20190429Palfreyman Exhibit 1.pdf

EXHIBIT 1
GEM STATE WATERCOMPANY
NW Natural Holdings' Form 10-K
(2t0 PAGES)
EXHIBIT 1
GEM STATE WATER COMPANY
NW Natural Holdings' Form l0-K
(2r0 PAGES)
Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 1O-K
tX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 1 5(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
I ] 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
NW Nqtu rq l'
NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
Oregon 824710680 Oregon 93-0256722
(State or other jurisdiction of (l.R.S. Employer (State or other jurisdiction of (l.R.S. Employer
incorporation or organization) ldentification No.) incorporation or organization) ldentification No.)
220 N.W. Second Avenue, Portland, Oregon 97209 220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal execulive offices) (Zip Code) (Address of principal executive offices) (Zip Code)
Registrant's telephone number: [phone] Registrant's telephone number: (5O3)226-4211
Securities registered pursuant to Section 12(b) of the Act:
Reoistrant Title of each class Name of each exchanoe on which reoistered
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.
lndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
NORTHWESTNATURALHOLDINGCOMPANYYeS[X] No[ ] NORTHWESTNATURALGASCOMPANYYeS[ ] No[X]
lndicate by check mark if the registrant is not req uired to flle reports pursuant to Section 1 3 or Section 15(d) of the Act.
NORTHWESTNATURALHOLDINGCOMPANYYeS[ ] NolXl NORTHWESTNATURALGASCOMPANYYeS[ ] No[X]
lndicate by check mark whether the registrant (1 ) has filed all reports required to be filed by Section 1 3 or 1 5(d) of the Securities Exchange Act of 1 934 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 requiremenls for the past g0
days.
NORTHWEST NATURAL HOLDING COMPANY Yes[ X ] No[ ] NORTHWEST NATURAL GAS COMPANY Yes[ X ] No[ ]
lndicate by check mark whether the registrant has submitted electronically every lnteractive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
($232.405 of this chapter) during the preceding 1 2 months (or for such shorter period that the registrant was required to submit such files).
NORTHWESTNATURALHOLDINGCOMPANYYeSIxI No[ ] NORTHWESTNATURALGASCOMPANYYeSIxI No[ ]
lndicate by check mark if disclosure of delinquenl filers pursuant lo ltem 405 of Regulation S-K (5229.405) is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information slatements incorporated by reference in Part lll of this Form 10-K or any amendment to this Form '10-K.IX ]
lndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleraled filer, a smaller reporting company, or an emerging growth
Act.
NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL GAS COMPANY
<fr NW Notu ro I
HOLD!N05-<fr
Large Accelerated Filer IX ]
Accelerated Filer [ ]
Non-accelerated Filer [ ]
Smaller Reporting Company [ ]
Emerging GroMh Company [ ]
Large Accelerated Filer [ ]
Accelerated Filer [ ]
Non-accelerated Filer IX ]
Smaller Reporting Company [ ]
Emerging Growth Company [ ]
lf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transilion period for complyi"S *gLf,?timlb:lrevised
financial accounting standards provided pursuant to Section 1 3(a) of the Exchange Act. [ ] J. palfreyman, Ol
Gem State Water Company
Page I of 210
lndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
NORTHWESTNATURALHOLDINGCOMPANYYeS[ ] No[X] NORTHWESTNATURALGASCOMPANYYeS[ ] NolXl
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 2 ol 210
As of the end of the second quarter oI 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 22,2019,28,896,471shares 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. lnformation 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 lnstruction (l)(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 20'lg Annual Meeting of Shareholders, are
incorporated by reference in Part lll.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 3 of 210
TABLE OF CONTENTS
Item Page
Glossarv of Terms
Forward-Lookino Statements
Business
Overview
Business Model
Natural Gas Distribution
Other
Environmental Matters
Emolovees
Executive Offlcers of the Reoistrant
Available lnformation
Risk Factors
Unresolved Staff Comments
Properties
Leoal Proceedinos
Mine Safetv Disclosures
Market for Reoistrant's Common Eouitv. Related Stockholder Matters and lssuer
Purchases of Eouitv Securities
Selected Financial Data
Manaoement's Discussion and Analvsis of Financial Condition and Results of Ooerations
Ouantitative and Oualitative Disclosures About Market Risk
Financial Statements and Suoplementarv Data
Chanqes in and Disaoreements with Accountants on Accountino and Financial Disclosure
Controls and Procedures
Other lnformation
Directors. Executive Officers and Coroorate Governance
Executive Comoensation
Securitv Ownership of Certain Beneficial Owners and Manaoement and Related Stockholder Matters
Certain Relationshios and Related Transactions. and Director lndeoendence
Princioal Accountant Fees and Services
L
Z
PART I
Item 1
Item 14.
Item 18.
Item 2.
Item 3.
Item 4.
PART II
g
c
g
g
12
13
14
14
14
16
25
26
26
26
27
28
29
60
62
122
122
12
123
125
125
127
127
't27
127
127
133
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 98.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item'14.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form'10-K Summarv
EXHIBIT INDEX
SIGNATURES
2
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 4 of 210
Table of Contents
GTOSSARY OF TERMS AND ABBREVIATIONS
AFUDC
AOCI / AOCL
ASC
ASU
Average Weather
Bcf
CNG
CODM
Core Utility Customers
Cost of Gas
CPUC
Decoupling
Demand Cost
Allowance for Funds Used During Construction
Accumulaled Other Comprehensive lncome (Loss)
Accounting Standards Codification
Accounting Standards Update as issued by the FASB
The 2S-year average of heating degree days based on temperatures established in our lasl Oregon general rate case
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
Residential, commercial, and industrial customers receiving firm service from the utility
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 lo 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) lnc.
Northwest Energy Corporation, a wholly-owned subsidiary of NW Natural
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
Natural gas service offered to customers under contracts or rate schedules that will not be disrupted to meet the needs
of other customers
First Mortgage Bonds
A periodic filing with state or federal regulators to establish billing rates for utility customers
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 25ok owned by
PG&E
Gas Transmission Northwest, LLC which owns a transmrssion pipeline serving California and the Paofic Northwest
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
Highway and Transportation Funding Act of 2014
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
The portion of the Mist gas storage facility not used to serve NGD, instead serving utilities, gas marketers, electric
generators, and large industrial users
Public Utility Commission of ldaho; the entity that regulates NW Holdings' ldaho water business with respect to rates and
terms of service, among other matters
lntegrated Resource Plan
EBITDA
EE/CA
Encana
Energy Corp
EPA
EPS
FASB
FERC
Firm Service
FMBs
General Rate Case
GHG
Gill Ranch
Gill Ranch Facility
GTN
Heating Degree Days
HATFA
lnterruptible Service
lnterstate Storage Services
IPUC
IRP
4
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 5 of 210
Table of Contents
KB
LNG
MAP.2.1
Moody's
NAV
NGD
NGD Margin
NNG Financial
NOL
NRD
NW Holdings
NW Natural
NWN Energy
NWN Gas Reserves
NWN Gas Storage
ODEQ
OPEIU
OPUC
PBGC
PG&E
PGA
Portland General
PHMSA
PRP
RI/FS
ROD
ROE
ROR
S&P
Sales Service
SEC
SRRM
TCJA
Therm
TWH
TWP
TransCanada
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 2'1st Century Act, July 2012
lvloody's lnvestors Service, lnc., 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
A financial measure consisting of NGD operating revenues less the associated cost of gas, franchise taxes, and
environmental recoveries
NNG Financial Corporation, a wholly-owned subsidiary of NW Holdings
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 LLC, a wholly-owned subsidiary of Energy Corp
NW Natural Gas Storage, LLC, a wholly-owned subsidiary of NWN Energy
Oregon Department of Environmental Quality
Office and Professional Employees lnternational Union Local No. 1'1 , AFL-ClO, 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 Electric; primary customer of the North Mist gas storage expansion
U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration
Potentially Responsible Parties
Remedial lnvestigation / 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, lnc.
Service provided whereby a customer purchases both natural gas commodity supply and transportation from the utility
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 22,20'17
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 Pipelines Limited, owner of TransCanada American lnvestments, Ltd., a 50% owner of TWH, and GTN
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page 6 of 210
6
Table of Contents
Transportation Service Service provided whereby a customer purchases natural gas directly from a supplier but pays the utility to transporl the
gas over its distribution system to the customer's facility
WARM An Oregon billing rate mechanism applied to natural gas residential and commercial customers to adjust for
variances from average weather
6
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
PageT o1210
Table of Contents
FO RWARD-LOOKI N G STATEM E NTS
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,generalizationsandestimates;. ongoing continuation of past practices or patterns;. future evenls 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;. technologyimplementation and cybersecurity practices;. competition;. procurement and development of gas supplies;. estimatedexpenditures;. 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 slorage conlracts and gas storage
markets;. outcomes, timing and effects of potential claims, litigation, regulatory
actions, and other administrative matlers;. 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:
approval and adequacy of regulatory deferrals;
effecls 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
slatements. They are neither statements of historical fact nor guarantees
or assurances of future performance. lmportant factors that could cause
actual results to differ materially from those in the forward-looking
statements are discussed at ltem 1A., "Risk Factors" of Part I and ltem 7.
and ltem 7A., "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Quantitative and Qualitative
Disclosures About Market Risk", respectively, of Part ll 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 8 of 210
7
Table of Contenls
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 Northwesl 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. lnformation 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 ll - ltem 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, stalements 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 ltem 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 ltems other than Part ll - ltem 8. are combined for the
reporting companies.
ITEM 1. BUSINESS
ovERvlEw
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
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.
ln 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 DTSTRTBUT|ON (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 cenlers 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 hightechnology 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 approximalely 60% of
NGD volumes delivered and approximately 90% of margin. lndustrial
customers largely account for the remaining volumes and margin.
The following table presents summary meter information for the NGD
segment as of December 31 ,2018:
Number of
Meters % of Volumes
o/o of
Margin (')
Residential
Commercial
lndustrial
Other
Total
680,1 34
69,259
1,028
N/A
37%
22%
41o/o
N/A
65o/o
8%
750,421 100%100%
8
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 9 of 210
PART I
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. ln 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.
(1)
Table of Contents
NGD margin is also affected by other items, including miscellaneous services,
gains or losses from our gas cost incentive sharing mechanasm, 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. lndustrial customers
also purchase transportation services, but may buy the gas commodity
either from NW Natural or directly from a third-party gas marketer or
suppfier. Gas commodity cost is primarily a pass{hrough 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. lndustrial 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
markel 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
ln its service areas, the NGD business has no direct competition from
other natural gas distribulors. 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.
For residential and small to mid-size commercial customers, the NGD
business competes primarily with providers of electricity, fuel oil, and
propane.
ln the industrial and large commercial markets, the NGD business
competes with all forms of energy, including competition from wholesale
natural gas marketers. ln 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.
Seasonalitv 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.
Reoulation 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. ln 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.
Forfurtherdiscussion on our most recent general rate cases, see Part ll,
Item 7, "Results of Operations-Regulatory Matters-Regulation and
Rates".
Gas Suoolv
NW Natural strives lo 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.
Reliabilitv
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,
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 10 of 210
I
Table of Contents
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 reimaining 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 flrm 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
cuslomer 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 seasonl
Therms in millions Therms Percent
Diversity of Suoplv 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 lvlountains 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{erm 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 presenls the storage facilities available for NGD
business supply:
Maximum Daily
Deliverability
(therms in
millions)
Designed
Storage
Capacity (Bcf)Sources of NGD supply:
Firm supply purchases
ltilist underground storage (NGD only)
Company-owned LNG storage
Off-system storage contract
Pipeline segmentation capacity
Recall agreements
Peak day citygate deliveries
Total
3.4
31
1.9
0.5
u-b
0.4
0.1
34o/o
31%
19%
5o/o
60/o
4%
1%
Gas Storage Facilities
Owned Facility
Mist, Oregon(')
Contracted Facility
Jackson Prairie, Washington('?)
LNG Facilities
Owned Facililies
Newport, Oregon
Portland, Oregon
Total
0.5
0.6
1.3
10.6
1.1
10.0 100%1.0
u.bThe 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 ll, ltem 7, "Results of Operations-Regulatory
Matters".
The tvlist 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.
The storage facility is located near Chehalis, Washington and is contracted
from Northwest Pipeline, a subsidiary of The Williams Companies.
The Mist facility serves NGD segment customers and is also used for
non-NGD purposes, primarily for contracts with gas storage customers,
including utilities and third-party marketers. Under regulatory
agreements with the OPUC and WUTC, gas storage at Mist can be
developed in advance of NGD customer needs but is subject to recall
when needed to serve such customers as their demand increases.
When storage capacity is recalled for NGD purposes it becomes part of
the NGD segment. ln 2018, the NGD business did not recall additional
deliverability or associated storage capacity to serve customer needs.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 11 ol 210
EA 13.3
(1)
t2)
10
Conlract Duration (primary lerm)
Table of Contents
ln 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 Tvpes
NW Natural has a diverse portfolio of short-, medium-, and long{erm
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 supplywith 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:
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. ln 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 cosl recovery are minimized
by resetting cuslomer 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 ll,
Item 7, "Results of Operations-Regulatory Matters" and "Results of
Operations-Business Seg ments-Natural Gas Distribution
Operations-Cosl 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 syslem. 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 20'19 to 2060. The largest pipeline agreements
are with Northwest Pipeline. NW Natural actively works with Northwest
Pipeline and others to renew contracts in advance ofexpiration 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. ln 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 transportalion
diversity. ln addition, there are potential industrial projects in the region,
which could increase the demand for natural gas and the need for
additional pipeline capacity and diversity.
Currently, there are various interstate pipeline projects proposed,
including the Trail West pipeline in which NW Holdings has an interest,
that could meet the forecasted demand growth for NW Natural and the
region. However, the location of any future pipeline project will likely
depend on the location of committed industrial projects. NW Holdings
and NW Natural will continue to evaluate and closely monitor the
currently prospected projects lo determine the best option for our
customers. NW Holdings
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 12 ol 210
Percent of
Purchases
Long-term (one year or longer)
Short-term (more than one month, less than one year)
Spot (one month or less)
Total
28Yo
)7
45
100%
Gas supply contracts are renewed or replaced as they expire. During
2018, no individual supplier provided over 10o/o 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 lo 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.
't1
Table of Contents
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. lf 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. ln the past, NW Natural had a
cosl 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 ll, ltem 7, "Results
of Operations- Reg u I atory M atte rs".
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. ln 20'16, 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 '1S-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.
North Mist Gas Storaqe Expansion Proiect
ln 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 r
resources. ln 2016, NW Natural began expanding its gas storage facility
near Mist, Oregon to provide innovative long{erm, 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 3O-year contract
with options to extend, totaling up to an additional 50 years upon mutual
agreemenl of the parties.
The expansion projecl includes a new reseryoir 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 20'19. See
additional discussion in Part ll, ltem 7 "Financial Condition-Cash
Flows-/nvestl ng Activ itie s" .
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 lime and any
expansion would be based on markel 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 lnvestments 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 olher under NW Natural, a wholly owned subsidiary of NW
Holdings:
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 13 of 210
12
Table of Contents
5.4 Bcf of the Mist gas storage facility contracted to utilities and third-
party marketers;
natural gas assel management activities; and
appliance retail center operations.
WATER. During 20 18, 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 20 19.
MIST GAS STORAGE. The Mist gas storage facility began operations in
'1989. lt 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. lntrastate 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. ln Oregon, NW Natural has a mechanism to recover expenses,
subject to an earnings test and allocation rules. See Part ll, ltem 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. ln 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.
Exhibit No.'t
J. Palfreyman, Dl
Gem State Water Company
Page 14 ol 210
'13
Table of Contents
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 cuslomers was considered to be production of emissions
attributable to the utility. ln December 2017, a Washington State Court
ruled that the DOE lacked legislative authorily to regulate non-emitting
sources, such as local distribution companies. The DOE has appealed
the ruling and oral argumenls 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 associaled with our
cuslomers' 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 ln-Boundary GHG lnventory
Preliminary 2015 Figures. Sales of natural gas to residential and
commercial customers - customers NW Natural procures gas for -
accounls 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
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"'
Non-Unionized Employees
Total NW Natural
Other Entities:
Water Company Employees
Other
Total Other Entities
635
532
1,167
16
15
31
Total Employees
'' lvlembers of the Office and Profess
(OPEIU) Local No. '1 1, AFL-CIO.
1,198
ional Employees lnternational Union
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 REG'STRANTS
For information concerning executive officers, see Part lll, ltem 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 lnternet site where reports, proxy
statements, and other information filed can be read, copied, and
requested online at its website (www.sec.gov). ln addition, we make
available, free of charge, on our website (www.nwnaturalholdings.com),
our annual reports on Form 10-K, quarterly reports on Form 'l 0-Q, current
reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Sectron 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. lnformation
contained on our website is not incorporated by reference into this
annual report on Form 10-K.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 15 of 210
14
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.
Table of Contents
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 lndependence 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 [phone] ext. 2402.
15
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 16 of 210
Table of Contents
ITEI\4 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", ltem 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 Generallv
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 tn 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 ldaho 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
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. Certaln of NW Natural's, and possibly
NW Holdings', propefties 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 lo these properties. A
regulatory asset at NW Natural has been recorded for estimated costs
pursuant to a Deferral Order from the OPUC and WUTC. ln 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. ln 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State water Company
Page 17 ol 210
16
Table of Contents
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 20'18 or
when we obtain greater certainty of environmental costs, whichever
occurs first. We submitted information for review in 20'18, 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
buslnesses, 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 resull in increased compliance costs or
additional operating restrictions, which may or may not be recoverable in
customer rates or through insurance. lf these costs are not recoverable,
they could have an adverse effect on NW Holdings'or NW Natural's
financial condition and results of operations.
GLOBAL CLIMATE CHANGE RISK. Fulure 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 busrnesse s 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 18 of 210
17
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STRATEGIC TRANSACTION RISK. Nt4l Holdings' and NW Natural's ability to
successfully complete strategic transactions, including merger,
acquisition, divestiture, joint venture, buslness 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. Nl4lHoldings and NW Naturals buslness
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{erm 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. /nvestrng ln buslness development projects
through partnerships, joint ventures or ofher buslness 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. ln 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 19 of 210
18
Table of Contenls
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. ln addition, while the cost of lhe 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. Iransportlng and storing natural gas involves
numerous risks that may result in accidents and other operating risks
and cosfs, 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
operalional levels or contractual commitments to our customers;. problems maintaining, or the malfunction of, pipelines, wellbores
and relaled equipment and facilities that form a part of the
infrastruclure 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 accidenls, 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
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. Nt/yHoldings and NW Natural may be
adversely impacted by local or national dlsasfers, pandemic illness,
terrorist activities, cyber-attaaks or data breaches, and other extreme
evenls lo 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. ln 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 cuslomers 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.
HOLD|NG COMPANY DIVIDEND RISK. As a holding company, NW Holdings
depends on its operating subsldlarles, including NW Natural, to meet
financial obligations and the ability of NW Holdings to pay dividends on
its common sfock ls 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 interesls 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
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 20 of 210
19
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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.
ln 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 formalion, 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.
lf NW Natural's long{erm secured credit ratings are below A- for S&P
and 43 for Moody's, dividends may be issued so long as NW Natural's
common equity is 45% or above. lf NW Natural's long{erm secured
credit ratings are below BBB for S&P and Baa2lor 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{erm secured
credit ratings fall to BB+ or below for S&P or Bal or below for Moody's, or
if NW Natural's common equity is below 44ok.ln each case, with the
common equity level to be determined on a preceding or projected 13-
month basis.
EMPLOYEE BENEFIT RISK. Ihe 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{ime 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 ofthe 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 acluarial 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. ln these circumstances, NW Natural may be required to
recognize increased contributions and pension expense earlier than it
had planned to the extent that the value of pension assets is less than
the total
anticipated liability under the plans, which could have a negative impact
on NW Holdings' and NW Natural's financial condition, results of
operations and cash flows.
WORKFORCE RISK. NW Holdings and NW Naturals busrnesses are
heavily dependent on being able to attract and retain qualified
employees and maintain a competitive cost structure with market-based
sa/arles 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-ClO, 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 R!SK. 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
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 21 ol 210
20
Table of Contents
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. ln 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
iudgments 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
iudgments 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.
ln this regard, the Tax Cuts and Jobs Acl of2017 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. lnternal Revenue Code. Such changes include a
reduction in the corporate tax rate from 35% lo 21o/o and limitations on
certain corporate deductions and credits, among other
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 lnfrastructure 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. lf 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. Nl,yNalural'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 cannol entirely eliminate the risks
associated with hedging. Additionally, NW Natural's hedging activities
may cause it to
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 22 ol 210
21
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. ln 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.
Table of Contents
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.
ln 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 treatmenl 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 failto perform, NW Natural may be
forced to enter into alternative arrangements to meet its normal
business requirements. ln 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{erm 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. lf 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. NI/Y 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{erm and long{erm 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
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{erm
and long{erm 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 lo 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
resulls 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
buslnesses, NW Holdings' and NW Natural's financial positions, resu/ts 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.
lf 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,
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 23 ol 210
22
Table of Contents
negative opinions about us could make it more difficull 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 Nalural'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. ln 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. /n 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.
lf 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 bus,ness, whereas
lower gas price volatility may adversely affect NW Natural's and NW
Holdings' gas storage buslness, 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. Al NW Natural, the cost we pay for natural
gas is generally passed through to customers through an annual PGA
rate adjustment. lf 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
fulure earnings. Additionally, because a portion (10o/o or 20o/o) 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, lf prices and volatility remain low or decline further, then the
Exhibit No. 't
J. Palfreyman, Dl
Gem State Water Company
Page 24 ol 210
23
Table of Contents
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. lmpairments 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 ofsuch assets. Projected
cash flows depend on the future operating costs and projected revenues
associated with the asset. ln 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. lf 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. NWHoldings'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. lnsufficient 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 buslness is subject to increased
competition which could negatively affect NW Holdings'or NW Natural's
results of operations.
ln the residential and commercial markets, NW Natural's NGD business
competes primarily with suppliers of electricity, fuel oil, and propane. ln
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. lf 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 cuslomer growth rate and NW Holdings' and NW
Natural's results of operations.
Our natural gas storage operations compele 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. lncreased 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 pafties to supply the natural gas in its NGD segment, and
limitations on NW Natural's ability to obtain supp/ies, 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, pressurizalion levels for those pipelines were reduced for
assessment and testing. lf 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 associaled with actions necessary to mitigate service disruptions,
both of which could significantly and negatively impact NW Holdings' and
NW Natural's results of operations.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Gompany
Page 25 ot 210
24
Table of Contents
SINGLE TRANSPORTATION PIPELINE RISK. NW Natu ral relies on a single
pipeline company for the transpoftation of gas to lts 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 direclly 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 lhe Alberta and the U.S.
Rocky Mountain supply basins. lf 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
buslnesses depend on third-pafty 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. lf 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
1 1% of its customers are
located in Washington where it does not have a weather normalization
mechanism. These effects could have an adverse effect on NW
Holdings' and NW Natural's financial condition, results of operations
and cash flows.
CUSTOMER CONSERVATION RISK. Customers' conservation efforts may
have a negative impact on NW Holdings' and NW Naturals reyenues.
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. ln 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 Primarilv 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
buslnesses 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:
contaminalion 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 26 of 210
.F
Table of Contents
ITEI\4 2. PROPERTIES
NW Natural's Natural Gas Distribution Properties
NW Natural's natural gas pipeline syslem consists of approximately
20,000 miles of distribution and transmission mains located in its
service territory in Oregon and Washington. ln 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. ln anticipation of the
expiration ofthe 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. ln 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 in2020.
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 ldaho, associated with
water distribution entities that were acquired during 20'18. Pipelines are
located in
municipal streets or alleys pursuant to franchise or occupation
ordinances, in county roads or state highways pursuant to agreements
or permits granted pursuant lo 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.
ITEIV1 3. LEGAL PROCEEDINGS
Other than the proceedings disclosed in Note 17, we have only
nonmaterial litigation in the ordinary course of business.
ITEM 4. ]\4INE SAFETY DISCLOSURES
Not applicable.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 27 ol 210
26
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUIry 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 1 934 during the quarter ended December 31,2018:
lssuer Purchases of Equitv Securities
Period
Total Number
of Shares Purchased(')
Average
Price Paid per Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans or
Programs(''
Maximum Dollar Value of
Shares that lvlay Yet Be
Purchased Under the Plans or
Programs("
Balance forward 2,124,528 $16,732,648
11101118-11130118 1 ,147 69.02
Total
(l)
1.147 2,124,528 $16,732,648
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
Reinvestmenl 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 slock were accepted as payment for stock
option exercises pursuant to the NW Natural Restated Stock Option Plan.
During the quarter ended December 31 , 20 1 8, no shares of NW Holdings common slock were repurchased pursuant to the Board-Approved share repurchase
program. ln 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.
27
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 28 ol 2'lO
$
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
ln thousands, except per share data
NORTHWEST NATURAL HOLDING COMPANY
SELECTED FINANCIAL DATA
For the year ended December 31,
2018 2017 2016 2015 2014
Operating revenues
Earnings from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Earnings from continuing operations per share of common
slock:
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
Total assets, end of period
Total equity
Long-term debt ''
ln thousands, excepl per share data
2.13 $
2.12
1.87
l. to
2.16
1.85
$
$
706,143 $
67,311
(2.742)
64,569
2.24 $
2.24
1.89
3,242,662 $
762,634
706,247
755,038 $
72,073
(1 27,696)
(55,623)
(4.45) $
(4.44)
(1 94) $
(1.e3)
1.88
3,039,746 $
742,776
683,1 84
668,173 $
62,419
(3,524)
58,895
2.26 $
2.25
(0.13) $
(0.13)
3,079,801 $
850,497
679,334
717,888 $
60,026
(6,323)
53,703
2.19
2.19
747,251
66,006
(7,314)
58,692
$$2.34 $
2.33
2.51
2.51
(0.10) $
(0.0e)
l.4l
$
$
$
(0.23) $
(0.23)
(0.271
(0 26)
1.96
1.96
1.86
3,069,410 $
780,972
569,445
3,056,326
767,321
593,095
Excludes $20 million of long-term debt in 2014 associated with our discontinued operations.
NORTHWEST NATURAL GAS COMPANY
SELECTED FINANCIAL DATA
For the year ended December 31
2018 2017 2016 2015 2014
Operating revenues
Earnings from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Total assets, end of period
Total equity
Long-lerm debt(')
$705,571 $
68,049
(1,723)
66,326
3,192,736 $
715,668
704,134
755,038 $
71,720
(127,343)
(ss,623)
3,043,676 $
742,776 $
683,184 $
667,949 $
62,835 $
(3,e40) $
58,895 $
3,081,470 $
850,497 $
679,334 $
717,664 $
60,511 $
(6,808) $
53,703 $
3,072,100 $
780,972 $
569,445 $
747,02
66,50
(7,81
58,69
3,063,71
767,32
593,09
$
(1)Excludes $20 million of long-term debt in 2014 associated with Gill Ranch discontinued operations.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 29 of 210
28
Table of Contents
ITEM 7. MANAGEIVENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 'l ,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. ln 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 lhe Notes to the
Consolidated Financial Statements in ltem B of this report.
ln 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 201 8 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, 201 8, 2017 , and 201 6 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:
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., lnc. (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 ldaho, LLC (NWN Water of ldaho); 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. ln 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
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 30 of 210
29
Table of Contents
measures to their closest U.S. GAAP measure used in subsequent
sections of ltem 7 are provided below.
ln millions, except per share data
2018 2017 2016
Amount Per Share Amounl Per Share Amounl Per Share
Net income from continuing operalions
Adjustments:
Regulatory environmenlal disallowance''
Tax effects of 2017 TCJA remeasurementr''
Tax effects of non-GAAP ad.iustment
Adjusted net income from continuing operations
NGD segment net income from continuing operations
Adjustments:
Regulatory environmental disallowancel"
Tax effects of 2017 fCJA remeasurement'''
Tax effects of non-GAAP adjustment
Adjusted NGD segmenl net income from continuing operalions
Other net income from continuing operations
Adjustments:
Tax effecls of 2017 TCJA remeasurement''
Adjusted other net income from continuing operations
NW NATURAL NON.GAAP RECONCILIATIONS
ln millions
$ 67.3 $ 2.33 $ 72.1 $ 2.51 $ 62.4 $ 2.25
J,J 0.12
(3 4) (0.12')
(1 3) (0.05)
$ 67.3 $ 2.33 $ 68.7 $ 2.39 $ 64.4 $ 2.32
$ 57.5 $ 1.99 $ 60.5 $ 2.10 $ 54.6 $ 1.96
3.3 0.12
1.0 0.03
(1 3) (0.05)
$ 57.s $ 1.9e $ 61.s $ 2.13 $ s6.6 $ 2.03
$9.8 $ 0.34 $ 11.6 $ 0.41 $7.9 $ 0.29
(4.4\(0.15)
$9.8 $ 0.34 $7.2 $ 0.26 $7.9 $ 0.29
2018 2017 2016
Amount Amount Amount
Net income from continuing operations
Adjustments:
Regulatory environmental disallowance "
Tax effects of 2017 TCJA remeasuremenl(t'
Tax effects of non-GAAP adjustment
AdJusted net income from continuing operations
NGD segment net income from contrnuing operations
Adiustments:
Regulatory environmental disallowancel"
Tax effects of 201 7 TCJA remeasurement I
Tax effects of non-GAAP ad.justment
Adjusted NGD segment net income from conlinuing operatlons
Other net income from continuing operations
Adjustments:
Tax effects of 2017 TCJA remeasurement't'
Adjusted other net income from continuing operations
$68.0 $71.7 $62.8
(1 3
(3.0)
$68.0 $68.7 $64.8
$57.5 $60.5 $
1.0
54.6
3.3
(1.3
$57.5 $61.5 $56.6
$10.6 $11.2 $8.3
(4 0)
10.6 $7.2 $
Nole: Tolals nay nol foot due to rcunding.
(')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 lncome.
(') 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% lo 21o/o 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 lncome. 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 31 of 210
$8.3
NW HOLDINGS NON-GAAP RECONCILIATIONS
Table of Contents
EXECUTIVE SUMMARY
We manage our business and strategic initiatives with a long{erm 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 201 8 for an annual
growth rate of 1.7o/o 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,
Key financial highlights for NW Holdings include
ln millions, except per share data
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 1 8,000
connections; and
delivered increasing dividends for the 63'd consecutive year to
shareholders.
2018 2017 2016
Amounl Per Share Amount Per Share Amount Per Share
Nel income from continurng operations
Loss from discontinued operations, nel of tax
Consolidated net income (loss)
Adjusted nel income from continuing operations("
Natural gas distribution margin
Key financial highlights for NW Natural include:
ln millions, except per share data
$67.3 $
(2.7)
2.33 $
(0.0e)
72.1 $
(127.7)
2.51 $
(4.44\
62.4
(3.s)
$2.25
(0.13)
$
$
$
$
$
$
$
$
646 $
67.3 $
383.7
2.24
aaa
(55.6) $
68.7 $
?O' A
(1.e3)
2.39
58.9 $
64.4 $
376.6
2016
2.12
2018 2017
Amount Amount Amount
Net income from continuing operations
Loss from discontinued operations, net of tax
2018 COMPAREDTo2017. 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.'t million and $71.7 million,
respectively, in 2017 . The decrease was primarily due to the benefit
associated with the TCJA deferred income tax remeasuremenlin20lT
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 ltem 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 addilional 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{ax regulatory environmental
disallowance in 2016.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 33 of 210
68.0 $
(1 7)
71.7 $
(127.3\
62.8
(3 e)
Consolidated net income (loss) $ 66.3 $ (55.6) $
Adjusted net income from conlinulng operations{" $ 68.0 $ 63.7 $
'' See the Non-GAAP Reconciliations table at the beginning of ltem 7 for a reconciliation of this non-GAAP flnancial measure to its closest U.S. GAAP measure.
Eao
64.8
31
$
Table of Contents
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 ltem 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 201 7
compared to warmer than average weather in 20',l6; 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.
32
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 34 of 210
Table of Contents
2019 oUTLOOK
Our 20 19 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{erm strategic objectives:
Delivering Our Products Grow Our Businesses
Ensure Safe and Reliable Service
Provide a Supenor Customer Experience
Advance Constructive Legislative Policies and Regulation
SAFETY AND RELIABILITY. Delivering our products safely and reliably to
customers is our first priority. During 20 19, 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 infrastruclure, 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. ln 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
oulcomes 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.
Enable NW Nalural Growth
Lead in a Low-Carbon Future
lntegrate and Grow our Water Businesses
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. ln 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 communilies.
LOW-CARBON PATHWAY. We are deeply committed to a clean energy
future. lt'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
undeMay 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 807o 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 ANO 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.
ln 20'19 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 35 of 210
33
Table of Contents
DIVIDENDS
NW Holdings dividend highlights include:
Pet common share 2018 2017 2016
ln 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 ofrecord on January 31,
2019, reflecting an indicated annual dividend rate of $1.90 pershare.
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.
34
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 36 of 210
Dividends paid $ 1.8925 $ 1.882s $ 1.8725
Table of Contents
RESUTTS OF OPERATIONS
Regulatorv Matters
Requlation 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. ln 20 1 8,
approximately 89% of NGD customers were located in Oregon, with the
remaining 1 1% 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
Washinglon, 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 sel 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. ln June 20'lB, 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 .78o/o, and a capital structure of 50% common
equity and 50% long{erm 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 .317ok, and a
capital structure of 50% common equity and 50% long{erm debt. For
additional information, see " Reg u I atory P roceedi ng 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{erm debt,
and 44o/o long{erm 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.Sok common equity,49.5% long{erm
debt, and 1% short{erm debt. For additional information, see
" Regu I atory P rocee di ng 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. ln
January 20'18, various state parties filed a request with the FERC to
adjust the revenue requiremenls of public utilities to reflect the recent
reduction in the federal corporate income tax rate and other impacts
resulting from the TCJA. ln 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-Rale Case" below.
Requlatorv Proceedino Updates
During 20 18, 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 . ln 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. ln February 2017, NW Natural filed
applications with the OPUC, WUTC, and CPUC for approval to
reorganize under a holding company structure. ln 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 37 ol 2'10
35
Table of Contents
to Washington customers. The firslyear credit to both Oregon and
Washington customers was given in conjunction with the PGA filings,
with the rate adjustments commencing on November 1,2018.
TAX REFORM DEFERRAL. ln 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 20 18 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 ldaho Falls, ldaho acquisition in July 2018 from the IPUC
and closed the transaction in September 2018.. Lehman Enterprises, lnc. and Sea View Water LLC - We
received regulatory approval from the WUTC for these Whidbey
lsland, Washington acquisitions in October 2018 and closed
the transaction in November 2018.. Sunriver Water, LLC and Sunriver Environmental, LLG - We
filed an application for regulatory approval from the OPUC for
the Sunriver Water, LLC acquisition in October 20't 8 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, ldaho acquisitions in February 20 19.. Estates Water Systems lnc. and Monterra lnc - 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.
OREGON GENERAL RATE CASE. On October 26, 201 8, the OPUC issued an
order regarding NW Natural's general rate case originally filed in
December 2017 and approved the following items.. Annual revenue requirement increase of $23.4 million or 3.72Yo
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 ol 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.'l million to revenue requirement for a
total of $1'l .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 wenl into effect on November 1,2018.
ln addition to the items above, the OPUC issued an order on October 26,
20'18, to freeze NW Natural's pension balancing account as of October
31 , 20"18. The order directed NW Natural and the other parties to the rate
case to engage in further regulatory proceedings extending the general
rale case docket to resolve open issues with respect lo the recovery of
the pension balancing account, and treatment of the '1o-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 , 201 8 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 38 of 210
36
Table of Contenls
million. lf 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. lf the Settlement is approved, NW Natural expects to recognize an
aftertax 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 lvlarch 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{erm debt, 1.0% short-term debt,
and 49.5o/o 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.'l million primarily related to property, plant, and equipment
and an expected $2.1 million associated with interim tax benefits
accumulated from January 1,20181o November30, 2019. NW Natural is
req uesting that the $ 1 8. 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.
ln addition, NW Natural is requesting a decoupling tariff for Washington
customers, which is intended to allow the NGD business to continue
encouraging customers to conserve energy without adversely affecting
earnings due to reductions in sales volumes. The proposed decoupling
tariff would also adjust for any deviation from normal usage, including
weather.
Finally, NW Natural is requesting that the WUTC review 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 approxim ately 3.32o/o 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 '1 1 months. NW
Natural has requested that the new rates take effect December 1, 201 9
INTEGRATED RESoURCE PLAN (lRP). 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 lRPs in August 2018, and
received both a letter of compliance from the WUTC and
acknowledgment by the OPUC in February 2019. The lRPs 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.
oEPRECIATION 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. ln December 2016, NW Natural filed the
required depreciation study with the OPUC. ln September 2017, the
parties to the docket filed a settlement with the Commission requesting
approval of updated depreciation rates. ln 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.
Exhibit No. 1
J. Palfrcyman, Dl
Gem State Water Company
Page 39 of 210
37
Table of Contents
Rate Mechanisms
During 2018, NW Natural's approved rates and recovery mechanisms for
each service area included:
OR
2018 Rate
Case
(effective
11t112018)
Authorized Rate Struclure
ROE
ROR
DebUEquity Ratio
ln September 20'18, 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 2.1o/o lrom the combined effect of the PGA and Oregon rate
case and Washington residential customers' rates declined by 7 .2o/o.ln
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 currenl earnings from the incentive sharing is either 20% or
10% of the difference between actual and estimated gas costs,
respectively. Forthe 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 aclual 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. lf 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% defenal gas cost option, then NW Natural retains all
earnings up to 150 basis points above the currently authorized ROE. lf
NW Natural selects the 90% deferral option, then it retains all earnings
up to 1 00 basis points above the currently authorized ROE. For the 201 7-
'18 and 2018-19 gas years, it selected the 90% deferral option. The ROE
threshold is subject to adjustmenl annually based on movements in
long{erm interest rates. For calendar years 2016, 2017, and 2018, the
ROE threshold was 1 'l .06%, 10.66%, and 10.48%, respectively. There
were no refunds required for 2016 and 2017 . NW Natural does not
expect a refund for 20'18 based on results, and NW Natural anticipates
filing its 20 1 8 earnings test in May 2019.
cAS RESERVES. !n2011, the OPUC approved the Encana gas reserves
transaction to provide long{erm 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 cuslomer rates. The net
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 40 of 210
2012 Rale
Case
9.5%
7 .go/o
50%t50%
9.4o/o
7.3%
50%t50%
2009 Rate
Case
10j%
8.4%
49%t51%
X
Key Regulalory Mechanisms:
PGA
Gas Cost lncentive Sharing
Decoupling
WARM
Environmental Cost Deferral
Environmental Cost
Recovery (SRRM)
Pension Balancing
lnterstate Storage and Asset
Management Sharing
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 cosls, 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 al49o/o in financial swap
and option contracts and 260/o in physical gas supplies for Oregon and
Washington.
As of December 31 ,2018, NW Natural is also hedged in future gas years
at approximately 1 7% for the 2019-20 gas year and between 1% and 8%
for annual requirements over the subsequenl five gas years. Hedge
levels are subject to change based on actual load volumes, which
depend to a certain extenl 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.
38
Table of Contents
investment under the original agreement earns a rate of return.
ln 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 ior 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. ln 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 resel 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. ln 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. ln 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 temperalure variances from average wealher, 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
for about 11o/o of lolal customers. See "Business Segments-Natura/
Gas Distribution " below.
INDUSTRIAL TARIFFS. The OPUC and WUTC have approved tariffs
covering NGD service to major industrial customers, which are intended
to give NW Natural certainty in the level of gas supplies needed to serve
this customer group. The approved terms include, among other things,
an annual election period, special pricing provisions for out-of-cycle
changes, and a requirement that industrial customers complete the term
of their service election under NW Natural's annual PGA tariff.
ENVIRONMENTAL COST DEFERRAL AND SRRM. 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. Canying 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 ofthe poslreview deferred balance. NW Natural earns a
carrying cost equal to the amortization rate determined annually by
the OPUC, which approximates a short{erm borrowing rate. NW
Natural included $6.1 million and $7.4 million of deferred
remediation expense approved by the OPUC for collection during the
20 18-19 and2017-18 PGAyears, respectively.
ln addition, the SRRIT/ 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 rn the operating
expenses section of the Consolidated Statements of Comprehensive
lncome (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 at9.5o/o and the last two months at 9.4%, reflecting the ROE
change from NW Natural's most recent rate case effective November 1,
2018.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 4'l of 210
20
Table of Contents
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-ove/t)
$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(')
Total amount transferred to post-review(1) Prior year carry-over results when the prior year amount transferred to pos!
review is negative. The negative amounl is carried over to offset annual
spend in the following year.(') Deferred interest is added to annual spend to the extenl 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. lf 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. FTom 2O1 1
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, 20 1 9, 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 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 ANO 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:
ln millions 2018 2017
Oregon $ 11.7 $ 11.7 $ 9.4
Washington 1.0 1.0 1.0
Business Seqment - 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. ln 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 Mech an i sms"
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.
NGD segment highlights include:
Dollars and therms in millions, except EPS
data 2018 2017 2016
NGD net income $ 57.5 $ 60.5 $ 54.6
Adjusted NGD net income"' 57.5 61.5 56.6
EPS - NGD segment 1.99 2.10 1.96
Adjusted EPS - NGD segment'" 1.99 2.13 2.03
Gas sold and delivered (in therms) 1 ,128 1,240 1 ,085
NGD margin''' $ 383.7 $ 392.6 $ 376.6
"'See the Non-GAAP Reconciliations table at the beginning of ltem 7 for a
reconciliation of this non-GAAP financial measure to its closest U.S. GAAP
measure.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 42 ot 210
2016
40
Table of Contents
('z'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 ltem 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 B 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 2O17 , 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 20'17
primarily due to the impact of weather that was 26% warmer than the
prior period and 1sok warmer than average.
2017 COMPAREo 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 deferred income tax balances associated
with the TCJA in 2017 and the after{ax $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 ltem 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 201 7 increas ed 14o/o over 2016
primarily due to the impact of weather that was 48% colder than the prior
period and 15% colderthan average.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 43 of 210
41
Table of Conlents
NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:
Favorable/(Unfavorable)
ln thousands, except degree day and customer data 2018 2017 2016 2018vs.2017 2017vs.2016
NGD volumes (therms):
Residential and commercial sales
lndustrial sales and transportation
Total NGD volumes sold and delivered
NGD ooeratino revenues:
Residential and commercial sales
lndustrial sales and transportation
Other revenues
Less: Revenue taxes(')
Total NGD operating revenues
Less: Cost of gas
Less: Environmental remediation expense
Less: Revenue taxes("
NGD margin
.N.@''
Residential and commercial sales
lndustrial sales and transportation
Miscellaneous revenues
Gain from gas cost incentive sharing
Other margin ad.justments''
NGD margin
Egrcs-dg.E''
Average(''
Actual
Percent colder (warmer) than average weather(''
NGD lvleters - end of period:
Residential meters
Commercial meters
lndustrial meters
Total number of meters
NGD Meter qrowth:
Residential meters
Commercial meters
lndustrial meters
Total meter growth
661 ,1 63
467,040
740,369
499,924
609,222
475,774
(7e,206)
(32,884)
131 ,147
24,150
1,128,203 1,240,293 1,084,996 (1 1 2,090)155.297
$621,782
58,713
153
684,214
63,925
3,872
19,069
732,942
325,019
15,291
392.632
604,390
59,386
3,812
17,111
162,432)
(5,212).
(3,719)
(1 9,069)
79,824
4,539
bU
1,958
82.465
(64,431)
(1,993)
$b $$
680,648
255,743
11,127
30,082
650,477
260,588
13,298
(s2,294\
69,276
4,164
(30,082)
383,696 376,591 (8,936)16,04'l
b $352,710
30,817
5,542
(27],
(5.346)
355,736 $
31,U7
3,865
1,237
(s3)
338,060
30,989
3,796
3,960
(214\
(3,026)
(1,030)
1,677
(1,264)
(5,2e3)
17,676
858
69
(2,723\
161
$$
$ 383,696 $ 392,632 $ 376,591 $ (8,936) $ 16,041
2,714
Z,JIJ
(15)%
2,705
3,114
15%
I
(26)%
(11)
48%
680, 1 34
69,259
1,028
668,803
68,050
1,021
11 ,331
1,209
7
11,948
772
8
750,421 737,874 725,146 12,547 12,728
1.7 %
1.8%
0.7 0/o
1.7 %
1.8%
1.10h
08%
1.8%
(1)
t2t
(3)
(4)
(5)
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 impacl on NGD margin results. For additional information, see Note 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.
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
inmme tax rate.
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.
Average weather represents the 2s-year average of heating degree days. Through October 31 , 201 8, average weather is calculated over the period 1 986 - 201 0, as
determined in NW Natural's 2Ol2Oregon general rate case, and beginning November 1,2018, average weatheris calculated overthe period May 31, 1992through
May 30, 2017 , as determined in NW Natural's 2018 Oregon general rate case.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 44 of 210
42
2,716
2,098
(23)'/"
656,855
67,278
1 ,013
Table of Contents
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 cuslomers 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 fulechanism" above.
NGD residential and commercial sales highlights include:
ln miilions 2018 2017 2016
million in natural gas distribution margin as a result of sales volume
increases ol 131 .2 million therms, or 22ok, due to customer growth and
the effects of colder than average weather in 20'17 compared to warmer
than average weather in the prior period.
lndustrial Sales and Transportation
lndustrial 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{hrough cost lo customers;
therefore, NGD profit margins are not materially affected by an industrial
customer's decision to purchase gas from third parties. lndustrial and
large commercial cuslomers 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.
411 .7
249.5
465.2
275.2
379.2
230.0
Volumes (therms):
Residential sales
Commercial sales
Total volumes
Operatino revenues:
Residential sales
Commercial sales
Total operating revenues
NGD marqin:
Residential:
Sales
Alternative revenues:
Wealher 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
Total NGD margin
$ 621.7 $ 684.2 $ 604.4
$ 240.0 $ 262.1 $ 223.2
Volumes (therms):
lndustrial - firm sales
lndustrial - firm transportatlon
lndustrial - interruptible sales
lndustrial - interruptible
transportation
Total volumes
NGD maroin:
lndustrial - sales and
transportation
661.2 740.4 609.2
$418.4 $
203.3
455.9 $
aao a
404.3
200.1
NGD industrial sales and transportation highlights include:
tn mittions 2018 2017 2016
353
162.7
50.6
218.4
35.7
167.7
33. I
241.4
a1 0
156.9
50.4
234.7
$ 352.7 $ 355.8 $ 338.1
499.9 475.8
$30.8 $31.8 $31.0
2018 COMPARED TO 2017. lndustrial 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. lndustrial 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 warmerthan average weather in 20'16, 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.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 45 of 210
7.6
(0 6)
1.9
(1 1.e)
(2.41
12.7
0.8 467.O
248.9
103.7
247.8
101 .5
(4.6)
11.1
236.7
87.2
2.4
7.3
5.0
9.2
(e.6)
103.8 108.0 101.4
2018 COMPAREDTO 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 11oh, 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
43
Table of Contents
Other NGD revenue highlights include:
ln millions 2018 2017 2016
Other NGD revenues
Cost of gas highlights include:
Dollare and thems in millions
Other NGD revenue increased $1.6 million in 2018 comparedlo20lT
due to increases in entitlement and curtailmenl 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 ofgas 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 cuslomers at the actual cost incurred, or
expected to be incurred. Customer rates are sel 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 Adjustmenf"above. ln 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 Acflvilies" below.
compared to warmer than average weather in 2016, and customer
growth.
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 201 7 and 2016, respectively. ln 20'18,
actual prices closely aligned with estimated prices included in customer
rates. ln 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 inveslment 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{ax 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 pretax income with the remaining
67% credited to a deferred regulatory account for credit to NGD
customers. ln conjunction with the Oregon rate case, effective November
2018 NW Natural relains 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:
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 46 of 210
c s.s $3.e $2a
2018 2017 2016
Cost of gas
Volumes sold (therms)
Average cost of gas (cents per
therm)
Gain from gas cost incentive sharing
b 255.7 $
747
0.34 $
325.0 $
831
0.s9 $
1.2
260.6
693
0.38
4.0
$
2018 COMPARED TO 2017. Cost of gas decreased $69.3 million, or 21Yo,
primarily due to the 10% decrease in volumes sold due lo 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 25Yo,
primarily due to the 20% increase in volumes sold due to colder than
average weather in 201 7
44
Table of Contents
ln millions, except EPS data 2018 2017 2016
NW Natural other - nel income
Other NW Holdings activity
NW Holdings other - net income
EPS - NW Holdings - other
$ 10.6 $
(0.8)
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 agreemenls 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 assel management agreements
for Mist storage and transportation capacity.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include
ln millions 2018 2017 2016
$ 155.2 $ 152.2 $ 136.0
Delinquent customer receivable balances continue to remain at
historically low levels. Bad debt expense as a percent of revenues was
O.1oh lor 201 8, 20 17, and 2016.
(0 4)Depreciation and Amortization
7.9 Depreciation and amortization highlights include:
ln millions 2018 2017 201 6
NW Natural
Other NW Holdings depreciation and
amortization
$ 85.0 $ 81.0 $ 77.6
0.2 0.1
11.2 $
0.4
8.3
9.8 1 1.6
0.34 0.41 0.29
NW Holdings $ 85"2 $ 81.1 $ 77.6
NW Natural
Other NW Holdings operations and
maintenance
NW Holdings
1.5 0.2 0.7
$ la- u *r" $ 1r-
The significant drivers of changes in depreciation and amortization
discussed below apply to both NW Holdings and NW Natural.
2018 COMPAREo TO 2017 . Depreciation and amortization expense
increased by $4.'l 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 lransmission and distribution systems,
storage facilities, and technology.
Other lncome (Exoense). Net
Other income (expense), net highlights include
ln millions 2018 2017 2016
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 lo 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.
Pension and olher postretirement
costs other than service costs
Equity portion of AFUDC
Gains from company-owned life
insurance
Net interest income (expense) on
deferred regulatory accounls
Other non-operating
NW Natural lolal other income
(expense), net
Other NW Holdings aclivity
NW Holdings total other income
(expense), net
4.1
1.7
1.7
(2.0)
(6 1)
2.7
2.5
2.0
(1.3)
$ (e.1) $$ (7.0)
1.7
(0 1)
(1 6)
$ (3.6) $(0.2) $
(0 1)
(7 0)
(0 2)
$ (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 COMPAREOTO2OlT. 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 47 ol 210
45
Table of Contents
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 20"16, an increase of
$2.7 million in the equity portion of AFUDC, and $0.8 million in higher
gains from company-owned life insurance.
ln addition to fluctuations in other income (expense), net reported above,
lrom20ll 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 forthe years ended December 31 ,2018,2017 and2016,
respectively. As a result, increased pension costs had a minimal effect
on other income (expense), net in 2018,2017, and 20'16, 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 3'1 , 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".
lnterest Exoense. Net
lnterest expense, net highlights include
ln millions 2018 2017 2016
2017 COMPARED TO 2016. lnterest 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,
pa(ially offset by increased interest expense of $1.5 million due to the
issuance of long{erm debt in December 2016 and August 2017.
lncome Tax Exoense
NW Holdings income tax expense highlights include:
ln millions 2018 2017 2016
$ 24.2 $ 41.0 $lncome tax expense
Effects of non-GAAP adjustments'
Effects from the TCJAI')
Adjusted income tax expense
43.0
1.3
3.4
$ 24.2 $ 44.4 $ 44.3
Effective tax rate 26.4% 36.3%
Adjusted effective tax rate 26.40/o 39.3ok
''' See the Non-GAAP Reconciliations table at the beginning of ltem 7 for a
reconciliation of this non-GAAP financial measure to its closest U.S.GAAP
measure.
40 8%
40.8%
2016
NW Natural income tax expense highlights include:
tn millions 2018 2017
lncome tax expense
Effects of non-GAAP adjustments'
Effects from the TCJA''i
Adjusted income tax expense
$ 24.5 $ 41.5 $43.3
1.3
3.0
$ 24.5 $ 44.5 $ 44.6
NW Natural
Other NW Holdings interest expense
NW Holdings
The significant drivers of changes in interest expense, net discussed
below apply to both NW Holdings and NW Natural.
2018 COMPARED TO 2017. lnterest expense, nel 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.
Effective tax rate 26.4% 36.6% 40.8o/o
Adjusted effective tax rate 26.4Yo 39.3% 40.8Yo
" See the Non-GAAP Reconciliations table at the beginning of ltem 7 for a
reconciliation of this non-GAAP financial measure to its closest U.S.GAAP
measure.
The significant drivers of changes in lncome tax expense discussed
below apply to both NW Holdings and NW Natural.
2018 COMPAREOfO2017. The effective tax rate decreased by 9.9% and
10.2o/o al NW Holdings and NW Natural, respectively, primarily due to a
decline in the statutory income tax rale from 39.5% to 26.5% as a result
of the TCJA enactment in 2017 . lncome 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 al 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 12.9o/o al 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 ltem 7 for additional information.
2017 COMPARED TO 2016. The effective tax rate decreased by 4.5% and
4.2o/o al NW Holdings and NW Natural,
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 48 of 210
$37.0 $
0.1
37.5 $ 38.1
$ 37.1 $ 37.5 $ 38.1
46
Table of Contents
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 ltem 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.
Pendino Sale of Gill Ranch Storaoe
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
lhe 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.
ln 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 contraclual relationships, and
agrees lo 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 ofthe 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 exlension for six months if the CPUC has not
issued an order approving the transaction by that date.
ln 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 settlemenl agreement with the CPUC. The CPUC is
expected to rule on the settlement agreemenl 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 1 1 bankruptcy. Although we do not currently anticipate that the
PG&E filing will affect the sale of Gill Ranch, we cannot fully predicl 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 lax, from
the results of continuing operalions of NW Holdings for all periods
presented. See Note '18 for more information on the Sale Agreement and
the results of our discontinued operations.
The CPUC regulates Gill Ranch under a markelbased 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 20'18, 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 20'19.
Short{erm 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{erm goals is to maintain a strong and balanced
consolidated capital structure, while maintaining a long{erm 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{erm commercial paper maturities. See " Liquidity
and Capital Resources"below and Note B.
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:
December 31
2018 2017
47.1%
43.3
9.6
Common stock equity
Long-term debt
Short-term debt, including cunent maturities of
long{erm debt
Total
44.4%
41 .1
14.5
100.0%
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 49 of 210
100.0%
47
Table of Contents
NW Natural's consolidated capital structure was as follows:
December 31
2018
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 467o 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 raliolo 44o/o. 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 567o.
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{erm debt and equity securities in the capital markets, NW Holdings
believes its liquidity is sufficient to meet anticipated near{erm cash
requirements, including all contraclual obligations, investing, and
financing activities as discussed in"Contractual Obligations and Cash
F/ours" below.
Natural Gas Distribution Segment
For the NGD business segment, short{erm 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{erm credit facilities, company-
owned life insurance policies, the sale of long{erm debt, and equity
contributions from NW Holdings. NW Natural's long{erm 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. ln 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 50 of 210
2017
Common stock equity
Long-term debt
Short-term debt, including current maturilies of
long-term debt
Total 100.0%100.0%
42.2
42.9%
14.9
47.1%
43.3
9.6
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{erm debt activity
at NW Natural. See further discussion below in "Cash Flows -F inancing Activities".
Liouidity and Caoital Resources
At December 3'l , 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. ln 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{erm fixed rate
environments are attractive.
NW Holdinos
For NW Holdings, shorlterm 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 shortterm
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{erm 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. lf 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. lf 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%. ln each
case, common equity ratios are determined based on a preceding or
projected '13-month average. ln addition, there are certain OPUC notice
48
Table of Contents
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 3'1 , 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{erm debt for
approved purposes.
ln the event senior unsecured long{erm 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 fealures underlying these
contracts were triggered on December 3't, 2018, assuming long{erm
debt ratings dropped to non-investment grade levels, NW Natural could
have been required to post $4.5 million in collateral with our
counlerparties. See "Credlf Raflngs" 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 (N/AP-21) and the
Highway and Transportation Funding Act of 2014 (HATFA). See
"Application of Critical Accounting Policies-Acco unting for Pensions and
Po streti re m e nt Beneflts" below.
BONUS OEPRECIATION. 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 afler 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. ln 2015, NW Natural
received an Order from the OPUC regarding the SRRM mechanism and
began recovering amounts through NGD business rates in November
2015. ln addition, the OPUC issued a subsequent Order regarding
SRRM implementation in
January 2016. See Note 17, and "Results of Operations-Regulatory
Matters-Enylro n m e ntal Cosls" 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{erm 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 F/ows" 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 " Contra ctua I Obligation s"
below.
ln October 20'17, 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 overthe 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 consideralion of build{o-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 expendilures
forecasts below, and have no impact on short{erm liquidity. When the
new lease accounting standard became effective for NW Holdings and
NW Natural in 20'19, the associated build{o-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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 51 of 210
49
Table of Contents
Contractual Oblioations
The following table shows contractual obligations from continuing operations at December 31 ,2018 by maturity and type of obligation
Payments Due in Years Ending December 31,
ln millions 2019 2020 2021 2022 2023 Thereafter Total
NW Natural
Short-term debt maturities
Long{erm debt maturities
lnterest on long-term debt
Postretirement benefi t payments(')
Operating leases
Gas purchases{"
Gas pipeline capacity commrtments
Other purchase commitmenls(''
Other long{erm liabilitiesla'
NW Natural Total
NW Holdings
Short- and long-term obligations 5
NW Holdings Total
$$$b o $U217.5
30.0
367
25.1
5.4
144.5
82.7
17.3
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
90.0
28.7
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
60.6
559.2
0.4
222.0
0.3
'193.6
0.3
124.4
0.3
213.9
0.3
'1,649.8 2,962.9
1.4 3.0
$ 559.6 $ 222.3 $ 193.9 $ 124.7 $ 214.2 $ 1,651.2 $ 2,965.9
('' 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 Westem States multiemployer pension plan due to our withdrawal from the plan in December
2013. See Note 9.(') 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 16.1') Other purchase commitments primarily consist of remaining balances under existing purchase orders.
timing of these payments are uncertain; however, these payments are unlikely to all occur in the next 1 2 months.(') Short- and long{erm obligations include short- and long-term debt obligations and other immaterial liabilities.
ln 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 invesligations. See Note
'17 for a further discussion of environmental remediation cost liabilities.
Short-Term Debt
The primary source of short{erm 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{erm
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.
ln addition to issuing commercial paper or bank loans to meet working
capital requirements, including seasonal requirements to finance gas
purchases and accounts receivable, short{erm 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{erm 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 "Credlt Agreements"
below.
At December 31, 201 8 and 2017 , NW Holdings had short-term debt
outstanding of $217.6 million and $54.2 mlllion, respectively, and NW
Natural had shorlterm debt outstanding of $2'17.5 million and $54.2
million, respectively. The weighted average interest rate on commercial
paper
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 52 ol 210
50
28.2
27.8
7.2
ot.t
0.1
At December 31, 2018, 635 of NW Natural's natural gas distribution
employees were members of the Office and Professional Employees
lnternational Union (OPEIU) Local No. 1'l . ln 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 'l
each year with the potential for up to an additional 3o/o per \ear based on
wage inflation at or above 4o/o.fhe Joint Accord also maintains
competitive health benefits, including alSVolo 20% premium cost
sharing by employees, a 401(k) contribution of 4ok fot employees hired
after our pension plan was closed on December 31, 2009, and a 401 (k)
match of 50% of the first 67o of savings, and other flexibility provisions
benefiting the Company.
Table of Contents
outstanding at December 31 , 2018 and 2017 was 3.0% and 1.9%,
respectively.
Credit Aqreements
NW Holdinos
ln 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
ln millions
Lender rating, by category
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
ln 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 wilh 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:
Lender rating, by category Loan Commitment
Loan Commitment
AA/Aa
A/A1
Total
$100
AA/Aa
Total
$300100
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 capitalizalion 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 lnvestors Service, lnc. ([/oody'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 speclfic 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.
300
Based on credit market conditions, it is possible one or more lending
commitments could be unavailable to NW Natural if the lender defaulted
due to lack offunds 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 7loh or less. Failure to comply
with this covenant would entitle the lenders to lerminate 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
57.1o/o 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 "Credrl
Ralrngs" below.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 53 of 2'10
$
$
51
Table of Conlents
Credit Ratinqs
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 credil ratings.
S&P Moody's
Commercial paper (short-term debt)
Senior secured (long-term debt)
Senior unsecured (long-term debt)
Corporate credit rating
Ratings outlook
Cash Flows
Ooeratinq 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
Cash provided by operating
activities $ 168.8 $
NW Natural
206.7 $ 222.1
ln 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 COMPAREDTO 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 lo $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 $'l 5.7 million decreases in NW Holdings and NW Natural
cash flows provided by operating activities, respectively, were as follows:. a decrease of $2'1 .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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 54 of 210
A-1
nla
A+
Stable
P-2
A3
nla
Negative
The above credit ratings and ratings outlook are dependenl 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{erm debt ratings, and preferred stock ratings, if any.
Lonq-Term Debt
The following NW Natural debentures were retired in the periods
indicated:
Years Ended December 31
ln millions 2018 2017 2016
NW Natural First Mortqaqe Bonds
Series 5.15% due 2016
Series 7.00% due 2017
Series 6.60% due 2018
Series 1 .55% due 2018
Total
$$a )R
40
22
75
$ 97$ 40$ 25
Bankruptcv 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.
52
Table of Contents
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 fot 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 , 201 5 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 3'l , 2017 . Accordingly, we do
nol 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.
lnvestinq Activities
lnvesting activity highlights include:
NW Holdings
ln millions 2018 2017 201 6
Total cash used in investing
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 cuslomer 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. ln 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 201 9 lo 2023. NW Holdings expects
an immaterial amount of non-NGD capital investments for Gill Ranch
and other activities in 201 9 and through 2023.
lnvestments in our infrastructure during and after 201 9 beyond the
amounts provided below will depend largely on additional regulations,
growth, and expansion opportunities.
activities
Capital expenditures
$ (217.5)
(214.6)
NW Natural
$ (214.2) $
(213.3)
(136.6)
(138.4)
ln millions 2018 2017 2016
Total cash used in investing
activities
Capital expenditures
$ (238.s)
(214 3)
$ (214.2) $
(213.3)
(136.6)
(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 COMPAREo 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
53
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page 55 of 210
NGD
Core capital expenditures
Significant projects:
Grolvth & reliability
Facilities & technology
North Mist expansion
Total projects
Total NGD
Table of Contents
For2019, capital expenditures are estimated, on an accrual basis, to be
as follows:
ln millions
One-Year Outlook
2019
Low High
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{erm 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 $2'17.6 million lower repayments
of shorlterm debt compared to the prior period, partially offset by $65
million lower net proceeds from long{erm debt activity in 2017 and $52.8
million of common stock proceeds in 20'16.
Pension Cost and Fundinq 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, 20',l8, the deferred regulatory balancing account,
totaled $20.7 million in 20'18, 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 3'l ,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
estimales, tax regulations, and funding requirements under federal law.
The qualified defined benefit pension plan was underfunded by $162.4
million at December 31 , 20'lB. NW Natural plans to make contributions
during 2019 of $1 1.0 million. See Note 9 for further pension disclosures
Continoent 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-Envi ronmental
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.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 56 of 210
$ 150 $ 165
.E
42
18
25
18
75 100
265
Other (
Total $ 230 $ 270
Required funds for the investments are expected to be internally
generated and/or financed with long{erm debt or equity, as appropriate
Financino Activities
Financing activity highlights include:
Total cash provided by (used in)
financing activities
Change in short-term debt
Change in long{erm debt
Change in common stock issued,
net
NW Natural
ln millions 2018 2017 2016
Total cash provided by (used in)
financing activities
Change in short-term debl
Change in long{erm debt
Change in common stock issued,
net
$
NW HOLDINGS
2018 COMPAREDTO 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
225
$57.8 $
163.3
(47.0\
7.4 $
0.9
60.0
(86.2)
(216 7)
125.0
52.8
69.8 $
163.3
(47.0)
7.4 $
0.9
60.0
(86.2)
(216.7)
125.0
52.8
54
Table of Contents
New Accountinq 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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
ln 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 resull 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
contexl 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.
Requlatorv Accountino
The NGD segment is regulated by the OPUC and WUTC, which
establish the rales and rules governing services provided to customers,
and, to a certain extent, set forth special accounting treatment for certain
regulatory transactions. ln 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 Adjustmenl"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 ofdelivering
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. lf 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 Recoqnition
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 cuslomers.
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 1o/o:
2018
ln millions Up 1o/o Down 1olo
Unbilled revenue increase (decrease)(') $ O.S $
Ivlargin increase (decrease)''' 0.1
Net income before tax increase (decrease)") 0.1
11' lncludes impact of regulatory mechanisms including decoupling mechanism and
excludes the rmpact of unbilled revenue from water services.
Derivative lnstruments and Hedging Activities
NW Natural's gas acquisition and hedging policies set forth guidelines
for using financial derivative instruments to
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 57 of 210
(0 8)
(0 1)
(0.1)
55
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support prudent risk management strategies. These policies specifically
prohibit the use of derivatives for trading or speculative purposes.
Financial derivative contracts are utilized to hedge a portion of natural
gas sale requirements. These contracts include swaps, options, and
combinations of option contracts. NW Natural primarily uses these
derivative financial instruments to manage commodity price variability. A
small portion of NW Natural's derivative hedging strategy involves foreign
currency exchange contracts.
Derivative instruments are recorded on the balance sheet at fair value. lf
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. lf 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
olher 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{o-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:
ln millions 2018 2017 2016
union and union employees hired or re-hired after December 31, 2006
and 2009, respectively, and employees of certain NW Holdings
subsidiaries are provided an enhanced Retirement K Savings Plan
benefit. The postretirement Welfare Benefit Plan for non-union
employees was also closed to new participants several years ago.
Net periodic pension and postretirement benefit costs (retirement benefit
costs) and projected benefit obligations (benefit obligations)are
determined using a number of key assumptions including discount
rates, rate of compensation increases, retirement ages, mortality rates
and an expected long{erm 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 sel
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 " Reg u I ato ry Acco u nti ng " above a nd Nole 2, " I n d u stry Reg u I atio n ".
ln 2O11, 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 , 201 8, 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 faclors, as discussed above, are considered in developing
pension and postretirement benefit assumptions. For the December 31,
20'18 measurement date, NW Natural reviewed and updated:. the weighted-average discount rate assumptions for pensions
i n creased f r om 3.52o/o'for 20 1 7 to 4.20o/o f or 20 1 8, and our weig hted-
average discount rate assumptions for other postretirement benefits
increased from 3.44o/o for 2017 lo 4.13o/o 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 58 of 210
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-
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drawn from the FTSE Above lvledian 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 lo a range ol 3.25o/o to 3.5% at December 31, 2018;
the expected long{erm return on qualified defined benefit plan
assets, which remained unchanged at a rate ol7 .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 lo 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{erm rate of return on plan assets is determined by
averaging the expected earnings for the target asset portfolio. ln
developing expected return, historical actual performance and long{erm
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:
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. ln 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. ln 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 lnternal Revenue Service
(lRS). 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 Leoislation
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 I I and V of the concurrent resolution on the budget for
fiscal year 20'l 8, also known as the Tax Cuts and Jobs Act (TCJA), was
enacted. The TCJA lowers the U-S. federal corporate income tax rate to
21o/o trom the existing maximum rate of 35%, effective for our tax year
beginning January 'l , 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 59 of 210
Dollars in millions
Change in
Assumption
lmpacl on 2018
Retirement
Benefit Costs
lmpacl on
Retiremenl
Benefit
Obligations at
Dec.31,2018
Discount rate:
Qualified defi ned benefit
plans
Non-qualified plans
Other postretirement
benefits
Expected long-term return
on plan assets:
Qualified defi ned benefit
plans
(0.25)%
$1.5 $
0.1
13.4
0.8
0.8
(0.25)%
0.7 N/A
ln 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 nearterm but generally increases contributions in
the long-run as well as increasing the
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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 ralelo2lo/o, U.S. GAAP requires deferred tax
assets and liabilities be 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 ,20'|.7 , utilizing the reduced federal
rale of 21o/o expected to apply when these temporary differences are
realized or setlled, based upon balances in existence at the date of
enactment. This revaluation had no impact on ow 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. ln 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.
Reoulatory 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 $2 1.4 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. ln 2017 , lhe 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 , 201 8 and 2O17 , 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. ln 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 flled an
application seeking deferral of changes in NW Natural's federaltax
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 ofthe
TCJA, of $2"17.1 million and $2'13.3 million, respectively, were recorded
by NW Natural. These balances include a gross up for income taxes of
$57.5 and $56.5 million, respectively.
The TCJA includes specific guidance for determining the shortest time
period over which the portion of this regulatory liability resulting from
accelerated cosl 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. lt 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 3'1 , 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 Continqencies
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. Fot a discussion of
current environmental sites and liabilities refer to Note 17. ln 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- Envi ronme ntal Cosfs" above.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 60 of 210
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Imoairment of Lono-Lived Assets and Goodwill
Lono-lived assets
We review the carrying value of long-lived assets whenever events or
changes in circumstances indicate the carrying amount of the assets
might not be recoverable. Factors that would necessitate an impairment
assessment of long-lived assets include a significant adverse change in
the extent or manner in which the asset is used, a significant adverse
change in legal factors or business climate that could affect the value of
the asset, or a significant decline in the observable market value or
expected future cash flows ofthe 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. lf 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.
ln the fourth quarter of 2017, we recognized a non-cash pre-tax
impairment of longJived 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 lhan 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 slrategic shifl away from California gas storage operations and the
significance of Gill Ranch's financial results in 2017 , we concluded that
the pending sale of Gill Ranch qualifies as assets and liabilities held for
sale and discontinued operations. As such, the assets and liabilities
associated with Gill Ranch have been classified as discontinued
operations assets and discontinued operations liabilities, respectively,
and, the results of Gill Ranch are presented separately from the results
of continuing operations, net of tax, as discontinued operations for the
consolidated results of NW Holdings in all periods presented. The
expenses included in the results of discontinued operations within the
consolidated results of NW Holdings are the direct operating expenses
incurred by Gill Ranch that may be reasonably segregated from the costs
of our continuing operations. See "Results of Operations - Pending Sale
of Gill Ranch Storage" above, Note 4, and Note 18 for additional
information.
Goodwill
ln 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 lmpairment" 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. ln
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. lf 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 201 I which
indicated a quantitative assessment was not required; thus, no goodwill
impairment was recorded. See Note 2 and Note 14 for additional
information.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 61 of 210
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT [\4ARKET 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 Supplv Risk
NW Natural enters into spoi, short-term, and long{erm 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 N/ist
storage and off-system storage facilities, to meet expected requirements
of core NGD customers. NW Natural's longterm 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.
Commoditv 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{erm 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,
20'18 and 20 17, 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 in2019, $2.5 million in2020, and $2.5
million in 2021.
lnterest 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{erm and
short{erm debt. lnterest 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 interesl rate swaps outstanding as of December 31,2018
or 2O17.
Foreion Currencv Risk
The costs of certain pipeline and off-system storage services purchased
from Canadian suppliers are subject to changes in the value of the
Canadian currency in relation to the U.S. currency. Foreign currency
forward contracts are used to hedge against fluctuations in exchange
rates for NW
Natural's commodity-related demand and reservation charges paid in
Canadian dollars. Notional amounts under foreign currency forward
contracts were $6.9 million and $7.7 million as of December 31 ,2018
and 2017 , respectively. lf all of the foreign currency forward contracts had
been settled on December 31, 20"18, a loss of $0.3 million would have
been realized. See Note 15.
Credit Risk
Credit Exoosure to Natural Gas Suooliers
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. ln 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
Nalural 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 Exoosure to Financial Derivative Counteroarties 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 resull 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.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 62 ol 21O
60
AAA/Aaa
AA/Aa
BBB/Baa
Total
Table of Contents
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 splilrated with more than one rating level
difference:
Financial Derivative Position by Credit Rating
Unrealized Fair Value Gain (Loss)
ln millions 2018 2017
commercial cuslomers, 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. ln addition to the Oregon customers opting out, Washington
residential and commercial customers account for approximately 11oh 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-Regulalory
Matters-Rate Mecha n isms-WARM" above.
Exhibit No. 1
J. Palfreyman, Ol
Gem State Water Company
Page 63 of 210
$
$
$
c (6 3)
(1.5)
(e 0)
(13.3)
$(7.8) $(22.3)
ln 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 64oh in
Canada with our counterparties.
Credit Exposure lo lnsurance Companies
Credit exposure lo 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 residentlal
and
61
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTE'\/rS
Manaqement's Reports on lnternal Control Over Financial Reporting
Reports of Independent Reqistered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Statements of Comprehensive lncome (Loss) of Northwest Natural Holdinq Companv for the Years Ended December
31 .2018,2017 , and 2O16
Consolidated Balance Sheets of Northwest Natural Holdinq Companv at December 31 , 2018 and 2017
Consolidated Statements of Shareholders' Equitv of Northwest Natural Holdinq Companv for the Years Ended December 31 , 2018,
2017 , and 2016
Consolidated Statements of Cash Flows of Northwest Natural Holdinq Companv for the Years Ended December 3'1 , 2018, 20't 7, and
2016
Consolidated Statements of Comprehensive lncome (Loss) of Northwest Natural Gas Companv for the Years Ended December 31,
20'18,2017, and 2016
Consolidated Statements of Shareholder's Equitv of Northwest Natural Gas Companv for the Years Ended December 31 , 2018,
2017, and2016
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
Quarterlv Financial lnformation
Supplementary Data for the Years Ended December 31 , 201 8, 2017 , and 2016:
Financial Statement Schedules
Schedule | - Condensed Financial lnformation of Northwest Natural Holdinq Companv
Schedule Il- Valuation and Qualifvinq Accounts and Reserves of Northwest Natural Holdinq Companv and Northwest Natural Gas
Company
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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 64 of 210
63
65
J.
il-
68
79
ru
72
73
73
76
77
1154.
5.
117
121
62
Page
Consolidated Balance Sheets of Northwest Natural Gas Companv at December 3'1 , 2018 and 2017
Table of Conlents
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 ,2018.1n making
this assessment, NW Holdings management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in lnternal Control-lntegrated 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. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
March 1, 2019
63
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page 65 of 210
Table of Contenls
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 wilh
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 ,2018.1n making this
assessment, NW Natural management used the criteria set forth by the Commiltee of Sponsoring Organizations of the Treadway Commission (COSO)
in lnternal Control-lntegrated Framework (201 3).
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 Decembet 31 ,2018.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
March 1, 2019
64
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 66 of 210
Table of Contents
REPORT OF INDEPENDENTREG'STERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Northwest Natural Holding Company:
Opinions on the Financial Statements and lnternal 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 lnternal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
ln our opinion, the consolidated financial stalements 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 3'l , 20'18 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 lnternal Control - lntegrated
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
lnternal 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
statemenls. 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 lnternal 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
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 67 of 210
65
Table of Contents
REPORT OF INDEPENDENTREG'STERED 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"). ln our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 20'18 and2017, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 20'18 in conformity with accounting principles generally accepted in the United States
of America.
Basis for Opinion
These consolidated financial stalements 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 overfinancial 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.
66
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 68 of 210
Table of Contents
ln thousands, except per share data
NORTHWEST NATURAL HOLDING COMPANY
coNSoLTDATED STATENIENTS OF COMPREHENSTVE TNCOME (LOSS)
2018 2017 2016
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
lncome from operations
Other income (expense), net
lnterest expense, net
lncome before income taxes
lncome 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, nel of taxes of ($166) lor 2018, $235 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
67
$ 706,143 $ 755,038 $ 668,173
255,519
156,698
11 ,127
32,172
30,082
85,1 56
3,227
324,795
'152,358
15,291
30,639
260,588
136,723
13,298
29,243
81,053 77,604
573,981 604,1 36 517,456
132,162
(3,601)
37,059
150,902
(2es)
37,526
150,717
(7,151)
38,1 36
91,502 I 13,081
24,191 41,008
67,31't 72,073
(2,742) (127,6e6)
105,430
43.011
62,419
(3,524)
64,569
476
774
(2,059)
572
(744)
955
(55,623)58,895
$ 65,81 I $ (s7,1 10) $ 5e,106
28,803
28,873
$
$
2.34 $
2.33
(0.10) $
(0.0e)
$
2.51 $
2.51
28,669
28,753
27,647
27,779
2.26
2.25
(4.45) $
(4 44)
(0.13)
(0.1 3)
(1.e4) $
(1.e3)
2.13
2.12
2.24
2.24
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 69 of 210
o
Year Ended December 31,
Table of Contents
ln thousands
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SH EETS
2018 2017
Assets:
Current assets
Accounts receivable 66,970 bb.zJt)
Allowance for uncollectible accounts (e77)(e56)
Derivative instruments 9,001 't,735
Gas reserves 16,647 15,704
Other current assets 28,472 24,949
Total current assets 295,921 269,936
3,414,490 3,204,635
2,421 ,372 2,244,'t58
37't,786 356,608
63,558
14,149
66,363
6,505
2,946,741 2,769,810
See Notes to Consolidated Financial Statements
68
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page 70 ol 21O
As of December 31,
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 $ 3,242,662 $ 3,039,746
$
Table of Contents
NORTHWEST NATURAL HOLDING COMPANY
CONSOLI DATED BALANCE SH EETS
As of December 31,
ln thousands 2018 2017
Liabilities and equity
Current liabilities:
Current maturities of debt 96,703
Taxes accrued 18,883
Regulatory liabilities 34,013
Other current liabilities 39,942
Total current liabilities 509,084 381,850
Deferred credits and olher non-current liabilities:
Regulatory liabilities 61 1,560 586,093
Derivative instruments 3,025 4,649
Discontinued operations - non-current liabilities 12,043
Commitments and contingencies (see Note 16 and Note 17)
Equity:
Common stock - no par value; authorized 100,000 shares; issued and outstanding 28,880 and28,736 al
December 31, 2018 and 2017 , respectively 457,640 448,865
Retained earnings 312,182 302,349
Accumulated other comprehensive loss (7,1 88) (8,438)
Total liabilities and equity $ 3,242,662 $ 3,039,746
See Notes to Consolidated Financial Statements
b9
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 71 of 21O
$217,620 $
29,989
115,878
11,023
7,306
47,436
12,381
54,492
12,959
1,264,697 1,231,936
762.634 742,776
Table of Contents
ln thousands
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
Retained
Earnings
Accumulated Other
Comprehensive
lncome (Loss)
Total
Equity
Comprehensive income 211 59,1 06
Stock-based com
lssuance of common stock, net of issuance costs
2,924
52,761
2,924
52,761
Comprehensive income (loss)
Stock-based com
Balance at December 31,2017
2,882
448,865 (8,438)742,776
Dividends on common stock, $1.89 per share
Shares issued pursuant to equity based plans
(54,736)
5,1755,175
Value of shares transferred for business combination 8,525 8,525
See Notes to Consolidated Financial Statements
70
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 72 ot 210
$ 383,144 $404,990 $
58,895
(51,624)
445,187 412,261
(s5,623)
(54,289)
(6,951)
(1 ,487)
850,497
(57,1 1 0)
(54,28e)
2,882
796704
302,349
64,569
(54,736)
$ 457,640 $ 312,182 $(7,188) $ 762,634
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
2018
Year Ended December 31
ln thousands 2017 2016
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
lnventories
lncome and other taxes
Accounts payable
lnterest accrued
Deferred gas costs
Other, net
Discontinued operations
Cash provided by operating activities
lnvesting 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{erm debt issued
Long{erm debt retired
Change in shortterm debt
Cash dividend payments on common stock
Stock purchases related to acquisitions
Other
Cash provided by (used in)financing activities
lncrease (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$ 64,569 $ (55,623) $ 58,895
85,1 56
16,684
14,356
8,1 08
(15,540)
(14,528)
77,604
15,525
32,056
5,274
(14,470)
(10,469)
3,287
13,298
81,053
16,353
(52,414)
5,364
(19,430)
(13,716)
15,291
2,'t02
11,127
7,929
1,596
1B.l
3,207
(16,904)
16,792
526
(14,395)
3,282
5,600
6,734
1,092
807
17,122
(4 0e3)
1 97,'1 80
552
(645
2,846
(6,395)
16,565
9,467
12,028
93
(10,204)
11,727
5,020
168,771
Q1? A53) Q14,1r4 (136^6rr)
(214,636)
(3,3e0)
573
1,546
50,000
(e7,000)
163,274
(51,311)
(7,951)
(715)
(213,325)
i.577)
(270\
(2,034)
4,819
100,000
(40,000)
900
(53,9s7)
(1 38,357)
2,882
(1,154)
(1,042)
8,404
52,760
150,000
(2s,000)
(216,735)
(51,508)
(2,30e) (3,087)
57,843 7,419 (86,208)
9,'161
3,472
(4e)
3,521
(6e0)
4,21 1
$ 12,633 $ 3,472 $ 3,521
Supplemental disclosure of cash flow information.
lnterest paid, net of capitalization
lncome taxes paid (refunded)
$ 35,324 $ 34,787 $
27,370 14,780
36,023
See Notes to Consolidated Financial Statements
71
(7,157)
206,704 222,147
Exhibit No.'l
J. Palfreyman, Dl
Gem State Water Company
Page 73 ol 210
NORTHWEST NATURAL GAS COMPANY
coNSoLr DATED STATETVT ENTS OF COM PREH ENSTVE r NCOM E (LOSS)
Year Ended December 31,
ln thousands 2018 2017 2016
Cost of 255,743 325,019 260,588
Environmental remediation 11 ,',t27 15,291 13,298
Revenue taxes 30,082
Other expenses
lncome from 133,099 150,922 151 ,287
lnterest expense, net 37,526 38,1 36
lncome tax expense 24,459 41 ,478 43,275
Loss from discontinued operations, net of tax (1,723) (127,343\(3,e40)
Other comprehensive income (loss):
Amortization of non-qualified employee benefit plan liability, net of taxes of ($278) for 2018, ($374)
for 2017 , and ($624) lor 2016 774 572 955
See Notes to Consolidated Financial Statements
72
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 75 of 2'10
Operating revenues $ 705,571 $ 755,038 $ 667,949
81,024 77,575
572,472 604,116 516,662
66,326 (55,623) 58,895
$ 67,576 $ (57,1 10) $ 59,100
NORTHWEST NATURAL GAS COMPANY
CONSOLI DATED BALANCE SH EETS
As of December 3 1,
ln thousands 2018 2017
Assets:
Current assets:
Accounts receivable 66,824 66,236
Receivables from affiliates 4,'166 266
assets
lnventories
41,930
44,126
45,781
47,577
Other current assets 25,347 24.862
Tolal current assets 272,786 273,866
and equipment 3,410,439 3,204,260
Total , plant, and
Regulatory assets
2,417,584 2,243,975
371,786 356,608
Other investments 49,922 52,654
Discontinued
Total assets
- non-current assels 24,709
$ 3,192,736 $ 3,043,676
See Notes to Consolidated Financial Statements
73
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 76 of 210
$
2,919,950 2,769,810
NORTHWEST NATURAL GAS COMPANY
CONSOLI DATED BALANCE SH EETS
As of December 31,
ln thousands 2018 2017
Liabilities and equity:
Current liabilities:
Currenl maturities of long{erm debt 96,703
to affiliates 3,664
lnterest accrued 6,773
Derivative instruments 18,722
Discontinued - current liabilities 2,565
Long{erm debt 704,134 683,1 84
Deferred tax liabilities 294,739 287,388
Pension and other postretiremenl benefit liabilities 221 ,886 223,333
Other non-current liabilities 147,668 135,205
Total deferred credits and other non-current liabilities 1,278,878 1,231,936
Equity:
Retained earnings
Total 776
See Notes to Consolidated Financial Statements
74
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page77 ol21O
217,500 $
29,989
114,937
523
10,990
t,ztc
47,436
12,381
53,027
494,056 385,780
226,452
496,404
(7,188)
448,865
302,349
(8,438)
7'15,668
$ 3,192,736 $ 3,043,676
NORTHWEST NATURAL GAS COMPANY
CONSOLI DATED STATEM ENTS OF SHAREHOLDER'S EQU ITY
ln thousands Common Stock Retained Earnings
Accumulated Other
Comprehensive
lncome (Loss)
Total
Equity
Comprehensive income 211 59,1 06
Stock-based compensation 2,924 2,924
lssuance of common stock, net of issuance costs 52,761 52,76',1
Comprehensive income (loss)(5s,623)(1,487)
Stock-based compensation 2,882
Balance at December 31,2017 448,865 302.349 (8,438)742.776
Dividends on common stock (41,035)(41,035)
Shares issued pursuant to equity based plans(l)3,075 3,075
Balance at December 31,2018 $226,452 $496,404 $
(') 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
75
(7,188) $715,668
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 78 ot 210
$383,144 $404,990 $
58,895
(51,624)
445,187 850,497
(57,110)
(54,289)
2,882
796796
(58,885)(227,649)168,764
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
ln thousands 2018
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
lnventories
lncome and other taxes
Accounts payable
lnterest accrued
Deferred gas costs
Other, net
Discontinued operations
Cash provided by operating activities
lnvesting 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{erm debt issued
Long{erm debt retired
Change in short{erm debt
Cash dividend payments on common stock
Other
Discontinued operations
Cash provided by (used in) financing activities
lncrease (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$ 66,326 $ (ss,623) $ 58,89s
84,986
16,684
12,330
8,1 08
(15,540)
(14,528)
81,024
16,353
15,894
5,364
(19,430)
(1 3,716)
77,575
15,525
30,772
5,274
(14,470).
(10,469)
3,287
13,29811 ,127
7,929
BB3
15,291
173,508 206,483 222,239
(3,920)
3,2',12
(7,8s4)
13,937
500
(14,395)
539
3,184
3,215
5,601
6,730
3,332
807
17,122
(3,855)
126,371
(6,319)
16,565
I,467
10,822
93
(10,204)
12,342
7,041
(138.464 e14.1?4 (136^6rr)
(214,328)
(3,517)
(20,617)
1,368
50,000
(97,000)
'163,300
(38,387)
(1,539)
(7,951)
(213,325)
(577)
(270)
(2,034)
4,819
100,000
(40,000)
900
(53,957)
(2,309)
(1 38,3s7)
2,882
(1,154\
(1,042)
8,404
52,760
150,000
(25,000)
(216,735)
(51,s08)
(3,087)
69,791 7,419 (86,208)
4,837
3,110
(270)
3,380
(se8)
3,978
$ 7,947 $ 3,110 $ 3,380
Supplemental disclosure of cash flow information
lnterest paid, net of capitalization
lncome taxes paid (refunded)
$ 3s,305 $
27,350
34,787 $
14,780
36,023
(7,157)
See Notes to Consolidated Financial Statements
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 79 of 210
76
2017 2016
2,003 2,745
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEIVENTS
1. ORGANIATION AND PRINCIPLES OF CONSOLIDATION
On October 1,2018, we completed a reorganization into a holding
company struclure. ln 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 enlities 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., lnc. (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); and
NW Natural Water of ldaho, LLC (NWN Water of ldaho); and. Gem State Water Company, LLC (Gem State)
lnvestments 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{erm
strategic plans, which include a shift away from the California gas
storage business. ln 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, 20'18 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.
lnterstate 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 81 of 210
77
Table of Contents
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
2. SIGNIFICANT ACCOUNTING POLICIES
reclassifications and the reorganization activities described above had
no effect on the prior yeals consolidated results of operations, financial
condition, or cash flows.
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.
lndustrv 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.
ln 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:
ln thousands 2018 2017
Current:
Unrealized loss on derivatives{')
Gas costs
Environmental costs('?)
Decoupling(t'
lncome taxes
Othel''
Total current
Non-current:
Unrealized loss on derivatives(')
Pension balancing(s'
lncome taxes
Pension and other postretirement benefit
liabilities
Environmental costs(2)
Gas cosls
Decoupling(')
Otherlo'
Total non-current
ln thousands
$ 41,930 $ 45,781
$3,025 $
74,173
19,'185
4,649
60,383
19,991
174,993
76,149
9,978
2,545
11,738
179,824
72,128
84
3,970
15,579
$12,381 $
2,873
5,601
9,1 40
z,z to
9,717
18,712
154
6,1 98
11,227
) )1Q
7,272
$ 371,786 $ 356,608
Regulatory Liabilities
2018 2017
Current:
Gas costs
Unrealized gain on derivatives'''
Decoupling(')
Other(o)
Total current
Non-current:
Gas costs
Unrealized gain on derivativesr"
Decouplingl')
lncome taxes(ul
Accrued assel removal costss)
Other'''
Total non-current
17,182 $
8,740
2,264
19,250
$ 47,436 $ 34,013
$14,886
1,674
322
17.131
$
225,408
380,464
4,411
4,630
1,306
957
21 3,306
360,929
4,965
oEE'
725
$ 611,560 $ 586,093(') Unrealized gains or losses on derivatives are non-cash items and, therefore,
do nol earn a rate of retum 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.('r Refer lo footnote (3) of the Deferred Regulatory Asset table in Note 17 for a
description of environmental costs.(t) This deferral represents the margin adjustment resulting from differences
between actual and expected volumes. Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 82 ol 21O
Regulatory Assets
Table of Contents
(o' 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.(6r This balance represents estimated amounts associaled with the Tax Cuts
and Jobs Act. See Note 10.{') Estimated costs of removal on certain regulated properties are collected
through rates. See "Accounting Policies-P/ant, Propefty, 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 ovet 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 3'l , 2018 are
prudent. All regulatory assets and liability are reviewed annually for
recoverability, or more oflen if circumstances warrant. lf 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 Requlatory Accountinq
See Note '17 for information about the SRRM and OPUC orders
regarding implementation.
Ilervl\eqou n!i ng 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.
Recentlv Adopted Accountinq 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 201 7-
07, "lmproving 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 3'l ,2017 and 20'16, $5.6 million and $6.6 million
of expense was reclassified from operations and maintenance expense
and included in other income (expense), net, respectively.
GOODWLL. On January 26,2017, the FASB issued ASU 2017-04,
"Simplifying the Test for Goodwill lmpairment." 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 84 of 210
79
Table of Contents
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 2016-1 5, "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 lnstruments - Overall: Recognition and
lvleasurement 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
Jan uary 1 , 2018, a nd the adoption d id not materially impact the finan cia I
statements or disclosures of NW Holdings or NW Natural.
REVENUE RECOGNITION. On lvlay 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 Nalural 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
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 , 201 B 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 ofthe 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, 201 B; 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. ln 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 $'l 1.2 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.
Recentlv lssued Accountinq Pronouncements
CLOUD COMPUTING. On August 29, 2018, the FASB issued ASU 2018-
15, "Customer's Accounting for lmplementation Costs lncurred in a
Cloud Computing Arrangement That ls 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, 201 B, 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 85 of 210
80
Table of Contents
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't4,
2018, the FASB issued ASU 2018-02, "lncome Statement-Reporting
Comprehensive lncome: Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive lncome." 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 ,lhe FASB issued ASU
2017 -l2, "Derivatives and Hedging: Targeted lmprovements to
Accounting for Hedging Activities." The purpose of the amendment is to
more closely align hedge accounting with companies' risk management
strategies. The ASU amends the accounting for risk component hedging,
the hedged item in fair value hedges of interest rate risk, and amounts
excluded from the
assessment of hedge effectiveness. The guidance also amends the
recognition and presentation of the effect of hedging instruments and
includes other simplifications of hedge accounting. The amendments in
this update are effective 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, 20 19 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. Forthe 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 in2020. 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.
ln 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,
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 86 of 210
81
Table of Contents
we expecl to de-recognized the build{o-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,
"Nleasurement of Credit Losses on Financial lnstruments," 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 forcredit 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 Asset Removal Costs
Plant and property are stated at cost, including capitalized labor,
materials, and overhead. ln 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.
ln accordance with long-standing regulatory treatment, our depreciation
rates consist of three components: one based on the average service life
ofthe asset, a second based on the estimated salvage value ofthe
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. ln 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 ofregulated assets are
generally deferred and refunded to customers. For assets not related to
NGD, we record a gain or loss upon the disposal of the property, and the
gain or loss is recorded in operating
income or loss in the consolidated statements of comprehensive
income.
The provision for depreciation of NGD property, plant, and equipment is
recorded under the group method on a straight-line basis with rates
computed in accordance with depreciation studies approved by
regulatory authorities. The weighted-average depreciation rate for NGD
assets in service was approximately 2.8o/ofor 2018,2017, and 2016,
reflecting the approximate weighted-average economic life of the
property. This includes 201 8 weighted-average depreciation rates for the
following asset categories:2.7o/o for transmission and distribution plant,
2.1o/o for gas storage facilities, 4.5o/o for general plant, and 3.1ok 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. lf short{erm debt balances
are less than the total balance of construction work in progress, lhen 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 5.2oh in
2018,5.5Yo in 2017, and 0.7o/o 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 ofthe 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. lf 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 appropriale valuation
methodologies, which may include an estimate of discounted cash
flows.
ln the fourth quaiet of 2017, a non-cash pre{ax 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
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 87 of 210
oz
Table of Contents
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 Reqognition and Accrued Utilled BeyelW
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 and2017 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 lnterstate
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. ln 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. ln 2018, revenue taxes
are included in operating expenses in the statements of comprehensive
income for NW Holdings and NW Natural. ln2017 and 20"16, 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 for20'lB,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. lnactive accounts are written-off against the
allowance after they arc 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.
lnventories
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{erm plant asset.
Materials and supplies inventories consist of inventories both related to
and unrelated to NGD and are stated at the lower of average cost or net
realizable value.
NW Natural's NGD and gas storage inventories totaled $29.9 million and
$36.7 million at December 3'l ,2018and2017, respectively. At
December 31 ,2018 and 2017 , NW Holdings' materials and supplies
inventories, which are comprised
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 88 of 210
Table of Contents
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. ln 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. ln 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 1,20'18,
2017, and 2016, NW Natural selected the 90%, 90%, and 90% deferral of
gas cost differences, respectively. ln Washington, 1 00% 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 instruments for trading purposes. All derivatives for NW
Holdings are currently held at NW Natural.
Fair Value
ln 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 nol 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; (9)
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 I, or whenever events or changes in circumstance indicate
that such carrying values may nol 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. lf the qualitative assessment
indicates that the carrying value may be at risk of recoverability, a
quantitative evaluation is performed to measure the carrying value of the
goodwill against the fair value of the reporting unit. The reporting unit is
determined primarily based on current operating segments and the level
of review provided by the Chief Operating Decision Maker (CODM)and/or
segment management on the operating segment's financial results.
Reporting units are evaluated periodically for changes in the corporate
environment.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 89 of 2't0
84
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As of December 31, 20'18, NW Holdings had goodwill of $9.0 million. All
of NW Holdings' goodwill was acquired in 20'18 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.
lncome 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 investmenl 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.
lnterest and penalties related to unrecognized tax benefits, if any, are
recognized within income tax expense and accrued inlerest 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 1 0.
Environmental Continqencies
Loss contingencies are recorded as liabilities when it is probable a
liability has been incurred and the amount of the loss is reasonably
estimable in accordance with accounting standards for contingencies.
Estimating probable losses requires an analysis of uncertainties that
often depend upon judgments about potential actions by third parties.
Accruals for loss contingencies are recorded based on an analysis of
potential results.
With respect to environmental liabilities and related costs, estimates are
developed based on a review of information available from numerous
sources, including completed studies and site specific negotiations. NW
Natural's policy is to accrue the full amount of such liability when
information is sufficient to reasonably estimate the amount of probable
liability. When information is not available to reasonably estimate the
probable liability, or when only the range of
probable liabilities can be estimated and no amount within the range is
more likely than another, it is our policy to
accrue at the low end of the range. Accordingly, due to numerous
uncertainties surrounding the course of environmental remediation and
the preliminary nature of several site investigations, in some cases, it
may not be possible to reasonably estimate the high end of the range of
possible loss. ln 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 slatements to be issued. We do
not have any subsequent events to report.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 90 of 210
OE
Table of Contents
3. EARN"VGS 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
NW Holdings'diluted earnings or loss per share are calculated as follows.
ln thousands, except per share data
assumed exercise of stock options and the payment of estimated stock
awards from other stock-based compensalion 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.
2018 2017 2016
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:
Antidilutiv6 shares
4. SEGMENT INFORMATION
$67,311 $
(2,742)
72,073 $
(127,696)
62,419
(3,524)
$ 64,56e $ (ss,623) $ 58,895
28,803
70
28,669 27,647
13284
$
$
$
$
$
$
$
$
$
$
$
$
28,873
2.34
2.33
(0.1 0) $
(0.0e) $
2.24
2.24
ao aEa
l.J I
2.51
13
27,779
2.26
2.25
2.12
(4.4s) $
(4.44) $
(0.13)
(0.13)
(1.94) $
(1.e3) $
E2
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{erm 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. lnterstate 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 southwesl 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
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 11o/o 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. lndustrial
customers largely account for lhe 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.
lndustrial 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
manufaclure of asphalt, concrete, and rubber; printing and publishing;
nurseries; and government and educational institutions.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 91 of 210
B6
Table of Contents
ln 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 lnterstate 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 lnterstate 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 pretax
income from these services when the costs of the capacity were not
included in NGD rates, or 33% of the pre-tax income when lhe costs
have been included in these rates. The remaining 20ok and 67o/o,
respectively, were recorded to a deferred regulatory account for crediting
back to NGD customers. After November 1,2018 NW Natural retains
10% ofthe pre{ax 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.
ln thousands NGD
NW Holdinqs
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 lnformation Summarv
lnter-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.
Other
(NW Natural)
Other
NW Natural (NW Holdings) NW Holdings
2018
Operating revenues
Depreciation and amortization
lncome (loss) from operations
Net income (loss) from continuing operalions
Capital expenditures
Total assets at December 31,201812'
2017
Operating revenues
Depreciation and amortization
lncome (loss) from operations
Net income ftom continuing operations(')
Capital expenditures
Total assets at December 31 , 201 7{'z)
2016
7A5,571 $
84,986
1 33,099
68,049
214,328
3,192,736
572 $
170
(e37)
(738)
308
36,657
$680,M8 $
83,732
1 18,095
57,491
212,323
3,141,969
732,942
79,7U
138,450
60,509
211.672
2,961,326
24,923 $
1,254
'15,004
10,558
2,005
50,767
706,143
85,1 56
132,162
67,311
214,636
3,229,393
755,038
81,053
1 50,902
72,073
213,325
3,025,872
$$22,096 $
1,290
12,472
11,211
1,653
50,471
755,038
81,024
150,922
71,720
213,325
3,011,797
$b
29
(20)
353
14,075
Operating revenues $ 650,477 $ 17,472 $ 667,949 $ 224 $ 668,173
Depreciation and amortization 76,289 1 ,286 77,575 29 77 ,604
lncome (loss) from operations 137,178 14,109 151,287 (570) 150,717
Net income (loss) from continuing operalionsl'' 54,567 8,268 62,835 (416) 62,419
Capital expenditures 138,074 283 138,357 138,357
Total assets al December 31,2016Q' 2,806,627 48,719 2,855,346 14,040 2,869,386
"'lncludes 51 .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 , 201 7.
B7
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 92 ol 210
12t
(3)
Table of Contents
Total assetsforNW Holdings exclude assets related todiscontinued operations of $13.3 million, $13.9 million and $210.4 million as of December 31,2018,2017,and
20l6,respectively.Total assetsforNWNatural excludeassetsrelatedtodiscontinuedoperationsof S3l.9millionand$226.1 millionasof December31,2017.and
2016, respectively.
lncludes $2.0 million in 2016 of after-tax regulatory environmental disallowance charges in NGD.
Natural Gas Djstribution MaIS!!
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{hrough 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
The following table presents additional segment information concerning NGD margin:
ln thousands 2018 2017 2016
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.
NGD margin calculation:
NGD operating revenues
Less: NGD cost of gas
Environmental remediation expense
Revenue taxesrt)
NGD margin
$680,648 $
255,743
11,127
30,082
732,942 $
325,01 I
15,291
650,477
260,588
13,298
$ 383,696 $ 392.632 $ 376,591
11)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 , 201 8. 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 20'17, 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 354,204 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 in2012; however, options granted before the Restated SOP
was terminaled 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 1 32,000 shares. The offering closed on
November 16,2016 and resulted in a total issuance of 1,0'12,000 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 Reourchase Prooram
NW Holdings has a share repurchase program under which it may
purchase its common shares on the open markel or through privately
negotiated transactions. NW Holdings currently has Board authorization
through May 201 9 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 93 of 210
88
Table of Contents
The following table summarizes the changes in the number of shares of
NW Holdings'common stock issued and outstanding:
ln thousands Shares
Sales to employees under ESPP 18
Equity lssuance 1,012
Sales to employees under ESPP 18
Balance, December 31, 201 7 28,736
Stock-based compensation 64
Balance, December 31, 2018
6. REVENUE
28,880
The following table presents disaggregated revenue from continuing operations
Year ended December 31 , 201 8
ln thousands NGD
Other
(NW Natural)NW Natural
Other
(NW Holdings)NW Holdings
Natural gas sales u 670,662 $$670,662 $a 670,662
Asset management revenue, net 8,548 8,548 8,548
Other revenue 572 572
997 997 997
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. lt is probable that we will collect substantially all of lhe
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.
Natural Gas Distribution
Natural gas sa/es. 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, lale payment
fees, service fees, and accruals for gas delivered but not yet billed
(accrued unbilled revenue). The accrued unbilled revenue balance is
based on estimates of deliveries during
Exhibit No. 1
J. Palfreyman, Dl
Gem State water Company
Page 94 of 210
ao
28,630
b/(, bbl
8,989
24,923 695,585
8,989
696,1 57
Alternative revenue
Leasing revenue
Tolal operating revenues $ 680.648 $24,923 $ 705,571 $572 $ 706,143
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.
Table of Contents
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 overthe term of the lease
agreement. Lease revenue is excluded from revenue from contracts with
customers.
NW Natural Other
Gas slorage revenue. NW Natural's other revenue includes gas storage
activity, which includes lnlerstate 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
7. STOC K.B AS E D CO M P E NSA T'O'V
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, 201 8, 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.'l million will be recognized in 2019, $1'l .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, 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. lt 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
ldaho 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.
Stock-based compensation plans are designed to promole stock
ownership in NW Holdings by employees and officers. These
compensation plans include a Long Term lncentive Plan (LTIP), an
ESPP, and a Restated SOP.
Long Term lncentive 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 ,1 00,000 shares were authorized
for issuance as of December 31 , 201 8. 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 3'l ,2018, there were 574,787 shares available for issuance
under any type of award. This
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 95 of 210
90
Dollars in thousands
Expense During
Award Year'2)
Total Expense
Shares(')
Estimated award:
2016-2018 grant(3) 28,218 $ 598 $ 1,413
Actual award:
2O15-2017 granl 18,304 (346) 1,169
2014-2016 grant 31,388 168 1,685
' ln addition to common stock shares, a parlicapant 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.
''? 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 , 201 8 as certain performance share measures have been
achieved. Amounts are subject to change with final payout amounts
authonzed 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:
Performance Share Awards
Table of Contents
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 lhe 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.
Performance Shares
Since the LTIP's inception in 200 1, 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:
the performance of the Russell 2500 Utilities lndex over the three-year
performance period and a growth modifier based on accumulative
EBITDA measure. Forthe 2018-2020 performance period, performance
share awards are based on the achievemenl 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 lndex 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
20'18, 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. lf the target was achieved for the 20 18 award, NW Holdings
would grant 34,702 shares in the first quarler 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 , 201 8, there was $1 .1 million of
unrecognized compensation expense related to the nonvested portion of
performance awards expected to be recognized through 201 9.
Restricted Stock Units
ln 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.
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page 96 of 210
for Award
Dollars in
lhousands
Performance
Period
Outstanding 2018
Target Maximum Expense
Cumulative
Expense
December 31
2018
201 6-1 I
2017-15
2018-20
Total
24,421
31,372
48,U2 $
62,744
1,413
1,400
598
458
(
55,793 111,586 $ 1,056
Forthe 2016-2018 performance period, performance share awards are
based on EPS and Return on lnvesled 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 (strateglc factor). For the
2017-2019 performance period, performance share awards are based
on lhe achievement of EPS and ROIC factors, which can be modified by
a TSR factor relative to
91
Table of Contents
lnformation regarding the RSU activity is summarized as follows:lnformation regarding the Restated SOP activity is summarized as
follows
Number of
RSUs
Weighted -
Average
Price Per RSU
Weighted -
Average
Price Per Share
lntrinsic
Value
(ln millions)
Option
SharesNonvested, December 31, 2015
Granted
Vested
Forfeited
88,587 $
40.271
(2e,488)
(s 397)
44.78
54 36
45.56
44.59
Balance outstanding,
December 31, 201 5
Exercised
Forfeited
352,688 $
(172,525\
44.00 $
43.61
nla
2.0
nla
Nonvested, December 31, 2016
Granted
Vested
Forfeited
89,973
32,168
(35,341)
(2,278)
48.85
60 51
47.07
53.78
1 80,163
(88,275)
(200)
44.38
44.33
41.15
Balance outstanding,
December 31, 2016
Exercised
Forfeiled
2.8
1.8
nla
Nonvested, December 31, 2017
Granted
Vested
Forfeited
84,522
32,450
(32,68e)
(1,603)
53.90
57.59
50.75
AO OA
91,688
(35,450)
(300)
44.43
43 61
43.29
Balance outstanding and
exercisable, December
31 ,2017
Exercised
Expired
1.4
0.8
nlaNonvested, December 31, 2018 82,680 $56.47
Restated Stock Option Plan
The NW Natural Restated SOP was terminated for new option grants in
20'12; 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 20'12 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 1 0 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.
Balance outstanding and
exercisable, December
31 ,2018 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.
Emplovee 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:
ln thousands 2018 2017 2016
Operations and mainlenance expense, for
stock-based compensation
lncome tax benefit
Net stock-based compensation effect on
net income (loss)
Amounts capitalized for stock-based
compensation
$ 1,830 $ 1,424 $ 1,446
$ 2,489 $
(65e)
2,354 $
(e30)
2,370
(924)
$ 531 $ 528 $ s54
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page97 o1210
92
Table of Contents
8. DEBT
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{erm
credit facilities it may enter into from time to time.
The primary source of short{erm 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. ln addition to issuing commercial paper or bank loans to meet
working capital requirements, including seasonal requirements to
finance gas purchases and accounts receivable, short{erm 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 longterm 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 and2017, NW Holdings had short{erm debt
outstanding of $217.6 million and $54.2 million, respectively,
substantialty 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 3'1
2018 and 2017 was 3.0% and'1 .9%, respectively.
The carrying cost of commercial paper approximates fair value using
Level 2 inputs, due to the short{erm 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 Aoreements
NW Holdinos
ln October2018, 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 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 nol have a credit rating)
with Standard & Poor's (S&P) and Moody's lnvestors Service, lnc.
(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 credil agreement, at December 31,
2018.
NW Natural
ln 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 agreemenl 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 ralio of 70ok 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.
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 ratlng 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 98 of 210
93
Table of Contents
loans under the new credit agreement when ratings are changed.
Lono-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.
The following table presents debt outstanding as of December 31:
ln thousands 2018 2017
NW Natural
First lvlortoaoe Bonds:
6.600% Series due 2018 $22,000
Maturities and Outstandino Lono-Term Debt
Retirement of long-term debt for each of the annual periods through
December 31, 2023 and thereafter are as follows:
8.31 0% Series due 2019 10,000 10,000
5.370% Series due 2020 75,000 75,000
Long{erm debt 3.176% Series due 2021 50,000 50,000ln lhousands maturities
2019 $30,000
5.620% Series due 2023 40,000 40,000
2021 60,000
6.520% Series due 2025 10,000 10,000
zuzS 90,000
3.21 1% Series due 2026 35,000 35,000
2.822% Seriesdue2027 25,000 25,000
6.650% Series due 2028 10,000 10,000
7.850% Series due 2030 10,000 10,000
5.660% Series due 2033 40,000 40,000
4.000% Series due 2042 50,000 50,000
3.685% Series due 2047 75,000 75,000
739,700 786,700
Total long-term debt $ 709,700 $ 689,700
Other NW Holdings Entities:
Long-term debt, gross $ 741,813 $ 786,700
Total long-term debt $ 71 1 ,813 $ 689,700
First lvlortoaoe Bonds
ln September 2018, NW Natural issued $50.0 million of FMBs with a
coupon rate of 4.110%, due in 2048.
ln September 2017, NW Natural issued $100.0 million of FMBs
consisting of $25.0 million with a coupon 'ale of 2.822% and a maturity
date in 2027 and $75.0 million with a coupon rate of 3.685% and a
maturity datein2047.
Retirements of Lono-Term Debt
ln 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 545ok in December 2018' Exhibit No. 1
ln August 2017, NW Natural retire^d $4Q.0 nrlttPaltg?}mfys 0frh a "orponGem State Water Company
Page 99 of 210
$ 2,113 $
Table of Contents
Fair Value of Lonq-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.
9. PENS'ON AND OTHER POSTRETIREMENT BENEFIT COSTS
The following table provides an estimate of the fair value of NW Natural's
long{erm debt, including current maturities of long{erm debt, using
market prices in effect on the valuation date:
December 31,
ln thousands 2018 2017
Gross long-term debt
Unamortized debt issuance
costs
Carrying amount
Estimated fair value
$739,700 $
(5,s77)
786,700
(6,813)
o
$
734,123 $
760,222 $
779,887
853.339
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.
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:
Postrelirement Benef it Plans
Pension Benefits Other Benefits
ln thousands 2018 2017 2018 2017
Reconciliation of change in benefit obligation:
Obljgation at January 1
Service cost
lnteresl cost
Net actuarial (gain) loss
Benefits paid('t
Obligation at December 31
Reconciliation of change in plan assets:
Fair value of plan assets at January 1
Actual return on plan assels
Employer contributions
Benefils paid(')
Fair value of plan assets at December 31
Funded status at December 31
$486,289 $
7,1 85
16,991
(32,e7s)
(21 ,e18)
457,839 $
7,090
18,111
34,829
(31,s80)
28,927 $
282
964
(327)
(1,6741
29,395
341
1,141
(213)
(1,737)
$ 455,568 $ 486,289 $ 28.172 $ 28,927
$287,925 $
(25.e25\
17,715
(21,918)
257,714 $
40,308
21,483
(31,s80)
1,674
(1,674\
1,737
(1,737],
$
$ 2s7 ,797 $ 287,925 $a
$ (197,771)$ (198,364) $ (28,172], $ (28,e27)
ln 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 3'l ,2018 and 20'17, respectively.
95
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 101 ol 21O
Table of Contents
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 (lncome)
Pension Beneflts Other Postretirement Benefits Pension Benefits
ln thousands 2018 2017 2016 2018 2017 2016 2018 2017
Netactuarial loss(gain) $ 14,261 $ 12,177 $ 14,005 $ (327) $ (214) $ (1,488) $ (677) $ 2,777 $
Settlement Loss
Amortization of:
Prior service cost
Actuarial loss
Total
The following table presents amounts recognized in regulatory assets and accumulated other comprehensive loss (AOCL) at December 3'l
Regulatory Assets AOCL
Pension Benefits Other Postretirement Benefits Pension Benefits
2016
(1 ,1 96)
193
(42\ (127) (230) 468 468 468
(18,761) (14,802\ (13,238) (448) (6e6) (705) (1,0s2) (e46) 1,386
$ (4,542) $ (2,752\ $ 537 $ (307) $ (442) $ (1,725) $ (1,72e) $ 1,831 $ 383
ln thousands 2018 2017 2018 2017 2018 2017
Prior service cost (credit)
Net actuarial loss
Total
$7$
1 70,535
49$
1 75,035
(1,738) $
6,189
(2,206) $
6,964 11,537 13,266
s
$ 170,542 $ 175,084 $4,451 $4,758 $11,537 $13,266
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:
Year Ended December 31
ln thousands 2018 2017
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
ln 20'19, NW Natural will amortize an estimated $13.7 million from
regulatory assets to net periodic benefit costs, consisting o't $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 discounl 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{erm 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. ln
developing the expected long{erm rate of return assumption,
consideration
$(8,438) $(6,e51)
(2,754)
1,052 946
1,694
(444)
(1,848)
361
1.250 (1,487\
(7,188) $(8,438)
was given to the historical performance of each assel 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 lncome Security Act of 1974. The approved
asset classes may include cash and short{erm 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.
lnvestment re-balancing takes place periodically as needed, or when
significant cash flows occur, in order to maintain the allocation of assets
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 102 ol 210
642
$
96
Table of Contents
within the stated target ranges. The retirement trust fund is not currently
invested in NW Holdings or NW Natural securities.
The following table presents the NW Natural pension plan asset target
allocation at December 31, 2018:
Asset Target Allocation
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 ofthe
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 markel
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{o-year net periodic benefit cost
volatility.
Long governmenucredit
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
20Yo
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 and2017, 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.
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:
Pension Benefits Other Postrelirement Benefits
ln thousands 2018 2017 2016 2018 2017 2016
Service cost
lnterest cost
Expected return on plan assets
Amortization of prior service cosls
Amortization of net actuarial loss
Settlemenl expense
Net periodic benefit cost
Amounl allocated to conslruction
Amount deferred to regulatory balancing account
Net amount charged to expense
$7,185 $
16,991
(20,63e)
43
19,813
7,090 $
18,1 1 1
(20,433)
127
15,748
7,083 $
18,399
(20,054)
231
14,624
193
282
964
$$341
1,141
(468)
391
1,175
(468)
448 696
(468)
705
23,393
(2,764)
(10,314)
20,643
(6,s97)
(6,542\
20,476
(5,746)
(6,2s2)
1,226
(e8)
1,710
(s87)
1,803
(600)
$ 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 25o/o lo 35o/o payroll overhead charge. ln 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 sel in rates, as approved by the OPUC, from 2011 through October 31 , 201 8. On October 26, 201 8 the OPUC ordered
that the balancing account be frozen as of October 3 1 , 201 I, with recovery subject to future proceedings. Effective November 1 , 201 8 the OPUC
authorized an additional $8.1 million to be included in rates for defined benefit pension plan expenses.
97
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 103 of 210
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
Rate of increase in compensalion
Expected long-term rate of return
Assumptions for year-end funded status:
Weighted-average discount rate
Rate of increase in compensation
Expected long-lerm rate of return
3.51%
3.25-4.5%
7.500/"
4.20%
3.25-3.syo
7.50%
? ooo/-
3.25-4.5%
7 .50o/o
4.17./.
3.25-4.5o/o
7.50%
3.44%3.85%4.000k
nla
nla
3.44o/o
nla
nla
nla
nla
nla
nla
4.13%
nla
nla
nla
nla
3.25-4.5% 3.2*4.50/o
7 50% 7.50%
3.85%
The assumed annual increase in health care costtrend rates used in
measuring other postretirement benefits as of December 3'1 , 20'lB 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 ,ale of 4.7 sok by 2025.
Assumed health care cost trend rates can have a significant effect on the
amounls reported for the health care plans; however, other
postretirement benefit plans have a cap on lhe amount of costs
reimbursable by NW Natural.
A one percentage point change in assumed health care cost trend rates
would have the following effects:
ln thousands 1% lncrease 1 7o Decrease
Effect on net periodic postretirement
health care benefit cost g a3 $ (39)
Effect on the accumulaled
postretirement benefil obligation 622 (560)
N4ortality assumptions are revlewed annually and are updated for
material changes as necessary. ln 2018, mortality rate assumptions
were updated from RP-2006 mortality tables for employees and healthy
annuitants with a fully generational projection using scale N/P-2017 to
RP-20'14 mortality tables using scale tMP-2018, which partially offset
increases of the projected benefit obligation.
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:
ln thousands Pension Benefits Other Benefits
Employer Contributions:
2017 $
2018
2019 (estimaled)
Benefit Payments:
2016
2017
2018
Estimated Future Benefit Payments:
2019
2024
2021
2022
2023
2024-2028
21,483 $
17,715
13,318
,n 060
31,580
21,918
1,737
1,674
1,787
1 1aa
1,737
1,674
1,787
1,846
1,930
1,941
1,993
9,628
22,695
23,622
24.516
25,316
26,074
145,917
98
Em
NW Natural makes contributions to its qualified defined benefit pension
plans based on actuarial assumptions and estimates, tax regulations,
and funding requlrements under federal law. The Pension Protection Act
of 2006 (the Act) established funding requirements for defined benefit
plans. The Act establishes a 100o/o 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 (lvlAP-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{erm but generally increases contributions in the long-run and
increases the operational costs of running a pension plan. ln 2014, the
Highway and Transportation Funding Act (HATFA) was signed and
extended funding relief for an additional five years.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 104 of 210
Table of Contents
Table of Contents
The qualified defined benefit pension plan was underfunded by $162.4
million at December 31, 2018. lncluding 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 20 19, NW Natural
expects to make contributions of approximately $1 1.0 million to this plan.
Multiemplover Pension Plan
ln 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 lnternational Union Pension Fund
(Western States Plan). The plan's employer identification number is 94-
6076144. Effective December 22,2013, NW 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 4ok lo 60/o of the total contributions to the plan by all
employer participants in those years.
Defined Gontribution Plan
NW Natural's Retirement K Savings Plan is a qualified defined
contribution plan under lnternal 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. ln cases where NW Natural's pension plan is
invested through a collective trust fund or mutual fund, the fund's market
value is utilized. lvlarket values for investments directly owned are also
utilized.
U.S. EQUITY. These are non-published nel 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.
INTERNATIONAUGLOBAL 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, asselbacked 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, RElTs, 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 I and non-published
NAV assets. The Level 'l 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.
lnvestment 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
Exhibit No.'l
J. Palfreyman, Dl
Gem State Water Company
Page 105 of 210
99
Table of Contents
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:
ln thousands
lnvestments
December 31 . 201 8
Level 1 Level 2 Level 3 Non-Published NAV Total(1)
US equity
lnternational / Global equity
Liability hedging
Opportunistic
Cash and cash equivalents
Total investments
lnvestments
$$$$85,233 $
70,017
45,659
23,1 86
8,707
85,233
95,011
45,659
23,1 86
8,707
24.994
a 24,994 $$$232,802 $ 257,796
Non-Published NAVLevel 1 Level 2 Level 3 (1)Total
December 31 . 201 7
US equity
International / Global equity
Liability hedging
Opportunistic
Cash and cash equivalents
Total investments
Receivables:
Accrued interest and dividend income
Due from broker for securlties sold
Total receivables
Liabilities:
Due to broker for securities purchased
Total investment in retirement trust
'')The fair value for these investments
o $$$98,375 $
84,818
53,981
23,895
98,375
1 06,029
53,981
,a aoR
5,615
21,211
82
$ 21,293 $$266.602 $ 287,895
December 31
2018 2017
$1$30
$U 30
257,797 $ 287 ,925
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.
10. INCOME TAX
The following table provides a reconciliation belween 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:
NW Holdings NW Natural
Dollars in lhousands
lncome taxes at federal statutory rate
lncr€ase (decrease):
State income tax, net of federal
Differences required to be flowed{hrough by regulatory
commissions
Effect of the TCJA
Deferred tax rate differential post-TCJA
Other, net
Total provision for income taxes
Effective tax rate
2018 2017 2016 2018 2017 2016
$19,222
4,927
1,302
$ 39,578 $
5,066
2,357
(3,376)
(76)
(1,184)(2,617)
$ 24,191 $ 41,008
36,901
4,844
2,357
(1,091)
$ 43,01 1
$19,434
4,982
1,302
(75)
(1 ,1 84)
5,072
2,357
(2,956)
37,137
4,858
2,357
$ 39,624 $
$ 24,459
(2,61e) (1 ,077\
$ 41,478 $ 43,275
26.4%36.6%
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 106 of 210
26.40 36.3%40.8%40.8%
q
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
lor 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.
NW Natural
The provision for current and deferred income taxes consists of the following at December 31
NW Holdings
ln thousands
Current
Federal
State
2018 2017 2016 2018 2017 2016
$8,953 $
3,785
'19,345 $
5,963
10,042 $
3,1 16
9,127 $
3,846
19,304 $
5,956
1 0,1 58
3,1 31
Deferred
Federal
State
9,001
2,452
13,869
1,831
25,473
4,380
9,025
2.461
14,371
1,847
25.581
4,405
11,453 15,700
lncome tax provision
Total net deferred income tax liabilities(') Amounts have been reclassified among categories to conform to current period presentation.
At December 31 , 2018 and 2017 , regulatory income tax assets of $ 19. 1
million and $2'1 .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 lax 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 Decembei 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
'101
29,853 11,486 16.218 29,986
$ 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:
NW Holdings NW Natural
ln thousands
Deferred tax liabilities:
Plant and property
Pension and postrelirement obligations
lncome tax regulatory asset
Other
Total deferred income tax liabilities
Deferred income tax assets:
lncome tax regulalory liability
Alternative minimum tax credit carryforward
Total deferred income tax assets
2018 20171'\2018 2017
b
$ 337,984 $ 327,062 $ 352,260 $ 343,924
$ 56,470 $
66
288,385 $
27,135
21,403
1,061
278,735 $
23,352
22,205
2,766
303,186 $
27,135
21,402
537
296,113
23,352
22,209
2,250
$57,469
R'
57,469 $56,470
66
$ 57,521 $ 56,536 $ 57,521 $ 56,536
$ 280,463 $ 270,526 $ 294,739 $ 287,388
income tax rate provided for by the TCJA. At December 31 , 20'18 and
201 7, reg u latory liability balances representing the net tax benefit of the
change in deferred taxes as a result of the TCJA of $2'17.'t 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
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 108 of 210
Table of Contents
lrl ,5308 13158 1r.r?3 %.260 132S'
Table of Contents
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 31,2O18,2017, or 2016.
NW Holdings files a consolidated U.S. federal income tax return that
includes NW Natural. lncome 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
ofthe 2015, and 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 lRS. 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 December3l ,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 201 5, 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 lo2lokfrom 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 afler 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, bul 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 'l 18, which
provided guidance on accounting for the tax effects of the TCJA. SAB 1 18
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 estimale could be made, a company would record a
provisional estimate in the financial statements. NW Natural previously
disclosed that due lo 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 Septembet 27,2017 but before January "l, 2018 had not been
recorded. The determination to exclude all assets placed in service after
September 27, 2017 bul before January 1, 201 8 from bonus tax
depreciation was provisional as provided for under SAB I 18.
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 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. ln 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.
ln 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.
102
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 1 10 of 210
Table of Contents
11. PROPERTY, PLANT, AND EQUIPMENT
The following table sets forth the major classifications of property, plant,
and equipment and accumulated depreciation at December 3'1 :
ln thousands 2018 2017
Accumulated depreciation does not include the accumulated provision
for asset removal costs of $380.5 million and $360.9 million at
December 31, 2018 and2017, respectively. These accrued asset
removal costs are reflected on the balance sheet as regulatory liabilities
See Note 2. During 20 1 8 and 2017 , no equipment was acquired under
capital leases.
NW Holdinos
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 20'16. The weighted average depreciation rate for
assets not related to NGD was 2.2% in 2018, 'l .9% in 20'17 , and 2.0oh in
2016.
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 "
Total property, plant, and equipment
Other (NW Holdings):
Other plant in service
Less: Accumulated depreciation
Other plant, netl
2,364,848 2j92262
$ 3.134.122 $
204.978
974,252
2.975,217
159,924
942,879
66,009
5,330
18,603
64,997
4,122
17,406
52,736 51 ,713
$ 2,417,584 $ 2,243,975
$4,051 $
165 192
3,788 183
NW Holdings:
Total property, plant, and equipment $ 2,421,372 $ 2,244,158
NW Natural and NW Holdings:
Capital expenditures in accrued liabilities $ 23,676 $ 34,761
' NW Natural's previously reported other balances were restated due to
cerlain assets and liabilities now being classified as discontinued operalions
assets and liabilities in its balance sheets. See Note 18 for further
d iscussion.
12. GAS RESERYES
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) lnc. 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 inveslment, 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.
ln 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 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 20"14. 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 20'1 6 respectively.
Exhibit No. 't
J. Palfreyman, Dl
Gem State Water Company
Page 111 ot 210
103
Table of Contents
The following table outlines NW Natural's net gas reserves investment at
December 31:
ln thousands 2018 2017
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.
Gas reserves, currenl
Gas reserves, non-current
Less: Accumulated amortization
Total gas reserves "
Less: Deferred taxes on gas reserves
Net investment in gas reserves
$16,647 $
170,660
104,463
15,704
171 ,832
87,779
82,844
20,071
99,757
)) 71)
$ 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.
l3.INVESTMENTS
lnvestments in life
insurance policies
lnvestments in gas
pipeline
Other
Total other
investments
lnvestments 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:
NW Holdings NW Natural
ln thousands 2018 2017 2018 2017
$ 49.922 $ 50,792 $ 49,922 $ 50,792
13,571
65 1,862
$ 63.558 $ 66.363 $ 49,922 $ s2,654
lnvestment in Life lnsurance Policies
NW Natural has invested in key person life insurance contracts to
provide an indirect funding vehicle for certain long{erm employee and
director benefit plan liabilities. The amount in the above table is reported
at cash surrender value, net of policy loans.
lnvestments 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 lnvestments Ltd., an indirect wholly-owned subsidiary of
TransCanada Corporation.
Variable lnterest Entitv (VlE) Analvsis
TWH is a VlE, with NW Holdings'investment in TWP reported under
equity method accounting. lt 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. lnvestments in TWH and TWP are
included in other investments on NW Holdings' balance sheet. lf 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 .
lmpairment Analvsis
lnvestments 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. lf 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 fairvalue. Fairvalue 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.
ln 2011, TWP withdrew its original application with the FERC for a
proposed natural gas pipeline in Oregon and informed FERC that it
intended to reJile 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 Northwest
to further understand their gas transportation needs and delermine 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 ,20'18
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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 112 ol 210
13,669
1,902
104
Table of Contents
,4, BUS'IVESS C O M BI N ATI O N S
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., lnc. (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 ldaho, expands service area, and opens further opportunity for
growth. Falls Water is based in ldaho Falls, ldaho and serves
approximately 5,300 connections.
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 Acouisitions
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.
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 foruvard contracts are used to hedge the fluctuation in foreign
currency exchange rates for pipeline demand charges paid in Canadian
dollars.
ln 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 inlo exchange contracts related to the third-party
asset management of its gas portfolio, some of which are derivatives
that do not qualify for hedge accounting or regulatory deferral, but are
subject to NW Natural's regulatory sharing agreement. These derivatives
are recognized in operating revenues, net of amounts shared with NGD
customers.
Notional Amounts
The following table presents the absolute notional amounts related to
open positions on NW Natural derivative instruments:
At December 3'1
ln thousands 2018 2017
Natural gas (in therms):
Financial
Physical
Foreign exchange
408,850
472,275
$ 6,936 $
429,100
520,268
7,669
105
Purchased Gas Adiustment (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. ln 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
48o/o and 49% in financial swap and option contracts, and 24o/o and 260/o
in physical gas supplies, respectively. Hedge contracts entered into prior
to the PGA filing, in September 201 8, were included in the PGA for the
20 1 8-1 I 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 113 of 210
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,
1 5. DERIVATIVE INSTRUMENTS
Table of Contents
Unrealized and Realized Gain/Loss
The following table reflects the income statement presentation for the unrealized gains and losses from NW Natural's derivative instruments, which also
represents all derivative instruments at NW Holdings:
December 31 . 201 I December 31.2017
ln thousands
Natural gas
commodity Foreign exchange
Natural gas
commodity Foreign exchange
Benefit (expense) to cost of gas
Operating revenues
Amounts deferred to regulatory accounts on balance sheet
Total gain (loss) in pre-tax earnrngs
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 ofgas,
deferred through regulatory accounts, and amortized through customer
rates in the following year.
Credit Risk Manaqement of Financial Derivatives lnstruments
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 counlerparty credit limits and portfolio
diversification, it was not subject to collateral calls in 20'18 ot 2017 .fhe
collateral call exposure is set forth under credit support agreements,
which generally contain credit limits. NW Natural could also be subject to
collateral call exposure where it has agreed to provide adequate
assurance, which is not specific as to the amount of credit limit allowed,
but could potentially require additional collateral in the event of a material
adverse change.
Based 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:
(2111 26,665 (107].
210 $$(356) $
Credit Rating Downgrade Scenarios
(Current BBB- Specu-
ln thousands Ratings) A+/A3 BBB+/Baa1 BBB/Baa2 lBaa3 lative
$(1,239) $
1,660
(284\ $(26,000) $
(1,021)
107
284
$
with
Adequate
Assurance
Calls
Without
Adequate
Assu ra nce
Calls
$$$$(3,e40) $(6,05e)
(3,940) (4,452)
106
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.
lf 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
lnternational Swaps and Derivatives Association contracts to minimize
this risk along with collateral support agreements with counterparties
based on their credit ratings. ln 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
inslrument 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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 114 of 210
Table of Contents
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
spreads, bond market credit spreads, financial condition, government
actions, and market news. A lvlonte-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.
We could become materially exposed to credit risk with one or more of
our counterparties if natural gas prices experience a significant increase
lf 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.
16. COMMITMENTS AND CONTINGENCIES
Fair Value
ln 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 nalural 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 3'l , 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 3l, 2018 and 2017.
ln thousands
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.
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 ofthe 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 3'l , 2018 and
2017, respectively.
Gas Purchase and Pioeline Gaoacitv 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. ln addition, NW Natural has entered into long-term
sale agreements to release firm pipeline capacity. NW Natural also
enters into short{erm and long-term gas purchase agreements.
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page1l5of210
Minimum lease
payments
2019
2020
2021
2022
2023
Thereafter
Total
5,368
4,812
7,077
7,304
149,881
$
$181 ,665
ln October 2017, NW Natural entered into a 2O-year operating lease
agreemenl 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.
107
Table of Contents
The aggregate amounts of these agreements were as follows at
December 31, 2018:Total payments for fixed charges under capacity purchase agreements
were $82.6 million for 2018, $85.3 million lor 2017, and $85.0 million for
2016. lncluded in the amounts were reduclions for capacity release
sales of $4.3 million for 2018, $4.5 million fo( 2017, and $4.5 million for
2016. ln addition, per-unit charges are required to be paid based on the
actual quanlities shipped under the agreements. ln 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.
ln thousands
Purchase
Agreements
Pipeline
Capacity
Purchase
Agreements
Pipeline
Capacity
Release
Agreements
Gas
2019
2020
2021
tutt
2023
Thereafter
Total
Less: Amount
representing interest
144,500 $
2,776
2,313
78,449 $
76,613
66,656
61,075
60,619
580,022
$4,272
3,560
923,4U
201,224
7,832
183
Total at present vatue $ 148,275 $ 722,210 $
1 7. ENVIRONMENTAL MATTERS
7,U9
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 (Rl)to determine the nalure and extent of contamination
and then a risk assessment (RA) to establish whether the contamination
at the site poses unacceptable risks to humans and the environment.
Next, a feasibility study (FS) or an engineering evaluation/cost analysis
(EE/CA) evaluates various remedial alternatives. lt 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 pos!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. ln those
cases, the nature ofthe 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. lt 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. ln 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 Poftland Harbol' below.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 116 of 210
108
149,589
1,314
Table of Contents
Environmental Sites
The following table summarizes information regarding liabilities related to environmental sites, which are recorded in other current liabilities and other
noncurrent liabilities in NW Natural's balance sheet at December 31:
Current Liabilities Non-Current Liabilities
ln thousands 2018 2017 2018 2017
Portland Harbor site:
Gasco/Siltronic Sediments
Olher Portland Harbor
Gasco/Siltronic Upland site
Central Service Center site
Front Street site
Oregon Steel Mills
Total
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. ln 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 +50ok of
actual costs.
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. ln addition, NW
Natural is actively pursuing clarification and flexibility under the ROD in
order to better understand its obligation under the clean-up. NW Natural
is also participating in a non-binding allocation process with the other
PRPs in an effort to resolve its potential liability. The Portland Harbor
ROD does not provide any additional clarification around allocation of
costs among PRPs and, as a result of 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.
Gasco/Siltronic Sediments. ln 2009, NW Natural and Siltronic
Corporation entered into a separate Administrative Order on Consent
with the EPA to evaluate and design specific remedies for sediments
adjacent to the Gasco uplands and Siltronic uplands sites. NW Natural
submitted a draft EE/CA to the EPA in May 2012 to provide the estimated
cost of potential remedial alternatives for this site. At this time, the
estimated costs for the various sediment remedy alternatives in the draft
EE/CA, for the additional studies and design work needed before the
cleanup can occur, and for regulatory oversight throughout the clean-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
$$$5,117
2,600
13,983
10
11.402
2,683
1 q/.q
13,422
25
1,009
44,351 $
6,273
44,830
3
179
45,346
4,1 63
47,835
10,757
179
$ 33,1 12 $ 19,088 $ 95,636 $ 1 03,280
109
sediments at this site represenl 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 cosls 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
polential 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 adjacenl to the Portland Harbor site
described above. The Gasco site has been under investigation by NW
Natural for environmental conlamination under the ODEQ Voluntary
Clean-Up Program (VCP). lt is not included in the range of remedial
costs for the Portland Harbor site noted
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 117 ot 210
Table of Contents
above. The Gasco site is managed in two parts, the uplands portion and
the groundwater source control action.
NW Natural submitted a revised Remedial lnvestigation Report for the
uplands to ODEQ in May 2007. ln 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.
ln 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.
ln 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 ofthe 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. ln 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 lndependent
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 conducled
a sediment and source control investigation and provided findings to
ODEQ. ln December 2015, a FS on the former Portland Gas
Manufacturing sile was completed.
ln July 20'17, ODEQ issued the PGM ROD, The ROD specifies the
selected remedy, which requires a combination of dredging, capping,
treatment, and natural recovery. ln
addition, the selected remedy also requires institutional controls and
longterm inspection and maintenance. NW Natural revised the liability in
the second quarter of 201 7 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
20'19 and expects to construct the remedy during 2019.
Oregon Steel Mills site. Refer to the "Legal Proceedings," below.
Site Remediation and Recoverv 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. ln the February 2015 Order establishing
the SRRM (20'15 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 ofthe earnings test prescribed by the OPUC to
occur by the third quarter of the following year.. Poslreview - 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
oneJifth ofthe post-review deferred balance. NW Natural earns a
carrying cost equal to the amortization rate determined annually by the
OPUC, which approximates a short{erm borrowing rate.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 118 of 2'10
1'10
Table of Conlents
ln 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 amorlizes 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.
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{hird
of the Oregon allocated proceeds were applied to costs deferred through
2012 wilh the remaining two{hirds 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 3't:
tn thousands 2018 2017
Deferred costs and intereslr"
Accrued site liabilities ('?r
lnsurance proceeds and interest
Total regulatory asset deferral"
Current regulatory assets{3)
Long-term regulatory assetst3' 76,149 72,1281r) lncludes pre-review and post-review deferred costs, amounts currently in
amortization, and interest, net of amounts collected from customers.('?' 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.1') Environmental costs relate to specific sites approved for regulatory deferral
by the OPUC and WUTC. ln Oregon, NW Natural earns a carrying charge on
cash amounts paid, whereas amounts accrued bul 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 cuslomers. ln 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 mjllion 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.
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 Nalural 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. ln 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.
Leoal Proceedinos
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
ullimate disposition of any of these matters will have a material effect on
financial condition, results of operations, or cash flows.
OREGON STEEL MILLS SITE. ln 2004, NW Natural was served with a
third-party complaint by the Port of Portland (the Port) in a lvlultnomah
County Circuit Court case, Oregon Steel Mills, lnc. 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. ln 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 Holdlngs'
financial condition, results of operations, or cash flows.
For additional information regarding other commitments and
contingencies, see Note 16.
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page '119 of 210
$ 41,883 $ 45,546
'128,369 126,950
(88,s02) (e4,170\
$ 81,750 $ 78,326
5,601 6,198
11',|
Table of Contents
1 8. DISCONTINUED OPERATIONS
NW Holdinos
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 markelbased 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.
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. ln July 20'18, 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 shifl 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 disconlinued
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.
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:
NW Holdings Discontinued
Operations
ln thousands 2018 2017
Assets:
Accounts receivable
lnventories
Other current assets
Property, plant, and equipment
Less: Accumulated depreciation
Other non-current assets
Discontinued operations - current assets
Discontinued operations - non-current
assets
Total discontinued operations assets
13,269 3,057
10,817
$ 13,269 $ 13,874
$390 $
685
333
11,621
7
247
2,126
396
535
10,816
Liabilities:
Accounts payable
Other current liabilities
Other non-current liabilities
Discontinued operations - currenl
liabilities
Discontinued operations - non-current
liabilities
$873 $
307
11,779
1,287
306
12,043
12,959 1,593
12,043
(1)
Tota I disconti nued operations I ia bi lities _t_1_r' r5r- _t _-__]!f31
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.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 120 ol 210
112
I
Revenues
Expenses
Operations and maintenance
General laxes
Depreciation and amortization
Other expenses and interest
lmpairment expense
Total expenses
Loss from discontinued
operations before income tax
lncome tax benefit("
Loss from discontinued
operations, net of tax
Table of Contents
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:
NW Holdings Discontinued Operations
ln thousands. except pet share data 2018 2017 2016
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
ln thousands 2017
$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\
(2,1671
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:
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 121 ot 210
$ 3,579 $ 7,135 $ 7,794
7,285 206,596 I 3,615
(3,710) (1e9,461) (s,821 )
(968) (71,765) (2,297\
Assets:
Cash
Accounts receivable
lntercompany receivables
lnventories
Other current assets
Property. plant, and equipment
Less: Accumulated depreciation
Other inveslments
Other non-current assets
Discontinued operations - current assets
Discontinued operations - non-current
assets
Total discontinued operations assets
Liabilities:
Accounts payable
lnlercompany payables
Other current liabilities
Deferred tax liabilities
Other non-current liabilities
Discontinued operations - currenl
liabilities
Discontinued operations - non-current
liabilities
Total discontinued operations liabilities
5,771
479
430
609
7,245
1,373
4,525
975
192,478
6,643
1,295
4,685
992
$ (2,742) $ (127,6e6) $ (3,524)
Loss from discontinued
operations per share of
common stock:
Basic $ (0.10) $ (4.45) $ (0.13)
Diluted $ (0.09) $ (4.44) $ (0 13)r' 2017 income tax benefit includes approximately $18 million of tax benefit from
lhe enactment of the TCJA. The TCJA was enacled Decembet 22,2017 and
resulted in the federal tax rate changing from 35oh lo 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.
$
$
$
113
Table of Contents
NW Natural Discontinued Operations
ln thousands. except per share data 2018 2017 2016
Revenues $ 3,016 $ 7,360 $ 8,018
Operations and mainlenance 4,151 7,423 7,387
and amortization 420 4,555 4,714
lmpairment expense 192,478
Loss from discontinued
operations before income tax (2,345) (1 99,1s6) (6,497)
Loss from discontinued
operations, net of tax -t-1].123I -9-(1,?,343)- -t-(3,%9i"' 2017 income lax 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 35ok lo 21o/o.
114
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 122 ol 210
5.361 206,516 14,515
Table of Contents
NORTHWEST NATURAL HOLDING COMPANY
QUARTERLY FTNANCTAL TNFORMATTON (UNAUDTTED)
NW Holdings
Quarter endedl''
ln thousands, except per share data March 31 June 30 September 30 December 31
Operating revenues $263,635 $124,567 $91,239 $
Loss from discontanued operations, net of tax (650)
Average common shares outstandrng:
Diluted 28,803 28,791 28,815 28,940
Basic 1.46 (0.01)(0.39)1.27
Loss from discontinued operalions per lhare of common stock:
Diluted (0.02)(0.02)(0.02)(0.03)
Basic 1.44 (0.03)(0.41)1.24
Operating revenues 295,724 $134,476 $86.212 $238,626
Loss from discontinued operations, net of tax ,346)(608)(1 24,65s)
Average common shares outstanding:
Diluted 28.723 28,717 28,678 28,797
Basic 1.45 0.14 (0.28)1.20
Loss from discontinued operalions per share of common stock:
Diluted (0.04)(0.04)(0.02)(4.33)
Basic 1.41 0.10 (0.30) (3.14)
Diluted 1.40 0.10 (0.30) (3.13)1" Quarterly earnings (loss) per share are based upon the average number of common shares outstanding during each quarter. Variatrons in earnings between quarterly
periods are due primarily lo the seasonal nature of our business.
115
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 123 ot 210
226,702
36,783
(e5e)
41,537
1.46
(ee8)(11,794)35,824
40,310 2,729
0.14
(8,495)(90,1 67)
Table of Contents
NORTHWEST NATURAL GAS COMPANY
QUARTERLY F r NAN C rAL r N FORNTATTON (U NAU D|TED)
NW Natural
Quarter ended
ln thousands March 3'1 June 30 December 31
Operating revenues $263,635 $124,563 $91,227 $226,146
Loss from discontinued operations, net of tax (477\(727)(s1 e)
Operating revenues $295.668 $134,420 $86,157 $238,793
Loss from discontinued operations, net of tax 24,253).
'l 16
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 124 ol 210
September 30
41,537 (ee8)(11,794)37,581
40,310 2,729 (8,4e5)(90,1 67)
Table of Contents
SCHEDULE I- CONDENSED FINANCIAL INFORTVATION OF NORTHWEST NATURAL HOLDING CO]VPANY
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(PARENT COMPANY ONLY)
ln thousands
lnception through
December 3'l , 20'18
Operating expenses:
Total operating expenses 838
Earnings from investment in subsidiaries, net of tax 36,469
lnterest
lncome tax
See Notes to Condensed Financial Statements
117
Exhibit No. 1
J. Palfreyman, Ol
Gem State Water Company
Page 125 ol 210
$838
(838)
36
53
35,614
(225)
o 35,839
Table of Contents
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
ln thousands
As of December 31,
2018
Assets:
Current assets:
Receivables from affiliates 2,796
Other current assets 3,078
Non-current assets:
Other investments 65
Total non-current assets 755,346
Current liabilities:
Payables to affiliates 9,1 66
Total current liabilities 9,366
Deferred credits and other non-current liabilities:
Total deferred credits and other non-current liabilities 7
Common stock 739,722
Total equity 76'1 ,859
See Notes to Condensed Financial Statements
118
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 126 ol 210
$
15,885
$771,231
(1)
7
$771,231
Table of Contents
ln thousands
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
lnception through
December 31,2018
Operating activities:
Net income 35,839
Equity in earnings of subsidiaries, net of tax (36,469)
Deferred income taxes 7
Other 15
$
Receivables, net (585)
Accounts payable 9,304
Other, net (44)
Cash used in operating activities (r35)
lnvesting activities
Cash used in investing activities (1,804)
Financing activities:
Cash dividend payments on common stock (12,e23)
Other (327)
Cash provided by financing activities 61150
lncrease in cash and cash equivalents 4,011
Cash and cash equivalents, end of period $4,011
See Notes to Condensed Financial Statements
'l 19
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 127 ol 21O
(1,804)
Table of Contents
NOTES TO CONDENSED FINANCIAL STATE]MENTS
,. AAS'S 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 ltem 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, 20'18.
2. DEBT
For information concerning NW Holdings'debt obligations, see Note 8 to
the consolidated financial statements included in ltem 8 of this report.
120
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 128 ol 210
Table of Contents
NORTHWEST NATURAL HOLDING COMPANY
SCHEDULE II . VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUI\i|N B COLUT\,'IN C COLUIVN D COLUMN E
Addilions Deductions
Balance at beginning
of period
Charged to costs
and expenses
Charged to other Balance al end of
ln thousands (yeat ended December 31 )accou nts Net write-offs period
Reserves deducted in balance sheet from assets
to which they apply:
2017
Allowance for uncollectible accounts $1,290 $86s $$1 ,199 $956
Reserves deducted in balance sheet from assels
to which they apply:
NORTHWEST NATURAL GAS COMPANY
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COTUMN C COLUMN D COLUMN E
Additions Deductions
Balance at beginning
of period
Charged to costs
and expenses
Charged to other Balance at end of
ln thousands (yeat ended December 31 )accounts Net write-offs period
Reserves deducted in balance sheet from assets
to which they apply:
2017
Allowance for uncollectible accounts $1,290 $86s $$1,199 $956
Reserves deducted in balance sheet from assets
to which they apply:
12'l
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 129 ol 21O
$9s6 $680 $$659 $977
$870 $1,246 $$826 $1,290
$956 $678 $$659 $
$870 $1,246 $$826 $
Table of Contents
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
1 3a-1 5(e) and 1 5d-1 5(e) of the Securities Exchange Act of 1 934, 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 reporls 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 lnternal 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 1 3a- 1 5
(f). There have been no changes in internal control over financial
reporting that occurred during the quarter ended December 3'l , 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 ltem 9(a).
ITEM 98. OTHER INFORMATION
None.
122
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 130 of 210
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The "lnformation 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.
EXECUTIVE OFFICERS
Name
Age at
Dec. 31, 2018 Positions held during last five years(1)
David H. Anderson*
Frank H. Burkhartsmeyer*
Lea Anne Doolittle'3r
James R. Downing
Shawn M. Filippi-
Kimberly A. Heiting
Jon G. Huddleston
Thomas J. lmeson(o)
Justin Palfreyman
Melinda B. Rogers
Lori Russell
MardiLyn Saathoff
David A. Weber
Brody J. Wilson*
FA
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 131 of 210
54
A2
49
46
49
56
68
40
53
59
62
(o
39
123
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).
SeniorVicePresidentandChief Financial Officel'z) QO'17-);PresidentandChief ExecutiveOfficer
of Renewables, Avangrid Renewables (2015-2017): Senior Vice President of Finance, lberdrola
Renewables Holdings, lnc. (2012-20 1 5).
Senior Vice President and Chief Administrative Officer (2013-2018); Senior Vice President (2008-
201 3).
Vice President and Chief lnformation O'fficer (2017- ); Chief lnformation 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(') (2016- ); Vice President and
Corporate Secretary (2015-2016\; Senior Legal Counsel (2011-2014), Assistant Corporate
Secretary (20 1 0 -20 1 4).
Senior Vice President, Operations and Chief Marketing Officer (201 8- ); Senior Vice President,
Communications and Chief Marketing Officer (2018); Vice President, Communications and Chief
Marketing Officer (2015-2018); Chief Marketing & Communications Officer (2013-2014); Chiet
Corporate Communications Officer (201 1 -20 1 3).
Vice President, Engineering and Utility Operations (2018- )l Senior Director, Utility Operations
(2014-2018); Director, Utility Operations (2013-2014), Process Director (2007-2013).
Vice President of Public Affairs (2Ua- ); Director of Public Affairs, Port of Portland (2006-2014).
Vice President, Strategy and Business Development (2017- );Vice President, Business
Development (2016-2017)r, Director, Power, Energy and lnfrastructure 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-
201 7); Senior Associate, Plan B (2014-2015); Director, Executive Development Center,
Willamette University (201 1 -20 1 51.
Vice President, Utility Services (2016- ); Utility Field Operations Director (2013-2016); Serve
Customer Process Director (2008-2013).
Senior Vice President, Regulation and General Counsel(s)12016- ); 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 (201 1- ).
Vice President, Chief Accounting Officer, Controllerand Treasurer(2) (2017-); Chief Financial
Officer (lnterim), Treasurer, Chief Accounting Officer and Controller (201 6-201 7); Chief
Accounting Officer, Controller and Assistant Treasurer (2016); Controller (2013-2015); Acting
Controller (20 "1 3) ; Accounting Director (20 12-20 1 3).
Table of Contents
DIRECTOR (NORTHWEST NATURAL GAS COMPANY ONLY)*
Name
Age at
Dec. 31, 20'18
Steven E. Wynne 66 Executive Vice President, Moda, lnc., a privately-held healthcare insurance company (2012- ); Director, FLIR
Systems, lnc. (1999- ); Director. JELD-WEN Holding lnc. (2012- ); Director, Pendleton Woolen Mills, lnc. (2013-
); Director, Lone Rock Resources, lnc. (2016- ); Director, Citifyd lnc. (2013- ); Trustee, Willamette University
(1999- ); Trustee, Portland Center Stage (2012- ); Executive Vice President, JELD-WEN, lnc. (201.1-2012\;
President and Chief Executive Officer, SBI lnternational, 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 lhe 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 Nalural Gas Company.
Statement for the 2019 Annual Meeting of Shareholders.
(1) Unless otheruise 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.
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.nwnaturalholdinqs.com. We intend to disclose
onourwebSiteat@anyamendmentStotheCodeorwaiversoftheCodeforexecutiveofficersanddirectors'
124
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page'132 of 21O
Positions held during last five years(1)
Table of Contents
ITEM 11. EXECUTIVE COMPENSATION
The information concerning "Executive Compensation", "Report of the
Organization and Executive Compensation Committee", and
"Compensation Committee lnterlocks and
Plan Category
lnsider Participation" contained in NW Holdings'definitive Proxy
Statement for the 2019 Annual Meeting of Shareholders is hereby
incorporated by reference. lnformation related to Executive Officers as of
December 31 ,2018 is reflected in Part lll, ltem 10, above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
]\4ATTERS
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):
(b)(a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans approved by security holders:
LTIP.,,,
Restated Stock Option Plan
Employee Stock Purchase Plan
Equity compensation plans not approved by security holders:
Executive Deferred Compensation Plan (EDCP13'
Directors Deferred Compensation Plan (DDCP)(')
Deferred Compensation Plan for Directors and Executives (DCP)''
Total
173,175
s5,938 $
20,022
1,063
41,069
194,205
nla
44.96
60.07
574,787
204,317
nla
nla
nla
nla
nla
nla
485,472 779,104
(" 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. lf the maximum awards were paid pursuant to the
Performance Share Awards outstanding at December 3'l , 2018, the number of shares shown in column (a) would increase by 90,495 shares, reflecting the maximum
share award ot 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.12) 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 slock options at December 31, 2018.13) Prior to January 1, 2005, deferred amounts were credited, at the participant's election, to either a "cash account" or a "stock account.'' lf 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, sub.iect 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 ln a lump sum, in installments over a period nol 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.(1) 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 slock 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, 1 0, or 1 5 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.
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page 133 of 210
125
Table of Contents
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.
126
Exhibit No. 'l
J. Palfreyman, Dl
Gem State Water Company
Page 134 of 210
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
Table of Contents
ITEI\4 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 ,I4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
NW Holdinqs
The information captioned "2018 and 2017 Audit Firm Fees" in NW
Holdings' definitive Proxy Statement for the 2019 Annual li,4eeting 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 and2017:
ln thousands 2018 20't7
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 reviewofthe
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). ln 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 20'18 and2017, 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
and2017 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 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 ltem L
2. List of Exhibits filed
Reference is made to the Exhibit lndex commencing on the
following page.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 135 of 210
$I $,379
30
34
4
1,262
115
35
a
$ 1,447 $ 1,415
ITEM ,I6. FORM 1O-K SUMMARY
None
127
Table of Contents
NORTHWEST NATURAL HOLDING COMPANY
NORTHWEST NATURAL GAS COMPANY
Exhibit lndex 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.
Asreement and Plan of Merger by Anq a!AS!S llSrthtyeg! Xe Gas Comoanv. Northwest Natural Holdinq Companv, and NWN Meroer
Sub, lnc., dated as of March 7, 20lS OnSAQAIatecLby 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 Companv, Northwest Natural Holdinq Companv, and NWN
Merqer Sub, lnc., dated September 26, 2018 (incorporated bv reference to Exhibit 2.1(b) to the Form 8-K dated October 1, 2018, File No. 1-
38681 ).
Amended and Restated Articles of lncorporation of Northwest Natural Holdinq Companv (incorporated bv reference to Exhibit 3.1 to the
Form 8-K dated October 1 , 2018, File No. 1-38681 ).
Amended and Restated Articles of lncorporation of Northwest Natural Gas Companv (incorporated bv reference to Exhibit 3.3 to the Form 8-
K dated Ostober 1 , 2018, File No.
Amended and Restated Bvlaws of Northwest Natural Holdino Companv (incorporated bv reference to Exhibit 3.2 to the Form 8-K dated
October 1,2018, File No. 1-38681).
Bvlaws of Northwest Natural Gas Companv (incorporated bv reference to Exhibit 3.1 to the Form 8-K filed December 22, 2017, File No. 1-
't 5973).
Copv of Mortqaqe and Deed of Trust of Northwest Natural Gas Companv, dated as of Julv 1 , I 946 (Mortgage and Deed of Trust), to Bankers
Trust (towhom Deutsche BankTI@ successor), Trustee (incorporated by reference to Exhibit 7(i) in File No. 2-
I lndentures Nos.th 14 to the and Deed of dated as of
lUlarch 1 1Q54 Anril I 1956 Fehnrarv 1959 .h|v 1961 .lanrrarv oA.a March 1 OAA December 1 qAq Anrit1 1971 Jan
'1981 June 'l 1 985 and November 1 1 985 reference to Exhibit in File No.
to the and Deed of dated as of 1986 as Exhibit in File No. 33-241
Supplemental lndentures Nos. 16, 17 and '18 to the Mortgage and Deed of Trust, dated, respectively, as of November 1 , 1988, October I ,
'1989 and July 1 , 1990 (incorporated bv reference to Exh in File No. 33-40482): Suoplemental lndenture No. 19 to the Mortqaoe and
1991 reference to Exhibit in File No. 33-64014
-4b.
*4c.
"4d.
*4e.
,4t.
w
Supplemental lndenture No. 20 to the Mortqaqe and Deed of Trust, dated as of June 1 , 1993 (incorporated bV reference to Exhibit 4a.(1 ) to
Form 1 0-K for year ended December 3
Supplemental Indenture No.21 tothe Mortqaqe and Deed of Trust, dated asof October 15,2012 (incorporated bv referenceto Exhibit4.l to
Form B-K dated October 2012, File No.'1 -1 5973).
Supplemental lndenture No. 22 to the Mortqaqe and Deed of Trust,dated as of November '1, 2016 (incorporated bv reference to Exhibit 4.1
to Form 10-Q forthe quarterended September30,2016, File No. 1-15973).
Supplemental Indenture No. 23 to the Mortgaqe and Deed of Trust, dated as of September '1, 2018 (incorporated by reference to Exhibit 4(a)
to Form 8-K dated September 1 0, 201 8, File No. 1 -1 5973).
Copy of lndenture, dated as of June 'l , 1 991 , 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, amonq Northwest Natural Holdinq Companv and the lenders partv thereto, with JPMorqan
Chase Bank, N.A. as administrative agent and Bank of America, N.A., U.S. Bank National Association, and Wells Farqo Bank, National
Association, as co-svndication agents (incorporated bv reference to Exhibit 4.1 to Form 8-K dated October 3, 201 8, File No. 1-38681 ).
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 136 of 210
Table of Contents
*4h.
-10
21.
23a.
23b.
31 a.
31 b.
31c.
Credit Aoreement, dated as of October 2, 20'18, amonq Northwest Natural Gas Company and the lenders partv thereto, with JPMorgan
Chase Bank, N.A. as administrative aqent and Bank of America, N.A., U.S. Bank National Association, and Wells Farqo Bank, National
Association, as co-svndication aqents (incorporated bv reference to Exhibit 4.1 to Form 8-K dated October 3, 2018. File No. 1-15973).
Purchase and Sale Agreement dated June 20, 2018, between NW Natural Gas Storaqe LLC and SENSA Holdings LLC (incorporated bv
reference to Exhibit 10 to Form 10-Q for the qua(el ended June 30, 2018, File No. 1-15973).
Subsidiaries of Northwest Natural Holdinq Companv.
Consent of PricewaterhouseCoopers LLP - NW Holdings.
Consent of PricewaterhouseCoopers LLP - NW Natural.
Certification of Principal Executive Officer of Northwest Natural Gas Companv Pursuant to Rule 1 3a-14(a)/1 5-d-14(a), Section 302 of the
Sarban 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-Oxlev Act of 2002.
Certifiqation of Prj4cipal Executive O
31d.
Sarbanes-Oxlev Act of 2002.
Certification of Principal Financial Officer of Norlhwest Natural Holdinq Companv Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the
Sarbanes-Oxlev Act of 2002.
.*32a.Certification of Principal Executive Officer and Principal Financial Officer of Northwest Natural Gas Companv Pursuant to Section 906 of the
Sarbanes-Oxlev Act of 2002.
..32b.Certification of Principal Executive Officer and Principal Financial Officer of Northwest Natural Holdinq Company Pursuant to Section 906 of
the Sarbanes-Oxlev Act of 2002.
10't The following materials formatted in Extensible Business Reporting Language (XBRL):
(i) Consolidated Statements of lncome;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Cash Flows; and
(iv) Related notes.
Executive Compensation Plans and Arrangements
.1 0a Executive Supplemental Retirement lncome Plan, 2018 Restatement (incorporated herein by reference to Exhibit 10.6 to the Form 8-K
dated October 1 , 201 8, File No. 'l -38681 ).
.1 0b Supplemental Executive Retirement Plan, 2018 Restatement (incorporated herein bv reference to Exhibit 1 0.7 to the Form 8-K dated
October 1,2018, File No. 1-38681).
.1 0c.Northwest Natural Gas Companv Supplemental Trust, effective Januarv 1, 2005, restated as of October 1, 2018 (incorporated bv reference
to Exhibit 1 0.9 to the Form 8-K dated October 1 , 2018, File No. 1-38681 ).
*'10d. Northwest Natural Gas Companv Umbrella Trust for Directors, effective January 1 , 1991 , restated as of October 1 , 2018 (incorporated bv
reference to Exhibit 10.11 to the Form 8-Kdated October 1.2018. File No. 1-3868'l).
Northwest Natural Gas Companv Umbrella Trust for Executives, effective January 1 , 1988, restated as of October 1 , 201 I (incorporated bv
reference to Exhibit 10.10 to the Form 8-K dated October 1, 2018, File No. 1-38681).
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 138 of 210
*1 0e.
Table of Contenls
'1 0f.Restated Stock Option Plan, as amended effective December 't4, 2006 (incorporated bv reference to Exhibit 10c. to Form 10-K for 2006, File
No.'1-15973).
*109. Form of Restated Stock Option Plan Agreement (incorporated bv 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 'l , 2018 (incorporated by reference to Exhibit
10.4 to the Form 8-K dated October '1, 2018, File No. 'l -38681).
.10i.Directors Deferred Compensation Plan, effective June 1, 1981, restated as of October 1, 2018 (incorporated bv reference to Exhibit 10.5 to
the Form 8-K dated October 1 , 2018, File No. 1-38681 ).
"10j. Deferred Compensation Plan for Directors and Executives, effective January 1 , 2005, restated as of October 1 , 2018 (incorporated bv
reference to Exhibit "10.3 to the Form 8-K dated October'1.2018. File No. 1-38681).
1 0k.lntentionally omitted.
Form of lndemnity Agree10t.
10m.Form of lndemnitv Aqreement as entered into between Northwest Natural Holdinq Companv and each director and certain executive
officers.
*1 0n.Non-Employee Directors Stock Compensation Plan, as amended effective December 15, 2005 (incorporated bv reference to Exhibit 10.2 to
Form 8-K dated Decembell6. 2005, File No. 'l-15973).
.1 0o Executive Annual lncentive Plan, effective Januarv 1, 2017 (incorporated bv reference to Exhibit 10o. to Form 10-K for 2016, File No. 1-
I 5973).
.1 op Executive Annual Incentive Plan, effective January 1 , 2018, as amended and restated effective October 'l , 2018 (incorporated bv reference to
Exhibit 10.8 to the Form 8:K dated October 1 , 20
1 0q.
Form of Chanqe in Control Severance Agreement between Northwest Natural Gas Companv and each executive officer, as amended and
restated as of October 1 , 2018 (incorporated bv reference to Exhibit 10.2 to the Form 8-K dated October 1 , 2018, File No. 1-38681 ).
*1 0s.Northwest Natural Gas Coopanv Lonq Term lncentive Plan, as amended and restated effective Mav 24,2012 (incorporated by reference to
.1 0r.
-'t 0t.
Exhibit 10rto Form 10-Kfor2012, File No. 1-15973).
Northwest Natural Gas Companv Long Term lncentive Plan, as amended and restated effective Mav 25, 2017 (incorporated bv reference to
Exhibit 10s to Form'10-K for2017, File No. 1-15973).
Northwest Natural Holding Companv Lonq Term lncentive Plan, as amended and restated as of October 1 , 2018 (incorporated bv reference
to Exhibit 10.'l to the Form 8-K dated October 1, 2018, File No. 1-38681).
Form of Long Term Incentive Award Aqreement under the Lonq Term lncentive Plan (2016-20'18) (incorporated bv reference to Exhibit 10w.
to Form 1 0-K for 20 1 5, FIe lls-ljllgz3tr
Form of Long Term lncentive Award Aqreement under the Lonq Term lncentive Plan between Northwest Natural Gas Companv and an
Executive Olficer (2016-2018) (incorporate! bylefelqlqe tqExltibitl!r-to Eorm 10-Kfor 2015, File No. 1-15973).
Form of Long Term lncentive Award Aqreement under Lonq Term lncentive Plan (2017-2019) (incorporated bv reference to Exhibit 10x. to
Form 10-Kfor2016, File No. 1-15973).
Exhibit No. 1
J. Palfreyman, Dl
Gem State water Company
Page 140 of 210
.1 0u.
.1 0v.
*10w.
*1 0x.
130
Executive Annual lncentive Plan, effective Januarv 1, 2019.
Table of Contents
.10v. Form of Performances Share Long Term lncentive Agreement under Lonq Term lncentive Plan (2018-2020) (incorporated bv reference to
Exhibit 10v. to Form 10-K 2017. File No.'l -'1 5973).
102.
"1 Oaa.
Form of Lonq Term lncentive Award Agreement under Lonq Term lncentive Plan (2019-2021 ).
Form of Consent dated December 14, 2006 entered into bv each executive officer with respect to amendments to the Executive
Supplemental Retirement lncome Plan, the Supplemental Executive Retirement Plan and certain chanqe in control severance agreements
(incorporated bv 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 Februarv 28, 2008 entered into bv each
executive officer (incorporated by 1 Obb to Form 1 0-K for 2007, File No. 1 -1 5973).
10cc. Form of Restricted Stock Unit Award Aqreement under Lonq Term lncentive Plan (2019).
.1 odd. Form of Restricted Stock Unit Award Aqreement under Lonq Term lncentive Plan (20'18) (incorporated bv reference to Exhibit 1obb. to Form
10-Klor 2017,No.1-15973).
.1 oee.Corrected Form of Restricted Stock Unit Award Aqreement under Lonq Term lncentive Plan (2017) (incorporated bv reference to Exhibit 10.'l
to Form 10-Q forthe quarterended March 31,2017, File No. 1-15973).
.1off.Form of Restricted Stock Unit Award Aqreement under Lono Term lncentive Plan (2016) (incorporated bv reference to Exhibit 10bb. to Form
10-K for 2015, File Np-l- !5929tr
.1 oqq.Form of Amendment to Restricted Stock Unit Awqrd Aqleqlnertts (2013,2014 and 2015) (incorporated by reference tp exniUiljleSlAfAM
10-Kfor2016, File No. 1-15973).
-1 ohh.Form of Restricted Stock Unit Award Agreement under the Long Term lncentive Plan (2013, 2014 and 2015) (incorporated bv reference to
Exhibit 10aa. to Form 10-K for 2012. File No. 1-15973).
1Oii. Form of Director Restricted Stock Unit Award Aqreement under Lonq Term lncentive Plan (20 18).
.10ii.Form of Director Restricted Stock Unit Award Agreement under the Lonq Term lncentive Plan (2017) (incorporated bv reference to Exhibit
10.'1 to Form 10-Q for the quarter ended June 30, 2017, File No 1-15973).
.'lOkk. Severance Aqreement between Northwest Natural Gas Company and an executive officer, dated Auqust 1 , 2016 (incorporated bv reference
to Exhibit 10.1 to Form 8-K dated July 29, 2016, Fib No. 1-15973).
.'1oil.Form of Restricted Stock Unit Award Aoreement between Northwest Natural Gas Companv and an executive officer dated as of Julv 27,
2016 (incorporated bv reference to Exhibit 10.1 to Form 10-Q forthe quarter ended June 30, 2016, File No. 1-15973).
* 10mm. Form of Severance Agreement between Northwest Natural Gas Company and an executive ofiicer, dated Mav 17, 2017 (incorporated bv
reference to Exhibit 10.1 to Form 8-K dated April 24, 20'17. File No. 'l-'15973).
.1 0nn.Form of Special Restricted Stock Unit Agreement between Northwest Natural Gas Companv and an executive officer, dated Mav 17, 2017
(incomorated bv reference to Exhibit 10.2 to Form 8-K dated April 24, 2017, File No. 1-15973).
"1 0oo.Form of Hire-On Bonus Aqreement between Northwest Natural Gas Companv and an executive officer, dated Mav 17, 2017 (incorporated bv
reference to Exhibit 10.3 to Form 8-K dated April 24. 2017, File No. 'l- 15973).
Form of Special Retention Restricted Stock Unit Aqreement between Northwest Natural Gas Companv and an executive officer, dated
September 30, 2016 (incorporated bv reference to Exhibit 1Oqq. to Form 10-K for 2017, File No. 1-'15973).
Exhibit No. 1
J. Palfreyman, Dl
Gem State water Company
Page 142 ol 210
. l opp.
131
Table of Contents
*lncorporated herein by reference as indicated**Pursuant to ltem 601 (b)(32)(ii) of Regulation S-K, this certificate is not being "filed" for purposes of Section 1 I of the Securities Exchange Act of 1934
as amended.
132
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 144 ol 210
.1 oqq.
*1 0rr.Cash Retention Aqreement between Northwest Natural Gas Companv and an executive officer, dated as of March 1 , 2018 (incorporated bv
reference to Exhibit 10ss.to Form 10-K for 2017,
1 Oss. Annual lncentive Plan for NW Natural Gas Storaqe, LLC, as amended effective Januarv 1 , 2019.
.1ott.Lonq Term Incentive Plan for NW Natural Gas Storaqe, LLC, as amended effective Januarv 1 , 2016 (incorporated bv reference to Exhibit
1 Opp. to Form 1 0-K for 2016, File No. 1-1 5973).
Table of Contents
S'GNATURES
Pursuant to the requirements of Section 1 3 or 1 5(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
Bv: /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
IJJ
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 145 of 210
Table of Contents
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
isl Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
/s/ Brody J. Wilson
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
Principal Executive Officer and Director
Principal Financial Officer
Principal Accounting Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
March 1, 2019
March 1,2019
March 1 , 2019
March 1 , 2019
Exhibit No.'l
J. Palfreyman, Dl
Gem State Water Company
Page 146 of 2{0
Charles A. Wilhoite
134
Director
Table of Contents
NORTHWEST NATURAL GAS COMPANY
Signature Title Date
/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
/s/ Brody J. Wilson
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
isl 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
Principal Executive Officer and Director
Principal Financial Officer
Principal Accounting Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
March '1 , 20'19
March 1,2019
Ivlarch 1, 2019
N4arch 1,2019
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 147 ol 210
(Back To Top)
135
Section 2: EX-IO.CC (EXHIBIT 10.CC)
RESTRICTED STOCK UNIT AWARD AGREEMENT
This Agreement is entered into as of February _,2019, between Northwest Natural Holding Company, an Oregon corporation
(the "Cornpany"), and ("Recipient").
On February 27,2019, the Organization and Executive Compensation Committee (the "Committee") of the Company's Board of
Directors (the "Board") awarded restricted stock units to Recipient pursuant to Section 6 of the Company's Long Term lncentive Plan
(the "Plan"). Recipient desires to accept the award subject to the terms and conditions of this Agreement.
NOW, THEREFORE, the parties agree as follows:
L Grant of Restricted Stock Units: Dividend Equivalents. Subject to the terms and conditions of this Agreement, the
Corrpany hereby grants to the Recipient restricted stock units (the "RSUs"). The grant of RSUs obligates the Company,
upon vesting in accordance with this Agreement, to deliver to the Recipient one share of Common Stock of the Company (a "Share") for
each RSU. Upon vesting of each RSU, the Company also agrees to make a dividend equivalent cash payment with respect to each vested
RSU in an amount equal to the total amount of dividends paid per share of Company Common Stock for which the dividend record dates
occurred after the date of this Agreement and before the date of delivery of the underlying Shares. The RSUs are subject to forfeiture as
set forth in Sections 2.1 and 2.10 below.
2. Vestinsl Forfeiture Restriction.
2.1 Vestins Sdedulq
(a) All of the RSUs shall initially be unvested. Subject to Sections 2.3,2.4,2.5,2.10 and 5.2, the RSUs shall
vest as follows
(l) one-fourth of the RSUs shall vest on March 1,2020 if the Performance Threshold (as defined in
Section 2.2 below) is satisfied for 2019:
(2) an additional one-fourth of the RSUs shall vest on March 1.2021rf the Performance Threshold is
satisfied for 2020',
(3) an additionalone-fourth of the RSUs shallvest on March 1,2022 if the Performance Threshold is
satisfied for 2021 I and
(4) the finalone-fourth of the RSUs shall vest on March l, 2023 if the Performance Threshold is
satisfied for 2022
(b) lf the Performance Threshold is not satisfied for any year set forth in ( I ), (2), (3) or (4) above, the RSUs that
would have vested ifthe Performance Threshold had been satisfied for that year (the "Perfonnance Year") shall be forfeited to the
Company effective as of the last day of the Performance Year. For example, if the Performance Threshold is not
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page '148 of 210
satisfied for 2019, all RSUs that were scheduled to vest on March l, 2020 shall be forfeited effective as of December 31, 2019.
(c) If a Change in Control (as defined in Section 2.6 below) occurs, the Performance Threshold shall be deemed
to be satisfied for all Performance Years that were not completed prior to the Change in Control, with the effect that the RSUs
outstanding at the time of the Change of Control shall vest upon completion of the applicable time periods in Section 2.1(a).
2.2 Performance Threshold.
(a) For purposes of this Agreement, the "Performance Threshold" for any year shall be satisfied if the ROE (as
defined below) for that year is greater than the 5 Yr Avg Cost of LT Debt 1as defined below) for that year.
(b) The "ROE" for any year shall be calculated by dividing the Company's Adjusted Net lncorne (as defined
below) for the year by the Average Equity (as defined below) for the year. Subject to adjustment in accordance with Section 2.2(c)
below, the Company's "Adjusted Net lncome" for any year shall be equal to the Company's net income attributable to common
shareholders for the year, as set forth in the audited consolidated statement of income of the Company and its subsidiaries for the year.
Subject to adjustment in accordance with Section 2.2(c) below, "Average Equity" for any year shall mean the average of the Company's
total common stock equity as of the last day of the year and the Company's total common stock equity as of the last day of the prior year,
in each case as set forth on the audited consolidated balance sheet ofthe Company and its subsidiaries as ofthe applicable date.
(c) The Committee may, at any time, approve adjustments to the calculation of ROE to take into account such
unanticipated circumstances or significant, non-recurring or unplanned events as the Committee may determine in its sole discretion, and
such adjustments may increase or decrease ROE. Possible circumstances that may be the basis for adjustments shall include, but not be
limited to, any change in applicable accounting rules or principles; any gain or loss on the disposition of a business; impairment of assets;
dilution caused by Board approved business acquisition; tax changes and tax impacts ofother changes; changes in applicable laws and
regulations; changes in rate case timing; changes in the Company's structure; and any other circumstances outside of management's
control.
(d) The "5 Yr Avg Cost of LT Debt" for any year shall mean the average of five numbers consisting of the Avg
Cost ofLT Debt (as defined below) for that ycar and for each ofthe four preceding years. The "Avg Cost ofLT Debt" for any ycar shall
be equal to the sum of the Weighted Costs (as defined below) calculated for each series or tranche of long-term debt of the Corrpany
outstanding on the last day of the year. The "Weighted Cost" fora series ortranche of long-term debt as of any date shall be calculated
by multiplying the Effective Interest Rate (as defined below) on the debt as of that date by the outstanding principal balance of the debt on
that date, and then dividing the resulting amount by the Company's total outstanding principal balance oflong-tenn debt as ofthat date.
The "Effective lnterest Rate" for a series or tranche oflong-term debt as ofany date shall be the yield calculated based on the
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 149 of 210
2
settlement date for the original issuance ofthe series or tranche, the maturity date ofthe series or tranche, the stated annual interest rate of
the series or tranche in effect on that date, the number of interest payments per year under the terms of the series or tranche, the initial
bonowing of an amount equal to the pnncipal balance net of Debt lssuance Costs (as defined below) for the series or tranche, and the
repayment of principal at maturity or otherwise according to the tems of the series or tranche. The "Debt lssuance Costs" for a series or
tranche oflong-term debt shall include the fees, commissions and expenses ofissuance ofsuch debt, any otherpurchase discount from the
face amount of such debt, and anypremiums, write-offs of unamortized debt issuance costs and othercosts incuned in connection with
retiring debt refinanced with the proceeds ofsuch debt, all as reflected in the Company's accounting records. For purposes ofthis Scction
2.2(d),the Cornpany's long term debt and the interest rates and outstanding principal balances of the outstanding series or tranches of
long-term debt as of any date shall be those amounts as set forth in the audited consolidatcd financial statemcnts of the Company and its
subsidiaries for the year ending on that date, and shall in all cases include the cunent portion ofany long-tenn debt and exclude
borowings under a revolving credit facility. For the avoidance of doubt, the Effcctive lnterest Rate for purposes of this Agrecment of cach
series offixed-rate long-term debt outstanding as ofthe date ofthis Agreement is set forth on Exhibit A hercto.
2.3 Effcct of Retirement" Death. or Disability.
(a) If Recipient's employment by the Company or any parent or subsidiary of the Company (the "Employer")
terminates because of Retirement (as defined below), death or physical disability (within the meaning of Section 22(e)(3) of the Code and
a Change in Control has not previously occurred, all outstanding RSUs shall remain outstanding and subject to potential future vesting
upon satisfaction ofthe Performance Threshold for the appHcable years.
(b) lf Recipient's employment by the Employer terminates because of Retirement, death or physical disability
and a Change in Control subsequently occurs, all outstanding RSUs shall immediately vest. lf a Change in Control occurs and Recipient's
employment by the Employer subsequently terminates because of Retirement, death or physical disability, all outstanding RSUs shall
immediately vest.
(c) The term "Retirement" means termination of employment ( I ) on or after the first anniversary of the date of
this Agreement, and (2) after the Recipient is (i) age 62 with at least five years of service as an employee of the Company or a parent or
subsidiary of the Company, or (ii) age 55 with age plus years of service (including fractions) as an employee of the Company or a parent
or subsidiary of the Company totaling at least 70; provided, however, that a termination of Recipient's employment by the Employer for
Cause (as defined in Section 2.8 below) shall not constitute a Retirement.
2.4 CIC Acceleration if ParW to a Severance Asreement. If Recipient is a party to a Change in Control Severance
Agreement with the Company or a parent or subsidiary of the Company, all outstanding RSUs shall immediately vest if Recipient becomes
entitled to a Change in Control Severance Benefit (as defined below). A "Change in Control Severance Benefit" means the severance
benefit provided for in Recipient's Change in Control Severance
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 1 50 of 21 0
J
Agreement with the Company or a parent or subsidiary of the Company; provided, however, that such severance benefit is a "Change in
Control Severance Benefit" for purposes of this Agreement only il under the terms of Recipient's Change in Control Severance
Agreement, Recipient becomes entitled to the sevcrance benefit (a) after a change in control of the Company has occurred, (b) because
Recipient's employment with the Employer has been terminated by Recipient for good reason in accordance with the terms and conditions
ofthe Change in Control Severance Agreement or by the Employer other than for cause, and (c) because Recipient has satisfied any other
conditions or requirements specified in the Change in Control Severance Agreement and necessary for Recipient to become entitled to
receive the severance benefit. For purposes ofthis Section 2.4,the terms "change in control," "good reason," "cause" and "disability"
shall have the meanings set forth in Recipient's Change in Control Severance Agreement.
2.5 CIC Acceleration if Not a Partv to a Severance Agreernent. If Recipient is not a party to a Change in Control
Severance Agreement with the Company or a parent or subsidiary of the Company, all outstanding RSUs shall immediately vest if a
Change in Control (as defined in Section 2.6 below) occurs and at any time after the earlier of Shareholder Approval (as defined in
Section 2.7 below), if any, or the Change in Control and on or before the second anniversary of the Change in Control, (a) Recipient's
employment is terminated by the Employer (or its successor) without Cause (as defined in Section 2.8 below), or (b) Recipient's
employment is terminated by Recipient for Good Reason (as defined in Section 2.9 below).
2.6 Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall mean the
occurrence of any of the following events:
(a) The consummation of:
(1) any consolidation, mergerorplan of share exchange involving the Company (a "Merger") as a result
of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors ("Voting
Securities") immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting
Securities of the surviving corporation or a parent corporation of the surviving corporation immediately after the Merger, disregarding any
Voting Securities issued to or retained by such holders in respect of securities of any other party to the Merger; or
(2) any consolidation, merger, plan of share exchange or other transaction involving Northwest Natural
Gas Company ("NW Natural") as a result of which the Company does not continue to hold, directly or indirectly, at least 50% of the
outstanding securities of NW Natural ordinarily having the right to vote for the election of directors; or
(3) any sale, lease, exchange or other transfer (in one transaction or a series ofrelated transactions) of
all, or substantially all, the assets of the Company or NW Natural;
(b) At any time during a period of two consecutive years, individuals who at the beginning of such penod
constituted the Board ("lncumbent Directors") shall cease
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 151 of 210
4
for any reason to constitute at least a majority thereof; provided, however, that the term "lncumbent Director" shall also include each new
director elected during such two-year period whose nomination or election was approved by two-thirds of the lncumbent Directors then
in office; or
(c) Any person (as such term is used in Section 14(d) ofthe Securities Exchange Act of 1934, other than the
Company or any employee benefit plan sponsored by the Company or NW Natural) shall, as a result of a tender or exchange offer, open
market purchases or privately negotiated purchases from anyone other than the Company. have become the beneficial owner (within the
meaning of Rule l3d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing twenty percent
(20%) or more of the combined voting power of the then outstanding Voting Securities.
2.7 Shareholder Aoproval. For purposes of this Agreernent, "Shareholder Approval" shall be deemed to have occurred
if the shareholders of the Company approve an agreement entered into by the Company, the consummation of which would result in the
occurrence of a Change in Control.
2.8 Cause. For purposes of this Agreement, "Cause" shall mean (a) the willful and continued failure by Recipient to
perform substantially Recipient's assigned duties with the Employer (other than any such failure resulting from incapacity due to physical or
mental illness) after a demand for substantial performance is delivered to Recipient by the Employer which specifically identifies the
manner in which Recipient has not substantially performed such duties, (b) willful commission by Recipient of an act of fraud or dishonesty
resulting in economic or financial injury to the Company or Employer, (c) willful misconduct by Recipient that substantially impairs the
business or reputation of the Company or Employer, or (d) willful gross negligence by Recipient in the performance of his or her duties.
2.9 Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after Shareholder
Approval, if applicable, or the Change in Control, of any of the following circumstances, but only if (x) Recipient gives notice to Employer
of Recipient's intent to terminate employment for Good Reason within 30 days after the later of (1) notice to Recipient of such
circumstances, or (2) the Change in Control, and (y) such circumstances are not fully corrected by the Employer within 90 days after
Recipient's notice;
(a) the assignment to Recipient of a different title, job or responsibilities that results in a decrease in the level of
Recipient's responsibility; provrded that Good Reason shall not cxist if Recipient continues to have the same or a greater general level of
responsibility for the former Employer operations after the Change in Control as Recipient had prior to the Change in Control even though
such responsibilities have necessarily changed due to the former Employer operations becoming a subsidiary or division of the surviving
company;
(b) a reduction by the Employer in Recipient's base salary as in effect immediately prior to the earlier of
Shareholder Approval, if applicable, or the Change in Control;
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 152 ot 210
5
(c) the failure by Employer to continue in effect any employee benefit or incentive plan in which Recipient is
participating immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control (or plans providing Recipient
with at least substantially similar benefits) other than as a result of the normal expiration of any such plan in accordance with its terms as in
effect immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control, or the taking of any action, or the
failure to act, by Employer which would adversely affect Recipient's continued participation in any of such plans on at least as favorable a
basis to Recipient as is the case immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control or which
would materially reduce Recipient's benefits in the future under any of such plans or deprive Recipient of any material benefit enjoyed by
Recipient immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control,
(d) the failure by the Employer to provide and credit Recipient with the number of paid vacation days to which
Recipient is then entitled in accordance with the Employer's normal vacation policy as in effect immediately prior to the earlier of
Shareholder Approval, if applicable, or the Change in Control; or
(e) the Employer's requiring Recipient to be based more than 30 miles from where Recipient's office is located
immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control except for required travel on the
Employer's business to an extent substantially consistent with the business travel obligations which Recipient undertook on behalf of the
Employer prior to the earlier of Shareholder Approval, if applicable, or the Change in Control.
2.10 Forfeiture: Possible Restoration. lf Recipient ceases to be employed by the Employer for any reason or for no
reason, with or without cause, other than because of Retirement, death or physical disability (within the meaning of Section 22(e)(3) of the
Code), any RSUs that did not vest pursuant to this Section 2 or Section 5.2 al or prior to the time of such termination of employment shall
be forfeited to the Company; provided, however, that if Recipient's employment is terminated by the Employer without Cause or by the
Recipient for Good Reason after Shareholder Approval but before a Change in Control, any RSUs that are forfeited under this sentence
shall be restored to the Recipient and vested if a Change in Control subsequently occurs within two years.
3. Certification and Deliverv. As soon as practicable following the completion of each Performance Year, the Company shall
calculate the ROE and the 5 Yr Avg Cost of LT Debt for that Performance Year, and shall submit those calculations to the Committee. At
or prior to the regularly scheduled meeting of the Committee held in February of the year immediately following each Performance Year
(each, a "Certification Meeting"), the Committee shall certify in writing (which may consist of approved minutes of the meeting) whether or
not the Performance Threshold was satisfied for that Performance Year. Unless otherwise required under this Agreement as a result of the
occurrence of a Change in Control, no amounts shall be delivered orpaid unless the Committee certifies that the Performance Threshold
has been satisfied for the applicable Performance Year. Subject to applicable tax withholding, on a date (a
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 153 of 210
6
"Payment Date") that is on or as soon as practicable after the date any of the RSUs become vested or, if later, five business days
following the Certification Meeting relating to those RSUs, the Company shall deliver to Recipient (a) the number of Shares underlying the
RSUs that vested (rounded down to the nearest whole share), and (b) the dividend equivalent cash payment determined under Section I
with respect to the number of Shares that are delivered; provided, however, that if accelerated vesting of the RSUs occurs pursuant to
Section 2.3(b) as a result of Recipient's Retirement after a Change in Control has previously occurred, the Payment Date shall be delayed
until a date that is on or as soon as practicable after the earlier of(x) the date the RSUs would have vested under Section 2.1, or (y) the
date that is six months after Recipient's separation from service (within the meaning of Section 409A of the lntemal Revenue Code).
Notwithstanding the foregoing provisions of this Section 3, if Recipient shall have made a valid election to defer receipt of the Shares and
dividend equivalent cash payment pursuant to the terms of Northwest Natural's Defened Compensation Plan for Directors and
Executives (the "DCP"), payment of RSUs that vest shall be made in accordance with that election.
4. Tax Wirhholdine.
4.1 Recipient acknowledges that, on any Payment Date when Shares are delivered to Recipient, the Value (as defined
below) on that date of the Shares so delivered (as well as the amount of the related dividend equivalent cash payment) will be treated as
ordinary compensation income for federal and state income and FICA tax purposes, and that the Employer will be required to withhold
taxes on these income amounts. To satisfy the required withholding amount, the Employer shall first withhold all or part of the dividend
equivalent cash payment, and if that is insufficient, the Employer shall withhold the number of Shares having a Value equal to the remaining
withholding amount. For purposes of this Section 4, the "Value" of a Share shall be equal to the closing market price for Company
Common Stock on the last trading day preceding the Payment Date.
4.2 Recipient acknowledges that under current tax law, the Employer is required to withhold FICA taxes with respect to
the RSUs at the earlier of (a) the issuance of shares underlying the RSUs or (b) the date after a Change in Control on which Recipient
becomes eligible for Retirement (or the date of the Change in Control if Recipicnt is eligible for Retirement at the time of the Change in
Control). To satisfy the required minimum FICA withholding in the event that subsection (b) applies, Recipient shall, immediately upon
notification of the amount due, pay to the Company in cash or by check amounts necessary to satisfy applicable FICA withholding
requirements. lf Recipient fails to pay the amount demanded, the Company may withhold that amount from other amounts payable to
Recipient, including salary, subject to applicable law.
4.3 Notwithstanding the foregoing, Recipient may elect not to have Shares withheld to cover taxes by giving notice to the
Company in writing prior to the Payment Date, in which case the Shares shall be issued or acquired in Recipient's name on the Payment
Date thereby triggering the tax consequences, but the Company shall retain the certificate for the Shares as security until Recipient shall
have paid to the Company in cash any required tax withholding not covered by withholding of the dividend equivalent cash payment.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 154 of 210
7
5. Sale of the Company. lf there shall occur a merger, consolidation or plan of exchange involving the Company pursuant to
which the outstanding shares of Common Stock of the Company are converted into cash or other stock, securities or property. or a sale,
lease, exchange or other transfer (in one transaction or a series ofrelated transactions) ofall, or substantially all, the assets ofthe
Company, then either:
5.1 the unvested RSUs shall be converted into restricted stock units for stock of the surviving or acquiring corporation in
the applicable transaction, with the amount and type of shares subject thereto to be conclusively determined by the Committee, taking into
account the relative values ofthe companies involved in the appficable transaction and the exchange rate, ifany, used in determining shares
of the surviving corporation to be held by the former holders of the Company's Common Stock following the applicable transaction, and
disregarding fractional shares; or
5.2 all of the unvested RSUs shall immediately vest and the underlying Shares and related dividend equivalent cash
payment shall be delivered simultaneously with the closing of the applicable transaction such that Recipient will participate as a shareholder
in receiving proceeds from such transaction with respect to those Shares.
6. Changes in Capital Structure. lf, prior to the full vesting of all of the RSUs granted under this Agreement, the outstanding
Common Stock of the Company is increased or decreased or changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of any stock split, combination of shares or dividend payable in shares, recapitalization or
reclassification, appropriate adjustment shall be made by the Committee in the number and kind of shares subject to the unvested RSUs
so that Recipient's proportionate interest before and after the occurrence of the event is maintained. Notwithstanding the foregoing, the
Committee shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any
fractional shares resulting from any adjustment may be disregarded or provided for in any manner determined by the Committee. Any such
adjustments made by the Committee shall be conclusive.
7. Recoupment On Misconduct.
7 .l If at any time before a Change in Control and within three years after any date on which any RSUs vested, (a) the
Company's financial statements for the corresponding Performance Year are the subject of a restatement due to the Misconduct (as
defined below) of any person (whether or not Recipient was personally involved in such Misconduct), and (b) based on the Company's
financial statements as restated, the Performance Threshold was not satisfied for that Performance Year, then Recipient shall repay to the
Company the Shares (the "Excess Shares") and dividend equivalent cash payment (the "Excess Dividends") that vested under this
Agreement on that vesting date. lf any Excess Shares are sold by Recipient prior to the Company's demand for repayment (including any
shares withheld fortaxes under Section 4 of this Agreement), Recipient shall repay to the Company 100% of the proceeds of such sale or
sales. The Committee may, in its sole discretion, reduce the amount to be repaid by Recipient to take into account the tax consequences
of such repayment for Recipient.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 1 55 of 210
8
7 .2 If the Committee determines that Recipient engaged in any Misconduct after the date of this Agreement and prior to
a sale of any of the Shares (the "Tainted Shares"), and this determination is made before a Change in Control and within three years after
the vesting of the Tainted Shares, Recipient shall repay to the Company the Excess Proceeds (as defined below). The Committee may, in
its sole discretion, reduce the amount ofExcess Proceeds to be repaid by Recipient to take into account the tax consequences ofsuch
repayment or any other factors. The retum ofExcess Proceeds is in addition to and separate from any other reliefavailable to the
Company due to Recipient's Misconduct.
7 .3 "Misconduct" shall mean (a) willful commission of an act of fraud or dishonesty resulting in economic or financial
injury to the Cornpany, (b) willful misconduct that substantially impairs the Company's business or reputation, or (c) willful gross
negligence in the performance of the person's duties; provided, however, that such acts shall only constitute Misconduct if the Committec
determines that such acts contributed to an obligation to restate the Company's financial statements for any quarter or year or otherwise
had (or will have when publicly disclosed) an adverse impact on the market price of the Company Common Stock.
7 .4 "Excess Proceeds" shall mean the excess of (a) the actual aggrcgate sales proceeds from Rccipient's sales of
Tainted Shares, over (b) the aggregate sales proceeds Recipient would have received from sales ofTainted Sharcs at a price per share
determined appropriate by the Committee in its discretion to reflect what the market price of the Company Common Stock would have
been if the restatement had occurred or othcr Misconduct had been disclosed prior to such sales.
7 .5 lf any portion of the Excess Shares and Excess Dividends was deferred under the DCP, that portion shall be
recovered by canceling the amounts so defened under the DCP and any dividends or other eamings credited under the DCP with respect
to such cancelled amounts. The Company may seek direct repayment from Recipient of any Excess Shares, Excess Dividends and Excess
Proceeds not so recovered and may, to the extent permitted by applicable law, offset such amounts against any compensation or other
amounts owed by the Company to Recipient. ln particular, such amounts may be recovered by offset against the after-tax proceeds of
deferred compensation payouts under the DCP, Northwest Natural's Executive Supplemental Retirement lncome Plan or Northwest
Natural's Supplemental Executive Retirement Plan at the times such defened compensation payouts occur under the terms of those plans.
Amounts that remain unpard for more than 60 days after demand by the Company shall accrue interest at the rate used from time to time
for crediting interest under the DCP.
8. Approvals. The obligations of the Company under this Agreement are subject to the approval of state and federal authorities
or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or
applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the award under this Agreement. The foregoing notwithstanding, the Company
shall not be obligated to issue or deliver Common Stock under this Agreement if such issuance or delivery would violate applicable state
or federal law.
Exhibit No.'l
J. Palfreyman, Dl
Gem State Water Company
Page 156 of 210
9
9. No Right to Employment. Nothing contained in this Agreement shall confer upon Recipient any nght to be employed by the
Employer or to continue to provide services to the Employer or to interfere in any way with the right of the Employer to terminate
Recipient's services at any time for any reason, with or without cause.
10. Miscellaneous.
10. I Entire Agreement; Amendment. This Agreement constitutes the entire agreement of the parties with regard to the
subjects hereof and may be amended only by written agreement between the Company and Recipient.
I 0.2 Notices. Any notice required or pennitted under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registered or certified
mail, refurn receipt requested, postage prepaid, addressed to the Company, Attention: Corporate Secretary. at its principal executive
offices, or to Employer, Attention: Corporate Secretary, at its principal executive offices, or to Recipient at the address of Recipient in the
Company's records, or at such other address as such party may designate by ten (10) days' advance written notice to the other party.
I 0.3 Assisnment: Riehts and Benefits. Recipient shall not assign this Agreement or any rights hereunder to any other
party or parties without the prior written consent of the Company. The rights and benefits of this Agreement shall inure to the benefit of
and be enforceable by the Cornpany's successors and assigns and, subject to the foregoing restriction on assignment, be binding upon
Recipient's heirs, executors, administrators, successors and assigns.
I 0.4 Furlher Action. The parties agree to execute such further instruments and to take such further action as may
reasonably be necessary to carry out the intent of this Agreement.
10.5 Applicable Law: Attorneys' Fees. The terms and conditions of this Agreement shall be govemed by the laws of the
State ofOregon. ln the event either parly institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys' fees
to be set by the trial court and, upon any appeal, the appellate court.
10.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original
l0
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 157 of 210
lN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
NORTIIWEST NATURAL HOLDING COMPANY
Title
Recipient
t1
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 158 of 210
By
EXHIBIT A
EFFECTIVE INTEREST RATES OF OUTSTANDING FIXED-RATE LONG-TERM DEBT
The outstanding series or tranches of fixed-rate long-term debt of the Company outstanding as of the date of this Agreement and
the Effective Interest Rate of each such series ortranche are as follows:
Series Effective Interest Rate
Corp 5000:
8.31% Series B due 2019
7.63 % Series B due 2019
5.31 % Series B due 2020
9.05 % Series A due 2021
3.176% Series B due 2021
3.542 % Series B due 2023
5.62% Series B due 2023
7 .72 % Series B due 2025
6.52 % Series B due 2025
7 .05 % Scries B due 2026
3.211% Series B due2026
7 .00 % Series B due 2027
6.65 % Series B due 2027
2.822 % Series B due 2021
6.65 % Series B due 2028
7 .14 % Series B due 2030
1 .85 % Series B due 2030
5.82 % Series B due 2032
5.66% Series B due 2033
5.25 % Series B due 2035
4.00 % Series B due 2042
4.136% Series B due 2046
3.685 % Series B due 2047
4.1 l0 % Series B due 2048
Corp 6000:
3.25 % weighted rate Notes
5.00 % Note due 2028
@es!-ro&s)
9.479%
7.727%
7.327%
9.163%
3.319%
3.696%
6.360%
8.336%
6.589%
7.121%
3.383%
7.062%
6.714%
2.966%
6.727%
8.433%
8551%
5.913%
s.723%
5.316%
4.062%
4.226%
3.754%
4.145%
3.250%
s.000%
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 159 of 210
Section 3: EX-l0.II (EXHIBIT 10.[)
DIRECTOR RESTRICTED STOCK UNIT AWARD AGREEMENT
This Agreement is entered into as of May 24,2018, befween Northwest Natural Gas Cornpany, an Oregon corporation (the
"Corrpany"), and ("Recipicnt")
Pursuant to the Company's Non-Employee Director Compensation Policy, the Organization and Executive Compensation
Committee (the "Committee") of the Company's Board of Directors (the "Board") has awarded restricted stock units to Recipient
pursuant to Section 6 ofthe Company's Long Term Incentive Plan (the "Plan"). Recipient desires to accept the award subject to the
terms and conditions of this Agreement.
NOW, THEREFORE, the parties agree as follows:
l. Grant of Restricted Stock Units. Subject to the terms and conditions of this Agreement, the Company hereby grants to
the Recipient _ restricted stock units (the "RSUs"). The grant of RSUs obligates the Company, upon vesting in accordance with this
Agreement, to deliver to the Recipient one share of Common Stock of the Company (a "Share") for each RSU. The RSUs do not include
a right to any dividend equivalent cash payments. The RSUs are subject to forfeiture as set forth in Section 2.8 below.
2. Vestins: Forfeiture Restriction.
2.1 Vestine Schedule. Allof the RSUs shallinitially be unvested. Subject to Sections 2.2,2.3, and 2.8, allof the RSUs
shall vest on the first anniversary of the date of this Agreement.
2.2 Effect of Death or Disability. lf Recipient's service as a director of the Cornpany tenninates because of death or
physical disability (within the meaning of Section 22(e)(3) of the lntemal Revenue Code of 1986 (the "Code")), allof the RSUs shall
immediately vest.
2.3 Acceleration on Chanse in Control. Allof the RSUs shall immediately vest if a Change in Control(as defined in
Section 2.4 below) occurs and at any time after the earlier of Shareholder Approval (as defined in Section 2.5 below), if any, or the
Change in Control and on or before the second anniversary of the Change in Control, (a) Recipient's service as a director is terminated by
the Company (or its successor) without Cause (as defined in Section 2.6 below), or (b) Recipient's service as a director is terminated by
Recipient for Good Reason (as defined in Section 2.7 below). Termination by the Company shall include any failure to re-elect Recipient
as a director of the Company or elect Recipient as a director of its successor.
2.4 Change in Control. For purposes of this Agreernent, a "Change in Control" of the Company shall mean the
occurrence of any of the following events:
(a) The consummation of:
( 1) any consolidation, merger or plan of share exchange involving the Company (a "Merger") as a result
of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors ("Voting
Securities")
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 160 of 210
immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting Securities
of the surviving corporation or a parent corporation of the surviving corporation immediately after the Merger, disregarding any Voting
Securities issued to or retained by such holders in respect ofsecurities ofany other party to the Mergert or
(2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, the assets of the Company;
(b) At any time during a period of two consecutive years, individuals who at the beginning of such penod
constituted the Board ("lncumbent Directors") shall cease for any reason to constitute at least a majonty thereof; provrded, however, that
the term "lncumbent Director" shall also include each new director elected during such two-year period whose nomination or election was
approved by two-thirds of the Incumbent Directors then in office; or
(c) Any person (as such term is used in Section l4(d) ofthe Securities Exchange Act of 1934, other than the
Company or any employee benefit plan sponsored by the Company) shall, as a result ofa tender or exchange offer, open market
purchases or privately negotiated purchases from anyone other than the Company. have become the beneficial owner (within the meaning
of Rule l3d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing twenty pcrcent (20%)
or more of the combined voting power of the then outstanding Voting Securitics.
2.5 Shareholder Approval. For purposes of this Agreement, "Shareholder Approval" shall be deemed to have occurred
if the shareholders of the Company approve an agreement entered into by the Company, the consummation of which would result in the
occurrence of a Change in Control.
2.6 Cause.ForpurposesofthisAgreement,"Cause"shall mean(a)thewillful andcontinuedfailurebyRecipientto
perform substantially Recipient's duties as a director ofthe Company (other than any such failure resulting from incapacity due to physical
or mental illness) after a demand for substantial performance is delivered to Recipient by the Company which specifically identifies the
manner in which Recipient has not substantially performed such duties, (b) willful commission by Recipient of an act of fraud or dishonesty
resulting in economic or financial injury to the Company. (c) willful misconduct by Recipient that substantially impairs the Company's
business or reputation, or (d) willful gross negligence by Recipient in the performance of his or her duties.
2.7 Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after Shareholder
Approval, if applicable, or the Change in Control, of any of the following circumstances, but only if (x) Recipient gives notice to the
Company of Recipient's intent to terminate service as a director for Good Reason within 30 days after the later of (l) notice to Recipient
of such circumstances, or (2) the Change in Control, and (y) such circumstances are not fully conected by the Company within 90 days
after Recipient's notice:
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 161 of 210
2
(a) a reduction by the Company in Recipient's director cash retainers as in effect immediately prior to the earlier
of Shareholder Approval, if applicable, or the Change in Control; or
(b) the failure by the Company to continue in effect any benefit or incentive plan in which Recipient is
participating immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control (or plans providing Recipient
with at least substantially similar benefits) other than as a result of the normal expiration of any such plan in accordance with its terms as in
effect immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control, or the taking of any action, or the
failure to act, by the Company which would adversely affect Recipient's continued participation in any of such plans on at least as
favorable a basis to Recipient as is the case immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in
Control or which would materially reduce Recipient's benefits in the future under any of such plans or deprive Recipient of any material
benefit enjoyed by Recipient rmmediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control.
2.8 Forfeiturel Possible Restoration. IfRecipient ceases to be a director ofthe Corrpany for any reason or for no
reason, with or without cause, other than because of death or physical disability (within the meaning of Section 22(e)(3) of the Code), any
RSUs that did not vest pursuant to this Section 2 or Section 4.2 al or prior to the time of such termination of board service shall be
forfeited to the Company; provided, however, that if Recipient's service as a director is terminated by the Company without Cause or by
the Recipient for Good Reason after Shareholder Approval but before a Change in Control, any RSUs that are forfeited under this
sentence shall be restored to the Recipient and vested if a Change in Control subsequently occurs within two years.
3. Deliverv. As soon as practicable after the RSUs become vested, the Company shall deliver to Recipient the number of Shares
underlying the RSUs. Notvrithstanding the foregoing. if Recipient shall have made a valid election to defer receipt of the Shares undcrlying
the RSUs pursuant to the terms of the Company's Defened Compensation Plan for Directors and Executives (the "DCP"), payment of
the award shall be made in accordance with that election.
4. Sale of the Company. lf there shall occur a merger, consolidation or plan of exchange involving the Company pursuant to
which the outstanding shares of Common Stock of the Company are converted into cash or other stock, securities or property, or a sale,
lease, exchange or other transfer (in one transaction or a series ofrelated transactions) ofall, or substantially all, the assets ofthe
Company, then either:
4.1 the unvested RSUs shall be converted into restricted stock units for stock ofthe surviving or acquiring corporation in
the applicable transaction, with the amount and type of shares subject thereto to be conclusively determined by the Committee, taking into
account the relative values ofthe companies involved in the applicable transaction and the exchange rate, ifany, used in determining shares
of the surviving corporation to be held by the former holders of the Company's Common Stock following the applicable transaction, and
disregarding fractional shares; or
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 162 ol 210
J
4.2 all of the unvested RSUs shall immediately vest and the underlying Shares shall be delivered simultaneously with the
closing ofthe applicable transaction such that Recipient will participate as a shareholder in receiving proceeds from such transaction with
respect to those Shares.
5. Chanses in Capital Structure.
5. I lf, prior to the vesting of the RSUs granted under this Agreement, the outstanding Common Stock of the Company is
increased or decreased or changed into or exchanged for a different number or kind ofshares or other securities ofthe Company by
reason ofany stock split, combination ofshares or dividend payable in shares, recapitalization or reclassification, appropriate adjustment
shall be made by the Committee in the number and kind of shares subject to the unvested RSUs so that Recipient's proportionate interest
before and after the occurrence of the event is maintained. Notwithstanding the foregoing, the Committee shall have no obligation to effect
any adjustment that would or might result in the issuance of fractional shares, and any fractional shares resulting from any adjustment may
be disregarded or provided for in any manner determined by the Committee. Any such adjustments made by the Comn-rittee shall be
conclusive.
5.2 lf the outstanding Common Stock of the Company is hereafter converted into or exchanged for all of the outstanding
Common Stock of a corporation (the "Parent Successor") as part of a transaction (the "Transaction") in which the Company becomes a
wholly-owned subsidiary of Parent Successor, then (a) the obligations under this Agreement shall be assumed by Parent Successor and
references in this Agreement to the Company shall thereafter generally be deemed to refer to Parent Successor, (b) Common Stock of
Parent Successor shall be issued in lieu of Common Stock of the Company under this Agreement, (c) service as a director of the
Company for purposes of Section 2 of this Agreement shall include service as a director of either the Company or Parent Successor.
6. Approvals. The issuance by the Company of authorized and unissued shares or reacquired shares under this Agreement is
subject to the approval of the Oregon Public Utility Commission and the Washington Utilities and Transportation Commission, but no such
approvals shall be required for the purchase ofshares on the open market for delivery to Recipient in satisfaction ofits obligations under
this Agreement. The obligations of the Company under this Agreement are otherwise subject to the approval of state and federal
authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps requircd by state or federal law
or applicable regulations, including rules and rcgulations ofthe Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the award under this Agreement. The foregoing notwithstanding, the Company
shall not be obligated to issue or deliver Common Stock under this Agreement if such issuance or delivery would violate applicable state
or federal law.
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 163 of 210
4
7. Miscellaneous.
7.1 Entire Asreement: Amendment. This Agreement constitutes the entire agreement of the parties with regard to the
subjects hereof and may be amended only by written agreement between the Company and Recipient.
7.2 Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally to the party to whom it is addresscd or when deposited into the United States Mail as registered or certified
mail, retum receipt requested, postage prepaid, addressed to the Company, Attention: Corporate Secretary, at its principal exccutive
offices orto Recipient at the address ofRecipient in the Company's records, or at such other address as such party may designate by ten
(10) days' advance writtcn notice to the other party.
7.3 Assisnmenl Riehts and Benefits. Recipient shall not assign this Agreement or any rights hereunder to any other party
or parties without the prior written consent of the Company. The rights and benefits of this Agreement shall inure to the benefit of and be
enforceable by the Company's successors and assigns and, subject to the foregoing restriction on assignment, be binding upon Recipient's
heirs, executors, administrators, successors and assigns.
7.4 Further Action. The parties agree to execute such further instruments and to take such further action as may
reasonably be necessary to carry out the intent ofthis Agreement.
7.5 Applicable Law; Attornevs' Fees. The terms and conditions of this Agreement shall be governed by the laws of the
State ofOregon. ln the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys' fees
to be set by the trial court and, upon any appeal, the appellate court.
7.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 164 of 210
5
lN WITNESS WHEREOF. the parties hereto have executed this Agreement as of the day and year first above written.
NORTHWEST NATURAL GAS COMPANY
Title SVP & Chief Administrative Officer
[Non-ernployee Director Name]
(Back To Top)
Section 4: EX-10.L (EXHIBIT 10.L)
In.DEMNITY AGREEMENT
THIS AGREEMENT is made as of _ by and between Northwest Natural Gas Company, an Oregon
corporation (the "Cornpany"), and ("lndemnitee"), a dircctor or officer of the Cornpany
RECITALS
A. lt is essential to the Company to retain and attract as directors and officers the most capable persons available.
B. The increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the
availability and coverage ofdirectors'and officers' liability insurance have been reduced.
C. lt is now and always has been the express policy of the Company to indemnifu its directors and officers so as to
provide them with the maximum possible protection permitted by law.
D. The Amended and Restated Articles of lncorporation of the Company ("Restated Articles") require indemnification of
the directors and officers of the Company to the fullest extent permitted by law. The Oregon Business Corporation Act (the "Act")
expressly provides that the indemnification provisions set forth in the Act are not exclusive, and thereby contemplates that contracts may
be entered into between the Company and members of the Board of Directors and officers with respect to indemnification of directors
and officers.
NOW, THEREFORE, the Cornpany and lndemnitee agree as follows:
1. Servieeslglbg Jp@3ny. Indemnitee will serve or continue to serve as a director or officer of the Company for so long
asIndemniteeisd@runtilIndemniteetendersaresignationinwritingorisremoved
2. Definitions. As used in this Agreement:
(a) The term "Proceeding" includes any threatened, pending or completed action, suit or proceeding, arbitration,
mediation or investigation, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or
investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that lndemnitee
is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise, whether or not serving in such capacity at the time any liability
or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. ,. ,#:fj*:;r,
Gem State Water Company
Page 165 of 210
By
6
(b) The term "Expenses" includes, without limitation, expenses of investi-eations, judicial or administrative proceedings or
appeals, attorneys' fees and disbursements and any expenses ofestablishing a right to indemnification under Section I I of
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 166 of 2'10
this Agreement, but does not include amounts paid in settlement by lndemnitee or the amount ofjudgments or fines against lndemnitee.
(c) References to "other enterprise" includes employee benefit plans; references to "fines" includes any excise tax
assessed with respect to any employee benefit plan; references to "serving at the request ofthe Company" includes any service as a
director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner
reasonably believed to be in the best interest of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
3. Indemnitv in Third-Party Proceedinss. The Company shall indemnifu lndemnitee in accordance with the provisions of this
Section 3 if Indemnitee is a parly to or threatened to be made a party to any Proceeding (other than a Proceeding by or in the right of the
Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably
incurred by lndemnitee in connection with the Proceeding, but only if lndemnitee acted in good faith and in a manner which lndemnitee
reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, in addition,
had no reasonable cause to believe that lndemnitee's conduct was unlawful.
4. Indemnity in Proceedines by or in the fusht of the Companv. The Company shall indemnifo lndemnitee in accordance with the
provisions of this Section 4 if lndemnitee is a party to or threatened to be made a pafty to any Proceeding by or in the right of the
Company to procure a judgment in its favor against all Expenses actually and reasonably incuned by lndemnitee in connection with the
defense or settlement of the Proceeding, but only if lndemnitee acted in good faith and in a manner which lndemnitee reasonably believed
to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 4 in
respect of any claim, issue or matter as to which lndemnitee shall have been finally adjudged by a court to be liable to the Company,
unless and only to the extent that any court in which the Proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, lndemnitee is fairly and reasonably entitled to indemnity.
5. Indemnification of Expenses of Successful Party. Notwithstanding any other provisions of this Agreement, to the extent that
lndemnitee has been successful, on the merits or otherwise, in defense of any Proceeding or in defense of any claim, issue or matter
therein, including the dismissal of an action without prejudice, the Company shall indemnify lndemnitee against all Expenses incurred in
connection therewith.
6. Additional Indemnification.
(a) The Company agrees, as set forth in this Section 6(a), to indemnif, lndemnitee to the fullest extent permitted by law,
notwithstanding that such indemnification may not be specifically authorized by the Restated Articles, the Company's Bylaws, the Act or
the
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 167 of 210
2
other provisions of this Agreement. Accordingly. notrvithstanding any limitation in Sections 3,4 or 5, the Company shall indemnify
lndemnitee to the fullest extent pemitted by law if lndemnitee is a party to or threatened to be made a party to any Proceeding (including
a Proceeding by or in the right of the Company to procure a judgment in its favor) against all judgments, fines, amounts paid in settlement
and Expenses actually and reasonably incurred by Indemnitee in connection with the Proceeding. No indernnity shall be made under this
Section 6(a) on account of lndemnitee's conduct which constitutes a breach of lndemnitee's duty of loyalty to the Company or its
shareholders or is an act or omission not in good faith orwhich involves intentional misconduct ora knowing violation of the law.
(b) For purposes of Section 6(a), the meaning of the phrase "to the fullest extent pe nnitted by law" includes. but is not
lirnited to:
(i) to the fullest extent permitted by the provision of the Act that authorizes or contemplates additional
indemnification by agreement, or the corresponding provision of any amendment to or replacement of the Act; and
(ii) to the fullest extent authorized or permitted by any amendments to or replacements of the Act adopted after
the date of this Agreement that increase the extent to which a colporation may indemnify its officers and directors.
(c) The Company agrees to indemnifo lndemnitee for Expenses if Indemnitee is called, in connection with a Proceeding,
as a non-party witness by reason of the fact that lndemnitee is or was a director or officer of the Company.
7. Exclusions. Notrvithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to
make any indemnity in connection with any claim made against Indemnitee;
(a) for which payment has actually been made to or on behalf of lndemnitee under any insurance policy or other
indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision;
(b) for any transaction from which lndemnitee derived an improper personal benefit;
(c) for an accounting of profits made from the purchase and sale (or sale and purchase) by lndemnitee of securities of the
Company within the meaning of Section I 6(b) of the Securities Exchange Act of I 934, as amended, or similar provisions of state statutory
or common law;
(d) if a court having jurisdiction in the matter shall finally determine that such indemnification is not lawful under any
applicable statute or public policy (and, in this respect, both the Company and lndemnitee have been advised that the Securities and
Exchange Commission believes that indemnification for liabilities arising under the federal securities laws
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 168 of 210
J
is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for
adjudication); or
(e) in connection with any Proceeding (or part ofany Proceeding) initiated by lndemnitee, or any Proceeding by
Indemnitee against the Company and its directors, officers, employees or other indemnitees, unless (i) the Company is expressly required
by law to make the indemnification, (ii) the Proceeding was authorized by the Board of Directors of the Company, (iii) the Company
provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law, or (iv) lndemnitee
initiated the Proceeding pursuant to Section l1 of this Agreement and lndemnitee is successful in whole or in part in the Proceeding.
8. Advances ofExpenses. The Company shall pay the expenses incuned by lndemnitee in any Procecding in advance at the
written request of lndemnitee. if Indemnitee:
(a) fumishes the Company a written affirmation of the lndemnitee's good faith belief that Indemnitee is entitled to be
indemnified by the Company under this Agreement; and
(b) furnishes the Company a written undertaking to repay the advance to the extent that it is ultimately determined that
Indemnitee is not entitled to be indemnified by the Company.
Advances shall be made without regard to Indemnitee's ability to repay the expenses and without regard to lndemnitee's
ultimate entitlement to indemnification under the other provisions of this Agreement. Advances made under this Section 8 shall be paid by
the Company to Indemnitee as soon as practicable but in any event within thirty (30) business days after written request by Indemnitee to
the Company pursuant to this Section 8.
9. Notification and Defense of Claim. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement
of any Proceeding, lndemnitee will, if a claim in respect of the Proceeding is to be made against the Company under this Agreement, notifu
the Company of the commencement of the Proceeding. The omission to notifl, the Company will not relieve the Company from any
liability which it may have to lndemnitee otherwise than under this Agreement. With respect to any Proceeding as to which lndemnitee
notifies the Company of the commencement:
(a) The Company will be entitled to participate in the Proceeding at its own expense.
(b) Except as otherwise provided below, the Company may, at its option and jointly with any other indemnifying pafiy
similarly notified and electing to assume such defense, assume the defense of the Proceeding, with legal counsel reasonably satisfactory to
the Indemnitee. lndemnitee shall have the right to use separate legal counsel in the Proceeding, but the Company shall not be hable to
lndemnitee underthis Agreement, including Section 8 above, forthe fees and expenses ofseparate legal counsel incuned afternotice from
the Company of its
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 169 of 210
4
assumption of the defense, unless (i) lndemnitee reasonably concludes that there may be a conflict of interest between the Company and
lndemnitee in the conduct of the defense of the Proceeding or (ii) the Company does not use legal counsel to assume the defense of such
Proceeding. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to
which lndemnitee shall have made the conclusion provided for in (i) above.
(c) lf two or more persons who may be entitled to indemnification from the Company, including the Indemnitee, are
parties to any Proceeding, the Company may require lndemnitee to use the same legal counsel as the other parties. Indemnitee shall have
the right to use separate legal counsel in the Proceeding, but the Company shall not be liable to lndemnitee under this Agreement, including
Section 8 above, for the fees and expenses ofseparate legal counsel incurred after notice from the Company ofthe requirement to use the
same legal counsel as the other parties, unless the lndemnitee reasonably concludes that there may be a conflict of interest between
Indemnitee and any of the other parties required by the Company to be represented by the same legal counsel.
(d) The Company shall not be liable to indemnify lndemnitee under this Agreement for any amounts paid in settlement of
any Proceeding effected without its written consent, which shall not be unreasonably withheld. lndemnitee shall permit the Company to
settle any Proceeding the defense of which it assumes, except that the Company shall not settle any action or claim in any manner which
would impose any penalty or limitation on lndemnitee without lndemnitee's written consent, which may be given or withheld in
lndemnitee's sole discretion.
10. Procedure Upon Application for Indemnification. Any indemnification under Sections 3, 4, 5 or 6 of this Agreement shall be
made no later than 90 days after receipt of the written request of lndemnitee for indemnification and shall not require that a determination
be made in accordance with the Act by the persons specified in the Act that indemnification is required under this Agreement. However,
unless it is ordered by a court in an enforcement action under Section I I of this Agreement, no such indemnification shall be made if a
determination is made within such 90-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to the Proceeding, or (b) independent legal counsel in a written opinion (which counsel shall be appointed if a quorum is
not obtainable), that the Indemnitee is not entitled to indemnification under this Agreement.
I l. Enforcement. Indemnitee may enforce any right to indemnification or advances granted by this Agreement to lndemnitee in
any court of competent jurisdiction if (a) the Company denies the claim for indemnification or advances, in whole or in part, or (b) the
Company does not dispose of the claim within 90 days of a written request for indemnification or advances. lndemnitee, in the
enforcement action, if successful in whole or in part, shall be cntitled to be paid also the expense of prosecuting the claim. It shall be a
defense to any such enforcement action (other than an action brought to enforce a claim for advancement ofExpenses pursuant to Section
8 above, if lndemnitee has tendered to the Company the required affirmation and undertaking) that Indemnitee is not entitled to
indemnifi cation under this
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 170 of 210
5
Agreement, but the burden of proving this defense shall be on the Company. Neither a failure of the Company (including its Board of
Directors or its shareholders) to make a determination prior to the commencement of the enforcement action that indemnification of
lndemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its
shareholders) that indemnification is improper shall be a defense to the action or create a presumption that lndemnitee is not entitled to
indemnification under this Agreement or otherwise. The tcrmination of any Proceeding by judgment, order of court, settlement, conviction
or upon a plea of nolo-contendere, or its equivalent, shall not, of itseli create a presumption that lndemnitee is not entitled to
indemnification under this Agreement or otherwise.
12. Partial lndemnification. If Indemnitee is entitled under any provisions of this Agreement to indemnification by the Company
for some or part of the Expenses, judgments, fines and amounts paid in settlement actually and reasonably incuned by lndemnitee in the
investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount, the Company shall indemnifo
Indemnitee for the portion of the Expenses, judgments, fincs and amounts paid in settlement to which lndemnitee is entitled.
I 3. Nonexclusivity and Continuity of Riehts. The indemnihcation provided by this Agreement shall not be deemed exclusive of
any other rights to which Indemnitee may be entitled under the Restated Articles, the Company's Bylaws, any other agreement, any vote
ofshareholders or directors, the Act, or otherwise, both as to action in lndemnitee's official capacity and as to action in another capacity
while holding office. The indemnification under this Agreement shall continue as to lndemnitee even though lndemnitee ceases to be a
director or officer and shall inure to the benefit ofthe heirs and personal representatives oflndemnitee.
14. Business Combinations. lf any person or group (as defined in Section 13(dX3) of the Securities Exchange Act of 1934, as
amended) acquires the legal right to elect a majority of the Board of Directors of the Company in a transaction or series of transactions
that has not received the prior approval of the Board of Directors of the Company, the Company or its successor, as the case may be,
shall, for a period of two years following the date that such legal right is acquired (the "Trigger Date"), maintain any and all directors and
officers' liability insurance in effect prior to the Trigger Date that covers Indemnitee.
I 5. Severabilitv. lf this Agreement or any portion of it is invalidated on any ground by any court of competent jurisdiction, the
Company shall indemnifli lndemnitee as to Expenses, judgments, fines and amounts paid in settlement with respect to any Proceeding to
the ful1 extent permitted by any applicable portion of this Agreement that is not invalidated or by any other applicable law or arrangement.
1 6. Subrosation. ln the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment
to all of the rights of recovery of Indemnitee. lndemnitee shall execute all documents required and shall do all acts that may be necessary
to secure such rights and to enable the Company effectrvely to bring suit to enforce such rights.
17. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in
writing by both parties. No waiver of any of the
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 17'l ol 210
6
provisions in this Agreement shall constitute a waiver of any other provisions of this Agreement (whether or not similar) nor shall any
waiver constitute a continuing waiver, unless expressly stated in any waiver.
18. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be
deemed to have been duly given (a) upon delivery if delivered by hand to the party to whom the notice or other communication shall have
been directed or (b) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so
mailed:
(i) If to lndemnitee, at the address indicated on the signature page of this Agreement.
(ii) If to the Company, to
Northwest Natural Gas Company
220 N.W. Second Avenue
Portland, Oregon 97209
Attention: President
or to any other address as may have been furnished to lndemnitee by the Company.
I 9. Counterparts. The parties may execute this Agreement in two counterparts, each of which shall constitute the original.
20. Applicable Law. This Agreement shall be governed by and construed in accordance with the law of the state of Oregon.
2 1 . Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns.
Exhibit No. 1' J. Palfreyman, Dl
Gem State Water Company
Page 172 ol 210
7
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first written above.
NORTHWEST NATURAL GAS COMPANY INDEMNITEE
By:By
Signature Signature
Type or Print Name Type or Print Narne
Title Address
(Back To Top)
Section 5: EX-10.M (EXHIBIT 10.M)
AMENDED AND RESTATED INDEMNITY AGREEMENT
THIS AGREEMENT is rnade as of _ by and befween Northwest Natural Holding Company, an Oregon
corporation (the "Cornpany"), as successor in interest to Northwest Natural Gas Company, and
director or officer of the Company.
("lndemnitee"), a
RECITALS
A. lt is essential to the Company to retain and attract as directors and officers the most capable persons available.
B. The increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the
availability and coverage ofdirectors'and officers' liability insurance have been reduced.
C. It is now and always has been the express policy of the Company to indemnifo its directors and offrcers so as to
provide them with the maximum possible protection permitted by law.
D. The Amended and Restated Articles of Incorporation of the Company (the "Restated Articles") require indemnification
of the directors and officers of the Company to the fullest extent permitted by law. The Oregon Business Corporation Act (the "Act")
expressly provides that the indemnification provisions set forth in the Act are not exclusive, and thereby contemplates that contracts may
be entered into between the Company and members of the Board of Directors and officers with respect to indemnification of directors
and officers.
NOW, THEREFORE, the Company and lndemnitee agree as follows:
l. Services to the Company. lndemnitee will serve or continue to serve as a director or officer of the Company for so long
as lndemnitee is duly elected or appointed or until lndemnitee tenders a resignation rn writing or is removed.
2. Definitions. As used in this Agreement:
(a) The term "Proceeding" includes any threatened, pending or completed action, suit or proceeding, arbitration,
mediation or investigation, whether brought in the right of the Company or otherwise and whether of a civil, criminaEdkihilstrltive or
investigative nature, in which Indemnitee may be or may have been involved as a parfy or otherwise, $l"ffigg1"W1{{"6|Bgffi,Plndemnitee
8
Page 173 ol 210
is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent
of another corporation. partnership, joint venture, trust or other enterprise, whether or not serving in such capacity at the time any liability
or expense is incuned for which indemnification or reimbursement can be provided under this Agreement.
(b) The term "Expenses" includes, without limitation, expenses of investigations, judicial or administrative proceedings or
appeals, attomeys' fees and
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 174 ot 21O
disbursements and any expenses of establishing a right to indemnification under Section 1l of this Agreement, but does not include
amounts paid in settlement by lndemnitee or the amount ofjudgments or fines against Indemnitee.
(c) References to "other enterprise" includes employee benefit plans; references to "fines" includes any excise tax
assessed with respect to any employee benefit plan; references to "serving at the request ofthe Company" includes any service as a
director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner
reasonably believed to be in the best interest of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as refened to in this Agreement.
3. Indemnity in Third-Partv Proceedines. The Company shall indemnify lndemnitee in accordance with the provisions of this
Section 3 if lndemnitee is a pafty to or threatened to be made a party to any Proceeding (other than a Proceeding by or in the right of the
Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and rcasonably
incurred by Indemnitee in connection with the Proceeding. but only if lndemnitee acted in good faith and in a manner which lndemnitee
reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, in addition,
had no reasonable cause to believe that lndemnitee's conduct was unlawful.
4. lndemniw in Proceedinqs by or in the Right of the Company. The Company shall indemnify Indemnitee in accordance with the
provisions of this Section 4 if lndemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the
Company to procure a judgment in its favor against all Expenses actually and reasonably incuned by lndemnitee in connection with the
defense or settlement of the Proceeding, but only if lndemnitee acted in good faith and in a manner which lndemnitee reasonably believed
to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 4 in
respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudged by a court to be liable to the Company,
unless and only to the extent that any court in which the Proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, lndemnitee is fairly and reasonably entitled to indemnity.
5. lndemnification of Expenses of Successful Pafi. Notwithstanding any other provisions of this Agreement, to the extent that
lndemnitee has been successful, on the merits or otherwise, in defense of any Proceeding or in defense of any claim, issue or matter
therein, including the dismissal of an action without prejudice, the Company shall indemnify lndemnitee against all Expenses incurred in
connection therewith.
6. Additional lndemnification.
(a) The Company agrees, as set forth in this Section 6(a), to indemnifu lndemnitee to the fullest extent permitted by law,
notwithstanding that such indemnification may
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 175 ol 2'10
2
not be specifically authorized by the Restated Articles, the Company's Bylaws, the Act or the other provisions of this Agreement.
Accordingly, notwithstanding any limitation in Sections 3, 4 or 5. the Company shall indemnify Indemnitee to the fullest extent permitted by
law if lndemnitee is a party to or threatened to be made a pafty to any Proceeding (including a Proceeding by or in the right of the
Company to procure a judgment in its favor) against all judgments, fines, amounts paid in settlement and Expenses actually and reasonably
incurred by lndemnitee in connection with the Proceeding. No indemnity shall be made under this Section 6(a) on account of lndemnitee's
conduct which constitutes a breach of lndemnitee's duty of loyalty to the Company or its shareholders or is an act or omission not in good
faith or which involves intentional misconduct or a knowing violation of the law.
(b) For purposes of Section 6(a), the meaning of the phrase "to the fullest extent permitted by law" includes, but is not
limited to:
(i) to the fullest extent permitted by the provision of the Act that authorizes or contemplates additional
indemnification by agreement, or the corresponding provision of any amendment to or replacement of the Act; and
(ii) to the fullest extent authorize d or permitted by any amendments to or replacements of the Act adopted after
the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.
(c) The Company agrees to indemnify lndemnitee for Expenses if Indemnitee is called, in connection with a Proceeding,
as a non-party witness by reason of the fact that lndemnitee is or was a director or officer of the Company.
7. Exclusions. Nohryithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to
make any indemnity in connection with any claim made against Indemnitee:
(a) for which payment has actually been made to or on behalf of lndemnitee under any insurance policy or other
indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision;
(b) for any transaction from which lndemnitee derived an improper personal benefit;
(c) for an accounting of profits made from the purchase and sale (or sale and purchase) by lndemnitee of securities of the
Company within the meaning of Section l6(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory
or common law;
(d) if a court having jurisdiction in the matter shall finally determine that such indemnification is not lawful under any
applicable statute or public policy (and, in this respect, both the Company and lndemnitee have been advised that the Securities and
Exchange Commission believes that indemnification for liabilities arising under the federal securities lavvs
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 176 of 210
J
is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for
adjudication); or
(e) in connection with any Proceeding (or part ofany Proceeding) initiated by Indemnitee, or any Proceeding by
lndemnitee against the Company and its directors, officers, employees or other indemnitees, unless (i) the Company is expressly required
by law to make the indemnification, (ii) the Proceeding was authorized by the Board of Directors of the Company, (iii) the Company
provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law, or (iv) lndemnitee
initiated the Proceeding pursuant to Section I I of this Agreement and lndemnitee is successful in whole or in part in the Proceeding.
8. Advances ofExpenses. The Company shall pay the expenses incuned by lndemnitee in any Proceeding in advance at the
written request of lndemnitee, if Indemnitee:
(a) fumishes the Company a written affinnation of the lndemnitee's good faith belief that lndemnitee is entitled to be
indemnified by the Company under this Agreement; and
(b) fumishes the Company a written undertaking to repay the advance to the extent that it is ultimately determined that
Indemnitee is not entitled to be indemnified by the Company.
Advances shall be made without regard to lndemnitee's ability to repay the expenses and without regard to lndemnitee's
ultimate entitlement to indemnification under the other provisions of this Agreement. Advances made under this Section 8 shall be paid by
the Company to lndemnitee as soon as practicable but in any event within thirty (30) business days after written request by Indemnitee to
the Company pursuant to this Section 8.
9. Notification and Defense of Claim. Not later than thirty (30) days after receipt by lndemnitee of notice of the commencement
of any Proceeding, Indemnitee will, if a claim in respect of the Proceeding is to be made against the Company under this Agreement, notif,i
the Company of the commencement of the Proceeding. The omission to notifo the Company will not relieve the Company from any
liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any Proceeding as to which lndemnitee
notifies the Company of the commencement:
(a) The Company will be entitled to participate in the Proceeding at its own expense.
(b) Except as other$'ise provided below, the Company may, at its option and jointly with any other indemnifuing parry
similarly notified and electing to assume such defense, assume the defense of the Proceeding, with legal counsel reasonably satisfactory to
the lndemnitee. lndemnitee shall have the right to use separate legal counsel in the Proceeding, but the Company shall not be liable to
lndemnitee underthis Agreement, including Section 8 above, forthe fees and expenses ofseparate legal counsel incurred afternotice from
the Company of its
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 177 of 21O
4
assumption of the defense, unless (i) lndemnitee reasonably concludes that there may be a conflict of interest between the Company and
lndemnitee in the conduct of the defense of the Proceeding or (ii) the Company does not use legal counsel to assume the defense of such
Proceeding. The Company shall not be entitled to assume the defense ofany Proceeding brought by or on behalfofthe Company or as to
which lndemnitee shall have made the conclusion provided for in (i) above.
(c) lf two or more persons who may be entitled to indemnification from the Company, including the Indemnitee, are
parties to any Proceeding, the Company may require Indemnitee to use the same legal counsel as the other parties. lndemnitee shall have
the right to use separate legal counsel in the Proceeding, but the Company shall not be liable to lndemnitee under this Agrecment, including
Section 8 above, for the fees and expenses ofseparate legal counsel incurred after notice from the Company ofthe requirement to use the
same legal counsel as the other pafties, unless the lndemnitee reasonably concludes that there may be a conflict of interest betwecn
lndemnitee and any of the other parties required by the Company to be represented by the same legal counsel.
(d) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any Proceeding effected without its written consent, which shall not be unreasonably withheld. Indemnitee shall permit the Company to
settle any Proceeding the defense of which it assumes, except that the Company shall not settle any action or claim in any manner which
would impose any penalty or limitation on lndemnitee without lndemnitee's written consent, which may be given or withheld in
lndemnitee's sole discretion.
10. Procedure Upon Application for lndemnification. Any indemnification under Sections 3,4,5 or 6 of this Agreement shall be
made no later than 90 days after receipt of the written request of lndemnitee for indemnification and shall not require that a determination
be made in accordance with the Act by the persons specified in the Act that indemnification is required under this Agreement. However,
unless it is ordered by a court in an enforcement action under Section 11 of this Agreement, no such indemnification shall be made if a
determination is made within such 90-day period by (a) the Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to the Proceeding, or (b) independent legal counsel in a written opinion (which counsel shall be appointed if a quorum is
not obtainable), that the lndemnitee is not entitled to indemnification under this Agreement.
1 1. Enforcement. Indemnitee may enforce any right to indemnification or advances granted by this Agreement to lndemnitee in
any court of competent jurisdiction if (a) the Company denies the claim for indemnification or advances, in whole or in part, or (b) the
Company does not dispose of the claim within 90 days of a written request for indemnification or advances. lndemnitee, in the
enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting the claim. It shall be a
defense to any such enforcement action (other than an action brought to enforce a claim for advancement ofExpenses pursuant to Section
8 above, if Indemnitee has tendered to the Company the required affrrmation and undertaking) that lndemnitee is not entitled to
indemnification under this
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 178 ol 210
5
Agreement, but the burden of proving this defense shall be on the Company. Neither a failure of the Company (including its Board of
Directors or its shareholders) to make a determination prior to the commencement of the enforcement action that indemnification of
lndemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its
shareholders) that indemnification is improper shall be a defense to the action or create a presumption that lndemnitee is not entitled to
indemnification under this Agreement or otherwise. The termination of any Proceeding by judgment, order of court, settlement, conviction
or upon a plea ofnolo-contendere, or its equivalent, shall not, ofitself, create a presumption that lndemnitee is not entitled to
indemnification under this Agreemcnt or otherwise.
12. Partial lndemnification. lf Indemnitee is entitled under any provisions of this Agreement to indemnification by the Company
for some or part of the Expenses, judgments, fines and amounts paid in settlement actually and reasonably incuned by lndemnitee in the
investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount, the Company shall indemnifli
lndemnitee for the portion of the Expenses, judgments, fines and amounts paid in settlement to which lndemnitee is entitled.
13. Nonexclusiviw and Continuitv of Rishts. The indemnification provided by this Agreement shall not be deemed exclusive of
any other nghts to which Indemnitee may be entitled under the Restated Articles. the Company's Bylaws, any other agreement, any vote
of shareholders or directors, the Act, or otherwise, both as to action in lndemnitee's official capacity and as to action in another capacity
while holding office. The indemnification under this Agreement shall continue as to lndemnitee even though Indemnitee ceases to be a
director or officer and shall inure to the benefit ofthe heirs and personal representatives oflndemnitee.
14. Business Combinations. Ifany person or group (as defined in Section 13(dX3) ofthe Securitics Exchange Act of 1934, as
amended) acquires the legal right to elect a majority of the Board of Directors of the Company in a transaction or series of transactions
that has not receivcd the prior approval of the Board of Directors of the Company, the Cornpany or its successor, as the case rnay be,
shall, for a period of two years following the date that such legal right is acquired (the "Trigger Date"), maintain any and all directors and
officers' liability insurance in effect prior to the Trigger Date that covers lndemnitee.
1 5. Severabilitv. If this Agreement or any portion of it is invalidated on any ground by any court of competent jurisdiction, the
Company shall indemnifu lndemnitee as to Expenses, judgments, fines and amounts paid in settlement with respect to any Proceeding to
the full extent permitted by any applicable portion of this Agreement that is not invalidated or by any other applicable law or arrangement.
16. Subrogation. ln the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment
to all of the rights of recovery of lndemnitee. Indemnitee shall execute all documents required and shall do all acts that may be necessary
to secure such rights and to enable the Company effectively to bring suit to enforcc such rights.
17. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in
wnting by both parties. No waiver of any of the
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page '179 of 210
6
provisions in this Agreement shall constitute a waiver of any other provisions of this Agreement (whether or not similar) nor shall any
waiver constitute a continuing waiver, unless expressly stated in any waiver.
18. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be
deemed to have been duly given (a) upon delivery if delivered by hand to the party to whom the notice or other communication shall have
been directed or (b) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so
mailed:
(i) lf to lndemnitee, at the address indicated on the signature page of this Agreement.
(ii) If to the Company, to
Northwest Natural Holding Company
220 N.W. Second Avenue
Portland, Oregon 97209
Attention: President
or to any other address as may have been furnished to lndemnitee by the Company.
19. Countemarts. The parties may execute this Agreement in two counterparts, each of which shall constitute the original.
20. Applicable Law. This Agreement shall be governed by and construed in accordance with the law of the state of Oregon.
2 1. Successors and Assiqns. This Agreement shall be binding upon the Company and its succcssors and assigns.
7
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 180 of 210
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first written above
NORTHWEST NATURAL HOLDING COMPANY INDEMNITEE
By:By
Signature Signaturc
Type or Print Narne Type or Print Name
Title Address
8
lBack To Top)
Section 6: EX-10.Q @XHIBIT 10.Q)
As amended
effective October l. 201 8
NORTHWEST NATURAL GAS COMPANY
EXECUTIVE ANNUAL INCENTIVE PLAN
This amended Executive Annual lncentive Plan (the "Plan") is executed by Northwest Natural Gas Company, an Oregon corporation (the
"Company"), effective October 1,2018. Effective October 1,2018, the Company became a wholly-owned subsidiary of Northwest
Natural Holding Company ("Parent") and holders of Company colruron stock becarne holders of Parent common stock ("Parent
Cornmon Stock").
PURPOSE OF PLAN
The success of the Company is dependent upon its ability to attract and retain the services of key executives of the highest competence
and to provide incentives for superior performance. The purpose of the plan is to advance the interests of the Company and its
shareholders through an incentive compensation program that will attract and retain key executives and motivate them to achieve
performance goals.
PROGRAM TERM
This Plan is an annual incentive plan and each new calendar year commences a new Program Term. Each Program Term will begin on
January I and conclude on December 31.
PARTICIPATION
All executive officers of the company and any other highly compensated employees as designated by the Company's Organization and
Executive Compensation Committee (the "Committee") are eligible to receive awards ("Awards") under the Exeg{voe.,,ftnngal IncentivePlan'
cem stateJnlalli"J#,1;,"J
Page 181 of 210
At the beginning of each Program Term, the Committee shall determine eligibility for Awards and establish for each participant, the target
incentive level as a percentage of year-end annualized based salary ("Target Award"). This information will be set forth in Exhibit I of the
Plan document for the Program Term. Each such participating employee shall be referred to as a "Participant."
To be eligible for payout of an Award the Participant must have a minimum of three months of service during the Program Term. If the
Participant is a new employee or is newly eligible to participate in the Plan, that Participant must be in an eligible position on or before
September 30 of the Program Term and will receive a prorated Award. ln addition, the Participant must be employed by the Company or
Parent on December 3 I of the Program Term to be eligible for payout of the Award for the Program Term unless the Participant is eligible
for a prorated Award as provided in the next sentence. Eligibility for a prorated Award occurs when a Participant has three or more
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 182 of 210
months of participation in the Program Term but the Participant's employment is terminated prior to December 3l of the Program Term
due to one of the following: Retirement (unless such Retirement results from a termination of the Participant's employment by the
Company or Parent for Cause), disability and death. Prorated Awards will be determined by prorating the Participant's final Award by
the number of days employed during the Program Term.
"Retirement" shall mean termination of employment after Participant is (a) age 62 with at least five years of service as an employee of the
Company and Parent, or (b) age 55 with age plus years of service (including fractions) as an employee of the Company and Parent
totaling at least 70.
"Cause" shall mean (a) the willful and continued failure by a Participant to perform substantially the Participant's assigned duties with the
Company or Parent (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial
performance is delivered to the Participant by the Company or Parent which specifically identifies the manner in which the Participant has
not substantially performed such duties, (b) willful commission by a Participant of an act of fraud or dishonesty resulting in economic or
financial injury to the Company or Parent, (c) willful misconduct by a Participant that substantially impairs the Company's or Parent's
business or reputation, or (d) willful gross negligence by a Participant in the performance of his or her duties.
ln the event of a change in job position during the Program Tenn, the Committee may, in its discretion, increase or decrease the amount of
a Participant's Award to reflect such change.
INCENTIVE FORMULA
The formula for calculating Awards for each Program Term is as follows:
Target
Award , [(
P/IPF
Factor
Weight )l:Parlicipant
Award
Company
Performance
Factor (CPF)
CPF Factor
Weight
Priority/lndividual
Performance Factor X
(rPF)
X +(
COMPANY PERFORMANCE FACTOR
The Company performance goals in the Plan are intended to align the interest of Participants with those of the shareholders. The goals and
the formula for determining the Company Performance Factor will be established by the Committee at the start of each Program Term and
set forth as Exhibit ll. The Committee may, at any time, approve adjustments to the calculation of the results under any Company
performance goal to take into account such unanticipated circumstances or significant, non-recurring or unplanned events as the
Committee may determine in its sole discretion, and such adjustments may increase or decrease the results. Possible circumstances that
may be the basis for adjustments shall include, but not be limited to, any change in applicable accounting rules or principles; any gain or
loss on the disposition of a business; impairment of assets; dilution caused by acquiring a business; tax changes and tax impacts of other
changes; changes in applicable laws
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 183 of 210
2
)
and regulations; changes in rate case timing; changes in the Company's structure; and any other circumstances outside of management's
control.
PzuORITY/IND]VIDUAL PERTORMANCE FACTOR
The P/IPF weight used in calculating the Priority/lndividual Performance Factor will be established for each Participant by the Committee
at the beginning of the Program Term and set forth as part of Exhibit I. Also included in Exhibit I will be the CPF Factor Weight for the
Company Performance Factor. Priority/lndividual goals for each Participant will be established at the beginning of each Program Term
and performance against these goals will be assessed by the Participant's superior and approved by the C.E.O. at the end of the Program
Term. This assessment will result in a rating on a scale of 0% to 175%.This rating is called the Priority/lndividual Performance Factor.
The Participant will not receive a payout under the Priority/lndividual Performance component of an Award if the Priority/lndividual
Perfonnance Factor is less than 50%.
ADMINISTRATION
Award payouts will be calculated and paid no later than the March 15 following the end of the Program Term. Award payouts are subject
to tax withholding unless the Pafiicipant made a prior election to defer the Award payout under the terms of the Defcncd Compcnsation
Plan for Directors and Executives ("DCP").
All Award payouts shall be audited by the lnternal Audit department and approved by the Committee prior to payment.
The Plan shall be administered by the Committee. The Committee shall have the exclusive authority and responsibility for all matters in
connection with the operation and administration of the Plan. Decisions by the Committee shall be final and binding upon all parties
affected by the Plan, including the beneficiaries ofParticipants.
The Committee may rely on information and recommendations provided by management. The Committee may delegate to management
the responsibility for decisions that it may make or actions that it may take under the terms of the Plan, subject to the Committee's
reserved right to review such decisions or actions and modify them when necessary or appropriate under the circumstances. The
Committee shall not allow any employee to obtain control over decisions or actions that affect that employee's Plan benefits.
RECOUPMENT ON EARNINGS RESTATEMENT
lf at any time before a Change in Control and within three years after the payout of Awards for a Program Term, Parent's financial
statements for that Program Term are the subject of a restatement due to the Misconduct of any person, each Participant who received an
Award payout for that Program Term (whether or not such Participant was personally involved in such Misconduct) shall repay to the
Company the Excess Bonus Compensation (as defined below). For purposes of the Plan, "Excess Bonus Compensation" for any
Parlicipant means the positive difference, if any,
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 184 of 210
J
between (i) the Participant's Award payout as originally calculated, and (ii) the Participant's Award payout as recalculated with the results
for Company performance goals being based on Parent's financial statements as restated. Excess Bonus Compensation shall not include
any amounts in respect of any rndividual performance goals or in respect of Company performance goals that are not measured in whole
or in part on financial results reported in Parent's financial statements. The Committee may, in its sole discretion, reduce the amount of
Excess Bonus Compensation to be repaid by any Participant to take into account the tax consequences of such repayment for the
Participant.
lf any portion of an Award payout was defened under the DCP. any Excess Bonus Cornpensation to be repaid with respect to that
Award shall first be recovered by canceling all or a portion of the amount so defened under thc DCP and any interest credited under the
DCP with respect to such cancelled amount. The Company may seek direct repayment from the Participant of any Excess Bonus
Compensation not so recovered and may, to the extent permitted by applicable law, offset such Excess Bonus Compensation against any
compensation or other amounts owed by the Company to the Participant. ln particular, Excess Bonus Compensation may be recovered
by offset against the after-tax proceeds of dcferred compensation payouts under the DCP, the Company's Executive Supplemental
Retirement Income Plan or the Company's Supplemental Executive Retirement Plan at the times such defened compcnsation payouts
occur under the terms of those plans. Excess Bonus Compensation that remains unpaid for more than 60 days after demand by the
Company shall accrue interest at the rate used from time to time for crediting interest under the DCP.
"Misconduct" shall mean (a) willful commission by any person of an act of fraud or dishonesty or (b) willful gross negligence by any
person in the performance ofhis or her duties.
"Change in Control" shall mean the occunence of any of the following events:
(a) The consummation of:
(i) any consolidation, merger or plan of share exchange involving Parent (a "Merger") as a result of which the holders of
outstanding securities of Parent ordinarily having the right to vote for the election of directors ("Voting Securities") irnmediately prior to the
Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting Securities of the surviving
corporation or a parent corporation of the surviving corporation immediately after the Merger, disregarding any Voting Securities issued to
or retained by such holders in respect ofsecurities ofany other party to the Merger;
(ii) any consolidation, merger, plan of share exchange or other transaction involving the Company as a result of which
Parent does not continue to hold, directly or indirectly. at least 50% of the outstanding securities of the Company ordinanly having the
right to vote for the election ofdirectors; or
(iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or
substantially all, the assets of Parent or the Company;
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 185 of 210
4
(b) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted Parent's
Board of Directors ("lncumbent Directors") shall cease for any reason to constitute at least a majority thercof; provided, however, that the
term "lncumbent Director" shall also include each new director elected during such two-year period whose nomination or election was
approved by two-thirds of the lncumbent Directors then in office; or
(c) Any person (as such term is used in Section la(d) of the Securities Exchange Act of 1934, other than Parent or any
employee benefit plan sponsored by Parent) shall, as a result ofa tender or exchange offer, open market purchases or privately negotiated
purchases from anyone other than Parent, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of Voting Securities representing twenty percent (20%) or more of the combined voting
power of the then outstanding Voting Securities.
AMENDMENTS AND TERMINAT]ON
The Board has the power to terminate this Plan at any time or to amend this Plan at any time and in any manner that it may deem
advisable.
IN WITNESS WHEREOF this Plan was duly arnended effective as of October 1,2018.
NORTHWEST NATURAL GAS COMPANY
By:/s/ DAVID H. ANDERSON
David H. Anderson
President and Chief Executive Officer
5
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 't86 of 210
Exhibit I
Effective January 1, 2019
Participants, Target Awards and lndividual Performance
Program Term: January 1,2019 - December 31,2019
6
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 187 ol 21O
Exhibit ll
Company Performance Factor
Program Term: January 1,2019 - December 31, 2019
Company Performance Factor Formula:
Net Income Component X 71.43o/o (Operations Component x28.57%)
Company
Performance Factor
Net lncome Component:
The Net lncome (Nl) Component will be determined using the formula in Note 1 below using Holding Company
consolidated Nl results. The table shows values rounded.
2019 Nl Results NI Performance Component
0%
s0%
100%
115%
Notes on Nl Component:
1) Values between those shown above will be interpolated using the formula shown below:
RegressionlnterpolationLineforNlbetween$-and$-isy=-x--andlineforNlbetween$-and$-isy=where X is the Nl results for the year
2) Final Nl Number will be rounded to two places to the right of the decimal. This will be the same number as reported to shareholders before
any approved exceptions.
7
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Gompany
Page 188 of 2'10
+(
Operations Component:
The Operations Component (previously called Expanded Key Goals which aligns with BU and NBU incentive goals) for
2019 will be determined using the following formula and table:
Sum of (Goal Perfonrance Rating Goal Weight )Oper. Component Factor( I )
2019 OperationalGoals
Goals Goal Performance Rating Goal Weight
Customer Satisfaction
(Overall)
Cust. Sat.
%
/o
Ratins
0%
r00%
200%
16.667"1'
Customer Satisfaction
(Employee/Custorner Interaction)
Cust. Sat.
/o
%
Ratins
0%
100%
)000./o
16.667 0t
Market Share & Grou'th
(Total New Meter Sets)
Total Ne$ \'lcter Sets Ratins
0%,
100%
200%
16.667 0
Manage Costs in Service Customers
(O&M Expense Per Customer)
Exncnse Per Customcr Rating
0%
100%
200%
16.667 "1,
Health and Safety-Damages
(Damages: 7o ofcalls w/ response less than 60
minutes)
7o Call Rsp.Ratinq
00h
100%
200%
16.667 0
Health and Safety-Odor Resp.
(% Calls w/response time less than 60 minutes)
7u Call Rso.Ratins
0%
100%
200%
16.667 "/"
1000/"
Notes on Operations Goals
l) Goal ratings will be interpolated between amounts shown.
2\ The Goal Performance Rating for each goal is limited lo200o/o.
3) The Operations Component is limited lo 2O0o/o and the aggregate performance from this component for use in the EAIP is limited to 175o/o.
IJ
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Gompany
Page 189 of 210
I
Final Notes on Company Performance Factor and General:
I ) Final EAIP Participant Awards to participants will be rounded up to the nearest $1,000.
2\ Final Nl results for 2019 could be adjusted for the impact of certain events as determined by the OECC
(Back To Ton)
Section 7: EX-l0.SS (EXHIBIT 10.SS)
ANNUAL INCENTIVE PLAN
NW Natural Gas Storage LLC
("company", or "the company")
PURPOSE
The purpose of the Annual lncentive Plan (AlP) is to recognize and reward Non-Bargaining Unit (NBU) employees who have performed
well and contributed to successful company performance as measured by key performance indicators.
PROGRAM TERM
This Plan is an annual incentive plan and each new calendar year commences a new Program Term. Each Program Term will begin on
January 1 and conclude on December 31.
PARTICIPATION
All NBU regular employees of the company are eligible to participate in the Annual lncentive Plan. For all purposes of this AlP, a person
who is an employee of Northwest Natural Gas Company (NW Natural) on full-time assignment to the company and designated by the
Company Board of Directors (BOD) shall be considered to be a regular employee of the company during the period of that full-time
assignment. ln these situations, a designated participant in this AIP shall not be eligible for incentive compensation from NW Natural.
NW Natural Oversight
lf the President of NWNGS is considered by NW Natural to be an executive officer of NW Natural for purposes of public disclosure,
any decision of the BOD under this AIP that affects an award to the President shall be subject to and conditioned upon the approval of
that decision by the Board of Directors of NW Natural or as delegated by the Board of Directors of NW Natural to the Organization and
Executive Compensation Committee.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 190 of 210
9
To be eligible for an award the Participant must have been employed by the company in an NBU role for at least one month during the
Program Term. ln addition, the Participant must be employed on the date of the plan payout to be eligible for any award for the Program
Term unless the Participants' employment is terminated prior to the payout date of the Program Term due to one of the following:
retirement(*), disability or death, Board approved exception due disposition of an affiliated business which results in the participant's
termination of employment with NWNGS. Prorated awards will be determined by prorating the Participant's final award by the number of
days employed during the Program Term. ln the case of a Board approved exception due to disposition of an affiliated business occurring
during the Program Term, the participant's prorated award will be based upon their target award and not actual Company perfonnance
for the Program Term. Such award will be paid within thiry (30) days following the completion of the transition period as defined by the
Board. The disposition of Gill Ranch Storage qualifies as Board approved and the Board will define the end of the transition period.
However, participating employees with Company approved Retention Agreements, will be eligible for prorated AIP awards consistent
with such agreements.
Employees who transfer to or from employment or full-time assignment to Northwest Natural or another subsidiary will be eligible for a
prorated award based upon the number of days they were eligible to participate in the AlP.
(*) Retirerrent is defined as a minimum of 5 ycars of service (with the company or with an affiliate company) and age and service equals
70.
INCENTIVE TARGETS
Target incentive award opportunities will be established by salary grade for each Plan Year and approved by the Board of Directors. The
target incentive levels for each salary grade are shown in Exhibit I to the Plan document for the Plan Year. The target incentive opportunity
is assigned by salary grade and calculated by multiplying the Target lncentive percentage times the following for each employee category:
NBU Salary Paid/Exempt - Annual Base Salary as of Decernber 31" of the plan year
NBU Hourly Paid/Non-Exempt Actual eligible eamings, including regular pay, overtime pay, & lump sum merit payments
INCENTIVE FORMULA
The formula for calculating the incentive award for the Program Term is as follows:
Participant Award :
Target Award X ((CPF X CPF Factor Weight) + (lPF X IPF Factor Weight))
COMPANY PERFORMANCE FACTOR (CPF)
The company performance goals in the Plan are intended to aligr the interest of Participants with those of the company. The goals and the
formula for determining the Company Performance Factor will be established by the NW Natural Gas Storage, LLC Board of Directors
(the "Board of Directors") at the start of each Program Term and set forth as Exhibit lla and Exhibit llb. After thEgflgltCU.qformula are
J. Palfreyman, Dl
Gem State Water Company
Page 191 of 210
established for a Program Term, the Board of Directors retains discretion to modify the goals and formula, including adjusting the
calculation of any financial or other goal to eliminate the effects of significant extraordinary, non-recurring or unplanned items.
INDIVIDUAL PERFORMANCE FACTOR (IPF)
The IPF weight used in calculating the Individual Performance Factor will be established for each Participant by the President, subject to
the approval of the Board of Directors at the beginning of the Program Term. lndividual goals for each Participant will be established by
the Participant's leader (subject to the approval ofthe President, and for the President subject to the approval ofthe Board ofDirectors)
at the beginning of each Program Term. Performance against these goals will be assessed by the Participant's leader at the end of the
Program Term (subject to the approval of the President, and for the President subject to the approval of the Board of Directors). This
assessment will result in a rating on a scale of 0 to 1.5 (the "lndividual Performance Factor"). The Participant will not receive an award if
the lndividual Performance Factor is less than 0.5.
ADMINISTRATION
Awards will be calculated and paid no later than March l5 following the end of the Program Term. Awards are subject to tax withholding
unless the Participant made a prior election to defer the Award under the terms of the NW Natural Gas Company Defened
Compensation Plan for Directors and Executives if they are eligible for this plan. All awards shall be audited and approved by the Board
of Directors prior to payment.
The Plan shall be administered by the Board of Directors. Except to the extent provided under "NW Natural Oversight" above. The
Board of Directors shall have the exclusive authority and responsibility for all matters in connection with the operation and administration
of the Plan. Except to the extent provided under "NW Natural Oversight: above. Decisions by the Board of Directors shall be final and
binding upon all parties affected by the Plan, including the beneficiaries ofParticipants.
The Board of Directors may rely on information and recommendations provided by management. The Board of Directors may delegate to
management the responsibility for decisions that it may make or actions that it may take under the terms of the Plan, subject to the Board
of Directors reserved nght to review such decisions or actions and modify them when necessary or appropriate under the circumstances.
The Board of Directors shall not allow any employee to obtain control over decisions or actions that affect that employee's Plan benefits.
AMENDMENTS AND TERMINATION
The Board of Directors has the power to terminate this Plan at any time or to amend this Plan at any time and in any manner that it may
deem advisable.
(Back To Top)
Section 8: EX-10.2 (EXHIBIT l0.Z)
Exhibat No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 192 of 210
PERFORMANCE SHARE LONG TERM INCENTIVE AGREEMENT
This Agreement is entered into as of February _, 2019, between Northwest Natural Holding Company, an Oregon corporation
(the "Company"), and ("Recipient").
On February ,2019, the Organization and Executive Compensation Committee (the "Committee") of the Company's Board of
Directors (the "Board") authorized a performance-based stock award (the "Award") to Recipient pursuant to Section 6 of the
Cornpany's Long Term lncentive Plan (the "Plan"). Recipient desires to accept the Award subject to the tems and conditions of this
Agreement.
NOW, THEREFORE, the parties agree as follows:
l. Arr,,ard. Subject to the terms and conditions of this Agreement, the Company shall issue or otherwise deliver to the
Recipient the numlEifshares of Common Stock of the Company (thJ "Perfofflance Shirest') determined under this Agreement based
on (a) the performance of the Company during the three-year period from January l, 2019 to Deceurber 3l , 2021 (the "Award Period")
as described in Section 2 and (b) Recipient's continued employment dunng the Award Period as described in Section 3. lf the Company
issues or otherwise delivers Performance Shares to Recipient, the Company shall also pay to Recipient the amount of cash determined
under Section 4 (the "Dividend Equivalent Cash Award"). Recipient's "Target Share Amount" for purposes of this Agreement is
shares.
2. Performance Conditions.
2.1 Payout Factor. Subject to possible reduction under Section 3, the nurnber of Perfomance Shares to be issued or
otherwise delivered to Recipient shall be determined by multiplying the Payout Factor (as defined below) by the Target Share Amount.
The "Payout Factor" shall be equal to (a) the TSR Modifier as determined under Section 2.2, multiplied by (b) the EPS Payout Factor as
determined under Section 2.3 below; provided. however, that the Payout Factor shall not be greater than200%o and the Payout Factor
shallbe 0% if the ROIC Performance Threshold (as defined in Section 2.4 below)is not satisfied. Notwithstanding the foregoing, if a
Change in Control (as defined in Section 3.7) occurs before the last day of the Award Period, the Payout Factor shall be 100%.
2.2 TSR Modifier.
(a) The "TSR Modifier" shall be determined under the table below based on the TSR Percentile Rank (as
defined below) of the Company:
TSR Pcrcentile Rank TSR Modificr
less than 25%
25ohto 75o/o
more than 7 5o/o
75%
100%
t2s%
(b) To determine the Company's "TSR Percentile Rank," the TSR of the Cornpany and cach of the Peer Group
Companies (as defined below) shall be calculated, and
I 00 I 7449t{.2 0055570-00315
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 193 of 210
the Peer Group Companies shall be ranked based on their respective TSR's from lowest to highest. lf the Company's TSR is equal to the
TSR of any other Peer Group Company, the Company's TSR Percentile Rank shall be equal to the number of Peer Group Companies
with a lower TSR divided by the number that is one less than the total number of Peer Group Companies, with the resulting amount
expressed as a percentage and rounded to the nearest tenth ofa percentage point. Ifthe Cornpany's TSR is between the TSRs ofany
two Peer Group Companies. the TSR Percentile Ranks of those two Peer Group Cornpanies shall be detennined as set forth in the
preceding sentence, and the Company's TSR Percentile Rank shall be interpolated as follows. The excess of the Company's TSR over
the TSR of the lower Peer Group Company shall be divided by the excess of the TSR of the higher Peer Group Company over the TSR
of the lower Peer Group Company. The resulting fraction shall be multiplied by the difference between the TSR Percentile Ranks of the
two Peer Group Companies. The product of that calculation shall be added to the TSR Percentile Rank of the lower Peer Group
Company, and the resulting sum (rounded to the nearest tenth of a percentage point) shall be the Company's TSR Percentile Rank. The
intent of this definition of TSR Percentile Rank is to produce the same result as calculated using the PERCENTRANK function in
Microsoft Excel to determine the rank of the Company's TSR within the anay consisting of the TSRs of the Peer Group Companies.
(c) The "Peer Group Companies" consist of those companies that were components of the Russell 2500 Utilities
Index on October I , 201 8 and that continue to be cornponents of the Russell 2500 Utilities Index through Decernber 3 l. 202 I . lf the
Russell 2500 Utilities Index ceases to be published prior to December 31,2021, the Peer Group Companies shall consist of those
companies that were components of the Russell 2500 Utilities lndex on October 1,2018 and that continued to have publicly-traded
corrunon stock through Decernber 31,2021 .
(d) The "TSR" for the Company and each Peer Group Company shall be calculated by ( l) assuming that $ 100
is invested in the common stock of the company at a price equal to the average of the closing market prices of the stock for the period
fromOctoberl,20l8toDecember3l,2018,(2)assurningthatforeachdividendpaidonthestockduringtheAwardPeriod,the
amount equal to the dividend pard on the assumed number ofshares held is reinvested in additional shares at a price equal to the closing
market price of the stock on the ex-dividend date for the dividend, and (3) determining the final dollar value of the total assumed number
of shares based on the average of the closing rnarket prices of the stock for the period frour October 1,2021 to December 31,2021.
The "TSR" shall then equal the amount determined by subtracting $ I 00 from the foregoing final dollar value. dividing the result by I 00 and
expressing the resulting fraction as a percentage.
(e) lf during the Award Period any Peer Group Company enters into an agreement pursuant to which all or
substantially allof the stock or assets of the Peer Group Company willbe acquired by a third party (a "Signed Acquisition"), and if the
Signed Acquisition is not completed by the end of the Award Period, then that company shall not be a Peer Group Company. lf a Signed
Acquisition of a Peer Group Company is terminated (other than in connection with the execution of another Signed Acquisition) before the
end of the Award Period, then that company shall rernain a Peer Group Company, and the TSR for that Peer Group
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 194 of 210
2
Company shall be calculated as provided in Section 2.2(d), except that if the announcement of the termination of the Signed Acquisition
occurs during the last three months of the Award Period, for purposes of determining the final dollar value under clause (3) of Section 2.2
(d), the three-month period for which closing market prices are averaged shall be shortened to exclude any trading days preceding the
announcement of the termination of the Signed Acquisition.
2.3 EPS Pavout Factor
(a) The "EPS Payout Factor" shall be determined under the table below based on the Cumulative EPS
Achievement Percentage (as defined below) achieved by the Company for the Award Period:
Cumulative EPS Achievement
Percentage EPS Pavout Factor
0%
40%
100%
185%
lf the Company's Cumulative EPS Achievement Percentage is between any two data points set forth in the first column of the above table,
the EPS Payout Factor shall be interpolated as follows. The excess of the Company's Cumulative EPS Achievement Percentage over the
Cumulative EPS Achievement Percentage of the lower data point shall be divided by the cxcess of the Cumulative EPS Achievement
Percentage of the higher data point over the Cumulative EPS Achievement Percentage of the lower data point. The resulting fraction shall
be multiplied by the difference between the EPS Payout Factors in the above table conesponding to the two data points. The product of
that calculation shall be rounded to the nearest hundredth ofa percentage point and then added to the EPS Payout Factor in the above
table corresponding to the lower data point, and the resulting sum shall be the EPS Payout Factor.
(b) The Company's "Cumulative EPS Achievement Percentage" for the Award Period shall equal the
Cumulative EPS (as defined below) divided by the Cumulative EPS Target (as defined below), expressed as a percentage and rounded to
the nearest tenth ofa percentage point.
(c) The Company's "Cumulative EPS" for the Award Period shall equal the sum of the Company's diluted
eamings per share of common stock ("EPS") for each of the three years in the Award Period. Subject to adjustment in accordance with
Section 2.5 below, the Company's diluted eamings per share of common stock for any year shall be as set forlh in the audited
consolidated financial statements of the Company and its subsidiaries for that year. After givrng effect to any adjustments required by
Section 2.5, the EPS for each year shall be rounded to the nearest penny.
(d) The Cornpany's "Cumulative EPS Target" for the Award Period shall equal the sum of the EPS targets
approved by the Committee for each of the three years in
Exhibit No. 1
J. Palfreyman, Dl
Gem State water Company
Page 195 of 210
3
the Award Penod. The EPS target for the first year of the Award Period as approved by the Committee is S_. Within the first 90 days
of the second year of the Award Period. the Committee shall approve the EPS target for that year. Within the first 90 days of the third
year of the Award Period, the Committee shall approve the EPS target for that year.
2.4 ROIC Perfonnance Threshold.
(a) For purposes of this Agreement, the "ROIC Perfonnance Threshold" shall be satisfied if the Company's
Average ROIC (as defined below) for the Award Period is greater than or equal to _%.
(b) The Company's "Average ROIC" for the Award Period shall equal the simple average of the Company's
ROIC (as defined below) for each of the three ycars in the Award Period, rounded to the nearcst hundredth of a percenta-ee point. The
Cornpany's "ROIC" for any year shall be calculated by dividing the Company's Adjusted Net Income (as defined below) for the year by
the Company's Average Long Term Capital (as defined below) for the year, and rounding the result to the nearest hundredth of a
percentage point. Subject to adjustrnent in accordance with Section 2.5 below, the Company's "Adjusted Net lncome" for any year shall
be equal to the Company's net income for the year, increased by the Company's interest expense, net for the year and reduced by the
Company's interest income (including net interest on deferred regulatory accounts) for the year, in each case as set forth in the Company's
Annual Report on Fonn l0-K for that year. "Average Long Term Capital" for any year shall mean the average ofthe Company's Long
Term Capital (as defined below) as of the last day of the year and the Company's Long Tcmr Capital as of the last day of the prior year.
Subject to adjustment in accordance with Section 2.5 below. "Long Term Capital" as of any date shall equal the sum of the Company's
total shareholders' equity as of that date and the Company's long-term debt (including current maturities) as of that date, in each case as
set forth on the audited consolidated balance sheet ofthe Company as ofthat date.
2.5 EPS and ROIC Adiustments. The Committee may, at any time, approve adjustments to the calculation of
Cumulative EPS and/or Average ROIC to take into account such unanticipated circumstances or sigrificant, non-recurring or unplanned
events as the Committee may determine in its sole discretion, and such adjustments may increase or decrease Cumulative EPS and/or
Average ROIC. Possible circumstances that may be the basis for adjustments shall include, but not be limited to, any change in applicable
accounting rules or principles; any gain or loss on the disposition of a business; impairment of assets; dilution caused by Board approved
business acquisition; tax changes and tax impacts ofother changes; changes in applicable laws and regulations; changes in rate case timing;
changes in the Company's structure; and any other circumstances outside of management's control.
3. Emplovment Condition.
3 . I Except as provided in Sections 3 .2, 3.3 or 7 .2, in order to receive a payout of Perfonnance Shares, Recipient rnust
be employed by the Company or any parent or subsidiary of the Company (the "Employer") on the last day of the Award Period.
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 196 of 210
1
3.2 If Recipient's employment by the Employer is terminated at any time prior to the end of the Award Period because
of death, physical disability (within the meaning of Section 22(e)(3) of the lnternal Revenue Code of 1986 (the "Code")), or Retirement
(unless such Retirement results from a termination of Recipient's employment by the Employer for Cause), Recipient shall be entitled to
receive a pro-rated award. The number of Performance Shares to be issued or otherwise delivered as a pro-rated award under this
Section 3.2 shall be determined by multiplying the number of Performance Shares determined under Section 2 by a fraction, the numerator
of which is the number of days Recipient was employed by Employer during the Award Period and the denominator of which is the
number of days in the Award Period. lf Recipient's employment by the Employer terminates because of Retirement, death or physical
disability and a Change in Control subsequently occurs before the end of the Award Period, the number of Performance Shares
determined under Section 3.3 shall immediately be paid to Recipient. lf a Change in Control occurs and Recipient's employment by the
Employer subsequently terminates before the end of the Award Period because of Retirement, death or physical disability, the number of
Performance Shares determined under Section 3.3 shall immediately be paid to Recipient.
3.3 CIC Acceleration.
(a) lf Recipient is a party to a Change in Control Severance Agreement with the Company or a parent or
subsidiary of the Company, Recipient shall immediately be paid a pro-rated award if Recipient becomes entitled to a Change in Control
Severance Benefit (as defined below). The number of Performance Shares to be issued or otherwise delivered as a pro-rated award
under this Section 3.3 shall be determined by multiplying the Target Share Amount by a fraction, the numerator of which is the number of
days Recipient was employed by the Employer during the Award Period and the denominator of which is the number of days in the
Award Period. A "Change in Control Severance Benefit" means the severance benefit provided for in Recipient's Change in Control
Severance Agreement with the Company or a parent or subsidiary of the Company; provided, however, that such severance benefit is a
"Change in Control Severance Benefit" for purposes of this Agreement only if, under the terms of Recipient's Change in Control
Severance Agreement, Recipient becomes entitled to the severance benefit (i) after a Change in Control of the Company has occuned,
(ii) because Recipient's employment with the Employer has been terminated by Recipient for good reason in accordance with the terms
and conditions of the Change in Control Severance Agreement or by the Employer other than for cause, and (iii) because Recipient has
satisfied any other conditions or requirements specified in the Change in Control Severance Agreement and necessary for Recipient to
become entitled to receive the severance benefit. For purposes ofthis Section 3.3(a), the terms "change in control," "good reason,"
"cause" and "disability" shall have the meanings set forth in Recipient's Change in Control Severance Agreement.
(b) lf Recipient is not a party to a Change in Control Severance Agreernent with the Company or a parent or
subsidiary of the Company, Reciprent shall immediately be paid a pro-rated award in the amount stated in Section 3.3(a) if a Change in
Control (as defined in Section 3.7 below) occurs and at any time after the earlier of Shareholder Approval (as defined in Section 3.8
below), if any, or the Change in Control and on or before the
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 197 ol 210
5
second anniversary of the Change in Control, (i) Recipient's employment is terminated by the Employer (or its successor) without Cause
(as defined in Section 3.6 below), or (b) Recipient's employment is terminated by Recipient for Good Reason (as defined in Section 3.9
below).
3.4 lf Recipient's employment by the Employer is terminated at any time prior to the end of the Award Period and
Section 3.2,3.3 or 7.2 does not apply to such termination, Recipient shall not be entitled to receive any Performance Shares.
3.5 "Retirement" shall mean termination of employment (a) on or after the first anniversary of the date of this Agreement,
and (b) after Recipient is (l) age 62 with at least five years of service as an employee of the Company or a parent or subsidiary of the
Company, or (2) age 60 with age plus years of service (including fractions) as an employee of the Company or a parent or subsidiary of
the Company totaling at least 70.
3.6 "Cause" shall mean (a) the willful and continued failure by Recipicnt to perform substantially Recipient's assigned
duties with the Employer (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for
substantial performance is delivered to Recipient by the Employer which specifically identifies the manner in which Recipient has not
substantially performed such duties, (b) willful commission by Recipient of an act of fraud or dishonesty resulting in economic or financial
injury to the Company or Employer, (c) willful misconduct by Recipient that substantially impairs the business or reputation of the
Company or Employer, or (d) willful gross negligence by Recipient in the performance of his or her duties.
3.7 For purposes of this Agreement, a "Change in Control" of the Company shall mean the occurrence of any of the
following events:
(a) The consummation of
( I ) any consolidation, merger or plan of share exchange involving the Company (a "Merger") as a result
of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors ("Voting
Securities") immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting
Securities of the surviving corporation ora parent corporation of the surviving corporation immediately afterthe Merger, disregarding any
Voting Securities issued to or retained by such holders in respect of securities of any other party to the Merger; or
(2) any consolidation, merger, plan of share exchange or other transaction involving Northwest Natural
Gas Cornpany ("NW Natural") as a result of which the Company does not continue to hold, directly or indirectly, at least 50% of the
outstanding securities of NW Natural ordinarily having the right to vote for the election of directors; or
(3) any sale, lease, exchange or other transfer (in one transaction or a series ofrelated transactions) of
all, or substantially all, the assets of the Company or NW Natural;
Exhibit No. I
J. Palfreyman, Dl
Gem State Wat6r Company
Page 198 of 210
6
(b) At any time during a period of two consecutive years, individuals who at the beginning of such period
constituted the Board ("lncumbent Directors") shall cease for any reason to constitute at least a majority thereof; provided, however, that
the term "lncumbent Director" shall also include each new director elected during such two-year period whose nomination or election was
approved by two-thirds of the Incumbent Directors then in office; or
(c) Any person (as such term is used in Section 14(d) ofthe Securities Exchange Act of 1934, other than the
Company or any employee benefit plan sponsored by the Company or NW Natural) shall, as a result of a tender or exchange offer, open
market purchases or privately negotiated purchases from anyone otherthan the Company, have become the beneficial owner (within the
meaning of Rule I 3d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing twenty percent
(20o/o) or more of the combined voting power of the then outstanding Voting Securities.
3.8 For purposes of this Agreement, "Shareholder Approval" shall be deemed to have occurred if the shareholders of
the Company approve an agreement entered into by the Company, the consummation of which would result in the occurrence of a
Change in Control.
3.9 For purposes of this Agreement, "Good Reason" shall mean the occurrence after Sharcholder Approval, if
applicable, or the Change in Control, of any of the following circumstances, but only if (x) Recipient gives notice to Employer of
Recipient's intent to tenninate employment for Good Reason within 30 days after the later of ( l ) notice to Recipient of such
circumstances, or (2) the Change in Control, and (y) such circumstances are not fully corrected by the Employer within 90 days after
Recipient's notice:
(a) the assignment to Recipient of a different title, job or responsibilities that results in a decrease in the level of
Recipient's responsibilrty; provided that Good Reason shall not exist if Recipient continues to have the same or a greater general level of
responsibility for the fonner Employer operations after the Change in Control as Recipient had prior to the Change in Control even though
such responsibilities have necessarily changed due to the former Employer operations becoming a subsidiary or division of the surviving
company;
(b) a reduction by the Employer in Recipient's base salary as in effect immediately prior to the earlier of
Shareholder Approval, if applicable. or the Change in Control;
(c) the failure by Employer to continue in effect any employee benefit or incentive plan in which Recipient is
participating immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control (or plans providing Recipient
with at least substantially similar benefits) other than as a result of the normal expiration of any such plan in accordance with its terms as in
effect immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control, or the taking of any action, or the
failure to act, by Employer which would adversely affect Recipient's continued participation in any of such plans on at least as favorable a
basis to Recipient as is the case immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control or which
would materially reduce Recipient's benefits in the future under any of such plans or deprive Recipient
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 199 of 210
7
of any material benefit enjoyed by Recipient immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in
Control:
(d) the failure by the Employer to provide and credit Recipient with the number of paid vacation days to which
Recipient is then entitled in accordance with the Employer's normal vacation policy as in effect immediately prior to the earlier of
Shareholder Approval, if applicable, or the Change in Control; or
(e) the Employer's requiring Recipient to be based more than 30 miles from where Recipient's office is located
immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control except for required travel on the
Employer's business to an extent substantially consistent with the business travel obligations which Recipient undertook on behalf of the
Employer prior to the earlier of Shareholder Approval, if applicable, or the Change in Control.
4. Dividend Equrvalent Cash Award. The amount of the Dividend Equivalcnt Cash Award shallbe dctermincd by multiplying the
number of Performance Shares deliverable to Recipient as determined under Sections 2 and 3 by the total amount of dividends paid per
share of the Company's Common Stock for which the dividend record date occurred after the beginning of the Award Period and before
the date of delivery of the Performance Shares.
5. Certification and Pavment. At the regularly scheduled meeting of the Committee held in February of the year immediately
following the final year of the Award Period (the "Certification Meeting"), the Committee shall review the Company's results for the
Award Period. Prior to the Certification Meeting, the Company shall calculate the number of Performance Shares deliverable and the
amount of the Dividend Equivalent Cash Award payable to Recipient, and shall submit these calculations to the Committee. At or prior to
the Certification Meeting, the Committee shall certifl in writing (which may consist of approved minutes of the Certification Meeting) the
number of Performance Shares deliverable to Recipient and the amount of the Divrdend Equivalent Cash Award payable to Recipient.
Subject to applicable tax withholding, the amounts so ceftified shall be delivered or paid (as applicable) on a date (the "Paynent Date")
that is the later of March I , 2022 or five business days following the Certification Meeting, and no amounts shall be delivered or paid pnor
to certification. No fractional shares shall be delivered and the number ofPerformance Shares deliverable shall be rounded to the nearest
whole share. Notvrithstanding the foregoing, if Recipient shall have made a valid election to defer receipt of Performance Shares or the
Dividend Equivalent Cash Award pursuant to the terms of Northwest Natural's Deferred Compensation Plan for Directors and
Executives (the "DCP"), payment of the award shall be made in accordance with that election.
6. Tax Withholdrne.Recipient acknowledges that, on the Payment Date when the Performance Shares are issued or otherwise
delivercd to Recipient, the Value (as defined below) on that date of the Performance Shares (as well as the amount of the Dividend
Equivalent Cash Award) will be treated as ordinary compcnsation income for federal and state income and FICA tax purposes, and that
the Ernployer will be required to withhold taxes on these income amounts. To satisfy the required withholding amount, the Employer shall
first withhold all or part of the Dividend Equivalent Cash Award, and if that is insufficient. the Employer shall wrthhold the number of
Performance Shares having a Value equal to the remaining withholding amount. For
Exhibit No. I
J. Palfreyman, Dl
Gem State Water Company
Page 200 of 210
8
pulposes of this Section 6, the "Value" of a Performance Share shall be equal to the closing market price for Company Common Stock
on the last trading day preceding the Payment Date. Notwithstanding the foregoing, Recipient may elect not to have Performance Shares
withheld to cover taxes by giving notice to the Company in writing prior to the Payment Date, in which case the Performance Shares shall
be issued or acquired in the Recipient's name on the Payment Date thereby triggering the tax consequences, but the Company shall retain
the certifrcate for the Performance Shares as security until Recipient shall have paid to the Company in cash any required tax withholding
not covered by wittrholding of the Dividend Equivalent Cash Award.
7. Sale of the Companv. lf there shall occurbefore the Payment Date a merger, consolidation or plan of exchange involving the
Company pursuant to which the outstanding shares of Common Stock of the Company are converted into cash or other stock, securities
or property, or a sale, lease, exchange or other transfer (in one transaction or a series ofrelated transactions) ofall, or substantially all, the
assets of the Company (either, a "Cornpany Sale"), then either:
7 .1 the unvested Performance Shares shall be converted into re stricted stock units for stock of the sun iving or acquiring
corporation in the applicable transaction, with the amount and type of shares subject thereto to be conclusively determined by the
Committee, taking into account the relative values of the companies involved in the applicable transaction and the exchange rate, if any,
used in determining shares of the suruiving colporation to be held by the former holders of the Company's Common Stock following the
applicable transaction, and disregarding fractional shares; or
7.2 a pro-rated number of Performance Shares and the related dividend equivalent cash payment shall be delivered
simultaneously with the closing of the applicable transaction such that Recipient will participate as a shareholder in receiving proceeds from
such transaction with respect to those shares. The number ofPerfonnance Shares to be delivered as a pro-rated award under this Section
L2 shall be determined by multiplying the Target Share Amount by a fraction, the numerator of which is the number of days of the Award
Period elapsed prior to the closing of the transaction and the denominator of which is the number of days in the Award Period.
8. Changes in Capital Structure. If the outstanding Common Stock of the Cornpany is hereafter increased or decreased or
changed into or exchanged for a different number or kind ofshares or other securities ofthe Company by reason ofany stock split,
combination of shares or dividend payable in shares, recapitalization or reclassification, appropriate adjustment shall be made by the
Committee in the number and kind of shares subject to this Agreement so that the Recipient's proportionate interest before and after the
occurrence of the event is maintained.
9. Recouprnent On Misesldual
9.1 If at any time before a Change in Control and within three years after the Payment Date, the Committee determines
that Recipient engaged in any Misconduct (as defined below) during the Award Period that contributed to an obligation to restate the
Company's financial statements for any quafter or year in the Award Period or that otherwise has had (or will have when publicly
disclosed) an adverse irnpact on the Company's common stock price,
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 2O'l ol 21O
9
Recipient shall repay to the Company the Excess LTIP Compensation (as defined below). The term "Excess LTIP Compensation" means
the excess of (a) the number of Performance Shares and the amount of the Dividend Equivalent Cash Award as originally calculated and
certified under Section 5 of this Agreement, over (b) the number of Performance Shares and the amount of the Dividend Equivalent Cash
Award as recalculated (l) for the TSR Modifier, assuming that the average of the closing market prices of the Company's common stock
for the period from October l, 2021 to December 3l , 2021 was an amount determined appropriate by the Comrnittee in its discretion to
reflect what the Company's common stock price would have been if the restatement had occurred or other Misconduct had been
disclosed prior to October 1,2021, and (2) for the EPS Payout Factor and the ROIC Perfonnance Threshold, based on the Company's
financial statements for all years of the Award Period as restated. The Committee may, in its sole discretion, reduce the amount of Excess
LTIP Compensation to be repaid by Recipient to take into account the tax consequences ofsuch repayment or any other factors. Ifany
Performance Shares included in the Excess LTIP Compensation are sold by Recipient prior to the Company's demand for repayment
(including any shares withheld for taxes under Section 6 of this Agreement), Recipient shall repay to the Company 100% of the proceeds
ofsuch sale or sales. The return ofExcess LTIP Compensation is in addition to and separate from any other reliefavailable to the
Company due to Recipient's Misconduct.
9.2 "Misconduct" shall mean (a) willful commission by Recipient of an act of fraud or dishonesty resulting in economic or
financial injury to the Company, (b) willful misconduct by Recipient that substantially impairs the Company's business or reputation, or (c)
willful gross negligence by Recipient in the performance of his or her duties.
9.3 lf any portron of the Performance Shares or the Dividend Equivalent Cash Award was defered under the DCP, the
Excess LTIP Compensation shall first be recovered by canceling all or a portion ofthe amounts so deferred under the DCP and any
dividends or other earnings credited under the DCP with respect to such cancelled amounts. The Company may seek direct repayment
from Recipient of any Excess LTIP Compensation not so recovered and may, to the extent permitted by applicable law, offset such
Excess LTIP Compensation against any compensation or other amounts owed by the Company to Recipient. In particular, Excess LTIP
Compensation may be recovered by offset against the after-tax proceeds of defened cornpensation payouts under the DCP, Northwest
Natural's Executive Supplemental Retirement lncome Plan or Northwest Natural's Supplemental Executive Retirement Plan at the times
such defened compensation payouts occur under the terms of those plans. Excess LTIP Compensation that remains unpard for more than
60 days after demand by the Company shall accrue interest at the rate used from time to time for crediting interest under the DCP.
10. Approvals. The obligations of the Company under this Agreement are subject to the approval of state and federal authorities
or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or
applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the award under this Agreement. The foregoing notwithstanding, the Company
shall not be obligated to issue or deliver Common Stock under this Agreement if such issuance or delivery would violate applicable state
or federal law.
t0
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 202 ol 210
I l. No Riqht to Employment. Nothing contained in this Agreement shall confer upon Recipient any nght to be employed by the
Employer or to continue to provide services to the Employer or to interfere in any way with the right of the Employer to terminate
Recipient's services at any time for any reason, with or without cause.
12. Miscellancous.
12.1 Entire Agreement: Amendment. This Agreement constitutes the entire agreement of the parties with regard to the
subjects hereof and may be amended only by written agreement between the Company and Recipient.
12.2 Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registered or certified
mail, return receipt requested, postage prepaid, addressed to the Company, Attention: Corporate Secretary, at its principal executive
offices, or to Employer, Attention: Corporate Secretary, at its principal executive offices, or to Recipient at the address of Recipient in the
Company's records, or at such other address as such party may designate by ten (10) days' advance written notice to the other party.
12.3 Assignment; Rights and Benefits. Recipient shall not assign this Agreement or any rights hereunder to any other
party or parties without the prior written consent of the Company. The rights and benefits of this Agreement shall inure to the benefit of
and be enforceable by the Corrpany's successors and assigns and, subject to the foregoing restriction on assignment, be binding upon
Recipient's heirs, executors, administrators, successors and assigns.
12.4 Further Action. The parties agree to execute such further instruments and to take such further action as may
reasonably be necessary to carry out the intent ofthis Agreement.
12.5 Applicable Law; Attorneys' Fees. The terms and conditions of this Agreement shall be governed by the laws of the
State ofOregon. ln the event eitherparty institutes litigation hereunder, the prevailing party shall be entitled to reasonable attomeys' fees
to be set by the trial court and, upon any appeal, the appellate court.
I2.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original.
1l
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 203 of 210
tN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
By
Title
Recipient
t2
(Back To Top)
Section 9: EX-21 (EXHIBIT 21)
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 Corporationr')Oregon
NWN Gas Reserves LLC(')Oregon
Gill Ranch Storage, LLC Oregon
NW Natural Energy, LLC Oregon
NW Natural Gas Storage, LLC Oregon
NNG Financial Corporation Oregon
Trail West Holdings, LLC Delaware
Trail West Pipeline, LLC Delaware
BL Credit Holdings, LLC Delaware
Northwest Biogas, LLC Oregon
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 204 ol 210
KB Pipeline Company Oregon
NW Natural Water Company, LLC
NW Natural Water of Oregon, LLC
NW Natural Water of Washington, LLC
Cascadia Water, LLC
NW Natural Water of ldaho, LLC
Gem State Water Company, LLC
Falls Water Co., lnc.
Salmon Valley Water Company
(') Subsidiary of Northwest Natural Gas Company
Oregon
Oregon
Washington
Washington
ldaho
ldaho
ldaho
Oregon
@ct-Is_Ies)
Section 10: EX-23.A (EXHIBIT 23.A)
Exhibit 23a
CONSENT OF INDEPENDENT RECISTERED 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-
100885-01,333-139819-0t, 333-221347-01 and333-227687) and Form S-3 (No. 333-227662) ofNorthwest Natural Holding Company ofour report dated
March l,2019 relating to the financial statements. financial statemenl schedules and the effectiveness ofinternal control over financial reporting, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Portland. Oregon
March l,2019
(Aact fo fop)
Section 11: EX-23.8 (EXHIBIT 23.B)
Exhihit 2-1b
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOTINTING 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 I , 201 9 relating to the financial statements and financ ial statement schedule, which appears in
this Form l0-K.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March l,2019
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 205 of 210
(Back To Top)
Section 12: EX-31.A (EXHIBIT 31.A)
EXHIBIT 31a
CERTIFICATION
l, David H. Anderson, certify that:
1. I have reviewed this annual reporl 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-1 5(e) and I 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules I 3a-1 5(f ) and 1 5d-'l 5(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 ofthe registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe 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
(Back To Top)
Section 13: EX-31.B (EXHIBIT 31.8)
Exhibit No. I
J. Patfreyman, fixHlBlr 31b
Gem State Water Company
Page 206 of 210
CERTIFICATION
l, Frank H. Burkhartsmeyer, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31 , 20'18 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 I 3a-1 5(e) and 1 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 1 3a-1 5(f) and 1 5d-1 5(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 ofthe registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe 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 significanl role in the registrant's internal control over
financial reporting.
Date: March 1,2019
/s/ Frank H. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
(gack To Top)
Section 14: EX-31.C (EXHIBIT 31.C)
EXHIBIT 31c
CERTIFICATION
l, David H. Anderson, certify that:
I have reviewed this annual report on Form 10-K for the year ended December 31, 20'18 of Northwest Natural Holding kfiflBp1io. f
J. Palfreyman, Dl
Gem State Water Company
Page 207 ot 210
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 ofoperations and cash flows ofthe registrant as of, and for, the periods presented in this report;
4. The registranl's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 1 3a-1 5(e) and 1 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules I 3a-1 5(f) and I 5d-1 5(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 ofthe disclosure controls and procedures, as ofthe end ofthe 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
BcgL_To Top)
Section 15: EX-31.D (EXHIBIT 31.D)
EXHIBIT 31d
CERTIFICATION
I, Frank H. Burkhartsmeyer, certify that:
1 . I have reviewed lhis annual report on Form 10-K for the year ended December 31 , 201 B of Northwest Natural Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or oinit 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;=rhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 208 of 210
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 '1 3a-1 5(e) and 1 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 1 3a-1 5(f) and 1 5d-1 5(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 ofthe 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):
(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 'l , 2019
/s/ Frank H. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
@\_rorop.)
Section 16: EX-32.A (EXHIBIT 32.A)
EXHIBIT 32a
NORTHWEST NATURAL GAS COMPANY
Certificate Pursuant to Section 906
of Sarbanes - Oxlev Act of 2002
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:
'l . The Company's Annual Report on Form '10-K for the year ended December 31 ,2018 (the Report) fully complies with the requirements of section '13
(a) or 15(d) of the Securities Exchange Act of '1934, as amended; and
2. lnformation contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
lN 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
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 209 of 210
(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
/s/ Frank H. Burkhartsmever
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.
(Back To Top)
Section 17: EX-32.8 (EXHIBIT 32.8)
EXHIBIT 32b
NORTHWEST NATURAL HOLDING COMPANY
Certificate Pursuant to Section 906
of Sarbanes - Oxlev 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:
1 . The Company's Annual Report on Form 10-K for the year ended December 31 , 2018 (the Report) fully complies with the requirements of section 13
(a) or 15(d) ofthe Securities Exchange Act of 1934, as amended; and
2. lnformation contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
lN WITNESS WHEREOF, each of the undersigned has caused this instrument to be executed this 1st day of March 20'19.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmever
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 Aclof 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.
(Back To Top)
Exhibit No. 1
J. Palfreyman, Dl
Gem State Water Company
Page 2'10 ol 210
EXHIBIT 2
GEM STATE WATERCOMPANY
NW Natural Holdings' Organizational Chart
-This Exhibit contains trade secrets or confidential
material and is filed separately -
(l PAGE)
EXHIBIT 3
GEM STATE WATERCOMPANY
Asset Purchase Agreement and Addendum to Asset
Purchase Agreement
-This Exhibit contains trade secrets or confidential
material and is filed separately -
(54 PAGES)
ATTACHMENT 2
GEM STATE WATERCOMPANY
DIAMOND BAR'S CIJRRENT TARIFF
0l: i0;r7 2a€a439iOO
RuG.3A-?q16 ltz5on AVONDaLE CONSTR INC NO.449 P.1
i.4EaEl1i ED
DilMOND BAR ESTATES WATER CO illi ,:,:.r3 30 pli 2: L5
PO Bo)( 1870 : . ,r.,rii-ij
HAyDEN ID g3gBS r- ':.1)i,ii,ilSSi0i{
208 565 9200
208 665 9300 F$(
.bl* -u/- r{-o i
DATE 9 - 3o -.1b/6
THE OFFICE OF:Gall,.; ilf,/,fu)
FAX:
ATTN;
SENT BY:
SHEETS T FOLLOW COVER SrIEET:tu
COMMENTS:
ATTACHMENT 2 TO APPLICATION
GEM STATE WATER
Page 1 of 23
M.-.i a4 - srd r)
01:r{:09 @-30-2016
frUG3A.?AL6 1:5@N RVONDALE CCXISTR II.IC NO.B51 P.Z
DIAMOND BAR ESTATES WATER COMPA}.IY
Sheef 1 Revision 2
Replaces AII Previous S:heek
Basic Charge
$41.00 per billing petiod
lncludes an allowance for the first 5,500 gallons of usage during the billing period
Commodity Charge
$ 1.16 per 1,000 gallons in excess of 5,500 gallons
NOTE:
Bills for water seMce will be rendered monthly and are payable within fifteen (15)
days of the billing date. The Basic Charge is the rninimurn charge forthe billing
period. For customers who have separate metens for domestic and inigation usage,
the usage for both meters wilt be added together before applying the 5,500 gallon
allowance.
lssued August29,20't6
EfiEc.tive August 30, 2016
OrderNo33578
Diamond Bar Eatates Water Gompany
ATTACHMENT 2 TO APPLICATION
GEM STATE WATER
Page 2 of 23
Issued by
I
METERED WATER RATEq
Ol:1O:17 p.m, 09-30-fOtd 3 2@39300
?UG.3A-ZA!A 7:ZTPY: AVO\DALE CONSTR INC
DIAMOND BAR ESTATES WATER COMPAI.IY
Sheet2 Revision 2
Replaees All Previous Sheeb
NO.@49 P.3
Reconnec{ion ChaEq:
$15.00 - when reconnection is requested during normal business hours
$30.00 - when reconnection is requested for otherthan nonna! husiness hours
For purposes of reconnection, nonnal business hours are defined as between 8:00
AM to 5:00 PM, Mondaythrough Friday, excluding holidays.
Applies when a customer requests reconnection following disconnection of seMe
for non-paymenl
Does not apply to seasonal insEllation of inigation rneters. Does not apply to
situations where the customer requests disconnection to make repairs or prevent
water damage to the cusbmer's property. Also does not apply when service was
d isconnected by the Compa ny for its co nvenience.
lnsufficient Funds Chargq $20.00
Applies when a customertenders paymentfor utility servioe with a dishonored check
or rnakes an electronic payment on an acmunt with insuff'cient funds.
Late Payment Fee: One percent (1%)
Applies to the past due balance owing at the time of the next billing-
krued August29,20'16
EffectiYe August 3ll, 2016
Order No.3578
Diamond Bar Estates lfihterCompany
ATTACHMENT 2 TO APPLICATION
GEM STATE WATER
Page 3 of 23
lssued by
NO N-RECU RRING- CHARGES.
0l:tO:5i p.h. B-30-2016 f
CUG.3A.E@16 |IZ?PY EVONDf,LE CONSTR INC N0. a49 P.?
DIAITJ|OND BAR ESTATES WATER COMPAI.IY
Sheet 3 Revision 1
Replaces All Previous Sheets
NEW CUSTOMER CONNECTION CHARGES
For a first time connection to the Diamond Bar Estates Water Cornpany system
when an existrrng Service line and meter base are already in place on the proper{y,
the cost is $335,
lf there is no service line tap to the Gompant's water rnains or meter box in place on
the pmperly the cost is $2500.
When the installation of a new servlce line requires the C,ompany to bore a line
under a road, all additional costs will be charged to the customer on a time and
materials basis. Nerv customers may, at their option, hire a Diarnond Bar Estates
Water Company appro/ed independent confactorto perfonn the road bore and
connection. The Company wfll reguire such cbnhaqtor to show proof of bonding,
licensing and lnsurance and have at leas'tfrve (5) years of e+erience at hottapping
water lines. Diamond Bar Estates WaterCornpanfs Water lvlasterwill inspectand
approve all the work being performed to insure compliance vrtth the Company s
instaltation requirements.
lssued August29, 2016
Effective .iiugust 30, 20{6
Order ilo. 33578
lssuad by Diamond Bar Estates Water Gompany
Oruner
ATTACHMENT 2 TO APPLICATION
GEM STATE WATER
Page 4 of 23
Office of the Secretary
Service Date
August 29, 20l6
BEFORE TTM IDAHO PUBLTC UTILITIES COMMISSION
IN TIIE MATIER OT DIAMOND BAR
ESTATE,S WATER COMPANY'S
APPLICATION FOR AUTEORITY TO
INCREASE ITS RATE.S AND CHARGES FOR
WATER SERVICE IN TIIE STATE OT
IDAHO
casE No. DIA-W-rs-ol
0RDERNO.33s78
In December 2015, Diamond Bar Estates Water Company filed a general rate case
Application to increase its rates for water service by about 797o, wbich would produce about
$20,910 more in annual revenue than the prior year. Diamond Bar has not had a rate increase
since its last rate case in 2007. Order No. 3M55.
The Commission issued a Notice of Application, Notice of Modified Procedure, and
Order suspending the effective date until July l, 2016. .Order No. 33452. Commission Staff
conducted a public workshop on April 19,2016, that was attended by more than 30 Diamond Bar
customers. Staff conducted an audit and filed written cornments summarizing its findings and
recommendations. Diamond Bar filed a timely reply. On June 7, 20L5, the Commission
conducted a public hearing where numerous customers appeared - six of whom gave comments
for the record- The Commission received more than 18 written comrnents.
In light of issues raised by customers, the Commission identified a number of
questions unresolved by the existing record. Accordingly, the Commission firrther suspended the
Application's effective date to August 30,2A16 and directed the Company to provide responses
to six questions. The Company submined responses, and Staff filed an addendum to its
comrnents. The Company followed with a brief reply.
Upon our thorough review of the record, including cormrents by Staff and the
Company, as well as the many comments by Diamond Bar's customers, we now issue the
following Order allowing an overall revenue increase of 46.37Vo.
BACKGROI]ND
Diamond Bar Estates Water Company is a water corporation providing water service
to the public within the State of Idaho, Idala Code $$ 61-124, 6L-175, and is operating as a
public uriliry. Idaho Code $ 61-129. The Commission has jurisdiction over this mattcr as
ATTACHMENT 2 TO APPLICATION
GEM STATE WATER
Page 5 of 23
)
)
)
)
)
)
)
I
oRDERNO.33578
authorized by Title 6i of the Idaho Code, and more particularly ldaho Codz $$ 61-501, 6l-502,
61-503, 61-520, and 6I-523.
The Commission granted Diamond Bar a Certificate of Public Convenience and
Necessity in 2003 to serve the Diamond Bar Estates subdivision. Order No. 29247. Diamond
Bar's service tenitory was expanded in 2004 to include the Boekel Estates Subdivision- Order
No.29556.
A. System Description
Water provided by Diamond Bar comes from two nearby wells - an operating well,
and a backup well Order No. 30455 at 2. Diamond Bar provides water service to M customers
near Rathdnrm in Kootenai County, Idaho. Most of Diamond Bar's customers maintain Iots of
about five acres. Average annual water use per customer typically exceeds 300,000 gallons-
The Company's current rate structure is comprised of wo parts: (l) a minimum
rnonthly charge of $29.00 with a monthly volume allowance of 5,500 gallons; and (2) a single-
block commodity charge of $0.80 per 1,000 gallons for consumption over 5,500 gallons.
B. CunentApplieation
Diamond Bar's Application requesa authority to: (l) increase water rates by 79.397o;
and (2) increase its new-customer meter-installation fee from $310 to $475. The Company
proposes raising the monthly minimum rate from $29.00 for the fust 5,500 gallons of water to
$52.02 per rnonth, and raising the commodity rate for usage above 5,500 gallons per month from
$0.80 per 1,000 gallons (above the initial 5,500 gallons) to $1.44 per 1@0 gallons. Proposed
Amended Tariff. Diamond Bar proposes a rate base of $40,398, reflecting accumulated
depreciation of $12,669, but also including a working capital allowance of $4,679 - or 1/8 of the
Company's operation aod maintenance expenses. Applicati on at !-Z;Exh. 1.
According to Diamond Bar, the Company has been operating at a loss, and the
proposed increases, ifapproved, would enable it to recover various expenses. Application at 2.
The biggest expense that Diamond Bar seeks to recover is for costs incurred from multipie pump
failures. Id The Company also asks to recover costs of "bookkeeping and customer-service
related services,".and recovery for expenses from "water testing, meter reading, pump service
and on-call duties." Id.iF-xh.2. In addition, the Company asks to recover rate case expenses for
this filing, and the cost of electricity to run its pumps. Id.
ATTACHMENT 2 TO APPLICATION
GEM STATE WATER
Page 6 of 23
1
oRDERNO.33s78
CUSTOMER COMMENTS
The Commission received about 22 written commetrts from customers, although a
few customers filed more than one comment. AII opposed the proposed rate increase- Over 30
customers attended Staffls workshop in April 2016, asking questions about the process,
expressing concerns about the proposed increases, and suggesting iueas for investigation by
Staff- At least ten customers attended the public hearing on June 7,20L6; six customers offered
testimony.
The Commission appreciates the customers' participation in Diamond Bar's rate case.
Customer involvement enables the Commission to get a more complete picture of the issues from
a critical perspective - that of the individuals directly affected by the Company's service. It is
clear to the Commission, both from the detailed written submissions and the thoughtful
testimony provided at the public hearing, that customers put a great deal of time and effort into
their comments. Those efforts have not gone unnoticed. We address the following areas of
concem expressed by customers.
7. Eardship duc to $xed income and saggestcil akernatives
Several customers commented that they or their neighbors were retired, on fxed
incomes, or had not received a raise in two or more years. One customer questioned how the
proposed increases compfie to the national consumer price index (CPD and national labor cost
increases. More than one assened that Diamond Bar's rates are already higher than most other
arca water companics and would be far above other area companies with the rate increase. Many
expressed that, with the proposed rate hike, tbey or others in the community would be unable to
afford water sufficient to maintain their five-acre properties, thus causing everyone's property
values to plummet.
A few customers suggested gradual step increasas nther than the proposed large,
immediate and permanent increase. Another suggestion was to fund needed improvements
through a levy, temporary surcharge, or special assessment, rather than by raising rates.
Commission findings: These customer concerns go to our duty to ensure that rates
are just and reasonable, under ldaho Code S 61-502. This obligation must be balanced with our
duty - of equal importance - to ensure that rates are sufficient to ensure adequate service. Idaho
Codz g 51-502. The Idaho Supreme Court has held, "It is the dury of the Cormfssion not only
to fix just and reasonable, nondiscriminatory rates, but to see that adequate service is fumished
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J
oRDERNO.33578
and in fixing such rates to allow the utility fumishing the service to make a just and reasonable
profit or return on its investment." Application of Pacific Tel. & Tel. Co-,71 Idatro 476,480,
233 P.2d rA24, t026 (1951).
While we are mindful of the hardships that fixed-income customers may face from a
rate increase, we must consider those concerns in concert with the need to ensure adequate, safe,
and reliable serryice- See ldaho Code $$ 6l-3U2,6L-502. Thus, our goal is to minimize negative
impacts to customers - whether in rate increases, surcharges, or othendse - but to also ensure
the Company's ability to provide adequate, safe and reliabie service. Our balancing of these
competing concerns is implicit in our findings herein.
2. Concerns about ihe Conpany's managernent
Several custorners raised concerns that the alleged need for such a large rate increase
is due to Company mismanagemenl One customer suggested that money should have been set
aside for replacement and maintenance of the water system over the years. Others complained
that Company owner Robert Turnipseed's reluctance to embrace technology has caused
inefficiencies for which customerc pay the cost.
A few customers expressed frustration that they were asked multiple times to stop
irrigating due to systern outages. one customer noted that a few outages caused the customer's
re-circulating pumps to fail, requiring their replacement at a cost of $400-$500 each. The
customer asked Robert Tumipseed to alert him in the event of an outage so he could avoid
having to replace his re-circulating pump, and Mr. Turnipseed did alert him once. However, the
next time there was an outage, the customer was not notified, and he lost another pump- The
customer stated that when he complained, Mr. Tumipseed's son was very mde, saying he could
not be bothered, and hanging up on the customer. More than one customer from the Diamond
Bar Estates Home Owner's Association suggested that the Company should send a group text to
alert customers ofany outage, and to alert them once the system is again fully operational.
At hearing, at least one customer expressed concem about the Cornpany's promptness
in alerting customers of contaminations at the wells, prompting one of our inquiries in Order No.
33547. The Company responded that it had provided adequate notice to customers about the
presence of coliform in the water n 2012, and that retesting following the incident showed the
absence of coliform thereafter. Company Response. Staff determined that Diamond Bar
complied with IDEQ's customer notification and testing requirements under IDAPA 58.01.08,
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4
ORDERNO.33578
concerning the detection of coliform in the Company's wells in 2012, arrd to date. Staff
Addendum at 7 (noting the Company sent a letter to customers within six days).
Commission findtnss: Sfe find the customers' suggestion that the Company provide
a text alert service to be innovative and reasonable. We encourage the Company to work with
customers to devise a process through which custorners can provide cell phone numbers to the
Company to receive such alerts, both about a known outage and once the outage has been
resolved. We further recommend that customers contact Commission Staff via the complaint
hotline if customers and the Company are unable to come to mutual terms for establishing such a
system.
As to concerns about the Company's management, we find insufficient evidence that
the Company's use or non-use of available technologies has caused undue costs to customers.
We note that even if there are advanced technologies that could achieve cost-saving efficiencies,
there are costs to obtaining and learning to properly use them - costs which may offset the gains.
However, we encouage the Company to consult with Commission Staff about ways to reduce
costs.
Regarding the water contamination incident, we find that the Company complied with
DEQ requirements regarding customer notification, and water testing and retesting. According
to IDEQ, coliform - the bacteria detected in Diamond Bar's system in 2012 - "are generally not
harmful themselves . . . [but] are bacteria which are naturally present in the environment and are
used as an indicator that otber, potentially-harmful bacteria may be prcsent." Attachment A to
Staff Addendum, at 2. Diamond Bar pursued the proper treaEnent "to chlorinate and flush the
reservoir and distibution system." Staff Addendum at 7. IDEQ requires a company to issue
public notice "as soon as possible, at least within 30 days." Attachment A to StaffAddendum, at
1. We frnd that Diamond Bar's notices to customers by mail, within a weelg adhered to IDEQ's
requirements-
3. Pumpfailures
The most talked-about concern was the many failures of the Company's main well
pump in the last several years. Customers inquired whetber the Company had taken sufEcient
precautions to avoid the pump failures, such as ensuring surge protection or installing lightning
rods. Also, customers questioned the purchase of a 50 horse power (hp), then a 50 hp pump,
despite a recommendation by the pump installer in 1994 to install a 25 hp pump. Several
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oRDERNO.33578
eustomers asked if the pump was inadequately insured, if a warranty was properly pursued, and
if other parties were otherwise liable for inferior workmanship or faulty electrical supply, so as to
avoid the need for such a drastic rate increase. Customers expressed concern that the Company
has not done enough to ensue against another pump failure. Specifically, customers noted that
the Company has yet to install a "soft-start" for the well pump, as suggested by the engineering
firm that the Company hired to investigate the pump failure. These concerns, which were the
subject of inquiry in Order No- 33547, will be addressed below.
4. Rolc of the Commission
Finally, a few customers expressed concern whether the Commission would
adequately look out for customers' interests. One customer noted with suspicion ttrat the
Company's consultant was once a Commission employee. Still, others expressed appreciation
for the efforts by Commission Staff to investigate the matter, and for the Commissioners who
conducted the public hearing in Rathdrum, and who stayed for an informal question and answer
session after the hearing concluded.
The Staff workshops are intended to explain what a rate case is, how the Commission
and Staff evaluate a case, and how customers can participate. We are encouraged that so many
customers attended Staffs workshop in this case. As Staff explained there, our role is to
evaluate the evidence and information submitted by Staff, the Company, and customers, and to
determine just, reasonable, and adequate rates, among other issues raised in the Company's case.
See ldaho Code I 6l-502. We now address the Company's and Stalfs proposals, and the
customers' remaining issues.
RSYENUE REQTIIREMENT
The Company reguested a rate base of $40,398, a return on equityl of I2?o, annual
expenses of $29,665, and a revenue requirement of $47,248- The Company proposed using a
test year of 2OL4, with which Staff agreed. Staff recomrnends annual expenses of $32,628, a rate
base of $32,945, a return on equity of L270, and a revenue requirement of $37,704. Staff
proposes adjustments to the Company's expenses, plant in service, and revenue.
A. Annual Expenses
Staff recommended adjusting the Company's proposed total expenses of $40,999,
down to $32.628- Staffs proposed adjustrnents concem: (1) pump repairs and deferral
I Because the Company has no debt, its Rate of Return is equal to its Return on Equity, thus the terms are used
interchangeably-
6
oRDER NO. 33578
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arnortization; (2) rate case amortization; (3) water testing expenses; (4) power purchase
expenses; and (5) salaries.
1. Pump re,pqin. Staff reconunended adjustments related to expenses from the
Company's well pump failures. The well pump failures were the issue of most concern to
customers in their written comrnents and as expressed at the customer workshop and public
hearing.
Staff investigated the pump failures and norcd that there, have been five since the last
rate case in2007. Staff indicated the main pump was replaced in 2010, 2012,2014, and twice in
20L5. Comments at 5. The 2010 pump replacement is not at issue in this case. Insurance
covered much of the pump replacement costs from the ?DLZ failure, which was attributed to a
nearby lightning strike. /d. Insurance covered a lesser portion of the 2014 failure. /d When the
pump failed again iu June 2015, the Company did not file an insurance clainu but retained AEI
Engineering Inc. to investigate the cause-
On Staffls examination of the record, Staff believes the primary cause of tbe pump
motor failures was o'that the 75 kWA ransformer was grossly undersized for the
simultaneous operation and starting of the water system's four pumps." Staff Addendum at 4.
Staff noted that the transformer, which supplies powff to the well house, was provided by
Kooteaai Electric Cooperative (KEC), not Diamond Bar. Id. Using the National Electric Code,
Staff calculated that the transfomrer should have been sized to supply at least 96 kWA when
Diamond Bar's water system was first constructed in 1995, with a 50 hp well pump. Id. at 4-5.
However, at that time, ICEC provided a 75 kWA transformer. Id After the Company installed a
60 hp pump in 2004, the transformer should have been sized to supply at least 109 kWA. Id.
Staff determined that a new pad transformer was installed in late 2015, but Staff could not verify
that it is large enough to meet pump house requirements. Id. at 5. Staff thus recommended that
we direct the Company to ensure that I(EC has replaced the 75 kWA transfonner with a
properly-sized transformer. Id. at 8.
Staff also determined that the transformer sizing problem was exacerbated by the
transformer's lack of compatible phase configurations- .Id. at L5, citing AEL Report (Attacbment
C to StaffComments). Staff recommended that the Company replace its Delta tlpe service drop
with a Wye tlpe service entry that is compatible with I(EC's Wye transformer, and complies
with KEC's current engineering guidelines. Id. at 8. To prevent future pump motor failures,
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oRDERNO.33578
Staff recommended that the Company install a circuit breaker that would simultaneously
disconnect all phases when any one phase is disconnected.2
As recently as August 2015, KEC's David Katrly reported that trCEC's "transformer
capaclty is good." Exhibit 1 to Company Response; Staff Addendum at 5. According to Staff,
"an engineer or journeyman electricial farniliar with the National Electic Code should have
determined that the transformer was grossly undersized." Staff Addendum at 5. Staff concluded
that Diamond Bar received inadequate and incornplete advice from outside experts, before it
consulred with AEL Id. at4-5.
In AEI's report to the Company, AEI attributed the pump failures to erratic power
from KEC, and made four recomrnendations to prevent future failures: (1) improve grounding
wires; (2) install addidonal surge protection; (3) upgrade the transformer, or replace the fuse
disconnect; and (a) install a solid state soft starter. Id. at 6. Staff indicated the Company
completed the first three, noting that the upgraded transformer (which was provided by KEC)
was not included in rate base. Addressing our concerns in Order No. 33547, Staff state4 'It is
unlikely that [the soft start] requirement was communicated to Diamond Bar prior to 2015," and
that installation of a soft start would not have prevented every pump motor failure experienced
by the Company. Id. at 6. For instance, "a soft start would not mitigate other potential causes
[of pump failures], such as lightning." Id. Staff also noted that the soft start "is primarily a
benefit to the electic company," and not to Diamond Bar Id. at7.
Commission findings: We first acknowledge and commend Diamond Bar's
customers for their involvement and efforts in helping us fra.me our inquiry about the pump
failures. With customers' comments, we were able to direct our questions to address the
significance of the soft start, and the extent to which Diamond Bar knew or should have known
about the cause of the pump failures.
We find it more likely than not that the pump failures were the result of an under-
sized transformer, combined with the effect of incompatible phase configurations, and single-
phasing. We recognize that Diamond Bar relied on outside experts for technical advice. And we
2 Staff explained that, in Diamond Bar's system, each phase of KEC's transformer is protected by a circuit breaker,
and cach of the wcll pump's three phases is protccted by a fuse. Staff Addendum at 5-5. If a single fuse blows, "the
Ioad on the rcmaining phase$ will increasc by approximately 737o," a condition called "single phasing." Id. at 6; see
AEI Repon at l. According to Staff, single phasing is "a leading cause of three phase motor failure." Id. Installing
a circuit breaker to disconnect all phases when any one phase is disconnected would shut offthe pump, and hclp to
prevent a pump failure.
8
oRDER NO. 33s78
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believe that, prior to hiring AEI, Diamond Bar sought and received advice that was incorrect and
inadequate. We also find that installation of a soft start would not necessarily have prevented
the pump failures experienced by Diamond Bar.
We sympathize with Diamond Bar's customers, for whom pump failures were
frustratingly recurrent. But as regulators, we must assess the prudency of a utility's actions
given all the circumstances. Diamond Bar sought opinions and consulted technical experts to
attempt to determine the cause of the pump failures. Only in hindsight is it evident that the
Company was receiving incomplete and inaccurate information. Given the evidence, including
that the transforrner was "grossly under-sized," we will allow Diamond Bar to recover the costs
of replacing the pumps, as discussed below. To avoid the likelihood of future pump failures, we
direct the Company to: (1) confirm with I(EC that the current tansformer is adequately sized,
per the National Electric Code; (2) replace its Delta type service drop with a Wye type service
entry that is compatible with KEC's Wye transformer and complies with tGC's current
engineering guidelines; and (3) install a circuit breaker that disconnects all phases
simultaneously in the event any one phase is disconnected. Also, given the limited benefits but
significant costs of installing the soft start, and with the knowledge that a soft start is primarily a
benefit to the electric company and not the water utility customers, we will not order the
Company to install a soft start.
2. Dejenal amortization
The Company classified a pro fonna adjustment of $5,750 for pump repairs as
Materials & Supplies - Operations & Maintenance. Because the Company rcquested a deferral
and'recovery of the costs, Staff removed the amount from operating expenses and booked it as a
separate regulatory asset to be amortized. Comments at 6. The Company does not appear to
dispute removing these costs as an operations expense, but disputes the amount Staff proposes to
be placed in a deferral account for amortization. Reply at 2.
The Company asked to recover $23,000 in expenses over four years, for the cost of
keeping the pump system running in 2015. Staff disagrees with the Company's amortization
proposal and instead recornmends that the unrecovered investment of the failed pumps be placed
in a defenal account to be amortized and recovered over the average remaining life of those
pumps. Comments at 6. Staff suggests that this treatrnent is similar to that allowed by the
Commission in Case No. PAC-E-L?-O&, Order No. 3274L In that case, the Commission
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oRDERNO.33578
authorized creation of a regulatory asset associated with the rcmaining book value of an electric
plant that was being forced to refire due to new Environmental Protection Agency standards.
Here, given AEIs engineering report, Staff believes the Company's pump failures and need for
replacements were the result of similarly unique circumstances.
The initial cost of the four replaced pumps was $51,444. Staff proposed reducing the
deferal amount by $13,671 - the amount paid by insurance. Staff found no evidence that it was
pnrdent for the Company to avoid frling an insurance claim after the June 2015 pump failure, and
thus recommends reducing the deferral amount by an additional $3,764 that the Company's
policy would have covered had a claim been filed. Finally, Sraffalso recommended reducing the
deferral amount by an additional $2,751 - the accumulated depreciation for the pumps. The
proposed remaining deferral amount is $31,258. Staff recommends an amortization period of 18
years, the average remaining life of the pumps, resulting in an amortization expense of $1,737 *
an adjustment of $4,013 less than that requested in the Company's Application.
The Company disputes removing the $3,764 that Staff asserts. would have been
recovered had the Company filed an insurance claim on pump 4. Repty at 2. According to the
Company, it "was wamed that an additional insurance claim would result in the loss of insurance
and that the Company may become uninsurable," consequences that the Company deemed
unacceptable. Id. In, addition, the Company maintains that a four-year recovery period is better-
suited ttran Staffs proposal of 18. Using a four-year period, the Company asserts, would "allow
customers who benefitted from the upgrades to pay for them, rather than someone else later on."
Id. Further, the Company owner, Robert Turnipseed" paid most of the costs to fix the pumps
from his retirement account; at age 84, he is unlikely to recover and use funds over an l8-year
period. /d. The Company rcquests that a period less than 18 years would be more reasonable
given the circumstances. Id
@mmltg.ian finding!. We find StafPs proposed reduction from Operations &
Maintenance expenses of $5,750 in pump repairs - which the Company did not dispute - to be
reasonable, and thus approve it. We next address the deferral account for the Company's
unrecovered investment in pump replacements.
As already discussed, we arB sympathetic to customers who were helpless to prevent
four pump failures in as many years (a fifth pump failure in 2010 is not at issue here)- However,
given all the circumsiances, we find it just and reasonable to allow the Company to recover its
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oRDERNO.33s78
l0
investment of the four previous pumps in a deferral account. We further find it reasonable for
the deferral account to be amortized and recovered over the average remaining life of those
pumps - 18 years. Despite the penonal circumstances of Diamond Bar's owner, Mr.
Turnipseed, this treatrnent is consistent wittr accounting treatment we would order for any other
utility. Sae Order Nos. 30171 at 2 (finding reasonable, and approving, amortization of bonds
over their remaining life);29966 at 4 (capital investments should be depreciated over their useful
life). Given the circumstances, we find that an l8-year amortization and recovery period applies
a proper accounting treatment that also softens the impact on Diamond Bar customers.
We find it appropriate to allow the Company to recover pump replacement costs
totaling $31,258. This arnount is the cost of replacing four pumps ($5t,4441, less accumulated
depreciation for the pumps ($2,751), less the amount paid by insurance ($13,671), and less the
amount that would have been covered by insurance had the Company filed a claim ($3,764).
Regarding Diamond Bar's unfiled insurance claim" the Company asserted that its insurance
policy would have been discontinued had it filed the claim. We note that the Company is
allowed insurance costs as an operating expense- We will not question the Company's business
decision not to file the claim. However, it would be unreasonable for us to allow the Company
to recover an expense from Diamond Bar's customers ttrat was otherwise recoverable through
insurance.
3. Rate case amortization. Staff recommends an amortization period for the rate case
expense of six years - the average of the years between rate cases - rather than the Company's
requested four years. Comments at 7. Staff finds that most of the Company's costs are
reasonable, except $200 related to preparing the 2015 annual report. Staff notes that the
Company's records indicate this was included under Contract Services - Professional, with an
invoice dated1D4ll4, and should therefore be excluded from this rate case amortization. Staff
thus recommends approving costs for this rate case of $4,551, amortized over six years. The
resulting rate case amortization expense is $794, or a reduction of $3ll from the Company's
proposal.
The Company states that the $2@ should be allowed "as an annual expense going
forward" because "tttere was no payment for the annual report preparation . . . for the test year.-
Reply rt 2-3. Staff agrees that the annual report is a proper annual expense going forward.
However, because it is included in the base 2014 expense levels, the annual report cost is
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ORDERNO,33578
I1
reflected in the Staff expense numbers (i.e. tbe Company will reeover the $200 under Staffs
proposed treatmenti. According to Staff, the cost should not (also) be included as a rate case
expense.
Commillsion findtnss: We frnd it reasonable to set an amortization period of six
years. We also find it appropriate to exclude the $200 from the costs approved for this rate case,
which the Company included in 2014 base expense levels. We thus approve rate case costs of
$4,561.
4. Water testinB. The Company proposed a water testing expense of $300. After
consulting with the ldaho Department of Environmental Quality (DEQ), Staff developed a list
of required tests. Staff recommends increasing water testing costs by $2a7 to an annualized
water testing cost of $547. The Compaoy agrees to Staff s proposed adjustment. Reply at 3.
CpilJ\mission findines: We find the agreed adjustment to be appropriate and approve
the annual water testing cost of $547.
5. Power purchase expenses. The Company proposed purchase power and fuel
expenses of $9,990, of which $479 is claimed as an increase in Kootenai Electric power rates.
Staff found that Kootenai Electric power rates have not increased since test year 2014 bills were
issued. Staff therefore recornrnends rejecting the proposed $479 increase. AIso, Staffproposes a
downward adjustment of $437, to refleet removal of personal energy use by Diamond Bar's
owners. Finally, Staff notes that $405 of the total was related to natural gas use at the well house
and was reclassified as miscellaneous expenses- Suff thus recommends adjusting the
Company's proposed purchase power and fuel expenses downward by a total of $1321. The
Company indicates it is in agreement with Staff s proposed adjustments. Reply at 3.
Commission findinss: We find the agreed adjustmens are just and reasonable and
thus approve purchase power and fuel expenses totaling $8,669.
5. Salarv expenses. Staff examined the Company's requested salaries for the water
system operator and bookkeeper. Using data from the Bureau of Labor Statistics, Staff
recomrnends reducing the water system operator salary expense by $763, and the bookkeeper
salary expense by $2,625. The Company disagrees with StafFs adjustment, noting in particular
that the Company's staff worked extra hours which Staff did not address. Reply at 3. The
Company requests both the increased salary rate and the extra hours. /d
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oRDERNO.33578
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eon?mission findilrss: We recognbe that the Company's staff, as with many small
water companies, has put considerable time and effort into operating and maintaining Diamond
Bar. However, we find it reasonable and appropriate to use data from the Bureau of Labor
Statistics to determine salary expenses. We therefore adopt Staffs recornnlended deductions,
and approve Labor Operations and Maintenance expenses totaling $9,752, and Labor
Administration and General expenses totaling $4,700.
B. Rate Base
The Commission approved a rate base in the Company's 2007 ease of $16,801.
Order No. 30455 at 16. Staff reviewed the Company's schedules showing how the rate base
amount has grown from $16,801 to the requested rate base of $40,398. In addition to the
suggested expense-adjustments, which affect working capital, Staff proposed adjusting the
Company's plant in service.
1. Working capi_tal. The Company calculaed working capital based on an eighth of
the Company's operating expenses. Staff used the same methodology for calculating working
capital. With Staffs hve adjustments to the Company's expenses, the resulting working capital
is $3,452.
2. Plant in service. Staff made multiple requests for confirmation of the Company's
plant in service calculations. After receiving no response, Staff calculated plant in service using
the Company's responses to request for production and information gathered during Staff s audit
of the Company's records.
Staff verified significant investments since the last rate case, including: new gate
valves installed in 2OO7, a new delay timer and new water check valves in 2010, new booster
pumps in 2011 and 2012, a sub monitor and lightning arrestor for the well pump and additional
grounding wire in 2014, new well pumps and transformer pad with improved wiring to the purnp
house plus additional lightning arrestor and emergency bypass in 2015. Staff thus recomurended
total plaot in service of $39,670. Comments at 4. Staffrecommended accumulated depreciation
of $10,177. Net plant in service is therefore $29,493, which, added to working capital of $3,452,
yields Staff s recommended rate base of $32,945.
The Company is in general agreement with Staff s proposed rate base except for thE
impact from deferral and amortization of those expense-related adjustrnents discussed above.
See Reply at 1-2.
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oRDERNO.33578
13
Qgmmisston findlnss: Based on our findings above, we find StafFs proposed rate
base of $12,945 to be appropriate.
C, Rate of Return and Revenue Requtrernent Calculation
1. Rate of return. Both the Company and Staff recomrnend a rate of retum of L27o.
Staff agrees that the Company is currently completely owner-financed.
Commission findinss: V[e frnd the agreed lLVo rate of return to be fair and just and
consistent with that which we have allowed in other small water company cases, and thus
approve it.
2. Revenue adiustment. In its Application, the Company included $642 in other
revenue, described as a rebate from Kootenai Electric Cooperative, made to Bar Circle S Water -
another water company owned by Diamond Bar's owner, Robert Tumipseed. Staff recommends
removing this amount from revenue for Diamond Bar's rate case. With this adjustment, Staff
proposes total revenue of $25,696. In its Reply, the Company agrees to Staff s adjustment and
believes it is appropriate. Reply at 2.
Commtssion findines: We find the agreed adjusunent to be reasonable and thus
approve total revenues of $25,696.
3- Revenue reguirement calculation. In its Application, the Company proposed
increasing its revenue requirement by 79.39Vo, from $26,338 (20L4 total revenue) to $47,248
(requested revenue requirement). See Application at l; ExNbit 3. For this calculation, the
Company used a $40,398 rate base, a lL%o retum on equity, and total operating expenses of
$37,434.
Applyrng Staffs proposed $32,945 rate base, L2Vo retum on equity, total revenue
adjusted down to $25,696, and total expense adjusted down to $32,628, Staff recommended the
following revenue requirement:
Return on Rate Base - Ta,r Grossed Up $5,063
Net Loss - Tax Grossed Up $6.945
Revenue lncrease Required above Test Year Revenues $12,008
Test Year Revenues $25.696
Total Gross Revenue Requirement $373U
Revenue lncrease Vo,46.73?o
See Comments, Attachment K
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t4
Corunission fivdipq{: Consistent with our findings above, we approve a total gross
revenue requirement of $37,704.
RA1T DESIGN
The proposed rate structure change in the Company's Application is summarized in
the following table:
Comments at 10.
Staff believes it is appropriate to maintain this two-part, single block rate design with
a minimum charge volume allowance. Staff noted that other small water utilities regulated by
the Commission use this structure. Staff also stated that this design provides a conservation
incentive by charging a customer more for use in excess of 5,500 gallons per month- However,
Staff proposed a different design that Staff believes will further encourage conservation by more
directly linking usage level with percentage bill increase.
Id. at Ll. The bill impact by usage level would be as follows:
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Charge Current Company Proposed Vo Cbange
MinimumMonthly $29.00 $52.O2 79.4To
Volume Allowance
sallons/month
5,500 5,500 No Change
Commodity
($ / 1,000.qallons)
$0.80 $1.44 80.0vo
Charge Current StaffProposed To Chanse
Minimum Monthly $29.00 $41.00 4I.4Vo
Volume Allowance
gallons / month
5,500 5,500 No change
Commodity
($ / 1.0O0 eallons)
$0,80 $1.16 45.lVo
Monthly Usage (gal)Current Bill BilI (per Staff Proposal)7o Chaage
5,500 s29.00 $41.00 4L.4Vo
10,000 $32.60 $46.22 4t.8?o
25,000 $44_60 $63.62 42.69o
50,@0 $64.60 $92-62 43.47o
100,000 $r04.60 $150.62 44.O?o
150,000 $144.60 $208.62 44.3Vo
300,000 $264.6A $382.67 M.6Vo
ORDERNO.33578
i5
Id. According to Staff, the resulting revenue is consistent with Staffls revenue requirement
recomrnendation when Staffs proposed rates (in the above table) are applied to2014 customer
counts and billed gallons. Id at 12.
ln its reply, the Company stated it "is in general agreement" to StafPs proposed rate
design. Reply at 3.
Commission findines: We find that the agreed rate stmcture is appropriate. The
proposed design is both reasonably cost-based and will further incentivize water conseryation, an
issue that has capnrred ever-greater concern throughout the region. We therefore approve it
In summary, based on our above findings and pursuant to our authority granted under
Idaho Code g 61-622, we find that the Company's existing rates are no longer reasonable, and
we approve as just and reasonable, the rates as set forth in this Order.
OTIIER PROPOSED CHANGES
A. Company Tariff
The Company's current tariff was last updated in 2007 on conclusion of Diamond
Bar's last rate case. The tariff includes the Company's rate schedules and general rules,
including rules governing the Company's Cross Connection Control Program, which it initiated
in 2004.3 In 2008, Staff developed a Model Tariff, including revised General Rules and
Regulations and incorporating the Uniform Main Extension Rule for'Water Utilities based on the
Commission's Order No. 7830 (Case No- U-1500-22). Also, in 2013, the DEQ revised
requirements for Cross Connection Control Programs. The Company's tadff has yet to reflect
these changes.
Staff recommended that the Company update its tariff to reflect the changes. In
addition, Staff recommended that the Company revise its Rate Schedule No. 2 to describe
circumstances in which a customer may be disconnected, which are not found in the Company's
current tariff. Staff is willing to work directly with the Company to ensure is tariff complies
with the Commission's rules, regulations, and orders. The Company indicated it agrees with
StafPs proposals and will work with Staffto update its tariff per the Commission's final order in
this matter. Reply at 3.
3 A cross-connection is an actual or potential connection between a drinking water system and another source that
could cause anything otlrer than potable water to backflow into the potable water supply. IDEQ Drinking Water
Cross Connections Control Programs Fact Sheet (FS^0416).
I6
oRDERNO.33578
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GEM STATE WATER
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Coru,n*sion.frndin#: We find the agreed changes to be appropriate, and direct
Diamond Bar to work with Staff to ensure the Company's tariff complies with IDEQ's curent
requirements, the Commission's rules and regulations, and this order.
B. New Customer Connection Charge
The new customer connection charge applies to a first-time connection with Diamond
Bar's system when an existing service line and meter base are aheady in place on the property.
In its Application, the Company asks to increase the charge from $310 to $475 per connection.
Staff believes this increase is too high, and recommends that it be reduced to $335, based on
Staff s estimation of the costs of the meter, labor, and transportation- Staff notes that this charge
will have limited applicability because only a dozen or so lots remain to be developed in the two
subdivisions served by the Company. The Company indicates it accepts Staff s proposed charge
of $335 for new customer connections. Reply at 4.
Commis.glon findinss: New customer connection charges should be a reflection of
the costs of labor and materials to connect the new customer to the system. Therefore, we find
the frrst-time connection charge of $335 to be reasonable and appropriate, and thus approve it.
C. Billing Statements and Late Payment
During the workshop, a customer raised a concern that it was not clear when the
Company reads customer meters, or how long billing periods are. Staff determined that the
Company generates billing statements after meters are read on the last Saturday of each month
except in winter. The Company then generates and sends billing statements around the first of
each month for service provided the previous month. Given this meter-reading schedule, the
number of days in a billing period could vary from 28 to 35 days. Staff recornmended that the
Company include the first and iast dates of its meter-reading period on its billing statement, as
required by Rule 201.03 of the Utility Customer Relations Rules, IDAPA 31.21.01. Staff
indicated that the Company has already agreed to this change.
Staff also recommends that the Company be allowed to charge l7o on any past-due
balance owing at the time of the next billing statement. Staff notes that allowing late payment
charges encourages timely payment, and enables the Company to recoup some of its costs of
collecting unpaid bills. The Company notes that it may not be able to afford the cost of mailing a
past-due reminder at a lVo charge, and thus respectfully requests a late payment charge of 7.57o
per month on past-due accounts. Reply at 4.
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GEM STATE WATER
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oRDERNO.33578
11
Commission fil?dillss: We find the agreed change on the Company's billing
statements, to include the first and last dates of the meter-reading period, is proper, and thus
approve it. We also find it reasonable and appropriate to allow a l%o charge on past-due balances
owing at the time of the next billing statement. Prior to this Application, the Company has not
imposed a past-due charge. Further, the Company provides no basis for anyttring greater than
our standard l7o charge.
ORDER
IT IS IIEREBY ORDERED that Diamond Bar Estates Water Company's rate base be
established at $32,945, with a lLVo rate of return, annual expenses of $32,628, and a revenue
requirement of $37,704, based on our findings stated above.
Ir IS zuRTHER ORDERED tbat new rates are approved establishing a base charge
of $41 per month, with a commodity charge of $1.16 per 1,000 gallons of use over 5,500 gallons
per month.
IT IS FTIRTHER ORDERED that the connection fee for new customers where a
service line tap aod meter box are already in place is authorized at $335.
IT IS FURTI{ER ORDERED that the Company is allowed to charge LVo on any past-
due balance owing at the time of the next billing statement.
IT IS FURTI{ER ORDERED that the Company work with Staff to revise its
customer billing statements as discussed above, and to revise its tariffto be consistent with IDEQ
and Commission rules and this Order.
IT IS FURTIIER ORDERED that consistent with our findings above, the Company
confrm with KEC that the transformer is adequately sized per the National Electric Code;
replace its Delta tlpe service drop with a Wye tlpe senrice entry compatible with trCEC's Wye
transformer; and install a circuit breaker that disconnects all phasas simultaneously.
IT IS FURTIIER ORDERED that the Company, with assisance from Staff, submit
tariffs conforrring to the new rates and charges as set forth in this Order, by no later than August
30, 2016, the date on which rates and charges authorized by this Order shall become effective.
THIS IS A FINAL ORDER. Any person interested in this Order rnay petition for
reconsideration within twenty-one (21) days of the service date of this Order. $/ithin seven (7)
days after any person has petitioned for reconsideration, any other persou may cross-petition for
reconsideration. See ldaho Code $ 61-626.
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GEM STATE WATER
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oRDERNO.33578
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DONE by Order of the ldaho Public Utilities Commission at Boise, Idaho this A
day ofAugust 2016.
PA PRESIDENT
?' o- / ,L-KRICTnTERAffi
ANDERSON, COMMISSIONER
ATTEST:
/h^A /),^-!!
JCln D. i;*"tt/l
dmmission SYcretary
{t
oRDERNO.33578
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GEM STATE WATER
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