(cid:19)(cid:20)(cid:3)(cid:20)(cid:24)(cid:87)(cid:75)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
Brooklyn, NY 11219
(888) 777-0321
web: astfinancial.com
email: info@(cid:68)(cid:86)(cid:87)(cid:403)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:17)(cid:70)(cid:82)(cid:80)
TRUSTEE AND
BOND PAYING AGENT
For bond issues:
Deutsche Bank
Trust Company Americas
(cid:25)(cid:19)(cid:3)(cid:58)(cid:68)(cid:79)(cid:79)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)
New York, NY 10005
(800) 735-7777
NIKKI SPARLEY
Director, Investor Relations
Toll free (800) 422-4012, Ext. 2530
Direct (503) 721-2530
nikki.sparley@nwnatural.com
CATHY CROWN
Manager, Shareholder Services
Toll free (800) 422-4012, Ext. 2402
Direct (503) 220-2402
cathy.crown@nwnatural.com
COMMUNITY & SUSTAINABILITY REPORT
Learn more about NW Natural’s community
involvement and philanthropic contributions,
environmental stewardship, employee safety
efforts and other company initiatives.
View the Community & Sustainability
Annual Report at:
nwnatural.com/aboutnwnatural/community
LOW-INCOME PROGRAMS
NW Natural helps low-income customers
manage their bills through a variety of
programs. Shareholders and customers
support the Gas Assistance Program, which
supplements federal and state assistance
programs. In addition, the Oregon Low-Income
Gas Assistance Program uses public purpose
fees to help low-income customers pay their
utility bills. The Oregon Low-Income Energy
(cid:40)(cid:73)(cid:403)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:51)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:15)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:69)(cid:92)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)
purpose charges, helps customers in need
(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:16)(cid:72)(cid:73)(cid:403)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)
weatherization upgrades.
View the Low-Income Programs at:
nwnatural.com/residential
ENERGY-EFFICIENCY PROGRAMS
NW Natural partners with Energy Trust of
Oregon to offer our Oregon and Washington
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services. Learn more about the results of these
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View the Energy Trust of Oregon
Annual Report at:
nwnatural.com/residential
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