20191118Palfreyman Direct.pdf

Preston N. Carter (lSB No. 8462)
Charlie S. Baser (lSB No. 10884)
Givens Pursley LLP
601 W. Bannock St.
Boise, ID 83702
Telephone: [phone]
Facsimile: (208) 388-1 300
;iECE IVED
iil: l:0V l8 PH 3: lr2
prestoncarter(a)g ivenspursley.com
[e-mail]
| 4859?09_4.doc u39t8.l l
Attorneys for Gen State Water Company, LLC
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF GEM STATE
WATER COMPANY, LLC FOR
APPROVAL OF ACQUISITION OF
THE ASSETS OF THE WATER
BUSINESS OF HAPPY VALLEY
WATER SYSTEM INC. AND
BITTERROOT WATER CO., INC.
case No. GSUL-l.l- tq -cl
DIRECT TESTIMONY OF JUSTIN PALFREYMAN
ON BEHALF OF GEM STATE WATER COMPAIIY, LLC
November 18, 2019
ORIGINAL
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BACK(;ROUND
a. Please state your name and title.
A. Justin Palfreyman, President of Gem State Water Company, LLC ("Gem State Water"). I
also serve as President olNW Natural Water of ldaho. LLC ('NW Natural Water of ldaho") and
NW Natural Water Company, LLC C'NW Natural Water").
a. Please summarize your professional experience and educational background.
A. I have worked for 16 years in strategy, finance and corporate development functions. I most
recently worked as a Director in Lazard's Power, Energy and Infrastructure Group in New York,
w'here I provided strategic and financial advice 1o corporations, institutional investors, private
equity lunds and govemment clients. My advisory assignments related to general strategic advice;
mergers, acquisitions and divestiturcs: raising capital; restructurings; corporate
preparedness/takeover defense; and capital structure optimization. Prior to Lazard, I worked in the
Infrastructure Investment Banking Group at Goldman Sachs in New York. I also previously held
various positions in finance, strategy and business development at both Apex Leaming and
Accenture in Seattle, Washington.
I hold an MBA lrom the University of Chicago Booth School of Business, a Master's of
Public Policy from The University ofChicago Irving B. Harris School ofPublic Policy and a
Bachelor's of Business Administration from Pacific Lutheran University.
a. What is the purpose of your testimony?
A. My testimony is offered to provide the Idaho Public Utilities Commission (the
"Commission") and Commission Staff with information regarding Gem State Water's proposed
acquisition (the "Transaction") of the assets of the Water Businesses of Happy Valley Water
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1 System Inc. ("Happy Valley") and Bitterroot Water Co., lnc. ("Bitterroot") (collectively, the "Water
Business Assets").
0. What do you mean by the term "Water Businesses?"
A. The Happy Valley and Bitterroot own and operate water supply and distribution systems. In
this testimony, I use the term "Water Businesses" to describe the Happy Valley and Bitterroot waler
supply and distribution systems, consistent with how the term "Businesses" is defined in the Asset
Purchase Agreement ("Agreement"), attached as Exhibit | .l
a. Please describe NW Natural Water, and the relationship among Gem State Water, IYW
Natural Water of ldaho, and NW Natural Water.
A. NW Natural Water is a wholly owned subsidiary of NW Natural Holding Company ("NW
Natural Holdings"). NW Natural Holdings, which is headquartered in Portland, Oregon, is a
publicly owned company with a market cap of approximately $1.8 billion. lt has revolving credit
facilities aggregating to approximately $400 million. NW Natural Holdings' Form l0-K for 2018
filed with the Securities and Exchange Commission is attached as Exhibit 2,
NW Natural Water was created to own and operate water utilities, through subsidiaries, in
Oregon, Washington, and Idaho. NW Natural Water also has signilicant financial assets. It
currently owns and operates five water utilities, including Gem State Water (hrough NW Natural
Water of Idaho) and Falls Water Co., Inc. ("Falls Water"), in the area around Idaho Falls, ldaho.
Gem State Water is a wholly owned subsidiary of NW Natural Water of ldaho, which is in
tum wholly owned by NW Natural Water. Gem State Water has access to the financial resources
and the utility expertise of NW Natural Water of ldaho, NW Natural Water. NW Natural Holdings,
and their affiliates.
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I The Asset Purchase Agreement. aftached as Exhibit l. is filed as "Confidential" puBuant to the Commission's rules
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1 An organizational chart illustrating NW Natural Holdings' corporate structure is attached as
Exhibit 3. The chart has been designated "Confidential" per Commission rules.
a. Please describe NW Natural Water's interest in, and recent acquisitions in, the water
sector.
A. In recent years, leadership ofthe NW Natural family ofbusinesses undertook a
comprehensive strategic review process to identiry and evaluate potential growth opportunities that,
among other criteria, would offer a risk profile consistent with our core utility business and a long-
term opportunity to grow beyond our existing business. The outcome of the strategic review
process was a strategy and plan to pursue opportunities in the water utility and infrastructure sector,
in addition to the ongoing focus on our I 60 year old gas utility, storage, emd infrastructure business.
We believe that a water strategy is a compelling fit for NW Natural because it would build on our
core competencies of constructing, operating, and maintaining infrastructure, providing best-in-
class customer service, ensuring safety and reliability, and effectively managing a regulated utility.
NW Natural Water has been actively pursuing this strategy. NW Natural Water recently
acquired, and is currently operating, five water companies through direct or indirect subsidiaries,
including Gem State Water, which recently acquired the assets of Spirit Lake East Water Company.
Ll.nnwood Water, Diamond Bar Estates, LLC, and Bar Circle "S" Water, Inc. Other water utilities
acquired by NW Natural Water include Falls Water; Cascadia Water, LLC, in Washington; Salmon
Valley Water Company, in Oregon; and Sunriver Water, LLC. in Oregon. By owning and operating
these water utilities, NW Natural Water has gained valuable experience in the water sector. NW
Natural Water will bring this experience to the Happy Valley and Bitterroot Water Business
customers.
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1 0. Do NW Natural Water and NW Natural Water of ldaho intend to make any changes to
Gem State Water employees as a result of its acquisition of the Happy Valley and Bitterroot's
Water Business Assets?
A. Yes. Currently, Happy Valley and Bittenoot both employ Kennelh and Catherine Rickel
(the "Rickels") and contract with an outside accountant (Susan Jacobson). If thc Transaction is
approved, Gem State Water employees will assume the roles previously unde(aken by Happy
Valley's and Bitterroot's current employees. Leslie Rayner, the licensed water system operator for
Gem State Water. will serve as the licensed water system operator for the Happy Valley and
Bitterroot Water Business Assets. Leslie Rayner holds license number DWD3-21515 (Class 3). and
her business address is 250 Northwest Blvd., Suite l'l '1, Coeur d'Alene, Idaho838l6. The
experience of expertise of Gem State Water's employees will complement NW Natural Water and
its affiliates' financial resources and utility expertise.
THE TRANSACTION
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74 a. Please describe Happy Valley and Bitterroot.
A. Happy Valley and Bitterroot are both regulated water utilities. Happy Valley serves
approximately 27 residential customers in and around Kootenai County. Idaho in accordance with
CPCN No. 390. Bitterroot serves approximately 160 residential customers in and around Kootenai
County, Idaho in accordance with CPCN No. 3l 9.2 The areas currently served by both Happy
Valley and Bitterroot are in the same vicinity as the territory served by Gem State Water.
My understanding is that Bitterroot Water Company, lnc. was formed in June 1995 and was
purchased in 2003 by the Rickels, who had started Rickel Water Company, Inc. in April 1995. In
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2 On April 9,2018, the Commission issued OrderNo.34027, which consolidated Bitterroot Water System, Inc. and
Rickel Water Company into Bitterroot Water System, Inc.; authorized service to customers under CPCN No. 319; and
cancelled CPCNNo.324. See Order No. 340?7, Case NO. RIC-W- 17-01 (April 9,2018).
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May 2018, the Commission permitted the Rickels to combine Bitterroot Water Company, Inc. with
Rickel Water Company, Inc. to form the current iteration of Bitterroot.
a. Why are NW Natural Water, NW Natural Water of ldaho, and Gem State Water
interested in acquiring the Happy Valley and Bitterroot Water Business Assets?
A. Acquiring these assets fits squarely into NW Natural Water's continued growth in the water
sector. NW Natural Water, NW Natural Water of Idaho and Gem State Water believe that Happy
Valley and Bitterroot's Water Businesses, and Water Business Assets, are well-run and well-
maintained. However, like many water utilities, the water system is in need of capital inveslmenl to
support system growth and maintain system integrity. Gem State Water has not identified any
specific capital projects, though it preliminarily notes that well sites and related equipment may
need improvement. Gem State Water intends to conduct a water master plaru:ring process to identify
capital needs of the systems.
In addition, NW Natural Water, NW Natural Water of Idaho and Gem State Water will
provide the professional expertise needed to provide high-quality water services to customers in the
long term. The proximity of Happy Valley and Bitterroot to Gem State Water's service territory
means that Gem State Water's employees can provide a local presence and seamless transition to
the customers of Happy Valley and Bitterroot.
a. Please describe the proposed Transaction to acquire Happy Valley and Bitterroot's
Water Business Assets.
A. On September 11,2019, Happy Valley, Bitterroot, the Rickels and Gem State Water entered
into the Agreement. Under the Agreement, if approved by the Commission. Cem State Water will
acquire the Water Business Assets of Happy Valley and Bitterroot.
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1 As stated above, if Gem State Water's acquisition of Happy Valley and Bitterroot is
approved. employees of Gem State Water will operate Happy Valley and Bittenoot's water
systems. Leslie Rayner, the licensed water system operator for Gem State Water, will serve as the
licensed water system operator for the Happy Valley and Bitterroot Water Business Assets. Leslie
Rayner holds license number DWD3-21515 (Class 3), and her business address is 250 Northwest
Blvd., Suite 111, Coeur d'Alene, Idaho 83816.
a. Does Gem State Water seek to change rates through this Transaction?
A. No. Gem State Water is not seeking to change rates, rate structure, or other charges for
customers of Happy Valley and Bittenoot or for Gem State Water customers though the
Transaction. Gem State Water proposes that the current rate structure, rates, and other charges
remain the same for each customer group. I understand that Idaho law authorizes the Commission
to provide for acquisition adjustments in certain circumslances for entities acquiring water utilities
in the State, but Gem State Water does not seek an acquisition adjustment with this pa(icular
Transaction, and Gem State Water will not seek any increase to rates as part ofthis Transaction.
Any future rate increases would be related to prudent capital investments or other increased
expenses, and would need to be justified at that time. Transaction-related costs have been incurred
by NW Natural Holdings, not by Gem State Water. The costs will not be passed to Gem State
Water and will not be included in any rate case filing. Transaction-related costs include activities
related to due diligence, environmental consultants, legal costs, travel costs, and other costs related
to negotiations.
If the Commission approves the Transaction, Gem State Water will work with Commission
Staff to file updated tariffs reflecting the approved rates and charges. Ifthe Commission approves
the Transaction, Gem State Water will also work with Commission Staff before and during future
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rate proceedings to consider consolidation of rates, rate structure, and other charges as reasonable
and appropriate for current Gem State Water and current Happy Valley and Bitterroot customers.
O. Does Gem State Water request any other action from the Commission?
A. Yes. Happy Valley currently holds CPCN No. 390 and Bitterroot currently holds CPCN No.
319. Gem State Water requests that CPCN Nos. 390 and 319 be transferred to Gem State Water.
This will enable Gem State Water to provide service to the current customers of Happy Valley and
Bitterroot.
a. Does Gem State Water have additional information for the Commission?
A. Yes. Through its recent acquisitions, and through its interactions with Commission Staff,
NW Natural Water and NW Natural Water of ldaho have identified additional information that may
prove useful to the Commission in evaluating the proposed Transaction. Maps and other
information pertaining to Happy Valley's Water Business system are attached as Exhibit 4. Maps
and other information pertaining to Bitterroot's Water Business system are attached as Exhibit 5. A
list of the Happy Valley and Bitterroot Water Business Assets, with the information known at this
time, are included in the Agreement. Ilthe Transaction is approved, NW Natural Water, NW
Natural Water of ldaho and Gem State Water intend to complete a water master planning process
for the Bittenoot and Happy Valley Water Business systems; Gem State Water anlicipates obtaining
additional information regarding the systems and associated Water Business Assets through this
process.
Well logs for the wells used by the Happy Valley and Bitterroot Water Business are
attached as Exhibits 6 and 7, respectively.
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Meters are currently read on a monthly basis from April through September, and customers
are currently billed on a monthly basis throughout the year. Gem State Water intends to maintain
this schedule for the foreseeable future.
Gem State Water provides 24-hour response to repairs or water quality issues. Customer
can calf the Gem State Water office phone number, [phone], and the call will be forwarded
to an answering service if the line cannot be answered.
Ilthe Transaction is approved, accounting, financial, and customer records will be kept in
the local office of Gem State Water, 250 Northwest Blvd., Suite 111, Coeur d'Alene, Idaho 83816.
Gem State Water's local office also will be the location for former Happy Valley and Bitterroot
customers to pay bills, make requests, and otherwise correspond with Gem State Waler.
Gem State Water intends to publish a notice to the customers of Happy Valley and Bitterroot
in the local newspaper, although I undersland that notice is not required.
While Gem State Water has not identified any particular growth opportunities lor Happy
Valley or Bitterroot, undeveloped lots, both with and without connections, currently exist within
and around the area currently served by Bitterroot. If these lots are developed, new customers can
be added to the system.
a. Does this conclude your testimony?
A. Yes.
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GEM STATE WATER COMPANY
- This Exhibit contains trade secret or confidential
material and is filed separately -
EXHIBIT 1
EXHIBIT 2
GEM STATE WATER COMPANY
NW Natural Holdings' Form 10-K for 2018
(210 PAGE)
Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 205,19
FORM 1O-K
IX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ondod Docomber 31. 2018
t I TRANS|TION REPORT PURSUANT TO SECTTON 13 OR 15(d) OF THE SECURTTTES EXCHANGE ACT OF 1934
For the lransition period from
Commission file number 1-3868'l
to-
Commission file number 115973
<fr NW Noturol
HOLDI}IG5-{ff xw Noturo!"
NORTHWEST NATURAL HOLDING COIIIPANY
(Exacl name o, registrant as specified an its charte.)
Oregon 824710680
(State or otherjurisdiction of (l.R.S. Employerincorporalionororganization) ldentiflcationNo.)
220 N.W. Second Avenue. Portland, Oregon 97209
(Address of principal executive offices) (Zap Code)
Registrant's lelephone number: [phone]
Securities registered pursuant to Section 12(b) ofthe Act:
Reqistrant Title ofeach class
NORTTfWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in ils charter)
Oregon 93-0256722
(State or otherjurisdiction of (l.R.S. Employerincorporationororganization) ldentificationNo.)
220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive ofiices) (Zip Code)
Registrant'slelephone number: [phone]
Name of each exchanqe on which reqislered
lNotxl
Norlhwest Natural Holding Company Common Stock NewYork Slock Exchange
Nonhwest Natural Gas Company None None
Securities registered pursuant to Section 12(g)ofthe Act: None.
lndicate by check mark if the registrant is a well-known seasoned issuer. as defined in Rule 405 of the Securilies Act.
NORTHI,IiEST NATURAL HOLDING COMPANY Yes{ X ] No[ ] NORTH\^,EST NATURAL GAS COMPAI'IY YesI
lndicale by check mark whelher the registrant (1) has liled all reports requked to be filed by Section 13 or 15(d) ol Ihe SeGrrities Exchenge Acl ol 1934 during the
preceding 12 months (or lor such shorter period lhat the registranl was required to lile such reports), and (2) has be€n subject to such filing requirements ior the past 90
days.
NORTHWEST MTURAI- HOLOING COMPANY Ye6[X ] No( I NORTHWEST NATURAL cAS COMPANY Yeslx ] Nd I
lndicate by check markwhetherthe registrant has submilted electronically every lnle.active Dala File required to be submitled pursuant to Rule 405 ol Regulation S-T
(5232 405 of this chapteo during lhe preceding 12 months (or for such shorter penod thal lhe regrslranl was required to submit such files)
NORTHWEST NATURAI- HOLDING COMPANY Yesl x I Nol I NORTHWEST NATURAL GAS COMPANY Yesl X I No[ ]
registranfs kno\Niedge. in definitive proxy or iniormation statemenls incorpo.ated by reference in Part lll of this Form 10-K or any amendrnent 10 this Fom 10-K IX ]
lndicate by ch€ck mark whelher lhe registrant is a large accelerated filer, en eccelerated fler, a non-a@elerated fler, a smaller reporting company, oran emerging growth
company See the defnations of "large accelerated fler," 'accelerated fller, ' "smaller reponirE company' and "emerging growth company" in Rule 12b-2 of the Erchange
T.IORTHWEST NATURAT HOLDING COMPANY NORTHWEST NATURAL GAS COMPANY
Large Accelerated Filer [X ] LaOe Acceleraled Filer [ ]
Accelerated Filer [ ] Accelerated Filer [ ] EXHIBIT 2
Non-accebrated Filer [ ] Non-accelerated Filertx I PALFREYMAN. DI
Smaller Reporting Company I I Smaller Reponing Company t IGEM STATE WATER
Emerging GroMh Company [ | Emerging GroMh Company [ ] page 1Of2l0
lf an emerging grovllh company. indicate by check mark if the registrant has elecled not to us€ lhe extended t€nsitron penod for complying with any new or revised
inancial ac@unling slandards provided pursuant to Seclion 1 3(a) of the Exchange Act [ ]
lndicale by check mark il the registrant is not required to Iile reports pursuant to Section 13 or Sectaon 15(d) of the Act.
NORTHI,GST NATURAL HOLDING COi,PANYYeSI ] No[XI NORTHWEST NATURAL GAS COMPANY Yes{ ] NoIX]
lndicate by check mark whether the .egistranl is a shellcompany (as delined in Rule 12b-2 of the Exchange Act).
NORTHWEST NATURAL HOLDING COMPANY Yes[ ] No[X ] NORTHWEST NATURAL GAS COMPANY Yes[ ] No[ X J
EXIIIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 2 of2l0
As of the end of the second quarter o12018, the aggregate market value of lhe shares of Common Stock of Norlhwest Natural Gas Company (based
upon the closing price of these shares on the New York Slock Exchange on June 29, 2018) held by non-affiliates was $1,814,276.842.
At February 22. 2019, 28,896,471 sha res of Northwest Natura I Holding Compa ny's Com mon Stock (the only class of Common Slock) were outstand ing
and 28,844,190 shares of Northwesl Nalural 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 separatelyflled by Norlhwest Nalural Holding Company and Norlhwesl Natu.alGas Company. lnformalion contained in
this document relating to Nonhwest Natural Gas Company rs filed by Northwest Natural Holding Company and separalely by Norlhwest NaluralGas
Company. Northwest Natural Gas Company makes no representation as lo information relating lo Northwest Natural Holding Company or its
subsidiaries, except as it may relate lo Northwest Natural Gas Company and ils subsidiaries.
Northwest Natural Gas Company meels the conditions set fodh in General lnslruction (l)(1)(a) and (b) of Form 10-K and is therefore filing lhis report with
the reduced disclosure formal.
DOCUMENTS INCORPORATEO BY REFERENCE
Portions of Northwest Natural Holding Company's Proxy Statement, to be filed in connection with the 2019 Annual Meeting of Shareholders, are
incorporaled by reference an Parl lll.
EXHIBIT 2
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TABLE OF CONTENTS
Item Page
Glossary of Terms
Forward-Lookino Statements
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PART I
Item 1 Business
Overview
Business Model
Natural Gas Distribution
Other
Enviaonmental Matters
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62
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122
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125
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127
127
127
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Item'lA.
Item 'l B.
Item 2.
Item 3.
Item 4.
Emolovees
Exeqrlive Oftlcers of lhe Reqislrant
Available lnformation
Rlsk Factors
unresolved Staff Comments
Prooerlies
Leoal Proceedinos
Mine Safely Disclosures
PART II
llem 5 Market for Reqistranfs Common Eouitv. Related Stoddolder Matters and lssuer
Purchases of Eouitv Securilies
Selec{ed Financial Data
Manaoement's Discussion and Analvsis ol Financial Condition and Results ofOoerations
Ouantitative and Oualilatiw Disdosures About Market Ri8k
Financial Statements and Suoolementarv Data
Chanoes in and Disaoreements with Accountants on Accountino and Finsncial Disclosure
Controls and Procedures
other lnrormation
PART III
llem 10
llem 11
Item 12
Item 13
llem 14
Directors. Executive Otfcers and Corporate Govemance
Executive Comoensalion
Securitv Ownershio ofCertain Beneficial Owners and Manaoement and Related Stockholder Matters
Certain Relationshios and Relaled Trensadions. and Director lndependence
Princioal Accountant Fees and Services
PART IV
Item 15
Item 16
Exhibits and Financial Statement Schedules
Form 10-K Summarv
EXHIBIT INDEX
SIGNATURES
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EXHIBIT 2
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llem 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
llem 98.
GLOSS4RY OF IERMS AND ABBREVIATIONS
AFUDC
AOCI/AOCL
ASC
ASU
Average Wealher
Bcf
CNG
CODM
Core Utility Customers
Cost ofGas
Allowance for Funds Used During Construclion
Accumulated Other Comprehensive lncome (Loss)
Accounting Standards Codificalion
Accounting Slanda.ds Update as issued by the FASB
The 25-yearaverage of heating degree days based on temperatures established in our last Oregon general rate case
Billion cubicfeel, a volumelric measure ol naturalgas, where one Bcfrs roughly equalto 10 million therms
Compressed NaturalGas
Chaef Operating Decision Maker. For accounting purposes. an andavidual or group of individuals responsible for the
allocation of resources and assessing the performance of the entily's business units
Residenlial. commercial, and industrial cuslomers receiving firm seNice from lhe utility
The delivered cost of natural gas sold to customers. including the cost of gas purchased or withdrawn/produced from
storage invenlory or reserves. gains and losses from gas commodity hedges, pipeline demand cosls, seasonal
demand cost balancing adjustments, regulatory gas cosl deferrals and Company gas use
California Public Utilities Commission, lhe entily that regulates our California gas storage business at the Gill Ranch
facility wilh respect to rates and terms of seNice, among olher matters
A billing rate mechanism, also referred to as a conservalion larifl, which is designed to allow a utility lo encourage
industrial and small commercial cuslomers lo conserve energy while not adversely affecting ils earnings due to
reduclions in sales volumes
A componenl in core utility customer rates representing the cost ofsecuring firm pipeline capacily, whetherlhe capacity
is used or not
Earnings before interest, taxes, depreciation and amorlizalion, a non-GAAP fnancial measure
Engineering Evaluation / Cosl Analysis
Enc€na Oil& Gas (USA) lnc.
Northwest Energy Corporation, a wholly-owned subsidiary oI NW Natural
Environmental Proteclion Agency
Earnings per share
Financial Accounting Standards Board
Federal Energy Regulatory Commission; the entity regulating interstate slorage services offered by the Mist gas storage
facjlity
Natural gas service offered to customers under conlracts or rale schedules that will not be disrupled to meel the needs
of other cuslomers
First Mortgage Bonds
A periodic filing wilh state or federal regulalors to establish billing rales for ulilily cuslomers
Greenhouse gases
Gill Ranch Storage, LLC, a wholly-owned subsidiary of NWN Gas Slorage
Underground natural gas storage Iacjlity near Fresno, Calilornia, with 75% owned by Gill Ranch and 25% owned by
PG&E
Gas Transmission Norlhwesl, LLC which owns a transmission pipeline serving California and lhe Pacific Northwest
Units of measure reflecting temperalure-sensitive consumption ofnaturalgas, calculated by sublracting the average ofa
day's high and low temperatures from 59 degrees Fahrenheit
Highway and Transportation Funding Act of20'14
Nalural gas service otfered to cuslomers (usually large commercial or industrial users) under conlrccts or rale
schedules thal allow for intenuptions when necessary to meel the needs offirm service customers
The porlaon of the Misl gas storage facality not used lo serve NGD, instead serving utilities, gas marketers, electric
generators, and large induslrial users
Public Utility Commission of ldaho; the entity that regulates NW Holdings' ldaho water business wilh respect lo rates and
terms ofseNice, among olhea matters
lntegrated Resource Plan
EXTIIBIT 2 PALFREYMAN. DI
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Page 5 of2l0
CPUC
Decoupling
Demand Cost
EBITDA
EACA
Encana
Energy Corp
EPA
EPS
FASB
FERC
Firm Service
FMBs
General Rate Case
GHG
GillRanch
Gill Ranch Facility
GTN
Heating Degree Days
HATFA
lntenuptible Service
lnterslale Slorage Services
IRP
-talledeadclt!
IPUC
KB
LNG
MAP-21
Moody's
NGD
PBGC
PG&E
PGA
NGD Margin
NNG Financial
NOL
NRD
NW Holdings
NW Natural
N\ /N Energy
NWN Gas Reserves
NWN Gas Storage
ODEQ
OPEIU
OPUC
Portland General
PHMSA
PRP
RUFS
ROD
ROE
ROR
s&P
Sales Service
SEC
SRRM
TCJA
Therm
T\ ilt
TransCanada
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EXHIBIT 2
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Table of Conlents
Kelso-Beaver Pipeline, ofwhich '10% is owned by KB Pipeline Company. a subsidiary of NNG Fanancial
Liquefled Natural Gas lhe cryogenic liquid form of nalura I gas. To reach a liquid form al atmospheric pressure, natural
gas must be cooled to approximately negalive 260 degrees Fahrcnheit
A federal pensaon plan funding law called lhe Moving Ahead for Progress in the 21st Century Act, Juiy 2012
Moody's lnveslors Servrc€. lnc . credrl rating agenry
Net AssetValue
Nalural Gas Dislribulion. a segmenl of NW Natural Holdings and NW Natural Gas Company that provides regulated
natural gas distribution sefvices to resrdential, commercial. and induslraal customers in Oregon and Soulhwest
Washington
A financial measure consisting of NGD operating revenues less the associated cosl of gas, franchase taxes, and
environmental recoveries
NNG Financial Corporation, a wholly-owned subsidiary of NW Holdings
Net Operating Loss
Natural Resource Damages
Northwest Natural Holding Company
Norlhwest Natural Gas Company, a wholly-owned subsidiary of NW Holdings
NW Nalural 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 subsidaary of NWN Energy
Oregon Deparlment of Environmental Qualily
Office and Professional Employees lntemational Union Local No. 1 1, AFL-ClO, which is also relerred to as the Union
represenling NW Natural's bargaining unit employees
Public Utility Commission of Oregon; the enlity that regulates our Oregon natural gas and water utility businesses with
respect to rates and lerms of service, among other matters; the OPUC also regulates the Mist gas storage facilily's
inlrastate slorage services
Pension Benefit Guaranty Corporation
Pacific Gas & Electrac Company; 25% owner ofthe Gill Ranch Facility
Purchased Gas Adjustmenl. a regulalory mechanism which adjusts naluralgas cuslomer rales to reflect changes in the
forecasted cost of gas and differences belween forecasled and actual gas costs from the prior year
Portland General Eleclric; primary customer of the Norlh Mist qas storage expansion
U.S. Deparlment of Transponation's Pipeline and Hazardous Materials Safety Administration
Polenlially Responsible Parlies
Remedial lnvesligalion / Feasibility Sludy
Record of Decision
Return on Equity, a measure ofcorporale profitabilaty, calculated as nel income or loss divided by average common stock
equity. Authonzed ROE refers to the equity rate approved by a regulalory agency for use in determining utility revenue
requirements
Rate of Relurn, a measure of return on ulility rate base. Aulhonzed ROR refers Io lhe rale of return approved by a
regulalory agency and is generally discussed in lhe contexl of ROE and capital skuclure
Standard & Poor's, a credit rating agency and division ofThe Mccraw-HillCompanies, lnc.
Service provided whereby a customer purchases bolh natural gas commodity supply and transportalion from the utility
U.S Securities and Exchanqe Commission
Sile Remediation and Recovery Mechanrsm, a billing rate mechanism for recovering prudenlly incurred envrronmental
site remedialion cosls allocable to Oregon through custorfier billings, subject lo an earnings test
The Tax Cuts and Jobs Act enacted on Decembe.22.2017
The basic unit of natural gas measuremenl, equal to one hundred thousand British thermal units
TrailWest Holdings, LLC, 50% owned by NWN Ene.gy
Trail West Pipeline, LLC, a subsidiary of TWH
Transcanada Pipelines Limited, owner of Transcanada American Investments. Ltd., a 50o/o owner of TWH, and GTN
Table ol Contents
Transportation Service
U,S, GAAP
WUTC
Service provaded whereby a customer purchases natural gas directly from a supplier but pays the utility to transpon the
gas over ils distributaon system to the customer's facility
Accounling principles generally accepted in the LJnited States ofAmerica
An Oregon billing rate mechanism applied lo natural gas residential and commercial cuslomers to adjust for
temperalure variances from average weather
Washington Ulilities and Transportalion Commission, the entity that regulates our Washington nalural gas and water
utility businesses with respect to rates and terms ofservice, among othermatteE
6
EXHIBIT 2
PALFREYMAN, DI
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Page 7 of 210
Tab e of Contenls
FORWARD.LOORING STA TEME'VTS
This report contains forward-looking slatemenls within the meaning of
the U.S. Private Securilies Litigation Reform Act of 1995, which are
subject lo lhe safe harbors created by such Acl. Forward-looking
statements can be identilled by words such as anticipates, assumes,
inlends, plans, seeks, believes, estimates, expects, and similar
references to fulure peraods. Examples of forward-looking slatements
include, bul a.e not limited to, statements regarding the following:. plans, projections and predictaons;. objeclives, goals or strategies;. assumplions,generalizationsandestimates:. ongoing continualion ofpast praclices or palterns;. future events or performance;. lrends;. risks;. uncerlainlies:. liming and cyclacality;. earnings and dividends;. capital expenditures and allocation;. capilal or organizational structure, including restructuring as a
holding company:. climate change and our role jn a low-carbon. renewable-energy
future;. groMh;. customer rales:. labor relalions and workforce successron.. commodity costs;r gas reserves;. operational performance and costsl
' energy policy, infrastruclurc and preferencesi. public policy approach and involvemenl;. efficacy ofderivatives and hedges;. liquidity, financial positions, and planned securilies issuances;. valuationsi. project and program developmenl, expansion. or inveslment;. business development efforts, including acquisitions and
integration thereof;. pipeline capacity, dernand. location, and reliabilily;. adequacy ofproperty rights and headquarter development;. technologyimplementation and cybersecurity practices;. compelilion;. procuaemenl and development ofgas supplies:. eslimaledexpendilures:. costs of compliance;. customers bypassing our infrastructure;. credit exposures:. rate or regulalory outcomes, recovery or refunds;
' impacls or changes of laws, rules and regulallons;
' tax liabilities or relunds. including effects of tax reform;
' levels and pricing olgas storage contracts and gas storage
markets;. outcomes, liming and effects ofpotenlial claims, litigation, regulatory
actions, and other administralive matters:. projecled obligations, expectalaons and lreatment wilh respect lo
retirement plans;. availability, adequacy, and shift in mix, ofgas supplies;. effects of new or anticipated changes in critical accounting policies
or eslifiates:
approval and adequacy of regulatory deferrals:
effects and etflcary of regulatory mechanisms; and
environmental, regulatory, litigation and insurance costs and
recoveries. and timing lhereof.
Forward-looking statements are based on our currenl expeclalions and
assumptions regarding our business. the economy, and other fulure
conditions- Because forward-looking stalements relate to the future. they
are subject lo inherent uncertainties, risks, and changes in
circumstances lhal are difficull to predict. Our actual results may differ
materially from those conlemplated by the forward-looking slalements.
We lherefore caution you against relying on any ofthese lorward-looking
stalements. They are neilher statements of hastorical facl nor guarantees
or assurances offulure perlormance. lmportant factors that could caUse
actual resulls to diffe. materially from those an lhe forward-looking
statements are discussed at ltem 1A., "Risk Faclors" of Parl I and ltem 7.
and ltem 7A., "l\.4anagemenl's Dascussion and Analysis of Financial
Condition and Results ofOperations" and "Quantilative and Oualatatave
Disclosures About Markel Risk", .espectively, of Part ll of this reporl.
Any forward-looking statement made in this report speaks only as ofthe
date on which il is made. Factors or events lhat could cause actual
results lo differ may emerge from time lo time, and il is not possible for
us to predict all of them. We undenake no obligation to publicly update
any forward-looking statemenl, whelher as a result of new information,
fulure developments or otherwise, except as may be required by law.
7
EXHIBIT 2
PALFREYMAN. DI
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Page 8 of210
Table ol Contents
PART I
FILING FORMAT
This annual report on Form 10-K is a combined reporl being llled by two
separate registranls: Northwest Natural Holding Company (NW
Holdings). and Northwest Natural Gas Company (NW Natural). Except
where the content clearly indicates otherwise. any reference in the report
lo "we." "us" or "our" is to the consolidated entity of NW Holdings and all
of its subsidiaries. including NW Natural, which is a distincl SEC
regisl.anl thal is a wholly-owned subsadiary of NW Holdings. Each ot NW
Holdangs'subsidiaries is a separale legal enlily wilh ils own assets and
liabilities. lnformation contained herein relating to any individual
registrant or its subsidiaries is filed by such reqistrant on its own behalf.
Each registrant makes representalions only as to itselfand its
subsidiaries and makes no olher representation whatsoever as to any
olher company.
IIEM 1, BUSINESS
ovERvtEw
On October 1. 20'18, we completed a reorganization into a holding
company slructure. We believe lhat our holding company structure is an
agile and etficaent platform from which lo pursue, tinance, and oversee
new opponunilies. such as in lhe waler secto., while also providing legal
separation between regulated natural gas distribution operations and
other businesses. ln this reorganization, shareholders of NW Natu.al
(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
immedialely priorlo lhe reorganizalion. NW Naturalbecame a lvholly-
owned subsidiary of NW Holdings. Additionally, certain subsidiaries of
NW Naturalwere transferred to NW Holdings. As required under
accounting guidance, lhese subsidiaries are presented as disconlinued
operations an the consolidated resulls of NW Natural within lhis report.
NW Holdings as a holding company headquartered in Portland, Oregon
and owns NW Natural, NW Natural Water Company (NW Water), and
olher businesses and activities. NW Natural is NW Holdings' largest
subsidiary.
NW Natural distributes natural gas to residenlial, commercial, and
industrial customers an Oregon and southwest Washington. NW Natural
and its predecessors have supplied gas servace to the publac since
1859. was
incorporated in Oregon in 1910, and began doing business as NW
Naturalin 1997. NWNalural's naturalgas distribution aclivilies are
reported in the naturalgas distribution (NGD) segment, formerly titled
and reported as the utility segment. Allother busaness a ctivalies,
includinq cenain gas storage activaties, water businesses, and other
inveslments and activities are aggregated and reported as "other" at their
resPeclive regiskant.
ln addition. NW Holdings has reported dascontinued operalaons resulls
related to the pending sale of Gill Ranch Storage. LLC (Gill Ranch). NW
Natural Gas Storage, LLC (NWN Gas Storage), cunently an indirecl
wholly-owned subsidiary of NW Holdings, entered into a Purchase and
Sale Agreement during the second quarler of 2018 thal provides fo.lhe
sale ofall membership interests in Gall Ranch. Gill Ranch owns a 75%
interest in the naturalgas storage lacilily 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
,VE TURAL GAS D'STRIBUTION (NGD) SEGMENT
Both NW Holdings and NW Natural have one reportable segment, the
NGD segment, whach as conducted by NW Nalural. The NGD business
purchases and distributes natural gas through approximately 750,000
meters an Oregon and southwest Washington. Approximately 89% of
customers are located in O.egon and 11% are located in southwest
Washinglon.
NW Natural has been allocated an exclusave service territory by the
OPUC and WUTC, which includes the major population centers in
weslern Oregon, including the Portland metropolilan area, most ofthe
Willametle Valley, the Coaslal area from Astoria to Coos Bay, and
portions of Washington along the Columbia River. Portland serves as
one ofthe largest ports on lhe West Coast and is a key distribution
center. Major businesses localed in NW Natural's service lerritory
include retail, manufacturing, and high{echnology induslries.
Customers
The NGD business serves residential. commercial. and induslrial
cuslomers with no individual cuslomer accounting for more than 10olo of
NW Naturalor NW Holdings revenues. On an annual basis, residenlial
and commercial customers typjcally account for approximately 60% of
NGD volumes delivered and approximately 90% of margin. lndustrial
customers largely account for the remaining volumes and margin.
Numberof
Melers
Yo ol
Margrn "'
Residential
Comrnercral
lndustrial
Other
Total
680,134
69,259
1,028
37yo
41o/o
65%
270k
A.
_oh
750,42',1 100%100%
8 EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 9 of2l0
Part ll - ltem 8. Financial statements and supplementary data in lhis
AnnualRepon on Form 10-K includes separate financial statements (i.e.
balance sheets. stalements of comprehensive income. slatements of
cash flows, and stalements olequity) for NW Holdings and NW Natural,
in that order. References in this discussion lo lhe "Notes" are to lhe
Noles to lhe Consolidated Financial Slatements in ltem 8 ofthis report.
The Notes to the Consolidated Financial Stalemenls are presenled on a
combined basis for both entities except where expressly noted
otherwise. All ltems olher lhan Part ll - llem 8. are combined for the
reporting companies.
The following table presents summary meter informalion for Ihe NGD
segment as of December 31, 2018:
Table oi Contenls
Generally, residentialand commercial cuslomers purchase bolh their
natural gas commodity (gas sales) and nalural gas delivery services
(lransporlation services) from the NGD business. lndustrial q]slomers
also purchase transponation services. but may buy lhe gas commodity
either from NW Natural or directly from a third-pany gas marketer or
supplier. Gas commodity cost is primarily a pass{hrough cost to
customers; therefore, prolil margins are not materially affected by an
induslnal cuslomer's decision to purchase gas from NW Nalural or from
ihird parties. lndustrial and large commercial customers may also select
between firm and inlerruptible service levels, wilh firm services generally
providing higher proflt margins compared lo interruplable services.
To help manage gas supplies. industrialtariffs are designed to provide
some certainty regarding induslrial customers' volumes by requiring an
annual service election, special charges for changes between elections,
and in some cases, a minimum or maximum volume requiremenl
before changing options.
Cuslomer growlh rales for natural gas utilities in the Pacific Northwest
hislorically have been among the highesl in the nalaon due lo lower
market saluration as nalural gas became widely available as a
residential heating soure after olherfuel options. We eslimale nalural
gas was in approximately 63% of singlejamily residential homes in NW
Nalural's service terrilory in 2018. Cuslomer growth in our region comes
mainly from the following sources: singlejamily housing, both new
construction and conversions; multifamily housing new construclion; and
commercial buildings, bolh new construction and conversions. Single-
family new construction has consistently been our strongest performing
source of groMh. Conlinued customer growlh is closely tied lo lhe
comparalive price ofnatural gas lo eleclricity and fueloiland the
economic health of Portland, Oregon and Vancouver, Washington. We
believe there is potential for conlinued groMh as natural gas is a
prefered energy source due to its affordable, reliable, and clean
qualitaes.
Comoetitive Conditions
ln its seNice areas, lhe NGD business has no direct compelition from
other natural gas distributors. However, it competes with other fonns of
energy in each cuslomer class. This competition among energy
suppliers is based on price, efficiency, reliability, performance,
preference markel condilions. technology, federal, slate. and local
energy pohry. and environmenlal impacls.
For residentialand small lo mid-size commercial cuslomers. the NGD
business competes primarily wilh providers ol electricity, fuel oil, and
propane.
ln ihe industrial and large commercial markels, the NGD business
compeles with all forms of energy. including competilion from wholesale
naluralgas marketers. ln addition, large induskial customers could
bypass NW Natural's nalural gas distribution syslem by installing their
own direct pipeline connection lo the interslate pipeline
system. NW Natural has designed cuslom transportalion service
agreements with several large industrial customers lo provide
kansportation service rates that are compeiitive with the customers
costs of inslalling their own pipeline.
Seasonalitv of Business
The NGD business is seasonal in nature due to higher gas usage by
residenlial and commercial customers during the cold winter heatlng
months. Other categories of cusiomers experience similar seasonality in
their usage bul to a lesser extent
Reoulation and Ratea
The NGD business is subject to regulation by the OPUC and WUTC.
These regulatory agencies authorize rates and allow recovery
mechanisms to provide the opportunily lo 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 ofaccounts and issuance ofsecurities
by NW Natural.
NW Natural Illes general rale cases and rate tariff requests periodically
with the OPUC and WUTC to establish approved rales, an authorized
ROE, an overall rale of retum on rate base (ROR), an authorized c2pital
slruclure, and other revenue/cosl deferral and recovery mechanisms.
NW Natural is also regulated by lhe FERC. Under NW Natural's Misl
interstate slorage certificate with FERC, NW Natural is required to file
either a petition for rate approval or a cosl and revenue study every live
years lo change or justify maintaining the existing rates for the interstate
storage setuice.
For further discussion on our most recent general rate cases, see Parl ll,
Item 7. "Results of Ope.ations-Regulatory Mallerc-Regulation and
R€tes'1
Gas Supply
NW Natural strives to secure suflicienl, reliable supplies of nalural gas to
meet the needs of customers at lhe lowest reasonable cost, \iyhile
mainlaining 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;. Oiverse Supply - providing daversity of supply sources;. DiveEe ContBcts - mainlaining a variety of contract durations,
types, and counterparties: and. Cct Managementand Recovery - employing prudent gas cost
managemenl slralegies.
Reliabilitv
The effectiveness ofthe nalural gas dislribulion syslem ultimately resls
on whether reliable service is provided to NGD customers. To ensure
etfectiveness, the NGD business has developed a risk-based
methodology in which it uses a planning standard to serve lhe highest
firm sales demand day in any yearwilh 99% certainty.
The projected maximum design day firm NGD customer sendout is
approximately 10.0 million therms. Of this lotal,
NGD margin is also aflecled by olher dems. including miscellaneous seMces,
gains or losses from our gas cost incenlrve shanng mechanism, and olher
seNice fees.
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page l0 of2l0
Tabe of Contents
the NGD business is currently capable of meeting about 56% of
requirements with gas from storage located within or adjacent to lhe
service lerritory, while the remaining supply requirements would come
from gas purchases under firm gas purchase conlracls and recall
agreements.
To supplement near-term natural gas supplies, NW Naturalcan
segment lransportation capacity, if needed. Pipeline segmentation is a
natural gas traospo.tation mechanism under which a shipper can
leverage its firm pipeline transporlation capacily by separating it into
multiple segments with altemate delivery routes- The reliability ofservice
on these altemate routes will vary depending on lhe conslraints orthe
pipeline system. Forthose segments with acceptable reliabilaty,
segmentation provides a shipper with increased flexibility and polential
cosl savings compared to traditional pipeline service. Since 2014, the
NGD busaness has relied on segmenlalion offirm pipelane
transportation capacity that flows from Stanfeld. Oregon to various points
soulh of Molalla, O.egon.
We believe gas supplies would be sufficient to meet existing NGO lirm
customer demand in the event oI maximum design day weather
conditions.
Diversitv of SuoDlv Sources
NW Natural purchases gas supplies primaraly from the Alberla and
Bratish Columbia provinces of Canada and multiple receipt points in lhe
U.S. Rocky Mountains lo prolecl againsl regional supply disruptaons and
to take advantage of price differentials. For 2018, 6l'/6 of gas supply
came from Canada, wath lhe balance primarily coming from lhe U.S.
Rocky Mountain region. We believe gas supplies available in the western
United States and Canada are adequate to serve NGD customer
requiremenls for the foreseeable future. NW Natural continues to
evaluate the long-term supply mix based on projections ofgas
produclion and pricjng an lhe U.S. Rocky Mounlain region as wellas
other regions in North America. Additionally, the extraction ofshale gas
has increased the availability ofgas supplies throughoul Norlh America
for lhe foreseeable future.
NW Natural supplements firm gas supply purchases with gas
withdrawals from gas storage facilities, including underground
reseNoirs and LNG slorage facililies. Slorage facililies are generally
injected with naturalgas during the otf-peak months in lhe spring and
summer, and the 9as is withdrawn for use during peak demand months
in the winter.
The following lable presenls lhe storage facilaties available for NGD
business supply:
Maximum Daily
Deliverability
(lherms in
millions)
Designed
Storage
Capacily (Bcf)Sources of NGD supply
Firm supply purchases
Irrst underground storage (NGD only)
Company-owned LNG storage
Olf -system slorage conlracl
Pipeline s€gmenlalion capacdy
Recallagreements
Peak day citygate deliveries
3.4
31
19
05
06
04
0.1
34yo
31Vo
1990
SVo
6%
4Yo
1%
Gas Storage F6cililies
Owned Fac lity
Mist, Oregonr'r
Contracted FacilLty
Jackson Prai.ie, Washingtonrr'
LNG Faohties
Owned Facililies
Newporl Oregon
Portland, Oregon
3.1
05
06
'10.6
1'l
10
06
100 100%
The OPUC and WUTC have IRP processes in which utllities derlne
diflerent growth scenarios and corresponding resource acquisition
strategaes jn an effort to evaluate supply and demand resource
requirements, consider uncerlaanties in the planning process and the
need for flexibility to respond to changes, and establish a plan for
providing reliable servrce at lhe least cost.
NW Nalural files a full IRP biennially for Oregon and Washington with lhe
OPUC and the WUTC, respectively, and files updates between lilings.
The OPUC acknowledges NW Natural's action plan; whereas lhe \ ,/IJTC
provides notice that the IRP has met the requirements ofthe Washington
Administrative Code. OPUC acknowledgment ofthe IRP does not
constitute ratemaking approval of any specitic resource acquisition
slrategy or expendilure. However, the Commissioners generally indicate
that lhey would give considerable weighl in pruden@ reviews lo 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 Opetalions-Regulatory
Malters'.
rotal _________11 ________l! x
The l\rist gas storage facrlrty has a tolal maximum daily delverability of 5 4
million therm s and a total designed slorage capacrty ot aboul 1 6 0 Bcf, of
which 3 1 million lherms of daily deliverabilily and 10 6 Bcf of storage
capacjty are reserved tor NGD business customers
The storage facility is located near Chehalis, Washhgton and is contracted
from Northwest Pipeline, a subsidiary ofThe Williams Companaes
The Mist facilily serves NGD segment customers and as also used for
non-NGD purposes, primarily for conlracts wilh gas storage customers,
including utilities and third-party marketers. Under regulatory
agreements with the OPUC and WUTC, gas storage al 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.
l rhen slorage capacity is recalled lor NGD purposes il becomes part of
the NGD segment. ln 2018. the NGD business did not recall additional
deliverabilily or associated storage capacity to seNe cuslomer needs.
10 EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page I I of2l0
The following table shows the sources of supply projected to be used to
satisfy lhe design day sendout for the 2018-2019 winter heating season:
Therms Per@nl
ln addition, pipeline capacity and supply resources from certain NW
Nalural customers may be recalled if needed to meet high demand
requirements
Diverse Contract Durations and Types
NW Natural has a diverse portfolio ofshorl-, medium-, and long-term
firm gas supply contracts and a variety of contract types ancluding firm
and anterruptible supplies as well as supplemenlal supplies from gas
storage facilities.
The portfolio of tirm gas supply contracts typically includes the following
gas purchase contracts: year-round and winter-only baseload supplies.
seasonal supply with an option to call on additional daily supplies during
the winter heatang season; and daily or monthly spot purchases.
During 2018, a total of 743 milljon lherms were purchased under
contracts wath durations outlined in the charl below:
These activities, net ofthe amount shared, are included in otherlor
segment rePorting purposes.
1Aav"
Gas supply contracts are renewed or replaced as they expire. During
2018, no individual supplier provided over 10% ofthe NGD business gas
sUPPly requirements.
Gas Cost Management
The cosl of gas sold to NGO customers primarily consists of the
following ilems, which are included in annual PGA rales: gas purchases
from suppliers; charges from pipeline companies to lranspon gas to our
distribulion system; gas slorage cosls; gas reserves contracls; and gas
commodity derivative contracts.
The NGD business employs a number of strategies to mitigate the cost
ofgas sold to customers. The primary slrategies lor managing gas
commodaty price risk include:. negotiating fixed prices directly with gas suppliers;. negotiating linancial derivative contracts that: (1) effeclively convert
floating index prices in physical gas supply contracts lo fixed prices
(referred to as commodity price swaps); or (2) effuctively set a ceiling
or floor price, or both, on floaling index priced physical supply
conlracts (refe.red to as commodity price options such as calls,
puls, and collars):. buying physicalgas supplies at a set price and injecting the gas into
slorage for price stability and to minimize pipeline capacity demand
cosls;and. investing in gas rese.ves for longerterm price stability. See Note 12
for addilional informalion aboul our gas reserves.
NWNatural also conlractswith an independent energy marketing
company lo capture opporlunities regarding storage and pipeline
capacity when those assets are not serving the needs of NGO business
customers. Asset management activities provide opportunilies for cost of
gas savings for cuslomers and incremental revenues for NW Natural
through regulatory incentive-sharing mechanasms.
Gas Cost Recovery
lrechanisms for gas cost recovery are designed to be fair and
reasonable, with an appropriate balance between the interests of
customers and NW Nalural. ln general, naluralgas distribution aates are
designed lo recover the cosls of, bul not to earn a return on, the gas
commodity sold. Risks assocaated with gas cost recovery are minimized
by reselling cuslome. rales annually through the PGA and aligning
cuslomer and shareholder interests through the use ofsharing, wealher
normalization, and conservation mechanisms an Oregon. See Part Il,
Item 7, "Results of Opetalions-Regulatory Matlers" and "Results of
Operations-Business Segmenls-Natural Gas Distribution
Operations-Cosf orGas."
Transportation of Gas SuDplies
NW Natural's gas dastribution syslem is relianl on a single, bijireclional
inlerslale lransmission pipeline to b.ing gas supplies into the natural
gas distribulion system. Although dependent on a single papeline, the
pipeline s gas flows into the Ponland metropolitan market from two
direclions: (1) the north, which brings supplies from the British Columbia
and Alberla supply basins; and (2) the east, whach brings supplies from
Alberta as well as the U.S. Rocky lvlountain supply basans.
NW Natural incurs monthly demand charges related to firm pipeline
transporlation conlracls. These conlracts are mulli-year contracts with
expirations ranging froo 2019 to 2060. The largest pipelane agreemenls
are with Northwest Pipeline. NW Natural actively works with Northwest
Pipeline and olhers to renew contracls in advance otexpiralion lo ensure
gas transportation capacity is sufficaent to meel customer needs.
Rates lor inlerstate pipeline transporlation services are established by
FERC wathin the U.S. and by Canadian authorities for services on
Canadian pipelines.
As mentioned above. the service territory is dependent on a single
papeline for its natu.al gas supply. ln October 2018. a critical natural gas
pipeline in western Canada experienced a rupture and 9as supply to the
Pacific Northwest was disrupted. NW Natural was able to serve firm
NGD business customers during the incident with nalural gas from the
Mist storage facility and realagnment o, other supplies. Pipeline
disruptions, replacement projects, and long-term projected natural gas
demand in our region underscore the need for pipeline transportation
diversity. ln addition,lhere are polential industrial projects in the region,
which could increase the demand for naluralgas and lhe need for
additional pipeline capacity and diversity.
Currently. there are various interstate pipeline projects proposed,
including the TrailWest pipeline in which NW Holdings has an inlerest,
that could meet lhe forecasted demand groMh for NW Natural and the
region. However. lhe loc€lion oI any fulure pipeline proiect will likely
depend on lhe location of committed industrial projects. NW Holdings
and NW Naturalwill continue to evaluate and closely monitorthe
cunently prospected projects to determine the besl option for our
customers. NW Holdangs
Conlract Duralon (primary term)
Percent of
Purchases
Longlerm (one year or longer)
Short-lerm (more lhan one month, less than one year)
Spot (on€ monlh or less)
Total
2gqo
45
11
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 12 of 210
Tabie of Contenls
Table ol Contenls
has an equily inveslment in TrailWest Holdings, LLC (TWH), which is
developing plans to build the Trail West pipeline. This pipeline would
connect Transcanada Pipelines Limiled s (TransCanada) Gas
Transmission Northwest (GTN) interstate lransmission line to NW
Natural's natural gas distribution system. lf constructed, this pipeline
would provade another lransportation path for gas purchases from
Alberta and the U S. Rocky Mountains in addilion to the one that currently
moves gas lhrough lhe Northwest Pipeline system.
Gas Distribution
The primary goals ofgas distribution operalions are safety and reliabilily
ofthe system, which enlails building and malntaining a safe papeline
distribution system.
Safely and the protection ofemployees, customers, and the public at
large are, and will remain, top priorities. NW Natural constructs,
operales, and maintains the pipeline distribulion syslem and storage
operations with the goal of ensuring natural gas is delivered and stored
safely. reliably, and eflicjenlly.
NW Natural has one of the most modern distribution systems in the
country with no adentified cast iron pipe or bare sleel maan. The flnal
known bare steel was removed from lhe syslem in 20'15 and cast iron
pipe removal was completed an 2000. Since lhe 1980s. NW Natural has
laken a proactive approach lo replacemenl programs and partnered with
the OPUC and WUTC on progressive regulation to further safety and
reliability efforts for the distribution system. ln lhe past, NW Natural had a
cosl recovery program in Oregon that encompassed programs for bare
sleel replacement, transmission pipelane integrily managemenl. and
dislribution papeline integrily management as appropriale. For
dascussaon on currenl regulatory programs, see Part ll. ltem 7, "Results
of Operalions-Regu/atory M a lle G".
Natural gas dislribution businesses will conlinue to be subject to grealer
federaland state regulation in the future due to pipeline incidenls
involving other companies.
Additional operating and safely regulations from ihe lJ.S. Department of
Transporlation s Pipeline and Hazardous Materials Safety Administration
(PH[,4SA) are currently under development. ln 2016, PHMSA issued
proposed regulations to update safety requirements for natural gas
lransmission pipelanes. Final regulations are anlicipaled lo be issued in
2019. Current proposed regulations indacale a '1s-year timeline tor
implementation of compliance requirements. NW Natural will continue to
work diligently with industry associations as well as federal and state
regulators to ensure the safely of the system and compliance with new
laws and regulalions. The costs associated with compliance with
federal, state. and local rules are expected lo be recovered in rales.
North lvlist Gas Storage Expansion Project
ln Oregon, lhere is a need to inlegrate intermitlenl resources, such as
wind and solar, into the power system with policymakers committinq to
the eliminalion of coal fired electric generalion and moving loward a 50%
renewable electricity slandard by 2040. Flexable naluralgas-fired electdc
generation facilities and associated gas storage are necessary to
support lhe anlegration of renewable
resources. ln 2016, NW Naturalbegan expanding its gas slorage facilily
near Mist, Oregon to provide innovalive long-term, no-nolice underground
gas storage service to support gas-llred electric generating facilities lhat
are intended to facilitate the integration ofmore wind power into the
region's electric generation mix. Natural gas slorage enables generation
lo adjusl quickly when renewable energy. such as wind and solar, rises
and lalls.
The expansion project includes a new reservoir providang up to 2.5 Bcf of
available storage, an additional compressor slation with design capacity
of'120,000 dekatherms of gas per day, no-notice service lhat can be
drawn on rapidly. and a 13-mile pipeline to connect to Porlland General's
gas plants al Port Westward. The expansion project is considered part of
the NGD segment and has an estimated cost of approximalely $149
million. wilh a targeted in-service date during the spring of2019. See
additionaldiscussion in Part ll, ltem 7 "Financial Condation-Cash
F lows-/rvestirg Act vifles".
\ /hen the expansion is placed inlo service, lhe investment will be
included in rate base underan established tariffschedule already
approved by the OPUC, with revenues recognized consistent with the
schedule. Billing rales will be updated annually to the current
depreciable assel level and forecasted operaling expenses.
\/\/hile there are additional expansion opportunities in the Mist storage
field, further development is not contemplated at this time and any
expansion would be based on markel demand, project execution, cost
effectiveness, available financing, receipt offuture permits. and other
rights.
OTHER
Certain businesses and aclivities of NW Holdings and NW Nalural are
aggregated and reported as olher for segment reporting purposes.
These include the following busanesses and aclivities aggregaled and
reported as other under NW Holdings:. water businesses and water acquisition activities;. an equity method inveslment in TWH, a joint venture to build and
operate a gas transmission pipeline in Oregon. TWH js owned 50%
by NWN Energy. a wholly-owned subsidiary of NW Holdings, and
50o/o by Transcanada American lnvestmenls Ltd.. an indirect wholly-
owned subsidiary of TransCanada Coeoration;. a minority interest in the Kelso-Beaver Pipeline held by our wholly-
owned subsidiary NNG FinancialCorporation (NNG Financial); and. holding company and corporate activities as well as adjustmenls
made in consolidation
Additionally, lhe following businesses and activilies are aggregaled and
reported as other under NW Natural, a wholly owned subsidiary of NW
Holdangs:
12
EXHIBIT 2
PALFREYMAN, DI
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Page l3 of2l0
This expansion project will be dedicated solely to Portland General
Electric (Portland General), a local eleclric company, to supporl their gas-
fired eleclric powe. generalion facililies under an initial 3o-year contract
wath options lo extend. totaling up to an addilional 50 years upon mulual
agreemenl of lhe parties.
Table of Conlents
5.4 Bcf ofthe Mist gas storage facility conlracted to utilities and third-
party marketers:
naluralgas asset management activilies; and
appliance reiail center operalions.
WATER. During 2018, NW Water completed the purchase of four
privately-owned regulated waler utilaties serving approxamalely 22.000
people through 7.400 connections in lhe Pacific Northwest. Several
additional acquisition agreemenls for privately-owned waler utilities have
been signed, the largest ofwhich is a water and wastewater business in
Sunriver, Oregon serving 9,400 connections. These pending
transactions are subject lo public utility commission approvals and a.e
expected to close during 2019.
MIST GAS STORAGE, The Mist gas storage facility began operalions 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 c.ntracted with
other utilities and third-party marketers with these results reported in
other.
The overallfacility consisls of seven depleled natural gas reservoirs, 22
injection and withdrawal wells, a compressor station, dehydration and
conlrol equipmenl, galhering lines, and other relaled facililaes. The
capacily al Mist serving olher utrlilies and third-party marketers provides
multi-cycle gas storage services to customers in the inlerstale and
intrastate markets. The interstate slorage services are offered under a
limiled jurisdiclion blankel certificale issued by FERC Under NW
Natural's interstale storage certificate with FERC, NW Natural is required
to file either a pelilion for rale approval or a cost and revenue study every
five years to change orjustify maintaining the exisling rates for the
inlerstale slorage service. lntraslale lirm storage services in Oregon are
offered under an OPUC-approved rate schedule as an optional service to
certain eligible customers. Gas slorage revenues from the 5.4 Bcf are
derived primarily from firm service customers who provide energy-related
services, including nalural gas distribution. electric generation, and
energy marketing. The Misi facility benefits from limiled compelition as
lhere are few storage facilities in lhe Pacific Northwesl region. Therefore.
NW Nalural is able 1o acquire high value, mulli-year contracts.
ASSET MANAGEMENT ACTIVITES. NW Natural contracts w,th an
independent energy marketing company to provide asset management
services, primaraly through the use of natural gas commodily exchange
agreemenls and naturalgas pipeline capacity release transactions. The
results ofthese aclivities are included in other, except for the asset
managemenl revenues allocated to NGD business customers pursuant
lo regulatory agreements, which are reported in the NGD segment.
ENVIRONMENTAL MATTERS
elgp-elties and Facilities
NW Naturalowns. or previously owned. properties and facilities that are
currently being investigated that may require environmental remediation
and are subject to federal, slale. and local laws and regulalions related
lo environmenlal matlers. These laws and regulations may require
expenditures over a long time frame to address certain environmental
impacls Estimales of liabilities for environmental costs are difficult to
determine with precision because of the various factors that can affect
their ultimale disposition. These factors include, but are nol limited to,
the following:
' lhe complexity ofthe site;. changes in environmental laws and regulations at the federal, state.
and locallevelsl. the numbea of regulatory agencies or other parties involved:. new technology lhat 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 belween the estimated and actual period of time lhat must
be dedicaled to respond lo an environmenlally-contaminaled sile;
and. the application ofenvironmental laws that imposejoinl and several
liabilities on all polentially responsible parties.
NW Naluralhas received recovery of a poriion ofsuch envirofimental
cosls through insurance proceeds, seeks the remainder of such cosls
lhrough customer rates, and belaeves recovery oflhese costs is
probable- ln Oregon, NW Natural has a mechanism lo recover expenses,
subject to an earnings test and allocation rules. See Part ll, ltem 7,
"Results of Operations-Rate l\ratters-Rate i,4echanisms-
Envionmental Costs". Note 2. and Note '17.
Currenl 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 induslries, specified large greenhouse gas
emission sources, and facilities that emil 25,000 metrac ions or more of
CO2 equivalents per year. NW Natural began reporting emission
inlormation in 20'l '1. Under this reporting rule, local natural gas
distribution companies like NW Natural are required to report system
throughpul to lhe EPA on an annual basis. The EPA also has required
addilional greenhouse gas reporting regulataons to which NW Natural is
subject, requiring the annual reporting of fugitive emissions from
operalions.
13
F,XHII]IT 2
PALFRIIYMAN. DI
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Page l4 of 210
Greenhouse Gas Matters
We recognize our businesses are likely to be affected by requirements to
address greenhouse gas emissions. Future federal, stale or local
requiremenls may seek to limit emissions of greenhouse gases,
including both carbon dioxide (C02) and methane These polential laws
and regulations may require certain aclivilies to reduce emissions
and/or increase lhe price paid for energy based on ils carbon conlenl.
The Oregon and Washinglon legislatures and governors continue lo
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 9as emissions emitled by a wide variety of emission
sources, including eleclric and natural gas utilities, and would require
those entities wilh a compliance obligation to hold pe.mil9. or
allowances, to emit greenhouse gas emissions on a pea lon basis.
While there is uncertainty regarding lhe extent ofthe legislation. potential
compliance cosls, and cost sharing impacts of these and other similar
proposals, NW Natural cunenlly expects to be able lo recover
compliance costs associated with lhis type oflegislation in rates.
The outcome ofthese or any additional federal, state or localclamate
change policy developmenls cannot be delermined at this lime, but
these initialives could produce a number olresults including new
regulations, legal aclions. additional charges to fund energy efficiency
aclivities, or other regulatory actions. The adoption and implementataon
olany regulations limiling emissaons ofgreenhouse gases could
require NW Natural to incur compliance costs associated with our
customers'use, resultang in an increase in the prices charged to those
customers and in a potential decline in the demand lor natural gas over
time.
\Mlh environmental stewardship as one ofour core values, we conlinue
to take proactive steps to address greenhouse gas emissions in our
region and the communilies we serve. We believe NW Nalural and its
modern pipeline system has an importanl role to play in helping the
Pacific Northwest rnove lo a low-carbon, renewable-energy future.
We inlend lo vigorously pursue our role in a low-carbon future, and
believe we are positioned to do so. Currenlly, NW Nalural delivers more
energy in Oregon than any other utility, and use of natural gas by our
Sales and Transportation cuslomers' accounls for approximately 8% of
Oregon's greenhouse gas emissions according to the Stale ol Oregon
Departmenl of Environmental Ouality ln-Boundary GHG lnvenlory
Preliminary 2015 Figures. Sales of nalural gas to residential and
commercial customers - customers NW Natural procures gas for -
accounts for approximately 5olo oflhe stale's emissions. Using this as a
starting baselane, in 2017, NW Natural initiated a multi-pronged, multi-
year core utility stralegy to deliver grealer emission reduclions. Key
components ofthis strategy include enerqy efficiency and lhe continued
adoption ofthe company's voluntary Smart Energy carbon offset
program. NW Natural as 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 lollowing
NW l,latu€l:
Unionized Employeesr"
No.lunionized Emdoyees
Total Nw l{alural
635
532
1.167
Other Entities.
Water Company Employees
Other
Tolal Olher Entlies
16
15
31
Total Employees 1,198
"' Members of lhe Offic€ and Professional Employees lntemationellJnion
(OPEIU) Local No. 11. AFL'CIO.
NW Nalural's labor agreement with members ofOPElU covers wages.
benefits, and working conditions. On May 22, 2014, NW Natural's
unionized employees ratified 8 laboragreement (Joint Accord) that
extends lo November 30, 2019. and thereafter from year to year unless
either party serves notice ofits intent to negoliate modifications to the
collective bargaining agreement.
Certain subsidiaries may receive services from employees ofother
subsidiaraes. When such services involve regulated entities, those
enlities receiving services reimburse the entity providing services
pursuanl lo shared services agreemenls
EXECUTIVE OFFICERS OF THE REG'SIRANTS
For intormation concerning executive officers, see Part lll, ltem '10
AVA'LABLE
'NFORMAT'ON
NW Holdings and NW Nalural file annual, quart€dy and current repons
and other informalion with the Securities and Exchange Commission
(SEC). The SEC mainlains an lnternet site where reporls, proxy
statements, and other information filed can be read, copied, and
requested online at its websile (www.sec.gov). ln addilion, we make
available, free of charge. on our websile (www.nwnaluralholdinos.com),
our annual reporls on Form 10-K, qUarterly reports on Fo.m 10Q, curent
reports on Form 8-K, and amendments to those reports filed or
furnished pursuant lo Section 13(a) or 15(d) and proxy malerials filed
under Section 14 of the Securities Exchange Act of 1934, as amended
(Exchange Act), as soon as .easonably practicable after we electronically
file such materialwith, or furnish it to, the SEC. We have included our
website address as an inactive textual reference only. lnformation
contained on our website is nol incorporated by reference into this
annual report on Form 10-K.
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page l5 of2l0
14
Table of Coitents
The state ofWashington's Department of Ecology (DOE) enacled the
Clean Air Rule (CAR) in 2016, which capped the maximum greenhouse
gas emissions allowed from slationary sources, such as natural gas
utilities. For gas d islribulion ulilities, lhe production of emissions from
usage by their cuslomerswas considered lo be production ofemissions
attributable to the utility. ln December 2017, a Washington State Court
ruled thal the DOE lacked legislative authority to regulate non-emitting
sources, such as localdistribution companies. The DOE has appealed
the ruling and oralargumenls forthe appeal are expecled to take place
during 2019.
Table of Contents
NW Holdings and NW Natural have adopted a Code of Elhics 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 ofllcers and directors on our websate. Our
Corporate Governance Standards, Direclor lndependence Standards.
charlers ofeach ofthe committees ofthe Board of Direclors, and
additional information aboul NW Holdangs and NW Natural are also
available at the website. Copies of these documents may be requesled,
al no cosl, by wdting or calling Shareholder Servaces, NW Natural, One
Pacific Square, 220 N.W. Second Avenue, Portland. Oregon 97209,
lelephone 503-226{211 exl. 2402
15
EXHIBIT 2
PALFREYMAN, DI
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Page l6 of 210
ITEIVI 1A, RISK FACTORS
Risks Related to our Business Generally
REGULAIORY RISK. Regutation of NW Holdings and NW Natural's
regulated businesses, including changes in the rcgulatory environment.
failurc of rcgulatory authotities to apprcve rcldswhich ptovide lot tinely
recovery of costs and an adequate retum on invested capital, ot an
unlavorable outcome in regulatory proceedings may adversely impact
NW Holdings and NW Naturals tinancial condition and rcsults of
oqerctions-
The OPLJC and WUTC have general regulatory authority over NW
Natural s gas and NW Holdings'water utility businesses in Oregon and
Washinglon, respectively, including: the rates charged lo customers;
authorized rates of return on rate base, including ROE; the amounts and
lypes of securities our regulated utility companies, like NW Nalural. may
issue; servaces our regulated utality companies provide and the manner
in which they provide them; the nature of inveslments our ulility
companies make, and, deferral and recovery of various expenses,
includang, but not limited to, pipeline replacemenl, environmenlal
remediation cosls, commodity hedgang expense. transaclions wilh
atfiliated interests, certain employee benetit expenses such as pension,
weather adjuslment mechanisms, and other matters. The OPUC and
WUTC also regulate aclions inveslors may lake with respect to our utility
companies, NW Natural and NW Holdings. Similarly, FERC has
regulalory authoraty over NW Nalural's interstale storage services, and
the CPUC has regulatory authority over NW Holdings' Gill Ranch slorage
operatjons. Additionally, expansion of our businesses. including into
water or olher seclors, could result in regulation by other regulatory
authorilies. For example, NW Holdings' has acquired a water utility
business in ldaho that is conespondingly subjecl to regulalory authority
of the IPUC
The prices lhe OPUC, WUTC, IPUC, and possible future regulalors allow
us lo charge for retail service, and the maximum FERC-approved rales
FERC authorizes us to charge for interstate slorage and relaled
kansporlation servi6es, are the most significanl factors affecting both
NW Natural's and NW Holdings' financial position, results ofoperations
and liquidity. The OPUC, WUTC, IPUC and
possibie future regulators have lhe authority to disallow recovery of cosls
they find imprudently incurred or otherwise disallowed. Additionally, the
rates allowed may be insufficienl for recovery of costs incurred. We
expect to continue to make expenditures lo expand, improve and operate
our gas and water utility dislribution and gas slorage systems.
Regulators can find such expansions or improvements of expendilures
were nol prudenlly incurred, and deny recovery. Additionally, while the
OPUC, WUTC and lPuC have established an aulhorized rale of return for
our utility businesses through the ratemaking process, the regulatory
process does nol provide assurance that we will be able lo achieve the
earnings level authorized. iroreover, in lhe normal course of business
we may place assets in servace or incur higherlhan expected levels of
operating expense before rale cases can be filed lo recover lhose cosls-
this is commonly referred lo as regulatory lag. The failure of any
regulalory commissaon to approve requesled rate increases on a timely
basis to recover increased costs or lo allow an adequate relurn could
adversely impacl 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 panies, including govemmenlal
agencies, consumer advocacy groups, and olher lhird parties. Each party
has differing concerns, bul allgenerally have the common objective of
limiting amounts included in rates. We cannot predict lhe liming or
oulcome ofthese delerred proceedjngs or the effects oflhose oulcomes
on NW Holdings' and NW Natural's results of operalions and financial
condilion-
ENVIRONiTEiITAL LIABILITY RtSx. Ce/.tal, of^iW Nalu?ls, and possibly
NW Holdings. propedies and facilities rnay pose environmental isks
rcquiihg remedialion, the cosls of which aG difficult to estifiate and
which could adveBely atfecl NW Holdings and NW Naturals financial
cohdition, results of opeftlions, and cash flows.
NW Natural owns, or previously owned. propeflies lhat require
environmental remedialion or other action. NW Holdings or NW Natural
may now. or in the future, own other properlaes thal require
environmental remedialion or other action. NW Natural and NW Holdings
accrue all material loss contingencies relalang to lhese properties. A
regulatory asset at NW Natural has been recorded for estimated costs
pursuant lo a Deferral Order from the OPUC and WUTC. ln addition 1o
mainlaining regulalory deferrals, NW Natural settled with most of its
historicalliability insurers foronly a portion ofthe costs it has incurred to
date and expects to incur in the fulure. To the extent amounts NW Natural
recovered from insurance are inadequale and il is unable lo recover
these deferred costs in utility cuslomer rales, NW Naluralwould be
required lo reduce its regulalory assets which would result in a charge lo
earnings in the year an which regulatory assels are reduced. ln addition.
in Oregon. the OPUC approved the SRRM, which limits recovery of
deferred amounts to lhose amounls which salisfy an annual prudence
review and an earnings test that requires NW Naturalto conkibule
addilional amounts loward environmental remediation costs above
approximately $'10 million in years in which NW Natural earns above its
16
EXIIIBIT 2
PALFREYMAN. DI
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Page l7 of 210
Table o, Contents
NW Holdings' and NW Natural's business and fanancial results are
subject to a number of risks and uncertainties, many of which are not
wathin our control, which could adversely affect our business, financial
condition, and results of operations. Additional risks and uncertainties
lhat are hot currently known to us or lhat are not currently believed by us
lo be material may also harm our businesses, financial condition, and
results of operations. When considering any investmenl in NW Holdings'
or NW Natural's securities. anveslors should carefully consider the
following information. as wellas information contained in lhe caption
"FoMard-Looking Statemenls", llem 74. and our otherdocumenls filed
with the SEC. This list is not exhaustive and lhe order ofpresentation
does nol reflecl management's dete.manation of p.iority or likelihood.
Additionally, our listing of risk factors that primarily affects one ofour
businesses does not mean that such risk faclor is inapplicable to our
other businesses.
authorized ROE. To the etent NW Natu.al eams mo.e lhan its aulhorized
ROE in a year. il would be required to cover environmental expenses
greaterthan the $10 million with those earnings that exceed ils
authorized ROE. The OPUC ordered a review of the SRRM in 2018 or
when we oblain greater cerlainty ofenvironmental cosls, whachever
occurs firsl. We submilled informalion for review in 2018. and believe we
could be subject lo further review. These ongoing prudence revaews, the
earnings test, or lhe periodic review could reduce the amounts NW
Nalural is allowed lo recover, and could adversely affect NW Holdings' or
NW Natural s financial condition, results ofoperalions and cash flows.
lvloreover, we may have disputes with regulators and olher parlies as to
the severily of parlicular enviaonmenlal mallers, what remediation eflorts
are appropriate. and the portion of the costs NW Natural or NW Holdings
should bear We ca nnot predict with certainly lhe amou nt or liming of
fulure expenditures relaled lo environmental investigations. remediation
or other action, the portions of these costs allocable to NW Natural or
NW Holdings, or dispules or litigalion arising in relation thereto.
Environmental liabilily estimates are based on current remediation
technology industry experience gained at similar sites. an assessmenl
of probable level of responsibilily, and the financial condilion of other
potentially responsible parties. However, it is difficull to eslimale such
costs due lo uncerlainties surrounding ihe course of environmenlal
remediation, the prelimanary nalure of certain site investigalions. and the
applicalion of environmental laws thal imposeioint and severalliabilities
on all polenlially responsible parties. These uncertainties and dispules
arising therefrom could lead to further adversarial adminislralive
proceedings or litigalion. wrth associated costs and uncerlain outcomes.
allofwhich could adversely atfect NW Hotdings orNWNatural's
flnancial condilaon, resulls of operations and cash flows
EtIVIROIMENTAL REGULATION COMPLIAI{CE RISK. NW Hoid,rqs ard NW
Natural arc subject to environmental regulations for ouongoing
businesses, compliance with which could advercely atfect ouroperations
orfinancial results.
NW Holdings and NW Natural are subject to laws, regulations and other
legal requirements enacted or adopted by federal, state and local
governmental authorilies relating lo protection ofthe envi.onment,
including those legal requirements thal govern discharges of
substances into the air and waler, lhe management and disposal of
hazardous substances and waste, groundwater quality and availability.
planl and wildlafe protection, and other aspects ofenvironmental
regulalion. Forerample, our naluralgas operations are subjecl lo
reporting requiremenls to the EPA and the ODEQ regarding greenhouse
gas emissions. These and olher current and future addilional
enviaonmental regulataons could resull in increased compliance costs or
additional operaling restrictions, which may or may nol be recoverable in
cuslomer rales or lhrough insurance. lfthese costs are not recoverable,
they could have an adverse effect on NW Holdings' or NW Nalural's
tinancial condition and resulls of operaiions.
GLOBAL CLIITIATE CHANGE RISK. Frlure /eglslation, regulation ot othet
initiatives (including ballot initiatives) to addressglobal climate change
may expose NW Holdingsand NW NaluQllo regulatory and financial
risk. Additiooally, ourbusinesses may be subjecl lo physical isks
associated wth climate change, a of which could adve6ely afrect NW
Holdings or NW Naturals financial condition, results of operations and
cash flows.
There are a number of international, lederaland state legislative and
regulatory iniliatives being proposed and adopted in an attempt to
measure, conlrol or limit the effects of global warming and climate
change, including greenhouse gas emissions such as carbon dioxide
and methane. For example, lhere are current legislalive efforts in
Oregon, Washington, and olher stales an which we operale lo cap or
otherwise reslricl the maximum GHGs an entity may emit without
reduction efforts or other undertakings. Such current or future legislation,
regulation or olher initiatives (including ballot initiatives) could impose on
our natural gas businesses operational requiremenls, addltional
charges 10 fund energy efficiency iniliatives, or levy a tax based on carbon
contenl. Such initiatives could resull in us incurring additionalcosts to
comply with the imposed restrictions, provide a cost advantage lo energy
sources otherthan naturalgas, reduce demand fornaluralgas. impose
costs or restriclions 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 lo such
requiremenls, and may impact cultural perception ol our services or
products negatively, diminishing the value ofour brand, all ofwhich 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, waler scarcity and changes in weather
condilions, such as changes in precipitalion, average temperatures and
exkeme wind orolherclimale conditions. A significant portion oflhe
nation's gas infraskucture is localed in areas susceptible lo storm
damage that could be aggravated by wetland and barrier island erosion,
which could give ise to gas supply interruplions and price spikes.
These and other physical changes could resull in disruptions to natural
gas production and transportalion systems polentially increasing lhe
cost of gas and affecting our natural gas businesses' abilily to procure
gas lo meel cuslomer demand. These changes could also aflect our
distribulion syslems resulting in increased maintenance and capital
costs, disruption of service, regulatory actions and lower cuslomea
salisfaction. Similar disruptions could occur in NW Holdings' water utility
businesses. Additionally, to the extent that climate change adve.sely
impacts lhe economic heallh orweather conditions of our service
lenitory directly. it could adversely impact cuslomerdemand or our
customers' abilily lo pay. Such physical risks could have an adverse
effect on NW Holdings' or NW Natural s linancial condition, resulls of
operations, and cash flows.
17
EX}IIBIT 2
PALFREYMAN. DI
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Page l8 of 210
Table of Contents
STRATEGIc TRAi{SACTION RISK. NLy Hold,irgs and NW Natural's abilily to
successlu lly complete slrclegic tran sactions, including merger,
acquisilion, diveslitule, joint venluo, busihess development pmjects ot
other strctegic transactions is subject to significant isks, including lhe
risk that rcquircd regulatory or govenmintal apprcvals may not be
obtained, dsks relating lo unknown prcblems or liabilties or problems ot
liabilities undisclosed to us. and the isk thal lor lhose or other reasons,
we hay be unable lo achieve some ot alloflhe benefitsthatwe
anticipate frcm such transactions, which could adversely affect NW
Holdings'orNW Natual s financial condition, Gsollsol openlions, and
cash flows-
From time to time. NW Holdings and NW Natural have pursued and may
continue lo pursue skategic lransaclions including merger, acquisition,
divestiture, joint venture, business development projects or other
strategic transactions, including the enlry by NW Holdings inlo lhe water
sector lhrough the acquisalion of a number ofwaler ulalilies and a water
services company, with NW Holdings' conlinuing to seek olher such
opponunities to acquire additional water companies- Any such
transactions involve substantial risks, including the following:. purchase or sale lransactions thal are conlracled for may fail to
close fora variety of reasons;. acquired businesses or assets may not produce revenues.
earnings orcash flow at anticipated levelS;. acquired businesses or assels could have, environmental,
permitting. or other problems for which clnt.aclual protections
prove inadequate;. there may be difficulties in integralion or operation costs of new
businesses;. there may be liabilities that were nol disclosed to us. lhat
exceed our estimates, ortorwhich our rights lo indemnification
from lhe seller are limiled;. we may be unable to obtain the necessary regulatory or
governmenlal approvals lo close a lransaction, such approvals
may be granted subject to terms lhal are unacceplable lo us, or
we may be unable lo achieve anticipated regulatory lreatment of
any such transaction, or such benetits may be delayed or not
occur at all: or. we may agree lo sell assets for a price that is less than the
book value of those assels.
One of more oflhese conditions could affect NW Holdings'and NW
Natural's financial condition, results of operalions, and cash flows.
BUSIIIESS DEVELOPMExT RISK. NW Holdhgs'and NW Natutal s business
developfient projects may encounler unanlicipafed obstac/es, cosls,
changes ordelays that could resull in a prcjecl becoming impaircd,
which could negatively nnpact NW Holdings or NW Naturals financial
condition , results of operations and cash flows.
Business development projecls involve many risks. We are curaently
engaged in several business development projects, including, but not
limited lo, NW Holdings' early planning and development stages for a
regional pipeline in O.egon, and NW Natural's expansion of its gas
storage facility at [Iist. We may also engage in other business
development projects such as inveslments in addilional long{erm gas
reserves, CNG refueling stations, RNG projects, o. projects in the water
sector. These projects may nol be successful. Additionally, we may not
be able to obtain required govemmental permits and approvals to
complete our projects in a cost-efficient or timely manner. potentially
resulting in delays or abandonment of the projecls. We could also
experience issues such as: startup and conslruclion delaysi
construction cost overruns: dispules wilh contraclorst the inabilily to
negotiate accepiable agreements such as rights-of-way, easements,
construction, gas supply or other malerial contractsi changes in
customer demand or comrnitment; public opposition to projects;
changes in markel prices; and operaling cost ancreases. Addilionally. we
may be unable to flnance our business development projects al
acceptable interest rates or within a scheduled time frame necessary for
complelang the project. One or more ofthese events could result in the
project becoming impaired, and such impaarment could have an adverse
effect on NW Holdings or NW Nalural's llnancial condition and results of
operations.
JOINT PART ER RISX. /rvest rg i.l bus,ress development projects
thtottgh padnerships, ioint vehturcs orothet business aftangefients
aflects our ability to rnanage cedain dsks and could adversely irnpact
NW Holdings or NW NatuQl s financial condilion, rcsulls ol operations
and cash llows.
We use joant venlures and other business arrangements to manage and
diversi, the risks of certain development projects, including NW
Holdings' Traal West pipeline and Gill Ranch Facility and NW Nalural's
gas reserves agreements. NW Holdings or NW Natural may acquire or
develop part-ownershap inlerests in other projects in the fulure. including
but not limited to. in the waler sector Under lhese arranqemenls. we
may nol be able lo fully direct lhe management and policies ofthe
business relationships, and other participants in those relationships
may take action conkary to our interests. including making operational
decisions that could negalively affect our costs and liabilities. ln addition,
other participants may withdraw from lhe project, divesl imponanl
assets, become financially distressed or bankrupt, or have economic or
olher business interests or goals that are inconsislenl with ours. For
example, in January 2019, Paofic Gas & Electric Company. which owns
the remaining 25 percent ofthe Gill Ranch Facility (75 perc4nt olwhich is
owned by NW Holdings). filed for bankruptcy protection. \ /hile NW
Holdings will monilor that bankruptcy proceeding, and take appropriale
actions in an attempt to prolect its anlerests, at does nol control, and
cannot predict, the outcome of such proceedings and the impact, if any,
ofthe proceeding on lhe operalions ofGillRanch orthe planned sale by
NW Holdings' of its interest in Gill Ranch.
NW Nalural's gas reseryes arrangemenls, which operate as a hedge
backed by physical gas supplies, involve a number of risks. including:
gas production lhal is significantly less than the expected volumes, or no
gas volumes; operaling costs that are higher than expected; changes in
the consolidated tax position or tax laws lhat could affecl NW Natural's
ability to take, or the timing of. certain tax benefits that impact lhe financial
outcome of this transactioni inherenl risks of gas production, including
disruption lo
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page l9 of2l0
Table of Contents
18
operations or a complete shut-in ofthe lleld; and one or more
participanls in one of these gas reserves arangements acting contrary
to NW Natural's interesls. ln addilion, while the cost of lhe original gas
reserves venture is currently included in customer rates and addilional
wells under that anangement are recovered at specilic costs. the
occurrence of one or more of lhese risks could affect NW Natural s ability
lo recover lhjs hedge in aales. Furlher. new gas reserves arrangemenls
have nol been approved for inclusion in rales, and regulators may
ultimately determine to not include allor a portion offulure kansactions
in rales The realizalion of any of the above mentioned situations could
adversely impacl NW Holdings' or NW Natural s financial condilion,
resulls of operations and cash flows.
OPERATING RISK. frarspofting and stoing naturclgas involves
nufiercus risks that fiay rcsult in accidenls and other operating tisks
and costs, some or all ol which fiay not be fully covercd by insurance,
and which coulc! adversely atlect NW Holdings or NW Natural's linancial
condition. results ol operalions and cash flows.
NW Holdings and NW Natural are subject to all ofthe risks and hazards
inherent an lhe businesses of gas distribution and storage, and water
dislributaon, including:. earthquakes, floods, storms, landslides and other severe weather
incidents and natural hazards:. leaks, losses or contaminalaon of nalu ral gas by other chemica ls or
compounds or by or of local water as a resull ofthe malfunction of
equipment or facilities;. damages from lhird parties. including construction. farm and utilily
equipment or other surface users:r operator erors;. hegative performance by our storage reservoirs. facilaties. orwells
that could cause us lo fail to meet expecled or forecasled
operational levels or conlraclual commilments to our customersl
' problems mainlaining, or the malfunction of, pipelines, wellbores
and related equipment and facililies thal form a part ofthe
infrastruclure that is criticallo the operation ofour gas distribution
and storage facilities;. collapse of underground slorage caverns;. operating costs that are subslanlially hagher lhan expecled;. migration of nalural gas through faults in the rock or lo some area of
the reservoirwhere existing wells cannol drain the gas effectively,
resulling in loss ofthe gas;. blowouts (unconkolled escapes of gas from a pipeline or well) or
other accidents, flres and explosions; and
' risks and hazards inherent in the drilling operalions associaled with
the development of the gas storage facilities, and wells.
These risks could .esull in personal injury or loss of human life, damage
to and destruction of properly and equipment, pollution or other
environmenlal damage, breaches of our conkactual commitments, and
may resull in curlailment or suspension ofoperalions, which in lurn
could lead to significanl costs and losl revenues Further, because our
pipelane, slorage and distributaon facilities are in or near populaled
areas, including residential areas, commercial business centers, and
industrial siles, any loss of human life or adverse financial oulcomes
resulting from such events could be signiticanl. Additionally, we may not
be able lo maintain the level or types of insurance we desire. and lhe
insurance coverage we do obtain may conlain large deductibles or lail to
cover certain hazards or cover all polenljal losses. The occurrence of any
operating risks not covered by insurance could adversely affect NW
Holdings' or NW Natural s financial condilion, results of operations and
cash llows.
BUSI ESS COtlTlllUlTY RISK. NW Holdings and NW NatuQl may be
adveEely impacted by localor national disasteB, pandemic illness,
leftonst aclivities, cyber-aftacks ordata breaches, and otherextreme
events to which we fiay not be able to prcmplly rcspond, which could
adversely affecl NW Holdings'orNW Naturcls opoations orfinancial
conditioo.
Local or nalional d isasters, pandemic illness, terrorist activlties, cyber-
attacks and data breaches. and olherexkeme events are a threat to our
assets and operations. Companies in critical infrastructure induslries
may face a heightened risk due to exposure lo acts of terrorism,
including physical and security breaches ofour informalion technology
infrastructure in the form of cyber-alta cks. These atlacks could target or
impacl our technology or mechanical syslems thal operale our
distribution, transmission or storage facilities and result in a disruption
in our operations, damage to our system and inability to meet customer
requiremenis. ln addition, the threat of lerrorist actlvities could lead to
increased economic instability and volatility in lhe price of natural gas or
other necessary commodities lhat could affecl our operalions.
Threatened or actual national disaslers or terrorisl activities may also
disrupt capilal or bank markets and our abilily lo raise capilal or obtain
debt financing, or impact our suppliers or our cuslomers directly Local
disasler or pandemic illness could result in part of our workforce being
unable to operate or mainlain our infrastructure or perform other lasks
necessary lo conducl our business A slowor inadequale response to
evenls may have an adverse impacl on our operations and earnings We
may not be able to maintain sufficient insurance lo cover all risks
associated wath local and national disasters, pandemic illness, terrorist
activities and other evenls. 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
evenl could adversely affect NW Holdings or NW Natural's operations or
financial results.
HOLDIIIG CONTPANY Dl.DEtlD RISK. As a hold,nq company, NW Holdings
depend,on ilsoperating sr.rbs/dlaries. including NW Natu@1. to meet
financial obligations ahd the ability of NW Holdings to pay dividends on
itscofimon stock is dependent on the receipt ofdividends and other
payments from its subsidiaries, including NW Natural.
As a holding company, NW Holdings' only significant assets are the
slock and membership interests of its operating subsidiaries, which al
this time is primarily NW Natural. NW Holdings'direct and indirect
subsrdiaries are separate and distinct legal enlitaes, managed by their
own boards ofdireclors. and have no obligation to pay any amounts to
their respeclive shareholders, whether through dividends, loans or other
payments. The abilily of these companies to pay dividends or make other
distribulions on their common stock is subjecl lo, among other lhingsl
lheir resulls of operations, nel income, cash flows and financial
condition. as well as the success of their business slrategies and
EXI]IBIT 2
PALFREYMAN. DI
GI]M STATE WATER
Page 20 of 2 )0
1S
Table of Contents
Table ol Conlents
ln addition, the ability of NW Holdings' subsidiaries to pay upstream
dividends and make other distributions is subject to applicable stale law
and regulatory restnctions. Under the OPUC and WUTC regulalory
approvals for the holdang company formalaon. if NW Natural ceases to
comply wilh credit and capital slructure requirements approved by the
OPUC and WUTC, it will not, with limiled exceptions, be permitled to pay
dividends to NW Holdings. Under the OPUC and WIJTC orders
authorizing the holding company reorganization, NW Natural may not pay
dividends or make dislributions to NW Holdings if NW Natural's credil
ralings and common equity levels fall below specified ratings and levels.
lf NW Natural's long lerm secured credil ratings are below A- for S&P
and A3 for Moody's, dividends may be issued so long as NW Nalural's
common equity is 45% or above. lf NW Natural's long-lerm secured
credjt ratings are below BBB for S&P and Baa2 for Moody s, dividends
may be issued so lonq as NW Nalural's common equily is 46% or
above. Dividends may not be issued if NW Natural's long-lerm secured
credit ratings fall to 8B+ or below for S&P or Ba 1 or below for Moody's. or
if NW Natural s common equity is below 44%. ln each case, with the
common equity levelto be determined on a preceding or projected '13-
monlh basis.
EITPLOYEE BEI{EFIT RISK. The cost ol ptoviding pension and
postrctircneot healthcare benelits is subject lo changes in pension
assets and liabilities, changing employeo defiogaphics and changing
actuarial assumptions, which fiay have an adverse effecl on NW
Holdings'otNW Natunl s financial condition, resultsol ope@tions and
cash fiows.
Unlil NW Natural closed lhe 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 poslretirement healthcare benefits lo
eligible full-time ulility employees and relirees. About half of NW
Natural's cu.rent utillty employees were hired prior to these dates, and
lherefore remain eligible for these plans. Othe. businesses we acquire
may also have pension plans. The costs of NW Natural, or lhe olher
applicable businesses we may acquire, for providing such benefits is
subiect lo change in lhe market value ofthe pension assets. changes in
employee demographics includang longer life expectancies, increases in
healthcare costs, current and future legislative changes, and various
acluarial calculations and assumptions. The acluarial assumptions
used lo calculate our future pension and postretirement healthcare
expeflses may differ materially from actual results due lo significant
market fluctualions and changing withdrawal rates. wage rales, interest
aates and olherfactors. These differences may result in an adverse
impact on the amount of pension contribulions, pension expense or
olher poslretirement benelil costs recorded in future periods. Sustained
declines in equity markets and reductions in bond rales may have a
malerial adverse effect on the value ofthe pension fund assets and
liabililies. ln these circumstances. NW Naturai may be required to
recognize increased contributions and pension expense earlier than il
had planned to the extent that the value of pension assets is less than
the lotal
anticipaled liabilily under the plans, which could have a negative impact
on NW Holdings' and NW Nalural's financial condition, results of
operations and cash flows.
woRxFORCE RISK. Nty Holdings and NW Naturals bus/resses are
heavily dependeot on being able lo atthct ahd rctain qualilied
ernployees ahd maintain a competitive cost sttucturc wilh markel-based
salaies and employee benofits, and wotklotce disruptions could
adversely aftect NW Holdings or NW Natural's operations and results.
NW Holdings' and NW Natural's ability to implefient our business
stralegy and serve our customers is dependent upon our conlinuing
ability to attract and retain lalented professionals and a lechnically skilled
workforce, and being able to transfer the knowledge and expertise of our
workforce to new employees as our largely older workforce relires. We
expect that a significant po.tion oI our workforce will retire within the
cunent decade, which will require lhat we attract. train and retain skilled
workers lo prevent loss of instilutional knowledge or skills gaps. Withoul
an appropriately skalled workforce. our abilily to provide quality seNice
and meet our regulatory requiremenls will be challenged and this could
negatively impact NW Holding s and NW Natural's earnings. Addilionally,
a majority of NW Naturalworkers are represented by the OPEIU Local
N0.11 AFL-ClO, and are covered by a collective bargaining agreemenl
thatextends to November 30,2019. Disputes with lhe 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 relataonship and work stoppages
that could impact the lamely delivery ofgas and other services trom our
utility and storage facilities, which could straan relalionships wilh
customers and stale regulalors and cause a loss of revenues. The
collective bargaining agreemenls may also limil ourflexibility in dealing
with NW Natural s workforce, and the ability to change work rules and
practices and implement other efflciency-related improvements to
succ€ssfully compete in today's challenging marketplace. which may
negatively affect NW Holdings' and NW Natural's financial condition and
results of operations.
LEGISLATIVE, COMPLIA}ICE AT{D TAXING AUTHORITY RISK. A,/I4l Hoid,,gs
and NW Natural are subject to governmental rogulation, and compliahce
with local, stato and fede.al requirefienas, including taxing rcquircmenls,
and unlorcseen changes in or interyrclationsol such rcquiernents could
affect NW Holdings ot NW Natural sfinancial condition and resulls of
operctions.
NW Holdings and NW Nalural are subjecl to regulation by federal, state
and local governmenlal aulhorities. We are required to comply with a
variety of laws and regulations and to obtain aulhorizations, permats.
approvals and certiflcales from governmental agencies in various
aspecls of our business. Significant changes in federal, slate. or local
governmenial leadership can accelerale or amplify changes in exisling
laws or regulalions, orthe manner in which lhey are inlerpreted or
enforced. For example, the cunent U.S presadential administration has
made numerous leadership changes at federal administrative agencies
since the 2016 U.S. presidential election. l\4oreover, the U.S. Congress
and the U.S. presidenlial administration may
EXIIIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 21 of 2)0
20
general economic and competitive conditionsi the prior righls of holders
ofexisling and future debt securities and any future preferred stock
issued by those companiesi and any applicable legal restrictions.
Table ol Contenls
make substantial changes to fiscal, lax, regulalion and other federal
policies. The cunent U.S. presidential adminislration has called for and
implemented significant changes to U.S. fiscal policies, U.S- trade,
healthcare, immigration, foreign, and govemment regulalory policy. To
lhe extent the U.S. Congress o. U.S. presidential administration
implemenls changes to U.S policy, those changes may impact, among
otherthings, the U.S. and Olobaleconomy. internationallrade and
relations, unemployment, immigration, corporate taxes, healthcare, lhe
U.S. regulatory environment, inflation and other areas. ln addition, foreign
governments may implement changes to their policies, in response to
changes lo U.S. policy or olherwise. Although we cannot predict the
impact, afany, ofthese changes10 ourbusinesses, they could adversely
affect NW Holdings'or NW Natural's financial condilion and resulls of
operalions. Until we know what poliry changes are made and how those
changes impact our businesses and the business of our compelitors
over the long term. we will nol know if, overall, we will benefit from lhem
or be negatively affected by them
Though we cannot predicl changes in laws, regulalions. or enforcement,
we expectlhere to continue lo be a number of significant changes. We
cannot predict with cenainty the impact ofany future revisaons or changes
in inlerpretalions of existing regulations or the adoplion of new laws and
regulalions Additionally, any failure to comply with exisling or new laws
and regulalions could result in fines, penalties or injunclive measures
that could affect operaling assets. For example, under the Energy Poljcy
Acl of 2005, lhe FERC has civil authority under the Natural Gas Act to
impose penalties for current violalions of in excess of $1 million per day
for each violation. ln addition, as the regulatory environmenl for our
businesses increases an complexity, the risk of inadverlent
noncompliance may also increase. Changes in regulations, the
imposition of additional regulations, and lhe failure lo comply with laws
and regulalrons could negatively influence NW Holdings or NW
Natural's operating environment and results of operations.
Addationally, changes in federal, state or local tax laws and their relaled
regulations, or differing interprelalions or enforcement of applicable law
by a federal, state or local taxing authority, could result in subslantial cost
lo us and negatively affect our resulls ofoperalions. Tax law and its
related regulalions and case law are inherently complex and dynamic.
Disputes over interpretalions of lax laws may be settled with the taxing
authority in examination, upon appeal or through litigation Our
judgments may include reserves for potenlial adverse outcomes
regarding tax positions thal have been taken that may be subject to
challenge by taxing aulhorities. Changes in laws, regulalions or adverse
judgmenls and lhe inherenl difficulty in quantifying potentialtar effects of
business decisaons may negatively affect NW Holdings' or NW Natural s
linancial condition and resulls of operations.
ln this regard, the Tax Cuts and Jobs Act of 20'17 was approved by the
U.S. Congress on December 20, 2017 and sjgned into law by the U.S.
Presidenl on December 22,2017. This legislation makes significant
changes to lhe U.S. lntemal Revenue Code. Such changes include a
reduction in the corporate tax rale from 35% to 21% and limitalions on
cenain corporale deductions and credits, among other
changes. Certain of lhese changes may negatively affect NW Holdings'
and NW Natural's financial condition and results of operations.
There is uncertainly as to how our regulators will reflect the impact of the
legislation in rates. The resulting ratemaking lrealmenl may negatively
affect NW Holdangs'or NW Natural s financial condition and resLrlts of
operalions
SAFETY REGULATIOT{ RISK. NW Holdings and NW Naturul rnay
expetieoce iocreased federcl, state and local regulation ofthe salety ol
our systemsand operations which could adversely atrecl NW Holdings
ot NW Natural s operaling costs and financial rcsults.
The safety and protection oI the public. our customers and our
employees is and will remain our top prioraty. We are commatled to
consaslently moniloring and maintaining our distribution syslems and
storage operations lo ensure lhal naluralgas is acquired. stored and
delivered safely, reliably and efficiently. Given recenl high-profile natural
gas explosions, leaks and accidents in otherparts ofthe counlry
involving both distribution syslems and storage facilities. we anticipate
that the natu.al gas industry may be the subject of even greater federal,
state and local regulatory oversaghl. For example, in 20'16, the Protecting
our lnfrastructure of Pipelines and Enhancing Safety Act (PIPES Acl) was
signed into law increasing regulations for natural gas storage pipelines
and underground storage facilities. Similarly, in 2016, California passed
legislalion directing the Department of Oil, Gas and Geothermal
Resources (DOGGR) to develop regulalions affecting gas slorage
operations. DOGGR has issued regulations which require certain
integrity testing and tubing forwells al the Gill Ranch Facility wilhin lhe
next 7 years.
We intend to work dilagently with industry associations and federal and
slate regulators to seek lo ensure compliance walh lhese and other new
laws. We expecl there to be increased costs associated with
compliance, and those costs could be significant. lfthese costs are not
recoverable in our customer rates, they could have a negalive lmpact on
NW Holdings and NW Natural's operating costs and financial results.
HErrclNG RISX- NWNalu@ls tisk managenlent policies and hedging
activities cannot eliminate the risk of commodity pice movemenls and
othetfinancial market isks, and its hedging activities rnay expose il to
additional liabilities fot which rate rccovery fiay be disallowed, which
could rcsult in an adveGe impact on NW Holdiogs and NW Naturcl's
operating revenues. cosls, de.ivallve assets and liabilities and opelating
cash flows.
NW Natural's gas purchasing requirements expose it to risks of
commodily price movements, while its use ofdebt and equity linancing
exposes il to interesl rate. liquidity and otherlinancial market risks. NW
Naturalattempls lo manage lhese exposures with bolh financial and
physical hedging mechanisms, including its gas reserves lransactions
which are hedges backed by physical gas supplies. \/vhile 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
21
EXIIIBIT 2
PALFREYMAN, DI
GEM STATE WATF,R
Page 22 of 210
incur addilional expenses to oblain lhe hedge. NW Natural does not
hedge its enlare inleresl rate or commodity cosl exposure. and the
unhedged exposure will vary overtime. Gains or losses experienced
lhrough hedging activities, including carrying cosls, generally flow
through NW Natural's PGA mechanism or aae recovered in future
general rale cases However, the hedge transactions NW Natural enlers
into for utilily purposes are subject to a prudence review by the OPUC
and WUTC, and, if found imprudent, lhose expenses may be, and have
been previously. disallowed, which could have an adverse effect on NW
Holdings or NW Natural's financial condilion and results ofoperalions.
ln addition, NW Natural's aclual business requirements and available
resources may vary Irom forecasts, which are used as the basis for its
hedging decisions, and could cause its exposure lo be more or less
lhan anticipated. lvloreover, if NW Natural's derivative instrumenls and
hedging lransactions do not quality for regulalory deferral and it does not
elect hedge accounting treatment Lrnder U.S. GAAP, NW Holdings' or NW
Nalural's resulls of operalions and financial condition could be adversely
affecled.
NW Natural also has credil-related exposure to derivative counterparties.
Counterparties owing NW Natural or its subsidiaries money or physical
nalural gas commodities could breach their obligations. Sho'rld the
counterparlies to these arrangements fail to perform, NW Natural may be
forced to enter into allemative arrangemenls to meel its normal
business requirements. ln that event, NW Holdings or NW Natural's
financialresults could be adversely affected. Additionally. under mosl of
NW Natural s hedging arangements, any downgrade oI its senior
unsecured long{erm debt credit rating could allow ats counterpartaes to
require NW Natural to post cash. a letter of credat or other form of
collaleral, which would expose NW Naturallo additional costs and may
trigger signiflcant increases in bonowing from its credit facilities or equity
contribution needs from NW Holdings, ifthe credit rating downgrade is
below investment grade. Further, based on cunenl inlerpretations, NW
Natural as nol considered a "swap dealer" or "major swap participanl" in
2019. so NW Natural is exempt from cerlain requirements under lhe
Dodd-Frank Act. lf NW Natural is unable to claim this exemption, it could
be subjecl to higher cosls 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 CAPTTAL HARKET RISK. NW Holdings'ot NW
Naturals inability to access capital, gt significant increases in the cost of
capilal. could adv,rsely aflecl NW Holdings'orNW Natural's linancial
condition and rcsults of operations
NW Holdings' and NW Nalural's ability to oblain adequale and cost
effective shorl-term and long-term financing depends on maintaining
inveslment 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 lo subsidiaries and olher
business requirements. NW Natural relies on access lo capilaland
bank markets. including commercial paper and bond markels, to finance
its operations, construction
expenditures and other business requiremenls, and to refund maturing
debt that cannot be funded entirely by internal cash flows. Disruptions in
capitalmarkets could adversely affect our abilaty to access short-term
and long-lerm financing. Our access lo runds under committed credit
facilities, which are currenlly provided by a number of banks, is
dependenton the abilily ofthe participaling banksto meet their funding
commilmenls. Those banks may not be able to meet their funding
commitments if lhey experience shortages of capital and liquidity.
Disruptions in the bank or capital fanancing markets as a result of
economic uncerlainty. changing or increased regulation ofthe financial
sector, or failure of major financial inslitutions could adversely affuct NW
Holdings'and NW Naturals access to capitaland negatively impact our
ability to run our businesses and make stralegic investments.
NW Natural is currenlly rated by S&P and Moody's and a negative change
in ils credil ratings. particularly below investment grade could adversely
affeci its cost of borrowing and access lo sources of liquidity and capital.
Such a downgrade could further limit its access lo bo.rowing under
available credil lines. Addilionally, downgrades in its current credit
ralings below investment grade could cause add(ional delays in NW
Natural's ability to access lhe capital markets while it seeks
supplemental stale regulatory approval, which could hamper its ability to
access credil markets on a timely basis. NW Holdings' credil profile is
largely supported by NW Nalural's credit ratings and any negalive
change in NW Naturals credil ratings would likely negatively impact NW
Holdings access to sources of liquadily and capatal and cost of
bonowing. A credit downgrade to NW Nalural, or resulling negative
impact on NW Holdings, could also require additional support in the
form of letlers of credit, cash or olher forms of collateral and otherwise
adversely affect NW Holdings' or NW Natural's financial condition and
results of operations.
REPUTATIOIAL RISKS. Customers', legi slators', and regulators' opinions
of NW Holdings and NW Natutal arc affected by rnany factors, including
syslem reliability and safely, prctection of customet inlormalion. rates,
media covercge, and public sentimenl. To the extent that custome6.
legislators, ot rcgulators have ordevelop a negative opinion ofour
b./s,resses, NW Holdings and NW Natural sfinaocial positions, results of
oporations and cash flowscould be adversely affected.
A number of faclors can affecl customer satisfaction including: service
interrirptions or safety concerns due lo failures ofequipment or facilities
or from other causes. and our abilaty to promptly respond to such
failures; our ability to safeguard sensitive customer informalioni the
timing and magnitude of rate increasest and volatilily 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, whelher factual or nol, lhat damages our
brand and repulation.
lf customers, legislalors, or regulators have or develop a negalive
opinion of us and our services, lhis could result in ancreased regulatory
oversight and could affect the relurns on common equily we are allowed
to earn. Additionally,
22
EXHTBIT 2
PAI-FREYMAN. DI
GIIM STATE WATFR
Page 23 of 2l 0
Tabe of Contents
negative opinions about us could make it more difficult for us lo achieve
favorable legislalive or regulalory oulcomes. Negative opinions could
also result in sales volumes reduclions or increased use of other
sources ofenergy. Any of these consequences could adversely affecl
NW Holdings or NW Natural s financial position, results of operations
and cash flows.
RELIANCE ON TECHNOLOGY RISK. NW Holdings and NW Natumls effotls
to integ@te, consolidate and streamline each of lheiroperalions has
resulted in increased rcliance on technology, the failure or security
brcach of which could adversely affect NW Holdings or NW Nalurcl s
financial condition and re sulls of oparations.
Over lhe last several years NW Holdangs and NW Natural have
undertaken a variety of initiatives to integrate, standardize, centralize and
streamlane operalions. These efforls have resulled in grealer reliance on
technologicaltools such as, at NW Natural: an enterprise resource
planning system, an automated dispalch syslem, an automaled meter
reading system, a customer information system, a web-based ordering
and lracking system. and other similar technological tools and initiatives.
The failure olany of these or other similarly imporlant technologies. or
our inabilily to have these technologies supported. updated. expanded or
integrated into olher technologies, could adversely impact operations.
We take precautions to protect our syslems, bul there is no guarantee
lhal lhe procedures we have implemented to protect against
unauthorized access to secured dala and systems are adequate to
safeguard againsl all security breaches. Our businesses could
experience breaches of security pertaining to sensilive customer,
employee, and vendor information mainlained by us in lhe normal
course of business, which could adversely affect our reputation, diminish
customer confidence, disrupt operations, materially incaease lhe costs
we incur to protect against these risks, and subject us to possible
flnancial liability or increased regulalion or litigataon, any ofwhich could
adversely affect NW Holdings' or NW Natural's financial condition and
resulls of operations.
Furthermore, we rely on information technology systems in the operalion
ofour businesses. There are various risks associated with these
systems, including hardware and software failure, communications
failure, data distortion or destruclion, unauthorized access to data,
misuse of proprielary or confidential data. unauthorized control through
eleclronac means, programming mislakes and olher inadvertent errors
or deliberate human acts. ln particular, clbersecurity attacks, data
breaches, lerrorism or other malicious acls could damage, destroy or
disrupt all oI our busjness syslems. Any lailure of information technology
syslehs could resull in a loss of operalrng revenues. an increase in
operating expenses and costs lo repair or replace damaged assels. As
these potentialcyber security altacks become more common and
sophisticated, we could be required to incur cosls to strengthen our
systems or obtain specific insurance coverage against potential losses.
REGULATORY ACCOUI{TING RISK. /n fl,e fulure NW Holdings or NW
Naturcl may no longet meet the ctitetia forcontinued application of
regulalory accounting practices for all ot a podion of our rcgulated
operations.
lf we can no longer apply regulatory accountang, we could be required lo
wrile off our regulatory assets and precluded from the fulure deferral ol
cosls not recovered through rates al the time such amounls are ancurred
even if we are expected to recover these amounts Lom customers in lhe
fulure.
cAS PRICE RISK. Highe r naturcl gas commodity pdces and volatility in the
price of gas may advdrsely affecl NW Natural s NGD bus/ness, whereas
lowetgas price volatility may adversely affect NW Natutal6 and NW
Holdings gas sloQge bos,r,ess, /, each case regatively allecting Nw
Holdings and NW Nalural's rcsults of operalions and cash flows.
The cost of natural gas is affected by a vaiety of factors, including
weather, changes in demand, the level of production and availabilily of
nalural gas supplies, transportation conslraints, availabilily and cosl of
pipeline
capacity, federal and slate energy and environmenlal regulation and
legislation. natural disasters and other calastrophic evenls. national and
worldwide economic and political conditions. and the price and
availability of alternalive fuels. At NW Natural, the cosl we pay for nalural
gas is generally passed through to customers through an annual PGA
rate adjuslmenl. lf gas prices were to increase significantly, il would
raise the cosl of energy to NW Natural's customers, potentially causing
those cuslomers to conserve or swilch to altemale sources ofenergy.
Significant price increases could also cause new home builders and
commercial developers lo select alternalive energy so{rrces. Decreases
in the volume of gas NW Natural sells could reduce NW Holdings or NW
Nalural's earnings, and a decline in customers could slow growlh in
future earnings. Additionally, because a portion (10% or 20ol") of any
difference belween lhe estimated average PGA gas cost an rates and lhe
actual average gas cost incurred is recognized as current income or
expense, higher average gas costs than those assumed in selting rates
can adversely affecl NW Holdings' and NW Natural's operating cash
flows, liquidity and results of operations Additionally, notwilhstanding
NW Natural's current rate structure, higher gas costs could result in
increased pressure on the OPUC orthe WUTC lo seek other means to
reduce NW Natural's rate$, which also could adversely affeci NW
Holdings' and NW Natural's results of operalions and cash flows.
Higher gas prices may also cause NW Natural to experience an
increase in shorl{erm debl and lemporarily reduc€ liquidily because it
pays suppliers for gas when it is purchased, which can be in advance ol
when lhese cosls are recovered lhrough rates. Significanl increases an
the price of gas can also slow collection efforts as customers experience
ancreased difficulty in paying their higher energy balls. leading to higher
than normal delinquent accounls receivable resulting in greater expense
associated wilh collection eflorts and increased bad debt expense
Conversely. storage businesses benefit from price volatility, which
impacts the level ofdemand for services and the rates that can be
charged for storage seNices. Largely due to the abundant supply of
nalural gas made available by hydraulic fracturing techniques, natural
Oas prices have dropped sioniflcanlly to levels lhat are near historac
lows. lf prices and volatility remain low or decline further. then the
23
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 24 of 210
Table of Contents
Table ol Contents
demand for storage services. and lhe prices that we will be able to
charge for lhose services, may decline or be depressed for a prolonged
period of time. Prices below lhe costs to operate a slorage facility could
result in a decision to shul-in all or a portion of the facility A sustained
decline in these prices or a shut-in ofallora portion ofthe facility could
have an adverse impacl on NW Holdings' or NW Natural's tinancial
condition, results of operations and cash flows.
IMPAIRMENT OF LOi{G-LtvED ASSETS OR GOODI/YILL RISK. lmpaimenls of
the value ol long-lived assels ot goodwill could have a maleial effect on
NW Holdings ot NW Natu@ls fioancial conditioo, ot rcsults ofopeQlions
NW Holdings and NW Nalural review the carrying value of long-lived
assets whenever events or changes in ctcumslances indicate lhe
carrying amount ofthe assets might not be recoverable. The
delermination of recoverability is based on the undiscounted nel cash
llows expected lo result from the operation ofsuch assels. 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 impairmenl of long-lived assets at the Gill Ranch Facility as of
Dec€mber 31, 2017. We review our other long-lived assets to determine
if an impairment analysis is necessary.
We review the carrying value ofgoodwill annually orwhenever evenls or
changes in circumstances indicate that such carrying value may not be
recoverable. A goodwill impairment analysis begans with a qualitative
analysis ofeventsand circumstances. lf the q ualitative assessment
indicates that the carrying value may be al risk, we wall perform a
quantilalive assessment and recognize a goodwill impairment for any
amount in which lhe fair value of a reporlang unit exceeds ils fair value.
Any impairment charge taken with respect to our longiived assets or
goodwill could be material and could have a malerial effecl on NW
Holdings or NW Natural's Iinancialcondition and results ofoperations.
cUSTOITER GROWTH RtsK. NW Holdings and NW Naturcls NGD maryin,
earnings and cash flow may be negatively alfected if we are unable to
sustain customer grcwth rates in our NGD segmenL
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, lo the new conslruclion housing markel, 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 conslruclion has resumed and the multi-
family composataon has been higher lhan ats pre-recession pace, overall
construction has not returned lo the pre-recession pace, and there are
prediclions ofan impending new recessionary cycle. lnsufrlcient growth
in these markets, for economic, polilical or other reasons could
adversely affect NW Holdings' or NW Natural's utality margin, earnings
and cash flows.
RISX OF COI{PEnTION. Oul/VGD brlsiness is s ubject to incredsed
competition which could negatively affect NW Holdings ot NW Natural's
resulls of o@Gtiong
ln lhe residential and commercial markets. NW Nalural s NGD business
competes primarily with suppliers of electricity, fuel oil, and propane. ln
the induslrial market, NW Natural competes with suppliers of all forms of
energy. Competition among these forms of energy is based on price.
efficiency, reliabillty, performance. markel conditions, technology,
environmental impacls and public perception. Technological
amprovemenls in other energy sources such as heal pump$, batteries or
other alternative technologies could erode NW Natural s compelilive
advantage. lf nalural qas prices rise relative to olher energy sources. or if
the cost. environmental impact or public perception ofsuch other energy
sources improves relalive to naturalgas, it may negatively affect NW
Natural s ability to attracl new customers or.elain our exisling
residenlial, commercial and andustrial customers. which could have a
negative impact on our cuslomer growlh rale and NW Holdings'and NW
Natural's results of operations.
Our natural gas slorage operations compete primarily with olher slorage
facilities and pipelines. Natural gas storage is an increasingly
compelative business, with lhe abillty to expand or build new slorage
capacity in Califomia, the U S. Rocky Mounlains and elsewhere in the
Uniled States and Canada. lncreased competrtion 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 exisling conlaacts al rales sufficient
to maintain currenl revenues and cash flows, which could adversely
affect NW Holdings' and NW Natural's financial condilion, results of
operalions and cash flows.
RELIANCE ON THIRD PARTIES TO SUPPLY NATURAL GAS RISX, NW NaTOTal
relies oo third pafties to supply the natuQl gasin its NGD segfienl. and
limitalionson NW Natuals ability lo obtain supplies, orfailure to rcceive
expected supplies for which it has cohttacted. coulcl have an adve.se
impact on NW Holdings or NW Nalural's financial results
NW Natural s ability to secure nalural gas for current and future sales
depends upon ils ability lo purchase and receive delivery ofsupplies of
natural gas from third parlies. NW Natural, and in some cases, its
suppliers of natural gas, does not have conkol over the availabilily of
natural gas supplies. competition for those supplies, disruptions in
those supplies, priorily allocalions on transmission pipelines, or pricing
of those supplies. Additionally, third parties on whom NW Natural relaes
may fail to deliver gas for which it has contracted For example, on
October9,2018, a 36-inch pipeline near P.ince George, British
Columbia owned by Enbridge ruplured, disrupting naturalgas flows from
Canada anlo Washanglon while the ruplured pipeline and an adjacent
pipeline were assessed and the ruplured pipeline was repaired. Once
repaired, pressurization levels for those pipelines were reduced for
assessment and testing. lf NW Natural is unable or limited in its ability to
oblain natural gas from ils currenl supplaers or new sources, il may nol
be able to meel customers'gas requirements and would likely incur
costs associaled with actions necessary lo miligale service disruptions.
both of which could significantly and negalively impact NW Holdings and
NW Natural s resulls of operations.
24
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 25 of2l0
Table of Conlents
sll{GLE rRA'{SPoRTATIoN P|PELINE RISK. Nlry Naturul relieson a single
pipeline company fot the transpottation of gas to its sevice terntory, a
disruption ofwhich could adve$ely impact its ability to meet cuslome6
gas requienents, which could significantly and negatively impact NW
Holdings'and NW Nalu,als results of opeations.
NW Natural's distribulion system is directly connected lo a single
interslate pipeline, which is owned and operated by Northwest Pipeline.
The pipeline's gas flows are biiirectional, kansporting gas inlo the
Portland metropolilan marketfrom two directions: (1) lhe north. which
brinqs supplies from the Brilish Columbia and Alberla supply basinsi
and (2) the easl, which brings supplies from the Alberla and lhe u.S.
Rocky L4ountain supply basins. lfthere is a rupture or inadequate
capacily in Ihe pipeline, NW Natural may not be able to meet its
customers'gas requiaements and we would likely incur costs
assocaaled with actions necessary to mitigale service disruplions, both
of which could significanlly and negatively impact NW Holdings' and NW
Nalural's resulls of operaiions.
THIRo PARTY PlPELltlE RISK. NW Holdings'and NW Nalurals gas storcge
businesses depend on thid+ady pipelines thal connect our storcge
facilities lo ihleGtata pipelines, the failurc d unavailability ol which could
adversely alfect NW Holdings or NW Natu,a/s financial condition, rcsults
of opeations and cash tlows.
Our gas storage facilities are reliant on the continued operation of a
third-parly pipeline and other facilities that provide delivery oplions to and
from our slorage facilities. Eecause we do not own all of these pipelines,
thear operations are not within our control. lf the third-parly pipeline lo
which we are connected were to become unavailable for current or future
withdrawals or injeclions of natural gas due to repairs, damage to the
infrastructure, lack of capacity or other reasons, our ability to operate
efficienlly and salisfy our customers'needs could be compromised,
thereby polenlially havinq an adverse impacl on NW Holdings' or NW
Natural's llnancial condition, results of operations and cash flows
WEATHER RISX. Warnet than avetage weathermay have a negative
impact on ou revenues and results ol operations.
We are exposed to wealher risk in our nalural gas business. primarily al
NW Natural. A majority of NW Natural's gas volume is driven by gas
sales to space healing residential and commercial cuslomers during
the winter heating season. Currenl NW Natural rates are based on an
assumption olaverage weather. Warmer lhan average weather lypically
results in lowergas sales. Colder weather lypically results in higher gas
sales. Although lhe etfects ofwarmer or colder wealher on utilily margin
in Oregon are expected lo be mitigaled through the operation of NW
Nalural's wealher normalization mechanism, weather variations kom
normal could adversely affect utility margin because NW Natural may be
required lo purchase more or less gas at spot rates, which may be
higher or lower than the rales assumed in ils PGA. Also, a porlion of NW
Nalural's Oregon residential and commercial cuslomers (usually less
than 10%) have opted out ofthe weather normalization mechanism, and
11% of its customers are
localed in Washinglon where it does nol have a weathea normalization
mechanism. These effects could have an adverse effect on NW
Holdings and NW Naturals financial condition, .esulls of operations
and cash flows.
CUSToITER coNsERvATfoN RlsK. Customers conseNalion effons may
have a negative impact on NW Holdings' and NW Naturcls revenues.
ITEM 18. UNRESOLVED STAFF COMMENTS
We have no unresolved stafl comments.
An increasing nationalfocus on energy conservalion, including improved
building praclices and appliance efficiencies may result in increased
energy conservation by cuslomers. This can decrease NW Nalural's
sales of natural gas and adversely affect NW Holdings' or NW Natural's
results of operalions because revenues are collected mostly through
volumetric rates, based on the amount of gas sold. ln Oregon, NW
Natural has a conseNalion tariffwhich is designed lo recover lost utility
margin due to declines in residential and small commercial cuslomers'
consumption. However, NW Natural does not have a consetuation tarilf in
Washington that provides it this margin protection on sales to cuslomers
in lhat state. Similar conservalaon risks exist lor water ulilities.
Customers conservation efforts may have a negatave impact on NW
Holding's and NW Natural's financial condilion, revenues and results of
operalions.
l{Ew WATER SECTOR BUSIi{ESS. NW Hold/r,qs hasenlercd lhe watet
sectorthrough the acquisition of a numberof watercofipanies. Water
buslresses are sub./ect to a numberol i6ks in addtion lo lhe dsks
described above.
conlamination ofwaler supplies. including water provided to
customers;
inlerruptions an water supplies and droughts;
conservation efforts by cuslomers;
regulalory requirements; and
weather conditions
Significant losses, liabilities or impairments arising from these
businesses may adversely affect NW Holdings' financaal position or
results of operations.
25
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 26 of2l0
Risks Related Primarily to NW Holdinqs' Water Sector
Businesses
Allhough the water businesses are not currenlly expecled to materially
conlribute to lhe results ofoperations of NW Holdings, these
busanesses are subject to risks. in addition to lhose described above
thal could adversely affect lheir resulls of operations, includingl
Table ofConlenls
ITEM 2, PROPERTIES
NW Natural's Natural Gas Distribution Properties
NW Nalural's natural gas pipeline system consists of approximately
20,000 miles ofdistribution and lransmission mains located in its
service lerrilory in Oregon and Washinglon. ln addition, the pipeline
system includes servlce pipelines, melers and regulators, and gas
regulaling and metering stations. Natural gas pipeline mains are located
in municipal streels or alleys pursuanl lo franchise or occupalion
ordinances in county roads or stale highways pursuant to agreements
or permils granled pursuant to statule, or on lands of others pursuant lo
easements oblained from the owners of such lands. NW Nalural also
holds permils for lhe crossing of numerous navigable v/aterways and
Smaller tributaries throughoul our entire service territory.
NW Natural owns service building facililies in Portland, Oregon, as well
as various salellite service centers, garages, warehouses, and other
buildings necessary and usefulin the conducl ofils business. Resource
cenlers are maintained on owned or leased premises al convenient
points in the dislribution system to provide seNice wilhin NW Nalural's
service territory. NW Natural also owns LNG storage facilities in Po and
and near Newport, Oregon.
NW Natural also leases office space in Portland for ils corporate
headquarters. which expires on May 31, 2020. ln anticipation of the
expiralion ofthe current lease, NW Naturalexeculed an exlensive search
and evaluation process lhal focused on seismic preparedness, safely,
reliabilily, the least cost to our customers, and a conlinued commitment
to ouremployees and lhe communilies we serve. ln October 2017, NW
Natural entered into a 20-year ope.ating lease agreement for a new
headquarters in Portland. Payments under the new lease are expected
lo commence in 2020.
NW Natural's Mortgage and Deed ofTrust (Morlgage) is a first mortgage
lien on subslantially all ofthe property constitutang our naluralgas
distribution plant balances.
NW N?tural's Natural Gas Storaqe Properties
NW Natural holds leases and other property interesls in approximately
12,000 net acres of underground nalural gas storage in Oregon and
easements and other property interesls related to pipelines associated
with these facililies. NW Natural owns righls lo depleled gas reservoirs
near Mist. Oregon that are continuinq lo be developed and operated as
underground gas storage facilities. NW Natural also holds all fulure
storage rights in cerlain other areas of lhe l\,4isl gas lleld in Oregon in
addition to olher leases and property anlerests.
A porlion of these properties are used in lhe NGD segment
NWN Water's Distribution Properties
We own and maintain waler pipelines and hold related leases and other
property inleresls in Oregon, Washington, and ldaho, associated wilh
waler distribution entities that were acquired during 2018. Pipelines are
located in
municipal streets or alleys pursuanl lo franchise or occupation
ordinances, in counly roads or slate highways pursuanl lo agreements
or permils granled pursuant lo statute, or on landS of others pursuant to
easements obtaaned from the owners of such lands. These properties
are used by entities that are aggregated and reporled as olher under NW
Holdings.
We consider all of our properties currently used in our operalions, both
owned and leased. lo be well maintained, in good operaling condilion,
and along wilh planned additions. adequate for our presenl and
foreseeable future needs
ITEIVl 3, LEGAL PROCEEDINGS
Olherthan the proceedangs disclosed in Nole 17, we have only
nonmalerial liligation in lhe o.dinary course of business.
Not applicable
EXIIIBIT 2
PALFREYMAN. DI
CEM S'IATE WATER
Page 27 of 2l 0
26
These properlies are used in lhe NGD segment.
IIEM 4. MINE SAFETY DISCLOSURES
Table of Conlents
PART II
ITEM 5, MARKET FOR REGISTRANT'S COMMON EQUITY, RETATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EOUIry SECURITIES
TotalNumber
ol Shares Purchased"
Average
Pnce Paid per Share
Maximum Oolar Value of
Shares thal May Yet Be
Purchased lJnder lhe Plans or
Programs''
NW Holdings' common slock is listed and trades on the New York Stock Exchange under the symbol NWN.
There is no established public trading market for NW Nalural's common slock.
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 Nalural's
common slock.
The following table provides information about purchases of NW Holdings'equily securitieslhat are registered pursuant to Section 12 ofthe Securities
Exchange Act of 1934 du.ing lhe quarler ended December 31, 2018:
lssuer Purchases of Equity Securities
Total Number of Shares
Purct ased as Part of
Publicly An nou nced Plans or
Programsi
Balance foMard
10t01t1&1ot31t1a
't1t01/1a-11t30tla
12lO1t1&12131t1A
Tobl
2,124,524 S 16.732 648
S
1.147
2.124.52A $16,732,648
27
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 28 of2l0
69 02
1147
Oufing lhe quarter ended December 31, 2018, no shares of NW Holdings common slock were puachased on the open markel lo meel the requi€menls of our Dividend
Reinvestmenl and Oirect Stoc* Purchase Plan However, 1 , 1 47 shares ol NW Holdings common stock were purchased on the op€n markel to meel lhe requrrements of
shere-based compensaton programs. Ounng the quaner ended Oecember 31. 2018. no shares of NW Holdings common stock were accepted as payment for stock
optron erercises pursuanl to the NW Natural Restated Stock Opion Plan
During the quarler ended December 31, 2018. no shares of NW Holdings common stock were repurchased pursuani to the Boad-Approved share repurchase
program ln October 2018, we received NWHoldings Board Approvalto exlend lhe repurchase program through May2019 For more rnformalon on lhisprcgram, see
Note 5.
Table of Contenls
ITEM 6. SELECIED FINANCIAL DATA
NORTHWEST NATURAL HOLDING COMPANY
SELECTED FINANCIAL DATA
For the year ended Oecember 31
]n thalends except pet share data 2014 2017 2416 2015 2414
Operating revenues
Eamings from continuing operatons
Loss from d sconlinued operatrons, net oftax
Nel income (loss)
s 755,038 $
72,O73
(127.6S6)
(55.623)
668 173 6
62.419
(3,524)
58.895
717 888 S
60,026
15 323)
53.703
747,251
o,314)
58 692
Eamings frcm continuing operations per share ofcommon
stock:
Easrc
Diluled
Loss from discontinued operalions per share ofcommon
stock
Basic
Diluted
Earnings (Loss) per share ofcommon stock:
Basic
Diluled
Dividends paid per share of cornmon slock
234 $2.51
2.51
$226 s 2.19
2.19
s 243
242
s (0 10) I
(0.09)
(4.45) $
14 44)
(0.13) $
(0.13)
(0.23) $
(0.23)
(0 271
(0.26)
$224
224
189
s (1.94) $
(1.83)
188
2.'t3
2.12
187
s 1.96
1S6
186
s 2_16
216
165
Total assels. end of penod
Totalequity
Longtem debl"
3,242,62
782,AU
706,217
s 3,069,410
7@,972
569..t45
S 3.056,326
707,321
593,095
Excludes $20 million of long-term debl in 2014 associated with our discontinued operalrons
NORTHWEST NATURAL GAS COMPANY
SELECTED FINANCIAL DATA
For the year ended December 31
ln thousands, except pet sharc.lata 2018 2417 2016 2015 20'14
Operating revenues
Eamings from @nlinurng operations
Loss lrom discontinued operations, nel oftax
Net income (loss)
s 755,038 $
71,720
(127,343)
(s5,623)
667,949 $
62,835 $
(3,940) |
58,895 $
717,664 S
60,511 S
(6,808) $
53,703 $
747,O2
66,50
(7,81
58,69
Tolal assets, end of penod
Totalequily
Long-tem debt"'
s 3,192,736
715,668
704,1U
s 3 0{3,676 S
742,776 $
683,184 $
3,08't,470 S
850,497 S
67S,334 $
3,072,100
7fi,972
569 445
s
s
$
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 29 of 210
28
706,1,t3 $
67,311
(2,742)
64 569
5 3,039.746 $
712,774
483.'r84
3,079,801 $
850,,t97
679.334
705,571 $
68,049
11,723)
66,326
3 063,71
767,32
593,09
Excludes $20 million of long{erm debl in 2014 assocrated wth Gill Ranch discontnued operations
ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 1, 2018, we completed a reorganization into a holding
company struclure. We believe thal our holding company slructure is an
agile and efficient platform from which lo pursue, tinance. and oversee
new opportunilies, such as in lhe water sector. while also providing legal
separalion between regulated natural gas diskibulion operalions and
other businesses. ln this reorganization, shareholders of NW Nalural
(the predecessor publicly held parent cornpany) became shareholders
of NW Holdings, on a one-for-one basis, with lhe same number of
shares and same ownership percentage as lhey held in NW Natural
immediately prior to the reorganizalion. NW Natural became a wholly-
owned subsidiary of NW Holdings. Additionally. certain subsidia.ies of
NW Naluralwere lransferred to NW Holdings. As required under
accounting guidance, these subsidiaries are presented as disconlinued
operations in the consoladated results of NW Natural within this report.
NW Natural's natural gas distrjbution activitaes are reported in the nalural
gas distribution (NGD) segment, formerly titled and reported as lhe utility
segmenl. AII other business activities, including certain gas storage
aclivalies, water businesses, and other investmenls and activities are
aggregated and reported as olher at their respective registrant.
References in this discussion to "Noles" are lo lhe Notes to the
Consolidaled Financial Statements in ltem 8 ofthis report.
ln addilion, NW Holdings has reported discontinued operalions results
related to lhe pending sale of Gill Ranch Storage. LLC (Gill Ranch). NW
Natural Gas Storage. LLC (NWN Gas Storage), cunenlly an indirect
wholly-owned subsidiary of NW Holdings, entered into a Purchase and
Sale Agreemenl during the second quarter of2018lhat provides for the
sale of all membership interests in Gill Ranch. Gill Ranch owns a 75%
inlerest in the natural gas slorage facility located near Fresno, Califomia
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 Sto.age Facility. For more information, see "Resulls of Operations -
Ponding Sale ol Gill Rarch Sto.age" below.
The following is management's assessment of NW Holdings' and NW
Natural's financial condiiion, including the principalfactors that affecl
results of operataons. The discussion covers the years ended December
31,2018.2017 , and 2016 and refers to the consolidated resulls of NW
Holdings, the subslantial majority of which consist of the operaling
results of NW Natural. Vvhen significanl activity exists at NW Holdings
lhat does not exist at NW Natural, additional disclosure has been
p.ovided.
NW Holdings'direcl and indirect wholly-owned subsidiaries include
Northwest Natural Gas Company (NW Nalural);. Northwesl 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 disconlinued operation;
NNG Financial Corporalion (NNG Financial);. KB Pipeline Company (KB);
NW NaturalWater Company, LLC (NWN Water)i. Falls Water Co., lnc. (Falls Waler)i
" Salmon Valley Water Company;. Cascadia Water, LLC (Cascadia);. NW Natural Water of Oregon, LLC (NWN Water oI Oregon);. NW NaturalWaler ofWashington, LLC (NWN Water of
Washington)i. NW Natural Waler of ldaho, LLC (NWN Water of ldaho); and. Gem State Water Company, LLC (Gem State)
The NGD segment includes our NW Nalural localgas dislributaon
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. Olher activities aggregated and reported as other at NW Natural
include the non-NGD storage activity at Mist as well as asset
manaqement seNices and the appliance retail center operations. Other
activities aggregaled and reported as other at NW Holdings include
NWN Energy's equily investment in TrailWest Holding, LLC (TwH),
which is pursuing the developmenl 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 conlinues to pursue inveslments an the
water sector. See Nole 4 for further discussion of our busaness segmenl
and other, as well as our dired and indirect wholly-owned subsidiarjes.
tloN-GAAP Ftt{AllclAL MEASURES. ln addition to presenting the results of
operalions and earnings amounts in total, cealain financial measures
are expressed in cents per share or exclude the effects of certain ilems,
which are non-GAAP financial measures. We presenl nel 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 nalure oflhese
ilems make period to period compa.isons of operations difficult or
potentially confusing. We use such non-GAAP financial measures lo
analyze our financial performance because we believe they provide
useful informalaon to our investors and credilors in evaluating our
financial condition and results of operalions. Our non4AAP financial
measures should not be considered a subslatute for, or superior lo,
measures calculated in accordance wath U.S. GAAP. Reconciliations of
the non-GAAP financial
29
EXHIBIT 2
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Page 30 of2l0
NW Holdings is a holding company headquartered in Portland, Oregon
and owns NW Natural, NWN Wale,, and other businesses and activities
NW Natural is NW Holdings largest subsidiary.
Table of Conlents
measures to their closesl lJ.S. GAAP measure used in subsequent
seclions of ltem 7 are provided below.
2014 2017
ln millions, except per sharcdala Amount Per Share Amount Per Share AmoLrnt Per Share
Net rncome from contrnuing operations
Adjuslments
Regulatory envrronmenlal drsallowance
Tax efiec1s o12017 TCJA remeasurement:
Tax effects of non-GAAP adlustmenl
AdJUsled net income from conlinuing operalions
s 673 I 721 $251 $624 $
33 o12
(3.4)(0.12)
(1.3)(0 05)
s 67.3 $2.33 $687 $2.39 $64.4 $
NGD segmenl net incomefrom conlinuing operatons
Regulatory environmential disallowance'1'
Tax eftecls of 20 1 7 TCJA remeasuremenl:
Tax efects of non-GAAP adjustmenl
Adjusted NGD segmenl net income lrom conlrnuing operations
s 575 $1.99 $605 $2.10 S 545 $196
o.12
003
(0.05)
s 575 S 1.99 $61 5 $213 $566 S 203
6 98 $0.34 $116 $0 4'1 $79 $o29
(4 4)(0 ls)
$9.S $ 034 $7.2 $ 0m $79 $429
NW NATURAL NON.GAAP RECONCILIATIONS
2018 20'17 2016
Nel ancome from continuing operalions
Adjustm€nt8:
Regulato.y enviEnmental disallowance"'
Tax ereds of 2ot 7 TCJA rcmeasuEmenlo
Tax effecls of non-GAAP adjustmenl
Adjusted net incorne from continuing opolalions
s 680 $628
3.3
(3.0)
(1.3
$68.7 $
NGD segmenl net income from contnuing operations
Adjustmenls:
Regulatory envhonmental disallowance"i
Tax effecls ol2017 TCJA remeasuremenl:r
Tax effects of non-GAAP adjustment
Adjusted NGD segmenl net rncome from conlrnurng operatDns
s 57.5 $605 S 546
33
10
(1.3
$575 $61.5 $5€6
Other net mcome from contrnuing operalions
Adjuslments:
Tax effects of 2017 TCJA remeasurernenl:l
Adlusted other net in@me from conlinuing operations
$10 6 $11.2 $
(4 0)
s 10.6 S 72 $
operations and maintenance expense. The tax effect of the adjustment is calculated using the combined federaland state staiutory rate rn effect at lhe tme dldlgqp I I z
NW Holdings'EPS amounts forthe 2016 edjuslment are calculated using diluted shares of 27.8 million, as shown on the NW HodinSs ConsolidateFllfll?RlMy{AN, DIComprehensive lncome.o Non-cash TCJA benefit (expense) assooaled wilh conlinuing operations of $3.4 million was recorded in income tax expense (benef it) in the foGEDdGi&p?DE ry ,TER
resull olthe federaltax rate cianging from 35% to 21% efieclive December 22,2017 the ma)onty ol this benefit was recorded at NW Natural NW Holdilgs EPq. ^^.^amounls arc calollated using diluted shares of 28 8 million as shdvn on the NW Holdings Consolidated Statements ol Comprchensive lncorne The TCJA tftlqglil lS I I U
NGD segrnent and other nEy not cofielate exaclly to the consolidaled amount due to rounding. See Note '10 for addilional information on the TCJA.
NY{ HOLDINGS NON-GAAP RECONCILIATIOI{S
2016
Other nel inmme from coninuing operatons
Adjustmenls:
Tax effects of 2017 TCJA remeasuremenll
Adjusled olher net income from continuing operalions
T,O
33
(1.3)
71_7 $
68.0 $
30
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 32 of2l0
Table of Contents
EXECUTIVE SUMMARY
We manage our business and strategic iniliatives 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 lor more information.
Highlights for the year includel. added over 12,500 naturalgas customers in 2018 for an annual
growth rate ol 1 .7% at De ce m ber 3 1 , 201 8:. invesled $215 million in NGO distribution systems and facilities for
growth and reliability:. completed key components of the North N,4ist Gas Sto.age
Expansion Project and continue to largel an in-service date
during the spring of2019;
NW Natural ranked first in the West in lhe 2018 J.D. Power Gas
Utility Residential Customer Satisfaction Study and Gas Utility
Business Customer Satisfactaon Studyi
completed key aspects of NW Natural's Oregon general rate case
and filed for a general rate increase in Washington forthe first
lime in a decade;
completed four water distribulaon acquisitions wilh several more
pending. the largest ofwhich is a water and wastewater
business in Sunriver, Oregon. Once pending transaclions
close, our water business is expecled to serve 18,000
conneclions;and
delivered increasing dividends for the 63'd consecutive yearlo
shareholders.
2018 2417 2016
ln millions, except per sharc data Amounl Per Share Amount Per Share
Nel income from continuing operatrons
Lo99 from discontinued operations, net of lax
Consolidated net incom€ (los6)
Adjusted net income fmm continuinO operataonsril
Natural gas dislribution margin
s 67.3 $
(2.7)
2.33 $
(0.00)
72.1 $
1127.7)
2.51 $
14.44)
62.4 $
(3.5)
225
(0 13)
s
$
64.6 $
67.3 $
383.7
2.24 $
$
$
(1.s3)$
$
$
58.9 $
84.4 S
Key linancial highlights for NW Natural include:
2014 2417
ln millions, except per sharcdata
Net income from continuing operallons
Loss hom discontinued operations. net of lax
680 6
(1.7)
717 $
\'127 3)
624
(3 e)
Consoldated net rncome (toss) s 66 3 $ (55 6) $
Adjusted nel income lrom mntinuing operations'r' S 68 O $ 68.7 $
'lrSee the Non-GAAP Recoociliatons table al the beginning of llem 7 lor a recDncjliatron of this non-GAAP flnancial measure to its closest L, S GAAP measure
58.9
648
2018 COMPAREO TO 2017. NW Holdings' and NW Natural's net income
from conlinuing operations were $67.3 million and S68-0 million.
respectively. in 2018 compared lo $72. 1 million and $71.7 million,
respectively, in 20'17. The decrease was primarily due to the benefit
associated with the TCJA deferred income tax remeasurement in 2017
Excluding the benefit in 2017 assocaated with the TCJA remeasurement,
NW Holdings adjusted nel income from continuing operalions
decreased $1.4 million. See the Non-GAAP reconciliations at the
beginning of ltem 7 for additional information. The desease was
primarily due to the following factors, all ofwhich were driven by activity al
NW Natural:. an $8.9 million decrease in NGD segment margin primarily due to
the defenalofexcess revenue associated with the federal income
tax rale decrease as a result ofthe TCJA:. a $4.3 million increase in operations and maintenance expense
driven by general payroll and benefits
Key llnaocial highlights for NW Holdings include:
Amounl Per Share
(55.6) $
68.7 $
3S2 6
increases as wellas increases in proressionalservices and
conlract labor:
a 94. 1 mallion increase in depreciation and amortization primarily
due to additlonal capital expenditures; and
a $3.3 million decrease in other income (expense), nel primarily due
lo an increase in pension and postrelirement benefit expense,
partially offsel by an increase in the equity portion ofAFUDC; partially
offset by
a $20.2 million decrease in income lax expense due lo the decrease
in the federal income tax rale as a result ofthe TCJA and lower
pretar earnings.
2017 CO PAREO TO 2016. NW Holdings' and NW Nalural's nel ancome
from conlanuing ope.ations were $72.1 million and $71.7 million,
respectively, in 2017 compared to $62.4 million and $62.8 millaon,
respeclively, in 2016. The increase included a $3.4 million benefit due to
the deferred income tax balance remeasurement associated with the
TCJA in 2017 and a $3.3 million pre-tax regulatory environmental
disallowance in 2016.
EXHIBIT 2
31 PALFREYMAN, DI
GEM STATE WATER
Page 33 of2l0
s
Tabe of Contenls
Excluding the impacl of these items, NW Holdings adjusted net income
from continuing operalions increased $4.3 million Seethe Non-GAAP
reconciliations at the beginning oI ltem 7 for additional informalion. The
increase was primarily due lo the following faclors, allofwhich were
driven by activity at NW Natural:. a $16.0 million increase in NGD segment margin primarily due to
customer growlh and effects of colder lhan average weather in 2017
compared lo warmer lhan average weather in 2016; and. a $6.9 million increase in other income (expense), net primarily due
an increase in the equity portion ofAFUDC; partially offset by. a $15.7 million increase in operataons and mainlenance expense
driven by higher NGD segmenl payroll and benefils increases, as
well as increased NGD segment safety equipment upqrade costsi
and
' a $1.0 million decrease in revenues from asset management
agreemenls for Misl storage and transportation capacity.
32
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATIIR
Page 34 of2l0
Table ol Contents
Our 20'l g goals leverage our resources and history of innovation to continue meeting the evolving needs of cuslomers, regulators, and shareholders
Our near-term outlook is centered on the following long{erm slrategic objectivesl
Oellvering Our Products Grow Our Businesses
Ensure Safe and Reliable Service
Provide a Supedor Cuslomer Experience
Ad,/ance CorEtruclile Legislati\e Policieg and Regulation
Enable NW Natural Growlh
Lead in a Lo*Cerbon Fulure
lntegrale and Grow our Water Businesses
SAFETY AI{D RELlABlLlry. Delivering our products safely and reliably lo
custome.s is our flrst priority. During 20'19, NW Naluralwill maintain its
vigilanl focus on safety and emergency response lhrough hands-on
scenario-based training for employees. third-parly conkactors, and local
authorities. To ensure the reliabilily, resiliency, and safely of NW
Natural's infraskuclure. we intend to continue to invest in the
mainlenance and necessary upgrades ofour pipelane syslem, including
completing projects to replace end-of-life equipment at our Mist storage
facility, renovating several resource centers, and supporling g.owlh and
reliability in Oregon and southwesl Washington. Safety also includes NW
Holdings'and NW Natural's vigilance in maintaining and seeking lo
slrenglhen rybersecurity defenses and preparing for large-scale
emergency evenls, such as seismic hazards.
SUPERIOR CUSTOIIER EXPER|E tCE. NW Naturalhas a legacy ofproviding
excellenl customer service and a long-standing dedication lo continuous
improvement, which has resulted in consistently high rankings in the
J.D. Powerand Associates customer satisfaction studies. ln 20'l9, r.i€
will strive to enhance our cuslomers' experience to meet their evolving
expeclations by priorilizing improvements lo technology and anternal
processes which supports our customers' lrequent interactions and
highest value louchpoints.
POIICIES AXO REGULATIOI{. We remain committed to working
construclively with policfmakers and regulalors to provide the besl
outcomes for bolh our cuslomers and stakeholders. At NW Natural. we
are working closely with the Oregon commission and other stakeholders
on severat significant items. including the besl way to relurn benefits
from the TCJA to NW Natural cuslomers and complele ils Oregon
general rate case, which we filed in Dec€mber2017- With regard to
Washington regulation, NW Naturalliled a general rate case with
Washinglon in Dec€mber 2018 and will seek to work productively with
parties in an effort to conclude that case in 20'19. NW Natural will
continue working with the EPA and olher stakeholders on an
environmentally proteclive and cost effective clean-up for the Po.lland
Harbor Superfund Sile. Finally, we are engaged in policy discussions
both in Oregon and Washington at the state and community level to build
support for a conslructive role lor nalural gas in a low-carbon fulure.
i,lw I{ATURAL GRO}YTH. Natural gas is lhe preferred energy choice in NW
Natural's service lenitory given its efficient. affordable. and reliable
qualities. We are focused on leve.aging lhese key attributes to capitalize
on our rcgion's strong economic growth. We conlinue lo grow our markel
share in the single-family resadential 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
Expansaon, is expecled to be completed and begin supporting the
integration of renewables into the electric grid in 20'19. We wall contanue
to look for opportunities to serve and grow with our communities.
LOW€ARSON PATHWAY. We are deeply commilted lo a clean energy
future. lt's why NW Natural launched a low-carbon initiative to reduce
emissions in the cuslomers and communilies NW Natural serves by
leveraging modern pipeline systems in newways. working closely with
customers. policymakers and regulators, and embracing cutting-edge
lechnology. NW Natural partnered with the City of Portland to bring
renewable nalural gas (RNG) onto its system. We expecl the entire
project to be operational in 2019 with several other RNG proiects
undelway for completion this year or in 2020. To further understand the
role of nalural gas in a low-carbon Iuture, NW Nalural engaged a premier
environmenlal consultant to complete a deep decarbonization study. The
study outlines how natural gas can help achieve crucialemassion
reductions of 80% by 2050. We will continue helping our customers
reduce and offsel their consumplaon as we support the development of
renewable nat!ralgas supply and explore othercutting edge solutions to
lower the carbon inlensily of nalural gas, such as power lo gas.
IIITEGRATE AXD GROW WATER. NWWater began its expansion into the
waler bu$iness more than a year ago with a focus on water seclor
anvestments thal fit ou. conseNative risk prolile and core competencies.
ln 2019 we plan to close our largest acquisition lo date in Sunriver,
Oregon that serves approximately 9,400 water and wastewater
connections. Once all outstanding transactions are closed. NWWater
will se.ve 18,000 connections and have invested nearly $70 million in the
waler sector.
33
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 35 of210
2019 oU|LOOK
Table of Conlents
DIVIDENDS
NW Holdings dividend highlights include
Pet cannhoa sharc 2014 2417 2416
Dividends paid $ 18925 $ 'r.882s $ 18725
ln January 20'i 9. lhe NW Holdings' Board of Directors declared a
quarlerly dividend on NW Holdings common stock of $0.4750 per share,
payable on February 15, 2019, to shareholders of record on January 3'l,
2019, reflecting an indicated annual dividend rate of $1 90 per share.
See "Financial Condition - Liquidity and Capilal Resources" for more
information regarding the NW Holdings and NW Naturaldividend
policies and regulatory conditions on NW Natural dividends to its parent,
NW Holdangs.
34
EXHIBIT 2
PALF'RF]YMAN. DI
GLM STATI WATER
Page 36 of210
RESULTS OF OPERAI'O'VS
Regulation and Rates
I{ATURAL GAS DISTRIBUTIOi{. NW Natural's natural gas dislribulaon
business is subject to regulation by lhe OPUC and WUTC with respect
lo, among other matters. rales and lerms ol service, syslems of
accounls. and issuances ofsecurilies by NW Nalural. ln 20'18
approxamately 89% of NGD customers were located in Oregon, with the
remaining 11% in Washington. Earnings and cash flows from natural
gas distribution operataons are largely determined by rates set in general
rate cases and other proceedings in Oregon and Washington. They are
also affected by wealher, lhe localeconomies in Oregon and
Washington, the pace of customer growth in the residential, commercial,
and industrial markets, and NW Natural's abalaty to remain price
compelitive, conkolexpenses, and obtain reasonable and timely
regulatory recovery of its natural gas distribulion-related cosls, including
operatang expenses and investment costs in plant and other regulatory
assets. See "Mosf Rece/,tGereral Rato Cases"below.
MIST INTERSTATE GAS STORAGE. NW Natural's inierstate storage aciivity
at l\rist is subject to regulalion by the OPUC. WUTC, and FERC with
respect to, among other malters, rales and terms of service. The OPUC
also regulaies the antrastale storage services at Mist. while FERC
regulates the interstate storage services at Misl. The FERC uses a
maximum cost of service model which allows for gas storage prices lo
be set at or below the cost of service as approved by each agency in their
last regulatory filing. The OPUC Schedule 80 rates are lied to lhe FERC
rates, and are updated whenever NW Natural modifies FERC maximum
rates.
oTHER. ln June 20'18, NWN Gas Storage entered inlo a Purchase and
Sale Agreement forthe sale ofallofits ownership inleresls in Gill
Ranch, a nalu.al gas slorage facility localed near Fresno, California,
which is subject to approval by the CPUC and other customary closing
condilions. See Note 18 for more information.
Most Recent General Rate Cases
OREGOT{, Effeclive November 1, 20,l2, through October 31. 2018. the
OPUC authorized rates to cuslomers based on an ROE of 9.5%, an
overall rate of relurn of 7.78%, and a capital structure of 50% comrnon
eq'raty and 50% long{erm debt.
Effective November 1. 2018. the OPUC authorized rales to customers
based on an ROE of 9.4%. an overall rate of reiurn of 7.3'17%, and a
capilal structure of 50% common equity and 50o/o long-lerm debt. For
additional information, see "Regulatory Prcceeding Updates" below.
On December 31, 2018, NW Natural filed a general rate case in
Washinglon requesling an ROE of 10.3olo, an overall rate ol return of
7.63%, and a capital structure of49.5% common equity,49.5olo long-term
debt, and 1% shorl-le.m debt- For addilional informalion, see
" Regulatory Prcceeding Updates" below.
FERC. NW Natural is required under its Mist interslate storage ce.tificale
aulhority and rate approval orders to file every fve years either a petition
Ior rate approvalor a cost and revenue study lo change orjuslify
maintaining the existing rates lor its interstale storage services. ln
January 2018. various state parties filed a request with the FERC to
adjust the revenue requirements ofpublic utllities lo reflect the recenl
reduction in the federal corporale income tax rate and otherimpacls
resulling from the TCJA. ln July 2018. the FERC issued an order
finalizing its regulalions regarding the effect ofthe TCJA. The new
regulations required NW Natural to flle a petition for.ale approval o, a
cost and revenue study to reflecl the newfederal corporate income lax
rate within lhirty days ofthe rale effective dale of NW Natural's Oregon
rate case. On October 12, 20'18. NW Natural fled a rate petition with
FERC for revised maximum cost-based rales, which incorporated the
new federal corporate income tax rate. The revised rales became
effective November 1. 2018.
NW Nalural continuously evaluales the need for rale cases in its
,urisdictions. For additional information, see "Regulalory Proceeding
Updales-Rate Case"below.
Requlatorv Proceedino UDdates
During 20'18, NW Naturalwas involved in the regulatory activilies
dascussed below.
It'ITERSTATE STORAGE AI{D OPTIMIZATIOI{ SHARING. NW NaIUTa eceived
an Order from lhe OPUC in March 2015 on lheir revaew of the cu.rent
revenue sharing arrangement that allocates a porlion of lhe nei revenues
generated from non-NGD Misl storage services and third-party asset
management services to NGD business customers. The Order required
a lhird-party cost sludy to be perto.med. ln 2017. a third-party consultant
completed a cost study and their flnal report was filed with the OPUC in
February 2018. The OPUC concluded on this matter in the Oregon
general rate case proceedinq. For addilional informalion, see "Oregon
Gereral Rate Case" below
35
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 37 of 2l 0
Table of Conients
Regulatorv Matters
waSHINGTON. Effective January 1, 2009, the WUTC authorized rates to
customers based on an ROE of 10 1% and an overall rate ofreturn of
8.4% wath a capital slructure of 510.6 common equity, 5% shorllerm debt,
and 44% long-term debt.
HOLOIIIG CONTIPANY REORGAIIZATION, ln February 20'17, NW Natural filed
applications wilh the OPUC, WUTC, and CPUC for app.oval lo
reorganize under a holding company structure. ln 2017, the OPUC and
vvlJTC approved NW Nalural's applicalions sublect lo cerlain restrictions
or "ring-Iencjng" 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 anto a holding company structure from the CPUC.
On Oclober 1, 2018, we completed the reorganization lo a holding
company structure. Effective November 1, 2018lhere are a number of
conditions under the agreement with lhe OPUC and the WUTC related to
the formation of a holding company structure. One oflhe conditions is
that. for three years, NW Natural will be required to provide an annual
5500,000 credit to Oregon cuslomers and a $55.000 credlt
lo Washington customers. The firsFyear credil to both Oregon and
Washinglon customers was given in conjunction with the PGA filings
with the rate adjustments commencing on November 1, 2018.
TAI REFORI{ oEFERRAL. ln December 2017. NW Nalural filed
applications with lhe OPUC and WUTC lo defer the overall nel benefil
associaled with lhe TCJA that was enacted on December 22, 2017.
Through the Oregon general rale case, in October 2018lhe OPUC
issued an order directing NW Natural and the other parties to the rate
case to engage in furlher regulatory proceedings to resolve open issues
with respect to lhe treatment ofthe 10-month deferral period of benefats
associated with the TCJA. On February 4, 2019, NW Nalural and the
other parties to the rate case agreed upon terms by which the deferred
benerits would be retumed lo cuslomers via a joinl slipulalion filed with
the OPUC. For it to be effective, lhe OPUC must issue an Order. See
"Regulatory Proceeding Updates-Orego, Ger6la/ Rate Caso" below for
more information-
NW Natural expecls lo work with the WUTC regarding the Washinglon
deferralforlhe TCJA as part ofthe generalrate casefiled in Washington
on December 31. 2018, and is currenlly deferring all amounls for the
benefil of Washington customers.
WATER BUSIIESS, Since we inilialed our waler strategy in December
2017, vre have entered anto the following agreemenls which requare 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 November2018.. Falls Water Company - We received regulatory approvalfor
this ldaho Falls, ldaho acquisition in July 2018lrom the IPUC
and closed the lransaction in Seplember 2018.
' Lehman Entorprises, lnc. and Sea View Wator LLC - We
receaved regulatory approvalfrom the WUTC for these Vl,/hidbey
lsland, Washington acquisitions in October 2018 and closed
lhe l.ansaclion in November20l8.. SunrivorWabr, LLC and Sunrivsr Environmental, LLC -Wefiled an application lor regulatory approval from the OPUC for
lhe SunriverWater, LLC acquisition in October20l8 and
aniicipate receivang regulatory approval in 20'19. Sunnver
Environmental, LLC is not under the OPUC's jurisdactaon. The
transactaon as expecled to close in the first half of 2019.. Spirit Lake Eastwater Company and Lynnwood Wator - We
tiled an application for regulatory approvalfrom lhe lPuC for
these Coeur d'Alene, ldaho acquisitions in February 2019.. Estatss Water Systems lnc. and Mgntetra lnc - We llled an
application for regulatory approvalfrom the WUTC fo. these
Sequim, Washington acquisitions in February 2019.
The acquisilions described above are expected to, upon the closing of
lhe Sunriver lransaction, represenl approximately $70 million of
aggregate investment.
oREGoll GEXERAL RATE cAsE. On October 26. 2018, the OPUC issued an
order regarding NW Nalural's general rale case originally filed in
December 2017 and approved the following items:. Annual revenue requirement increase of$23.4 million or 3.72%
over NW Natural's revenue from existing rates, which includes
a pproximately S12.1 million that would otherwise be recovered
under the conservation la.iff deferrali. Capital struciure of 50% debt and 50% equity;. Return on equity of 9.4%;. Cost of capitalof 7.317%l. Rate base of $1.186 billion, or an increase of $300 million since
the last rate c€se in 2012i
' Commencing November 1, 2018, ASC 715 pension expenses
for lhe qualified pension plan will be recovered through rates
with an increase of 58.1 million to revenue requiremenl for a
rolal of $'11.9 million; and. The sharing of asset management revenues related to NGD
business pipeline and storage assets will be 90o/o/10% with
90% being credited to customers- Previously cuslomers
received 67% of lhese revenues.
The rate changes listed above wenl into etfect 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, 2018. The order directed NW Natural and the other parties to the rate
case to engage in further regulatory proceedings exlending the general
rate case docket to resolve open issues with respect lo lhe recovery of
lhe pension balancing accounl, and keatment ofthe 1o-month deferral
period benefits associated with lhe TCJA. On February 4, 20'19, NW
Nalural. OPUC Slaff. Oregon Cilizen's Ulility Eoard (CUB), and the
Alliance ofWestern Energy Cuslomers (AWEC), which comprise all of
lhe parties lo lhe 2018 Oregon rate case, Iiled with the OPUC a joint
stipulation addressing remaining items relaled to NW Natural's pension
balancing accounl and the return ofdeferred 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 settlemenl or be issued under the
OPUC's own terms
Under the Settlement, the stipulating parties agree that NW Natural
properly recorded lhe remeasuremenl of regulated NGD excess deferred
income taxes pursuant to the effects of the TCJA, and agree that all of
NW Nalural's TCJA-related dockets will be resolved in accordance with
the terms ofthe Settlemenl. Under the Settlement, NW Natural would
relurn excess defered income laxes pursuant to the TCJA as follows: (i)
an annual credit to base rates ot 53.4 million; (ii) a credit of $3.0 million
per year for live years to sale customers; (iii) a credit to customers'
benefit ol 55.44 million of deferred income laxes, and $7.07 million of
TCJA benefits defened between January 1, 2018 and October 3'1, 2018.
reflected as a reduction lo NW Natural s pension balancing account,
described below. As a resull oflhese returns and credits. NW Nalurals
rate base is expected to increase by approximalely $15.38 million, and
the revenue requiremenl is expected to increase approximalely S1.43
36
EXI IIBIT 2
PALFREYMAN. DI
GEM STATF, WATER
Page 38 of2l0
Table of Conlents
million. lf NW Naturalllles a general rate case within five years of the
date of the Order implementing the Settlement, lhis revenue requirement
may be adjusted as part of thal general rate case.
As to the future operation and timing of rate recovery of amounts reflected
in NW Nalural's pension balancing account, under the Settlement, lhe
stipulating parties agree that, effective October 3'1, 2018, NW Natural
would: (i) reduce the amount of lhe frozen pension balancing accounl by
$1 0.5 million, and apply $12 51 million of the Company's deferred TCJA
benefits, for a total reduction ofthe pension balancing account of
approximalely 523.0'1 million: and (ii) reduce the inlerest rate on lhe
pension balancing account from NW Nalural's authorized rate of retum of
7.317 perc€nl lo 4.3 percenl. NW Natural would then collect the
remainderofthe pension balancing account balance overlen years in a
customer tarif{ of $7 3 million per year beginning on the rate etfective
date. lfthe Settlement is approved. NW Naturalexpects to recognize an
afler-tax charge 10 earnings of approximately $6.7 million in the quarter in
which an order is issued.
The Settlemenl is subject lo the review and approval ofthe OPUC with a
decision and order expected in N4arch 20'19, and new rates expected to
be effeclive April 1, 20'19.
WASHIilGIOI{ GE}IERAL RATE CASE. On December 31. 2018, NW Natural
filed for a general rate case in the stale of Washinglon. The .equesled
increase, the firsl in approximately 10 years, is intended lo recover
operaling costs and inveslmenls made in the Washington distribution
syslem and is based upon lhe following assumptaons or requests:
' Capital structure of 49.5% long-term debt, 1.0% short{erm debt,
and 49.5% common equity;. Return on equity of 10.3%;. Cost of capital of 7.63%; and. Rate base of$186.5 million. an increase of$58.7 million since
lhe last rate case.
The flling also includes a proposalto return federal tax reform benefits to
cuslomers related to lhe TCJA. NW Natural eslimates the lolal laability for
lax reform benefits allocated to Washington customers lo be
approximalely $20.2 million, which is comprised of a historical deferred
liability of S18.1 million primarily related to prope.ly. plant. and equipment
and an expected $2.'l million associated with interim tax benefits
accumulated from January 1, 2018 to November 30, 2019. NW Natural as
requesting that the $18.1 millio n historical deferral be credited lo rates in
compliance with the TCJA guidance, which is currenlly al a rale of
approximalely $0.5 million annually for the first five years, and which
would be reviewed and adjusted in year five for lhe next five years. NW
Naturalis requesling thatthe interim $2.1 mallion lax benefitbe returned
to customers over two yea.s.
ln addation, NW Nalural is requesting a decoupling lariff for Washington
cuslomers. which is inlended to allow the NGD business lo continue
encouraging customers to conserve energy withoul adversely aflecling
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 requesling thal the WUTC review cosls allocable
lo Washington relaled lo environmenlal remediation expenses and
consider a mechanism for recovery of these costs. The requested costs
are eslimated lo be approximalely 3.32% of total costs associated with
lhose siles related to serving Washington customers
NW Natu.al's filing will be reviewed by the WUTC and other
slakeholders. The process is anticipated to lake up lo 11 monlhs. NW
Nalural has requesled that lhe new rales take effect December 1, 2019
Ii{TEGRATED RESOURCE PLA (lRP). NW Natural tiles a full IRP biennially
for Oregon and Washington with the OPUC and WUTC, respectavely. NW
Naturalfiled its 2018 Oregon and Washington lRPs in August 20'18, and
received both a letter ofcompliance from the WUTC and
acknowledgmenl by lhe OPUC in February 2019 ThelRPsincluded
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
nalural gas service.
DEPRECIATIOI{ STUDY- Under OPUC regulations, NW Natural is required
to fle a depreciation study every five years lo update orjuslify maintainang
the existinq depreciation rales. ln December 2016, NW Natural filed the
required depreciation sludy with lhe OPUC. ln Seplember 2017, the
parties to the docket filed a setllemenl with the Commission requesting
approval ofupdated depreciation rates. ln January 2018, OPUC issued
an order adopting the stipulalion. A co.responding docket,ras 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 depreciataon
rates and did not have a material ampact lo financial results.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 39 of2l0
37
Teble of Contenls
Rale Mechanisms
During 2018, NW Natural's approved rales and recovery mechanisms for
each service area included:
OR
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 9as costs
compared to estimated PGA prices, such that the impacl on NW
Natural's currenl eamings from the incentive sharing is either 20% or
10% oflhe differenc€ between actual and eslimated gas cosls,
respectively. For the 2017-18 and 2018-19 gas years, NW Natural
selecled the 90% deferraloption. LJnder the Washington PGA
mechanasm, NW Natu.al defers 100% oI the higher or lower actual gas
cosls, and those gas cosl differences are passed on to cuslomers
lhrough the annual PGA rate adjustment.
EARNINGS TEST REVIEW. NW Natural is subject to an annual eamings
review in Oregon to determane ifthe NGD business is earning above its
autho.ized ROE threshold. lf NGD business eamings erceed a specafic
ROE level, lhen 33o/o ol the amount above that level is required to be
deferred or refunded to customers. lJnder this provision. if NW Nalural
selects the 80% deferral gas cost option, then NW Nalural relains all
earnings up to 150 basis points above lhe currently aulhorazed ROE. lf
NW Nalural selects the 90% deferral option, then it retains all earnings
up to 100 basis points above lhe currently authorized ROE. For the 2017-
18 and 2018-19 gas years. it selected lhe 90% deferral oplion. The ROE
threshold is subjecl to adjuslment annually based on movements in
long{erm inlerest rates. For calendar years 2016, 2017, and 2018, the
ROE lhreshold was 1 1 .06%, 10.66%, and 10.48%. respeclively There
were no refunds required for 2016 and 2017. NW Natural does not
expecl a refund for 20'18 based on resulls, and NW Natural anticipates
filing its 2018 earnings test in May 20'19.
GAS RESERVES. ln 2011. the OPUC approved lhe Encana gas reserves
lransaclion lo provide long{erm gas price protection for NGD business
customers and delermined costs under lhe agreemenl would be
recovered on an ongoing basis through the annual PGA mechanism.
Gas produced from NW Natural's interests is sold at then prevailing
markel prices, and revenues from such sales, net of associated
operating and production costs and amonization, are included in cost of
gas. The cost ofgas, including a carrying cosl for the rate base
inveslmenl made under the original agreement, is included in NW
Natural's annual Oregon PGA filing, which allows NW Natural to recover
these cosls through customer rates. The net
2012 Rale
Case
2018 Rate
Case
(effeclive
11t1t2O18)
2009 Rate
Case
Aulhoazed Rale Struclure
ROE
ROR
DebuEquity Ratlo
9.5%
7.gyo
SOoklSOVo
10.1%
a.4%
490k151%
Key Regulatory Mechanisms:
PGA
Gas Cost lncentive Shadng
Decoup|ng
Envrronmenlal Cost oefenal
Environmental Cost
Recovery (SRRM)
Pension Balancing
lnterstate Storage and Asset
lvanagement Sharing
PURCHASE0 GAs ADJUSTMENT. Rate changes are established for NW
Naturaleach year under PGA mechanisms in Oregon and Washington lo
reflect changes in the expected cost of natural gas commodity
purchases. The PGA filings and ,llings coincident with the PGA include
gas costs under spot purchases as well as contract supplies, gas costs
hedged with financialderivalives, gas cosls from the withdrawal of
storage invenlones, the production ofgas reserves, interstate pipeline
demand costs,lemporary rale adjustments, which amortize balances of
deferred regulatory accounts, and the removalof lemporary rate
adjustments etfective for the previous year.
Each year. NW Natural lypically hedges gas prices on a ponion of NW
Nalural's annual $ales requirement based on normalwealher. including
both physicaland financial hedges. NW Naturalentered the 20'18-19 9asyearwith its forecasled sales volumes hedged at 49% in financial swap
and option conlracls and 26% in physicalgas supplies for Oregon and
Washanglon.
As of December 31 , 2018, NW Nalural is also hedged in future gas years
at approximately 17% forthe 2019-20 gas year and between 1% and 8%
for annual requiremenls over the subsequent five gas years. Hedge
levels are subjecl lo change based on aclual load volumes, which
depend to a certain extent on weather, economic condilions, and
estimaled gas reserve production. Also, gas slorage invenlory levels
may increase or decrease with slorage expansion, changes in slorage
contracts with thard parties, variations in lhe heat content of lhe gas,
and/or storage recall by NW Nalural.
x
x
x
x
x
x
x
x
x
X
x
x
x
x
x
x
x
x
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 40 of 210
ln Seplember 2018, NW Naturalfiled ils annual PGA and received OPUC
and WUTC approval in Oclober 20,|8. PGA rate changes were effective
November 1, 2018. Rates between states can vary due to different rale
structures and mechanisms. Oregon residenlial cuslomers' rates
declined 2.1% from the combined effect of the PGA and Oregon rate
case and Washington residential customers' rates declined by 7.2olo. ln
addition, as required with the Washington PGA filang, NW Natural
provided the WUTC with a fullstrategy implementation plan to
incorporate risk-responsive hedging strategies in ils nalural gas
procuremenl process. The plan calls for a flexible hedging approach that
reacls to changes in market conditions as Ihose changes occur. NW
Natural expects to begin implementing risk-responsive hedging
strategies for the 2019-20 PGA for its Washinglon gas supplies.
91%
7.3%
5006/50%
38
Table of Conlents
investment underthe original agreement earns a rate ofreturn.
ln 2014, NW Natural amended the original gas reserves agreement in
response to Encana's sale of ils interest in the Jonah field localed in
Wyoming to Jonah Energy. Underthe amended agreemenl with Jonah
Energy. NW Nalural has the option to invest in addilionalwells on a well-
by-well basis wilh drilling costs and resulting gas volumes shared at the
amended proportionate working interest for each well in which NW
Natural invests. volumes p.oduced from lhe additionalwells drilled after
the amended agreement are included in NW Nalural's Oregon PGA at a
fxed rate ofS0.4725 pertherm. NW Naturaldid not have the opportunily
to participate in addilional wells in 20'16. 20'17, or 2018.
DECOUPLING. ln Oregon, NW Natural has a decoupling mechanism.
Decoupling is inlended to break the link belween earnings and the
quantity ofgas consumed by customers, removing any financial incenlive
to discourage customers efforls lo conserve energy.
The Oregon decoupling mechanism was reauthorized and the baseline
expected usage pea customet was reset in the 2018 Oregon general rate
case. This mechanism employs a use-per-customer decoupling
calculalion, which adjusls margin revenoes lo account for the diflerence
between aclualand expected customer volumes. The margin
adjustment resulting from differences betlveen actual and expected
volumes under the decoupling component is recorded to a defeffal
account, which is included in the annual PGA filing. ln Washington,
customer use is not covered by such a tariff. However, NW Nalural's
general rate case filed in Washington on December 31, 2018, requests
that such a lariff be implemented. See "Regulatory Proceeding
Updates-Wash,rgton General Rafe Case" above
tryARM. ln Oregon, NW Natural has an approved weather normalization
mechanism, which is applied to residentialand commercial cuslomer
bills. This mechanism is designed to help slabilize the collection offixed
costs by adjusting residential and commercial customer billings based
on temperature variances from average weather, with rate decreases
when lhe wealher is colder lhan 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 cuslomers' rates lo reflect average
weather, which uses lhe 25-year average temperalure foreach day ofthe
billing period. Daily average temperatures and 2s-year average
lemperatures are based on a set point temperature of 59 degrees
Fahrenheit for residential customers and 58 degrees Fahrenheit for
commercial clslomers. The collections of any unbilled WARlvl amounls
due to tariff caps and floors are deferred and earn a c2nying charge until
collected, or retumed, in the PGA the following year. This weather
normalization mechanism was reaulhorized in lhe 2012 Oregon general
rate case withoul an expiration date. Residential and commercial
cuslomers in Oregon are allowed lo opt out of the weather normalization
mechanism. and as of December 31, 2018. 8% ol eligible customers
had opted oul. NW Natural does not have a wealher normalizalion
mechanism approved foa residential and commercial cuslomers in
Washington, which account
INDUSTRIAL TARIFFS. The OPUC and WUTC have approved tariffs
coverinq NGD service to major industrial customers, which are intended
to give NW Nalural certainty in the level of gas supplies needed lo serve
lhas cuslomer 9roup. The approved terms include, among other things,
an annualelection period, special pricing provisions for out-of-cycle
changes, and a requirement thal industrial cuslomers complete the term
oftheir service election under NW Natural's annual PGA tariff
ENVIRO ME}ITAL COST DEFERRAL AND SRRM. NW NaIuTaI has a SRRM
through which it lracks and has the ability to recover pasl deferred and
future prudenlly incurred environmental remediation costs allocable to
Oregon, subject to an earnings lest.
Under the SRRM collection process. there are lhree types ofdeferred
environmental remediation expense:. Pre-review - This class of costs represents remedialion spend that
has not yet been deemed prudenl by the OPUC. Carrying costs on
these remediation expenses are recorded at NW Natural's
authorized cost ofcapital. NW Natural anticipates the prudence
review ror annualcosts and approvaloflhe earnings lest prescribed
by the OPUC to occur by the third quarter ofthe following year.. Posl-review - This class of costs represenls remediation spend that
has been deemed prudent and allowed afler applying the earnings
test, but is not yel included in amortization. NW Natural eams a
carrying cosl on these amounts at a rale equalto the five-year
treasury rate plus 100 basas points.. Amonization - This class of cosls represents amounts included in
current customer rales for collection and is generally calculated as
one-fiflh ofthe post-review deferred balance. NW Naluralearns a
carrying cost equalto the amortization rate determined annually by
the OPUC. which approximates a shorl-lerm borrowing rale. NW
Natural included 56.1 million and S7.4 million ol deferred
remedialion expense approved by the OPUC for colleclion during the
2018-19 and 2017-18 PGA years, respeclively.
39
EXHIBIT 2
PALFRIIYMAN. DI
CEM STATL WATER
Page 4l of2)0
for about 1 I % of total customers. See "Business Segments-Nalrra/
Gas Dlstnburbl, " below.
ln addition. the SRRM also provides for the annual collection of $5.0
million from Oregon customers through a tariff rider. As it collecls
amounts f[om cuslomers, NW Natural recognizes lhese colleclions as
revenue and separately amonizes an equal and offsetting amount ofthe
deferred regulatory asset balance through the environmenlal
remediation operating expense line shown separately in 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 tesl is an annual revaew of adjusted NGD ROE
compared to aulhorized NGD ROE. For 2018, the first len months will be
weighied at 9.5olo and lhe lasl two months at 9.4%, reflecting the ROE
change from NW Natural's most recent rate case effective November '1,
2018.
TabLe of Conlenls
To apply the earnings test NW Natural musl first determine whal if any
costs a.e subjecl to the test through the following calculalion:
Annualspend
Less: $5.0 million base rate rider
Prior year carry-ove/"
$5.0 million insurance + inlerest on insurance
Total amount transferred to poslreviewr" Prior year carry-over results when the prioryear amounl lransr€rred lo post-
review is negative. The negative amounl is carried over to olrset annual
spend in the following year.a' Defened anterest is added lo annual spend lo the erlenl lhe spend is
For 2018, NW Natural has performed this test, which is anlicipated to be
submltted to lhe OPUC an May 2019. and no earnings test adjustment is
expected for 2018
The WUTC has also previor.rsly authorized the deferral of environmental
cosls, ifany, thal are appropriately allocaled to Washinglon customers.
This Order was effective in January 2011 with cost recovery and carrying
charges on amounts deferred for costs associaled with services
provided to Washington customers to be determined in a future
proceeding. Annually, or more often if circumslances warranl, NW
Natural reviews all regulalory assels for recoverability. lf NW Natural
should delermine all or a portion of these regulatory assels no longer
meet lhe criteria for continued applicataon of regulatory accounting. then
NW Naturalwould be required to write-offthe nel unrecoverable
balances againsl earnings in the period such a determanalion was
made.
PExSloil COST OEFERRAL At{D PEI{Slott BALAT{C|I|G ACCOUNT. From 201'l
through October 2018, the OPUC authorized a regulatory mechanism in
which NW Natural defened annual pension expenses above the amounl
sel in rales. with recovery of these defened amounts lhrough lhe
implemenlation ofa balancing account, which included the expectation
of hagher and lower pension expenses in fulure years. During lhis period
the mechanism permitted for NW Natural lo accrue interest on the
account balance at the NGD business' authorized rate of relurn. On
October26,2018. the OPUC issued an orderto freeze NW Nalural's
pension balancing accounl as of October 31, 2018. The order direcled
NW Natural and the other parties to the 20,l8 Oregon rate case to
engage in further regulatory proceedings extending lhe general rale case
dockel lo resolve open issues wilh respect to lhe recovery ofthe pension
balancing accounl. On February 4. 20'19, NW Naturaland the olher
parties to the rate case filed a joinl stipulation wilh the OPUC outlining a
resolulion lo lhe issue.
See "Regulatory Proceeding Updates-Oregon Genercl Rate Case'
above. Pension expense deferrals. excluding inlerest, were $10.3
million. $6.5 million. and $6.3 million in 2018.2017 and2016,
resPeclively
II{TERSTATE STORAGE AND OPTI IZATIOI{ SHARING. On an annual basis,
NW Nalural credits amounls to Oregon and Washington cuslomers as
part of a regulatory incentive sharing mechanism relaled to net revenues
earned from Mist gas storage and asset managemenl aclivities.
Generally. amounts are credited to Oregon customers in June, whale
credils are given to clslomers in Washinglon as reduclions in rales
through the annual PGA filing in November.
The following table presents the credits to NGD cuslomers
2018 2017
Oregon $ '11.7 $ 11.7 6 94
Washinglon 10 10 10
Business Seqment. Natural Gas Dist.ibution INGD)
NGD margin results are primarily affected by cuslomer groMh, revenues
from rate-base additions, and, to a certain exlent, by changes in
delivered volumes due to weather and customers' gas usage patterns
because a significanl portion of NGD margin is derived from nalural gas
sales to residential and commercial cuslomers. ln Oregon, NW Natural
has a conservalion tariff (also called the decoupling mechanasm), which
adjusts margin up or down each month through a deferred regulatory
accounling adjustmenl designed to offset changes resultjng from
increases or decreases in average use by residential and commercial
cuslomers. NW Natural also has a weather normalizalion larifl in
Oregon. WARM, which adjusls cuslomer bills up or down to offsel
changes in margin resulting from above- or below-average temperatures
during the winter heating season. Bolh mechanisms a,e designed to
reduce. but not eliminale, the volatility of customer bills and natural gas
distribution earnings. See "Regulalory l\ratters-Rale Mechanisrns"
above.
The NGD business is seasonal in nature due to higher gas usage by
residential and commercial customers during lhe cold winler heatang
months. Other categories of customers experience seasonality in lheir
usage but lo a lesser extent. Seasonality affecls the comparabilaly ofthe
results of operations of the NGD business across quarters but nol
across yeaG.
NGD segment highlights include:
oo/la.s aN theni6 h mltans exa EPS
2018 2017 2016
NGD net irbo.ne $ 57.5 $ 60.5 $ 54.6
Adjusted NGD nel income"' 57 5 61 5 56.6
EPS - NGD s€gnEot 1.99 2.1O 1.96
Adjusted EPs - NGD s€gnEnt'' 1.eg 2.13 2.o3
Gas sold and deli\etrd (in therms) 1 ,128 1 ,240 'l ,085
NGD margin''' $ 383.7 s 392 6 s 376 6
r'r Sree lhe Non-GAAP Reconciliatjons table al the beginning ol llem 7 for a
reconciliation ofthis non-GAAP fnancial me€sure to ris closest U.S. GAAP
measure.
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 42 of2l0
40
Totaldeferred annual spend subject to eamings lesl
Less: over-earnings adjustment, if any
Addi defened interest on annualspend''z'
To the extent the NGD business earns al or below its authorized ROE,
the lolal amount kansferred lo post-review is recove.able through the
SRR[il. To lhe extent more than authorized ROE is earned in a year, the
amount transferred to post-review would be reduced by those eamings
that exceed its authorized ROE.
2016
Tab e of Contenls
:iSee NaturalGas DistflbutDn [,iargrn Table below for addftlonaldetail
2018 COMPAREo TO 2017. NGD net income was $57 5 million in 2018
compared to $60.5 million in 20t 7. NGD nel income in 2017 includes a
S1.0 million loss from the remeasurement of deferred income tax
balances due lo lhe enactment ofthe TCJA. Excluding this ilem, adjusled
NGD net income decreased S4.0 mallion. or $0 14 per share. See the
NW Holdings non-GAAP reconcilialions al the beginning of llem 7 for
additional information
The pimary factors contributing to the decrease in adiusted NGD net
income were as follows:. a 58.9 million decrease in natural gas distribulion margin p.imarily
due lo:
' a $7.9 million decrease due lo revenues collecled and deferred
in association with the TCJA; partially otfset by. a $4.8 million increase from custome. groMh; and. the majority ofthe remaining decrease was due to the effects of
warmerthan averageweather in 2018 compared lo colderlhan
average weather in 2017, partially offset by higher rates from the
20'18 Oregon general rate case effeclive November 1, 2018.. a $6.0 million increase in operations and mainlenance expense
driven largely from payroll and benefits due to increased headcount,
general salary increases, and increased professional services and
conlract labor expense:. a $4.2 million decrease in other income (expense), net, primarily
due lo increases in pension non-service component costs, parlially
offset by increases in lhe equity ponion of AFUDC in 2018; and. a $4-0 million anc,ease in depreciation expense primarily due to
additional capital expendituresi partially otfset by. a $20.0 million decrease in income tax expense primarily due to the
reduction in the federal slatutory tax rate from the TCJA and lower
prelax rncome.
Total natural gas sold and delivered in 2018 decreased 9% over 2017
ptimarily due to lhe impact of weather that was 26% warmer than the
prior period and 15% warmer than average.
2017 COMPARED TO 20i6. NGD net income was $60.5 million in 2017
compared to S54.6 million in 2016, which includes lhe $1.0 million loss
from the remeasurement of deferred income tax balances associated
with the TCJA in 2017 and the after-tax $2.0 million regulatory
disallowance in 2016 Excluding these items. adjusted NGD net income
increased $4.9 million, or $0.10 per share. See the Non-GAAP
reconciliations al lhe beginning of ltem 7 for additional jnformation.
The primary lactors contributing to this increase in adjusted NGD net
income were as followsl. a $16.0 million increase in NGD margin primarily due to:. a 56.8 million increase from customer growth; partially otfset by;. a 52.7 million decrease from gains an gas cost ancenlive
sharing due lo actualgas prices being lower lhan lhose
estimaled in the 2016-2017 PGA,
but not by the same magnilude as in the prior period;. a portion of the remainang increase was due to the effects of
colder lhan average wealher in 2017 compared lo warmer than
average weather in 2016.
a 52.2 million increase in other income (expense). net. primarily due
to an increase in the equity portion ofAFuDC in 2017i partially otfset
by
a $10.4 million increase in operatlons and maintenance expense
driven largely from payroll and benefils due to increased headcount,
general salary increases, and increased safety equipmenl updale
cosls; and
a $3.4 million increase in deprecialion expense primarily due lo
addilional capital expenditures.
Total nalural gas sold and delivered in 201 7 increased 14olo over 201 6
primarily due to the impacl ofweather that was 48% colder than the prior
period and 15% colderthan average.
41
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Pagc 43 of 210
Table of Contents
NATURAL GAS DISTRIBUTION MARGIN TASLE. The following table summarizes the composition of NGD gas volumes. revenues, and cost of sales:
Favo.able/(lJnfavorable)
lA lhousands except degrce day and crslotue. data 2014 20',17 2016 2018 \s 2017 2017 vs 2016
NGD volumes (lherms)
Residenlaal and @mmeroal sales
lndustrial sales and transporlation
Total NGD volumes sold and delivered
NG0 ooeratino revenues
Residential and commeroal sales
lndustrial sales and transportation
Olher revenues
Less: Revenue taxes'rr
Total NGO op€latng revenues
Less: Cosl of gas
Less: Environmenlal remedration expense
Less: Revenue l,axes")
NGO margin
NGD margin El
ResidentiEl and commercial sales
lndustrial sales and transfDrtalrcn
M scellaneous revenues
Gain from gas cost incenlive sharing
Other marcrn adjustments 3l
NGD margin
oeoree davsr''
Percenl colder (warmer)than ave€ge wealhe/''
NGD lueters -end of perod
661.163
467.MO
740,369
499,924
609.222
475,774
{79.206)
(32,884)
'13.l,147
24.',t50
1.124.203 1,240,293 1,084.996 (112,090)155.297
s 621.782
58,713
't53
ffi4,214
63,925
3.472
'19.069
804.390
59,346
3.812
17,111
162,432)
15,2121
(3,719)
(19,069)
79,424
4.53S
1,958
5 S $
680,648
255,743
11,127
30,o82
732.942
325,019
15.291
650,477
260,588
13,2S8
\52,294)
69,276
4,164
(30,082)
82.465
(64,431)
(1,993)
383.696 376,591 16 041
$352,710
30,817
5 542
127)
(5,346)
(3,026)
(1.030)
1,677
(1,264)
(5 293)
'17,676
858
69
12,723)
161
$355,736 S
31,847
3,865
(s3)
336,060
30,989
3,796
3,960
l2'14)
$$
$ 383,696 $ 392,632 $ 376,5S1 $ (8,S36) $ 16,041
Resrdential melers
commercral meters
lndustrialmeters
Totalnumber of meters
NGD Meter gmwthl
2.714
(5)ak
2,705
3.114
15%
2 716
2 098
123)%
I
(26)%
680,134
69,259
1,028
668,803
68.050
1,O21
656,855
67 278
1.013
11,331
1,209
7
11.948
772
I
750.421 725146 12 547
Residential rn€ters 17 1o 1 alo
Comrnercial rneters 18 q. 11%
lndustrial rnelers 07 a/o o.a%
Tolal meter growth 1 7 o/o 1 .8%
''' The change rn presentalion ol @venue taxes was a resull of lhe ac,option of ASU 2Ol4-Og "Revenue From Contracls with Cuslomers" and all relaled amendments on
January 1.2018 This change had no impact on NGD ma.gin r€sulls. For additionalinformation. see Note 2
'r' Amounls reported as margin for each calegory of meters are operalang revenues, which are net of revenue taxes, less @sl ofgas and environmental remediation
F Other margin adjustmenls include re!€nue deferrals of 6T g mrllion for lhe year ended Oecember 3l , 20l 8 assocjated wth the decline of the lJ S. tederal corporate
inco.ne lax rater'' Heating degree days are units of measure reflecting temperature-sensilive consumphon of naluralgas. celculaled by subtracting lhe ave€ge ofa day s hrgh and low
lemperatures from 59 degrees FahrenheitsrAverageweatherrepresentsthe2s-yearaverageofhealingdegreedEysThroughOctober3l,20lsaverageweatherjscalculaledovertheperiodl986-201O.as
delermined in NW Natural's 2012 Oregon general late case, and beginning Novemb€r 1, 2018, average weather is calcuhled over the period May 31. 1992 lhrough
May 30 2017, as determined in NW Natural's 2018 Oregon generalrate ca9€.
EXIIIBIT 2
PALFREYMAN. DI
GEM STATE WATER
42
Page 44 of 210
s
392 632 (8 936)
(11)
4A%
737.874 12.728
Residential and Commercial Sales million in nalural gas dislribulion margin as a result of sales volume
increases of 131.2 million therms, or 22%, due to customer groMh and
the effects of colder than average weather an 2017 compared lo warmer
than average weather in lhe prior period.
lndustrial Sales and Transportation
The primary factors that impacl results of operations an the residential
and commercial markets are customer growth, seasonal weather
patterns, energy prices, compelition from other energy sources, and
economic conditions in ourservice areas. The ampacl ofweatheron
margin is sig nificantly .ed uced through NW Natural's weather
normalizalion mechanism in Oregon; approximately 81% ofNW
Natural's totalcuslomers are covered underthis mechanism. The
remaining cuslomers either opt out ofthe mechanism or a.e located in
Washinglon, which does nol have a similar mechanism in place. For
more information on the weather mechanism, see "Regulatory Matters-
Rale Mechanisms-l,veathet Nomalization Mocharlsm" above.
lnduslrial cuslomers have the option of purchasing sales or
transponalion seNices. under the sales service, the cuslomer buys the
gas commodity. Underthe transportation service, the custome. buys the
gas commodity direclly f.om a third-party gas marketer or supplier. The
NGD gas commodity cost is primarily a pass{hrough cosl to customers;
therefore, NGD prollt margins are nol materially aflected by an industrial
customer's decision to purchase gas from third parties. lndustrial and
large commercial customers may also selecl between firm and
intenuptible service options. with llrm services generally providing higher
proflt margins compared lo interruplible services. To help manage gas
supplies, industraal lariffs are designed lo provide some ce.lainty
regarding induslrial customers' volumes by requiring an annual service
election which becomes effective Novembe.l, specialcha.ges for
changes between eleclions. and rn some cases. a mrnrmum or
maximum volume requirement before changing options.
NGD induslrial sales and transportation highlights include:
NGD residenlial and commercral sales highlighls include
2017 2416
Volumes (therms)
Resrdentral sa les
Commercial sales
Totalvolumes
Ooeratino revenues:
Commercial sales
Tolal operaling revenues
NGD margin:
Residential
Sales
AltematNe revenues:
Wealher normelization
Decoupling
Amortization of allematrve
Total residenlial NGO rnargjn
Cornmercial:
Sales
Alternatave revenues:
Wealher normallzaton
Oecoupling
Amortzatron of allemative
Total commercial NGD rnargin
Tolal NGo margin
465 2
661 2 740 4 609 2
418.4 I
203.3
455.9 S
229 3
404 3
200.'1
$ 621.7 $ 684.2 $ 604.4 Volumes (herms)i
lndultdal - firm sales
lnd6t al . frm lranspodalioar
lndust al - inlenuptibl€ seles
lrdu3tial - inlenuplible
t.anspo,tatioo
ToialvdurEs
l{GO marcin:
lnduslrial - sale3 and
lran$orlalion
s 240.0 , 262.1 $ 232
142.7
50.6
35.7
147.7
55.1
158.9
50.4
218.4 241.4 234.7
7-B
(0.6)
't.9
12_7
08 467 0 499.9 475 A
248I 247.4 236 7 $308 S 31 8 S 31 0
103 7 101 5 472
2018 COMPARED TO 2017. lndustrialsales and transporlation volumes
decreased by 32.9 million therms and NGD margin decreased $1.0
million due lo lower usage from warmer than average weather in 2018
compared to colderthan average wealher in 2017.24
73
(4 6)
111 m17 COITPARED 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 wealher in 20'17
compared to warmerthan average wealher in 2016, and increased
usage from higher production load.
(9.6)
103.8 108.0 101.,4
$ 352.7 $ 355.8 S 338.1
ml8 COMPARED TO 2017. The primary factors contributing lo changes in
the residential and commercial markels were decreases of S62.5 million
in operating revenue and $3.1 million in NGD margin as a result ofsales
volume decreases of 79.2 million therms, or '11%, due to warmer than
average weather in 2018 compared to colder lhan average weather in
the prior period, partially offsel by customer groMh.
2017 CoMPARED TO 2016. The primary factors contributing lo changes in
the residential and commercial markets were increases of S79.8 million
in operating revenue and $17.7
IIXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 45 of210
Table of Conlents
2018
2018 2017 2016
411_7
249_5
379 2
230.0
$
(11.9)
(2.4t
Other NGD Revenues
Other NGD revenues include miscellaneous fee income as well as
regulatory aevenue adjuslmenls, which reflecl curaent period deferrals lo
and prior year amortizations from regulatory asset and liability accounts,
exc€pl for gas cost deferrals which flow through cost ofgas. Decoupling
and other regulatory amortizations from prioryear defenals are included
in revenues from residential, commercial, and industrial firm customers.
50
43
Other NGD revenue highlights includel
tn ntttons 2O1A 2017 2016
Olher NGD revenues
Other NGD revenue increased $1.6 million in 2018 compared to 2017
due lo inseases in entitlement and curtailment revenue due to system
restrictions for certain industrial and commercial cuslomers as a resull
of a Canadian pipeline event in October 2018 that disrupted gas supply
Other NGD revenues remained flat between 2017 and 2016
Cost of Gas
Cosl ofgas as reported by the NGO segment includes gas purchases,
gas withdrawn from slorage inventory. gains and losses lrom commodity
hedges, pipeline demand costs, seasonal demand cost balancing
adjustmenls. regulalory gas cost deferrals, gas reserves costs, and
company gas use. The OPUC and WUTC generally require natural gag
commodity costs lo be billed to customers at the actual cost incurred, or
expected lo be incuned. Customer rales are sel each year so that if cost
eslamales 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 Adjustme?t"above. ln addilion to the
PGA incentive sharing mechanism, gains and losses from hedge
contracls entered into afler annual PGA rates are effective for Oregon
customers are also required to be shared and lherefore may impacl nel
income. Further, NW Natural also has 8 regulatory agreement whereby it
earns a rate of retum on its inveslment in lhe gas reserves acquired
underthe o.iginal agreement wilh Encana and includes gas from the
amended gas reserves agreemenl at a fixed rate of$0.4725 pertherm,
which are also reflected in NGD margin. See "Application ofCritical
Accounting Policies and Estimates-Accrurting for Detivative
lnstruments and Hedging lctivitles " below.
Cost ofgas highlights include:
lht1a6 a.d thenls tn tullians 2014 2016
compared to warmerthan average weather in 2016, and cuslomer
groMh.
The effect on nel income from NW Natural's gas cosl incentive sharing
mechanism resulted in a slight margin loss in 2018 and margin gains of
S1.2 million and $4.0 million for 2017 and 2016. respeclively. ln 2018,
actual prices closely aligned wilh estimated prices included in customer
rates. ln 2017 and 2016, aclual prices were lower than the estimaled
prices included in customer rates due to warmer than average weather
nationally, which resulted in lower national natural gas commodity
prices. Fora discussion oflhe gas cosl incenlive sharing mechanasm,
see "Regulatory Matlers-Rate Mechanisms-Purchased Ga s
Adjustment" above .
Other
other activilies aggregated and reporled as other al NW Nalural include
the non-NGD storage activily at Misl as well as asset management
se.vices and the appliance retail cenler operations. Other activilies
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, TrailWest Pipeline, LLC (TWP); NNG
Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); and NWN
Water, which owns and continues to pursue inveslmenls in lhe water
seclor. See Nole 4 for further discussion ofour business segment and
other, as $/ell as ou. direct and indirecl wholly-owned subsidiaries, and
Nole 13 for further details on our inveslmenl in TWH.
At Mist, NW Natural provides gas storage seNices to customers in the
interstate and intrastate markets using storage capacily that has been
developed in advanc€ of NGD customers' requiremenls. Pre{ax income
from gas storage at Mist and asset managemenl servic4s is subject to
revenue sharing with NGD customers.
Underthis regulatory incentive sharing mechanism, NW Natural retains
80o/o ofpre-tax income lrom Mist gas slo.age servaces and assel
management services when lhe underlying costs ofthe capacity being
used are not included in NGD business rates. The remaining 20% as
credited lo a defened regulatory account for credit to NGD customers.
Through October 2018. when the capacity used was included in NGD
rates, NW Natural retained 33% of pre-tax income with the remaining
67% credited to a deferred regulatory account for credit to NGD
cuslomers. ln conjunction with the Oregon rale case, effective November
2018 NW Natural relains 10% of pre-tax income from such storage and
asset managemenl services and 90o/o is credited to NGD business
customers. See "Regulatory Mallers-Regu/atory Prcceeding Updates"
above for information regarding an open docket related to this incentive
sharing mechanism.
The following table presents the results of activilies aggregated and
reported as other for bolh NW Holdings and NW Naturali
$5s $39 $38
Cost of gas
Volumes sold (therms)
Average cosl ol gas (cenls per
lherm)
Garn lrom gas @st rncentive sharing
S 255.7 $
747
325.0 i
831
260 6
693
s 0.34 $039 $
1.2
034
40
2018co PARED To ml7. Cost of gas decreased $69.3 million. or 21olo,
primarily due to the 10% decrease in volumes sold due lo warmer lhan
average wealher in 2018 compared lo colder than average weather in
2017, and lower average cost of gas collected from customers, partaally
offsel by cuslomer groMh.
2017 COMPAREO TO 2016. Cost of gas increased $64.4 million, or 250/",
primarily due to the 20% increase in volumes sold due to colder lhan
average weather in 20'17
44
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 46 of 210
Table of Contenls
2017
Table ol Contenls
toa Dns ex(€pt EPS (hta 2A1a 2017 2016
Delinquent customer rec€ivable balances continue to remain at
historically low levels. Bad debt exp€nse as a percenl ofrcvenues was
0.1% lor 2018, 2017 , and 2016.NW Natural oher - nel incorne
Other NW Holdrngs actvity
NW Holdings oth6r - net income
EPS - NW Holdings - olher
$'t 0.0 $
(0 8)
8.3
(0.4)Depreciation and Amortizatron981167.9 Depreciataon and amortization highlights include
034 041
The signilicant drivers of changes in other net income discussed below
apply to bolh NW Holdings and NW Natural.
2018 COMPARED TO ml7, Other net income decreased compared to the
prior period pimarily due to $4.2 million in higher income tax expense
driven by $4.4 million in income tax benefits recognized in 20'17 from the
enactment of the TCJA, panially offset by a $2.8 million increase in
revenues from asset management agreements for lvlist storage and
transportation capacity.
2018 2017 2016
NW Natural
Other NW Holdrngs deprecialion and
amoftEation
I 85.0 $ 81.0 $ n.6
o2 0.1
NW Holdings $ 85.2 $ 8'r.1 I n.A
The signilicant drivers ofchanges in depreciation and amortization
discussed below apply to both NW Holdings and NW Natural.
2017 COMPAREo TO 2016. Other net income increased primarily due to a
gain associaled with lhe TCJA defened taxes remeasurement, partially
otfset by a decrease in revenues from asset management agreemenls
for Misl slorage and transportataon capacity.
20 l8 CoI{PARED TO m17. Depreciation and amortizalion expense
increased by $4.1 million and 54.0 million for NW Holdings and NW
Natural, respeclively, primarily due to NGD plant additions that included
investments in naluralgas lransmission and dislributaon syslems
supporting customer growth. safety, reliability, facility upgrades, and
enhanced technology.Consolidated Operations
Operations and Maintenance m17 COMPARE0 TO 2016. Deprecialion and amortization expense
increased by $3.5 million and 53.4 million for NW Holdings and NW
Natural, respectively, primarily due lo NGD plant addilions lhal included
investmenls in natural gas transmission and distribution syslems.
storage facililies, and technology.
Operations and mainlenance highlights include
2A1A 2017 2016
NW Nalural
Other NW Holdings operations and
mainlenance
NW HoldirEs
$ 155.2 $ 152.2 S 136.0 Other lncome (ExDense), Nei
02 07
$ 156.7 $ 1524 S 136.7
Other income (expense), net highlights include
to httions 2010 2017 2016
The signillcanl drivers of changes in operations and mainlenance
expenses discussed below apply to both NW Holdings and NW Natural
Pension and olmr poslrelrremenl
costs other than service coslS
Equity portion ofAFUOC
Gair|s lrom company-owned life
inguran@
Nel inlecsl income (expense) on
deferred regulatory accounlg
Olher non-opelEting
NW Natural total olher income
(expense), net
Other NW Holdings activity
NW Holdings total other income
(expense). net
S (e.1) $
41
(6.1) $
2.7
(7 0)
z)18 COMPARE0 TO 2017. Operalions and maintenance expense
increased $4.3 million and $3.0 million for NW Holdings and NW
Natural, respectively, primarily due to the following factors:. a $3.4 million increase in NGD payroll and benefits due to increased
headcounl and general salary increases; and
' a S3.2 million increase in NGD non-payroll costs primarily due to
increases in general professional services and contract labor.
1_7 25 '17
1_7
(2.0)
2_O
(1.3)
(0 1)
(1.6)
s (3.6) $(0.2) s
(0.1)
(7.0)
(0.2)
$ (36) $ (0.3) $ (7.2\
The signilicant drivers ofchanges in Other income (expense) discussed
below apply to bolh NW Holdings and NW Natural.
m18 COtIPARE0 TO 2017. Olher income (expense). net. decreased $3.3
million and $3.4 million al NW Holdings and NW Natural, respectively,
primarily due to a $3.0 million increase in pension and olher
postretirement non-service costs and $0.8 million lower gaans from
company-owned life insurance, partially offset by a $1.4 million increase
in the equity portion ofAFUDC.
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 47 ot2l0
45
11.2 I
0.4
029
20'17 COiIPARED 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 lollowing facto6:, 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 sarety equipmeni upgrade costs.
Table of Contenls
2017 COIiIPAREo TO 20i6. Other ancome (expense), nel, increased $6.9
million and $6.8 million al NW Holdings and NW Natural, respectively,
primarily due lo the January 2016 Order from the OPUC, which resulted
in a pre-tax $2.8 million interest disallowance in 2016, an increase of
52.7 million in the equity portion of AFUDC, and $0.8 million in higher
gains frorn company-owned life insurance.
ln addition to fluctuations in olher income (expense). net reported above,
from 2011 through October 31, 2018. NW Natural had OPUC approval to
defer certain pension costs in excess ofwhat was recovered in customer
.ates, with the majority of such cosls being non-service componenl cosls
renected within other income (expense), net. This pension cost deferral
was recorded to a regulatory balancing account, which stabilized lhe
amounl ofotherincome (expense), net each year. Total pension cost
defenals. excluding interest, were $10.3 million. $6.5 million, and 56.3
million for lhe years ended December 31, 2018,2017 ard 20'16.
respeclively. Aa a resull, increased pension costs had a minimal effect
on other income (expense), net in 2018, 2017, and 2016, with the
increase princjpally related lo 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 orderlo freeze NW Natural's
pension balancing account as ofOctober 31,2018. The orderdarected
NW Natural and the other parlies to the rate case to engage an further
regulatory proceedings extending the general rale case dockel to resolve
open issues with respect to the recovery oflhe pension balancang
account. On February 4, 2019, NW Naturaland the other parties to the
rate case liled a joint stipulation with the OPLJC oullining a resolulion to
the issue. See Note g and "Regulatory Matters-Regulalory Proceeding
Update$- 01690, GenoralRat6 Case"
lnterest ense. Net
lnterest expense, net highlighls include
2A1A 2017 2016
2017 COMPAREO TO 2015. lnlerest expense. net of amounts capitalazed.
decreased $0.6 million at both NW Holdings and NW Natural primarily
due to a $2.1 million increase in lhe interesl-relaled porlion ofAFUDC.
partially offset by increased inlerest expense of $1 5 million due to the
issuance of long-lerm debt in December 2016 and Augusl 2017.
lncome Tax Exoense
NW Holdings income tax expense highlighls include
2018 2017 2016
lncome tax expense
Effects of non-GAAP adjustmentsl
Effecls from the TCJA"'
Adtusted rncome tax expense
$ 24.2 $ 41.0 S 430
13
Elfedivetaxrate 2s.49o 38.3% 40.8%
Adjusted efective tax rate 28.4% 39.3% 40.8%
''' See the Non-GMP Reconcilialions table at the beginning ot ltem 7 for 6
€conciliation of this non-GMP fnarrcial measue to il3 d6eat U.S.GAAP
meSsur€.
34
$ 24.2 S 44.4 S ,14.3
2017 2016
NW Natural income tax expense highlights include
tn niltions 2018
lncome tax expense
Effects of non-GAAP adjustnrenlsl
Effects from the TCJA")
Adiusled rncome tax expense
s 24.5 $ 41.5 $43.3
1.3
$ 245 S 445 $ 446
NW Natural
Other NW Holdings inlerest expense
NW Holdings
37.0 $
0.1
The significant drivers of changes in inlerest expense. nel discussed
below apply to bolh NW Holdings and NW Natural
a)18 COMPAREO TO 2017. lnterest expense, net of amounts capitaljzed
decreased $0.4 million and S0.5 mallaon at NW Holdings and NW
Natural, respectively, primarily due to a $2.3 millaon increase in the
interest-related portion ofAFUDC, partially offset by increased
commercial paper interest expenses of $1 6 million.
Effeclive tax rate 26 46/o 36 6% 40 8olo
Adjusted etfective lax €le 26.40/o 39.3% 40.Sok
") See lhe Non-GAAP Reconciliations table at the beginning of llem 7 lor a
reconciliation ofthis non-GAAP inenciel measure to ils closest U S GAAP
The significant drivers of changes in lncome lax expense discussed
below apply to both NW Holdings and NW Natural.
mi8 COMPARED TO 2017. The efreclive tax rale decreased by 9.9% and
'10.2% at NW Holdings and NW Natural, respectively, primadly due to a
decline in the statutory income lax rale from 39.5% lo 26.5% as a result
olthe TCJAenactment in 2017. lncome lax expense decreased due to
the TCJA and lowerpre-tax income, partially offset by a beneft of $3.4
million recognized in 2017 at NW Holdings and a benefil of $3.0 million
recognized in 2017 at NW Naturalfrom the remeasuremenl ofdelened
tax balances upon the TCJA enaclment date- Excluding the impact ofthe
2017 remeasurement benefits of $3.4 million and $3.0 million at NW
Holdings and NW Natural, respectively, the adjusted etfective tar rate
decreased 12.9olo at both NW Holdings and NW Naturaldue to lhe
statutory tax rate declining from the TCJA. See the Non-GAAP
reconcilialions al the beganning of ltem 7 for additional info.mation.
2017 COMPARED TO ?016. The effec{ive tax rate decreased by 4.5% and
4.2016 at NW Holdings and NW Natural,
$375 $ 381
E 37.1 $ 37.5 $ 38.1
46 EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 48 of 210
Table ot Contents
.espectively. Excluding lhe tax benefits associaled with the TCJA
enactmenl 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 Naiural, the adjusted
effeclave lax rale decreased 1.5% at both NW Holdings and NW Natural.
See lhe Non4AAP reconciliations at the beginning of ltem 7 for
additional information. The adjusted effective lax rate decreased
primarily as a result oIAFUDC equity income and increased stock-based
compensalion deductions in 2017.
Pqndino Sale ofGill Ranch Storaoe
On June 20,2018, NWN Gas Storage, awholly owned subsidiary of NW
Holdangs, entered into a Purchase and Sale Agreement (the Sale
Ag reement) that provides for the sale by NWN Gas Storage of all of its
membership interests in Gill Ranch. Gall Ranch owns a 75% interest in
the natural gas storage facility located near Fresno, California known as
the Gill Ranch Gas Storage Facility. PG&E owns the remaining 25%
interest in the Gill Ranch Facility.
The Sale Agreement provides for an inilial cash purchase price ol $25.0
million (subject lo a working capital adjustment), plus potential
additiohal payments to NWN Gas Storage ofup to $26.5 mallion an the
aggregate if Gill Ranch achieves certain economic performance levels
for the firsl three fullgas slorage years (April 1 ofone yearthrough March
31 of the following year) occurring after the closing and the remaining
portion of the gas storage year during whach the closing occurs.
The closing of the transaclion is subject to approval by the CPUC, other
customary closing condilions and covenants, including the requirement
that allofthe represenlations and warranties be kue and correcl as of
the closing date except, as would not, in the case ofcertain
representalions and warranties, be reasonably expected to have a
materialadverse effect on Gill Ranch. The agreemenl is subjecl to
termination by eilherparty ilthe transaction has not closed by June 20.
2019, subject to automatic extension for six months ifthe CPLJC has not
issued an order approving the transaction by that date.
On January 29. 2019. PG&E filed voluntary petitions for reliefunder
chapler 1 1 bankruptcy. Allhough we do not cur.enlly anticipate that the
PG&E filing will afiect the sale of Gill Ranch, we cannot fully predicl the
course of the bankruptcy proceedings or lhe impact on lhe sale and will
The resulls of Gill Ranch Storage have been determined to be
discontinued operalions and are presenled separately, net oItax, from
lhe results of continuing operations of NW Holdings for all periods
presented. See Note 'l8 for more information on the Sale Agreement and
lhe results of our discontinued operalions.
The CPUC regulates Gill Ranch under a market-based rate model which
allows for the price ofslorage services to be sel by the marketplace. The
CPUC also regulales the issuance of securilies, system of accounls,
and regulales intrastate storage services. The California Department of
Oil Gas and Geothermal Resources (DOGGR) regulations for gas
storage wells were llnalized in June 2018. and the U.S. Deparlment of
Transporlation's Pipeline and Hazardous Malerials Safety Administration
(PHMSA) proposed new federal regulations for underground nalural gas
storage facilities. which are expecled lo be finalized during 2019 and
increase costs for all storage providers. NW Holdings will conlinue lo
monilor and assess lhe new regulations unlil the sale is complete.
which is expecled in 2019.
Short-term liquidity for Gill Ranch is supported by cash balances, internal
cash flow from operations, equity contributions from ils parenl company.
and. rf nec€ssary. additional exlernal financing
Capital Structure
One ofourlong-term goals isto mainlain a sirong and balanced
consolidaled capilal structure, while maintaining a long-term larget
capital structure at NW Natural of 50% common stock and 50% long-
lerm debt to alagn to allocations prescribed by NW Natural's regulators.
When additional capital is required, debt or equity securilies are issued
depending on both the target c€pital structure and market conditions.
These sources of capital are also used to lund long{erm debt
retirements and shorl'term commercial paper maturities. See "Liguidlty
and Capital Resources"below and Nole 8.
December 31
2018 2017
Common stock equty
Long lerm debt
Short-term debl. including current matudties ol
loflg-terrn debt
Total
44.4%
41.1
145
47.1%
96
100 0%100 0%
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 49 of2l0
47
ln lhe Sale Agreement, NWN Gas Storage makes representalaons and
waranties concernang, among other things, Gill Ranch, the Gill Ranch
Facility and Gill Ranch's business and contractual relationships, and
agrees to cause Gill Ranch to conduct its business and maintain its
properties in the ordinary course, consislent with material agreements
and past praclice.
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 settlement agreement with the CPUC. The CPUC is
expected to rule on the setllement agreemenl within 90 days of its liling,
but may grant Iurther time for public comment. We expect an order on
this matterby the end oI June.
continue to monitor lhe situation closely. We will contanue lo seek to
close the transaction in the first half of2019.
FINANCIAL CONDITION
Achieving our largel capital slructure and mainlaining sufflcient liquidity
to meet operating requirements are necessary to maintain atlractive
credit ratings and provide access to capital markels at reasonable cosls.
NW Holdings' consolidated capital slructure was as follows:
Tab e of Contents
NW Natural's consolidated capitalstruclure was as follows:
December 3l.
2O1B 2417
Common stoc* equty
Long-lerm debt
Short-lerm debl, includ,ng cunent maturities of
,ong-term debt
Tolal
14I 9.6
100 0%100.00/"
Liquidity and Caoital Resources
Al December 31 , 2018 and December 31, 2017. NW Holdings had
approximately $12.6 millaon and $3.5 million, and NW Natural had
approximately $7.9 m illion and $3.'l million of cash and cash
equivalents. respectively. ln orderto maintain sufficienl liquidily during
periods when capital markets are volalile. NW Holdings and NW Natural
may elect to maintaan higher cash balances and add short term
borrowing capacily. NW Holdings and NW Natural may also prejund
their respecljve capital expenditures when longlerm fixed rate
environments are allraclive
NW Holdinqs
For NW Holdings, shortlerm liquidity is primarily p.ovided by cash
balances. dividends from ats operating subsadaaries, in particular NW
Natural, available cash from a multi-year credit facilily, and short{erm
credit facililies. NW Holdings also has a unive.sal shelf registration
statement llled with the SEC lorthe issuance ofdebl and equity
securities. NW Holdings long-term debt, if any, and equity issuances are
primarily used to provide equily contribulions lo NW Holdings operating
subsidiaries lor operating and capital expenditures and olher corporate
purposes. NW Holdings' issuance of securities is not subject to
regulation by stale public utillty commissions, but the dividends from NW
Natural to NW Holdings are subject to regulalory ring-fencing provisions.
As part of the ring-fencing condilions agreed upon with the OPUC and
WUTC in connection with the holding company reorganization, NW
Natural may not pay dividends or make distrabutions to NW Holdings if
NW Natural's credit ratings and common equity ratio fall below specified
levels. lf NW Nalural'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 45olo or more. lf NW Natural's long lerm
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 ratao
is 460,6 or more. Dividends may nol be issued if NW Nalural's long-term
secured credit ratings are BB+ or below for S&P or Ba1 or below for
Moody's, or if NW Naturals common equity ratio is below4406. ln each
case, common equity ratios are delermined based on a preceding or
projected 13-month average. ln addition, there are certain OPUC notice
At December 31, 20,l8, NW Nalural satisfied the ring-fencing provisions
described above.
Eased on several factors, includang current c€sh reserves, commitled
credit facilities. its ability to receive dividends from ats operating
subsidiaries. in particular NW Natural, and an expected abilily to issue
long{erm debt and equity securities in lhe capital ma*els. NW Holdings
believes ils liquidity is sufficient to meet anticipaled near-lerm cash
requarements. including all conkactual obligations, investing, and
financing aclivities as discussed in "Contractual Obligations and Cash
Frows"below.
Natural Gas Distribution Seoment
For the NGD business segmenl. short term borrowang requirements
typically peak during colde. winter monlhs when the NGD business
borrows money to cover the lag between natural gas purchases and bill
collections from cuslomers- Shorl-term liquidity for the NGD business Is
pramarily provided by cash balances, inlernal cash flow from operations,
proceeds from lhe sale of commercial paper noles, as well as available
cash from multi-year credit facililies, shorl{erm credit facilities, company-
owned life insurance policies, the sale of long-term debt, and equity
conlributions from NW Holdings. NW Natural's long-te.m debt and
contributions from NW Holdangs are primarily used lo 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 Ral,.,gs" below),
it has been able to issue commercial paper and long-term debt al
atkactive rates and has not needed to borrow or issue letlers of credil
from ats back-up credit facility. ln the event NW Natural is nol able to
issue new debt due to adverse market conditions or other reasons, NW
Nalural expects that near-lerm liquidity needs can be met
42.9%
422
47.1%
43.3
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 50 ol2l0
48
requiremenls for davidends in excess ol5% of NW Natural's relained
earnings.
Additionally, if NW Natural's common equity (excluding goodwill and
equily associaled with non-regulated assets), on a prec€din9 or
projected '13-month average basis, is less ihan 46% ot NW Natural's
capital slructure (coomon equity and long-term debt excluding imputed
debt ordebt-like lease obligations), NW Natural is required lo notify the
OPUC, and if the common equity ratio falls below44%, file a plan with
the OPUC to restore its equity ratio to 44%. This condition is designed to
ensure NW Natural continues to be adequately capitalized unde. the
holding company structure. Under the WUTC order, the average
common equity ratio must not exceed 56076.
}{w HoLolNGs olvloEND PoLlcY. Quartedy dividends have been paid on
common stock each year since NW Holdings' predecessor's stock was
first issued to the public in 195,l . Annual common stock dividend
payments per share, adjusted for stock splils, have increased each year
since 1956. The declarations and amount offuture dividends to
shareholders will depend upon earnings- cash flows, flnancial condition.
NW Naturals ability to pay dividends to NW Holdings and otherlactors.
The amount and timing ofdividends payable on common slock is at the
sole discretion of the NW Holdings Board of Directors.
During 2018. changes to NWHoldings'and NWNatural's capital
slructures were primarily due to increases in short term debl al NW
Natural partially offset by lower net proceeds from long{erm debt activity
at NW Nalural. See further discussion below in "Cash Flows -F i h a nci ng Activ itie s".
Table of Conlents
using inlernal cash flows. issuing commercial paper, receiving equity
contributions from NW Holdings, or, for the NGD segment. drawing upon
a commilted credit facilily. NW Natural also has a unaversal shelf
registration slatement filed with the SEC for the issuance of secured and
unsecured debt securities. As of December 31, 2018, NW Nalural has
Board authorization to issue up to $325 million of additional FlvlBs and
OPUC approval to issue up lo $25 million of additional long-term debl for
aPProved PurPoses.
ln lhe event senior unsecured long{erm debl ratings are downgraded. or
outstanding derivative posations exceed a certain credit threshold,
counlerparties under derivative contracts could require NW Naturallo
post cash, a letter of credit, or other forms of collaleral, whach could
expose NW Natural to additional cash requirements and may trigger
increases in short-lerm borrowings while in a nel loss posilion. NW
Natural was not required to post collateral at December 31. 2018
However, ifthe credit risk-related contingent features underlying these
contracts were triggered on December 3'1, 2018. assuming long-term
debl ratings dropped to non-inveslment grade levels. NW Natural could
have been required to post $4.5 million in collateralwith our
counterparlies. See "Credrl Rafmgs" below and Note 15
Other items lhat may have a signiflcanl impact on NW Nalural's liquidity
and capilal resources include NW Natural's pension conkibution
requiremenls and environmental expenditures.
PENslotl coltrRtBullo . NW Natural expects to make contributions to its
company-sponsored defined benefit plan, which ls closed to new
employees, overthe nexl severalyears untilthe plan as fully funded under
the Pension Prolection Act rules. including the rules issued under the
Moving Ahead for Progress in the 21sl Cenlury Act (MAP-21) and the
Highway and Transportation Funding Act of 2014 (HATFA). See
"Application of Crilical Accounling Policies-Accounting lor Pensions ahd
Postrcti rcmenf Be n etitC' belovl.
BONUS 0EpREC[AT|Oi{. Fifty percent bonus depreciation was available for
a large porlion of our capital expenditures in 2016 and 20'17 for both
federal and Oregon laxes. This reduced laxable income and provided
cash flow benefits. However. due lo the enaclment oflhe TCJA on
December 22, 2017, bonus deprecialion is eliminaled for regulated
NGD-business property acquired after December 31, 2017. Accordingly.
we do not anticipate similar cash flow benefits related lo bonus
depreciation in the future.
ENVIRONiiEilTAL ExPEIDITURES. NW Naluralexpecls lo conlanue using
cash resources to fund environmental liabililies. ln 2015, NW Natural
received an Order from the OPUC regarding the SRRM mechanasm and
began recovering amounts through NGD business rates in November
2015. ln addition, the OPUC issued a subsequenl Order regarding
SRRM implementation in
January 2016. See Note 17. and "Resulls of Operations-Regulatory
M alle.s- E n vi ron fi e ntal Cosls" above
Based on severalfactors, including current credit ratings, NW Nalural's
commercial paper program, currenl cash reserves, commilted credat
facilities, and an expected abilily to issue long{erm debt and receive
equity contributions from NW Holdings. NW Natu.al believes ils liquidity
is sufficient lo meet anticipaled near-lerm cash requircmenls, including
all conlractual obligalions, investing, and financing activities as
discussed in "CoDfactual Obligalions" and " Cash F/ows" below.
NW ATURAL DIVIDEND POLICY. The declarations and amount of future
dividends to NW Holdings willdepend upon earnings, cash flows,
financial condition, the salisfaction ofOPUC and WUTC regulatory ring-
fencing restrictions. and olher factors. The amount and timing of
dividends payable on common stock is subject to approval of the NW
Natural Board of Directors.
OFF-BALAIICE SHEET ARRAXGEiIE TS. Except for certain lease and
purchase commitments. NW Holdings and NW Natural have no malerial
off-balance sheel financing arrangements. See "Contractual Obligations'
below
ln October 2017, NW Natural enlered into a 2o-year operating lease
agreement for a new headquarlers location in Portland, Oregon. The
existing headquarters lease expires in 2020 and after an exlensive
search and evaluation process with a focus on seismic preparedness,
safety, reliability, least cosl to cuslomers and a continued commitmenl to
NW Nalural's employees and the communilies NW Natural seNes, NW
Natural execuled a new lease for suitable commercial office space in
Porlland. Oregon. Payments under lhe lease are expected lo commence
in 2020 and totalestamated base renl payments over lhe life ollhe lease
are approximalely $160 million. NW Natural has the option to extend the
lerm ofthe lease for lwo addilional seven-year periods.
Additionally, the lease was analyzed in consideralion of build{o-suit
lease accounting guidance with lhe conclusion lhal NW Natural is the
accounting owner of lhe asset during conslruction. 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-currenl Iiabilities for the same amounl on ils consolidated balance
sheel. These accounting kansactions are non-cash in nature. and as
such, are not included in lhe cash flow analysas and capilal expenditures
forecasts below and have no impact on short lerm liquidity. When the
new lease accounling standard bec€me effeclive for NW Holdings and
NW Natural in 2019. the associated build-to-suit asset and liability were
de,recognized in accordance wilh lhe new slandard See Note 2 for more
information on the impacls ofthe new lease standard.
49
EXFIIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 5l of2l0
TabLe of Conlents
Contractual Obliqations
The following lable shows contraclual obligalions from continuing operalions at December 31. 2018 by maturity and type of obligalion
Payments Due in Years Ending December 3l
2019 2020 2021 2022 2423 Thereatter Tota
NW Nalural
Shorl-term debt maturitres
Long-term debl maturities
lnlerest on long-tenn debt
Postrctirement benef it paymentsl')
Operating leases
Gas putchases'r'
Gas pipel ne cepacily commitments
Other purchase commiunenlsr'
Other lonq-term liabilities I
NW Natural Total
NW Holdings
Short- and long-term obligalionstr)
NW Holdlngs Totat
s 217.5
30.0
36.7
25.1
5.4
144.5
42.7
75.0
31.0
*.1
4.8
80.2
2.1
60.0
29.9
27 _O
7.1
2.3
667
o.6
80.0
27.3
7_3
4U_7
2754
159 4
149 I
580 0
217 _5
739_7
424.9
2s!,.1
181.7
149.6
2.4
17.3
s $S s S $
606
559.2 222.O '193.6 124 4 213 9 1.649 8 2.962I
o4 03 03 0.3 -14 30
$ 5596 $ 222 3 S 1939 $ 124.7 $ 214.2 S 1,65.1.2 $ 2,965 9
r1 Postretircment beneft paymenls primanly consists of tlvo NW Nalural item6: (1)eslimated pension and olher posAetirement plan payments, which a.efunded by plan
assel9 and future cash contnbutions. and (2) required payments to the Westem Shtes multiemployer pension plan due lo our withdra$alfrom the plan in December
2013 See Nole 9
''' Gas purciases irclude contracls whch use prjce formulas tied to monthly index prices. The commilrnenl amounts p.esented rncorporate the Deceinber 2Ol8 frrsl of
month rndex price for eaci supply basin from whici gas is purcfiased For a summary of gas purchase and gas pipeline capacity commilments, see Nole 16
'!' Other purchase comm,lmenls pimaily cmsst of remaining balances underexisting purchase orders
tming ol these payments are uncenain; however. these paymenls are unlikely lo alloccur in lhe next 12 monlhs.r5' Short- and long-lerm obligations include short- and long-tem debt obligations an<l other imrnaterial liabilities.
ln addition to known contractual obligalaons listed in the above table, NW
Natural has also recognized liabilities for future envaronmental
remediation or action. The exact timing of payments beyond 12 months
with respect to those liabilities cannot be reasonably estamated due to
numerous uncerlainties surrounding the course olenvironmental
remediation and the preliminary nature of site investagataons. See Note
17 for a fu rther discussion ofenvironmenlal remedialion cost liabilities.
At December 31, 2018, 635 of NW Natural's natural gas diskibution
employees were members of lhe Office and Professional Employees
lntemational Union (OPEIU) Local No. 11. ln May 2014, our union
employees ralified a new labor agreement (Joint Accord) lhat expires on
November 30, 2019, and thereafter from year to year unless either party
seNes notice of its intent to negotiate modifications to lhe collective
bargaining agreement. The remaining terms ofJoinl Accord include lhe
following itemsr a scheduled 3olo wage increase effective December 1
each yearwith the polenliallor up to an addilronal 3oi6 per year based on
wage anflation at or above 4%. The Joint Accord also maintains
competitive health benefits, lncluding a 15% lo 20% premium cost
sharing by employees, a 401(k) contribution of 4% for employees hired
after our pension plan was closed on December 31 , 2009, and a 40'l (k)
match of 50% ofthe flrst 6% of savings, and other flexibility provisions
benefiting the Company.
Short-Term Debt
The primary source of shorl{erm liquidity for NW Holdings is cash
balances, dividends from its ope.ating subsidiaries. in particular NW
Natural, available cash from a multi-year credit facility, and short-term
credit facilities il may enter inlo hom time lo time.
The primary source of short-term liquidity for NW Nalural is from the sale
oI commercial pape. and bank loans. NWHoldings and NWNatural
have separate commercial paper programs and separate bank facalilies.
ln addition to issuing commercial paper or bank loans to meel working
capital requiremenls, 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-term debt or equity contributions from NW Holdings. Commercial
paper, when outstanding, is sold through two commercial banks under
an issuing and paying agency agreement and is supported by one or
more unsecured revolving credit facilities. See "Credit Agreements'
below.
At December 31, 2018 and 2017, NW Holdings had short{erm debt
outstandang of $217.6 million and $54.2 million, respectively, and NW
Natural had short{erm debt outstanding of $217.5 million and $54.2
million, respectively. The weighted average inlerest rate on commercial
paper
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 52 of 210
50
242
27.8
7_2
61 1
0.1
173
0.3
Table oi Contenls
outstanding at December 31, 2018 and 2017 was 3.0% and '1.90,6,
respectively.
Crodit Aqreements
NW Holdings
ln October 20'18, NW Holdings entered into a $100 mallaon credit
agreemenl, with a feature thal allows it to request increases in the total
commatment amount, up lo a maximum oI $150 million. The matudty
date of the agreement is October 2, 2023, with available extension of
commitmenls forlwo additional one-year periods, subjectto lender
approval.
All lenders underthe NW Holdings credit agreement are major financial
instilutions with committed balances and investment grade credil ratings
as of December 31, 20'18 as follows:
Lender ratrng, by category Loan Commtmenl
NW Holdings had $2.8 million of letters of credit issued and outstanding,
separale from the aforemenlioned credit agreement, at December 31,
2018.
NW Natural
ln October 2018, NW Naturalentered into a new multi-year credit
agreement for unsecu.ed revolving loans lolaling $300 million, wilh a
feature thal allows NW Natural to request increases in the toial
commilment amount, up to a maximum of $450 million. The maturity
dale of the agreemenl is October 2, 2023 with an available extension of
commitments for lwo additional one-year periods, subjecl 1o lender
approval. NW Nalural concurrenlly lerminated its prior credit agreement
upon the closing ofthe new agreement.
Alllenders underthe NW Natural credit agreement are major financial
institutions with committed balances and inveshent grade credit ratings
as of December 31, 2018 as follows:
Lender rating, by category Loan Commitmenl
Total
Total
$T00
$100
Based on credit market conditions, it is possible one or more lending
commilmenls could be unavailable lo NW Holdings if the lender
defaulted due to lack offunds or insolvencyi however, NW Holdings does
not believe this risk to be imminent due to the lenders' strong
investmen!grade credit ratings.
The NW Holdings credil agreemenl permits the isguance of lellers of
credit in an aggregate amount of up lo $40 million. The principal amount
of borrowings under the credil agreement is due and payable on lhe
malurily date. The credit agreement requires NW Holdings to maintain a
consolidated indebtedness lo lolal capitalization ralio of 70% or less.
Failure lo comply with this covenanl would enlitle the lenders 10
terminate lheir lending commilmenls and accelerate the maturily of all
amounts outstanding. NW Holdings was in compliance with this
covenanl al December 31, 2018, with a consolidated indebledness to
total capitalization ratio of 55.6010
The agreement also requires NW Holdings to maintain debt ratings
(which are defined by a formula using NW Natural's credit ratangs in the
event NW Holdings does not have a credit ratang) 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 ralings 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 nol an evenl of
default, no. is the maintenance ofa specific minimum level ofdebt rating
a condition ofdrawing upon lhe credit agreement. Rather, interest rates
on any loans outstanding underthe credil agreements are lied to debt
ralings and therefore, a change in the debt rating would increase or
decrease lhe cost ofany loans underlhe sedit agreemenls when
ratings are changed. NW Holdings does not currently maintain ratings
wilh S&P or Moody's.
I
s 300
Based on credil market condilions, it is possible one or more lending
commitmenls could be unavailable to NW Natural if the lender defaulted
due lo lack of funds or insolvencyi however, NW Natural does not believe
this risk to be imminenl due to lhe lenders' sirong investment-grade
credit ratings.
The NW Naturalcredit agreement permits the issuance oflelters ot
credit in an aggregale amount of up lo 560 million. The principal amount
ofborrowings under lhe credit agreement is due and payable on the
maturity date. There were no outstanding balances underthis credit
agreemenl or lhe prior credil agreement at December 31 , 2018 or 2017
The credit agreement requires NW Nalurallo maintain a consolidated
indebledness lo lotal capitalization .atio of 70% or less. Failure to comply
with this covenant would entitle the lenders to terminale their lending
commiimenls and accelerate the maturity of all amounts outstanding.
NW Natural was in compliance with this covenant at December 31, 2018
and 20'17, wilh consolidated indebtedness to total capatalizalion ratios of
57.17o and 52.9%, respeclavely.
The agreement also requires NW Natural to maintain credil ratings with
S&P and lVoody's and nolafy lhe lenders of any change in NW Natural's
senaor unsecured debt ratings or senior secured debt ralings, as
applicable, by such rating agencies. A change in NW Nalural's debt
ratings by S&P or l\,4oody's is not an event ofdefault. nor is the
maintenance ofa speciflc minimum level of debl rating a condition of
drawing upon lhe credil agreemenl. Rather, interest rates on any loans
outslanding under lhe agreement are tied to debt ratings and therefore, a
change in the debt rating would increase or decrease lhe cost ofany
loans underlhe credit agreement when ralings are changed. See "Credia
Ratlrgs"below.
300
51
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 53 of 210
Table of Conlents
Credit Ratinos
NW Holdings does not currently maintaan ratings with S&P or Moody's.
NW Natural's credit ralings are a factor ofliquidity, potentially affecting
access to the capital markets including the commercial paper market.
NW Natural's credit ratings also have an ampact on the cost offunds and
lhe need to post collateral under derivative contracts. The following table
summarizes NW Natoral's current credit ralings:
s&P
Comrnercial paper (short-tem debt)
Senior secured (long,term debt)
Senior uns€cuEd (long-lerm debt)
Coporate c€dit rating
Ratngs outlook
Operatino Activities
Changes in our operating cash flows are primarily affected by net
income or loss, changes in working capilal requiremenls, and other
cash and non-cash adjustments to operating results.
Operating activity highlighls includei
2017 2016
nla
Stable
A3
Negative
206 7 $ 222.1$ 168.8 $
The above credit ratings and ratings oullook are dependenl upon a
number offactors, both qualitative and quantitative, and are $ubject to
change al any time. The disclosure ofor reference lo lhese credit ratings
is nol a recommendation to buy, sell or hold NW Holdings or NW Natural
securities. Each rating should be evaluated independently ofany olher
rating.
As part ofthe dng-fencing conditions agreed upon with the OPUC and
WUTC in conneclion with the holding company reorganizataon. NW
Holdings and NW Natural are required lo maintain separale credit
ratangs, long-term debt ralings, and prefened stock ralings, if any.
Lono-Term Debt
The following NW Nalural debentures were retired in lhe periods
indicatedl
Yeers Ended December 31,
2018 2017 2016
NW Nalural Frrsl l\,,lortqaqe Bonds
2018 2017 2016
Cash provided by operating
activities $ 173.5 S 206.5 $ 222.2
S S $25
22
75
$ 97S 40$ 2s
The signitlcant drivers ofchanges in cash provided by operating activaties
discussed below apply to both NW Holdings and NW Natural.
2018 COMPARED TO 2017. The signilicant factors contributing to the $37.9
million and $33.0 million decreases in NW Holdings and NW Natural
cash flow provided by operaling activities, respeclively, were as follows:. a decrease ol $31 .5 million in cash flow benelits from changes in
deferred gas cost balances primarily due to higher gas prices in the
fourth quarter of2018 and lower currenl year PGA rates reflecting
over-collections of cerlain fixed cosls from customers in the prioa
yearwhen weather was colder than average:. a decrease ol 512.6 million due to 527.4 million income taxes paid
in 2018 due to lhe elimination of bonus depreciation as a result of
the TCJA, compared to income taxes paid of $14.8 million in 2017;
partially offsel by. a netincrease of$10.2 millaon from changes in working capital
relaled lo receivables, invenlories. and accounls payable reflecting
warmer lhan average wealher 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 signilicant faclors contributing lo the $15.4
million and $15.7 million decreases in NW Holdings and NW Natural
cash flows provided by operating activities, respectively, were as follows:. a dec.ease of $2 1 I million due to $14.8 million income taxes pald
in 2017 compa.ed to a refund of $7.2 mallaon in 2016 as a result of
the enactment of bonus deprecialion in December 2015;. a decrease of $5.0 million due to an increase in cont.ibutions paid
lo qualified defined beneflt pension plans; and. a net decrease of$12.2 million from changes in working capilal
related lo rec€ivables, invenlories, and accounls payable reflecting
colderthan average weather in 2017 compared to the prior period;
partially offset by
Series515%due2016
Series 7.00% due 2017
Series 6 6070 due 2018
Series 1.55% due 2018
Tol,al
40
Cash Flows
Cash provided by operating
activities
Bsnkruotcv Rinq-fencing Restrictions
As parl ofthe ring-fencing conditions agreed upon with the OPUC and
WUTC in connectaon with the holding company reorganizalion, NW
Natural is required lo have one directorwho is independent from NW
Natural management and from NW Holdings and lo issue one share of
NW Natural preferred slock to an independent third parly. NW Natural
was in compliance with both of lhese rjng-fencing provisions as of
December 31, 2018. NW Natural may file a voluniary pelition for
bankruptcy only ifapproved unanimously by the Board of Direclors of NW
Natural, including the independent director, and by the holder ofthe
prelened share.
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 54 of2l0
During the year ended December 3'1, 2018, NW Natural contribuled
$15.5 mallaon to its qualified defined benefit pension plan, compared lo
$19 4 million for 2017 and $'14.5 million for 2016. The amount and
timing offulure conlributions will depend on market interest rales and
inveslmenl returns on the plans'assets. See Note 9
Bonus depreciation of50%was available for a large porlion ofcapital
expenditures forfederal 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 retroadively back to January 1, 20,l5 of the respective year.
As a result, estimated income tax payments were made throughout 2015
without the benefit ofbonus depreciation forthe year. This delayed the
cash flow benelit o, bonus depreciation until refunds could be requested
and received. We received refunds offederal income tax overpayments of
$7.9 million during 2016. As a result ofthe enactment of the TCJA on
Oecembet 22,2017 ,bonus depreciation was eliminated for NGD
business property acquired affer December 3'1, 2017. Accordingly, we do
not anticipate similar cash flow benefits related to bonus depreciation in
the future.
We have lease and purchase commitmenls relating to our operaling
aclavilaes that are financed with cash flows from operations. For
informalion on cash flow requirements related to leases and other
purchase commitments. see "Financial Condilioo-Contractual
Obrgatiors" above and Note 16
lnvesting Aclivities
lnvesting actavaty highlighls include
2018 2017 2016
Mist Gas Storage Expansion Project as well as customer growth, syslem
reinlorcement, lechnology, and racilities.
NW ATURAL
2018 COiTPARED TO 2017. The $24 3 million increase in cash used in
invesling activities was primarily due lo NW Natural's initial cash
contribution of $20 million to its then subsidiary, and now parent, NW
Holdings, in addition to conlanued c€pilal expenditures primarily related
to NW Natural's Norlh Mist Gas Storage Expansion Project as well as
customer growlh, system reinforcemenl, lechnology. and facilities.
2Ot7 COMPARED TO 2016. The $77.6 million increase in cash used in
lnvesting activilies was primarily due to higher capital expenditures
primarily .elated to NW Natural's Nonh Misl Gas Slorage Expansion
Project as well as cuslomer growth, system reinforcemenl, lechnology.
and facilitaes.
The operaling subsidiaries of NW Holdings invest in capilal
expenditures lo mainlain and enhance the safety and integrity oftheir
distribution systems, to expand the reach or capacity ofthose assets,
and improve the efficiency oloperalions.
CAPITAL EXPE,{DITURES. NW Holdings' largest subsidiary, NW Nalural,
expects lo make a significant level ot investmenls in its NGD segment in
2019 and through 2023. Over lhe five-year period from 2019 to 2023, the
NGD segment is expected to invest $820 to $910 million in capital
erpenditures to supporl system reliability, customer growth, and operale
effective technology for the business. ln 2019, NW Natural anlicipales
several significanl projects for the NGD segment, including completing
the replacement ofend of life equipment at the Mist gas storage facilaly.
and renovaling several resource facililies across NW Natural's service
lerritory. Projects in 2019 also include leasehold improvements and
technology for the new headquarters in Portland. Oregon and lhe
completion of lhe North Mist gas storage expansion projecl.
NW Holdings' wholly-owned waler subsidiaries expect to invest in their
Iacilities to support groMh and upgrade lherr systems wilh $30 to $40
million expected to be anvested from 20tg to 2023. NW Holdings expecis
an immaterial amount ol non-NGD capilal investments for Gill Ranch
and other activities in 2019 and through 2023.
Tolal ca3h wed in in\€sling
activitieg
Cepitalexpenditr./les
$ (217.5) $
\214.6)
(214.2) $
(213.3)
(136.6)
(138.4)
Total cash us€d ln in\esting
activities
Capilal expend{ures
(238.s) $
1214.3)
(214.2) $
(213.3)
(136.6)
(138.4)
2018 2017 2016
s
t{tv HoLonGs
2018 COITIPARED TO m17. The $3.3 million increase in cash used in
investing aclivities was primarily due to continued capital expenditures
primarily relaled to NW Natural's North Mist Gas Storage Expansion
Projecl as wellas custome. growth, syslem reintorcement, lechnology,
and facilities.
2017 coMPAREo To m16, The $77.6 million increase in cash used in
anvesting aclivities was primarily due to higher capital expenditures
primarily related to NW Nalural's North
53 EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 55 of2l0
Table of Conlenls
an increase o, $27.3 million in cash tlow benefils from changes in
deferred gas cost balances primarily due to the $19.4 million gas
cost savings credited to customers in 20'16 that did nol ocaur in
2017 .
lnveslmenls in our infrastruclure during and after 2019 beyond the
amounts provided belowwill depend largely on additional regulataons,
growth, and expansion opportunities.
Table of Contents
For 2019, capital expenditures are estimated, on an accrual basis, to be
as follows:
One-YearOullook
2019
Low Hagh
265
Other 5
Tolal $ 230 C 270
Required funds for the inveslmenls are expecled to be intemally
generaled and/or financed with long-term debl or equity, as appropriale
2018 2017 2016
$
proceeds from long{erm debt activity in 2017 and S52.8 million of
common stock proceeds in 2016.
NIV I{ATURAL
20i8 COT PARED TO 2017. The $62.4 million increase in cash provided by
financing activilies was primarily due lo increases in short lerm debt
issuances of S162.4 million, partially offset by S107.0 million lower nel
proceeds from long,lerm debt activity in 20'18. NW Natural cash provided
by fanancing activities was $12.0 million higher in comparison to NW
Holdings primarily due to the payment ofthe November 15, 2018
dividend to NW Holdings shareholders using NW Holdings funds
2017 COITPARED TO ml6.The $93.6 million increase in cash provaded by
financing activities was primarily due to $217-6 million lower repayments
ofshort-term debt compared to the prior period, partially olfsel by $65
million lower nel p.oceeds from long{erm debt activity in 2017 and $52.8
million ofcommon stock proceeds in 2016.
Pension Cost and Fundinq Status ot Oualified Retirement
Plans
NW Natural's pension cosls are determined in accordance with
accounting standards for compensation and retirement benefits. See
''Application of Critical Accounting Policies and Estimates - Accotlrflrg
lorPensioos and Poslrctirement Benefits'below. Pensaon expense for
NW Natural's qualified defined benefit plan, which is allocated between
operalions and maintenance expenses, capital expendilureg. and
through October 31, 2018, lhe deferred regulatory balancing account,
totaled$207millionin2018 anincreaseof 52.6 million from 2017. The
fair market value of pension assets in lhis plan decreased to $257.8
million at December 31, 20'18 from $287.9 millaon at December 3'1,
2017. The decrease was due to a loss on plan assets of $25.9 million
and benefit payments of $19.7 million, oflset by $15.5 million in employer
conkibutions.
Conl.ibulions made lo NW Natural's company-sponsored qualafaed
defined benefit pension plan are based on actuarial assumptions and
estimates, tax regulations, and funding requiremenls under federal law.
The qualifled defined benefit pension plan was underfunded by $162.4
million at December 31, 2018. NW Natural plans to make contributions
during 2019 of $1 1.0 million. See Nole I for further pension disclosures
Continoent Liabilities
Loss conlingencies are recorded as liabilities when it is probable lhat a
liability has been incu.red and lhe amount ofthe loss is reasonably
estimable in accordance with accounting standards for contingencies.
See " Application ot Critical Accounting Policies ard Est/rnates" below. At
December 31. 2018, NW Natural's total estimated Iiability related to
environmenlal sites was S128.7 million. See Note'17 and "Results of
Operatioos-Regulatory Matters-Rate lvlechanisms-Envion me ntal
Cosls" above
NW Holdings is not cunently party to any direct claims or litigation,
though in the future it may be subjecl to claims and litigation arising in
the ordinary course of business.
Total cash provided by (used in)
financing activities
Change in short-term debt
Change rn long-lerm debl
Change in common stock rssued
nel
7.4 $
09
600
(86.2)
1216.71
125 0
NGD
Core cadlal expenditures
Sqnifcanl protects:
Grorlh & rellabilily
Facililies & technology
Norlh Mist expansion
Total proJects
TOIAI NGD
S 150 $165
'15
42
18
25
57
18
5
57.8 $
163 3
(47 0)
524
2018 2017 2016
Total cash poviled by (rE€d in)
fnancing activities
Change in shon-bm debt
CtrarEe in loarg-t€.m d€bt
Chang€ in comfiron stock i9gued,
rEt
s 598 $
163 3
147 o)
(86.2)
1216.7)
125.0
2017 COMPARED TO 2016. The $93.6 million increase in cash provided by
llnancing activilies was primarily due to $217.6 million lower repayments
of short-lerm debl compared to the prior period, parlially otfsel by $65.0
million lower nel
54
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 56 of2l0
100
Financino Activities
Financing activity highlights inciude:
7.4 S
0.9
60.0
IW HOLDI{GS
2olaCOi|PARED TO 20'17. The $50.4 million increase in cash provided by
tinancing activities was primarily due to $162.4 million higher shorl-term
debl issuances. partially offset by $107-0 milllon lower net proceeds
from long{erm debl activity in 2018.
APPUCANON OF CR'NCAL ACCOUNTING POLICIES AND
ESTTN'A IES
New Accounting Pronouncements
For a description of recent accounling pronouncements Ihal may have an
impacl on our financial condition, results of operations, or cash flows,
see Nole 2
adjustmenl to amounts included in rales charged to cuslomers
The conditions that must be satisfied to adopt lhe accounling policies
and praclices of regulatory accounting include:. an independent regulator sets rales;. the regulatorsets the rates to cover specific costs of delivering
service;and. the service tenilory lacks competilive pressures to reduce rales
below the rates set by the regulator.
Because NW Natural's NGD operations salisty allthree conditions, NW
Natural continues to apply regulatory accounting to NGD operations.
Fulure accounting changes, regulatory changes, or changes in the
competilive environmenl could require NW Natural to discontinue the
application ofregulatory accounling forsome or allofour regulated
businesses. This would require the write-off of those regulalory assets
and liabilities that would no longer be probable of recovery from or refund
to cuslomers.
Based on currenl accounting and regulatory competitive conditions, NW
Natural believes it is reasonable lo expecl continued application of
regulatory accounting for NGD activities. Further, il is reasonable lo
expect the recovery or refund of NW Natural's regulatory assets and
liabilities at December 31 , 2018 throug h future customer rales. lf it is
determined lhat allora portion ofthese regulatory assets orlaabalilies no
longer meet lhe criteria for continued application of regulatory
accounting, then NW Naturai would be required lo write-offlhe net
unrecoverable balances againsl earnings in the period such
delermination is made. The net balance in regulatory assel and liability
accounls was a net liability of $245.3 million and a net liability of $217.7
million as of Decembe.3l ,2018 and 2017, respectively. See Note 2 for
more detailon regulatory balances.
Revenue Recoonition
Revenues, which are derived primarily from the sale, transportation, and
storage of natural gas, are recognized upon lhe delivery of gas
commodity or seNices rendered to cuslomers.
Accrued Unbilled Revenue
For a descriplion ofthe poliry regardang accrued unbilled revenue. most
ofwhich relates to lhe NGD business at NW Nalural. see Nole 2. The
following table presenls changes in key melrics if the estimated
percentage of unbilled volume at December 31 was adjusted up or down
by 1%:
2418
Up l.h Down 1%
Unulled revenue increase (decreasel" $ o I $
Margin increase (decrease)' 0 1
Net income beto.e tax rncrease (decrease)i') 0. 1r'' hcludss rmpacl ol.egLlatory mechanrsms r.crudng d€couplrng mechansm and
exc udss lhe impad ol unbrllEd revenue froh wal6r seturcss
Derivative lnstruments and Hedqing Activities
NW Nalural's gas acquisition and hedging policies sel forth guidelines
for using financial derivative instruments lo
ln preparing financial statements in accordance with U.S. GAAP,
management exercises judgment in the seleclion and application of
accounling principles, including making estimates and assumplions
thal affect reported amounts ofassets, liabilities, revenues, expenses,
and related dasclosures in the financial statemenls. Managemenl
considers critical accounling policies to be those which are most
imporlanl to the represenlation of financial condition and results of
operations and whach require management s most difficult and
subjective or complex judgmenls, including accounting eslimales that
could resull in materially ditferent amounts if reported under different
conditions or used differenl assumplaons- Our most critical estimates
and judgmenls for both NW Holdings and NW Natural include
accounling for:. regulatory ac.counting;
' revenue recognition;. derivative instruments and hedging activilies;. pensions and postretirement benefits;. income taxes;. environmental conlingencieS; and. impairment of long-lived assets and goodwill.
Management has discussed its currenl estimates and judgments used
in lhe application of critical accounlang policies with the Audit
Committees ofthe Boards of NW Holdings and NW Natural. Wathan the
context of critical accounting policies and eslimales, managemenl is nol
aware of any reasonably likely evenls or circumstances lhat would result
in materially different amounts being reported.
ReoulatorY Accountino
The NGD segment is regulated by the OPUC and WUTC. which
establish the rates and rules governang services provided to customers,
and,lo a certain extent, sel forlh specaal accounting treatmenl for ceiain
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 lo show the effects of such .egulation. For example, NW
Natural accounts for the cost of 9as using a PGA defenal and cost
recovery mechanism, \ivhich as submitted for approval annually to the
OPUC and WUTC. See "Resulls of Operalions-Regulatory l!!atters-
Rate Mechanisms-Purchased Gas Adjustmerl"above. There are olher
expenses and revenues that the OPUC or WUTC may require NW
Nalu.allo defer forrecovery or refund in luture periods. Regulatory
accounting requires NW Naturalto account for these lypes ofdeferred
expenses (or deferred revenues) as regulatory assels (or regulatory
liabilities) on the balance sheet. When lhe recovery of lhese regulatory
assets from, or refund of regulatory liabilities to, customers is approved.
NW Natural recognizes the expense or revenue on the income statemenl
at the same time the
(0 8)
(0 1)
(0.1)
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 57 of 210
55
Table ol Contents
Table of Contents
support prudent risk management strategies. These policies specifically
prohibit the use ofderivatives for lradang or speculative purposes.
Financaal derivative conlracts are utilized to hedge a porlion ofnatural
gas sale requiremenls. These contracts include swaps, options, and
combinations of oplion contracls. NW Natural primarily uses these
derivative financial inskuments to manage commodily price variability. A
small porlion of NW Natural's derivalive hedging slralegy involves Ioreign
curency exchange contracts.
Derivative instruments are recorded on the balance sheel at faar value lf
certain regulatory conditions are met, then the derivative instrument fair
value is recorded togetherwith an oftsetling entry to a regulalory asset or
liability account pursuant to regulatory accounting, and no unrealazed
gain or loss is recognized in currenl income or loss. See "Regu/atoly
Accounting" above Iq additional informalion. The gain or loss from the
fair value of a derivative inslrumenl subjecl to regulalory deferral is
included in the recovery from, or refund to. NGD business customers in
future periods. lf a derivalive conlracl is nol 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 ln current ancome or loss or in accumulated
olher comprehensive income or loss (AOCI oTAOCL). Derivalive
contracts outslanding at December 31. 20'18, 2017 and 2016 wete
measured al fair value using models or other market acc€pted valualion
melhodologies derived from observable markel data. Estimates offair
value may change significantly from period-to-period depending on
market conditions and prices. These changes may have an impact on
results of operations, but the impact would largely be mitigaled due to
the majority ofderivative activities being subjecl to regulatory deferral
lrealmenl. For more inrormation on derivative activity and assocaated
regulatory treatment, see Note 2 and Note 15.
The following lable summarizes the amount of losses realized from
commodily price transactions for the lasl three years:
2011
union and union employees hired or re-hired after December 3,|, 2006
and 2009, respeclively, and employees of cerlain NW Holdings
subsidiaries are provided an enhanced Retiremenl K Savings Plan
benelll. The postretirement Welfare Benellt Plan for non-union
employees was also closed lo new participants several years ago.
Net periodic pension and postretiremenl benefll co8ts (retirement benefit
costs) and projected benefil oblagations (benerit obligations) are
determaned using a number of key assumptions including discount
rates, rate of compensalion increases, retirement ages, monality rales
and an expected long-term return on plan assets. See Note I
Accounting slandards also require balance sheet recognition of
unamorlized actuarial gains and losses and prior service costs in AOCI
orAOCL, net oftax. However, the retirement beneft costs related to
qualified dellned benelit pension and postretirement benefil plans are
generally recovered in rates charged to NGD customers. which are set
based on accounling slandards for pensions and postretirement benefit
expenses. As such, NW Naturalreceived approval kom 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, ratherthan including il as AOCI or AOCL under common equity.
See "Reguhlory Accou,tirg 'above and Note 2."lndustry Regulation".
ln 201 'l , NW Nalural received regulatory approval from lhe OPUC and
began deferring a portion of pension expense above or below lhe
amount set in rates lo a regulatory balancing accounl on lhe balance
sheet. On Oclober 26, 2018, the OPUC issued an order to freeze NW
Natural's pension balancing account as of October 31, 20'18. The order
directed NW Nalural and lhe other parties to the rate case lo engage in
furlher regulatory proceedings extending the general rate case docket to
resolve open issues walh respect to the recovery ofthe pension
balancing account. On February 4, 20'19, NW Natural and the other
parties to the rate case filed a joint stipulataon with the OPUC oullining a
resolution to the issue. See "Regulatory Mallers-Regulatory Proceeding
Updates-Oregon Gene.a/ Rafe Case" fo. more information. At December
31, 20'18, the cumulative amount defefied for future pension cost
recovery was $74.2 million. including accrued interesl. The regulatory
balancing accounl includes lhe recognition of accrued interest on the
account balance at NW Natural's authorized rale ofrelurn, wilh lhe equity
portion ofthis interesl deferred until amounts are collected in rales.
A number of factors, as discussed above, are considered in developing
pension and postretirement benefit assumplions. For the December 31,
2018 measuremenl date, NW Natural reviewed and updaled:. the weighted-average discount rate assumptions for pensions
increased from 3.52olo fot 2017 lo 4.20o/o lot 2018, and our weighted-
average discount rate assumplions for other postretiremenl benefits
increased from 3.44o16 lor 2017 lo 4.13y.fot 2018. The new rale
assumptions were determined for each plan based on a matching
ofbenchmalk inlerest rates to the estimaled cash flows. whach
reflecl the timing and amount offuture benefit paymenls. Benchmark
interest rates are
NGD business net loss on
Commodity Stvaps S 74 $7.8 $ m.9
Realized losses from commodity hedges shown above were recorded
as increases to cos( of gas and were, or wiil be, included in annual PGA
rales.
Pansions and Postretirement Ben€tits
NW Nalural maintaans a qualilied non-contributory defined benetit
pension plan. non-qualified supplemental pension plans lor eligible
execulive officers and c€rtain key employees, and other poslretirement
employee benefit plans covering certain non-union employees. NW
Naluralalso has a qualified defined contribution plan (Retiremenl 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 qualilied defined benefit retirement plan for union and non-
union employees was closed to new participanls several years ago.
Non-
56
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 58 of2l0
2418 2016
Table of Contents
drawn from the FTSE Above l\,ledian Curve, whach consisls of high
quality bonds rated AA- or higher by S&P or Aa3 or higher by
Moody si
lhe expected annual rale offuture compensalion increases, which
was updaled lo a range of 3.25% lo 3.5ol" at December 31 , 20'l8.
lhe expected long-term return on qualified defined benelil plan
assets, which remained unchanged at a rate of 7.500,6;
the mortality rate assumptions were updated lrom RP-2006 mortality
lables for employees and healthy annuitants wath a fully generational
projection using scale MP-20'17 to RP-2014 mortality lables using
scale MP-2018. which contributed lo the decrease ofour projected
benefit obligalioni and
other key assumptions. which were based on aclual 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 qualifled defined beneflt
plan increased $0.7 million compared to 2017. The increase in lhe nel
pensaon liability is primaraly due lo the $30.1 million decrease in plan
assets, partially offsel by a $29.5 million decrease in the pension benefit
obligation. The liability fo. non{ualafied plans decreased $1.3 million,
and lhe liability for other postretirement benefits decreased $0.8 million
in 2018.
The expected long-term rale of return on plan assels is determined by
averaging the expected earnings for lhe target assel portfolio. ln
developing expected return, historical actual performance and long-lerm
return prqections are analyzed, which gives consideration lo the current
asset mix and largel aSset allocalion.
NW Nalural believes its pension assumplions are appropriale based on
plan design and an assessment of market conditions. The following
shows the sensitivity of retirement benefil cosls and benefit obligalions
to changes in certain acluarial assumptions:
operational costs of running a pension plan. Prior to MAP-21, interesl
rates based on a 24-month average yield of investment grade corporate
bonds (also referred to as "segmenl rale") were used lo calculale
minimum conkibulion requirements. MAP-21 established a new
minimum and maximum corridor for segment rales based on a 2s-year
average ofbond yields. which resulted in lower minimum contribulions
requirements than those under previous regulations. ln August 2014.
HATFA was signed and extended funding relieffor an additionalfive
years.
lncome Taxes
Valuation Allowances
Deferred lax assets are recognized to lhe extent that these assets are
believed to be more likely lhan not to be realized. ln making such a
determinalion. available positive and negative evadence is considered.
including fulure reversals of exisling taxable temporary differences.
projected future taxable income. tax-planning strategies. and results of
recent operalions NW Holdings and NW Nalural have determined that
all recorded deferred lax assels are more likely than nol to be realazed as
ofDecember31,20'18. See Note 10.
Uncertain Tax Benefits
The calculation of tax liabilities involves dealing with uncertainties in the
application of complex lax laws and regulations in the jurisdictions in
which we operate. A lax benefil from a material uncertain tax position will
only be recognized when it is more likely than not that lhe position, or
some porlion lhereof, will be suslained upon examinalion, including
resolution of any relaled appeals or litigation processes, on the basis of
the lechnical merits. NW Holdings and NW Natural participate in the
Compliance Assurance Proc€ss (CAP) wilh the lnternal Revenue Service
(lRS). Under the CAP program companies work with the IRS to identify
and resolve material tax mallers before lhe federal income tax relurn is
filed each year. No reserves for uncertain tax benefits were recorded
dwing 2018,2017 , ot 201 6. See Note 10.
Tax Legislation
When significanl proposed or enacted changes in income tax rules
occurwe consider whether there may be a material impact lo our
financial posilion, results of operations, cash fiows, or whether the
changes could materially aflect exisling assumptions used in making
estimates of tax related balances.
Change rn
lmpacl on 2018
Retirement
Benefrt Costs
lmpact on
Reirrement
Benefil
Obligations at
Dec 31. 2018
Discount rate:
Oualifed defnad b€neft
dans
Non-qualilied plans
Other po6tretiEmenl
benefts
Expected long,term letum
on plan assets:
Qualif ied def ined benefit
plans
{0 25fk
s 1.5 S
0.1
13 4
08
08
(o 25)Eo
o7 NTA
ln July 2012. President obama signed MAP-21 into law. This legislalion
changed several provisions atfecting pension plans, including lemporary
Iunding relief and Pensaon Benefit Guaranty Corporation (PBGC)
premium increases, which reduces the level of minimum required
contributions in the near-lerm but generally increases conlributions in
lhe long-run as well as increasing the
EXHIBIT 2
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57
On December 22, 2017. H.R.'l - An Acl to provade for reconcilialion
pursuant to litles ll and V oI the concurrent resolution on the budgel for
fiscalyear2018. also known as lhe Tax Culs and Jobs Acl (TCJA), was
enacted. The TCJA lowers the U.S. federal corporate income lax rate to
21% from lhe existing maximum rale of 350/6, elfeclive for our tax year
beginning January 1, 2018. The TCJA includes specific provisions
related to regulated public ulilities thal generally provide lor the continued
deductibility of interest expense and the elimination of bonus
depreciation. Certain rate normalization requirements foraccelerated
cost recovery beneflls related to regulated plant balances also conlinue.
See Nole 10 for more informalion on how we are impacted by the TCJA.
The reduced U.S. corporale income tax rate had a material impacl on our
financial statements in 2017. As a result ofthe reduction ofthe U.S.
corporate income tax rale to 21ok, U.S. GAAP requires deferred tax
assets and liabililies be revalued as ofthe date ofenactment, with
resulting tax etfecls accounted for in the reporting period ofenaclment.
We recorded a net revaluation ofdeferred lax asset and liability balances
ofS196.4 million as ol December 31. 2017. utilizing the reduced federal
rale of21% expected to apply when these lemporary differences are
realazed or settled, based upon balances in existence at the date of
enactment. This revaluation had no impact on our2017 cash flows.
Wilh respect to other tax legislation, the final tangible property
regulations applicable to all taxpayers were issued on Seplember 13,
2013 and were generally effective for taxable years beginning on or after
January 1, 20'14. ln addition, procedural guidance related to the
regulations was issued under which taxpayers may make accounting
method changes lo comply with the regulalions. We have evaluated the
regulalions and do not anticipate any malerial impacl. However, unit-of-
properly guidance applicable to naturalgas distribution networks has not
yet been issued and is expected in the near future. We will furlher
evaluate lhe effect oflhese regulations afterthis guidance is issued, but
believe the current method is materially consislenl wilh the new
regulations and do nol expect lhas additional guidance to have a material
effect on our flnancial slalements.
Reoulatory Matters
Regulalory lax assets and liabilities are recorded to the extent il is
probable they will be recoverable from, or refunded to, costomers in the
future. Al December 31, 2018 and 2017, NW Natural had net regulatory
income lax assets of $21.4 million and $22.2 million, respectively,
representing future rale recovery of deferred tax liabililies resulling from
dafferences in NGD plant financial stalement and lax bases and NGD
planl removal cosls. These regulalory assets are currently being
recovered through customer rates. ln 2017, the regulalory asset balance,
and ils associaled deferred tax liability, were bolh reduced by $17.4
million as a result ofthe TCJA revaluation to reflect the lower corporate
income tax rate. At December 31, 2018 and 2017, regulatory income tax
assets of $2.3 million and $0.9 million, respectively. were recorded by
NW Natural, representing probable future rate recovery of defered tax
liabilities resulting from the equity portion ofAFUDC. ln 20'17. the
.egulalory asset balance, and its associated deferred tax liabilily, were
both reduced by S0.8 million as a result ofthe TCJA revaluataon to reflecl
lhe lower corporate income tax rale
On December 29. 2017, NW Natural filed applications with lhe OPUC
and WUTC seeking authorization to defer the overall nel benefits of NGD
resulling from lhe TCJA. On the same day, Staffofthe OPUC filed an
applicalion seeking deferral of changes in NW Natural's federal lax
obligations resulting from the TCJA. On January 8,2018. theWUTC
issued a slalemenl acknowledging receipt of NW Natural s application
and indicating lheir inlention lo incorporale lhe rmpact inlo fulure rate
case proceedings.
Al December 31, 2018 and 2017, regulatory liabilily balances,
representing the estimated net benefit to NGD
The TCJA includes specific guidance for determining the shodest time
period overwhich the portion ofthis regulatory liability resulting from
acceleraled cosl recovery of NGD plant may accrue to the benefit of
customers to avoid incuning federal normalization penalties. However, il
is anticipated that unlil such lime lhal cuslomers receive the direct
benefil ofthis regulatory liability, the balance, nel ofthe additional gross
up for income taxes, willcontinue to provide an indirecl beneit to
customers by reduclng the NGD rate base which determines customer
rates for service. ll is not possible at this time to determine when lhe 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 lhe 2018 Oregon rate case llled a joint
stipulalion addressing lhe return of net tax benefits to customers. See
"Regulalory Matters-Regulalory Proceeding U pdales-Orego n G e ne n I
Rat€ Case" for more information.
NGD rates in effecl for Oregon lhrough October 31, 2018 and for
Washingion through December 31, 2018 included an allowance lo
provide for lhe recovery ofthe anticipated provision for income laxes
incurred as a result of providing regulated services. The provision for
income taxes during lhese perjods included an allowance for federal
income taxes determined by utilizing the pre-TCJA federal corporate
income lax rale of35 percent. NW Naturalrecorded an addilional
regulatory liability representing the deferralof NGD s net benefit from a
lower provision for income laxes due lo the newly enacted 21 percent
federal corporate income tax rate, including a gross up for income taxes
As of December 31, 2018. a regulalory liabilaly of $8.2 million, including
accrued interest, was recorded to rellect lhis revenue deferral.
Environmental Continqencies
Environmental liabilities are accounted for in accordance with accounting
slandards under lhe loss contingency guidance when it is probable that
a liability has been incurred and the amount ofthe loss is reasonably
eslimable. Amounls recorded for environmental contingencies lake
numerous factors inlo consideraton, including. among other variables.
changes in enacted laws, regulatory orders, estimaled remediation
costs. interesl rates. insurance proceeds, participalion by other parties.
liming of paymenls. and lhe input of legal counsel and third-party
experls. Accordingly, changes in any of lhese variables or other faclual
circumstances could have a maleriai impacl on the amounts recorded
for our environmenlal liabilities. For a complete discussion of
environmental accounling policies refer to Note 2. For a discussion of
current environmental sites and Iiabilities refer lo Nole 17. ln addilion, for
information regarding lhe regulatory lrealmenl ofthese costs and NW
Natural's regulatory recovery mechanism, see "Results of Operalions-
Regulatory l,ratters-Rale Mechanisms-E vircnmental Cosls" above.
58
EXHIBIT 2
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Table of Contents
customers resulling from lhe change in deferred laxes as a resull oflhe
TCJA. of $217.1 million and $2'1 3.3 million, respectively, were recorded
by NW Natural. These balances include a gross up for income taxes of
$57.5 and $56.5 million, respectively.
lmpairment of Lonq-Lived Assets and Goodwill
Lono-lived assets
We reviewthe carrying value of long-lived assels whenever evenls or
changes in circumstances indicate the carrying amountofthe assets
might nol be recoverable. Factors that would necessitale an impairment
assessment of long-lived assels include a significant adverse change in
the extenl or manner in which lhe asset is used, a signilicant adverse
change in legal faclors or busaness climate that could affect the value of
lhe asset, or a signiflcant decline in the observable market value or
expected future cash flows of lhe asset, among olhers.
\Men such factors are present, we assess the recoverability by
determining whetherthe carrying value of the asset will be recovered
through expecled future cash flows. An asset is determined to be
impaired when the carrying value ofthe asset exceeds lhe expecled
undismunted future cash flows from the use and evenlual disposition of
the asset. ll an impairmenl is indicated, we record an impairment loss
forlhe difference between the carrying value and the fair value ofthe
longJived assets- Fair value is eslamaled using appropriate valuation
methodologies, which may include an estimate of discounted cash
ln lhe fourth quarter of20t7, we recognized a non-cash pre{ax
impairment of long-lived assets at the GillRanch Facility of $192.5
million. We determined circumslances exisled that indicated the carrying
value ofthe assets may not be recoverable. Those circumslances
included the conpletion of a comprehensive stralegic review process
that evalualed various alternatives including a potenlial sale, as well as
conlracting for available storage al lowerlhan anticipated values for the
coming storage year. Given these considerations. management was
required to re-evaluale the eslimated cash flows from our inleresls in lhe
Gill Ranch Facility, and determined that those estimaled cash flows were
no longer sufficienl to coverthe carrying value oflhe assets.
We used lhe income approach lo estimate fair value, using the
eslimated future nel cash flows. We also compared lhe results of the
income approach to our own recenl sale experience and recent market
comparable lransactions in orderto estimate fair value. lllany factors and
assumptions impact the net cash flows used The most sigoificant and
uncertain estimates included our forecast of 9as storage pricing. our
ability to succ€ssfully identify and contract with higher-value customers in
and/or near the nonhern California markel lhat Gill Ranch serves. and
explor,ng the possibility of providing energy slorage services such as
cofipressed gas energy slorage (CGES). After compleling the slralegic
evaluation, which included a potentialsale in the foudh quarter 0f2017,
we lowered our views of a near{erm markel recovery and decreased the
likelihood associated with contracting with higher-value customerS.
These changes were lhe most significant estimates that caused our
cash flow projections to decrease lo a point where lhey were no longer
sufficient lo cover the carrying value ofthe asset.
On June 20, 2018, NWN Gas Storage. NW Holdings' wholly-owned
subsidiary, entered into a Purchase and Sale Agreemenl that provides
for the sale by NWN Gas Storage of all of lhe membership inleresls in
Gill Ranch. As a result
of our strategic shift away from California gas slorage operations and the
signirlcance 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 disconlinued operations. As such. the assets and liabililies
associated with Gall Ranch have been classified as discontinued
operalions assets and discontinued operations liabilities, respectively,
and. the results of Gill Ranch are presenled separately from the results
of continuing operalions, net of tax, as dasconlinued operations for the
consolidated results of NW Holdings in all periods presenled. The
expenses included in the results ofdiscontinued operations within the
consoladated resulls ot NW Holdings are the direct operaling expenses
incurred by Gill Ranch thal may be reasonably segregated from the costs
of our continuing operalions. See "Resulls of Operalions - Pe,dil,g Sa/e
of Gill Ranch Storag6" above, Nole 4, and Note 18 for addiiional
information
NW Holdings and NW Natural early-adopted ASU 2017-04, "Simplirying
the Test forGoodwill lmpairmenl" in the third quarter oI2018. The ASU
removes Step 2 from the goodwill impairment test and under the
amended guadance an entity should perform its annualgoodwill
impairment tesl by comparing the fair value of a reporting unat with ats
carrying amount and recognize an impairment charge forthe amounl in
which the carrying amounts exceed Ihe faar value ofthe reporting unil. ln
accordance with the updated guidance per ASU 2017-04, NW Holdings'
and NW Natural's poliry for goodwill assessments begins with a
qualitative analysis in which events and circumslances are evalualed,
including macroeconomic condations. andustry and markel conditions,
regulatory environments, and the overall financial performance of the
reponing unit. lfthequalalalave assessment indicates that the carrying
value may be at risk of recoverability, a quanlitative evaluation is
performed lo measure lhe carrying value against the fair value ofthe
reporting unit. This evaluation may involve the assessmenl offuture cash
flows and olher subjective factors for which uncertaanty exists and could
impact the eslimation of future cash flows. These faclors anclude. but are
not limited to, the amount and timing offuture cash flows, fulure groMh
rates, and the discount rate. Unforeseen events and changes in
circumslances or markel conditions could adversely affect these
estimates, which could resull in an impairment charge. A qualitative
assessment was performed during lhe fourlh quarter of 2018 which
indicated a quanlitatave assessment was not required; thus, no goodwill
impairment was recorded. See Note 2 and Note 14 for additional
informataon.
EXHIBIT 2
PALFREYMAN. DI
GE\4 STATI] WATI]R
Page 6l of 210
Table oi Conlents
Goodwill
ln a business combanation, goodwill is initially measured as any excess
olthe acquisitioniate fair value ofthe consideralion lransferred over the
acquisilion{ate fair value ofthe net identiliable assets acquared.
The carrying value of goodwill is reviewed annually during the fourlh
quarter usang balances as of Oclober 1, or whenever events or changes
an circumstance indicale thal such carrying values may nol be
recoverable.
5g
Table ol Contents
ITEI\' 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
NW Holdings and NW Natural are exposed to various forms of market
risk including commodity supply risk. commodity price risk, inlerest rale
risk, foreign currency risk, credit risk and weather risk. The following
describes NW Holding$'and NW Natural's exposure lo these risks, as
applicable.
Commoditv Suoolv Risk
NW Natural enters into spol, short-ierm, and long{erm natural gas
supply contracts. along with associated pipeline transportation contracts,
to manage commodity supply risk. Histo.ically, NW Natural has arranged
for physical delivery ofan adequate supply ofgas, ancludang gas an lVist
storage and off-system storage facilities. to meet expecled requirements
of core NGD customers. NW Nalural's long-term gas supply conlracts
are primarily index-based and subject to monthly re-pricing, a strategy
that is intended lo substantially mitigale credit exposure to physical gas
counterparlies. Absolute notional amounls under physical gas contracts
related to open positions on derivative instruments were 472.3 million
therms and 520.3 million therms as of December 31, 2018 and 2017,
resPectively.
Commodity Price Risk
Natural gas commodity prices are subjecl to market fluctualaons due lo
unpredictable factors including weather, pipeline transpo.tation
congestion, drilling technologies, market speculation, and olher faclors
that affect supply and demand. Commodity price risk is managed wilh
flnancial swaps and physical gas reserves from a long-term investment
in working interests in gas leases operated by Jonah Energy. These
flnancialhedge conlracts and gas reserves volumes are generally
included in NW Natural's annual PGA filing for recovery. subject to a
regulatory prudence review. Nolional amounts under llnancial derivalive
contracts were $77.7 million and S108.1 million as of December 31.
2018 and 2017, respectively. The fair value of financial swaps as ol
December 31 , 2018 was an unrealized loss of $7.8 million with future
cash oulflows of $2.8 million in 2019, $2.5 million in 2020, and $2.5
million in 2021.
lnt€rest Rate Risk
NW Holdings and NW Natural are exposed to interest rale risk primarily
associated wilh new debt flnancing needed to fund capital requirements,
including future contractual obligations and malurities of long-term and
short-lerm debi. lnteresl rale risk is primarily managed through the
issuance offixed-rate debl with varying malurities. NW Holdings and NW
Natural may also enter into financial derivative inslruments, including
interest rale swaps, options and other hedging inslrumenls, lo manage
and miligate interest rate exposure. NW Holdings and NW Naturaldid
not have any inleresl rale swaps outstanding as of December 31, 2018
ot 2017
Foreign Currencv Risk
The cosls of certain pipeline and off-syslem storage services purchased
from Canadian suppliers are subject to changes in the value of the
Canadian curency in relation to the U.S. cunency. Foreign currency
forward conkacts are used to hedge againsl fluctuations in exchange
rales for NW
Natural's commodity-related demand and reservation charges paid in
Canadian dollars. Notaonal amounts under foreign currency forward
contracts were S6.9 mallion and $7.7 million as of December 31. 2018
and 2017, respectively. lfalloflhe foreign cunency forward contracts had
been sellled 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 eilher 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 ditferent suppliers at liquid
exchange points. NW Nalural evaluates and monltors suppliers'
credilworlhaness and maintaans the abalily to require addiiional financial
assurances. ancluding deposits. letters of credil, or surely bonds, in case
a supplier defaulls. ln lhe event of a supplier's failure to deliver
contracled volumes of gas, the NGD business would need to replace
lhose volumes at prevailing market prices, which may be higher o. lower
than the origanaltransaclion praces. NW Naturalexpects these cosls
would be subject to ils PGA sharing mechanism discussed above. Since
most ol NW Nalural's commodity supply contracts are priced at lhe daily
or monthly market index pnce tied to llquid exchange points. and NW
Natural has adequale storage flexabilily. NW Natural believes it is unlikely
a supplier default would have a material adverse effect on ils financial
condilion or results of operalions.
@Basedon
estimated fair value at December 31, 20'i 8. NW Nalural's overall credlt
exposure relating to commodily contracts is considered immaterial as it
reflecls amounls owed to financial derivative counterparties (see lable
below). However, changes in natu.al gas prices could result in
counlerparties owing NW Natural money. lherefore, NW Natural's
financialderivatives poliry requires counteeanies lo have at least an
inveslmenl{rade credit ratang at the time the derivative inskument is
entered into and specific limits on the conlract amounl and duralion
based on each counlerparty's credit rating. Due to polential changes in
market condilions and credit concerns. NW Natural continues to enlorce
skong credat requirements. NW Nalural actively monitors and manages
derivalive credit exposure and places counterparties on hold for trading
purposes or requares cash collaleral, letters of credit- or guarantees as
circumstances warrant.
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Tabe ot Contents
The following table summarizes NW Nalural's overall financial swap and
option credit exposure, based on estimated fair value, and the
corresponding counlerpany credit ratings. The table uses credit ratings
from S&P and l\,'toody's, reflecting the higher of the S&P or Moody's rating
or a middle raling if the entily is split-raled with more than one raling level
difference:
commercial customerS, which is intended to slabilize the recovery of
NGD business fixed cosls and reduce fluctuations in customers bills
due to colder or warmer lhan average weather. Cuslomers in Oregon are
allowed to opt out of the weather normalization mechanism. As of
December 31. 2018, approximately 8% of Oregon customers had opled
out. ln addition lo the Oregon customers opting out, Washington
residential and commercial customers account for approximately 11% of
our tolal customer base and are not covered by wealher normalazation.
The combinalion ofOregon and Washinglon cuslomers not covered by a
weather normalization mechanism is 19% of all residenlial and
commercial customers. See "Results of Operations-Regulatory
Matters-Rate Mechanisms-WARM" above-
Financial Derjvative Poslion by Credft Rating
lJnrealized Fair Value Gaan (Loss)
2014 20'17
BBB/Baa
Tolal
S
S
$
$(6 3)
(1.s)
\22 3)
ln most cases, NW Natural also mitigates the credit risk of financial
deaivatives by having master nelting arrangements with counterparties
which provide for making or receaving net cash setllements. Generally.
lransaclions otthe same type in the same currency lhal have settlemenl
on the same day with a single counterparty are netled and a single
paymenl is delivered or received depending on which party is due funds
Additionally, NW Natural has masler contracls in place wilh each
deravative counterparty that include provisions for posting or calling for
collaleral. Generally, NW Natural can obtain cash or marketable
securities as collaleralwith one day's notice. Various collateral
management strategies are used lo reduce liquidity risk. The collateral
provisions vary by counterparly but are not expected to result in the
significant posting ol collateral, if any. NW Natural has performed slress
lests on the portfolio and concluded the liquidity risk from collateralcalls
is not material. Derivative credit exposure ls primarily with investmenl
grade counlerparties raled AA-/Aa3 or higher. Contracts are diversified
across counlerparties to reduce credil and liquidity risk.
At Dec€mber 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' localion At December 31 ,
2017, financial derivalive credit risk on a volumekic basis was
geographically concentrated 36% in the United Stales and 64% in
Canada with our counterparties.
Credil Exposure to lnsurance Companres
Credit exposure to insuaance companies for loss or damage claims
could be malerial. NW Holdings and NW Natural regularly monitor the
financial condition of insurance companies who provide general liabilily
insurance policy coverage lo NW Holdings, NW Nalural, their
predecessors. and lheir subsidiaries.
Weather Risk
NW Nalural has a weather normalization mechanism in Oregon.
however. il is exposed lo weather risk primarily from NGD business
operalions. A large percentage of NGD margin is volume driven, and
currenl rates are based on an assumption of average weather. NW
Natural's weathea noamalization mechanism in Oregon is for residential
and
s
EXHIBIT 2
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61
(9.0)
(13.3)
(7.8) $
ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENIS
Page
'1. fu|anaqemenl's Reports on Internal Control Over Financial Reportinq
2. ReDorts of lndeoendent Reqistered Public Accountino Firm 65
3. ConsolidatedFinancialSlalements
Consolidated Statemenls ofComprehensive lncome (Loss) of Norlhwest Natural Holdinq Company for the Years Ended Decembe.
68
ZO
71
72
75
76
77
31,2018.2017 . and 2016
Consolidated Statements of Shareholders' Equity of Nonhwest Nalural Holding Company lor the Years Ended December 31, 2018,
2017, and 2016
Consolidated Statements ofCash Flows ofNorlhwest Natural Holding Company forthe Years Ended Decembet 31,2O18,2017, and
Consolidated Balance Sheets of Northwest Natural Gas ComDanv at Decembe.31, 2018 and 2017
Consolidated Statements of Shareholder's Equilv of Northwest Natural Gas ComDanv for the Years Ended December 3'1, 2018.
2017 and 2016
Consolidaled Stalemenls of Cash Flows of Northwest Natural Gas Company for the Years Ended December 31 , 2018,2017 , and
2016
Noles to Consolidated Financial Statements
4. QuarlerlyFinanciallnformalion 115
5. Supplementary Dala fo.theYears Ended December31,2018,2017, and 2016
Financial Slatement Schedules
Schedule I - Condensed Financial lnforqq!iq!![]\!9l!!!!qst Natural Holding Company
chedule ll - Valuation and Qual Accounls and ReseNes of Northwest Natural Hold a and Northwest N
Companv
Supplemenlal Schedules Omilted
All other schedules are omitted because ofthe absence of the condilions under which they are required or because the required informa{ion is inciuded
elsewhere in the financial slatements. EXHIBIT 2
PALFREYMAN. DI
62 GEM STATE WATER
Page 64 of 210
Table of Contents
eeasllidated Balance Sheets of Norlhwqst Natural Holdinq Companv at December 31. 2018 and 20'17
Consolidated Statements of Comprehensive lncome (Loss) of Northwest Natural Gas Companv for the Years Ended December 31,
2018.2017. and 2016
2016
117
't21
Table of Contenls
NW HOLDINGS MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NW Holdings managemenl is responsible for establishing and maintaining adequate internal conkol ove. financial reporting as defined in Rules 13a-
'l5(0 o|l5d-15(f) under lhe Securities Exchange Acl of 1934, as amended. NW Holdings' inlernal conkol over financial repo.ling is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of Unancial slatements for external purposes in accordanc€ with
generally accepted accounting principles in the Uniled States of America (GAAP). NW Holdings' internal conlrol over financial reporting includes those
policies and proc€dures that:
(i) pertain to lhe maintenance of records lhat, in reasonable detail. accurately and fairly reflecl the transactions and dispositions involving company
assels;
(ii) provide reasonable assurance thal lransactions are recorded as necessary lo permil ihe preparation of financial statements in accordance with
GAAP, and that receipts and expenditures a.e being made only in accordance with authorizations of management and lhe NW Holdings Board of
Directors:and
(iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition oI NW Holdings' assets
lhat could have a malerialeffect on the financial slatemenls.
Eecause of ils inherent limitalions, inlernal control over financial reporling may not prevent or detect misstatemenls or fraud. Also, projections of any
evaluation of eflectiveness to future periods are subject to the risk that conlrols may become inadequate bec€use of changes in condilions, or that the
degree of compliance with ihe policies or procedures may deteriorate.
NW Holdings management assessed the etfecliveness of NW Holdings' anternal conlrol over Iinancial reporting as of December 31 , 2018. ln making
this assessment, NWHoldings management used lhe crateria set forth by the Committee ofSponsoring Organi2ations oflhe Treadway Commission
(COSO) in /rtemal Control-lntegrated Fftmewoft (2013)
Based on NW Holdings management's assessmenl 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 audiled by Pricewalerhousecoopers LLP, an
independenl registered public accounting firm, as stated in their report which appears in this annual report.
/s/ David H. Anderson
David H. Anderson
Presadent and Chief Executive Officer
Frank H. Burkhansmeyer
Senior Vice President and Chief Financial Officer
/s/ Frank H. Burkhartsmeyer
N4arch 1, 2019
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Table oi Conrenls
NW NAfURAL MANAGEMENT'S REPORr ON INTERNAL CONIROL OVER FINANCIAL REPORTING
NW Nalural managemenl is responsible for establishing and mainlaining adequale anlernal conlrol over financial reporting as defined in Rules 13a 1 5
(0 or 15d-15(f) under the Securities Exchange Act of 1934, as amended NW Nalural's inlemal control over flnancial reporting is designed lo provide
reasonable assurance regarding the reliability offinancial reporting and lhe preparation of financial slatements for external purposes in accordance wilh
generally accepled accounting principles in the United States of America (GAAP). NW Nalural's internal control over financial reporting includes those
policies and procedures that:
(i) perlain to the maintenance of records that, in reasonable delail, accurately and fairly reflect lhe transaclions and dispositions involving company
assels:
(ii) provide reasonable assurance lhat lransactions are recorded as nec€ssary lo permit lhe preparation of financial statements in accordance with
GAAP, and that receipls and expenditures are being made only in accordance with authorizations of management and the NW Natural Eoard of
Directors:and
(iii) provide reasonable assurance regarding prevention or timely deteclion of the unaulhorized acquisition, use, or disposition of NW Natural's assets
thal could have a malerial effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detecl misslatements or fraud. Also, projeclions ol any
evaluation of effecliveness lo future periods are subject to the risk thal controls may become inadequate because of changes in condilions. or that the
degree of compliance with the policies or procedures may deteriorate.
NW Natural managemenl assessed lhe eflectiveness of NW Nalural's inlernal conlrol over financial reporling as of December 31 , 2018. ln making this
assessmenl, NW Natural management used the criteria setlorth by the Committee oI Sponsoring Organizations ofthe Treadway Commission (COSO)
in lntemal Control-lntagated F6mewo* (2013).
Based on NW Natural management's assessmenl and those criteria, NW Nalural management has concluded that it mainlained effective anternal
control over linancial reporting as of December 31 . 2018.
/s/ Frank H. Burkhartsmeyer
Frank H. Burkharlsmeyer
Senior Vice President and Chaef Financial Offlcer
March 1, 2019
64
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/s/ David H. Anderson
David H. Anderson
President and Chief Execulive Ofllcer
REPORT OF INDEPENDENr REGISTERED PUBLIC ACCOUNNNG FIRM
To the Board of Directors and Shareholders of Northwest Nalural Holding Company
Opinions on ahe Financial Sa'rments and lnte.nal Cont ol over Financial Reportiog
We have audited the accompanying consolidated balance sheets of Norlhwest Natural Holding Company and its subsidiaries (the 'Company") as of
December 31. 2018 and 2017, and the relaled consolidaled slalemenls of comprehensive income (loss). of shareholders' equity, and of cash flows for
each of the three years in the period ended Oecember 31, 2018, including the related notes and financial slalement schedules listed in the
accompanying index (collectively referred to as the "consolidated financial slatements"). We also have audiled lhe Company s inlernal conkol over
financial reporting as of December 31. 2018, based on criteria established in lnlernal Control - lntegrated Framework (2013) issued by lhe Committee of
Sponsoring Organizations of the Treadway Commisslon (COSO).
ln our opinion, the consolidated financial statements referred lo above presenl fairly, in all material respecls. the financial position of the Cornpany as of
December 31, 2018 and 20,l7. and the results of its operations and ils cash flows for each of lhe three years in the period ended December 31, 2018 in
conformity with accounting principles generally accepled in lhe Uniled States of America. Also in our opanion, lhe Company maintained. in all material
respecls, effective intemal control overfinancial reporting as of December 31. 2018, based on criteria established in lnternal Conlrol - lntegrated
Framework (2013) issued by the COSO.
Basis for Opihions
The Company's management is responsible for these consolidated financial statements, for maintaining effective inlernal control over financial
reporting, and for its assessmenl of lhe effectiveness of internal conkol over financial reporting, included in the accompanying Management's Repod on
lnlernal Control over Financial Reporling. Our responsibility is to express opinions on lhe Company's consolidaled flnancial stalements and on lhe
Company s internal conlrol over financial reporting based on our audils. We a.e a public accounling llrm registered with lhe Public Company Accounting
Oversighl Board (United States) (PCAOB) and are required to be independent with respect to the Company in acrordance wilh lhe U.S. federal securities
laws and lhe applicable rules and regulations of lhe Securities and Exchange Commission and lhe PCAO8.
We conducted our audils in accordance with the standards of the PCAOB. Those standards require lhal we plan and perform the audits to obtain
reasonable assurance about whelher the consolidated financial statemenls are free of material misstatement, whether due to error or fraud, and
whether effective internal conlrol over financial reporting was maintained in all material respects.
Our audits of lhe consolidated financial stalements included performine procedures to assess the rasks of material misstatemenl of the consolidated
financial statemenls. whether due to error or fraud, and performing procedures lhal respond to those risks Such procedures included examining, ona
tesl basis, evidence regarding the amounls and disclosures in lhe consolidaled financaal stalemenls. Our audits also included evaluating lhe
accounting princaples used and signilicant estimates made by managemenl. as well as evaluating lhe overall presentataon of the consolidated financial
stalements. Our audit of inlernal control overfinancial reporting included obtaining an understanding of inlernal control over financial reporling.
assessing the risk that a material weakness exists, and testing and evaluating lhe desagn and operating etfectiveness of internal control based on lhe
assessed risk Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audils provrde a reasonable basrs tor our oprnrons.
Delinition and Urnitations ol lntarnal Control over Financial Reponing
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilily of financial
reporting and the preparation of financial statemenls for external purposes in accordance wilh generally accepted accounting principles. A company's
internal control over financaal reporting includes those policies and procedures that (i) pertain to the mainlenance of records lhat, in reasonable detail,
accurately and fairly reflecl lhe transactions and dispositions ofthe assets of the company, (ii) provide reasonable assurance lhat lransactions are
recorded as necessary to permit preparalion of rlnancial slalements in accordance wilh 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 prevenlion or limely detection of unauthorized acquisition, use, or disposilion of the company s assels that could have
a malerial effect on the financial statemenls.
Because of its inherent limitatjons, internal conkol over financial reporting may not prevenl or delect misslatements. Also. projections of any evaluation
of effecliveness to future periods are subject lo lhe rask thal conlrols may become inadequate because ofchanges in 60nditions, or lhat the degree of
compliance with the policies or procedures may deteriorale.
,ls/ PricewaterhouseCoopers LLP
Ponland, Oregon
March 1, 2019
We have served as the Company's auditorsince 1997
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 67 of2l0
65
Table of Contents
To lhe Board of Directors and Shareholder of Northwest Nalural Gas Company
Opinion on lhe Financial Saatements
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 ofthe three years in the period ended December 31, 2018. including the related noles and financial statement schedule listed in the
accompanying index (collectively referred lo as the "consolidaled financial statements'). ln our opinion. lhe consolidaled financial statements present
fairly, in all material respecls. the flnancial posilion of the Company as of December 3'1, 2018 and 2017, and the results of ils operalions and its cash
flows for each of the three years in the period ended December 31, 20'18 in conformity wilh accounting principles generally accepted in lhe LJniled Stales
ofAmerica.
BasElotOpinion
These consolidated financjal slalemenls are the responsibility of the Company's managemenl. Our responsibility is to express an opinion on the
Company's consolidated financial statements based on our audils. We are a public accounting firm registered wilh the Public Company Accounling
Oversight Board (United Slates) (PCAOB) and are required to be independent with respect lo the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations ofthe Securilies and Exchange Commission and lhe PCAOB.
We conducted our audats ofthese consolidated financial statements in accordance with the standards ofthe PCAOB. Those standards require that we
plan and perform the audit lo obtain reasonable assurance about whelher the consolidated financaal statements are free of malerial misslalemenl,
whelher due io error or fraud. The Company is not required to have, nor were we engaged to perform. an audit of its inlernal conkol over flnancial
reporting. As parl of our audils we are required to oblain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on lhe eflectiveness of lhe Company's intemal control over financial reporting. Accordingly, we exprcss 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 lhat respond lo those rasks. Such procedures included examining, on a tesl basis, evidence regarding the amounts
and disclosures in the consoladated financial slatements. Our audits also included evaluating the accounting principles used and significanl eslimates
made by management, as well as evalualing the overall presenlalion ofthe consolidated llnancaal slalemenls. We believe lhat our audits provide a
reasonable basis for our opinion.
/s/ PricewalerhouseCoopers LLP
Portland, Oregon
N4arch 1.2019
We have served as the Company's audator since '1997.
66
EXIIIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 68 of2l0
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Table ol Conlents
ln lhorsands. except per share data
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31
2018 2017 2016
Operaling revenues
Operating expenses:
Cosl ofgas
Operations and maintenance
Environmental remediation
Generaltaxes
Revenue taxes
Depreciation and amortizalion
Olher operating expenses
Tolal operating expenses
lncome trom operations
Other income (expense), net
lnteresl expense. nel
lncome before income taxes
lncome tax expense
Net income from continuing operations
Loss from discontinued operations, net of tax
Nel income (loss)
Olher comprehensive income (loss)r
Change in employee benefit plan ,iability, net of taxes of ($ 166) for 2018, $735 tor 2017, and $452
for 2016
Amorlizalion of non-qualifled employee benefit plan liability, net of laxes of ($278) for 2018, ($374)
for2017, and ($624) for2016
Comprehensive income (loss)
Average common shaaes outstanding:
Basic
Diluled
Earnings from continuing operations per share of common stock:
Basic
Daluted
Loss from discontinued operations per share of common stock:
Basic
Diluled
Earnings (loss) per share of common stock:
Basic
Diluted
See Notes to Consolidated Financial Slatements
$ 706,143 $ 755,038 $ 668,173
255,519
156,698
11 .127
32,172
30,082
85,156
3,227
324.795
152,358
15,291
30,639
260.588
't36,723
13,298
29,243
81.053 77 ,604
573,981 604,136 517.456
132,162
(3,601)
37,059
r50.902
(295)
37,526
150.717
(7.151)
38,136
91.502 113,081 105,430
24.191 41,008 43,01 1
67,31'1 72,073 62,419
(2.7421 (127,696) (3,524)
64.569 (55,623)58,895
476
774
(2,059)
572
(7 411
955
$ 65.819 $ (57,110) $ 59,106
$
s
28.803
28.873
28,669
24.753
27,647
27,779
2.34 $
2.33
2.51
2.51
$
(4.45) $
(4.44)
(0.13)
(0.13)
s 2.24 $
2.24
(1.%) $
('r.93)
2.13
2.12
EXHIBIT 2
PALFREYI\4AN. DI
CEM STATE WATER
Page 69 of 210
67
Table of Contenls
(0.10) $
(0.0s)
2.26
TabLe of Contents
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31,
2 018 2017
Assets:
Currenl assets:
Cash and cash equivalents
Accounts receivable
Accrued unbilled revenue
Allowance for uncollectible accounls
Regulatory assets
Derivative inslruments
lnvenlories
Gas reserves
lncome taxes rcceivable
Olher current assels
Oiscontinued operalions - currenl assets
Total current assets
Non-current assetsl
Property plant, and equipment
Less: Accumulated depreciation
Total property, plant, and equipment, net
Gas reserves
Regu,alory assets
Derivative inslruments
Other investmenls
Goodwill
Other non-current assels
Disconlinued operations - non-current assets
Total non-current assets
Tolal assets
$'t2,633 S
66,S70
57.827
(977)
41,930
9.001
44,149
16,647
6,000
28.472
'!3.269
3,472
66,236
62.381
(956)
,r5,781
't,735
47,577
15,704
24.949
3.057
295.921 269,936
3,414.490
9S3,1 't 8
3,204,635
960,477
2.421.372
66,'t97
371,786
63,558
8.954
14.145
2,244,',t58
84,053
356.608
1,306
66,363
6,505
10,817
2.946,7 41 2,769,810
$ 3,242,662 $ 3,039,746
See Notes to Consolidated Financial Statements
68
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 70 of2l0
Table ol Contenls
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31.
2018 2017
Liabililies and equity:
Current liabilities:
Short{erm debt
Current maturities of long-term debt
Accounts payable
Taxes accrued
lnterest accrued
Regulalory liabalataes
Derivative instruments
Other current liabilities
Disconlinued operations - cunent liabilities
Total cunent liabilities
Long{erm debt
Deferred credits and olher non-current liabilitiesi
Defened tax liabilities
Regulatory liabilities
Pension and other postrelirement benefil liabilities
Derivative instrumenls
Other non-current liabilities
Discontinued operations, non-currenl liabilities
Totaldelerred credits and other non-current liabilities
Commitmenls and contingencies (see Note 16 and Note 17)
Equity:
Common stock - no par value; authorized 100,000 sharesl issued and outstanding 28,880 and 28,736 al
December 31, 2018 and 2017, respeclively
Retained earnings
Accumulated othercomprehensive loss
Total equily
Toral liabitities and equity
See Noles Io Consolidated Financial Statemenls
69
S 54,200
96,703
11't,021
18,883
6,773
34,013
18,722
39,942
1,593
509,084 381.850
706,247 683,'t84
217.620 $
29.989
115.878
1 1,023
7,306
47,436
12,381
54.492
12,959
280,463
61 1,560
22't,886
3,025
147,763
270,526
586,093
223,333
4.649
135,292
12.043
1.264.697 1.23r,936
457.640
312.182
(7,188)
762,634 7 42,776
$ 3.242.662 $ 3,039,746
EXHIBIT 2
PALFREYMAN. DI
CEM STATE WATER
Page 7l of 210
448,865
302,349
(8,438)
Tab e of Contenls
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Slock
Accumulated Olher
Comprehensive
lncome (Loss)
Relained
Earnings
Tolal
Equily
Balance at Oecember 31. 2015
Comprehensive income
Dividends on common stock, $1.87 per share
Stock-based compensation
Shares issued pursuant to equity based plans
lssuance of common slock. nel of issuance cosls
Balanc€ at December 31, 2016
Comprehensive income (loss)
Dividends on common stock, $1.88 per share
Stock-based compensalion
Shares issued pursuant lo equity based plans
Balance at December 31 2017
Comprehensive income
Dividends on common stock, S1.89 pershare
Stock-based compensation
Shares issued pursuanl to equily based plans
Cash purchase ofshaaes lor business combination
Value ofshares transferred for business combination
Balance at December 31. 2018
412,261
(55,623)
(54,289)
(6,95r)
(1,487)
$ 383,144 $404.990 $
s8,895
(s1,624)
(7,162) $
211
780,972
59,106
(51,624)
2,924
6.358
52.761
850,497
(57.110)
(54,289)
796
2,924
6,358
52.761
445.18?
2.842
796
448,865 302,349
64,569
(54,736)
(8,438)
1.250
742,776
65,819
(54.736)
3,020
5,175
(7,945)
8,525
3,020
5,175
(7,945)
8,525
$ 457,640 $ 312,182 $
See Notes to Consolidated Financial Statements
(7,188)i____I93f!4
70
EXHIBIT 2
PALFREYMAN^ DI
CEM STATE WATER
Page 72 of2l0
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
2018
Year Ended December 31,
2017 2016
Operating activities:
Net income (loss)
Adjuslments lo reconcile net income (loss) to cash provided by operalionsr
Deprecaation and amortizalion
Regulatory amortazation of gas reserves
Deferred income laxes
Oualified defined benefit pension plan expense
Contributions to qualified defined benefit pension plans
Deferred environmenlal expenditures, net
Regulatory disallowance of prior environmental cost deferrals
Amorlazation of environmental remediation
Regulatory revenue defenal from the TCJA
Other
Changes in assets and liabilities:
Rec€ivables, nel
lnventories
lncome and othea taxes
Acclunts payable
lnlerest accrued
Deferred gas costs
Other, nel
Disconlinued operations
Cash provided by operating activilies
lnvesting aclivitiesl
Capital expenditures
Other
Discontinued operalions
Cash used in investing activities
Financing activilies:
Repurchases related to stock-based compensation
Proceeds from slock options exercised
Proceeds lrom common stock issued
Long{erm debl issued
Long-term debl retired
Change in shorl{erm debt
Cash dividend paymenls on common stock
Stock purchases relaled to acquisilions
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 perjod
$ 64,569 $ (55,623) $ s8,89s
1',1 ,127
1.596
85,156
16.684
14.356
8.108
(15,540)
(14,528)
81,053
16,353
152.414)
5.364
(19,430)
(13,716)
3.282
5,600
6.734
1,092
807
17,122
(4,093)
197,180
77,604
15,525
32,056
5,274
(14,470\
(10,469)
3.287
13.298
181
(16,904)
16.792
(14,395)
552
(645)
2,846
(6,395)
16,565
9,467
12.028
93
(10,204)
11,727
5,020
168.771 206,704 222147
1,546
50,000
(97.000)
163.274
(51,311)
(7,951)
(715)
(2.034)
4.819
100,000
(40.000)
900
(s3,9s7)
(1,042\
8,404
52,760
150,000
(2s,000)
(216,735)
(51,508)
57.843 7.419 (86,208)
9.161
3.472
(49)
3.521
(690)
4,211
$ 12.633 $ 3,472 $ 3,52',1
Supplemental disclosure of cash flow information
lflterest paid, nel of ca pita lization
lncome taxes paid (refunded)
34,787 $
'14,780 E{*islr 2
36,023
71
$ 35.324 $
27.370
See Notes lo Consolidated Financial Statements PALIRE,YMAN.t)t
GEM STATE WATER
Page 73 of 210
15.291
2.102
(214,636) (213,325) (138.357)
(3.390) 1577) 2,882
573 (270) ( 1.154)
(217.453) 1214.172) (136,629)
(2,309) (3,087)
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 74 of 210
Operaling aevenues
Operating expensesl
Cost ofgas
Operaiions and maintenance
Environmenlal remediation
Generaltaxes
Revenue taxes
Depreciation and amorlization
Other operating expenses
Total operaling expenses
lncome from operalions
Other ancome (expense), nel
lnlerest expense, net
lncome befote income laxes
lncome tax expense
Net incorne from continuing operations
Loss from discontinued operalions, net oftax
Net income (loss)
Olher comprehensive income (loss):
Change in employee benefit plan liability, net of laxes of ($166) for 2018, $735 for 2017, and $452
for 2016
Amortization of non-qualified employee benefit plan liability, net of taxes of ($278) for 2018, ($374)
for2017, and ($624) for 2016
Comprehensive income (loss)
See Notes to Consolidated Financial Slatements
$ 705,s7r $ 755,038 $ 667,949
255,743
155.225
11 .127
32.086
30.082
84.986
3.223
32s.019
152,180
'15.291
30,602
260,588
135,979
13,298
29,222
81.024 77.575
572,472 604,116 516,662
133,099
(3,599)
36,992
150,922
(198)
37,526
15',t,287
(7,041)
38,136
92,508 r 13,1S8 106,110
24.459 41,478 43 275
68,049 71,720 62,835
\1.723) (127.343) (3 940)
66,326 (55,623) 58,895
476
774
(2,059)(744}
955
$ 67,576 $ (57,110) $ 59,106
72
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 75 of2l0
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEI\iIENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31
2018 2017 2016
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31.
2018 2017
Assets:
Currenl asseis:
Cash and cash equivalents
Accounts receivable
Accrued unbilled revenue
Receivables from afliliates
Allowance for uncollectible accounls
Regulalory assets
Derivative instruments
lnventories
Gas reserves
Olher current assets
Discontinued operations - surent assels
Total currenl assets
Non-current assets:
Property. plant, and equipment
Less: Accumulated depreciation
Tolalproperty, plant, and equipmenl net
Gas reserves
Regulalory assets
Derivative instruments
Other investments
Other non-cunent assets
Disconlinued operations, non-currenl assels
Total non-currenl assels
Tolalassels
S 7,947 $
66.824
57.773
4,166
(975)
41,930
9,001
44,126
16.647
25,347
3,'t10
66.236
62.381
266
(956)
45,781
1,735
47 ,577
15,704
24,862
7,170
272.786 273.866
3.410,439
992,855
3,204,260
960,285
2.417,5A4
66,197
371,786
725
49,922
13,736
2.243,975
84,053
356,608
1,306
52.654
6.505
24,709
2.919.950 2,769,810
$ 3,192,736 $ 3,043,676
See Notes to Consolidaled Financial Statements
73
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 76 of2l0
NORTHWEST NATURAL GAS COMPANY
CONSOLI DATED BALANCE SHEETS
As of December 31,
2018 2017
Liabililaes and equityi
Current liabilities:
Short{erm debl
Currenl maturities of long{erm debt
Accounts payable
Payables to affiliales
Taxes accrued
lnterest accrued
Regulatory liabilities
Oerivative instrumenls
Other current liabilities
Disconlinued operations - currenl liabilities
Total current liabilities
Long{erm debl
Deferred credits and other non-current liabililies:
Deferred iax liabilities
Regulalory liabalities
Pension and other postretirement benefit liabililies
Derivative instruments
Other non-current liabilities
Discontinued operalions - non-current liabilities
Tolaldeferred credits and other non-current liabililies
Commitments and conlingencies (see Note'16 and Note 17)
Equity:
Common slock
Retained earnings
Accumulated other comprehensive loss
Totalequity
Total liabilities and equity
$217,500 $
29,S89
114,937
10,990
47.436
12.381
53,027
54,200
96,703
110.354
3,664
18,844
6,773
34,013
18,722
39,942
2,565
494.056 385.780
704.134 683.184
294.739
6t't,560
221.846
3,025
147,668
287,388
586,093
223,333
4,649
't35,205
(4,732)
1.278.478 't,23't.936
226.452
496.404
(7,188)
448,865
302.349
(8,438)
715,668 742 776
$ 3.192,736 $ 3,043.676
See Notes to Consolidaled Financial Statements
74
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 77 of 210
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Common Slock Retained Earnings
Accumulated Other
Comprehensive
lncome (Loss)
Iotal
Equity
Balance at December 31, 2015
Comprehensive income
Dividends on common stock
Stock-based compensalion
Shares issued pursuant to equity based plans
lssuance of common slock, net of issuance costs
Balance at December 31, 2016
Comprehensive income (loss)
Dividends on common stock
Stock-based compensation
Shares issued pursuant to equity based plans
Balance at December 31. 2017
Comprehensive income
Dividends on common stock
Stock-based compensationril
Shares issued pu.suanl lo equity based plans'
Transler of investments to NW Holdings as olOclober 1,
2018
Balance at December 31, 2018
S 383,144 $404,990 $
58,89s
(51,624)
(7,162) S
211
780,972
59,106
(51,624)
2,924
6,358
52,?6'l
2,924
6,358
52.761
445.187 412.261
(s5.623)
(54.289)
(6,9s1)
\1.487)
850,497
(57,110)
(54,289)
2,882
796
2,842
796
448,865 302,349
66,326
(41,035)
(8,438)
1,250
742,776
67,576
(41,035)
2,161
3,075
2,161
3,075
\227,649)168,764 (58,885)
s 226.452 S 496,404 S (7,188) $715,668
" Slock-based compensalion as based on stock awards of NW Nalu.al lo be issLred in shares of NW Holdings.
See Notes to Consolidated Financial Statements
75
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 78 of2l0
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 3'1,
2018 2017 2016
Operating actavities:
Nel income (loss)
Adjuslmenls to reconcale nel income (loss) lo cash provided by operalions:
Oepreciation and amorlization
Regulatory amorlizalion of gas reserves
Defeffed income taxes
Oualified defined benefit pension plan expense
Conlributions to qualified defined benefit pension plans
Deferred environmental expenditures, net
Regulatory disallowance of prior environmental cost defe.rals
Amorlization of environmenlal remedialion
Regulatory revenue delenalfrom the TCJA
Other
Changes in assets and liabrlilies:
Receivables. nel
lnventories
lncome and other taxes
Accounts payable
lnleresl accrued
Deferred gas costs
Other, net
Discontinued operations
Cash provided by operating activilies
lnvesting activities:
Capital expenditures
Olher
Discontinued operations
Cash used in investing aclivities
Financrng aclivitaes:
Repurchases related to stock-based compensation
Proceeds from stock options exercised
Proceeds from common slock issued
Long{erm debt issued
Long-term debt retired
Change in shorl-term debt
Cash dividend payments on common stock
Other
Discontinued operations
Cash provaded by (used in) financing activities
lncrease (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalenls, end of period
$ 66.326 $ (55.623) $ 58,895
11 .127
7,929
883
84.S86
16,684
r2,330
8,108
(15,540)
(14,528)
8'r,024
16,353
15,894
5,364
(1S,430)
(13,716)
3,215
5,601
6,730
807
17.122
(3.855)
126.371
77,575
15.525
30,772
5.27 4
(14,470)
(10,469)
3,287
't3,298
2.003 2.745
(3.920)
3,212
(7,854)
13,937
500
(14,395)
539
3,184
(6,319)
16,s65
9.467
10,822
93
(10,204)
12,342
7,041
173,508 206,483 222,239
(2,034)
4,8191.368
50,000
(97,000)
163,300
(38,387)
(1.s39)
(7.951)
(1.042)
8.404
52,760
150,000
(25,000)
(216,735)
(51,s08)
(3.087)
100,000
(40,000)
900
(53.9s7)
(2,309)
69.791 7.419 (86,208)
(598)
3.978
4.837
3,110
g 7,947 $ 3,110 $ 3.380
Supplemental disclosure ot cash flow information
lnterest paid, net of capitalization
lncome laxes paid (retunded)
34,787 S EISoBIT 2
14P99 FR FYMIfN)DI
$35,305 $
27.350
See Notes to Consolidated Financial Stalements CEM STATE WATER
Page 79 of2l0
15,291
'214,328) (213.325) (138,357)
(3,s17) t517) 2,882
(20.617) (270) (1.154)
\238.462) \214,1721 (136,629)
(27o)
3,380
EXHIBIT 2
PALFREYMAN. DI
GEM STATII WATF,R
Page 80 of 210
Tabe of Contenls
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORCANIZATION AND PRINCIPLES OF CONSOUDANON
On October 1, 2018. we compleled a reorganization into a holding
company slructure. ln lhis reorganization, shareholders of NW Natural
(the predecessor publicly held parenl company) became shareholde.s
of NW Holdings on a one-for-one basis: maintaining the same number
of shares and ownership percentage as held in NW Natural ammediately
prior lo lhe 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
accounled for as a transaction among entities under common control. As
required under accounting guidance. lhese subsidiaries are presented
in lhis report as disconlinued operations in the consolidaled results ol
NW Nalural. See Note 18 lor additional informalion.
The accompanying consolidated financial statemenls represent the
respective, consolidaled results and financial results of NW Holdings
and NW Natural and all respective companies lhal each registrant
directly or indirectly controls. eitherthrough majority ownership or
olherwise. This is a combined reporl of NW Holdings and NW Natural
which includes separate consolidated financaal slatemenls for each
registrant.
NW Natural's natural 9as distribulion activities are reported in the natural
gas diskibution (NGD) segment, formerly titled and reported as the utilily
segment. The NGD segment is NW Natural's core operating business
and serves residential, commercaal. and industrial cuslomers in Oregon
and southwest Washington. The NGD segment is the only reporlable
segmenl for NW Holdings and NW Natural. Allother business activities.
including certain gas storage activities. water businesses, and other
investmenis and activilies are aggregaled and reported as other at their
respective regislranl.
ln addition, NW Holdings has reported discontinued operalaons results
related to the pending sale of Gill Ranch Slorage, LLC (Gill Ranch).
NW Holdings' direct and indirect wholly-owned subsidiaries include
Cascadia Water, LLC (Cascadia);
NW NaturalWater ofOregon, LLC (NWN Water of Oregon);
NW NaluralWaler ofWashington, LLC (NWN Waler of
Washington)i and
NW Natural Water of ldaho, LLC (NWN Waler of ldaho); and. Gem State Waler Company, LLC (Gem State)
lnvestments in corporate joinl 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 investmenl in Kelso-Beaver
Pipeline and NWN Energy's inveslment in TrailWest Holdings, LLC
(TWH), which is accounled for under lhe equity method. NW Holdings
and ils direct and indarect subsidiaries are colleclively referred to herein
as NW Holdings, and NW Natural and its direct and indirect subsidlaries
are collectively referred to herein as NW Natural. The consolidated
financial stalemenls of NW Holdings and NW Natural are presenled after
elimanation of all intercompany balances and transactions.
During the second quaner of 20'18, we moved forward with our long-lerm
strategic plans, which include a shift away from the California gas
slorage business. ln June 20'18, 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 lhat
provides for the sale of allofthe membership interests in ils wholly-
owned subsidiary, Gill Ranch, subject to various regulatory approvals
and closing conditions. We have concluded lhal the pending sale of Gill
Ranch qualifies as assets and liabilalies held for sale and disconlinued
operataons. As such, the results of Gill Ranch have been presenled as a
discontinued operalion for NW Holdings for all periods presented and for
NW Natural up until lhe holding company reorganization was effective on
October 1, 2018 on lhe consolidated statements of comprehensive
income and cash llows. and the assets and liabililies associaled wilh
Gill Ranch have been classified as disconlinued operations assets and
liabilities on the NW Holdings consolidated balance sheet. See Nole 18
foraddilional information. Addilionally, we reevaluated reportable
segments and concluded lhal lhe remaining gas storage activities no
longer meel the requirements to be separalely reporled as a segmenl.
lnterstate Storage Services is now reported in Other under NW Nalural
and all prior periods reflect this change. See Nole 4. which provides
segmenl informalion.
Notes to the consolidated financial stalements reflect the activity of
continuang operations for both NW Holdings and NW Natural for all
periods presenled, unless otherwise noted. Note 4 and Nole 18 provide
information regarding reportable segmenls and discontinued
operations, respeclively.
EXIIIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 8l of210
77
. Northwest NaturalGas Company (NW Natural);
" Northwesl Energy Corporation (Energy Corp);. NWN Gas ReseNes LLC (NWN Gas ReseNes);
' 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 NaturalWaler Company, LLC (NWN Water);
" Falls Water Co., lnc. (Falls Water);. Salmon Valley Water Company;
Table of Contenls
All prior peraod amounts have been relrospectively adjusled lo reflect the
change in reportable segments and the designation of Gill Ranch as a
discontinued operation for NW Holdings, and the designation oI
subsidiaries previously owned by NW Natural that are now owned by NW
Holdangs as discontinued operations for NW Natural. These
2. SIGNIFICANr ACCOUNTING POLICIES
reclassifications and the reorganization activities described above had
no effect on the prior yeais consolidated results of operations, flnancial
condilaon. or cash llows.
Use of Estimales
The preparation of financaal slatements in conformity with generally
accepted accounting principles in the United Slates ofAmerica (u.S.
GAAP) requires management to make estimates and assumptions thal
affect reported amounts in the consolidated financial statemenls and
accompanying notes. Actual amounls could differ from those eslimates,
and changes would most likely be reported in fulure periods.
Managemenl believes lhe eslimates and assumplions used are
reasonable.
lndustry Requlation
NW Holdings principal business is to operale as a holding company for
NW Nalural. NWN Water and its other subsidiaries.
NW Natural's principal busaness is the dislributaon of natural gas, which
is regulated by the OPUC and WUTC. NW Nalural also has natural gas
storage services. which are regulated by lhe FERC, and to a c€rtain
extenl bythe OPUC and WUTC. Additionally, certain NW Holdings'
subsidiaries own water businesses, which are regulated by the OPUC,
WUTC, or IPUC. Accounting records and practices ofthe regulaled
businesses conform to the requirements and uniform system of
accounts prescribed by these regulatory authorities in accordanc€ with
U.S GAAP. The busanesses in which customer rates are regulated by
the OPUC, WUTC, IPUC, and FERC have approved coslbased rates
which are intended lo allow such businesses to earn a reasonable
return on invesled capital.
ln applying regulatory accounting principles, we capitalize or defer certain
costs and revenues as regulatory assets and liabilities pursuanl lo
orders of the OPUC. WUTC, or IPUC, which provide for the recovery of
revenues or expenses from, or refunds to, ulility customers in future
periods, including a return or a carrying charge in certain cases.
At Oecember 3'1, NW Naluraldeferred the following amounts as
regulalory assets and liabililies:
2014 2017
Cunenl:
lJnrealazed loss on derivative€r"
Gas costs
Envi@nmental @stsP'
DecoupInO''
lncome tares
other'''
Total current
Non-cunent:
lJnrealized loss on derivalives"'
Pension batancrng'''
lncome laxes
Pensron and other postreliremenl benefrt
liabrltes
Envircnmental coslsa
Gas costs
Decoupling"'
Other''
Tolal non-cuarent
$12,381 $
2.473
5,601
9.140
2,218
I717
1e,712
't 54
6,198
11,227
2,218
7,272
$ 41.930 I 45,781
S 3,025 t
74,173
19,185
4,649
60.383
19,991
174 993
78.'t49
9.978
2,445
1't,738
179,A24
72,124
84
3,S70
15,579
s 371,786 $ 356,608
Regulatory Liabilitres
2018
Curent
Gas costs
Unrealzed gain on derivati!€sl'i
Decoupling'"
olh€l''
Total curaent
Non-cunent:
Gas cosls
lJn€alized gain on derivativesr'
oecouplingo
lncome taxes'o'
Accrued asset removal costsr'
olhe/''
Total non-curenl
$ 17.182 $ 14,886
8.740 1,674
2.264 322
19,250 17,131
s 47,436 $ 34,013
$ 552 $ 4,630
725 1,306
- s57
225 404 213.306
380.464 360,929
4 411 4.965
$ 611,560 S 586,093
"yJf;'J5:iT5"1;8ffi "J:"J"#;:""i'j#";ffiill?H,i[#Hffi rz
F,"tr"St'::Hjllfl :fi ','"11'i"J":i1"J#ffi ff f$.gf$Hffiu+,1'r, DI
':r Refer to rootnote (3) of the oererred RegutErorv ls6EldesfliAf[B ll*ATER
desciplion of environmental costs.''' This deferral represenls the margin adiustment resulting lromBa€Sfi3sof 210
between aclual and expecled volumes.
RegulaloryAssels
2017
78
EXHIBIT 2
PALFREYMAN- DI
GEM STATE WATIIR
Page 83 of2l0
'r Balances consist of deferrals and amortizations under appDled regulatory
fiechanisms and typically eam a rale ofreturn or €rrying charge.''r Refer to footnote (1)ofthe Net Penodlc Eenefil Cost lable in Note I for
inlormetion regarding the deferral of penson expenses6r Thrs balance represents estrmated amounts associaled wilh lhe Tax Cuts
and Jobs Act. See Note 10'ir Estimated costs ol removal on certain regulated propenies are collected
through rales See "Accounting Polces-Plant. Propeftf and Accrued Assel
Removal Cosls'below.
The amortization period for NW Natural's regulatory assets and liabilrties
ranges from less than one year to an indelerminable period. Regulalory
defenals 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. Similady, most olher regulatory
deterred accounls are amonized over'12 monlhs- However. cerlain
regulalory account balances. such as income taxes, environmental
costs. pension liabilities, and accrued asset removalcosls, are large
and tend lo be amortized over longer periods once NW Naturalhas
agreed upon an amonizalion pe.iod with the respective regulatory
agency
We believe all costs incuned and delerred al December 31. 2018 are
prudent. All regulalory assets and liability are reviewed annually for
recoverability, or more often if circomslances warrant. lfat is delermined
thal all or a portion ofthese regulatory assets or liabilities no longer
meel the crileria for continued application ofregulalory accounling. then
NW Naturalwould be required to write-offthe net unrecoverable
balances in lhe period such delerminalion is made.
Environmental latory Accountinq
Recentlv ooted Accountino Pronouncements
STOCK COMPENSATION. On May 10, 2017, rhe FASB issued ASU 2017-
09, "Stock Compensation - Scope of Modification Accounting." The
purpose of the amendment is to provide clarity. reduce diversily in
practice, and reduce lhe cost and complexity when applying the guidance
in Topic 718. related lo a change to the terms or conditions of a share-
based payment award. Specifically, an entity would not apply
modificalion accounling ifthefair value, vesting conditions, and
classification of the awards are the same immediately before and affer
the modification. The amendments in this update were effective
beginning January 1. 2018, and will be applied prospectively to any
award modrfled on or afler the adoplion date The adoplaon did not have
a malerial impacl to the financial statements or disclosures of NW
Holdings or NW Nalural.
RETIREiIENT BENEFITS. On March '10, 2017. the FASB issued ASU 2017-
07, "lmproving the Presentalion oI Net Periodic Pension Cosl and Net
Periodic Post Retirement Benelit Cost." The ASIJ requires entilies lo
disaggregale current service cost from lhe other components of net
periodic benefit cosl and present it with olhercurrenl compensation
cosls for related employees in the income statement. Additionally, the
other components of net peraodic benefit costs are lo be presented
elsewhere in the income slatemenl and oulside of income from
operations it that subtotal as presented. Only the service cosl componenl
ofthe net periodic benefit cosl is eligible for capitalization. The
amendments in this updale were effective beginning January 1. 2018.
Upon adoplion, lhe ASU required that changes to the income slatement
presentation of net periodic benefit cost be applied retrospectively, while
changes lo amounts capilalized must be applied prospectively. As such.
the interest cost. expecled return on assels, amortization of prior service
cosls, and other cosls have been reclassified from operations and
maintenance expense to other ancome (expense), nel 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 reclassificalion of amounls disclosed
previously in the pension and other postretirement benefits footnote
disclosure as the basis for applying relrospective presentation. As
mentioned above, on a prospective basis, the other components of nel
peraodic benefit cost will not be eligible for capitalization.
The relrospeclive presentation requiremenl relaled lo the olher
components of nel periodic benefit cost atfected the operations and
maintenance expense and olher income (expense). nel lines on the NW
Nalural consolidaled slatemenls of comprehensive income. Forlhe
years ended December 31. 20r 7 and 2016. $5.6 million and 56.6 million
ofexpense was reclassified from operalions and maintenance expense
and included in other income (expense), nel, respeclively.
GOODWILL. On January 26, 2017, lhe FASB assued ASU 2017-04,
"Simplifying the Test for Goodwill lmpairment." The ASU removes Step 2
from the goodwill jmpairment tesl and under lhe amended guidance an
entily should perform its annual goodwill impairment test by comparing
the fair value of a reponing unil wilh ils carrying amount and recognize an
impairment charge for lhe amount in which the carrying
See Nole 17 for inlormation about the SRRM and OPUC orders
regarding implementation.
New Accountinq Standards
NW Holdings and NW Natural consider the applicability and impact ol all
accounting standards updates {ASUs) issued by lhe Financial
Accounting Standads Board (FASB). ASUs nol listed below were
assessed and determined to be either not applicable or are expecled lo
have minimal impact on the consolidaled flnancial posilion or results of
operations.
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 84 of2l0
7S
amounts exceed the fair value of the reporling unil. The amendmenls in
this standard are effective beginning January 1, 2020 and early adoption
is permitled for interim or annual goodwill imparrment lests performed
afler January 1, 2017. ASU 2017-04 was early adopted in the third
quarler ended September 30, 20'18. The adoption of lhis ASu did not
malerially affecl the financial statemenls or disclosures of NW Holdings
or NW Natural and is currenlly not applicable to NW Natural.
STATEMENT OF CASH FLOWS. On August 26. 2016, the FASB issued
ASU 2016-15. "Classillcation of Certain Cash Receipls and Cash
Payments." The ASU adds guidance pertaining to the classification of
certain cash receapts and payments on the slatemenl ofcash flows. The
purpose of the amendment is lo clarity issues that have been creating
diversity in practice. The amendments in this slandard were effective
beginning January 1. 2018, and the adoption did not have a material
impact to financial stalemenls or disclosures as our historical practices
and presentation were consistent with the direclives ofthis ASLJ for NW
Holdings and NW Natural.
FINANCIAL INSTRUITIENTS. On January 5, 2016, the FASB issued ASU
2016-01, "Financial lnstruments , Overall: Recoqnilion and
Measuremenl of Financial Assets and Financial Liabilities." The ASU
enhances the reporling model lor financial inslrumenls. which includes
amendmenls to address aspects ol recognition. measurement,
presentataon, and disclosure. The new standard was effective beginning
January 1,2018, and the adoption did nol materially impactthe financial
slatemenls or disclosures of NW Holdings or NW Natural.
REVENUE RECOGNITION. On May 28, 2014, the FASB issued ASU 2014-
09 "Reven!e From Contracts with Customers." The underlying principle
oflhe guidance requires entities lo recoqnize revenue depicting the
transfer of goods or services lo customers al amounts lhe enlity is
expected to be entitled to in exchange for those goods or services. The
ASU also prescribes a llve-step approach lo revenue recognition: (1)
idenlify lhe conlract(s) with the customer: (2) identify lhe separate
performance oblagalions in the contract(s); (3) determine the lransacllon
price; (4) allocate lhe transaction price lo separale performance
obligations: and (5) recognize revenue when. or as, each performance
obligation is satisfied. The guidance also requires additional
disclosures- both qualitative and quantilalive, regarding the nalure,
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
contracls using the modifled retrospective method. The new standard is
primarily reflected in the consolidaled slatements of comprehensive
income and Nole 6. The implementation oflhe new revenue standard
did nol result in changes to how NW Holdangs and NW Natural currently
recognize revenue, and lherefore, no cumulative effect or adjuslment to
lhe opening balances of retained earnings was required. The
implementation did result in changes to lhe disclosures and
presenlation of revenues and expenses. The comparative informalion for
prioryeaIs has not been restated. There is no material
impacl to lhe financial results of NW Holdings or NW Nalural and no
signillcant changesto our conlrol environment due lo lhe adoption ofthe
new revenue slandard on an ongorng basrs.
As previously discussed, the adoption ofthe new revenue slandard did
not impact the consolidaled balance sheets or statemenls of cash flows
but did result in changes lo lhe presentation of the consolidated
slatemenls of comprehensive income for NW Holdings and NW Nalural.
Had the adoption ofthe new revenue slandard not occurred. operating
revenues for lhe year ended Dea€mber 31. 2018 would have been
5676.0 million for NW Holdings. compared to the reported amounl of
S706.1 million under the new revenue slandard. Similarly, absent lhe
impacl of lhe new revenue slandard, operaling expenses would have
been $543.9 million for NW Holdings. compared to the reported amount
of $574.0 rnillion under lhe new revenue standard for the year ended
December 31, 2018. The effect of lhe change was an increase in both
operating revenues and operating expenses of $30.1 million al NW
Holdings and NW Natural ,or lhe year ended December 31 . 2018: due to
the change in presentation of revenue taxes. As part of lhe adopiion of
the new revenue standard. we evalualed lhe presentation of revenue
laxes under the new guidance and across our peer group and concluded
that lhe gross presentation of revenue taxes provides the grealest level
of consistency and transparency. P.iorto the adoption oflhe new
revenue standard, a portion of revenue laxes was presented nel in
operaling revenues and a ponion was recorded directly on lhe balance
sheet. During yearended December31,2018, $30.'1 million in revenue
taxes for NW Holdings and NW Nalural was recognized in operaling
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 $'11 .2 million were recorded on the consolidaled
balance sheets, respeclively. The change in presentataon of revenue
Iaxes had no impact on NGD margin, net income or earnings per share
Recently lssued Accountinq Pronouncements
cLOUD cor,tPUT|NG. On August 29, 2018. lhe FASB issued ASU 20r8-
15, "Customer's Accounting for lmplementalion Costs lncurred in a
Cloud Computing Arrangement That ls a Service Conlract." The purpose
oflhe amendment is to align the requirements forcapitalizing
implementation costs incurred in a hosling arrangement that is a service
contract with the requiremenls for capatalizing implementation costs
incurred to develop or obtain internal-use software. The amendments in
lhis update are effeclive beginning January 1, 2020. Early adoption is
permitted. The amended guidance can be applied either relrospectively
or prospectively to all implemenlation cosls incurred afterthe dale of
adoption. We are cunently assessing the effect of this standard on NW
Holdings'and NW Nalural's llnancial slalements and disclosures.
RETIREiIENT BENEFITS. On August 28. 2018. lhe FASB issued ASU
2018-14, "Changes to lhe Oisclosure Requirements for Oeflned Benefit
Plans." The purpose oflhe amendmenl is lo modity the disclosure
requirements for
80
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 85 of 210
Table ol Conlenls
Table of Contents
defined benefit pension and other poslretirement plans. The
amendments in lhis update are effeclive for the year ended December
31, 2020. Early adoption is permilled. The amended presentation and
disclosure guidance should be applied retrospectively. We are currcntly
assessing the effect ofthis standard on NW Holdings'and NW Natural's
disclosures.
FAIR VALUE iTEASUREiTENT. On Ausust 28. 2018. the FASB issued ASU
2018-13, "Changes to the Disclosure Requirements for FairValue
Measurement." The purpose oflhe 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 signiflcant unobservable
inputs used to develop Level 3 fair value measurements and the
narralive description of measuremenl uncertainty should be applied
prospectively. All olher amendmenls should be applied relrospectively-
We are currenlly assessing the elfect of this standard on NW Holdings'
and NW Nalural's disclosures.
ACCUMULATED OTHER COMPREHENSIVE INCOME. On February 14,
2018, the FASB issued ASU 2018,02, "lncome Statemenl-Reporling
Comprehensive lncomer Reclassillcrtion of Certain Tax Etlects from
Accumulated Other Comprehensive lncome." This update was issued in
response to concerns from cerlain stakeholders regarding the current
requirements unde. U.S. GAAP that deferred tax assets and liabilities are
adjusted for a change in tax laws or rales, and the effect is lo be included
in ancome from continuing operalions in the period oflhe enactmenl
date. This requirement is also applicable to ilems in accumulated other
comprehensive income where the related lax etfecls were originally
recognized in other comprehensave income. The adjustmenl of deferred
laxes due lo lhe new corporale income tax rate enacted through the TCJA
on December 22, 20J 7 recognized in income from continuing ope.alions
causes the tax effects of items within accumulated olher comprehensive
income (refened to as stranded tax effects) lo not reflect the appropriate
tax rate. The amendments in this update allow a reclassifacation from
accumulated other comprehensave income to retained earnings for
stranded lax effects resulting from the TCJA and require certain
disclosures aboul stranded lax effects. The amendments in lhis update
are effective beginning January 1. 2019, and should be applied either in
lhe period ofadoption or retrospectively to each period in which the effect
ofthe change in the federal corporate income lax rate in the TCJA is
recognized. The reclassjlication allowed in this update is elective, and
we are cunently assessing whether we will make the reclassification.
This updale is nol expected lo have a materjal impact on the Ilnancial
condition of NW Holdings or NW Natural.
0ERIVATIVES AND HEDGING, On August 28, 2017, the FASB issued ASU
2017-12, "Derivalives and Hedging: Tarqeted lmprovemenls to
Accounting for Hedging Activities." The purpose ofthe amendmenl is lo
more closely align hedge accounting with companies'risk management
strategies. The ASU amends the accounling for risk component hedging
the hedged item in fair value hedges oI interest rate risk, and amounls
excluded trom the
assessment of hedge effectiveness. The guidance also amends the
recognition and presentation oI the effect of hedgrng inslruments and
includes olher simplifications of hedge accounling. The amendments in
this update are effective beginning January 1,2019. Early adoption is
permitled. The amended presentation and disclosure guidance is
.equired prospectively. We do not anticipate the adoption ofthis slandard
to have a malerial impact on NW Holdings'and NW Natural's financial
slalemenls and disclosures.
LEASES. On February 25, 2016, the FASB issued ASU 2016-02,
"Leases," which revises the existing lease accounling guidance.
Pursuanl to the new standard, lessees will be required to recognize all
leases, includ ing operating leases that a re g reater tha n 12 monlhs al
lease commencement, on lhe balance sheel and record corresponding
righl-of-use assets and lease Iiabilities. Lessor accounting will remain
substantially the same under the new standard. Quantitative and
qualitative disclosures are also required for users of the flnancaal
stalements lo have a clear understanding of the nalure of NW Natural's
leasing activilies. On July 30. 2018, the FASB approved an optional
alternative kansilion approach thal would allolv enlilies lo apply lhe
transition requiremenls on lhe effeclive date ofthe standard. Additionally,
on January 25, 2018, the FASB issued ASU 20'18-01, "Land Easement
Practical Expedienl for Transition lo Topic 842", to address the costs and
complexity of applying the lransition provasions ofthe new lease
standard to land easements. This ASU provides an optional practical
expedient to not evaluate existing or expired land easements thal were
nol previously accounted for as leases under the currenl lease guidance
The standard and associated ASUs were effective for us beginning
January 1,2019.
We elecled the alternalive prospective transation approach for adoption of
ASC 842 beganning January 1,2019. Allcomparative periods priorto
January 1 , 2019 will retain the financial reporting and d isclosure
requirements ofASC 840 "Leases" ('ASC 840"). We elected the land
easemenl oplional practical expedient to not evaluale existing or expired
land easements that were not previously accounted for as leases under
lhe cunent lease guidance. Forthe existing lease porlfolio, we did not
elect the optional practical expedient package lo retain the legacy lease
accounling conclusions upon adoption; rather, we re-assessed our
exisling conlracls under the new leasing slandard including whether lhe
conlract meets the definition of a lease and lease classitlcation. As a
resull, we determined thal most of our underground gas storage
conkacts no longer meet the definition of a lease under the new lease
standard. Our lease porlfolio under the new standard consists primarily
ofour leased headquarters. which expires in 2020. Upon adoption, NW
Holdings expects to record a right-of-use lease asset and an associated
lease liability of approximately 57.3 million, of which $7.0 million is
expected to be recorded at NW Nalural.
ln October 2017. NW Naturalentered into a 20-year operating lease
agreement commencing in 2020lor lhe new headquarters location in
Portland, Oregon. Under lhe new lease slandard, NW Natural is no
longer considered the accounting owner olthe asset during
construction. As such.
81
EXHIBIT 2
PALFREYMAN. DI
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Page 86 of2l0
we expect to de-recognized the build-lo-suil asset and liability balances
of S26.0 million as of Decemb€r 31. 2018 that were recorded under ASC
840 within property. plant and equipmenl and other non-current liabilities
in the consolidated balance sheet. Referto Note 16 for currenl lease
commilmenls.
CREoIT LOSSES. On June 16. 2016, lhe FASB issued AS1,2016-13,
"Measurement of Credit Losses on Financial lnstruments." which
applies to llnancial assets subject to credit losses and measured al
amorlized cost. The new standard will require financial assets
measured al amorlazed cosl to be presented al the net amount expecled
lo be collected and the allowance for credit losses is lo be recorded as a
valualion accounl lhal is deducted from the amortized cost basis. The
amendments in this update are effective beginning January 1,2020.
Early adoplion is permitted for fiscal years beginning after December 15,
2018. We are currently assessing the eflecl ofthis slandard on the
financial slatemenls and disclosures of NW Holdings and NW Natural.
Accountino Policies
The accounling policies discussed below apply to both NW Holdings
and NW Nalural
Plant. Property. and Accrued Asset Removal Costs
Planl and property are slated al cosl, including capitalized labor,
malerials, and overhead. ln accordance wilh regulalory accounting
slandards, the cosl ot acquiring and construcling longlived plant and
properly generally includes an allowance for funds used during
construction (AFUDC) or capitalized interest. AFUDC represents the
regulatory financang cost incurred when debl and equity funds are used
for construction (see 'AFUDC" below). When constructed assels are
subject to market-based rales ralher than cost-based rates, the
financing costs incurrcd during construclion are included in capitalized
inleresl in accordance with U.S. GAAP, not as regulatory financing costs
underAFUDC.
ln accordance wilh long-standing regulatory lrealmenl, our depreciation
rales consisl of lhree componenls: one based on the average service life
ofthe assel, a second based on the eslimaled salvage value ofthe
assel. and a third based on the assel's eslimaled cost of removal. We
collect, through rates, the estimated cost of removal on cerlain regulated
properlies through depreciation expense, with a corresponding offsel to
accumulaled depreciation. These removal costs are nonlegal
obligations as deflned by regulatory accounting guidance. Therefore, we
have included these cosls as non-current regulalory liabilities ratherthan
as accumulated depreciation on our consoladated balance sheels. ln lhe
rale setting proc€ss, the liability for removal costs is kealed as a
reduclion lo lhe net rate base on which lhe NGD business has the
opporlunity to earn ils allowed rale of return
The cosls of NGD plant retired or otherwise disposed ofare removed
from NGD plant and charged to accumulaled depreciation for recovery or
refund through fulure rates. Gains from the sale ol regulated assets are
generally deferred and refunded to customers. For assels not related lo
NGD, we record a gain orloss upon the disposalofthe property, and the
gain or loss is recorded in operating
income or loss in the consolidaled slatemenls of comprehensive
rncome
The provision for depreciation of NGD property, plant, and equipment is
recorded under the group method on a straight-line basis wilh rates
computed in accordance with depreciation studies approved by
regulatory authorities. The weighted-average depreciation rate for NGD
assets in service was approximalely 2.8% for 2018, 2017, and 2016.
reflecting lhe approximate weighted-average economic life ofthe
property. This includes 20'18 weighted-average deprecialion rales for lhe
following asset categoriesi 2.7olo for transmission and distribution plant.
2.1% for gas storage lacilities. 4.5olo for general plant, and 3 'l % for
intangible and other fixed assets.
AFUDC. Certain additions lo NGO plant include AFUDC, which
represenls the nel cost ofdebt and equity funds used during
construction. AFUDC is calculated uslng actual interesl rates for debl
and aulhorized rale$ for ROE, ifapplicable. lfshort{erm debt balances
are less than the total balance of conslruclaon work in progress, lhen a
composite AFUDC rale is used lo represent interest on all debt funds.
Shown as a reduction to interest charges, and on ROE funds, shown as
other income. While cash is nol ammediately recognized from recording
AFUDC, it is realized in future years through rate recovery resullang from
the hagher NGD cost of service. Our composite AFI.JDC rate was 5.2olo in
2018. 5.5'/. in 2017 . and 0.7% in 2 0'l 6.
IMPAIRMENT OF LONG-LIVEO ASSETS. We review the carrying value ot
long-lived assets whenever events or changes in circumstances indicate
lhe carrying amount ofthe assets may nol be recoverable. Faclors that
would necessitate an impairment assessment of long-lived assetg
include a sigflificant adverce change in the extent or manner in which the
asset is used, a signillcant adverse change in legal factors or business
climate thal could affecl the value ofthe asset. or a significant decline in
the observable market value or expected future cash flows oflhe assel,
among olhers.
When such factors are presenl. we assess lhe recoverability by
delermining whetherthe carrying value ofthe asset will be recovered
through expected fulure cash flo\,r.s. An asset is determined to be
impaired when the carrying value ofthe asset exceeds the expected
undiscounted fulure cash flows from the use and evenlual disposition of
the asset. lf an impairment is indicated, we record an impairment loss
for the dafference between lhe carrying value and lhe fair value of the
long-lived assets. Fair value is estimaled using appropriate valuation
methodologies, which fiay include an estimate ofdiscounted cash
flows.
ln the fourth quarter of2017, a nonrash pre-tax impairment of long-lived
assets at the Gill Ranch Facilily of $192.5 million was recognized. The
income approach was used to eslimale fair value, using the eslimated
future net cash flows. We also compared lhe results ot the income
approach lo our own recent sale experience and recent markel
comparable transactions in order lo estimate fair value. The Gill Ranch
Facility was originally ihcluded in the gas slorage segment, which has
since been eliminated, and is now included in discontinued operations.
We determined
82
EXIIIBIT 2
PALFREYMAN. DI
GEM STATF, WATER
Page lt7 of2l0
Table of Conlents
Table of Conients
circumstances exisled that indicated the carrying value of the assets may
not be recoverable. Those circumstances included the completion ofa
comprehensive slrategic review process thal evalualed various
allernatives including a potential sale, as well as contracting for available
storage al lower than anticipated values for the coming slorage year.
Given these considerations, managemenl re€valuated the estimated
cash flows from our interesls in lhe Gill Ranch Facility, and delermined
lhal lhose estimated cash flows were no longer sufflcient to cover the
carrying value ofthe assets. The results of Gill Ranch have been
presenled as a dascontinued operalion for NW Holdings and NW Natirral
on the consolidated slatements ofcomprehensive income and cash
flows. and lhe assets and liabilities associaled with Gill Ranch have
been classified as disconlinued operations assels and liabilities on the
consolidaled balance sheets. See Note 18 for additionalinformation-
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand plus highly laquid investment accounts with origanal
maturity dates of three months or less. At December 3'1, 2018 and 2017,
NW Holdings had outslanding checks ofapproxamately $2.7 million and
$4 8 million, respectively. substanlially allofwhich is recorded at NW
Natural. These balances are included in accounts payable in the NW
Holdings and NW Natu.al balance sheels.
Eqyqnue Recognition and Accrued Unbilled Revenue
Revenues, derived primarily from the sale and transportation ofnatural
gas, are recognized upon delivery of the gas commodily or service to
customers. Revenues include accruals for gas or water delivered bul not
yet billed lo cuslomers based on estimates ofdeliveries from meter
reading dates to month end (accrued unbilled revenue). Accrued unbilled
revenue is dependent upon a number of faclors lhal require
management's judgment, including total natural gas receipls and
deliveries, cr.rslomer use of natural gas or water by billing cycle, and
wealher factors. Accrued unbilled revenue is reversed lhe following
monlh when actual billings occur NW Holdings'accrued unbilled
revenue at December 31.2018 and 2017 was $57 8 million and $62.4
million. respectively, substantially all of which is accrued unbilled
revenue at NW Natural.
Revenues not relaled lo NGD are derived primarily from Inlerstate
Storage Services, asset management activities al the Mist gas storage
facility, and other investmenls and business activities. At the Mist
underground storage facility. revenues are primarily firm service
revenues in lhe form offixed monlhly reservation charges. ln addition, we
also have assel managemenl service revenue from an independent
energy marketing company thal optimizes commodily. slorage, and
pipeline capacity .elease lransactions. Under this agreement.
guaranleed asset management revenue is recognized using a slraight-
line. pro rata methodology over the lerm of each contract. Revenues
eamed above the guaranteed amounl are recognized as lhey are
eamed-
Revenue Taxes
Revenue-based taxes are primarily franchise taxes, which are collected
from customers and remilted to taxing authorilies. ln 2018. revenue taxes
are included in operating expenses in lhe statements of comprehensive
ancome for NW Holdings and NW Natural. lh 2017 and 2016, revenue
taxes are included in operating revenues in the statements of
comprehensive income for NW Holdings and NW Natural. All revenue
laxes are recorded at NW Nalural and were S30.'l millaon. S19.1 million.
and $17.1 million for2018,2017, and 20'16, respectively.
Accounts Receivable and Allowance for Uncollectible Accounts
Accounls receivable consisl primaraly of amounls due for nalural gas
sales and lransporlation services to NGD customers. plus amounts due
for gas slorage services. At NW Holdings and NW Nalural we eslablish
allowances for uncollectible accounts (allowance) fortrade receivables,
including accrued unbilled revenue, based on the aging of receivables,
collection expe.ience ofpast due accounl balances ancluding payment
plans. and historicaltrends otwrite-otfs as a percent ol revenues. A
specallc allowance is esiablished and recorded for large individual
customer receivables when amounts are identified as unlikely to be
pa rtia lly or fully recovered . lnactive accounls are written -off a ga in st the
allowance aflerthey are 120 days past due orwhen deemed
uncollectible. Differences between the estimated allowance and actual
write-offs will occur based on a number of facto.s, including changes in
economic conditions, cuslomer creditworthiness, and nalural gas
prices. The allowance for uncolleclible accounts is adjusted quarterly, as
necessary, based on information currently available.
lnventories
NGD gas invenlories. which consist of nalural gas in storage for NGD,
are stated at lhe lower of average cost or net realizable value. The
regulalory lreatment of lhese inventories provides for cost recovery in
cuslomer rates- NGD gas inventories injected into storage are priced in
invenlory based on actual purchase costs, and those wilhdrawn from
storage ale charged to cost ofgas during the current period they are
wilhdrawn at the weighted-average inventory cost.
Gas slorage inventories, which primarily represent inventories al the Gill
Ranch Facility and are included in Discontinued operations - currenl
assets on the consolidated balance sheets, mainly consisl of natural
gas received as fuel-in-kind from Slorage cuslomers. Gas Slorage
inventories are valued at the lower of average cost or net realazable value.
Cushion gas is nol included in inventory balances. is recorded al original
cosl, and is classifled as a long{erm plant assel.
Materials and supplies invenlories consist of inventories both related to
and unrelated to NGD and are stated at the lower ofaverage cost or nel
realizable value.
NW Natural's NGD and gas storage inventories lotaled $29.9 million and
$36.7 million at December 31. 2018 and 2017, respectively. Al
December 31. 2018 and 2017, NW Holdings' malerials and supplies
inventories, which are comprised
83
IlXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 88 of 2l 0
primarily of NW Nalural's materials and supplies. lotaled s14.2 million
and 510.9 million, respectively.
Gas Reserves
Gas reseNes are payments to acquire and produce natural gas
reseryes. Gas reseryes are slaled at cost, adjusted for regulatory
amorlization. with the associated delerred tax benefits recorded as
liabilities on the balance sheel. The currenl portion is calculated based
on expected gas deliveries wilhin the next fiscal year. NW Natural
recognizes regulalory amortization of this asset on a volumetric basis
calculaled using the estimaled gas reserves and the estimaled therms
extracted and sold each month. The amortizalion of gas reserves is
recorded lo cost of gas along with gas production revenues and
production costs. see Note 12.
Derivatives
NW Natural's derivatives are measured al fair value and .ecognized as
either assels or liabilities on lhe balance sheet. Changes in lhe fair
value ofthe derivalives are recognized currently in earnings unless
speciflc regulalory or hedge accounting criteria are met. Accounling for
derivatives and hedges provides an exception for conlracts intended for
normal purchases and normal sales forwhich physical delivery is
probable. ln addilion, cerlain derivalive conkacls are approved by
regulatory aulhorities for recovery or refund through customea rates.
Accordingly, the changes in fair value ofthese approved contracls are
deferred as regulatory assels or liabilities pursuanl lo regulalory
accounting principles. NW Natural's llnancial denvatives generally qualify
for defenal under regulalory accounling. NW NatLrral's index-priced
physical derivative contracts also qualify for regulalory deferral
accounting treatmenl.
Derivative conlracls entered into for NGD requiremenls after the annual
PGA rate has been set and maturing during the PGA year are subiect lo
the PGA incentive sharing mechanism. ln Oregon, NW Natural
participates in a PGAsharing mechanism underwhich it is required to
select either an 80% or 90% deferral of higher or lower gas costs such
lhat the impact on current earnings from the gas cost sharing is either
20% or 10% of gas cosl differences compared to PGA prices,
respectively For the PGA years in Oregon begrnning November 1, 2018,
2017, and 2016, NW Natural selected the 90o/o. 90%, and 90% defenal of
gas cost differences, respectively. ln Washinglon, '100% ofthe
differences between the PGA prices and actual gas costs are deferred.
See Note 15
NW Natural's financialderivatives polacy sels forth the guidelines for
using selecled derivative producls to support prudent risk management
strategies within designated parameters. NW Natural's objective for
using derivatives is to decrease the volatility ofgas prices. earnings, and
cash rlows without speculative .isk. The use ofderivatives is permitted
only after the risk exposures have been identified, are determined nol to
exceed acceptable tolerance levels, and are determined necessary to
supporl normalbusaness activities. NWNaturaldoes nol enter inlo
derivative instruments for trading purposes. All derivalives for NW
Holdings are cunenlly held at NW Natural.
Fair Value
ln accordance wilh fair value accounting. we use the following fair value
hierarchy for determining inputs for our debt, pension plan assels, and
defivative fair value measuremenls:. Level l iValuation is based on quoled prices for identical
instruments traded in active maftets.. Level 2: Valuation is based on quoted praces for similar instrumenls
in active markels. quoted prices for identical or similar instruments
in markels that are not active, and model'based valuation
techniques for which all significant assumptions are observable in
the market: and. Level 3: Valualion is generaled trom model-based technaques that
use significant assumplions not observable in the market. These
unobservable assumplions reflecl our own estimates of
assumptions markel participants would use in valuing the asset or
liabilily.
\ryhen developing fair value measuremenls, it is our policy to use quoted
rnarket prices whenever available or lo maximize the use of observable
inputs and minimize lhe use of unobservable inputs when quoted
markel prices are nol available. Fair values are primaraly developed
using industry-standard models thal consider various inputs including:
(a) quoled future prices for commodities: (b) forward cu.rency pricesi (c)
time value: (d) volatility factors; (e) current market and contractual prices
for underlying inslrumenls; (f) market interest rates and yield curves; (9)
credit spreads; and (h) other relevant economic rneasures. NW Natural
considers liquid points for naturalgas hedging to be those points for
which lhere are regularly published prices in a nationally recognized
publicalion orwhere the instruments are kaded on an exchange.
Goodwill
NW Holdings. through its wholly-owned subsidiary NWN Water and NW
Water's wholly'owned subsidiaraes, has completed various acquisitions
thal resulled in the recognition ofgoodwill. Goodwillis measured asthe
excess ofthe acquisilion-date fair value of the consideration transferred
over the acquisition-date fair value of the net identifiable assels
assumed. Adjuslmenls are recorded during the measurement period to
llnalize the allocatjon ofthe purchase price. The carrying value of
goodwill is reviewed annually during the fourth quarter using balances
as of October 1, orwhenever events or changes in crrcumslance indicate
that such carrying values may not be recoverable. The goodwill
assessment poliry begins with a qualitative analysis in whach events
and circumstances are evaluated, including macroeconomic condilions,
industry and market conditions. regulatory environments. and overall
linancial performance of the reporting unit. lfthe qualitalive assessment
indicales thatthe carryang value may be at risk oI recoverability, a
quantitative evaluation is performed to measure the carrying value of the
goodwill against the fair value ofthe reporling unit. The reporting unit is
determined primarily based on current operating segments and the level
of review provided by the ChaefOperating Decision [.4aker (CODI\4) and/or
segmenl managemenl on the operating segment's financial results.
Reporting units are evaluated periodically for changes in the corporate
envaronmenl.
B4
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 89 of2l0
Table of Conlenls
Table ol Contenls
lncome Taxes
We account for income laxes under lhe asset and liabilily method, which
requares the recognition ofdeferred tax assets and liabilities for lhe
expected future lax consequences ofevents that have been included in
lhe financial statements. Under this melhod. deferred lax assels and
liabilities are delermined on the basis ofthe differences belween the
financaal slalement and tax basis of assets and liabilities using enacted
tax rates an effecl for the year in which the differences are expecled lo
reverse. The efiect of a change in lax rates on deferred tax assets and
liabililies is recognized in income in the enactment date period unless.
for NW Natural, a regulatory Orde. specifies defenalofthe effect ofthe
change in lax rales over a longer period of time.
For NW Natural, deferred income tax assels and liabalilies are also
recognized for temporary differences where the deferred rncome tax
benefils orexpenses have previously been flowed through an lhe
ratemaking process of the NGD business. Regulatory tax assels and
liabililies are recorded on these deferred Iax assets and liabililies to the
extent il is believed they will be recoverable from or refunded to
cuslomers in future rates.
Deferred anvestmenl tax credils on NGD plant addilions. which reduce
income taxes payable, are deferred forfinancial siatement purposes and
amortized over the life ofthe related plant.
lnterest and penalties related to unrecognized lax benefits, ifany. are
recoqnized within income tax exOense and accrued interest and
penallies are recognized wilhin lhe relaled tax liabiliiy line in lhe
consolidated balance sheels No accrued interest or penalties for
uncerlain tax benefits have been recorded. See Note 10.
Environmental Contingencies
Loss conlingencies a.e recorded as liabilities when it is probable a
liability has been incu.red and lhe amount of the loss is reasonably
eslimable in accordance with accounting standards for conlingencies
Estimating probable losses requires an analysis of uncertainties that
oflen depend upon judgments about potential actions by third panies.
Accruals for loss conlingencies are recorded based on an analysis of
potentialresults.
Wth respecl lo environmental liabililies and related costs, eslamales are
developed based on a review of information available from numerous
sources, including completed studies and site specilic negotialions. NW
Natural's policy is to accrue the full amount of such liability when
informalion is sufficient to reasonably eslimale the amounl of probable
liability. \^/hen informalion is not available to reasonably estimate the
probable liability, orwhen only the range of
probable liabilities can be eslimated and no amount within lhe range is
more likelythan another, it is ourpolicyto
accrue at the low end of the range. Accordingly, due to numerous
uncertaanlaes surrounding the course of environmental rcmediation and
the preliminary nature of several sile investigations, in some cases, it
may not be possable lo reasonably estimate the high end ofthe range of
possible loss ln lhose cases, the nature oflhe polential loss and the
fact thal the high end ofthe range cannot be reasonably estimated is
disclosed. See Note 17.
Subsequent Events
We monilor significant events occurring afler the balance sheet date and
prior to lhe issuance of the financial statemenls to delermine Ihe
impacts, if any, of evenls on the financial statements to be issued. We do
not have any subsequent events lo reporl.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 90 of 210
As of December 31 , 2018, NW Holdings had goodwill of $9.0 million. All
of NW Holdings' goodwill was acquired in 2018 through the business
combinations compleled by NWN Water and its wholly-owned
subsidiaraes. No impairment charges were recorded as a result of the
fourlh quarter goodwill ampairment assessment.
Tabl€ of Contenls
3. ETRAI"VGS PER SHARE
Basic eamings or loss per share are compuled using NW Holdings' net
income oa loss and the weighted average number of common shares
outslanding for each period presented. Diluted eamings per share are
computed in the same manner, except il uses the weighted average
numberofcommon shares outstanding plus lhe effecls ofthe
assumed exercise of stock options and the payment o, estimated stock
awards from other stock-based compensation plans that are
outstanding at the end ofeach period presented. Antadilutave stock
awards are excluded from the calculation ofdiluted earnings or loss per
common share.
ln lhousaods ercopl per shara dala 2018 201?2016
Net income from continuing operations
Loss from d scontnued operations, net of tax
Net income (loss)
Average common shares outstanding - basic
Additional shares fo. slock-based compensation plans (See Note 7)
Average common shares outstandrng - diluled
Eamings (loss) fom continuing operations per share of common stock:
Basic
Dituled
Loss lrom discontinued operations per share of@mmon slock:
Baslc
0iluted
Earnings (loss) pershale ofcommon stock:
Basic
Diluted
Addilional inlormaion.
Antrdilutive shares
$67,311 $
\2 742)
72,073 $
(127,696)
62,419
\3 524)
$64,569 S (55,623) S 58.835
28,803
70
28,669
84
27.641
2A 473 24.753 27.779
$
$
234 $
$
2.5'l
2.51
$
$
226
225
$
$
(0.10) $
(0 0s) $
(4.4s) $
(4 44) $
(0.13)
(0.13)
$
$
224
224
$
$
(1 94) S
(1.93) S
213
2_12
2 13 5
4. SEGMENT INFORMAT'ON
We primarily operate in one reportable business segment, which is NW
Natural's localgas distribution business and is referred to as the NGD
segment. Du.ing the second quaner 0f2018, we moved forward wilh our
long-term sl.ategic plans, which include a shifl away from lhe California
gas storage business, by enterang into a Purchase and Sale Agreement
that provides for lhe sale of allotthe membership interests in Gill Ranch,
subjecl to various regulatory approvals and closing conditions. As such,
we reevalualed reportable segments and concluded that the remaining
gas storage activities no longer meet the requiremenls of a reponable
segment. lnterstale Slorage Services and assel managemenl aclivilies
at lhe Mist gas stoaage facilily are now reporled as olher under NW
Natural. NW Natural and NW Holdings also have investmenls and
business aclivities not specifically related to NGD, which are aggregated
and reported as other and described below for each enlity.
No individual customer accounts forover 10% of NW Holdings'or NW
Nalural's operaling revenues.
Natural Gas Diatribution
and interruptible t.ansportation ofgas over interstate pipelines to bring
gas from the supply basins into its servic€ territory, and re-selling the
gas to customers subject to rales, terms, and conditions approved by the
OPUC orWUTC. NGD also includes taking customer-owned gas and
transporting it from interstale pipeline connections, or cily gates, to the
customers' end-use facilities for a fee, which is approved by the OPUC
or l,/UTC. Approximately 89% of NGD customers are located in Oregon
and llolo inWashington. On an annual basis. residentialand
commercial customers typically account for around 60% oftotalNGD
volumes delivered and around 900/5 o, NGD margin. lndustrial
customers largely accountlorthe remaining volumes and NGO margan.
A smallamount ofthe margin is also derived from miscellaneous
services. gains or losses lrom an incentive gas cost sharing
mechanism, and other service fees.
lndustrial sectors served by NW Natural include: pulp, paper, and olher
forest products; the manufacture ofelectronic, electrochemical and
electrometallurgical products: the processing of farm and food products;
the produclion of various mineral producls; melal fabrication and casting;
the production of machine tools, machinery, and textiles; the
manufacture of asphall, concrete, and rubberl printing and publishing;
nurseries; and government and educalional institutions.
The NGO segment is a regulaled utility principally engaged in the
purchase, sale, and delivery of natural gas and relaled services to
customers in Oregon and soulhwest Washington. With regulated utility
operalions, NW Natural is responsible for building and maintaining a
safe and reliable pipeline dislribulion system, purchasing sufficient gas
supplies from producers and marketers, contracting Iorfirm
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 9l of 210
86
NW Holdings' diluted earnings or loss per share are calculated as follows:
ln addition to NW Natural's local gas dislribution business, the NGD
segment also includes the portion of the Mist underground storage
facility used to serve NGD customers, the North lllisl gas storage
expansion in Oregon. and NWN Gas Reserves, which is a wholly-owned
subsidiary of Energy Corp.
NW Natural
NW Natural activilies ancluded in Other includes lnterstale Storage
Services and third-party assel management services forthe Mist Iacility
in Oregon, appliance retail center operations, and corporate operating
and non-operaling revenues and expenses that cannot be allocaled to
NGD operations.
Earnings from lnlerstate Storage Services assels are primarily related to
firm storage capacity revenues. Eamings from the Mist facilily also
include revenue, net of amounts shared with NGD customers, from
management of NGD assels at Mist and upstream pipeline capacity
when nol needed to seNe NGD cuslomers. Historically, under the
Oregon sharing mechanism, NW Naiural retained 80oA ofthe pre-lax
income from these services when lhe cosls oflhe capacity were not
included in NGD rates, or 33% olthe pre-tax ancome when lhe costs
have been included in these rales. The remaining 20% and 67%,
respectively, were recorded to a defe.red regulatory account for credating
back to NGD customers. Afler November 1.20'18 NW Naturalretains
10% ofthe pre-tax income when the costs have been included an these
rates, and lhe remaining 90% is recorded to a deferred regulatory
account forcrediting back lo NGD customers.
NGD
NW Holdinqs
NW Holdings' activities included an Other includes all remaioing activities
not associaled with NW Natural, specifically NWN Water, which
consolidates the water operataons 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 pursuang developmenl ofa cross-
Cascades transmission pipelane 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 amounls have been retrospectively adjusted to reflect the
change in reportable segments and the designation of Gill Ranch as a
discontinued operation for NW Holdangs, and lhe designation of
subsidiaries previously owned by NW Nalural that are now owned by NW
Holdings as discontanued operalions for NW Natural.
S€qment lnlormation Summary
lnter-segment lransactions were immalerial for the periods presented.
The following table presenls summary financial anformalion concernang
lhe reportable segmenls of conlinued operations. See Note 18 for
jnformataon regarding discontinued operations for NW Holdings and NW
Nalural.
Olher
(NW tiaturaD
Olher
(NW Holdings)NW Natural NW Holdings
2014
Operating reveflues
DepreoatDn and amortizalion
lncome (loss) from operatons
Net rncome (loss) fmm conlinuinq operalions
Capitalexpenditures
Total assets al December 31. 2018':'
2017
Operaling revenues
Oeprecialion and amortEation
lncome (lossl from operetions
Nel income from continuing operations'rl
Capilalexpenditures
Total assets at December 31 . 2Ol 7?
2016
$640,648
83.732
118,095
57,491
212,323
3,'141,969
24,923
1.2U
15,0(x
10,558
2,005
50,767
705,571
84,986
133,009
68,049
214324
3,192,736
706,14:)
45,'156
1x2,162
67,3t 1
214,636
3,229,393
732.U2
79,7
138,450
60.500
211,672
2.961.326
22,096
1,290
12,472
11,211
1 653
50,471
755,038
81,053
150 902
72.073
213,325
3,O25,472
S S s
s
572 $
'170
(e37)
(738)
30E
36,657
Sss 755.038
81,O24
150.922
71.720
z',t3,325
3,011,797
s
29
(20)
353
14,O75
Operatins revenues $ 650.477 $ 17.472 $ 667,949 $ 224 $ 668.173
Deprecration and amorlization 76.245 1.286 77,575 29 77.6U
lncome (loss) from operations 137,17A 14.109 151,287 (570) 150,717
Net income (loss) lrom continuLng operalronsr 54 567 8.268 62,835 (416) 62.419
Capilal expenditurcs 138,074 263 138,357 - 138.357
Totalassetsat December 31 2016';1 2-sm.627 48,719 2,855,346 '14 o4o 2869386
'llncludes $ 1 0 mlllion of lax expense in NGD $4.0 million of lax b€nelil in Other (NW Natura l) and $0 4 million of tax benef I in Other (NW Holdrngs) from the TCJA
remeasuremenl for the year ended Dec€mber 31 20'17
EXHIBIT 2
PALFREYMAN. DI
CEM STATE WATER
Page 92 of 210
87
Tabe oI Contents
Natural Gas Distribution Marq rn
NGD margin is a financial measure used by the CODM. consasting oI
NGD operaling revenues, reduced by the associated cost ofgas,
environmental recovery revenues. and revenue taxe!. The cost ofgas
purchased for NGD customers is generally a pass-through cost in lhe
amount of revenues billed lo regulated NGD customers. Environmental
aecovery revenues represent colleclaons received from cuslomers
through the environmenlal recovery mechanism in Oregon. These
collections are offset by the amorlization olenvironmental liabilities,
which
The following table presents additional segment informalion conc€rning NGD margin
Total assels for NW Holdings exclude assets related to discontinued operations of $13.3 million, S13 I milion and $210.4 mrltion as ot December 31, 201a.2017, and
2016 respectively Total assels for NW Natural exclude assets related to discontinued operations of $31 .9 million and S226 1 million as of oecembe t 31 , 2017 , and
2016, resFteclively
lndudes $2.0 million in 2016 of after-tax regulatory envrronmental drsallowance charges rn NGO.
is presenled as environmenlal remediation expense in operating
expenses. Revenue taxes are collected from NGD cuslomers and
remilted lo laxing authorilies. The collections from cuslomers are offsel
by the expense recognition ofthe obligation lo the taxing authority. By
subtracling cost of gas, environmenlal remediation expense, and
revenue laxes from NGD operaling revenues, NGD margin provides a
key metric used by the COD[4 in assessing the performance ofthe NGD
segment.
20T8 2017 2016
680.648
255.743
11,127
30,082
732,942
325,019
15.291
650.477
260,588
13.298
$$
383 696 $392632 $376 591
The change in presentalion ol revenue taxes was a result of lhe adopton of ASIJ 2014-09 "Revenue From Contracts with Customers" and all relaled amendments on
January 1, 2018. This change had no impact on NGD margin resull6 e6 revenl,e taxes were previously presented net in NGD operating revenlre Foraddilional
informalioh, see Note 2.
s. coMMoN sTocK
As part oflhe reorganization of NW Holdangs and NW Naturalanlo a
holding company slruclure effective October 1, 2018, NW Nalural
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 lhe reorganization.
common stock along wilh a 30{ay option forthe underwriters to
purchase an addilional 132,000 shares. The offering closed on
November 16. 20'16 and resulted in a total issuance of 1.0'12,000 shares
as both the initial offering and the underwriter option were fully executed.
Allshares were issued on November 16, 2016 at an offering price of
$54.63 per share and resulted in total net proceeds of $52.8 mallion.
Stock Reourchase Program
NW Holdings has a share repurchase program under which it may
purchase its common shares on the open markel orthrough privately
negotjated transactjons. NW Holdings currently has Board authorizalion
through May 2019 to repurchase up to an aggregate ofthe greater of2.8
million shares or $'100 millaon No shares ofcommon slock were
repurchased pursuant to this program during lhe year ended December
31, 20'18. Sinc€ lhe plan's inception an 2000 under NW Natural. a total of
2.1 million shares have been repurchased at a total cost of 583.3 million
88 EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 93 of2l0
Table of Conlenls
NGD rnargin calculalio6
NGD operalinO revenues
Less: NGD mst of gas
Environm€nlal remedlation expense
Revenue taxesrlr
NGD margin
$
$
As of December31,20'18, NWHoldingshad 100 million shares of
common stock authorized. As of December 31, 2018 and 2017, NW
Naturalhad 100 million shares ofcommon slock authorized. As of
December 3'1, 2018, NW Holdings had 24.339 shares reserved for
issuance of common stock under the Employee Stock Purchase Plan
(ESPP) and 394,204 shares reserved for issuance under the Dividend
Reinvestment and Direct Stock Purchase Plan (DRPP). At NW Holdings'
election, shares sold through the DRPP may be purchased in lhe open
market orthrough original issuance ofshares reseNed for issuance
under the DRPP.
The Reslated Slock Option Plan (SOP) was terminated with respect to
new grants in 2012; however, options granled before lhe Restated SOP
was terminaled remain outstanding untilthe earlier of their expiration,
forfeiture. orexercise. Options are now exercisable for shares of NW
Holdings common stock. There were 55,938 options outstanding at
December 3,|, 20'18, which were granted prior to termination ofthe plan.
During November 2016, NW Natural compleled an equily issuance
consisling of an otfering of880,000 shares of
Table of Contenls
The fotlowng table summarizes the changes in the number of shares of
NW Holdings'common stock issued and oulslanding:
Shares
Balence, December 31 , 201 5
Sales to employees under ESPP
Stcck-ba6ed compensation
Equily lssuance
Ealance, Dec€rnber 31 , 201 6
Sales to employees under ESPP
Stock-brsed compensation
Balance, December 31, 20i7
Saleg to employe€s under ESPP
Slock-based compensalion
Sales to shereholders under DRPP
27,427
18
173
1 412
20,630
18
88
28,736
1S
64
61
Ealance, Oecember 31, 2018 28 880
6. REVENUE
Year ended December 31. 2018
NGO NW Natural
Olher
(NW Holdings)NW Holdings
Natural gas sales
Gas storage revenue net
Asset management revenue. nel
Appliance retail center revenue
Other revenue
Revenue from conlracts wlth customers
$S S 670,662
10,780
8,548
5,595
572
10,780
8,548
670 662 24.923 696.157
Altemative revenue
Leasing revenue
Total operating revenues
8,989
997
8,989
957
s 680.648 S 24.923 S 705,571 6 572 $706,143
NW Natural's revenue represenls substantially all of NW Holdings'
revenue and is recognized for both registrants when the obligation to
customers is satisfied and in the amounl expecled lo be .eceived in
exchange for transferring goods or providing services. Revenue from
contracls with customers contain one performance obligation lhat is
generaily satisfied over tame, using the output method based on lime
elapsed, due lo the conlinuous nature ofthe service provided. The
lransaclion price is determined per a set price agreed upon in the
conkact or dependent on regulatory tariffs. Cuslomer accounts are
settled on a monthly basis or paid al lime of sale and based on hislorical
expeience. lt is probable that we willcollect substantially allofthe
consideration to which we are entitled.
Revenue-based taxes are primarily franchise taxes, which are collected
frofi NGD customers and .emitled to taxing authorities. Beginning
January 1, 2018, revenue taxes are included in operaling revenues with
an equal and offsetling expense recognized in operating expenses in the
consohdaled slatemenls of comprehensrve rncome
Natural Gas Oistribution
NW Holdings and NW Natu.al do not have any material contract assets,
as net accounts receivable and accrued unbilled revenue balances are
uncondational and only involve the passage of time untilsuch balances
are billed and collected. NW Holdings and NW Natural do not have any
material contract liabililies.
Natural gas sa/6s. NW Natural's primary source of revenue is providing
natural gas lo customers in the NGD service tenitory, which includes
residenlial, commercial, industrial and lransporlalion cuslomers. NGD
revenue is generally recognized over lime upon delivery of the gas
commodity or service to the customer, and the amounl ofconsaderation
received and recognized as revenue is dependenl on lhe Oregon and
Washington tariffs. Cuslomer accounts are to be paid in full each monlh,
and there is no right of retum or warranty for services provaded.
Revenues include firm and inlerruptible sales and lransportation
services, franchise taxes recovered from the customer, late payment
fees, service tees, and accruals forgas delivered but not yet billed
(accrued unbilled revenue). The accrued unb',,"O r"r"nr" O","EXllIBIT zbased on estimates ofdeliveries during
PALFREYMAN, DI
GEM STATE WATER
Page 94 of2l0
89
The lollowing table presents disaggregated revenue from continuing operations:
Other
{NW Natural)
670.662 $670,662 $
10,780
8 548
695.585 572
8,989
997
Tab e of Cootents
the period from the lasl meler reading and management judgment is
required for a number of factors used in this calculation, including
customer use and wealher faclors
We applied the significanl flnancing practical expedienl and have nol
adju$ted lhe consideralion NW Naturalexpects to receive from NGD
customers for lhe effecls of a significant tlnancing component as all
payment arangements a re seltled annually. Due to the election of the
right lo invoice practical expedienl, we do not disclose lhe value of
unsatislled performance obligalions as of December 31, 2018
Aftemative @venue. Weather normalizalion (WARM) and dec.upling
mechanjsms are considered to be alternative revenue programs.
Alternative revenue programs are considered lo be conlracls belween
NW Nalural and its regulalor and are excluded lrom revenue from
conkacts wilh customers.
Leasing rcvenue. Leasing revenue primaraly consists of rehlal .evenue
Ior small leases of properly owned for NGD to third parties The majority
oflhe llansactions are accounted for as operating leases and the
rEvenue is remgnized on a straaght-line basis over lhe term oflhe lease
agreemenl. Lease revenue is excluded from revenue from conlracls wilh
customers.
NW Natural Other
Gas storage revenue. NW Natural's other revenue includes gas storage
activity. which includes lnterstate Storage Services used lo slore nalural
gas for customers. Gas slorage revenue is generally recognized over
time as lhe 9as storage service is provided lo lhe cuslomer and lhe
amount of consideration received and recognized as revenue is
dependenl on set rates defined per the storage agreements. Noncash
consideralion in the form ofdekatherms of natural gas is received as
consideration for providing gas injection services to gas slorage
customers. This noncash consideration is measured al fair value using
the average spot rate. Customer accounts are generally paid in tull each
month, and there is no right of retum or warranty for services provided.
Revenues include flrm and inlerruplible storage services. net of the profit
sharing amount refunded to NGD customers
Assel management rcyenue. Assel managemenl revenue is generally
recognized over lime using a slraight-line approach over the term of each
contracl. and lhe amount of consideralion rec€ived and recognized as
revenue is dependenl on a variable pricing model. Variable revenues
earned above guaranteed amounts are estimated and
7. STOCK.BASED COMPENSATION
recognized at the end of each period using lhe most likely amount
approach. Revenues include the optimization of lhe slorage assels and
pipeline capacily provided. net ofthe profit sharing amount refunded to
NGD customers Asset management accounts are seltled on a monthly
basis.
As of Oecember 31, 2018, unrecognized revenue for lhe fixed component
of the lransaction price relaled lo gas storage and assel managemenl
revenue was approximately $56.0 million. Oflhis amount, approximately
$14.1 mallion will be recognized in 2019, $11.7 million in 2020 510.7
million in 202'1. $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 oclober 12, 2018, NW Natural filed a rate
petition with FERC for revised maximum cosfbased rates, which
incorporated the newlederal corporate income tax rale. The revised
rales became elfective November 1. 2018.
Appliance rctail centet revenue. NW Nalural owns and operates an
appliance store that is open lo Ihe public, where cuslomers can
purchase naluralgas home appliances. Revenue from the sale of
appliances is recognized at lhe poinl in time in which the appliance is
transferred io the third party responsible for delivery and installalion
services and when the customer has legaltitle lo lhe appliance. lt is
required lhat the sale be paid Ior in fullpriorlo transfer of legaltitle. 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
daslributaon servlc€s to customers. Waler dislribulaon revenue as
generally recognized over tame upon delivery oflhe water commodity or
servace lo lhe cuslomer, and lhe amounl ofconslderation receaved and
recognized as.evenue is dependent on the Oregon, Washington and
ldaho lariffs. Cuslomer accounts are lo be paid in fulleach monlh, and
there is no right ofreturn orwarranty for services provided.
We applied lhe sagniticanl financing practical expedient and have not
adiusted the consideralion we expect to receive from water distribulaon
customers for lhe eflecls of a significant financing component as all
paymenl arrangemenls are setlled annually. Due to the election ofthe
right to invoice praclical expedienl, we do not disclose the value of
unsalisfied performance obligations as of December 31, 2018
Slock based compensation plans are designed to promote stock
ownership in NW Holdings by employees and offlcers These
compensalaon plans include a Long Term lncentive Plan (LTIP), an
ESPP. and a Restaled SOP.
Lonq Term lncentive Plan
The LTIP is intended to provide a flexible, competitive compensalion
program for eligible officers and key employees. Under the LTIP, shares
of NW Holdings common slock are authorized for equity incentive granls
in
the form of slock. restricled stock. restricted stock unit$. stock options, or
performance shares. An aggregate of 1.100,000 shares were authorized
for issuance as of Dec€mber 31 , 2018. Shares awarded under the LTIP
may be purchased on the open market or rssued as original shares.
Of the 1 ,100,000 shares of common slock aulhorized for LTIP awards at
December 31, 2018, there were 574,787 sha.es available for issuance
under any type ofaward. This
90
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 95 of 210
Table of Contents
Performance Shares
Since the LTIP's inception in 2001, performance shares, which
incorporale markel, pedomance, and service-based factors, have been
granted annually with three-yea. performance periods. The following
table summarizes performance share expense information:
Restricted Stock Units
ln 2012, RSUs began being granled under the LTIP instead of stock
options under the Restated SOP. Generally, the RSUs awarded are
forfeitable and include a pedormance-based threshold as well as a
vesting period of four years from the grant date. lJpon vesting, the RSU
holder is assued one share of common stock plus a cash payment equal
to the total amount of dividends paid per share between the granl date
and vesting dale of that portion of the RSU. The fair value of an RSU is
equal to lhe closing market price of NW Holdings' common slock on lhe
grantdate. During 2018. tolalRSU expense was Sl.8 million compared
lo $1.6 million in 2017 and $1.5 million in 2016. As of Dec€mber 31,
20,l8, 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.
Shares'
Total Expense
Estimated award:
2016-2018 g.ant6 28,218 $ 598 $ 1.413
2015"2017 granl 18,304 (34€) 1,169
2O1+2O1Ag@nl 31,388 '168 '1,685
"' ln additon to common stock shares, a padjcjpant also receives a dividend
equavalent cash payment equal to the number of shares of @mmon stock
received on lhe award payout mulliplaed by the aggregate cash dividends
paid per share during the pertormance period.o Amounl represents the expense recognrzed in the thjrd yearofthe vesiing
peio<, noled above. For the 2015-2017 granl, targets were nol met and
expense was eversed duing 2017 thal had b€en previously recognized.
"' This represenls lhe estamated number of shares lo be awarded as of
December 31.2018 as certarn ped,cmance share measures have been
achieved. Amounts are subject lo change with final payoul amounts
authoflzed by the Board of Oireclo.s in February 2019
The aggregate number of performance shares granted and outstanding
at the targel and maximum levels were as follows:
Performance Share AwErds
Outstanding
Period
Cumulalive
Expense
December 31
2014Target Maximum Expense
201&18
2017- 19
2014-20
Total
48,842 S
62,744
1.413
1.400
24 421 598
458
s
55,793 111.586 $ 'l,056
For the 2016-2018 performance period, performance share awards are
based on EPS and Relum on lnvested Capital (ROIC) factors and a total
shareholder relurn (TSR factor) relative to the Dow Jones U.S. Gas
Distribution peer group over Ihe three-year performance period.
Additionally. these plans are based on performance results achieved
relative lo specific core and non-core strategies (slrategic facloo. For the
2017-2019 performance period, performance share awards are based
on the achievement of EPS and ROIC factors, which can be modified by
a TSR factor relative lo
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 96 of2l0
91
assumes market, performance, and servace-based grants currently
outslanding are awarded at the target level. There were no oulstanding
grants of reslricled stock or stock options under the LTIP at December
31, 2018 or 20'17. The LTIP slock awards are compensatory awards for
which compensation expense is based on the faar value of stock awards,
with expense being recognized over lhe performance and vesting period
ofthe outstanding awards. Forfeitures are recognized as they occur.
Expense During
2018
the performance of the Russell 2500 Ulilities lndex over the three-year
performance period and a growth modifier based on accumulative
EBIIDA measure. For the 2018-2020 performance period, performance
share awards are based on the achievement of a lhree-year ROIC
threshold thal must be met and a cumulative EPS factor. which can be
modified by a TSR factor relative to the performance ofthe Russell 2500
Utililies lndex overlhe three-year performance period. The 2018-2020
performance period allows for one ofthe performance factors to remain
variable untilthe flrst quarter ofthe third year ofthe award period. As the
perfomance factor will not be approved until the first quarter of 2020,
lhere is not a mutual understanding of the award's key lerms and
conditions between NW Natural and the participants as oI Dec€mber 31,
2018, and lherefore, no expense was recognized forthe 2018-2020
performance period. NW Nalural will calculate the grant dale fair value
and recognize expense once the final performance faclor has been
approved. lf the target was achieved for the 2018 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 estimaled fair value using the
Monte-Carlo method. The weighted-average grant date fair value of
nonvested shares al 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 yearwas $56.23 per share and there
were no performance shares granted during the year for accounting
purposes. As of December 31, 2018, there was $'1.1 millionol
unrecognized compensation expense related to the nonvesled portion ol
performance awards expected to be recognized lhrough 2019
lnfo.mation regarding the RSU activity is summarized as follows lnformation regarding the Restated SOP activity is summarized as
follows:
Number of
RSUs Option
Shares
Weighled -
Average
Price Pef Sha@Nonvested, December 31, 2015
Granled
Vested
Forfurted
88,587 $
40,271
(29,488)
(s.3s7)
4478
54 36
45 56
44 59
galance oubt€ndirE,
De.ember31,2015
Exercised
Fodeibd
,1,1.00 $
43.61
nla
2.3
2.O
da
Nonvesled, December 3'1. 2016
Granled
Forfeded
89,973
32 168
(35,341)
\2,278)
48.85
60.51
47.07
53 78
Balance oulstanding
December 3l, 2016
Exercis€d
Forfeiled
180.163
(88,27s)
(200)
44 38
44_33
41 15
2.8
1.S
Nonvested, December 31, 20't 7
Granted
Vested
Forfeited
44,522
323fi
(32,689)
(1,603)
53.90
57 59
50.75
59 95
B€lance out{anding and
o(€rcisable, Oecember
31. zJ17
Exelused
Erfied
91.688
(35.450)
(300)
44 43
43 61
43_29
1.4
0.8
82,680 S 56 47
Restated Stock Option Plan
Balance oulstanding and
exercisable, December
31.2018 55.938 S 44.96 $0sThe NW Natural Restated SOP was terminated for new option grants in
2012i however, oplions granted before the plan terminated remain
outstanding untilthe earlier oftheir expiration, forfeiture, or exercise and
arc now exercisable for shares of NW Holdings common stock. Any new
grants of stock options will be made under NW Holdings' LTIP, however,
no option grants have been awarded since 2012 and all stock options
were vested as oI December 3'1. 2015.
During 2018, cash of $1.5 million was received for slock options
exercised and S0.2 million relaled tax benelil was recognized. The
weighted-average remaining life oI options exercisable and outslanding
at December 31, 2018 was 1.69 years.
Employee Stock Purchase Plan
Options underthe Restated SOP were granled to offlcers and key
employees designaled by a committee of the Board of Direclors. All
oplions were granted at an oplion price equalto the closing markel price
on the dale ofgrant and may be exercised for a period of up to 10 years
and seven days from lhe date of granl. Option holders may exchange
shares lhey have owned for at least six months. valued at lhe curenl
markel price, to purchase shares at the option price.
NW Holdings' ESPP allows employees of NW Holdings, NW Natural and
cerlain designated subsidiaries to purchase common stock at 85% of
the closing price on lhe trading day immedialely preceding lhe initial
offerang dale, 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+ased compensalion expense is recognized as operalions and
maintenance expense or is capilalized as parl ofconslruction overhead
at lhe entity at which the award recipient is employed. The following table
summarizes the NW Holdings' financial statement impact, subslantially
all of which was recorded at NW Natural, of stock-based compensalion
underthe LTIP Restaled SOP and ESPP:
2014 2017 2016
Operatio.B and nEinEnance erpense, for
stock-besed coft p€nsstirn
lncome tax ben€lit
t{et sock-based compensatbn efied on
nel incomg (h8s)
Amounts capitakzed tor stoc*-ba6ed
compengation
s 2,489 $
(659)
2,354 $
(e30)
2,370
(924)
$ 1830 $ 1,424 $ 1,446
s 531 $ 528 $ 554
92
Table of Conlents
lnlrinsic
Weighted -
Average
Price Per RSU
352,648 $
1172 525)
Nonvesled, December 31. 2018
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 97 of2l0
Table of Conlenls
8. DEBT
Short-Term Oebt
The primary source of shorllerm liquidity for NW Holdings is cash
balances. dividends from its operaling subsidiaries, in panicular NW
Natural. available cash from a mulllyear credit facility, and shorl{erm
credil facilities it may enler into from time to lime.
The primary source ofshort-term liquidity for NW Natural is from lhe sale
of commercial paper and bank loans. NW Nalural has a commercial
paper program, and NW Holdings and NW Natural have separate bank
lacililies. In addition to issuing commercial paper or bank loans lo meet
working capital requirements. includang seasonal requiremenls to
finance gas purchases and accounls receivable, shon-lerm debt may
also be used to temporarily fund capilal requirements. For NW Nalural,
commercial paper and bank loans are periodically rellnanced through
the sale of long{erm debl or equity conlributions from NW Holdings. NW
Nalural's commercial paper is sold through lwo commercial banks
under an issuing and paying agency agreement and is supported by one
or more unsecured revolving credil facililies. See "Credit Agrcements"
below.
Al December 31 , 2018 and 2017. NW Holdings had short-term debl
outstanding of $217.6 millaon and $54.2 million, respedively.
substantially all of which was recorded at NW Nalural and was
comprased primarily of NW Nalural's commercial paper. The weighled
average interest rate of commercial paper outstanding at December 31,
2018 and 2017 was 3.0% and 1.9%. respectively.
Credit Agreements
NW Holdinqs
ln October 2018, NW Holdings entered inlo a $100.0 million credit
agreement, with a feature lhat allows it lo requesl increases in the total
commitment amount. up to a maximum of $150.0 million. The malurity
dale of the agreement is October 2, 2023, with available extensions of
commilments for two additional one-year periods, subjecl lo lender
approval.
The agreement also requires NW Holdings lo maintain debt ralings
(which are defined by a formula using NW Natural's
credit.atings in the event NW Holdings does not have a credit raling)
with Standard & Poor's (S&P) and Moody's lnveslors Service. lnc.
([,loody's) and notify lhe lenders of any change an ils senior unsecured
debl ratings or senior secured debt ratings. as applicable. by such raling
agencies. A change in NW Holdings' debt ratings by S&P or Moody s is
nol an event ofdefault, nor is lhe maintenance ofa specific manimum
levelofdebt rating a condition of drawing upon the credil agreemenl
Rather, interest rates on any loans outstanding under the credit
agreemenls are tied lo debl ratings and therefore, a change in the debt
raling would increase or decrease the cost of any loans underthe credit
agreements when ratangs are changed. NW Holdings does not currently
maintain ratings with S&P or Moody's.
There were no outslanding balances and no letlers of credit issued or
oulslanding under the NW Holdings agreement at December 31, 20'18.
NW Holdings had 52.8 million of letlers o, credit issued and outstanding
sepaaale trom lhe aforementioned credit agreemenl, at December 31,
2018.
NW Natural
ln October 2018, NW Natural entered into a new mulli-year credil
agreement for unsecured revolving loans lolaling $300.0 million. wilh a
feature that allows NW Naluralto requesl increases in the lotal
commitmenl amount. up to a maximum of $450.0 million The maturity
date oflhe agreemenl is October 2, 2023 with available extensions of
commitmenls for two additional one-year periods, subjecl lo lender
approval. The new credit agreement is substantially similar lo lhe prior
credit agreement which was terminated upon the closing ot the New
Credit Agreement. The new credil agreement permits lhe issuance of
letlers of credit in an aggregate amount of up to $60.0 million. The
principal amount of borrowangs under the credit agreement is due and
payable on the maturity dale There were no oulslanding balances under
NW Nalural's prior credil agreemenl or the new credit agreemenl 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 Naturallo maintain a consolidaled indebledness to total
capitalization ratio of 70% or less. Failure lo comply with this covenant
would entille the lenders to lerminale lheir lending commrlmenls and
accelerate the maturity of all amounts outslanding. NW Natural was in
compliance wilh lhis covenant al December 31,2018 and 2017
The new credit agreement also requires NW Nalural to mainlain credal
ratings with S&P and Moody's and notiry the lenders ofany change in NW
Natural's senior unsecured debt ratings or senior secured debt ratings,
as applic€ble, by such raling agencies- A change in NW Natural's debt
ralings by S&P or Moody s is not an event ofdefault, nor is the
maintenance ola specific minimum level of debl raling a condation of
drawing upon lhe new credil agreemenl Ralher, inleresl rales on any
loans outstanding under the new credit agreement are tied to debt
ralings and lherefore, a change in the debt rating would increase or
decrease the cost of any
93
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 98 of2l0
The carrying cost of commercial paper approximates falr value using
Level 2 inputs, due to the short{erm nature of the notes. See Note 2 for a
description of lhe 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 of22 days.
The NW Holdings credit agreement permats the issuance of lellers of
credit in an aggregate amounl of up to 540.0 million The principal
amounl of borrowings under the credit agreement is due and payable on
the maturity date. The credil agreement requares NW Holdings lo
mainlain a consolidated indebtedness to total capitalization ratio of70%
or less. Failure lo comply with this covenanl would entitle the lenders lo
lerminale lheir lending commilments and accelerale the maturily otall
amounts oulstanding. NW Holdangs was in compliance with this
covenant al December 31, 20'l 8.
Table of Cont€nts
loans under lhe new credit agreement when ratings are changed
Long-Term Debt
NW Natural's issuance of FMBs, which includes NW Natural's medium-
term notes, under the Mongage and Deed ofTrust (Mortgage) is limited
by eligible propeny, adjusted net earnings, and other provisions of lhe
Mongage. The Mortgage constilutes a firsl mongage lien on substahtially
allof NW Nalural's NGD property.
Maturities and Outstandino Lono-Term Debt
Relirement ot long-lerm debl for each ofthe annual periods lhrough
December 31, 2023 and thereatter are as lollows:
Long-tem debt
maturities
l{W Natural
Fi6t Mortoaoe Bonds:
6 60090 Series dL€ 201 E
1.545% Series due 2018
8.310% Senes due 2019
7.630% S€i€s due 2019
5.370% S€ries due 2020
9.050% Sed6 due 2021
3.176Yo Series due 2021
3.5{2Yo Series d(€ 2023
5 62070 Sedes due 2023
7.720% Seri€s due 2025
6.520% Sedes due 2025
7.050% Sede5 due 20m
3.211% Series due 2026
7.000% S,eries due 2027
2.A22h Senes d@ 2027
6.650Yo Senes du6 2027
6.650% Series due 2028
7 740% Series dtE 2m0
7.850% Series due 2030
5.820% Series due 2032
5 660% Seies due 2033
5.250% Sefies due m35
4 Oo(M Se es due 2042
4.1 36% Series due 2046
3.685% Series due 2047
4.110% Series due 2048
s
10.000
20.0m
75,000
10,000
50,000
50,000
40,000
20,000
10.000
20,000
35 000
20,000
25,000
19,700
10,000
20,000
10.000
30,000
40,000
10,000
50,000
40,000
75,000
50,000
22,OOO
75,000
10,000
20,000
75,000
10,000
50,000
50,o00
40,o00
20,m0
10,000
20,000
35,000
20,000
25,000
1S,700
10,000
20,000
10.000
30,000
40.000
10,000
50,000
,10,000
75,000
2019
2020
2021
2022
2023
Thereafler
s 30,000
75,000
60.000
90,000
484,7m
739,700
30.000
786,700
97.000Less: cunent maiudties
Tolal long-lerm debt
other NW Holdlngs Enlities
Long-term debl obligalions
$ 709.700 s 689,700
S 2,113 $
t{W l.lolding.:
Long-term debt, gross
Less: orrrent maturilies
Tolal longlerfi debt
s 741,a13 $
30,mo
$ 711.E13 $ 689,700
First l\,4ortoaoe Bonds
ln September 2018, NW Natural issued $50.0 mallion of FI\4Bs with a
coupon rale of 4 1 10o/o, due in 2048.
ln September 2017, NW Natural issued $100.0 millaon of FMBS
consisting of $25.0 million with a coupon rate o12.822o/o and a mall.ltily
date in 2027 and $75.0 million with a coupon rate of 3.685% aTEiHIBJT 2maturitv date in 2047'
'ALFRE'MAN,
DI
Retirements of Lono-Term Debt
tn March 20't8, NW Naturat retrred s22.0 mitr'* "t9fitY ',$i[tTLHf TE R
rate of 6.600%, and retired $75 O million of FMBs wilh a coLBogeapcof 2 I0
1.545% in December 2018.
The following table presenls debt outstanding as of December 3l:
tn thousnds 2018 2017
746,700
97,000
ln August 2017. NW Nalural retired $40.0 million of FlrBs wilh a coupon
rale of 7 000%
g4
EXHltsrT 2
PALFREYMAN. DI
GEM STATE WATER
Pagc J00 of2l0
Table of Contenls
Fair Value of Lono-Te.m Debt
NW Holdings' and NW Natural's outslanding debt does nol trade in
aclive markets. The fair value of debt is estimaled using natural gas
distribution companies with similar credat ratings, lerms, and remaining
maturities to NW Holdings' and NW Natural's debt thal actively trade in
public markels. Substantially all outstanding debt at NW Holdings is
comprised of NW Natural debt. These valualions are based on Level 2
inputs as defined in the fairvalue hierarchy. See Note 2.
December 31,
2014 2017
s 739,700 $
i.5,577)
786,700
(6,813)
s
$
734,123 $
760,222 $
779,887
853,339
9. PENSION AND OTHER POSTRETIREMENT AEN'EF'T COSTS
NW Natu.al maintains a qualified non'contributory defined benefit
pension plan, non{ualified 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 Retirenent K Savings
Plan have plan assets, which are held in qualified trusts to fund
retiremenl benefits.
Effective January 1. 2007 and 2010, the qualified defined benelit pension
plans and postretiremenl benefils for non-union employees and union
employees. respectively. were closed to new participants-
Non-union and union employees hired or re-hired afler December 31.
2006 and 2009, respeclively, and employees of NW Nalural subsadiaries
are provided an enhanced Retirement K Savings Plan benefit
The following table providesa reconciliation ofthe changes in NW Natural's benefit obligations and fairvalue ofplan assets, as applicable, forNW
Natural's pension and other postretirement benefit plans, excluding the Relirement 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 :
Penson Benefils Olher Eenefits
2018 2017
Reconciliaton of change in benefit obligalronl
Obligalon at January 1
Servic€ cosi
lnterest cost
Netactuanal (gain) loss
Benefits pald"'
Obligation at December 31
S 486,289 $
7,185
'16.991
(32,s7e)
(21,918)
457 839 $
7.090
18.111
34,629
(31,500)
2a.927 $
964
(327)
(1,674)
29 395
341
1 141
(213)
11737)
$ 4ss,568 $ 486,283 $ 2A,172 $ 25,927
Reconciliation ofchange in plan assets:
Fair va ue of plan assets at January 1
Aclual retum on pl6n assets
Employer conlributions
Ben€fils pajd I
Fat value ol plan assets at December 31
Funded stalus al Decenber 31
$2A7.925 $
(25,S2s)
17 715
(21,918)
257,714
40,308
21.443
(31,580)
$
'1.674 1.737
11,7371(1.674)
$ 257,797 S 287,925 S $
$ 1197,77',t1 3 (198,364) S 128.1721 $ \24,927)
"' ln 2017, NW Natural compteted a partial buy,out of ats qualified defined benefil pension plan in which $9.3 million of plan assels and $8 7 mallion of liabilities were
transfered to an insurer lro provide annuities for buy-out plan parlicipanls.
NW Natural's qualified defined beneflt 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 assels of $257.8 million and $287.9 mallaon, respectively. The plan had an accumulated benefil obligation of
$385.9 million and $410.3 million at Decembet 31,2018 and 2017, respectively.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page l0l of 210
95
The following table provides an estimate ofthe fair value of NW Natural's
long{erm debt. including current maturities of long-term debt, using
market prices in effect on the valuation date
Gross long-term debt
Unamorlized debt issuance
Carrying amount
Eslmaled farr value
Poslrelirement Benefit Plans
2017 2018
s
Pension Benelils 0lher Poslrelirement Benef ts Pensron Eenefds
2014 2017 2016 20T8 2417 2016 2418 2017 2016
Net actuarial loss (gain)
Settlemenl Ioss
Prior seMce cosl
Acluarialloss
Total
0 1,{,261 $ 12.177 $ 14.OO5 t Fn) $ (214) $ (1.488) $ (677) $ 2,777 I (1,196)
193
468 468
(6s6)(705)(1,052)(946)1,386
$ (4,542) $ (2.752) $ 537 $ (307) $ 14421 $ \1,725) $ (1,729) $ 1,831 $
\42)
(18 761)
1127)
114,8021
(230)
(13,2s8)
458
(448)
The following table presents amounts recognized an regulatory assels and accumulaled other comprehensive loss (AOCL) at December 3'l
Regulatory Assets AOCL
Pension Benerits Olher Poslretirement Beneits Penson Beneflts
2018 2017 2014 2017 2018 2017
Prior seMce cost (credrl)
Net actuanalloss
Total
SSs
$ 170,542 $ 175,084 $
7
170,535
49
175,035
(1,738) $
6,189
(2,206) $
6,S64
$
11 537 13,266
11,537 S 13,2664,451 $4,758 $
The following table presents amounts recognized by NW Holdings and NW Natural in AOCL and the changes in AOCL related lo NW Natural's non-
qualified employee beneflt plans:
Year Ended December 31
2014 2017
Begrnnrng balance
Amounts redassifiet to AOCL
Amounts redassified f.om AOCL.
Amortrzalion of actuarial losses
Total reclassificatrons belore lax
Tax expense (benefii)
Total reclassrfrcations for the period
Ending balance
s (8.438) $
u2
(6.951)
12.794)
1,052 946
1,694
i'444)
(r,848)
361
ln 2019. NW Nalural will amortize an eslimated $13.7 mallion from
.egulatory assets to net periodic benefit costs, consisling of $'14.2
million of actuaria I losses offset by $0.5 million ofprior seNice credils. A
total oI $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 c.rporate bonds rated AA- or higher by S&P orAa3 orhigher by
Moody's. The discount rate curve was applied lo match the estimated
cash flows in each of the plans to reflect the timing and amount of
expected future benefit paymenls for these plans.
The assumed expecled long-term rate ofrelurn on plan assets for NW
Natural's qualified pensaon plan was developed using a weighted-
average ofthe expected retums for the larget assel portfolio. ln
developing the expected long{erm rate of return assumption,
consideration
1.250 11,487)
(7.188) S (8,438)
was given to the historical perfo.mance oleach asset class in which the
plan's assets are invested and the target asset allocation for plan
assets.
The investment strategy and policies for qualified pension plan assets
held in the retirement trust fund were approved by the NW Natural
Reliremenl Committee, which is composed of senior management with
the assistance of an outside investment consultant- The policies set
Iorth the guidelines and objeclives goveming the investment of plan
assets. Plan assels are invested fortotal retum with appropriale
consideralion for liquidity, portfolio risk, and retum expectations. All
investments are expected to satisfy the prudent inveslments rule under
lhe Employee Retirement lncome Security Act of'1974. The approved
asset classes may include cash and shon{erm investments, flxed
income, common stock and convertible securities, absolute and real
return slrategies, and realestale. Plan assets may be invesled in
separalely managed accounts or in commingled or mutual funds.
lnvestmenl re-balancing takes place periodically as needed, or when
significant cash flows occur, in order lo maintain the allocationfS{firfdlT 2
PALFREYMAN, DI
GEM STATE WATER
Page 102 of2l0
$
s6
Table ol Contents
The Iollowing table presenls amounts realized through regulatory assets or in olher comprehensive loss (income) for lhe years ended December 3'l:
Regulatory Assets Other Comprehensive Loss (lncome)
Table of Contenls
within the stated targel ranges. The retirement trust tund is nol cunently
invested in NW Holdings or NW Natural securities.
The following table presenls the NW Natural pension plan asset target
allocation at December 31, 2018
Asset Category Tarqel Allocatron
These are unfunded. non-qualified plans with no plan assetsi however,
a signillcant portion oflhe obligations is indirectly funded with company
and lrust-owned life insurance and olher assels.
Other postrelirement benefit plans are unfunded plans but are subject to
regulatory defenal. The actuarial gains and losses, prior service costs,
and transilion assets or obligations for these plans are recognized as a
regulatory asset.
Net periodic beneflt costs consist of service costs, interest costs, the
expected returns on plan assets, and the amortization otgains and
losses and prior service costs. The gains and losses are the sum oflhe
actuarial and assel gains and losses throughoul the year and are
amonized over lhe average remaining service period of active
participants. The asset gains and losses are based an part on a market-
related valuation ofassets. The market-related valuation reflects
differences belween expecled returns and actual investment retums with
the dafferences recognized over a two-yea,period Irom the year in which
they occur, thereby reducing year-to-year nel periodic benelll cost
volatility.
Long govemmenvcredit
U S large cap equity
tlon-U.S. equity
Absolute retum slrategies
U.S srElumid cap equity
Real estate funds
High yi€ld bond8
ErErging ma els equity
Emeqing nlarket det[
20vo
18
10
7
5
5
The seNice cost component of nel periodic benefit cost for NW Natural pension and olher postretirement benefit plans is recognized in operalions and
maintenance expense in the consolidaled statements of comprehensive income. The other non-setuice cosl componenls are recognized in other
income (expense). net in lhe consoljdated stalements ofcomprehensive inc!me. The following table provides lhe components of net periodic benefit
cost tor NW Nalural's pension and other postretiremenl benefit plans lorthe years ended Oecember 31:
Penslon Benefils Other Postrehrement Benelits
2018 2017 2016 2018 2017 2016
Servrce cost
lnleresl cosl
Expected retum on plan assets
Amorlizat on ol pror seNice cosls
Amortization of net actuarialloss
Settlemenl expense
Net periodac beneft cost
Amounl al ocated lo conslruction
Amount deferred to regulalory balancing account
Net amount charged to expense
$7,185 S
16,991
(20.633)
43
19.813
7,090 $
18.111
(20,433)
127
15,744
7,083 S
18.399
(20 054)
231
14,624
193
2A2 $341
1.141
39'l
1.175
(468)
444
(468)
696
(468)
705
s
964
23,393
12,7u)
(10,314)
20.643
(6 597)
(6,s42)
20,476
(5,746)
(6,252)
1,226
(e8)
't,710
(587)
1.803
(600)
s 10.315 $7.504 $8,478 S 1,128 $1,123 $1 243
Net periodic benefit costs are reduced by amounts capatalized to NGD plant based on approximately 25% to 35% payroll overhead charge. ln addition, a
certain amounl of net periodic benefit costs were recorded lo lhe regulatory balancing account, representing nel periodic pension expense for the
qualifled plan above the amounl set in rates, as approved by the OPUC, from 2011 through October 3r, 2018. On October 26, 2018 the OPLJC ordered
that the balancing account be frozen as of October 31, 2018, with recovery subject to future proceedings. Effective November 1, 2018 the OPUC
authorized an addilional $8.1 million to be included in rates for detined benerit pension plan expenses.
97
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 103 of2l0
Non{ualified supplemenlal defined benefil plan obligations were $35.4
million and $36.6 million at December 31, 2018 and 2017, respeclively.
These plans are not subject to regulatory deferral, and the changes in
actuarialgains and losses. prior service cosls, and lransitaon assets or
obligations are recognized in AOCL, net oflax untilthey are amonized as
a componenl ofnet periodic beneflt cost.
Table of Conlents
The following table provides the assumptions used in measuring periodic benefil cosls and benefit obligations for the years ended Decembe. 31
Pension Benelits Oiher Postretirement Benefits
2418 2017 2016 2018 2017 2016
Assumptrons for net penodrc benefit cost:
We ghted average discount rate
Rate of increase in cornpensation
Expecled long{erm rale of relurn
Assumptions for year-end funded slalus:
Weighled-average drscount rate
Rate ofrncrease in compensalron
Expecled onq term rate of return
3 25-4 50k
7.5O'/o
3 9e%
3 25-4 50/a
7.50%
4174k
3.25-4 50k
7.Soa/o
nla
3.44yo 4_OoVo
7.54%
4.000/"
3.25-4.54/"
7 500/0
4_130k 3_44yo
nla
3.857o
The assumed annual increase in heallh care cost taend rates used in
measuring other poslretirement benerlts as of December 31, 2018 was
6.757o. These trend rates apply lo both medical and prescription
drugs. l\4edical costs and prescription drugs are assumed to decrease
gradua lly each year to a rcle of 4.75yo by 2425.
Assumed heallh care cosi lrend rates can have a significanl effect on the
amounts reporled for the health care plans; however, other
postretirement benefil plans have a cap on the amounl of costs
reimbursable by NW Natural.
A one percentage point change in assumed health care cost trend rates
would have the following effects:
1Yo Decrease
Effect on net periodic postrelirement
health care benefil cosl $ 43 $ (39)
Effect on the accumulated
postrelremenl benefit obligation 622 (560)
luortality assumptions are reviewed annually and are updated for
material changes as necessary. ln 20,l8, mortality rate assumptions
were updated from RP-2006 mortality tables for employees and healthy
annuitants with a fully generational projection using scale l\rP-2017 to
RP-2014 morlality lables using scale lvlP-2018, which partially offset
increases of the projected benefit obligation.
The following lable provides information regarding employer
contributions and benefit payments for NW Natural's qualified pension
plan, non-qualified pension plans, and olher postreliremenl benefil
plans forthe years ended December 31, and esiimated fulure
contributions and payment$:
Pension Senefds Other Benefits
Employer Cont bulrons
2417 $
2018
2019 (estimaled)
Benefit Paymenls:
2016
2017
2018
Eslimated Fuluae Benefit Paymenls
2019
2020
2022
2023
2024-2024
21,483 $
17,715
13,318
1,737
1,674
1,747
20 959
31 580
21 918
1,737
1,674
23,622
24.516
25,316
26.O74
145,917
1,757
1,846
1,930
1,941
1,9S3
9,628
NW Natural makes contributions to its qualified defined benefit pension
plans based on actuarial assumptions and estimates, lax regulations,
and funding requirements under federal law. The Pension Proteclion Act
of 2006 (the Act) established funding requirements for defined benefit
plans. TheAcl eslablishes a'100% funding target over seven yearSfor
plan years beginning after December 31 . 2008. ln 2012 the [,4oving
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-term but generally increases contributions in lhe long-run and
increases the operational costs of running a pension plan. ln 2014, the
Highway and Transporlation Funding Act (HATFA) was signed and
exlended funding relief for an addilional flve years.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page I04 of 210
9B
4.204/.
3_25-3.54/o
7 50./.
Employer Contributions to company-Spongored Defined
Benefit Pension Plans
Tabe of Contenls
The qualified defined benefit pension plan was underfunded by $162 4
million at December 31 . 20'18. lncluding the ampacts of l\4AP-21 and
HATFA, NW Nalural made cash contributions totaling $15.5 million lo its
qualified deflned benefit pension plan for 2018. During 2019. NW Natural
expects to make conlributions of approximately $'1 1.0 million to this plan.
MultiemDloyer Pension Plan
ln addilion lo the NW Nalural-sponsored defined benefit plans presented
above, prior to 2014 NW Natural contrabuted to a multiemployer pension
plan for its NGD union employees known as the Western Slates Office
and Professional Employees lnternational union Pensaon Fund
(Western States Plan). The plan's employer identification number is 94-
6076144. Effective December 22, 2013, NW Naturalwithdrew from the
plan, which was a noncash transaction. Vested participants will receive
all benefits accrued through the dale ofwithdrawal. As lhe plan was
underfunded at the time ol wilhdrawal, NW Natural was assessed a
withdrawal liability of $8.3 million, plus interest, which requires NW
Natural to pay S0.6 million each year lo lhe plan for 20 years beginning in
July 2014. The cosl 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
liabillty balance was 56.8 million. For 2017 and 2016, contributions to the
plan were S0.6 million and $0.6 million, respectively, which was
app.oximately 4% to 6% of the total contdbutions to the plan by all
employer participants in those years.
Defined Contribution Plan
NW Natural's Retirement K Savings Plan is a qualified defined
contribution plan under lnlernal Revenue Code Sections 401(a) and 401
(k). NW Natural conlribulions tolaled $6.5 million, S5.4 million, and $4.6
million for 20'18, 2017, and 2016, respectively. The Retirement K Savings
Plan includes an Employee Slock Ownership Plan.
Deferred Comoensation Plans
NW Nalural's supplemental deferred compensation plans for eligible
officers and senaor managers are non-qualified plans. These plans are
designed to enhance the relirement savings ofemployees and to assist
them in slrengthening their financial security by providing an incenlive lo
save and invesl regulaaly.
Fair Value
Belowis a description ofthe valuation methodologies used forassets
measured at fair value. ln cases where NW Nalural's penslon plan is
invesled through a collective trusl fund or mutual fund, the fund's market
value is utilized. Markel values for inveslmenls direclly owned are also
utalazed.
INTERNATIONAUGLOBAL EQUITY- These are Level 1 and non-published
NAV assets. The Level 1 asset is a mutual fund, and the non-published
NAV assels consisl of commingled trusts whe.e lhe NAV/unit price is not
published but the investment can be readily disposed ofat the NAV/unil
price. The mutual funds has a readily determinable fair value, including a
published NAV. and lhe commingled lnrsls are valued al unit price This
asset class includes investments primarily in foreign equity common
stocks.
LIABILITY HEDGI]{G. These are non-published NAV assels. The non-
published NAV assets consist ot commingled trusls where NAV is not
published but the anvestment can be readily disposed of at NAV or
market value. The underlying inveslments in lhis asset class include
long duralion fixed income investmenls primarily in U.S treasuries, U.S
government agencies, municipal securities, morlgage-backed
securilies, assel-backed securities, as wellas U.S. and anlernalional
investmenl{rade corporale bonds.
OPPORTUNISTIC. These are non-published NAV assels consisting of
commingled lrusts where the investments can be readily disposed of at
unit price, and a hedqe fund of funds where the valuatron rs not
published. This hedge fund of funds is winding down. Based on recenl
dispositions. NW Nalural believes the remaining investmenl is fairly
valued. The hedge fund offunds is valued at the weighted average value
of inveslments in various hedge funds, which in turn are valued at the
closing price ofthe underlying securities. This assel class includes
inveslments 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
conslsting of a hedge fund offunds where lhe valuation is not published
This hedge fund of funds is winding down. Based on recent
djspositions, NW Natural believes the remaining inveslment is fairly
valued. The hedge fund of funds is valued at lhe weighled average value
of investments in various hedge funds, which in tum are valued al lhe
closing price oflhe underlying securities. This asset class primarily
includes investments in common stocks and fixed income securilies.
CASH Al{O CASH EOUIVALENTS. These are Level 'l and non-published
NAV assets. The Level 'l assets consisl of cash in U S dollars. which
can be readily disposed of at face value. The non-published NAV assets
represenl mulual funds wilhout published NAV's but the investment can
be readily disposed of at lhe NAV. The mulual funds are valued at lhe
NAV ofthe shares held by the plan at the valualion date.
The preceding valuation methods may produce a fair value calculation
thal is nol indicative of nel realizable value or reflective offulure fair
values. Although we believe lhese valualion melhods are appropriate
and consistent with other market participants, the use ofditferent
melhodologies or assumptions to determine lhe fair value ofcertaan
inveslments could result in a dafferent fair value measuremenl at lhe
reporting date.
lnvestment securities are exposed lo various financial risks including
interest rate, markel, and credit risks. Due to lhe level of risk assocaaled
with cerlain investment securities, it is reasonably possible that changes
in the values of NW
99
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U.S. EQt,lTY. These are non,published net asset value (NAV) assets. The
non-published NAV assets consisl of commangled Irusts where NAV is
not published but the investmenl can be readily disposed of at NAV or
markel value. The underlying inveslments in this assel class includes
inveslments primarily in U S. common stocks.
Natural's inveslment securities will occur in the near term and such
changes could materially affect NW Natural's investment account
balances and lhe amounts reporled as plan assels available for benefit
payments.
The following tables present the fair value ofNW Natural's plan assets, inciuding oulstanding receivables and liabilities, of NW Natural's retirement trust
tund:
December 3l. 201I
Level 1 Level 2 Level 3 Non-Publshed NAV Total
US equity
lnlernalonal / Global equity
Liabil[y hedging
Opporlunislic
Cash and cash equivalenls
Tolel inveslmenls
85,233 $
70,o17
45,65S
23,186
4,707
85,233
95 01'1
45,659
23.186
8,707
ss$$
24I
s 24,994 $$$232402 $ 257.7
December 31. 2017
Non-Published NAVLevel 1 Leve 3 Total
US equi,
lnlemational / Global equity
Lrabrlty hedgrn9
Opportunistic
Cash and cash equivalenls
Tolal inveslmenis
Receivables
Accrued interest and divrdend ncome
Due from broker tor secutities sold
Total receivebles
Liabilitiesl
Due lo brcker lor secunlies purchesed
Tolal inveslment in retrement trusl
S
21.211
e8,375
84,818
53,981
23,895
98.375
106,02S
53,981
23.895
5,615
s Ss s
a2
$21,293 S s s 266,602 $ 287,895
Decemb€r 31
2A1A 2017
1$30
1$30
-$
S 257.797 $ 287,925
10. INCOME TAX
The following table provides a reconcilialion between income taxes calculated at the slalutory federal tax .ale and lhe provision for income taxes
reflected in the NW Holdings and NW Natural statemenls of comprehensive income or loss for December 311
NW Holdangs l{W l{atu ral
2018 2017 2016 2014 2A17 2016
{'rThe fair value for these jnveslments is detemined using Net Asset Value per share (NAV) as of December 31, as a praclcal expedient, and iherefore they are nol
dassified wrthin the fair value hierarcny. These investments primanly consist of inslitutional investment prcducts, for whach the NAV ls generally not publidy
available
lncome taxes at federal stalutory rate
lncrease (decrease):
State income tax. nel of federal
Diff€rences required lo be flowed-lhough by regulalory
comm|3siOna
Effect ot the TCJA
Oefeared tax rate djfferential pGI-TCJA
Olher, net
Total provision for income taxes
Efieclive lax rate
$'19,222
4,927
'1,302
(76)
(1,'r 84)
36,901
4,844
2.357
s 39578 $
5 066
$ 19,434 $ 39,624 $ 37,137
4 942 5,O72 4.858
1.3022,357
(3 376)(2,956)
2.357
EXHIBIT 2
(75)
(1,184)
R$ 24.191 $ 41.00a $ 43,011 $ 24.459 $
26 40k 36.30/o 40 ao/o 26 40k
.==========ffiiiffir0
Table of Contents
Level 2
$
$
s
12,6171 (1,091)
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Table of Contents
The NW Holdings and NW Natural effeclive income lax rates for 2018
compared to 2017 changed primarily as a result ofthe lower federal
corporale income tax rate provided for by the TCJA. The effective tax rates
for 20'17 compared lo 2016 changed primarily as a result of the lower
federalcorporate income tax rate provided for by the TCJA and NW
Nalural's increased benefits from lhe equity porlion of AFUDC and
excess tax benefils related to stock based compensation.
The provision for current and deferred income laxes consists of the following at December 31
NW Holdings NW ilatu ra I
Curent
Fede.al
State
2018 201?2016 2014 2017 2016
s 8 953
3 785
S 19.345 $
5.963
10 042 S
3.116
9.127
3,846
S 19,304 i
5,956
10.158
3.131
12,734 25 308 13,158 25,260 13.28S
Deferred
Federal
Stale
13,869
1.831
25,473 9,025
2,461
14,371
't,u7
25,581
4 4054.380
11,453 '15,700 29.853 11,486 16,218 29,986
ln@metax Drov sron s 24,191 $ 41,008 $ 43,011 $ 24,459 $ 41,478 $ 43,275
The followang table summarizes the tax effect of signiflcant items comprising NW Holdings and NW Nalural's deferred income lax balances recorded al
December 31:
NW Holdings l{W Natural
OeferGd lax liabilities:
Planl and property
Pension and posvetiremenl obligations
lncome tax regulatory asset
Olher
Toial deferred incorne tax lhtiliti€s
Defened income tax assets
lncome tar regulatory liability
Alternative minifium tax credit carMorward
Total deferred income lax assets
Total net deferred income tar liabilities:' Amounts have been reclassified among categones lo @nform lo oJrrent period presentalrcn.
2018 2017'"2018 2017
$288,305 $
27,135
21,403
1,061
274,735 $
23 352
22,205
2.766
303,186 $
2t,402
296,113
22,209
2,250
E 337,984 $ 327,062 $ 352.260 $ 343,924
s 57,469
52
$ 56,470 S 57,469 s 56,470
6666
$ 57,s2'r $ s8,536 $ 57,521 $ 56,536
$ 280.463 $ 270,526 $ 294,739 S 287,388
At December 31. 2018 and 20'17, regulatory income tax assets of $19.1
million and $2'1.3 million, respectively, were recorded by NW Natural, a
portion of which is .ecorded in current assets. These regulalory income
tax assets primarily represent future rale recovery ofdeferred tax
liabilities, resulling from differences in NGD plant financial slatement
and lax bases and NGD plant removal cosls, which were previously
flowed through for rate making purposes and to take into account the
additional future taxes, which will be generated by lhat recovery. These
deferred tax liabilities, and lhe associated regulalory income lax assets.
are currently being recovered lhrough customer rales. At December 31,
2018 and 20'17, regulatory income lax assels of $2.3 million and $0.9
million, respectively, were recorded by NW Natural, represenling future
recovery ofdefered lax liabilities resulting from the equity portion of
AFUDC-
income tax rate provided for by the TCJA. At December 31 , 2018 and
2017, regulatory liability balances representing the net tax benefit oflhe
change in deferred taxes as a result ofthe TCJA of $217.1 million and
$213.3 million, respectively, were recorded by NW Natural.
NW Nalural's natural gas utility rates include an allowance to p.ovide for
the recovery oflhe anticipated provision for income laxes incurred as a
resull ofproviding regulaled services. As a result otlhe 21 percent
federal corporate income tax rate enacted in 2017, NW Natural recorded
an additional regulatory liability in 20'18 reflecting the estimated net
reduciion 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
58.2 million, including accrued interest, was recorded to reflect this
estimaled revenue delenal.
At December 31, 2018 and 2017, deferred tax assels of S57.5 million
and $56.5 million, respeclively, were recorded by NW Natural
representing the future income lax benefit associated wilh lhe excess
deferred income tax regulatory liability recorded as a result of the lower
federalcorporale
NW Holdings and NW Natural assess the avaalable positive and
negative evidence to estimate il sufficient laxable income will bEXIfIBJT 2generated to utilize lheir respective exislrng pALFREyMAN. DI
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101
s,001
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Table ol Contents
deferred tax assels. Based upon lhis assessment, NW Holdings and
NW Natural determined thal it is more likely than not lhat all oflheir
respeclive deferred tax assets recorded as of December 31, 2018 will be
realized
Uncerlain lar positions are accounled for in accordance wilh accounting
standads that require an assessment of lhe anticipaled settlement
oulcome of material uncerlain lax positions laken in a prior year, or
planned to be taken in the current year. Until such positaons are
suslained, the uncerlain tax benefits resulting from such positjons would
not be recognized. No reserves for uncerlain tax posilions were recorded
as of December 31. 2018.2017, ot 2016.
NW Holdings files a consolidaled U.S. federal income tax return that
includes NW Natural. lncome tax expense is allocated on a separale
company basis.
The federal income tax returns for tax years 20'14 and earlier are closed
by statute. The IRS Compliance Assurance Process (CAP) examination
of the 2015, and 2016 tax years have been completed. There were no
malerial changes to lhese relurns as filed. The 2017 and 2018 tax years
are currently under IRS CAP examination. Our 2019 CAP applicalion has
been accepled by the lRS. Under lhe CAP program. NW Holdings and
NW Nalural work with the IRS to identify and resolve malerial lax matters
before the lax relurn is filed each year.
As of December 31, 2018, income tax years 2015 through 2018 remain
open for state examination. The Stale of Oregon is currently examining
lhe Oregon corporate income tax returns for tax years 20'15. 2016, and
2017. No material changes are anlacipaled as a result ofthis
examinalion.
U.S. Federal TCJA Mafters
On December 22, 2017, the TCJA was enacled and lowered the U.S.
federal corporate income tax rale lo 21% from the exisling maximum rate
of 35%, effeclive Ior the tax year beginning January 1, 2018. The TCJA
included specillc provasions related to regulated public utilities lhat
provided forthe 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 p.e-TCJA law, business inlerest was generally deductible in the
determination oftaxable income. The TCJA imposed a new limilation on
the deductibility of net business inleresl expense in excess of
approximalely 30 percent of adjusted taxable income. Taxpayers
operating in the trade or business of a regulated utality are excluded from
lhese new interesl 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 regulaled utility activities, then allofthe
business inlerest expense of
that taxpayer is deemed lo be exc€pted business interest of the
regulated ulility activity and is thereby nol limited underlhe TCJA. As a
.esult 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 ammediate 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
cosl 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 lhal bonus tax depreciation would not be available
lor regulated utility activity assets acquired and placed in service by NW
Holdings or NW Nalural on or afler January 1, 2018, bul bonus lax
deprecialion would be avaalable for regulated utility activily assels
acquired and placed in service by NW Holdings or NW Natural before
January 1,2018.
The SEC staff previously issued Staff Accounting Bulletin 1 18, which
provided guidance on accounling for the tax effecls ofthe TCJA. sAB 118
provided a measuremenl period that should not extend beyond one year
from the TCJA enactment date for companies to complete the accounling
forthe TCJA under ASC 740. To the extent that a company's accounting
for certain income tax effects ofthe TCJA was incomplete but a
reasonable estimate could be made. a company would record a
provisional eslimale in the financial slatements. NW Natural previously
disclosed that due to uncertainlies with respect to the avaalabality of
bonus tax deprecialion for regulaled utility activily assets under the TCJA
that the effects of bonus tax depreciation for assels placed in service
after Seplember 27. 2017 bul before January 1, 2018 had not been
recorded. The determinalion to exclude allassets placed in service afler
September 27. 2017 but before January 1. 2018 from bonus tax
depreciation was provisional as provided for under SAB 118.
As a result of the Proposed Regulalions on bonus lax deprecaalaon
published in Augusl of2018, NW Naturalrevised the provisional
estimate ofdeferred taxes and income tax€s payable lo reflecl the effecls
of bonus tax depreciation for assets placed in service after Seplember
27, 2017 but before Ja nuary 1 . 2018. ln lhe third quarter, NW Natural
recognized increases to prepaid income tax of $7.4 million, deferred
income tax liabilily of $4. 1 million, and regulatory liabilily of S3.3 millio n.
ln lhe fourth quarter, NW Nalural recognized additional increases to
prepaid income lax of S0.5 million, deferred income tax liability of $0.3
million, and regulatory liabilily of $0.2 million. The accounting for income
tax effects of lhe TCJA is now complete.
102
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Page I 10 of 210
The lollowang table sets Iorth the major classifications of property, planl,
and equipmenl and accumulated depreciation at Oecember 31:
2014 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 and 2017, respectively. These accrued asset
removal cosls are reflected on the balance sheet as regulatory liabilities
See Nole 2. During 2018 and 2017, no equipmenl was acquired under
capitalleases.
NW Holdinos
Other plant balances include long-lived assels associated with water
operations and non-regulated activities not held by NW Nalural or its
subsidiaries.
NW Natural
Other plant balances include long-lived assets not relaled lo NGD
The weighted average deprecialion rale for NGD assels was 2.8%
during 2018, 2017, and 2016. The weighled average depreciation rate for
assels not relaled lo NGD was 2.2% in 2018, l.gok in 2017. ahd 2.Ookin
20't 6.
NIY Naturel:
NGD plenl in service
NGD work in progress
Lessr Accumulated deprecialion
NGD plant, net
Other plant in service
Other construction work in progress
Less: Ac mulaled deprecjation
Other plant. nel"
Tolal property, plant, and equipment
Olhe. (NW Holdlnga):
Other plam in sewice
Lerss: Accumulated depeciation
Other plant, netrr)
$ 3,134,122 S
204.978
974,252
2,575,217
159,924
s42.879
2.T4.444 2 192 262
66.009
5.330
18,603
64,997
4,122
17,46
52,736 5'1.713
s 2,417,584 I 2,243,975
s 4.051 $
263
375
3,788 183
NW Holdings:
Total property, plant and equipment $ 2.421.372 $ 2.244.154
I'lW Naturil and NW lloldings:
Capilal expenditures in accrued liabiliiies S 23.676 $ 34,761' NW Natural's previously reporled other balances were restated due to
certain assets and liabililles now being classifed as disconlinued operations
asets and liabililies in its balance sheels. See Note 18 lor furlher
discusson.
,2, GAS RESERYES
Table ol Contenls
11. PROPERTY, PIANT, AND EQUIPMENT
NW Natural has invesled $188 million through lhe gas reserves p.ogram
in lhe Jonah Field located in Wyoming as of December 31. 2018. Gas
reserves are stated al cost, nel of regulatory amortization. wath the
assocaated deferred tax benefits recordecl as liabililies in the
consolidated balance sheets. The investment in gas reserves provides
long-lerm price prolection for NGD customers through the original
agreementwith Encana Oil & Gas (USA) lnc. underwhich NW Natural
invested $r 78 million and lhe amended agreemenl with Jonah Energy
LLC under which an additional $'10 million was invesled.
NW Nalural enlered into lhe original agreements with Encana in 201 1
under which NW Natural holds working interests in certain seclions of
the Jonah Field. Gas produced in these sections is sold al prevailing
markel prices, and revenues from such sales, net of associated
operating and production cosls and amortization, are credited to the
NGD cost of gas. The cost of gas, including a carrying cost for the rate
base inveslmenl, is included in the annual Oregon PGA filing, which
allows NW Natural Io recover these cosls through customer rates. The
inveslment under the original agreement, less accumulated amortizalion
and deferred taxes, earns a rate of relurn.
ln March 2014, NW Naturalamended the originalgas reserves
agreement in order to facilitate Encana's proposed sale of ils interest in
lhe Jonah field to Jonah Energy Under the amendment. NW Natural
ended the drilling program with Encana, bul increased its working
interests in its assigned seclions of the Jonah field. NW Natural also
relained lhe rightto anvest in newwells with Jonah Energy. Underthe
amended agreement there is still the option to invest in addilional 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 il invesls. NW Natural elected to participate in some oflhe
additional wells drilled in 20'14, but did not participale in additionalwells
since 2014. However, there may be lhe opportunity lo panicipate 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 approximales the 1o-year hedge
rate plus financing costs at lhe anceptaon of the inveslmenl.
Gas reserves acted to hedge the cost ofgas for approximately 6%,6%
and 8% of NGD sas supplies for the years ended December 3hl{1?BIT 22017, and 20'|6 respectively.
PALFREYMAN, DI
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Pagelllof2l0103
Table of Contents
The followang table outlines NW Natural's net gas reserves investmenl al
December 31:
2A1A
NW Natural's investment is included in NW Holdings' and NW Natural's
consolidaled balance sheels under gas reserves wilh the maximum
loss exposure limited to the inveslmenl balance.
Gas reserves, current
Gas reseryes non-curreni
Less Accumulaled amortrzation
Totalgas reseNes '
Less: Defer€d taxes on gas aeserves
Net rnvestmenl in gas reserves
'i The nel investmenl in additionalwells included in total gas.eseNeswas S4.8
million and S5 8 million at December 31, 2018 and 2017 respectrvely
13. INVESTMENTS
$ 16.647 S 15,704
170.660 171,432
104,463 47.779
82,444
20,o71
99157
22 712
$ 62,773 $ 77,045
lnveslmentg in life
insurance policies
lnvestments in gag
pQeline
Olher
ToElother
investnents
lnveslments include flnancial investments in life insurance policies, and
equity melhod investments in certain partnerships and lamited liability
companies The following table summarizes olhe. inveslmenls at
December 31:
NW Holdrngs NW Natural
2018 2017 2018 2017
Holdings' equity inveslment balance, less its share of any cash or olher
assets avai!able lo NW Holdings as a 50% owner. The investment
balance in TWH was 513.4 million al December 31. 2018 and 2017.
lmDairment Analvsis
lnvestments in nonconsolidated entities accounted for underthe equity
method a.e reviewed for impairmenl at each reporting period and
tollowing updates to our corporale planning assumptions. lf il is
dete.mined a loss in value is other than temporary, a charge is
recognized for the difference between the investment's carrying value
and ils estimated fair value. Fair value is based on quoted market prices
when available or on the present value ofexpected future cash flows.
Dilfering assumptions could affect the timing and amount of a charge
recorded in any period.
ln 20'11, TWP withdrew its original application with the FERC for a
proposed nalural gas pipeline in Oregon and informed FERC that it
inlended to re-file an application lo reflect changes in the projecl scope
aligning the proiect wilh lhe region's current and future gas infrastruclure
needs. TWP continues working with customers in the Pacific Norlhwest
lo funher unde.stand their gas transportation needs and determine the
commercial support for a revised pipeline proposal. A new FERC
certificate applicalion is expected to be filed to reflect a revised scope
based on lhese regional needs.
NW Holdings' equity investment was nol impaared al December 31, 2018
as the lair value ofexpected cash llows from planned developmenl
exceeded NW Holdings' remaining equity investment of$13.4 million at
December 31, 2018. However. iI NW Holdings leams that the project is
not viable orwill not go forward, it could be required to recognize a
maximum charge of up to approximately $'13-4 million based on the
currenl amount oflhe equity investment, net of cash and working capital
at TWP. NW Holdings will continue to monitor and updale the
impairment analysis as required.
$ 49.922 S 50.792 $ 49.922 $ 50.792
13,571
65
13,669
1,902 1.862
$ 63,558 $ 68,363 $ 49,922 $ 52,654
lnvestment in Life lneurallce Policieg
NW Naturalhas invested in key person life insurance conlracts lo
provide an indirect funding vehicle for certain long-term employee and
director benefit plan liabilities- The amount in the above table is reported
at cash surrender value, net of policl loans.
lnvestments in Ga8 Pipeline
TWP, a wtrolty-ovrned subsidiary of TWH, is pursuing the development of
a new gas lransmission pipeline that would provide an interconneclion
with NW Natural's NGO system. NWN Energy, a wholly-owned subsidiary
of NW Holdings. owns 50% of TWH. and 50% is owned by Transcanada
American lnveslmenls Lld., an indirect wholly-owned subsidiary of
TransCanada Corporalion-
Variable lnterest Entity (VlE) Analysis
TWH is a VlE, wilh NW Holdings' investment in TWP reporled under
equity method accounting. ll has been determined that NW Holdings is
not the primary beneficiary of TWH'S aclivities as il only has a 500/6 share
ofthe entity, and lhere are no stipulations that allow NW Holdings a
disproportionate influence over it. lnveslments 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 relaled to
TWH is limited to NW
EXHIBIT 2
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Page I l2 of 210
104
Table of Contents
,4. AUSTTVESS CO'I4 Bl N AT I O NS
Falls Water
On Septembe|13, 2018, NWN Water,lhen a wholly-owned subsidiary of
NW Nalural and now a wholly-owned subsidiary of NW Holdings,
compleled 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 adjuslmenls, in the
form of 125.000sharesof NW Natural common stock. FallsWaler
became a wholly-owned subsidiary of NWN Water and marked its first
acquisition in the waler services sector. This acquisilion aligns wilh NW
Holdings'water sector strategy as the acquisition provides NWN Water
entry into ldaho, expands service area, and opens furlher opportunity for
growth Falls Water is based in ldaho Falls. ldaho and se.ves
approximalely 5.300 Connections
Through lhe purchase of all of the outstanding shares of Falls Waier,
NWN Water acquired the nel assets and '100% controlof Falls Waler. We
dete.mined that the Falls Water acquisilion mel lhe criteria of a business
combinalion. and as such performed a preliminary allocation ofthe
consideration to the acquired assets and assumed liabilities based on
their fair value as ofthe acquisition date, the majority ofwhich was
allocated to goodwill. The allocation is considered preliminary as of
December 31, 2018, and is primarily associated wilh cedain tax
positions and goodwill. Subsequent adjustments are not expected to be
signiflcant,
15. DERIVATIVE INSTRUMENTS
NW Natural enters into financial derivative contracts to hedge a ponion oI
the NGD segment's nalural gas sales requiremenls. These conlracts
include swaps. oplions, and combinations ofoption contracts. These
derivalive financial instruments are prirnarily used lo manage commodity
price variability. A small ponion of NW Natural's derivalive hedging
strategy anvolves foreign currency exchange conlracls
NW Natural enlers into these flnancial derivatives, up to prescribed
limits. primarily to hedge price variability related to physacal gas supply
contracls as well as to hedge spot purchases of natural gas. The foreign
currency forward conkacls are used to hedge the flucluation in foreign
currency exchange rates for pipeline demand charges paid in Canadian
dollars.
ln lhe normal course of business. NW Natural also enters into indexed-
price physical forward natural gas commodity purchase conlracts and
options to meet the requirements of NGD customers. These contracls
qualify for regulatory deferral accounting lreatmenl.
NW Natural also enlers into exchange conlracts related to lhe third-party
assel management of its gas portfolio, some olwhich are derivatives
that do not qualiry for hedge accounting or regulalory defer,al, but are
subject to NW Natural's regulatory sharing agreement. These derivatives
are recognized an operating revenues, nel of amounts shared with NGD
cuslomers.
and any such adjustments are expected to be completed wilhin a one-
year measuremenl period. The acquisilion costs were insignificant and
were expensed as incurred. The results of Falls Waler are not maleriallo
the consolidated llnancial 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
expeaienced workforce as well as the strategic benefils expected from
this high-growth service terrilory. NW Holdings has included lhis
goodwall in olher for segment reporting purposes, and it is not deductibie
for income lax purposes. No intangible assets aside from goodwillwere
acquired. See Note 2 ,or goodwill impairment information.
Other Acouisitions
During 2018. in addition lo lhe Falls Water acquisition, NWN Water
completed three acquisitions qualifying as business combinations. The
aggregate fair value ofthe preliminary consideration transfened forthese
acquisitions was approximately $2.8 million. These business
combanations, both individually and an aggregate, were not sagniflcant to
NW Holdings' results of operalions.
As a result of all acquisitions completed, total goodwill was $9.0 million
as of December 31 20'18
Notional Amounta
The following table presents the absolute notional amounts relaled to
open positions on NW Natural derivative instrumenls:
Al December 31
2018 2017
Natural gas (in therms)
Financial
PhysicEl
Foreign exchange
408,850
472,275
6,936
429.100
520.268
7.669S$
Purchased Gas Adiustment (PGA)
Derivatives entered into by NW Natural for the procurement or hedging of
natural gas for fulure gas years generally receive regulalory defenal
accounling treatmenl. ln general, commodity hedging for the cunenl gas
year is completed prior to the slan oflhe gas year. and hedge prices are
reflected in lhe weighled-average cosl of gas in the PGA llling. Hedge
contracts entered inlo after the stan ofthe PGA period are subjecl to the
PGA inc€ntive sha.ing mechanism in Oregon. NW Naturalentered the
2018-19 and 2017-18 gas year with forecasted sales volumes hedged at
480/6 and 49% in financial swap and option c!nltracls, ard 24o/o and 26o/o
in physical gas supplies. .especlively. Hedge contracts entered into prior
to the PGA liling, an September 2018, were included in the PGA for the
2018-19 gas year. Hedge contracts entered into affer the PGA tlling, and
related lo subsequent 9as years, may be included in future PGA fllings
and qualify Ior regulatory deferral.
105 EXIIIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page I l3 of2l0
Unrealized and Realized Gain/Loss
The following table reflects the income statement presentalion for the unrealized gains and losses from NW Nalural's derivative instruments, which also
represents all de.ivative instruments at NW Holdings:
December 31 2018 December 31 2017
Natural gas
commodity Fore€n exchange
Naturalgas
Forergn exchange
Beneril (expense) to cost of gas
Operating revenues
Amounts defened to regulalory accounts on balance she€l
Tolalgain {loss) in pre-tax eamings
(1,239) $
'1,660
(26,000) s
(1,O21)
$(284) $
26,665 (107)1211)
s 210 $s (356) $
UNREALIZED GAII/LOSS. Outstanding derivative instruments relaled lo
regulated NGD operations are deferred in accordance wilh regulatory
acmunting standards. The cost offoreign cunency forward and nalural
gas derivative contracts are recognized immediately in the cost of gas;
however, costs above or below lhe amounl embedded in the current year
PGA are subject to a regulalory deferral tariff and lherefore, are recorded
as a regulatory asset or liabjlily.
REALIZED GAIN./LOSS. Nel gains of $7.4 million and nel losses of $7 I
million were realized for the years ended December 31, 2018 and 2017,
respectively, from the setllement of natural gas fnancial derivative
conlracts. Realized gains and losses are recorded in cost ofgas,
deferred through regulatory accounls, and amortized through customer
rates in the following year.
Credit Risk Manaqement of Financial Derivativea lnatruments
No collateralwas posted wath or by NW Natural counterparties as of
December 31.2018 or2017. NW Nalural attempls to minamize the
polenlial exposure to collateral calls by counterparties to manage
liquidity risk. Counterparties generally allow a certain credit limil
threshold before requiring NW Natural to post collateral against loss
positions. Given NW Nalural's counterparty credit limiis and portfolio
diversafication, it was not subjecl to collateral calls in 2018 or 2017. The
collateral call exposure is set forlh under credit supporl agreements,
which generally contain credit limils. NW Natural could also be subject to
collateralcall exposure where it has agreed to provide adequale
assurance, which is not specific as to the amount oI credit limit allowed.
but could poientially require additional collateral in lhe event of a material
adverse change.
Based on current commodily financial swap and oplion contracls
oulstanding, which reflect unrealized losses of $7.8 million at December
31 , 2018, we have estimated the level of collateral demands, with and
without potenlial adequate assurance calls, using current gas prices
and various credit downgrade ralang scenarios for NW Nalural as
follows:
(Current
Ratinss)A+/A3 BBB+/Baa1 BBB/Baa2
8BB-
/8aa3
Specu-
ative
Credil Rahng Oowngrdde Scenarios
s s S s(3,940) $(6.05S)
(3,940) (4,452)
NW Natural's financial derivative instruments are subject to master
netting arrangements; however, they are presented on a gross basis in
NW Natural's consolldated balance sheets. NW Nalural and ils
counterparties have the abalaty to set-off obligations to each olher under
specified circumslances. Such circumstances may include a defaulting
party, a credil change due to a merger affecting either party, or any other
lerminalion event.
lfnetted by counterparty, NW Natural's derivative posilion would resull 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 mallaon as of
December3'1.2017.
NW Natural is exposed lo derivative credit and liquidity risk primarily
through securing fixed price natural gas commodity swaps lo hedge the
risk of price increases for natural gas purchases made on behalf of
customers. NW Natural utilizes master netting arrangements lhrough
lnternalional Swaps and Derivalaves Association contracls to minimize
this risk along with collateral support agreements with counterparlies
based on their credit ralings. ln certain cases, NW Natural requires
guarantees or lelters of credil from counlerparties lo meet ils minimum
credil requiremenl slandards.
Adequate
Assurance
Calls
l^/ilhout
Adequate
Calls
Table of Contents
107
2U
NW Natural's financial derivatives polisy requires counterparties to have
a cerlain investment{rade credit rating at the lime the derivative
instrument is entered into, and the policy specifies limits on the contract
amounl and duralion based on each counterparty's credit rating. NW
Naturaldoes not speculate with derivatives; instead, derivalives are used
to hedge exposure above risk tolerance limits. Any increase in market
risk created by lhe use ofderivatives should be offset by the exposures
they modiry.
EXHIBIT 2
106 PALFREYMAN, DI
GEM STATE WATER
Page I 14 of 210
Table oI Contents
We actively monitor NW Natural's derivalive credil exposure and place
counterpanies on hold for lrading purposes or require other forms of
credit assurance, such as letters of credit, cash collaleral. or guaranlees
as circumstances warranl. The onqoing assessmenl of counterparty
credit risk includes consideration of credit ratings. credit default swap
spreads, bond market credit spreads, financial condition, government
actlons. and markel news. A l onle-Carlo simulalion model is used to
eslamate the change in credit and liquidity risk from the volalility of natural
gas prices. The results ofthe model are used lo establish earnings-at-
risk kading limits. NW Natural's credit risk for all outstanding financaal
derivatives al December 31 . 2018 extends to October 31. 2021.
we could become materially exposed to credit risk with one or more of
our counterparties if naturalgas prices experience a significant increase
lra counterpady were lo become insolvent o. failto perform on its
obligalions, we could suffer a malerial loss; however. we would expect
such a loss to be eligible for regulatory detenal and rate recovery,
subject to a prudence review. All o, our existing counlerpanies currenlly
have investment{rade credit ratings.
1 6, COMMITMENT S AA,D CO,VI,II,GE,VC,ES
Fair Value
ln accordance with fair value accounting, non-performance risk is
included in c€lculating fair value adjustmenls. This includes a credat risk
adjustment based on the credat spreads of NW Natural's counlerpanies
when it is in an unrealized gain position, or on NW Nalural's own credil
spread when it is in an unrealized loss position. The inputs in the
valualion models include nalural gas fulures, volatility, credit default
swap spreads, and anteresl rates. Addilionally, lhe assessment of non-
performance risk is generally derived from the credit default swap markel
and from bond market credil spreads. The impact ol the credil risk
adjustmenis for all outstanding derivatives was immaterial to the fair
value calculation al December 31. 2018. As of December 3'l, 2018 and
2017, the net fair value was a liabilily of 55.7 million and a liability ol
$20.3 million, respectively. using significant olher observable. or Level 2,
inputs No Level 3 inputs were used in the derivative valuations. and
there were no lransfers between Level 1 or Level2 during the years
ended December31.2018 and 2017.
Leaaea
Land, buildings, and equipment are leased under agreements that
expire in various years, including a 99-year land lease that exlends
through 2108. Rentalcosts for continuing operations were $5.9 million,
$7.3 million, and S5.9 million lorthe years ended December 31. 2018,
20'17, and 20'16, respectively, a portion ofwhich was c€pitallzed.
The following lable reflects NW Natural's future minimum lease
payments due under non-cancelable operating leases lor continuing
operations at December 3'1, 2018. These commitments relate p.incipally
lo the lease of the ofiice headquaners and underground gas slorage
facililies.
Mrn mum lease
payments
Additionally, the lease was analyzed under the lease standard in effect at
lhe lime of signing in consideration of build-lo-suit lease accounting
implications. and NW Nalural concluded that it was the accounting
owner oflhe assel during conskuction. As a result, NW Natural
recognized $26.0 millaon and $0.5 million in propeny, plant and
equipment and an obligation in other non-current liabilities for the same
amount in its consolidated balance sheet at December 31, 2018 and
2017, respedively.
Gas Purchase and Pipeline caoacitv Purchase and Releaso
Commitments
NW Natural has signed agreements providing for the reservation of firm
pipeline capacaly under which it is required to make fixed monthly
payments for conkacted capacity. The pricing component ofthe monlhly
payment is established, subject to change, by U.S. or Canadian
regulatory bodies. ln addition, NW Natural has enlered into long{erm
sale agreements to release firm pipeline capacity. NW Natural also
enters inlo short-lerm and long{erm gas purchase agreemenls.
2019
2020
2021
2022
2023
Thereatter
Tolal
$5,368
4,412
7,O77
7 304
149 881
s 181 665
ln October 2017. NW Natural entercd inlo a 2o-year operating lease
agreement for a new headquarlers in Portland, Oregon in anticjpation of
the expiration ofthe cunent lease in 2020.
Paymenls under the new lease are expected to commence in 2020.
Total eslimaled base renl payments over the life of ihe lease are
approximately S160 million and have been included in the table above
There is an oplion lo extend the lerm of the lease for two addilional
seven-year periods.
107 EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page I l5 of2l0
The aggregate amounts ofthese agreements were as follows at
December3'1.2018:Total payments for fixed charges under capacity purchase agreements
were S82.6 million for 2018, $85.3 million for 2017, and 585.0 miliion for
2016. lncluded in lhe amounls were reduclions for capacity release
sales of $4 3 million for 2018, $4.5 million for 2017, and $4 5 million for
2016. ln addition, per-unil charges are required to be paad based on the
actual quanlitaes shipped under the agreements. ln certain lake-or-pay
purchase commitmenls, annual deficiencies may be offsel by
prepayments subject lo recovery over a longer term iftuture purchases
exceed the minimUm annual requirements.
Environmental Matters
Agreements
Pipeline
Capacity
Release
Agreemenis
2019
2020
2021
2022
2023
Thereafler
Tolat
repres€nlrn9 interesl
Total at present value
$1/t4,500 $
2.776
2,313
4,272
3,560
78,449 $
76.613
66.656
61.075
60,619
54o,022
Refer to Note 17 for a discussion of environmental commitments and
contingencies.
973,4U
201.224
$ ua,275 $ 722.210 $7,649
17. ENVIRONMENTAL MATTERS
NW Naturalowns, or previously owned. properties that may require
environmenlal remediation or action. The range ot loss for environmental
liabilities is eslimated based on currenl remediation technology, enacted
laws and regulations, industry experience gained al similar sites, and an
assessment of lhe probable level of involvement and financial condition
of other potentially responsible parties (PRPs). When amounls are
prudently expended related to site remediation ofthose sates described
herein, NW Nalural has a recovery mechanism in place to collect 96.68%
of remedialion costs from Oregon cuslomers, and NW Natural is
allowed to defer environmental remediation costs allocated to
customers in Washington annually unlal lhey are reviewed for prudence
at a subsequent proceeding.
These sites are subject to the remedialion process prescribed by the
Environmental Proteclion Agency (EPA) and the Oregon Department of
Environmental Quality (ODEO). The proc€ss begins wilh a remedial
investigation (Rl) to delermine the nature and exlent ofcontamination
and then a risk assessment (RA) to establish whether the contamination
at the site poses unacceptable risks to humans and the environment.
Next, a feaslbility study (FS) or an engineering evaluation/cosl analysis
(EE/CA) evaluates various remedial alternatives. lt is at this point in the
process when NW Natural is able to estimale a range of remediation
costs and record a reasonable potenlial remediation liability. or make an
adjuslment lo the existing liability. From this study, lhe regulalory agency
selects a remedyand issues a Record of Decision (ROD).
Remediation may include treatment ofconlamanaled media such as
sediment, soil and groundwater, removal and disposal of media,
instilutional controls such as legal restrictions on future property use, or
natural remvery. Followjng constructaon ofthe remedy. the EPA and
ODEQ also have requirements for ongoing maintenance, monitoring,
and other poslremedialion care thal may conlinue for many years.
Where appropriate and reasonably known, NW Naturalwill provide for
these costs in the remedaation liabilities described below.
Due to the numerous uncerlainties surrounding the course of
environmenlal remediation and the preliminary nature of several site
investigations. in some cases, NW Natural may not be able to
reasonably estimate the high end ofthe range ofpossable loss. ln those
cases, the nalure of lhe possible loss has been disclosed. as has the
fact that the high end ofthe range cannol be.easonably estimated where
a range of polential loss is available. Unless there is an estimate within
the range oI possible losses thal is more likely than olher cost estimates
within that range, NW Natural records lhe liability at the low end of lhas
range. lt is likely changes in these estamates and ranges will occur
throughout the remediation process for each oflhese sites due to the
conlanued evaluation and clarification concerning responsibility, the
complexity oI environmental laws and regulalions, and lhe determinalion
by regulators of remediation altematives. ln addition to remedialion
costs, NW Natural could also be subject to Nalural Resource Damages
(NRD) claims. NW Nalural will assess the likelihood and probability of
each claim and recognize a liability if deemed approp ate. Referto
"Othet Podland Hahol' belo'N-
108
Prpeline
Capacily
Agreements
Table of Contents
149.589
't,314
7,A32
183
After a ROD is issued, NW Natural would seek to negolaale a consent
decree or consent judgment for designing a nd implementing the
remedy. NW Natural would have the ability to lurther refine estimates of
remediation liabililies al that time.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page I l6 of2l0
Tabe of Contents
Environmental Sites
The following table summarizes information regarding liabilities related to environmenlal sites, which are recorded in other current liabililies and other
noncurrent liabilities in NW Natural's balance sheet at December 31:
Current Liabililies Non-Cunenl Lrabilftes
2014 2017 2017
Porlland Haftor srte:
Gasco/Siltronic Sedimenls
Olher Porlland Harbor
Gasco/Sillronic Upland ste
Central SeMce Cenler sile
Front Streel ste
Oregon Steel Mitts
Total
5,117
2,600
13 983
't0
11302
2,683
1,S49
13,422
1,009
44,351 $
6,273
44,830
45,346
4,163
47.435
s
$
$$
3 '10_757
179179
33,112 $ 19,088 $ 95,636 5't08,28O
PORTLAND HARBOR SITE. The Portland Harbor is an EPA listed
Superfund site that is approximately '10 miles long on lhe Willamette
River and is adjacent to NW Natural's Gasco uplands sites. NW Natural
is one of over one hundred PR Ps to the Superfund site. ln January 2017 ,
the EPA issued its Record of Decisaon, which selects lhe remedy for the
clean-up oflhe Portland Harbor site (Portland Harbor ROD). The
Porlland Harbor ROD estimates the present value total cost at
approximately $1.05 billion with an accuracy between -30% and +50% of
eclualcosls
NW Natural's potenlial liability is a portion ofthe cosls ofthe remedy tor
the entire Portland Harbor Superfund sile. The cost orthat remedy is
expected to be allocated among more than 100 PRPs. ln addition, NW
Natural is aclively pursuing clarification and flexibility under the ROD in
order to better understand its obligation under the clean-up. NW Nalural
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 addilional clarification around allocation of
costs among PRPs and, as a result ofthe issuance ofthe Portland
Harbor ROD, NW Natural has nol modified any ofthe recarded liabilities
at this time.
NW Natural manages its liability .elated to the Superfund site as two
distinct remediation projects, the Gasco/Silkonic Sedimenls and Other
Ponland Harbor projects.
Gaaco/Siltronlc Sedlmonr6. ln 2009, NW Natural and Siltronic
Co.poration entered into a separate Administralive Order on Consent
with the EPA to evaluate and design specific remedies for sediments
adjacent lo the Gasco uplands and Siltronic uplands sites. NW Natural
submilted a dralt EUCA to the EPA in May 2012 to provide lhe estimated
cost of polenlial remedial alternatives for this site. Atthis time, the
estimaled cosls forthe various sediment remedy allernatives 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 Nalural has recorded a
liabilily of $49.5 million for the sediment clean-up, which reflects the low
end ofthe range. At this time, we believe
sediments at this site represent the largest portion of NW Nalural's
liability relaled to the Portland Harbor site discussed above.
Other Portland Ha.bor. yvhile we believe liabilitaes associated with the
Gasco/Siltronic sediments site represent NW Natural's largest exposure,
lhere are olher potential exposures associated wilh the Portland Harbor
ROD, including NRD cosls and harborwide clean-up costs (including
downstream petroleum contamination), for which allocations among lhe
PRPs have not yet been determined.
NW Natural and other parties have signed a cooperative agreement with
the Portland Harbor Natural Resource Truslee councilto participate in a
phased NRD assessment to estimate liabilities lo suppo.t an early
restoration-based settlement of N RD claims. one member of this
Trustee council, the Yakama Nation, withdrew from lhe council in 2009,
and in 2017, filed suil against NW Natural and 29 other parties seeking
remedial costs and NRD assessment costs assocaated with the
Portland Harbor. set forth in the complaint. The complaint seeks recovery
of alleged costs lotaling $0.3 million in connection wath lhe selection ol a
remedial action for the Portland Harbor as well as declaratory judgment
for unspecified future remedial action cosls and for costs to assess the
injury. loss. or destruclion ofnalural resources resulting from the release
ofhazardous subslances at and from the Portland Harbor sile. The
Magislrate Judge has recommended granting NW Naturaland certain
other defendants' motion to stay the case. NW Natural has recorded a
liability for NRO claims which is at the low efid of the range of the
potential liability;the high end ofthe range cannot be reasonably
estimated al this time. The NRD liability is not included in lhe
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 thal was
closed in 1958 (Gasco site) and is adiacent to the Portland Harbor site
desc{ibed above. The Gasco site has been under investigation by NW
Natural for environmental contamination under the ODEQ Voluntary
Clean-up Program (VCP). lt is not included in lhe range of remedial
costs for the Portland Harbor site noted
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page I I7 of2l0
109
Table of Conlenls
above. The Gasco site is managed in two parts. the uplands portion and
the groundwalersource control action.
NW Natural submilted a revised Remedial lnvesligalion 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 liabilily for lhe remedialion of lhe uplands portion of the sile
which is at the lowend ofthe range of polentialliability;lhe high end of
the range cannot be reasonably eslimated al this time.
ln Oclober 2016, ODEQ and NW Natural agreed to amend their VCP
agreement to incorporate a portion ofthe Siltronic property adjacent to
lhe Gasco sate 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 investigalion of manufactured
gas planl conslituents on the enlire Sillronic uplands for ODEQ. Silkonic
will be working wilh ODEQ directly on environmental impacts to lhe
remainder of its property.
ln September 2013, NW Natural completed construction of a
groundwaler source control system, including a water keatment stalion,
at the Gasco sile. NW Natural has estimated lhe cost associated with
lhe ongoing operation oflhe system and has recognized a liability which
is al the lowend ofthe range of potentialcosts. NW Naturalcannot
eslimate the high end of the range al this time due to the uncertainty
associated wilh lhe duration ofthe operation ofthe water lreatment
station, which is highly dependenl on the remedy determined for bolh lhe
upland portion as well as the final remedy lor Gasco sediment exposure.
OTHER SITES. ln addition to those sites above. NW Natural has
environmenlal exposures at three olher sites: Cenlral Service Cenler,
Front Slreet, and Oregon Steel Mills. NW Natural may have exposure at
other sites lhal have nol been identified at this time. Due to lhe
uncertainty of the design of remediation, regulation, liming of the
remediation, and in the case of the Oregon Steel Mills sile, pending
liligation, liabilities for each of these sites have been recognized al their
respeclive lowend ofihe range of potentialliability;lhe high end ofthe
range cannot be reasonably estimaled at this 1ime.
Central Servlce Centor site. NW Natural is cunently performang an
environmenlal invesligation of the property under ODEQ's lndependent
Cleanup Pathway. This site is on ODEQ's listofsites with confirmed
releases ol hazardous subslances, and cleanup is necessary.
F.ont Street 3ite. The Fronl Street site was the former location of a gas
manufacturing plant NW Natural operaled (lhe former Portland Gas
Manulacluring site, or PGM). At ODEO's request. NW Nalural conducted
a sedimenl and source control investigation and provided findings to
ODEO. ln December 2015, a FS on the former Porlland Gas
Manufacturing sile was completed.
ln July 2017, oDEQ issued the PGM RoD. The RoD speciflesthe
selecled remedy, which requares a combination ofdredging, capping,
lreatment, and naturalrecovery. ln
addition, the selected remedy also requires institulional controls and
long-term inspection and maintenance. NW Natural revised the liability in
the second quarter of 2017 to incorporale the estimated undiscounted
cost of approximately $'10.5 million for lhe selected remedy. Further, NW
Nalural has recognized an additional liability of $0.9 million for additional
studies and design cosls as well as regulatory oversight throughout the
clean-up. NW Natural plans to complete lhe remedial desagn in early
2019 and expecls to construct the remedy during 2019.
Oregon Steel Mills site. Refer to the 'Legal Proceedings, below
Sito Remediation and Recoverv Mechanism (SRRM)
NW Natural has an SRRM through which it tracks and has the ability lo
recover past deferred and future prudently incurred environmental
remedialion costs allocable to Oregon, subject to an earnings test, for
those sites identified therein. ln the February 2015 Order establishing
the SRRI\4 (2015 Orde0. the OPUC addressed oulstanding issues
relaled to the SRRM, which required NW Nalural lo forego lhe collection
of $15 mjllion out of approximately $95 million in tolal environmental
remediation expenses and associaled carrying costs.
As a follow-up lo lhe 2015 Order, the OPUC issued an addilionalOrder
in January 2016 (2016 Order) regarding lhe SRRM implementation in
which the OPUC: (1) disallowed the recovery of 52 8 millaon of interest
earned on the previously disallowed environmental expendature
amounts; (2) clarified lhe state allocation of 96.68% of environmental
remedialion costs for all environmental sites allocable to Oregon; and
(3) confirmed NW Natural's treatment ol S13.8 million of expenses put
into lhe SRRM amortization account was correct and in compliance wilh
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 reflecled 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 lypes ofdeferred environmental
remediation expense:. Pre-review - This class of costs represents remediation spend thal
has not yet been deemed prudenl by the OPUC. Carrying costs on
these remediation expenses are recorded al NW Nalural's authorized
cosl of capital. NW Nalural anlicipates lhe prudence review for annual
cosls and approval of lhe eamings test prescribed by the OPUC to
occur by the third quarter ofthe following year.. Poslreview - This class of costs represents remedaation spend thal
has been deemed prudent and allowed after applying lhe earnings
tesl, but is not yet included in amortization. NW Nalural earns a
carrying cosl on lhese amounls at a rale equal lo lhe five-year treasury
rate plus ,l00 basis points.. Amortization - This class ofcosts represents amounts included in
current customer rates for collection and is geneaally calculaled as
one-fifth of the poslreview deferred balance NW Natural earns a
carrying cost equalto the amortization rate determined annually by the
OPUC, which approximates a sho.l{erm borrowinq rate.
EXIIIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page I l8 of2l0
110
Table of Contents
ln addilion lo the collection amounl noled above. the Order also provides
for the annual collection of $5.0 million from Oregon customers lhrough
a tariff rider. As NW Natural collects amounts from customers, it
recognizes lhese collections as revenue and separately amorlizes an
equal and offsetting amount of its deferred regulatory asset balance
through the environmental remediation operaling expense line shown
separately in the operating expense section ofthe income slalemenl.
NW Natural received total environmenlal insurance proceeds of
approximalely S150 0 million as a resull of seltlements from litigation
that was dismissed in July 2014. LJnder the 2015 OPUC Order, one-lhird
oflhe Oregon allocated proceeds were applied to costs deferred through
2012 with the remaining lwo-thirds applied to costs al a rate of$5.0
million per year plus interest over the following 20 years. NW Natural
accrues inlerest on the insurance proceeds in lhe customels 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 remedialion cosls allocated to Oregon.
2018
$5.0 million tariff rider and $5.0 million insurance proceeds are
recoverable through the SRRM. To the extent NW Naturaleams more
than its aulhorized ROE in a year, it is required to cover environmental
expenses and inierest on expenses greater than the $10.0 million with
lhose earnings ihat exceed its authorized ROE.
Underthe 2015 Order. the OPUC stated they would revisit the deferral
and amortization of future remedialion expenses. as wellas the
lreatment of remaining insurance proceeds three years from the original
Order, or earlier if NW Naturalgains g reater certainty about its future
remedaation costs, to consider whelher adiustments lo the mechanism
may be appropriale. NW Natural flled an update with the OPUC in March
2018 and recommended no changes.
WASHINGTON DEFERRAL. ln Washington, cost recovery and carrying
charges on amounls deferred for costs associated with services
provided to Washington customers will be determined in a future
proceedang.
Leoal Proceedinqs
NW Holdings is nol currently party to any direct claims or litigation.
though in the future it may be subject to claims and liligalion arising in
the ordinary course of business.
NW Nalural is subjecl to claims and litigation arising in the ordinary
course ol business. Although the final outcome ofany ollhese legal
proceedangs cannot be predicled with certainty, including the matter
described below. NW Natural and NW Holdings do not expecl that the
ultimate disposition of any of lhese matlers will have a material effect on
financial condition, results of operations, or cash flows.
For addilional information regarding olher commitments and
contingencies, see Nole ,|6
Defered @gt3 and antercst r')
Acarued site liabrlities '"
lnsuranco proc€ods and inieresl
Total regulatory assel deferral')
Currenl regulatory assetso
Long-term regulalory assets'3)
41,883 $
128,369
(88,sm)
45,546
126,950
(s4.170)
81 750 $
5 601
76.149
74,328
6,198
72.128
lndudes pre-review and posl-review deferred cosls, amounts currently in
amorlrzalon. and interesl net of amounts collected lrom q.rslome.s.
Excludes 3.32% of lhe Front Slreel site llability. or S0 4 million in 2018 and
30.4 million in 2017, as the OPIJC only allows recovery of 96 68% of cosis
for those stes allocable to Oregon, including lhose that hislorically served
only Oregon cuslomers
Envronmentalcosls relate lo speolic siles approved for regulatory defenal
by the OPUC and WUTC. In Oregon. NW Naturaleams a €rrying charge on
cash amounts paid, whereas amounts accrued but nol yet pad do nol eam a
canying charge unlil exp€nded NW Natural also a@rues a carrying charge
on insurance proceeds for amounts owed to cuslomers. ln Washjnglon a
carrying charge related lo defefled amounts will b€ determrned in a future
prc'c€eding. current environmenlal cosls leplesent remediation costs
manageinenl expcts to collect from customers in the nexl 12 months
Amounls included in this estimale are stillsubjectto a prudence and pemings
tesl revis/v by the OPIJC and do nol indude the S5.0 million tar,ff rider The
amounts allocable to Orelon are recoverable through NGD rates. sublect lo
an eamings test.
ENVIRONiIENTAL EARNINGS TEST. To the enent NW Natural earns at or
below its authorized Retum on Equity (ROE), .emedialion expenses and
inleresl an excess of the
111
EXHIBIT 2
PALFREYMAN, DI
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Page I l9 of2l0
The following table presents information regarding the tolal regulatory
asset deferred as of December 3'l:
2017
$
OREGOT{ STEEL MILLS SITE, ln 2004. NW Naturalwas served with a
third-pany complaint by the Port of Portland (the Port) in a Multnomah
County Circuit Court case, Oregon Sleel Mills, lnc. v. The Port ofPodland.
The Pon alleges that in the 1940s and 1950s petroleum wasles
generated by NW Natural's predecessor, Portland Gas & Coke
Company, and l0 other third-party delendants, were disposed of in a
waste oil disposal facility operated by lhe 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
unspecifled past remedial aclion costs incurred by lhe Porl regarding the
former waste oil disposal facilily as well as a declaratory judgment
allocating liability for future remedial action costs. No date has been set
for trial. ln August 2017, lhe case was stayed pending outcome of lhe
Portland Harbor allocalion process or other mediation. Although the linal
oulcome ofthis proceeding cannot be predicted with certainty, NW
Natural and NW Holdings do not expect the ultimate disposition olthis
malter will have a material etfect on NW Natural's or NW Holdings'
tinancial conditaon, resulls of operations, or cash flows.
NW Holdinqs
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 forthe sale by NWN Gas Storage of allofthe
membership interesls in Gill Ranch. Gill Ranch owns a 757o interest in
the nalural gas storage lac.ility located near Fresno, California known as
the Gill Ranch Gas Slorage Facilily. PG&E owns the remaining 25%
inlerest in lhe Gill Ranch Gas Storage Facility. The CPUC regulales Gill
Ranch under a market-based rate model which allows for the price of
storage services to be sel by the marketplace. The CPUC also regulates
the issuance of securities, system of accounts, and regulates intrastate
storage services.
The Agreemenl provides for an initialcash purchase price of$25.0
million (subject to a working capital adjustment), plus potential
additional payments lo NWN Gas Storage ofup to $26.5 million in lhe
aggregate if GillRanch achieves cenain economic performance levels
for the fi.st three Iull gas storage years (April 1 ofone yearthrough March
31 ofthe following year) occurring after lhe closing and lhe remaining
portion ofthe 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, salasfaction of representations,
warranties and covenants ofthe Agreement, and other customary
closing conditions. ln July 2018, Gill Ranch liled an applacalion wath the
CPUC for approval oI 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 seltlement agreement
wilhin 90 days ofits filing, but may grant furthertime for public
comment. We expect an order on this malte. by the end ofJune.
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 qualafied it as assets and
liabilitaes held fo. sale and discontinued operations. As such, the assels
and liabilities associaled with Gill Ranch have been classitied as
discontanued operations assets and disconlinued operations liabilities,
respectively. and, the
resulls of Gill Ranch are presented, net of tax, as discontinued
operations separate lrom the results ofcontinuing operations for all
peraods presented. The expenses included in the results ofdiscontinued
operalions are the darect operating expenses incuned by Gill Ranch lhat
may be reasonably segregaled Irom the costs olour conlinuing
operalions.
The following iable presents lhe carrying amounls of lhe major
components of Gill Ranch lhal are classified as disconlanued operations
assels and liabilities on NW Holdinqs'consolidated balance sheets:
NW Holdings Discontinued
Operalions
201A 2017
Accounls receivable
lnventores
Other current assets
Property. plani and equipment
Less: Accumulaled depreciation
Olher non-currenl assets
Discontrnued op€Etons - current assels
Drsconlrnued operalions - non-current
assels
Tolal discontnued operations ass€ts
Uabilities:
Accounls payable
Olher currcnt liabilities
Olher non'current liabrlrties
Oisconlinued operatjons - current
liabililies
Dasconlinued opel'ations - non-currenl
liabrlit€ts
$390 S
685
11,621
7
247
2,14
396
10,816
13,m9 3,057
10,817
$ 13.269 $ 13,874
$873 $
11,779
1,287
'12,043
12.959 1.593
'12,u3
112
IIXHII]IT 2
PALFREYVAN, DI
GEM STATE WATER
Page 120 of 2l 0
Table ot Conlenls
1 8. DI SCO NNNU ED OPERAf I ONS
Total dilconlinuedoperali6ns l.abilities j_3!91 j_____]!I38
The lotalassets and liabililies of Gill Ranch are classified as curent as of
December 31, 2018 because it is probable that lhe salewill be completed
within one year.
Table ol Contenls
The following table presents the operating results of Gill Ranch, which
was histo.ically reported within the gas storage segment, and is
presented net oftax on NW Holdings' consolidated statements of
comprehensive income:
NW Holdings Oiscontinued Operatons
tn lhorsands except pet sh3rc data 2018 2417 2016
$ 3.579 $ 7135 $ 7.794
The following table presents lhe carrying amounls oflhe major
components of NWN Energy, NWN Gas Storage, Gill Ranch, NNG
Financial, NWN Water, and NW Holdings thal are classified as
discontinued operations assets and liabililies on NW Natural's
consolidated balance sheets:
NW Natural Discontnued
OperationsRevenues
Expens€s
Operalrons and maintenance
General laxes
Deprecialion and amorttzatton
Olher expenses and rnteresl
lmpairment expense
Toial expenses
Loss lrom dEcontinued
operations before in@me tax
lncome tax benefit"'
Loss from discontinued
operations, net o[ lax
Assets
Cash
Accounts receivable
lntercompany receivables
lnvenloies
Other current assets
Property. planl. and equipment
Lessr Accumulated depreqation
Olher inveslments
Olher non-curaent alsets
Disconthued operalions - currenl assets
Ds@ntinued oper6lions - non-cufi ent
essels
Tolal discontinued operalions assets
2017
5.771
479
430
60s
7,245
't,373
4,525
s75
192 478
S 342
2,126
3,664
11,191
19t2
13,710
7,249 206,596 13,615
7,170
24,709Loss frcm dis@ntrnued
operatrons per share of
common slockl
Basic $ (o 10) $ (4.45) s (o 13)
Drluled $ (0 09) S (4 44) $ (0 13)11 20 I 7 rncome tax benefil includes a pproximateiy S 1 I million of tax benefit from
fhe enaclment of the TCJA The TCJA wa6 enacted Oecembet 22 2017 and
resulted in the tederal tax rate changing from 35% lo 210/".
NW Natural
As part ofthe 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 Ihe reorganization, are no longer subsidiaries of NW Natural. See
Note 1 for additional information. As a resull. NW Natural's financial
slatemenls reflecl amounts related to lhese enlities as discontinued
operations for all periods presented. The expenses included in the
results ofdiscontinued operations are the direct operating expenses
incur.ed by lhe entities that may be .easonably segregated from the
cosls of NW Natural's continuing operations.
Liebililies
Accounts payable
lntercompany payables
Other currenl liebilities
Delerred lax liabilities
Oth€r non-cunent liabiliiies
Discontinued operalons - curenl
liabililies
Discontjnued operalions " non-curent
liabilities
Tolal disconlinued operations liabilities
S 31 87S
s 1,S54
2e6
345
(16,862)
12,1!X)
2,565
(4,732)
12.167)
The following lable presenls lhe operating results praor lo 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 reporled wilhin lhe gas storage segment and
other, and is presented net of tax on NW Natural's consolidated
slalemenls of comprehensave incomel
$
113
EXHIBIT 2
PALFREYMAN. DI
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Page l2l of2l0
6.643
1 295
4,685
992
(3,710) (19s,461) (5.521)
(s68) (71.76s) (2,297)
$ 12,742) S 027.696) $ (3,524)
NW Natulal 0iscontinued Operalrons
]n thousands ex@pt pet share data 2018 2017 2016
Expenses
Operatons and mainlenance
Generaltaxes
Deprecration and amorlEaton
Other expenses and inlerest
lmpairment expense
3 016
4151
448
420
342
s 7,360
7,423
1,410
4.555
650
192 474
$8,018
? 387
1,317
4714
1,097
Totalexpensas 5,361 206,516 14,5'15
Lo6s lrom disconlinued
operafons b€bre income tax (2,345) (199.156) (6,497)
lncome liar benef{t' (622) (71,813) 12.55z|
Loss lrom disaontinued
operarions. ner of rax l____lIr9l- l-!l3g ryr') 2017 income tax benefit includes approximately t18 million of lax benelit Irom
fE enactneit ol the TCJA. The TCJA vas erEcied December 22. 201 7 and
resuned in the federal tax rale chenging lrom 35% to 21olo.
114
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 122 of210
Tabe of Contents
Table ol Conlents
NORTHWEST NATURAL HOLDING COMPANY
QUARTERLY FINANCIAL I NFORIV]ATION (UNAUDITED)
NW Holdrngs
Ouarler ended'rl
ln thousthcls, oxcapt pe( share dala l\,larch 31 Seplember 30 December 31
2018
Operal.ng revenues
Net income {loss) from continuang operatrons
Loss from drscontinued opecttions, nel ollax
Net income (loss)
Average common shares oulstandlng:
Basc
Oil!ted
Earnings (loss) lrom continuing operalions per share ot @mmon stock:
Basic
Diluted
Loss lrom drsconlinued operations per share of common siock
Basic
Drluled
Eamings (loss) per share of common stock:
Basrc
Diluted
S 263,635 $
42,011
1474)
124,567 S
(33s)
(659)
91 239 $
111,144)
(650)
226.702
36,783
(959)
41,537 {998)(11,794)
24,791
2A 791
24,415
28,815
28,851
28,940
146 (0 01)(0.39)
(0.39)
1.27
1.27(0 01)
(0.02)
(0.02)
(0.02)
(0 02)
(0 02)
lo 02)
(0.03)
(0.03)
144
1_44
(0.03)
(0.03)
(0.41)
(0.41)
124
124
2017
Operaling revenues
Net income (loss) from continuing operations
Loss from disconlinued operatrons, nel oflax
295724 $
41.397
{1.087)
134.476 $
4.O75
(1,346)
86,212 $
(?,884
(608)
234,626
34,448
(124 6s5)
Net incorne (lo6s) 40,310 2,7n (8,495) (90,167)
Averag€ common shaaes outstandrng:
Basic 28,633 28,648 2A.67A 2A,716
Dituted 24,723 28.717 28,674 2A 797
Eamings (loss) rrom continuing operalionB per share of common slock:
Basic 1.45 0.14 (0 28) 12O
Oiluted 1.44 0.14 (0.2e) 1.2O
Loss trom discontinued operations per share ol common stoct:
Basic (0.04) (0.04) (0.02) (4.34)
Dibred (0 04) (0 04) (0.02) (4 s3)
Eamings (loss) p€r share oI common st@k:
Basic 1.41 0.'10 (0 30) (3 14)
oiluled 14o 0.10 (0.30) (3 13)r'r Oua erly earnings (loss) per share are based upon the average numberofcommon sha@s oulstanding during each quaner Variations in eamings between quarterly
penods are due pnmarily to the seasonal nature of our business.
115
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 123 of 210
June 30
2A 753
28 803
$
Table ol Contenls
NORTHWEST NATURAL GAS COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
NW Naiural
Ouarler ended
March 31 June 30 September 30 December 31
2018
operat ng revenues
Nel rncome (loss)from continuing operalrons
Loss from discont nued operations netoflax
Net income (loss)
263,635 $
42,014
(477)
124,563 $
\271)
\727)
91,227 S
11t,2751
(519)
226.146
37,581
$
41 537 (se8)(11 794)37,581
2017
Operaljng revenues
Net income (loss) from continuing operations
Loss from d sconlinued operations, net oftax
Net inclme (loss)
295.668 $
41,438
(1,128)
134 420 $
4,O72
(1,343)
86,157 $
o.676)
(61e)
238.793
34.086
(124,253)
s
40,310 2,729 (8,495)(s0,167)
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 124 of 210
116
Table of Conlents
SCHEDULE I- CONDENSED FINANCIAL INFORMATION OF NORTHWEST NATURAL HOLDING COIVIPANY
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOIVIE
(PARENT COMPANY ONLY)
lnception lhrough
December 31. 20'18
Operating expensesl
Operations and maintenance
Total operating expenses
Loss from operalions
Earnings from investment in subsidjaries, net oftax
Other income (expense), net
lnleresl expense. nel
lncome before income laxes
lncome tax expense (benefit)
Nel income
$838
838
(838)
36,469
36
35,614
(22s)
$35,839
See Noles to Condensed Financial Stalements
117
EXHIBIT 2
PALFREYMAN, DI
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Page 125 of 210
Table of Contenls
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED BALANCE SHEETS
(PARENT COI\iI PANY ON LY)
As of December 31,
2018
Assels:
Current assels:
Cash and cash equivalents
Receivables from affiliates
lncome taxes receivable
Olher currenl assels
Totalcurrent assets
Non-currenl assets:
lnvestments in subsidiaries
Othea investments
Other non-currenl assets
Total non-current assets
Totalassets
Liabilities and equity:
Current liabilities:
Accounts payable
Payables to affiliates
lnteresl accrued
Tolal current liabilities
Long{erm debt
Deferred credils and other non-currenl liabilities:
Deferred lax liabilities
Totaldeferred credils and other non-currenl liabilities
Equily:
Common stock
Relained earnings
Tolal equity
Total liabilities and equity
4,011
2,796
6,000
3,078
'r5,885
754,971
65
310
755,346
$771,231
168
9.166
9,366
(1)
7
7
739.722
22,137
$
761.859
771 ,231
EXHIBIT 2
PALFREYN4AN, DI
GEM STATE WATER
Page 126 of2l0
See Notes to Condensed Financial Slatements
118
s
Table ol Contents
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
lnceplion lhrough
December 31. 20'18
Operaling acliviliesi
Nel income
Adjustments to reconcile net income to cash used in operationsl
Equity in earnings of subsidiaries, net of tax
Delerred income laxes
Olher
Changes an assets and liabililies:
Receivables. nel
lncome and other laxes
Accounts payable
lnterest accrued
Other. net
Cash used in operating actavilies
lnvesting activities:
Contributions to subsidiaries
Cash used in investing aciivities
Financing activities:
Cash dividend paymenls on common slock
Capital contributions
Other
Cash provided by finaficing activities
lncrease in cash and cash equivalents
Cash and czsh equivalents, beginning of period
Cash and cash equivalents, end of period
$35,839
(36,469)
7
15
(585)
(9,034)
9.304
(44)
(935)
(1,804)
(1,804)
(12,923)
20,000
/'327\
6,750
4,011
4,01'l
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 127 of2l0
$
See Notes to Condensed Financial Statements
11S
Table of Contents
1. BASIS OF PRESENTATION
NOTES TO CONDENSED FINANCIAL STATENIENTS
NW Holdings is an energy services holding company that conducls
subslantaally all of its business operalions through its subsidiaries,
particularly NW Natural. These condensed financial statements and
relaled footnotes have been prepared in accordance wilh Rule 12{4,
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
2. DEBT
consolidated financial slatements and notes thereto of NW Holdings
included in llem I ofthis Form 10-K.
Equity earnings of subsidiaries included earnings from NW Natural of
$36.5 million for the yearended December 31 2018
For informalion concerning NW Holdings' debt obligations. see Note 8 to
the consolidated financial stalements included in ltem I ollhis report.
120
EXHIBIT 2
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GEM STATE WATER
Page 128 of2l0
Table of Contents
NORTHWEST NATURAL HOLDING COMPANY
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUII4N A COTUMN 8 COLUII,{N C COLUI'TN D COLUIIN E
Add tions Oeductons
Ealance al beginnino
of penod
Charged lo costs
and expenses
Balance at end of
penodln lhous,ds lyear endad Da.€ntu. 31)Net wrile-offs
2018
Reserves deducted rn balance sheel from assels
to whlch lhey apply
Allowance for uncollectible acco!nts
2017
Reserves deducted in balance sheel from assels
lo which they apply:
Allowance for uncolleclible accounls
20t6
Reserves deducted in balance sheet llom assels
to whrch they apply
Allowance lot uncollectible accounts
s e56 $680 $$659 S 977
$1,290 9 865 $$1,193 $956
s 870 $1,246 $$826 $
NORTHWEST NATURAL GAS COMPANY
SCHEDULE II - VALUATION AND OUALIFYING ACCOUNTS AND RESERVES
COLUI\,IN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions Oeduclrons
tn thousaNs (yeat endcd De.Enbet 31)
Balance at beginning
of pe.iod
Charged to costs
and expenses
Chaeed to olhe.
accounts Net wnte-olfs
Balance at end of
period
mt8
ReseNes deducted in balance sheel lrom assets
to whrch they apply
Allowance for uncollectlble accounts
2011
Rese.ves deducted in balance sheet from assets
to whrch they apply:
Allowance for uncollectble accounts
2016
Reserves deducled in balance sheet from assets
to which they apply:
AllowEnce for uncollectible accounls
S 956 S 678 $s 659 $975
956
1,290
$1,290 S 865 $$1,199 S
$870 $1246 $$826 $
121
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 129 of2l0
Cha,ged to other
ac@unts
1,290
Table ot Conlenls
ITEM 9. CHANGES IN AND DISAGREEMENTS WTH
ACCOUNIANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEI\4 9A, CONTROLS AND PROCEDURES
(a) Evalualion of Disclosure Conlrols and Procedures
NW Holdinqs and NW Natural managemenl, under the supervision and
with the panicipation of the Chief Executive Oficer and Chief Financial
Ofrlcer, compleled an evalualion of the effecliveness ofthe design and
operation of disclosure conlrols and procedures (as detined in Rules
13a-15(e) and 15d-15(e) of the Secu.ities Exchange Act of 1934, as
amended (lhe Erchange Act)). Eased upon this evaluation.lhe Chief
Executive Offlcer and ChiefFinancial Officer ofeach registranl have
concluded lhat, as ofthe end olthe period covered by this repon,
disclosure conlrols and procedures were effective lo ensure that
informalion required to be disclosed by each such regislranl and
included in reporls llled or submitted underlhe Exchange Act is
recorded, processed, summarized, and reported withan the tame periods
specified in the Securities and Exchange Commission (SEC) rules and
forms and that such information is accumulated and communicated lo
management ofeach registrant, including the Chief Executive Officer and
Chief Financial Ofiicer, as appropriate to allow timely decisions
regardang required disclosure.
(b) Changes in lnlernal Conl.ol Over Financaal Reporling
NW Holdings and NW Natural managemenl are responsible for
establishing and maintaining adequate inlern al control over lina n caa I
reporling, as such term is defined in the Exchange Act Rule 13a-15
(0. There have been no changes in internal control over financial
reporting that occuffed during the quarler ended December 31, 2018 that
have materially affected, or are reasonably likely lo malerially affect,
anternal conlrol over llnancial reporting for NW Holdings and NW Natural.
The statements contained in Exhibit 31a.. Exhabit 31b., Exhibit 31c. and
Exhibit 31d. should be considered in light of. and read together with, lhe
information set forth in this ltem 9(a).
None
122
EXHIBIT 2
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Page 130 of2l0
ITE|\,ll 98, OTHER INFORMATION
PART III
ITEI\4 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The "lnformalion Concerning Nominees and Continuing Directors", "Corporate Governance", and "Section l6(a) Beneficial Ownership Reporting
Compliance" contained in NW Holdings' delinitive Proxy Statement for the 2019 Annual Meeling of Shareholders is hereby incorporaled by reference
Name
Age at
Dec.31,2018 Positions held during lasl five yealsrrr
David H Anderson'
Frank H. Burkharlsrneyer'
Jon G. Huddleston
Thomas J. lmeson(''
Justin Palr.eyman
Melinda B. Rogers
57 Chief Executive Officer and Presidentp) (2016- ); Chief Operating Ofllcer and Presidenl (2015-
2016)t Execulive Vice President and Chief Operating Ofricer (2014-2015); Executive Vice
Presidenl Operations and Regulalioo (2013-2014); Senior Vice Presidenl and Chief Fanancial
Officer (2004-2013).
Senior Vice President and Chie, Financial Office/') (2017- ): Presidenl and Chief Exec{rlive Oficer
of Renewables, Avang,id Renewables (2015-2017); Senior Vice President of Finance, lberdrola
Renewables Holdings. lnc. (2012-2015).
Senior Vice Presidenl and ChiefAdministrative Ofiicer (2013-2018); Senaor Vice President (2008-
2013).
Vice President and Chiet lnformstion Officer (2017- ); Chief lnformation OIficer, WorieyParsons
(America's Division) (2016-2017); Executive SeMce Delivery Managerror SAP. British Petroleum
(2011-2015).
Vic€ President, Chief Compliance Offcer and Corporate Secretaryr'?r (20'16- ); Vice Presidenl and
Corporate Secretary (2015-2016); Senior Legal Counsel (2011-2014); Assistant Corporate
Sec.etary (20'10-2014).
Senior Vice President, Operations and Chief l\,larketing Ofiicer (2018- ); Senior Vice Pregident,
Communications and ChiefMarteling Officer (2018);Vico President, Communicalions and Chief
Marketing Oflicer (20'1$20'18) i Chief Markeling & Communic€tions Otficer (2013-2014); Chief
Corporate Communications Ofiicer (201'l -2013).
Vice President, Engineering and Utility Operations (2018- ); Senior Director, Utility Ope.alions
(2014-2018)i Director, Utility Operations (20'13-2014); Process Director (2007-2013).
Vice President of Public Affairs (2014- ); Director of Public Affairs, Pod of Porlland (200+2014).
Vice President, Strategy and Business Development (2017- );Vace Presadent, Business
Development (2016-2017); Director, Power, Energy and lnfrastructure Group, Lazard, Freres &
Co. (2009-2016).
Vice President, ChiefHuman Resources and Diversity Ofiicer (2018- ); Senior Director ofHuman
Resources (2018)i Senior Manager, Organizational Eftecliveness and Talent Acquisilion (2015-
20'17); Senior Associate, Plan B (2014-20'i5);Director, Executive Development Center,
Wllamelte University (201 1 -201 5).
Vice President, Utility Services (2016- ); Utility Field Operalions Direclor (2013-2016); Serve
CuEtomer Process Director (2008-201 3).
Senior Vice President, Regulalion and General Counselrs)(2016- ); Senior Vice President and
General Counsel (2015-2016); Vice Presidenl, Legal, Risk and Compliance (2013-20'14);
Depuly GeneralCounsel (2010-2013): Chie, Govemance Olficer and Corporate Secretary (2008-
2014\.
President and Chiel Executive Officer, NW Natural Gas Storage, LLC and Gill Ranch Storage,
LLC (2011- ).
Vice President, ChielAccounting Officer, Controller and Treasurer) (2017- ); ChiefFinancial
Ofrcer (lnterim), Treasurer, ChieI Accounting Olficer and Controller (20162017); Chiet
Accounting Olficer. Controllerand AssEtsnt Treasurer (2016); Controller (20'112015);Ading
Controller (201 3); Accounting Direc{or (2012-2013).
54
49
46
49
Lori Russell
MardiLyn Saalhoff*
56
68
40
59
62
59
39
David A. Weber
Brody J. Wlson'
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page l3l of 210
Table of Conlents
EXECUTIVE OFFICERS
Lea Anne Doolittle'
James R. Downing
Shawn M. Filippi'
Kimberly A. Heiting
Table of Conlents
DIRECTOR INORTHWEST NATURAL GAS COMPANY OtiLYT'
Name Posilions held durjng last five years"r
Steven E. Vwnne 66 ExecLrtive Vice Presldeni, Moda, lnc., a privately-held healthcarc insurance company (2012- ), Drreclor, FLIR
Systems, Inc. ('199S- ); Okector. JELD-\I/EN Holding lnc (2012' )i Oirector, Pendlelon Vvoolen Mills, lnc (2013-
)r Drreclor, Lone Rock Resources lnc (2016- ), Dreclor, Citifyd lnc. (2013- )i Trustee, Wllamene Unrversity
(1999- ). Trustee, Ponland Center Slage (2012- )i Executive Vice Presidenl, JELD-I /EN, lnc 12011-2O12)l
Presidenl and Chief Executive Ofllcer. SBI lnternatonal, Ltd (2004-2007) Partner, Aler \^lynne LLP (2001-
2002. 2003-2004); Presidenl and Chief Executive Oflicer. Adidas (1995-2000)
I\,,1r. VWnne's senior managemenl experience with a variely otcompanies, board service on a numberof
public and private companies and longstanding legalpraclice in the arcas of @rporate frnance, securilies
and mergers and acquisitions qualify him to provde insighl and guidance in lhe areas of corpoGle
governance. strategp planning, enlerprise risk management finance and ope€lions
' EtE@nvB Ofrcer ol Nonheesr Natu.al Holdrng Company and No,rhw6$ Nalural Gas Compan!
Sialemenl lor lh€ 2019 Annual Meer ng ol Shacholders
rr) Unl€ss olhetuis€ sp€dti6d, all positions held sl Norlh*esl Nalural Gas Companyo Posiuon he d ar Nonhw€st Naturat Hotding company (beginning March 2018) snd Nonhresr Nalural Gas company.
ri, Ms. ooohllie.etrred Ef,6ctNe D€cemb€r 31.2018
Norlhresr Narurar Gas Company
Each executive officer serves successive annual terms; presenl terms end at the 2019 annual meeling. There are no family relationships among our
execulive officers, direclors or any person chosen to become one of our officers or directors. NW Holdings and NW Natural have adopted a Code of
Ethics (Code) applac€ble to all employees, officers, and directors lhat is available on our website al !l44y!e!Id!q!!!!g.Q98. We intend to disclose
on our website al www.nwnaturalholdinqs.com any amendmenls to the Code or waivers of lhe Code for executive oflicers and direclors.
124
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page I 12 of2l0
Age al
Dec 31. 20'18
ITEM 12, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND IVIANAGEIVENT AND RELATED STOCKHOLDER
IVIATTERS
ITEM 1 1, EXECUTIVE COMPENSATION
The information concerning "Executive Compensaiion", "Report ofthe
Organization and Executive Compensation Committee", and
"Compensation Committee lntedocks and
Plan Category
lnsider Participation" contained in NW H old ings' definitive Proxy
Statement for the 2019 Annual l\,4eeting 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.
As of February 22, 2019, NW Holdings owned 100% of lhe outstanding common stock of NW Natural.
The following table sets forth information regarding compensation plans underwhich equity securities of NW Holdings are authorized for issuance as of
December 31, 2018 (see Note 7 to the Consolidated Financial Slalemenls):
{a)
Number ol securilres to be
issued upon exercise of
outstanding oplions,
warrants and righls
Weighted-avelage
exercise price of
outslandlng options,
warants end righls
(c)
Nu mber of secuilies
remarning available for
future issuance under
equity compensation plans
(exclldinq secu ties
reflected in column (a))
Equity compensalion plans approved by security holders:
Restated Slock Option Pian
Employee Stock Purchase Plan
Equity compensation plans not approved by securily holders:
FxecJlrve Deterreo Compensattor Plan (FDCP)
Direclors Dete'red CoFpensaron P.an TDDCP)r
Deferled Cornpensaton Plan for Oircclors and Executives (OCP)'i
Total
'173175
55.938
20 022
44.96
60 07
1.063
41,089
194,205
$
574,787
204,317
775,-104
nla
445,472
r" Awards may be granted under lhe LTIP as Performance Share Awards, Restricted Stock Units, or stock options Shares rssued purcuant to Performance Share
Awards and ResirEted Stock Unils under the LTIP do not include an exercise pice, but are payable when the award criteria are satrsfled The number of shares
shown in coiumn (a) include 82,680 Reslricled Stock units and 90.495 Performance Share Awards, reflecting ihe number of shares to be issued as performance
share awards under outslanding Performance Share Awards if taaget performance levels are achieved. ll the maximum awards were paid pursuant to the
Pe,formance Share Awards outstanding at December 31, 2018, the number of shares shown in column (a) would increase by 90,495 shares rcflec1ing the maximum
share award of 200% of larget, and the number ofshares shown in mlumn (c) would decrease by the same amount of shares. No stock options or other types of
award have been issued under the LTIPo The number of shares shown in column (c) ncludes shares that are avarlable for future issuance under the LTIP as Restricted Stock Units, Perlormance Share
Awards, or stock oplions at December 31. 2018'3r PriortoJanuaryl2005,defenedamountswerecredited.allheparticipant'seleclion,toeithera'cashaccounl or a 'slock accounl.' lf defered amounts were
credrted to stock accounts, such accounts were credited wilh a numberof shares oI NW Natural (now NW Holdings)common slock based on the purchase pnce of
lhe common slock on lhe nexl purchase date under our Dvrdend Reinvestmenl and Drrect Stock Purchase Plan. and such a@ounts were credited wth additional
shares based on lhe deemed reinveslmenl ofdividends. Cash eccounts are credited qua(erly wilh nterestata rateequalto l\/loody s Average Corporale Bond Yield
plus two percentage points, subject lo a 6% minimum raie. At the electron olthe participanl defened balances in the slock accounts ere payeble efter term inalion ol
Eoard setui@ or ernployment in a lump sum, in installmenls over a pe odnottoo\ceed10yearsinlhecaseoflheDDCP,or15yearsinthecaseoftheEoCP,orrna
combination of lu mp su m and installments Amounts credited lo stock accounts are paya ble solely in sha res of common stock and cash for fractional shares and
amounts in ihe above table represent lhe Eggregate number of shares credlied lo participant's slock accounls We have contribuled common stock to the trustee of
the Umbrella Trusts such thai the llmbrella Trusts hold appoximately the numberolshares ol common stock equal to the number of shares crcdited lo allparlicipants
stock ac@Lrnts''r Effective January 1,2005,1he EDCP and DDCP were closed lo new parlicipanls and replaced with the DCP The DCP coniin ues the basic provisions ofthe EDCP and
DOCP underwhich delerred amounts ale credited to eithera'cash account'or a'slock accounl' Stock accounls represent a right lo recerve shares of NW Holdings
common stock on a deferred basE, and such accounts are credited wilh additional shares based on lhe deemed reinvestment ofdividends. Effective January 1,2OO7
cash accoufits are credited quarterly with inlerest al a rate equal lo Moody's Average Corporate Bond Yield. Our obligation to pay deferred compensation in
accordance with lhe terms of the DcP willgenerally become due on retirement. death, or other termination of servce and will be pald in a lump sum or in installments
offive 10. or 15 years as elected by lhe participant in accordance with lhe terms of the DCP. Amo!nts crediled to stock accounls are payable soleiy in shares of
common stock and cash for fractronal shares, and amounts in lhe above table represenl the aggregale number of shares credited to parlicipants' slock accounts. We
have @ntributed common stock io the lrustee ollhe Supplemental Trusl such that this trust holds approximately the number ofcommon shares equalio lhe number of
shares credited to all particrpants' slock ac@unls The righl of each participa nt in the DC P is lhat of a general, unsecured cred itor of the Company
125
Table of Contenls
(b)
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 133 of2l0
Table of Conients
The information captioned "Beneficaal Ownership of Common Stock by Directors and Executive Officers" and "Security Ownership of Common Stock of
Certain Beneficial Owners" conlained in NW Holdings' definilive Proxy Statement forthe 2019 Annual Meeting of Shareholders is incorporated herein by
reference.
126
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 134 of2l0
Table of Contents
ITEIII 13, CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The informalion captioned "Transaclions with Related Persons" and
"Corporate Governance" an NW Holdings' definitive Proxy Statement for
the 2019 Annual llleeting ofShareholders is hereby incorporated by
aeference.
ITEI\,4 14, PRINCIPAL ACCOUNTANT FEES AND SERVICES
NW Natural
The following table shows the fees and expenses of NW Nalural, paid or
accrued for the integrated audits ofthe consolidated financial statements
and other services provided by NW Natural's independent registered
public accounting firm, Pricewalerhousecoopers LLP, Ior fiscal years
2018 and 2017 |
2018 2017
AUDIT FEES. This category includes fees and expenses for services
rendered for the inlegraled audit of the consolidated financial statements
included in lhe Annual Report on Form 10-K and the review oflhe
quarterly financial slatements included in the Quarterly Reports on Form
10-Q. The integrated audit includes the review of our internal control over
financial reporting in cornpliance with Section 404 ofthe Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley Act). ln addition, amounts include fees for
services routanely provided by the audilor in connection wth regulalory
filings, including issuance of consents and comfon letlers .elating to the
registralion of Company securilies and assistance with the review of
documents filed with (he SEC.
AUDIT-RELATED FEES. This category includes lees for assurance and
relaled seNices that are reasonably related to the performance ofthe
audit or review ofour financial statemenls and inlernalcontrolover
flnancial reporting. including fees and expenses relaled lo consultations
for llnancial accounting and reporting, in addilion to fees for EPA
assurance letlers.
TAX FEES. This calegory includes fees for tax compliance, and review
services rendered for NW Nalural's income tax returns.
ALL OTHER FEES. This category relates to services other than those
described above- The amounl reflects paymenls for accounting research
tools in each of 2018 and 2017, and educational semioars in 2018.
PRE-APPROVAL POLICY FOR AUDIT AND NON-AUOIT SERVICES. The
Audit Committee of NW Natural approved or ratified 100 percent of 20,l8
and 2017 services for audat. audat-related, lax services and all other fees,
includang audit services relating to complaance with Section 404 ofthe
Sarbanes-Oxley Act. The chair ofthe Audil Committee of NW Natural is
authorized to pre-approve non-audil services between meetings olthe
Audit Commitlee and musl report such approvals at the ne)(t Audit
Commitlee meeting.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. A list of all Financial Stalements and Supplemental Schedules
rs incorporaled by reference to llem 8.
2. List of Exhibils fited
Audil Fees
Audil-Related Fees
Tax Fees
AllOther Fees
Total
1,379 $
30
34
4
$1 262
115
35
3
$ 1,447 $ 1.415
ITEM 16. FORM 10-K SUI\,llVlARY
None.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 135 of2l0
NW Holdinas
The information captioned "2018 and 2017 Audit Firm Fees" in NW
Holdings' defnitive Proxy Slatemenl for lhe 2019 Annual Meeting of
Shareholders as hereby incorporated by reference.
(a) The following documents are filed as part of this exhibit 99.1:
Reference is made lo lhe Exhabit lndex commencing on the
following page.
Table of Contenls
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
Oocument
.2a Ag-eemenl and Pla n of lvlellC! !y AOq A@q!g l!qd! l Gas Company, Norlhwest Nalural Holdinq Company, and NWN Me.ger
Sq!-!nc., dated as of Ma.ch 7, 2018 (incorporated bv reference lqEflllbit 2lo the Cunent Report on Form 8-K dated March 13,2018 File
.2b Afendment to Agreemen! and Plan of Meroer between Northwest Natural Gas Cornpany, Northwest Natu.al Holding Company, and NWN
lvleroer Sub, lnc., dated September 26, 2018 (incorporated by reference lo Exhibit 2.1(b) to the Form 8-K dated Octobe|l, 2018, File No. 1-
'3a.
'3b.
'3d
'4a
,4b.9lpplemenlal lndenture No-?qllp lllqld94gqqe and Deed of Trust. dated as of June 1. 1993 (incorporated by reference to Exhibit 4a.(1) to
Form 10-K for vear ended December 31, 1993, File No. 0-009S4)
'4c
.4d.
"4e.
'4f.
:1s
Copy of lndenlure. dated as of June 1. 1991, belween Northwest Natural Gas Company and Bankers Trust Company (to whom Deutsch
Bank Trust Company Americas is successo0, Truslee, relating to Northwest Nalural Gas Company's Unsecured Debt Securities
(incorporated by reference to Exhibit 4(e) in File No. 33-64014). E XHIBIT 2
PALFRIIYMAN. DI
Credit reement dated as of October 2 2018 amo Northwest Natural Holdin Com and the lenders th TER
Chase Bank N.A. as administrative and Bank of America N,A LJ.S. Bank Nalional Association. and Wells Fa o Bank
Association as co cation a enls nco rated reference to Exhibit 4.1 to Form 8-K dated Oclober 3 ?018 File No. 'l 6 of2l0
Exhibit Number
No. 1-15973)
38681).
Amended and Restated Arlicles of lncorporation of Northwest Natural Holdino Companv (incorporated bv reference to Exhibit 3.1 to the
Form 8-K dated Oclober'1, 2018. File No. 1-3868'1).
Amended and Restated Articles of lncgrDoration of Northwest Natural Gas ComDanv (incorDoraled by reference to Exhibil 3.3 lo lhe Form 8-
K dated Oclober 1, 2018, File No. l-15973).
Amended and Restated Bvlaws ofNorthwest Natural Holdinq Comoanv (incorporated by reference lo Exhibit 3.2 to the Form 8-K dated
october 1. 2018. File No. 1-38681).
Bvlaws of Northwest Natural Gas Comoany (inco.Dorated bv reference to Exhibit 3.1 to the Form 8-K filed December 22. 2017. File No. 1-
15973).
Coov of Mortoaqe and Deed of Trust ol No.thwest Nalural Gas Comoanv, dated as of Julv 1, 1946 (Morlqaqe and Deed ofTrust), to Bankers
Trust (to whom Deutsche Bank Trust CompanvAmericas is the successor), Trustee (incomorated bv reference to Exhibit 7(i) in File No. 2-
6494); and copies of Supplemental lndentures Nos. 1 through '14 to the Mortoaqe and Deed of Trust, dated respectivelv. as of June l, 1949,
March 1,1954, April 1, 1956, Februarv 1, 1959, July 1, '1961, Januarv'1,1964, March 1, 1966, December 1, 1969, April 1, 1971, Januarv 1.
1975, December 1, 1975, Julv '1, 1981, June 1, 1985 and November '1, 1985 (incorporated bv reference to Exhibit 4(d) in File No. 33-1929);
Supplemental lndenture No. 15 to the Mortqage and Deed of Trust, dated as of Julv 1. '1986 (filed as Exhibil 4(c) in File No. 33-24168):
Supplemental lndentures Nos. 16, 17 and 18 to the Mortqaqe and Deed of Trust, dated, resoectivelv, as of November 1, 1988, October '1,
1989 and Julv 1. '1990 (incomorated bv reference to Exhibit 4(c) in File No. 33-40482): Supplemental lndenture No. 19 to the Mortoaqe and
D€ed of Trust. dated as ol June 1. 't 991 (incorporated bv reference to Exhiblt 4(c) in File No. 3364014).
Supplemental lndenture No. 2'l to the Mortoaqe and Deed ofT.ust. dated as of Oclober 15, 2012 (incorporated bv reference to Exhibit 4.1 to
Form 8-K dated Oclober 26, 2012, File No. 1-15973).
SuDplemental lndenture No. 22 io the Mortaaqe and Deed of Trusi, dated as ot Novembe. 1. 2016 (incorDoraled bv reference to Exhibit 4.1
to Form 10-O for the auarter ended Seotember 30, 20'16, File No. 115973).
Suoplemental Indenture No. 23 to the Mortqaoe and Deed of Trust, dated as of September 1, 2018 (incoroorated bv reference to Exhibit 4(a)
to Form 8-K dated Seplember 10, 2018, File No. 1-'15973).
128
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 137 of 210
'4h Credit Aqreement. dated as of October 2, 2018, amona Northwest Natural Gas Company and the lenders pany thereto. with JPI\roroan
Chase BaOk. N.A. as administrative aaenl and Bank ofAmerica, N.A., U.S. Bank Nalional Association, and Wells Fargo Bank. Nalional
Association. as co-svndic€tion aqenls (incorDoraled bv.eference to Exhibit 4.1 to Form 8-K dated October 3,2018, File No. 1-15973)
10 Purchase and Sale Aoreement dated June 20, 2018, between NW Natural Gas Slorage LLC and SENSA Holdings LLC (incorporated by
reference to Exhibit 10 to Form 10-Q for the quarler ended June 30, 2018, File No. 1-15973)
21
23a
23b.
31a Certiflcation of Princi oalExecutive Offcer of Northwest Natural Gas Company Pursuant to Rule 13a-14(a )/1 5-d,14(a), Section 302 of the
Sarbanes-Oxley Act of 2002
31b Cerlalic€tion of Principaut!!!!!aLQ&9!@ural Gas Company Pursuant to Rule 13a-14(a)/1 5{-14(a), Section 302 of the
Sarbanes-Oxley Acl of 2002
31c Certification of Principal Execulive Otficer of Northwest Natural Holdinq Company Pursuantto Rule 13a-14(ayl5-d-14(a), Seclion 302 ofthe
-S!tbanes-Oxley Act of 2002
31d Certillcation of Princi al Financial Officer of Northwest Natural Holdinq ComDany Pursuanl to Rule 'l3a-'14(a),115{-14(a). Section 302 ofthe
Sarbanes-Oxley Act of 2002
"32a. Certification of Princi al Execulive Officer and Priocioal Financjal Offic€r of Northwesl NaturalGas ComDanv Pursuanl to Section 906 oflhe
Sarbanes-Oxley Acl of 2002
"32b. Cerliflcation of Principal Executive Officer and Principal Financial Officer of Norlhwest Natural Holdino Companv Pursuanl lo Section 906 of
the Sarbanes-Oxley Act of 2002
101 The following materials formatted in Extensible Eusiness Reporting Language (XBRL)
(i) Consolidated Statements of lncomei
(ii) Consolidated Balance Sheets;
(iii) Consolidated Slalemenis of Cash Flows; and
(iv) Related notes.
Executive Compensation Plans and Arrangements:
'10a
Supplemental Executive Retirement Plan, 2018 Restatement (incorporated herein by reference to Exhibit 10.7 to the Form 8-K dated
october 1, 2018, File No. 1-38681)
'10c. Northwest Natural Gas Company lqppleo9olqlltqst, etfective January '1, 2005, restated as of October 1 , 201 8 (incorporated by reference
to Exhibit 10.9 to the Form 8-K dated October 1, 2018, Fale No. 1-3868'l )
,10d Norlhwest Natural Gas Com a Umbrella Trust for Oirectors effective Janua 1991 restated as of October 1 2018 rn BIT 2teJerence to Exhibit 10.'l t to thefq{4rL(!at9!l?pl!qber '1, 2018, File No. 1-38681)
PALFREYMAN. DI
Northwesl Natural Gas Com Umbrella Trust for Execula effective Janua TER'10e
@lElqnce to Exhibit '10.10 to the Form 8-K dated October 1, 2018. File No. 1-38681)
1988 restated as of October 1 20-lE
Page 138 of2l0
Table of Conlenls
Subsidiaries of Nodhwest Natural Holding-.lQ9Ipg!)L
Consent of Pricewaterhousecoopers LLP - NW Holdinqs
Consent of Pricewaterhousecoooers LLP - NW Natural.
Executive Supplemental Retiremenl lncome Plan. 2018 Restatement (incomorated herein bv reference to Exhibit 10.6 to the Form 8-K
dated October 1, 2018, File No. 1-38681).
'10b.
129
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 139 of2l0
'10f. Restated Stock Option Plan, as amended effeclive December '14, 2006 (inclrporaled by reference to Exhibit '10c. lo Form 10-K for 2006, File
No. 1-15973
'1os Form of Restated Stock Option Plan Agreement (inqgrporated by reference lo Exhibit 10h. to Form 10-K for 2009, File No. 1-15973)
'10h Executive Defened Compensation Plan, effective as of January '1, 1987, restated as of October 1, 2018 (incorporated by reference to Exhibit
10.41o the Form 8-K dated October 1, 2018, File No. 1-3868'l)
-10i irectors Deferred C n Plan nel 1981 restaled a of 18 inco orated Exhi
lhe Form 8-K dated Oclober 1. 2018, File No. 1-3868'l)
-10j
10k.lntentionally omitted.
Form of lndemnity Agreement as entered into belween Northwest Natural Gas Company and each director and cerlain execulive ofiicers't 0t
10m Form of lndemnity Agreemenl as entered inlo between J',lorthwest Nalural Holding Company and each director and certain execulive
oflicers
'10n Non-Employee Directo.s Stoc! Compensalion Plan, as amended effective qeqember 15, 2005 (incorporated by reference to Exhibit 10?lo
Form 8-K dated December 16, 2005, File No. 1-15973)
'1 00. Executive Annual lncenlive Plan, effective January 1 , 2017 (incorporated by reference to Exhibit 10o to Form 10-K for 2016, File No. 1 -
15973).
,10p
10a.
'10r Form ofChanqe in Control Severance Agreement between Northwest Natural Gas Company and each execulive officer, as amended and
restated as of October 1, 2018 (incorporaled by reference to Exhibit 10.2 to the Form 8-K dated October '1, 2018, File No. 1-38681)
10s
101
'l0u
10v
'10w. Form of Lonq Term lnceolive Award Agreement underthe Long Term lncentive Plan between No.thwest NaturalGas Comparllqlld All
Executive Officer (2016-2018) (incorporated by reference to Exhibit '10x. to Form 10-K for 2015, File No. 1.15973)
'10x
Table of Contenls
Deferred Compensation Plan for Directors and Executives. effective Januarv 1.2005, restated as of October 1, 20'18 (incorporated bv
reference to Exhibit 10.3 to lhg Form 8-K dated October 1, 2018, File No. 1-38681).
Executive Annual lncentive Plan. etfective Januarv 1. 2018, as amended and restated effeclive October 1, 2018 (incorporated bv reference to
Exhibit'10.8 to the Form 8-K dated October'1, 2018, File No. 1-38681).
Executive Annual lncentive Plan. effeclive January 1, 20'19.
Northwest Naturat Gas Companv Lonq Term lncentive Plan. as amended and restated etfective Mav 24. 20'12 (incorporated bv reference to
Exhibil l0r to Form 10-K for 20'12, File No. 1-'15973).
Northwest Natural Gas ComDanv Lonq Term lncenlive Plan, as amended and restated effective May 25, 2017 (incorporated bv reference to
Exhibit 10s to Fo.m 10-Kfor20'l7.FileNo. 1-15973).
Northwest Natural Holdina Comganv Lonq Term lncentive Plan, as amended and restated as of October 1, 2018 (incorporated by reference
to Exhibit 10.1 to the Form 8-K dated October 1. 2018, File No. 1-38681).
Form of Long Te.m lncentive Award Aoreement under the Lono Term lncentive Plan (20'16-2018) (incorporated bv reference to Exhibit 10w.
to Form 10-K for 2015, File No. 1-15973)
EXHIBIT 2
Form of Long Term lncentive Ayrard Aqreemenl under Lonq Term lncentive Plan (2017-2019) lrncoroorated bv referenc+to gF*b${\4AN, DI
STATE WATI]R
r3o Page I40 of2l0
EXI IIBIT 2
PALFR EYMAN. DI
GEM STATE WATER
Page l,{ I of 210
.10v.Form of Pertormances Share Lonq Term lnc€otive Aqreement under Long Term lncenlive Plan (2018-2020) (incorporaled by referenc€ to
Exhibit 10y. to Form 10-K for 20'17, File No. 1-15973)
102
*10aa.Form of Consent dated December 14- 2006 entered ioto by each executive oflice.wilh respect to amendments lo lhe Erecutive
Slpplemenl?lRetirement lncome Plan. the Supplemental Executive Retiremelt Plan and cenain change in conkol severance aqreements
1occ.
'1odd. Form of Restricted Stock Unit Award Aqreement under Lona Term lncentive Plan (2018) (incorporated by reterence to Exhibit 1obb. to Form
l0-K Ior 2017, File No. 'l-15973)
*1oee q)r.ected Form of ResldAte{S@!!lJ!!!4WaE ASIeeEe!! q[der Long Terrn lncentive Plan (2017) (incorporated by reference lo Exhibit 10.1
to Form 10-Q forthe quarter ended March 3'1 , 2017, File No. 'l-15973)
1off
i1oqq.Form of Amendment to Restncled Stocl unit Award Aoreements (2013, 2014 and 2015) (incorporated by reference lo Exhibat 1occ to Fo.m
10-K for2016. File No. 1-15973)
10hh E9!rn of Restricted StoS! Ull q?4 ASIeqlClt!!4 Term lnce0live Plan (2013, 2014 and 2015) (incorporated by reference to
Exhibit 1oaa. to Form 10-K for 2012, File No. 1-15973)
'l0ri
'10ii.
'10kk Severance Aqreement between Northwesl Natural Gas Coepany and an executive officer, daled Augusl 1, 20'16 (incorporaled by reference
to Exhibit 10.1 to Form 8-K dated July 29, 2016, File No. 1-15973)
'10
'1 omm. Form of Severance Aqreement between Norlhwest Natural Gas Company and an execulive otficer, dated May 1 7, 2017 (incorporated by
relerence to Exhibit 10.1 to Form 8-K dated April 24, 2017, File No. 1-15973)
t1onn Form of Special Restricted Stock Unit Agreement betweefi Northwest Nalural Gas Company and an executive ofiicer. dated May 17,2017
(incorporated by reference lo Exhibit'10.2 to Form 8-K dated April 24, 2017, File No. 1-15973)
10oo. Form of Hire-On Bonus Aqreement between Northwest Natural Gas Company and an executive otficer, dated May '17, 2017 (incorporated by
reference to Exhibit '10.3 to Form 8-K dated ADril 24, 2017, Eile No. 1- 15973)EXHIBIT 2
PALFREYMAN. DI
Form of S I Retention Restricted Stock Unil reemenl between Norlhwest NaturalGas Com an and an execu WATERSeptember 30, 2016 (incorporated by reference to Exhibit 1oqq. to Form 10-K for 20'17, File No. 1-'l5973)
,10pp.
't 31
Page 142 of 210
Table ol Contenls
Form of Lonq Term lncentive Award Aoreement under Lonq Term lncentive Plan (2019-2021).
(incomorated bv referenc€ lo Exhabit 10.1 to Form 8-K daled December '19. 2006, File No. 1-15973).
''l0bb. Consent to Amendment of Deferred Compensation Plan for Directors and Executives, dated Februarv 28, 2008 entered into bv each
execi-rtive oflicer (incorporated by reference lo Exhabit'lobb lo Form 10-K for 2007, File No. 1-15973).
Form of Restricted Stock Unil Award Aqreement under Lonq Term lncentive Plan (2019).
Form of Restricled Stock Unit Award Aqreement under Lono Term lncentive Plan (2016) (incorporated bv reference to Exhibit 1obb. to Form
't0-K for 2015, File No. 1-'15973).
Eglql of Director Restricted 9tock Unil Award Aoreement under Lonq Te,m lncentive Plan (2018).
Form of Direclor Restricted Slock Unit Award Aoreement under the Lonq Term lncentive Plan (20'!7) (incorOorated bv reference to Exhibil
10.1 lo Form 10-Q for the quarterended June 30, 2017, File No 1-15973).
Form of Restricted Slock Unit Award Aqreement between Northwest Natural Gas Company and an executive officer dated as of July 27,
2016 (incorporated by reference to Exhibit '10.1 to Form '10-O forthe quarter ended June 30, 2016, File No. '115973).
EXIIIBIT 2
PALFREYMAN, DI
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Page 143 of210
Tab e ol Contents
'1oqq.
Cash Retention Aqreement between Northwest Natural Gas Comoanv and an executive ofllcer, daled as of March 1, 2018 (incorporated bv
reference to Exhibit 'loss. to Form 10-K for 20'17, File No. 1-15973).
1 oss. Annual lncentive Plan for NW Naturat Gas Storaae, LLC, as amended effective Januarv l 2019.
'1011. Lonq Term Incentive Plan for NW Natural Gas Storage, LLC, as a mended effective Januarv '1 , 2016 (incomorated by reference Io Exhibit
100D. to Form 10-K for 6 File No. 115973)
'lncorporated herein by relerence as indicaled
"Pursuant to ltem 601(bX32)(ii) oI Regulalion S-K, lhis certificate is not being "filed" for purposes of Section '18 of the Secu.ities b(change Acl of 1934,
as amended.
132
Form of Hire-On Bonus Aoreement bet\ €en Northwesl Natural Gas Comoanv and an executive officer, dated SeDtember 30. 2016
(incomorated bv reference to Exhibit 10rr. to Form 10-K for 2017, File No. 1-15973).
*10rr.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page l.l4 of2l0
S'GNI TURES
Pursuant to the requirements of Sectaon 13 or 15(d) of the Securities Exchange Act of 1934, each registrant has duly caused this report lo be signed on
its behalf by the undersigned, thereunto duly authorized. The signalure for each undersigned company shall be deemed to relate only to matters having
reference to such company and its subsidiaries.
NORTHWEST NATURAL HOLDING COMPANY
By: /V David H. Anderson
David H Anderson
President and Chief Executive Offlcer
Dater March 1. 20,9
NORTHWEST NATURAL GAS COMPANY
David H. Andersoo
David H. Anderson
President and Chief Executive Officer
Dale: March 1. 2019
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 145 of 210
Table of Conlents
Tabie of Conlents
Pursuant to the requarements oflhe Securities Exchange Act of 1934, this report has been signed below by the following persons on behalfofthe
registrant and in lhe capacities and on the date indicated. The signatures of each of the undersagned shall be deemed to relale only to matlers having
reference lo lhe below named company and ils subsidiaries.
NORTHWEST NATURAL HOLDING COMPANY
Signature Title Date
/s/ David H. Anderson Principal Executive Officer and Dircctor March 1,2019
David H. Anderson
Presidenl and Chief Execulive Ofiicer
/s/ Frank ll. Burkhansmeyer Principal Financial Otflcer March 1, 2019
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Oflicer
/s/ Brody J. Wlson Pnncipal Accounting Ofllcer March 1.2019
Brody J. Wlson
Vice Presidenl, Treasurer, ChiefAccounting Officer and Controller
/s/ Timothy P Boyle Director )
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Timothy P. Boyle
/5/ Manha L. Byorum Director
Martha L. Byorum
/VJohn D. Carter Direclor
John D Carter
/s/ Mark S. Dodson Director
[.,lark S Dodson
/s/ C. Scolt Gibson Director arch 1, 2019
/s/ Tod R. Hamachek Drreclor
Tod R. Hamachek
/s/ Jane L Peverett Director
Jane L Peverell
/s/ Kenneth Thrasher Director
Kennelh Thrasher
/s/ Malia H. Wasson Director
Malia H. Wasson
/s/ Charles A. Wilhoile Direclor
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 146 of 210
Charles A Wilhoile
134
C. Scott Gibson
Table ol Contents
NORTHWEST NATURAL GAS COMPANY
Signature Title 0ate
/s/ Davrd H. Anderson Principal Executive Officer and Direclor
Princrpal Financial Officer
Principal Accounting Officer
Director
Direclor
Director
Director
Director
Direclor
Director
Director
Direclor
Direclor
Director
[,4arch '1.2019
March 1, 2019
L4arch 1. 2019
arch 1,2019
IIXHIBIT 2
PALFREYMAN. DI
CEM STATE WATER
Pagc 147 of2l0
David H Anderson
Presidenl and Chief Executive Olficer
/s/ Frank H. Burkharlsmeyer
Frank H. Burkhartsmeyer
SeniorVice President and Chief Fanancial Officer
/s/ Brody J \Mlson
Brody J. Wilson
Vice P.esident, Treasurer, ChiefAccounting Oftlc€r and Controller
/s/ Timothy P. Boyle
Timothy P. Boyle
/V Martha L. Byorum
Martha L. Byorum
/s/ John D Carter
John D. Carter
/s/ [,4ark S Dodson
Mark S Dodson
/s/C Scott Gibson
C. Scotl Gibson
Tod R. Hamachek
/s/ Jane L Peverell
Jane L. Peverett
/s/ Kennelh Thrasher
Kenneth Thrasher
/s/ [ralia H. Wasson
Malia H Wasson
/s/ Cha.les A. Wilhoite
Charles A. Wilhoite
/s/ Sleven E. Vlynne
Steven E. Vwnne
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lBack lo lop I
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/s/ Tod R. Hamachek
Section 2: EX-lO.CC (EXHIBIT l0.CC)
RI-S'I RIC'fED SI'OCK UNIT AWARD ACR[[MENT
Th is Agreement is entered into as of February . 201 9. betwccn Northwest Nalural t lolding Com pany, an Oregon corporation
(the "Cornpany"), and ("Rccipicnt')
On February 27.2019, the Organization and Executive Compensation Committee (the 'Committee") ofthe Company's Board of
Directors (the "Board") awarded restricted stock units to Recipient pursuant to Section 6 ofthe Conpany's Long Term Incentive Plan
(the'Plan"). Recipient desires to accept the award subject to the terms and conditions ofthis Agreement.
NOW, TIIEREFORE. the parties agree as follows:
Grant of Restricted Stock Units Dividend E uivalents Subject to the terms and conditions ofthis Agreement. the
Company hereby grants to the Recipient restricted stock unils (the ' RSUs"). The grant of RSUs obligates the Company.
upon vcsting in accordance with this Agreement, to deliver to the Recipient one share ofCommon Stock ofthe Company (a "Share") tbr
each RSU. Upon vesting of each RSL.l, the Company also a-qrees to makc a dividend equivalent cash payn)ent with respect to each vested
RSL.I in an amount equal to the total amount ofdividends paid per share ofCornpany Common Stock for which the dividend rccord dates
occurred aller the date oflhis Agreement and before the date of dclivery olthe underlying Shares. The RSUs are subject to forfeiture as
set forth in Sections 2, I and 2. l0 below.
2. Vesting:ForlciturcRestriction
2.1 Vesting Scheduk
(a) All ofthe RSUs shall initially be unvested. Subject to Sections 2.i, 2.4. 2,5.2.10 and 5.2, the RSUS shall
vest as follorrs
(l) one-fourth ofthe RSUs shall vest on March l, 2020 ifthe Performance Threshold (as detined in
Section 2.2 below) is satisfied for 2019t
(2) an additional one-fourth ofthe RSUs shall vest on March 1,2021 ifthe Performance Threshold is
satisfied for 2020;
(3) an additional one-founh ofthe RSUs shall veston l\'larch 1.2022 ifthe Performance Threshold is
satisficd lor 202l: and
(4) the final onc-fourth ofthe RSUs shall vest on March I,202] if the Performance Threshold is
satisfied for 2022
(b) lfthe Performance Threshold is not satisfied for any year set forth in ( l). (2), (3) or (4) above, the RSUS that
would have vested ifthe Performance Threshold had been satisfied for that year (the "Performance Year") shall be forfeited to the
Company effeclive as ofthe last day ofthe Performance Year. For example, ifthe Performance Threshold is not
EXIIIBIT 2
PALFREYMAN. DI
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Page 148 of2l0
satisfied for 20 I 9. all RSUs that were schedu led to vest on lllarch l. 2020 shall be forfeited effective as of Decem ber 3 I . l0 l9
(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 eflect that the RSUS
outstanding al the time ofthe Change ofControl shall vest upon completion ofthe applicable time periods in Section 2.1(a).
2.2 Performancc'fhreshold
(a) For purposes ofthis Agreenent. the 'Performance Threshold" for any lear shall be satisjled ilthc ROE (as
defined below) for that year is greater than the 5 Yr Avg Cost of LT Debt (as dcfincd below) for that year.
(b) The 'ROE" for anv year shall be calculated by diiiding the Compan!'s Adjusted Net Income (as dcfined
below) for the year by the Average Equity (as defined below) for the year. Subject to adjustment in accordancc with Scction 2.2(c)
below, th€ Company's "Adjusled Net Income" for any year shall be equal to thc Company's net income attributable to conmon
shareholders tbr the ycar, as set forth in the audited consolidated statemeflt of income of the Company and its subsidiaries fbr the year.
Subject to adjustment in accordance with Section 2.2(c) bclow, 'i\verage Equity" fbr any year shall mean the average ofthe Company's
total common stock equity as ofthe last day olthe year and the Company's total common stock equity as ofthe last day ofthe prior year.
in each case as set fbrth on the audited consolidated balance sheet ofthe Company and its subsidiaries as ofthc applicablc dale.
(c) The Committee may, at any time. appmve adjustments to the calculation ofROE to take into account such
unanlicipated circumstances or significant. non-recuning or unplanned events as the Committee may'determine in its sole dismetion. and
such adjustments may increase or decrease ROE. Possible circumstances that may be the basis for adjustments shall include, but not be
limited to. an1' change in applicable accounting rules or principles: an1'gain or loss on the disposition ofa business: impairment ofassets:
dilution caused by Board approved business acquisilion; tax changes and tax impacts ofother changes; changes in applicable laws and
regulations: changes in ratc case timing: changes in the Compan\'s structure; and any other circumstances outside ofmanagement's
control.
(d) The"5YrAvgCostofLTDebt"lbran1'learshall mean the arerage of fi.re numbers consisting of thc Avg
Cost of L'l' Debt (as defined below) fbr that year and for each ofthe tbur preceding years. The 'Avg Cost of L'l l)eht" lor an1 ycar shall
be equal to the sum ofthe Weighted Costs (as defined below) calculated for cach series or tranche oflong-term debt ofthe Company
outstanding on the last day of the year. The "Weighted Cost" for a series or tranche of long-term debt as of any date shall be caiculated
by rnultiplying thc Effective lnterest Rate (as defined below) on thc debt as ofthat date by the outstanding principal balance ofthe debt on
that date. and thcn dividing the resulting amounl b-v thc Companl's total outstanding principal balance of long-term debt as of that date.
The "Elfectile lnterest Rate" lbr a series or tranche of long-term debt as of any date shall be the yield calculated bascd on the
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 149 of2l0
settlement date for the original issuance olthe scries or tranche, thc maturity date ofthc scrics or tranchc. thc statcd annual inlercst rate of
the series or lranche in effect on that date, the number of intercst payments per year under the tems of the series or tranche. the initial
bonowing ofan amount equal to the principal balance net ofDebt lssuance Costs (as defined below) for the series or tranche, and the
repayment ofprincipal at maturity or otherwise according to the tenns ofthe series or tranche. The "Debt lssuance Costs" tbr a series or
tranche of long-term debt shall include the fees, commissions and expenses of issuance of such debt, any other purchase discount from the
face amount of such debt, and any premiums, write-offs of unamortizcd debt issuance costs and olher costs incuncd in conncction with
retiring debt refinanced rvith the proceeds ofsuch deht, all as reflected in the Company's accounting records. For purposes ofthis Section
2.2(d), the Company's long term debt and the interest rates and outstanding principal balances ofthe outstanding series or tranches of
long-term debt as ofany date shall be those amounts as set forth in the audited consolidated t'inancial statements ofthe Cornpany and its
subsidiaries for the vear ending on that date. and shall in all cases include the curcnl portion of an) long-term debt and exclude
borrowings under a revolving credit facility. For the avoidance of doubl. thc Effcctivc Interest Ratc for purposcs of this Agreement of each
scries of fixed-rate long-tenn debt outstanding as of thc datc of this Agreemcnl is sel forlh on Exhibit A hercto.
2.3 Effect of Retirement Death. or Disabilin
(a) If Recipient's employment by the Company or any parent or subsidiary ofthe Company (the "Emplo) er")
terminates because ofRetirement (as delined below). death or physical disability (within the meaning ofSection 22(eX3) ofthe Code and
a Change in Control has not previousll occuned. all outstanding RSUs shall remain outstanding and subject to potential future Yesting
upon satisfaction ofthe Performance Threshold for the applicable years.
(c) The term "Retirement" means termination of emplol'ment ( l) on or after the first anniversary ofthe date of
this Agreement, and (2) aller the Recipient is (i) age 62 with at least five yeaB ofservice as an employee ofthe Company or a parent or
subsidiary ofthe Company. or (ii) age 55 with age plus years ofservice (including fractions) as an employee ofthe Company or a parent
or subsidiary of the Company totaling at least 70; provided, however. that a termination of Recipient's emplo) menl b) the Emplo)'er for
Cause (as defined in Section 2.8 below) shall not conslitute a Retirement.
2.4 CIC Acceleration if Partv to a Severance Aereement. IfRecipient is a party to a Change in Control Severance
Agreement Nith the Compan) or a parent or subsidiaq' ofthe Companl'. all outstanding RSUs shall immediatell r,est if Recipient becomes
entilled 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 2
PALFREYMAN, DI
CEM STATE WATER
Page 150 of2l0
(b) IfRecipient's emplo)menl bi'the Emplo) er terminates because ofRetirement. death orphlsical disabilitl'
and a Change in Control subsequently occurs, all outstanding RSUs shall immediately vest. If a Change in Control occurs and Recipient's
emplo)ment b) the Emploler subsequentl)' terminates because ofRetirement. death or ph1'sical disabilitl'. all outstanding RSUs shall
immediateh rest.
Agreement with the Company or a parcnt or subsidiary ofthe Company: provided, however. thal such severance benefit is a "Change in
Conlrol Severance Benefit" for purposes of th is Agreement onll if. under the terms of Recipient's Change in Control Severance
Agreement. Recipient becomes entilled lo the scverance benefil (a) afler a change in control ofthe Company has occuned, (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 Sevemnce Agreement or by the Employer other than for cause, and (c) because Recipient has satisfied any olher
conditions or requirements specified in the Change in Control Severance Agreement and necessary for Recipient to become entitled to
receive the severance benelit. 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 Panv to a Sevemnce Aereement. lfRecipient is 4q1a party to a Change in Control
Severance Agreement with the Company or a parent or subsidiary ofthe 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). ifany, or the Change in Control and on or before the second annivcrsary ofthe Change in Control. (a) Recipient's
employment is terminated by the Employer (or its succcssor) without Cause (as defined in Scction 2.8 belo\y), or (b) Recipient's
employment is tcrminaled by Recipient for Good Reason (as defined in Section 2.9 below).
2.6 Chanee in Control. For purposes o[this Agreement, a 'Change in Control" olthe Companl shall mean the
occunence ofanr ofthe lollorving elents:
(a) The consummation o[:
(l) any consolidation, merger or pJan ofshare exchange involving the Company (a "Merger") as a result
ofwhich the holders ofoutstanding securities ofthe Company ordinarily having the right to vote tbr the election 0fdirectors ("Voting
Securities") immediately prior to the Merger do not continue to hold at least 50% ofthe combined voting power ofthe outstanding Voting
Securities of the surviving corporation or a parent corporation of the sun iving corporation immediately after the Merger, disregarding an,v-
Voting Securities issued to or retained by such holders in respect ofsecurities of any other party to the Merger; or
(2) any consolidation, merger, plan ofshare exchange or other transaction involving Northwest Natural
Gas Company ("NW Natural") as a result ofwhich the Company does nol continue to hold, directly or indirectly, at least 50% ofthe
outstanding securities ofNW Natural ordinarill having the right to vote for the election ofdirectors: or
(3) any sale. lease. exchange or other transfer (in one transaction or a series ofrelated transactions) of
all. or substantially all, the assets ofthe Company or NW Natural:
(b) At anl time during a period of t$o consecutive ) ears. individuals who at the beginning of such period
constituted the Board ("lncumbent Directors") shall cease
.1
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page l5l of2l0
for any reason to constitute at least a majority thereof; provided. however, that the term "lncumbent DirectoC'shall also include each neu
director elected during such two-year period whose nomination or election was approved by two-thirds ofthe Incumbenl Directors then
in office: or
(c) Any person (as such tcrm is used in Section l4(d) ofthe Securities Exchange Act of 19i4. other than thc
Company or any ernployee benefit plan sponsored by the Company or NW Natural) shall. as a result ofa tender or cxchangc offcr, open
market purchases or privately negotiated purchases from anyone other than the Company, have become the bencficial owner (wilhin the
mean ing of Rule I 3 d-l under the Securities Exchange Act of 1934). dircctly or indirectly. of Voting Securities representing hventy percent
(20%) or more ofthe combined voting power ofthe then outstanding Voting Securities.
2.7 Shareholder Aporoval. For purposes ofthis Agreement, "Shareholder Approval" shall be deemed to have occurred
ifthe shareholders ofthe Company approve an agreement entered into by the Company, the consummation ofwhich would result in the
occunence ofa Change in Control.
2.8 Cause. For purposes ofthis Agreement, "Cause" shall mean (a) the uillful and continued failurc by Recipient to
perform substantiall)' Recipient's assigned duties with the Employer (other than an1 such failure resulting from incapacitl due to physical or
mental illness) aller a demand for substantial perlbrmance is delivered to Recipient by the tmploler which specifically identilies the
manner in xhich Recipient has not subslantiallv performed such duties. (b) rrillful commission by' Recipient ofan act ofliaud or dishonesq
resulting in economic or financial injury to the Company or Emplo_ler. (c) uillful misconduct b)-, Recipient that substantiall) impairs the
business or rcputation ofthe Company or Emploler. or (d) uillful gross negligence b) Recipient in the performance ofhis or her dutics.
2.9 Cood Reason. For purposes ofthis Agreement. "Cood Reason" shall mean lhe occurrence aller Shareholder
Approlal. ifapplicable. or the Change in Control- ofanl ofthe follorving circumstances. but onll if(x) Recipient giles notice to Emplo)er
of Recipient's intent to terminate employment for Good Reason within 30 days after the later of (l) notice to Recipient ofsuch
circumstances. or (2) the Change in Control. and (y) such circumslances are not fully conected by the Employer within 90 days after
Recipient's notice:
(a) theassignmenttoRecipientofadilfercnttitle.joborresponsibilitiesthatresultsinadecreaseinthelerel of
Recipient's responsibilitl l provided that Oood Reason shall nol erist if Recipient continues to have the same or a greater general level of
responsibility for the tbrmer Ernployer operations after the Change in Control as Recipient had prior to the Change in Contml evcn though
such rcsponsibilities have necessarily changed due to the forrner Ernploler operations becoming a suhsidiarr or division oIthc survir,ing
company:
(b) a reduction by the Emploier in Recipient's base salary as in effect immediatell prior to the earlicr of
Sharcholdcr Approval. ifapplicable, orthe Change in Control;
5
EXHIBIT 2
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Page 152 of 210
(c) the failure by Emploler 10 continue in effect any emplo.ree benefil or incentive plan in rvhich Recipient is
participating irnmediately prior to the earlier oi Shareholder Approval. if applicable, or the Change in Control (or plans providing Recipient
\vith at least substantialll similar benefits) other than as a result ofthe normal expiration ofanl. such plan in accordance rvith its terms as in
effect immediately prior ro the earlier of Shareholder Appmval. if applicable, or the Change in Control, or the taking of any action. or the
failure to act. by Emplol,er uhich uould adr,ersel) affect Recipient's continued participation in anv ofsuch plans on at least as favorable a
basis to Recipient as is the case immediately prior to the earlier ofShareholder Approval, ifapplicable, or the Change in Control or which
would materially reduce Recipient's bcncfits in the future under any ofsuch plans or dcprive Recipient ofany material benefit enjoyed b1
Recipient immediately prior to the earlier of Shareholder Approval. if applicable. or the Change in Control:
(d) the failure by' the Emplo\cr to provide and credit Recipient \\ilh the number ofpaid lacation da)s to t\hich
Recipient is then entitled in accordance rrith the Emploler's normal vacation policl as in effect immediatel) prior to the earlier ol
Shareholder Approval, if applicablc. or the Change in Control: or
(e) the Employer's requiring Recipient to be based more than 30 miles from where Recipient's of'fice is located
immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control except for required travel on the
Emplol'er's business to an e\tent substantiall) consistent with the business travel obligations uhich Recipient undertook on behalfofthe
Employer prior to the earlier of Shareholder Approval. if applicable. or the Change in Conlrol.
2.10 Forfeiturc: Possible Restoration. lfRecipient ceases to be employed by the Employerlbrany reason or forno
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 Rst.ls that did not vest pursuant to this Section 2 or Seclion 5.2 at or p or to the tirne ofsuch termination ofemployment shall
be forfeited to the Companyl provided. houever, that if Recipient's cmployment is terminated b-v the Empl(ryer without Cause or by the
Recipient lor Good Reason after Shareholder Approval but before a Change in Control, an].. RSUs that are forfeited under this sentence
shall be restored to the Recipient and vested if a Changc in Control subsequently occurs within two years.
3. Certification and Deli,'e , As soon as practicable following the completion ofeach Performance Year, the Company shallf\
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 regularll scheduled meeting ofthe Commiftee held in Februaq'ofthe 1'ear immediatell follouing each Performance Year
(each, a "Certification Meeting"). the Committee shall cerliff in u riting ($ hich ma1 consist of approved minules of the meeting) \ hether or
not the Peformance Threshold was satisfied for thal Performance Year, Unless otherwise required under this Agreement as a result ofthe
occunence ofa Change in Control, no amounts shall be delivered or paid unless the Committee certifies that the Performance 'l'hreshold
has been satisfied for the applicable Performance Year. Subject to applicable tax withholding, on a date (a
6
EXHIBIT 2
PALFREYMAN, DI
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Pagc 153 of2l0
"Payment Date") that is on or as soon as practicable after the date any ofthe RSUs become vested or. if later. five business days
folloring the Certification l\4eeting relating to those RSUs. the Company shall deliver to Recipient (a) the number of Shares underll ing the
RSUs that vested (rounded down to the nearest whole share), and (b) the dividend equivalent cash payment determined under Section I
wilh respect to the number of Shares that are delivered; provided, however, that if accelerated vesting of the RSUs occurs pursuanl to
Section 2.3(b) as a result of Recipient's Retirement afler a Change in Control has previously occurred, the Payment Date shall be delayed
until a date that is on or as soon as practicable afler the earlier of (x) the date the RSUs rryould have vesled under Section 2.1. or (y) the
date lhat is siri months after Recipient's separation from service (within the meaning ofSection 409A ofthe Intemal Revenue Code).
Nohvithstanding the foregoing provisions of this Section 3. if Recipient shall have made a r,alid election to defer receipt ofthe Shares and
dividend equivalent cash payment pursuant to the terms ofNorthwest Natural's Defened Compensation Plan for Dircctors and
Executives (the "DCP"), payment ofRSUS that vest shall be made in accordance with that election.
4. Tar Witlrholdinu
4.1 Recipient acknowledges that, on any Payment Dale when Shares are delivered to Recipient, the Value (as defined
below) on that date ofthe Shares so delivercd (as well as the amounl ofthe related dividend equivalent cash payment) will be treated as
ordinary compensation income for federal and state income and FICA tax purposes, and thal the Employer will be required to withhold
ta\es on these income amounts. To satisfy the required rvithholding amount. the Emplo)'er shall tirst withhold all or pan ofthe dividend
equivalent cash payment. and ifthat is insufficient. the Employer shall rvithhold the number of Shares having a Valuc equal to the remaining
withholding amount. For purposes of this Section 4, the "Value" ofa Share shall be equal to the closing market price for Conrpany
Common Stock on the last trading day prcceding the Payment Date.
4.2 Recipient acknowledges that under current tax law. the Employer is required to wilhhold FICA laxcs with respect to
lhe Rst.ls at the earlier of(a) the issuance ofshares underlying the RSUs or (b) the date after a Change in Control on which Recipient
becomcs eligible fbr Retirement (or the date of the Change in Control if Recipient is eligible for Rctirement at the time of the Change in
Control). To satisll the required minimum FICA \!ithholding in the event that subsection (b) applics. Recipient shall. immediatel)' upon
notification ofthe amount due. pay to the Company in cash or by check amounts nccessary to satisfy applicable FICA withholding
requirements. If 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 Notu ithstanding the foregoing. Recipient mai elecl not to have Shares u ithheld to co\,er tares b) 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 Paymenl
Date thereby triggering the tax consequences. but the Company shall retain the cerlificate for the Shares as securitl until Recipient shall
hai,e paid to the Compan)' in cash any required tar rvithholding not coyered by withholding ofthe dividend equivalent cash palment.
7
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 154 ol2l0
-5. Sale ofthe Company. Ifthere shall occur a merger. consolidation or plan oferchange inrolling the Compan\ pursuant lo
which the outstanding shares ofCommon Stock ofthe Company are convened inlo cash or other stock. securities or property. or a sale,
lease, exchange or other transfer (in one transaction or a series of relaled transactions) of all, or substantially all, the assets ofthe
Companl'. then either:
6. Chanqes in CaDital Structure. IL prior to the full r esting of all of the RSUs granted under this Agreement. the outstanding
Common Stock ofthe Company is increased or decreased or changed into or exchanged for a different number or kind ofshares or other
securities of the Company by reason ofany stock split. combination of shares or dividend payable in sharcs, recapitalization or
reclassification. appropriate adjustment shall be made by the Committee in the number and kind ofshares sub.iecl to the unvested RSUS
so that Recipient's proportionale interest before and affer the occurrence ofthe event is maintained. Nolwithstanding the foregoing, the
Committee shall have no obligation to effect any adjustment that would or might result in the issuance ol f'ractional 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.
7.1 Ifat any time before a Change in Control and within three years after any date on which any RSUs vcsted. (a) the
Company's financial statemenb for the conesponding Performance Year are the subject ofa restatement due to the Misconduct (as
defined below) ofany person (whether or not Recipient was personally involved in such Misconduct), and (b) based on the Company's
financial stalements as restated, the Performance Threshold was not salisfied for that Performance Year. lhen Recipient shall repay to the
Company the Shares (the "Excess Shares") and dir,idend equi\alenl cash pa) ment (the "Excess Dividends") that vested under this
Agreement on that vesting date. lfany Excess Shares are sold by Recipient prior to the Company's demand for repayment (including an1'
shares withheld for taxes under Section 4 ofthis Agreement), Recipient shall repay to the Company 100% ofthe proceeds ofsuch 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,
8
EXHIBIT 2
PALFRF,YMAN. DI
GEM STATE WATIIR
Page 155 of2l0
5.1 the unvested RSUs shall be converted into restrictcd stock units for stock ofthe surviving or acquiring corporation in
the applicable transaction, with the amount and type of sharcs subject thereto to be conclusively deteflnined by the Committee, taking into
account the relative values ofthe companies inrolved in the applicable transaction and the e\change rate. if any. used in delermining shares
ofthe surviving corporation to be held by the former holders ofthe Company's Common Stock following thc applicable tmnsaction. and
disregarding lractional shares: or
5.2 all ofthe unrested RSUs shall immediatell vest and the underlying Shares and related dividend equivalent cash
payment shall be delivered simultaneously rvith the closing ofthe applicable transaction such that Recipient rrill participate as a shareholder
in receiving proceeds from such transaction with respect to those Shares.
7.2 If the Committee detemines that Recipient engaged in any Misconduct after the date ofthis Agreement and prior to
a sale ofany ofthe Shares (the "Tainted Shares"). and this determination is made before a Change in Control and within three years affer
the vesting ofthe 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 lo take into account the tax consequenccs ofsuch
repayment or any olher factors. The retum ofExcess Proceeds is in addition to and separale from any other reliefavailable to the
Company due to Recipient's Misconduct.
7.i \4isconduct" shall mean (a) rrillful commission ofan act offraud or dishonesll resulting in econonric or financial
injun tothc Companr'. (b) uillful misconduct that substantialll inrpairsthe Companr's business or rcputation. or (c) sillt'ul gross
negligcnce in the perfbrnrance ofthe person's duties; provided. however. that such ac$ shall only constitule \lisconduct ifthe Comrnittee
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 thc markct price ofthe Company Common Stock,
7.4 "Excess Proceeds" shall mean the excess of(a) the actual aggregate sales proceeds from Recipient's sales of
Tainted Shares, over (b) the aggregate sales proceeds Recipient would havc received from sales ofTainted Shares at a price per share
determined appropriate by the Committee in ils disffetion to reflect whal the market price ofthe Company Common Stock would have
been if the restatement had occurred or other N4isconduct had been disclosed prior to such sales.
7.5 If any portion of the Excess Shares and Excess Dividends was deferred under the DCP. that porlion shall be
recovered by canceling the amounts so defened under the DCP and any dividends or other eamings crediled under the DCP with respect
to such cancelled amounts. The Company may seek direct repaymenl from Recipient ofany 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. tn panicular, such amounls may be recovered by offset against the after-tax proceeds of
deferred compensation payouts under the DCP, Northwest Natural's Executive Supplemental Retirement Income Plan or Norlhwesl
Natural's Supplemental Executive Retirement Plan at lhe times such defened compensation payouts occur under the terms ofthose plans.
Amounts lhat remain unpaid for more than 60 days after demand by the Company shall accrue interest at the rate used from lime to lime
for crediting interest under the DCP.
8. Aoprovals. The obligations ofthe Company under this Agreement are subicct to the approval of state and f'ederal 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 ofthe Securities and Exchange Commission and anl. stock erchange on uhich the
Company's shares may then be lisled. in connection with the a\!ard undcr this Agreenrent. The foregoing notrvithstanding. the Company
shall not be obligatcd to issue or deliver Common Stock under this Agreenrent if such issuance or delivery would violate applicable statc
or federal law.
I
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 156 of 210
9. No Risht to Emplovment. Nothing contained in this Agreement shall conler upon Recipient an1' right to be employed b1 the
Em plo) er or to continue to pro! ide sen ices to the Emplol er or to interfere in anr $ a1 \\'ith the right of lhe Emplo\ er to terminate
Recipient's services at any time for any reason. with or without cause.
I 0.1 Entire Aqrecmcnt: Amendment. This Agreement constitutes the entire agreement of the parties with regard to the
subjects hereof and may be amendcd only by written agreement between the Company and Recipicnt.
10.2 Notices. An) notice required or permittcd under this Agreement shall be in rr riting and shall be decmcd sufficient
when delivered personally to the parly to whom it is addressed or when deposited into the United States Mail as registered or certilled
mail, retum receipt requested. postage prepaid. addressed to the Company. Attention: Corporate Secretary. at ils principal executive
offices. or to Employer, Attention: Corporate Secretary. at its principal executive ofices. or to 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 written notice to the other pany.
10.3 Assiqnmenl: Ri[hts and Benefits. Recipient shall not assign this Agrecmcnt or itn) righls hereunder to an) other
party or parties r!ithout the prior written consent ofthe Company, The rights and benefits ofthis Agreement shall inure to the benelit 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.
I 0.4 Further Action. The parlies agree to execute such further instruments and to take such furlher action as may
reasonably be necessary to carry out the inlent ofthis Agreement.
| 0.5 Applicablc 1,4!i A!!aI!!y! I!c!. 'l he terms and conditions of this Agreement shall be govemed by the laws ofthe
State of Oregon. In the event either parl) institutes litigation hereunder. the prevailing party shall be cnlitled to reasonable attorne)'s' fees
to be set by the trial court and. upon any appeal, the appellate court,
10.6 Countcmarts. This Agreement may be cxecuted in two or more counteryarts, each ofwhich shall be deemed an
original.
IO
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 157 of2l0
10. M iscellaneous.
l\ WITNF.SS WHEREOF. the parties hereto havc executed this Agrccmenl as ofthe day and ]-car first above lvritten.
NORTI IWESl' NATI.]RAI, HOLDlNG COI\4PANY
B)
Title
Recipicnt
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 158 of2l0
EXllttltT,{
I.:FFECTIVE INTEREST RATES OT OU ISTANDING FIXED-RA IE LONC.TERM DEBT
The outstandingl series or tranches offired-rate long-term debt ofthe Company outstanding as ofthe date ofthis Agreement and
the Effectivc lnlerest Rate ofeach such series or tranche are as follows:
Scrics
Corp 5000:
8.31%SeriesBdue20l9
7.63 % Series B due 2019
5.37 % Series B due 2020
9.05 o/o Serics A due 2021
3,176 % Series B due 2021
3.542 % Series B due 2021
5.62 % Series B due 2023
7 .72 o/o Serles B due 2025
6,52 % Series B due 2025
7.05 % Series B due 2026
3.211 % Series B due 2026
7.00 7o Scries B due 2027
6.65 % Series B due 2027
2.E22 % Series B due 2027
6.65 % Series B due 2028
7.74 7o Serics B due 2030
7.85 % Series B due 2030
5.82 % Series B due 2032
5.66 % Series B due 2033
5.25 % Serics B due 2035
4.00 7o 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 9/o weighted rate Noles
5.00 % Note due 2028
(Bacl To Top )
9.4790/0
7.727o/o
7.3?7%
9.1630/o
3.3190/o
3.696%
6.360%
8.336%
6.5890/o
7 .l2lo/o
3.383%
7.06?%
6.714o/o
2.9660/o
6.727%
8.433%
8.55 r %
5.913o/o
5.723%
5.3t6%
4.062%
4.2260/o
3.7 54o/o
4.t450/0
3.250%
5.000%
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 159 of2l0
Section 3: EX-l0.ll (EXHIBIT l0.II)
Effective lnterest Rate
I)IRECTOR RI.]S'I'RICTED STOCK I]NI'I AWARD ACREEMENT
This Agreement is entered into as of May 24, 201 8, between Northwest Nalural Cas Company. an Oregon corporation (the
"Company"), and ("Recipicnt")
NO\\'. l'HEREFORE. the parlies agree as follows
Grant of Restricted Stock Units. Suhject to the temrs and conditions of this Agreement. the Company hcrcby grants to
the Recipien1 restricted stock un ts (the "RSUs"). The grant of RStJs obligates the Company. upon vcsting in accordance with this
one share ofCommon Stock ofthe Company (a "Share") for each RSU. The RSt,s do not include
payments.'fhe RSUs are subject to forfeiture as set fbrth in Section 2.8 below.
Agreement,to de'liv'er to the Recipient
a right to any dividend equivalent cash
2. Vesting: Forfeiture Restriclion
2.1 Vestine Schcdulc. All ofthe RSLis shall initially hc unvested. Subject to Sections 2.2, 2.i, and 2.8, all ofthe RStls
shall vest on the first anniversary ofthe date ofthis Agreement
2.2 E ffect ol ath or I)isabilitr lf Recipient's service as a director oflhe Company lelminates because of death or
physical disabilitl (uithin the meaning ofSection 22(e)(3) ofthe Intemal Revenue Code of 1986 (the "Code")). all ofthe RSUs shall
immediately vest.
2.3 Acceleration on Chan in Control All of the RSUs shall immediately vest if a ChanBe in Control (as defined in
Section 2.4 below) occurs and at any time afler the earlier of Shareholder Approval (as detined in Section 2.5 below), ifany. or the
Change in Control and on or before the second anniversary ofthe Change in Conlrol. (a) Recipient's service as a director is terminaled by
the Company (or its successor) without Cause (as delined in Section 2.6 below). or (b) Recipicnt's service as a director is terminaled by
Recipient for Good Reason (as defined in Section 2.7 below). Termination by the Company shall include any fhilure to re-elect Recipient
as a director of the Company or elect Recipient as a dircctor of its successor.
2.4 Chanee in Control. For purposes ofthis Agreement, a "Change in Control" ofthe Company shall mean the
occunence of an1 of the follo\l ing e\ents:
(a) The consummation of:
( I ) any consolidation, merger or plan of share exchange involving the Company (a "Meqer") as a result
ofwhich the holders ofoutstanding securities ofthe Company ordinaril,n.' having the right to vote for the election ofdirectors ("Voting
Securities')
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 160 of2l0
Pursuant to the Company's Non-Employee Director Compensation Policy. the Organization and Executive Compensation
Comrnittee (thc "Cornmittee") 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 PIan (the "Plan"). Recipient desires to accept thc award subject to the
terms and conditions ofthis Agrecmcnt.
immediately prior to the Merger do not continue to hold at least 50% ofthe combined voting power ofthe outstanding Voting Securities
ofthe sun ir ing corporation or a parent corporalion ofthe sur! iving corporation immedialel) after the Merger. disregarding anl Voting
Securities issued to or retained by such holders in respect ofsecurities ofany other parly to thc Mergeri 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 ofthe Company;
(b) At any time during a period of two consecutive y'ears. individuals rvho at the beginning ofsuch period
constituted the Board ("lncumbent Directors") shall cease for any reason to constitute at Ieast a majority thereof; provided, however, that
the term "lncumbent Director" shall also include each new direclor elected during such two-year period whose nomination or election was
approved by two-thirds ofthe Incumbent Directors then in oftice: or
(c) Any pcrson (as such term is used in Section l4(d) ofthe Securities F.xchange Acl of 19i4, other than the
Company or any employee benefit plan sponsored by the Company) shall. as a result of a tendcr or cxchange offer, open market
purchases or privately negotiated purchases from anyone other than the Company. have become thc 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 olthe combined voting power ofthe then outstanding Voting Securitics.
2.5 Shareholder Apprqy4[. lor purposes ofthis Agreefient, "Shareholder Approval shall be deemed to have occurred
ifthe shareholders ofthe Company approve an agreement entered into by the Company, the consummation of which would result in the
occurrence ofa Change in Control.
2.6 Cause. For purposes ofthis Agreement, "Cause" shall mean (a)the rrillful and continued failure bl Recipient to
perform substantialll Recipient's duties as a director ofthe Companl' (other than anv such failure resulting from incapacitl due to ph) sical
or mental illness) after a demand fbr substantial performance is delivered to Recipient b1 the Compan) which specifically identifies the
manncr in which Recipient has not substantially perfbrmed such duties. (b) rvillful commission by Recipient ofan act offraud or dishonest-r
rcsulting in economic or financial injury to the Company. (c) Nillful misconduct bl Recipient that substantially impairs the Company's
business or reputation. or (d) lillful gross negligence by Recipient in the performance of his or her dulies.
2.7 Good Reason. For purposes ofthis Agreement. "Good Reason" shall mean the occunence after Shareholder
Approral. ifapplicable. or the Change in Control. ofany' ofthe follouing circumstances. but onl.t" if(\) Recipient gives notice lo the
Company of Recipient's inlent lo lerminate service as a director for Good Reason within 30 days after the later of( I ) notice to Recipient
ofsuch circumstances. or (2) the Change in Control. and (y) such circumstances are not fully corrected by the Company within 90 days
after Recipient's notice:
1
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page l6l of 210
(a) a reduction by the Company in Recipient's director cash retainers as in effect immediatell- prior to the earlier
ofShareholder Approval, ifapplicable, orthe Change in Controll or
(b) the lailure bl the Compan) to continue in etfecl an\ benelit or incentive plan in rvhich Recipient is
participating immediatel) prior to the earlier ofShareholder Approval. ifapplicable. or the Change in Control (or plans proliding Rccipient
\!ith at lcasl substantialll similar benefits) other than as a resull ofthe normal e\piration ofanl such plan in accordance rrilh ils terms as in
effcct immedialely prior to the earlier ofShareholder Approval. ifapplicable. or the Change in Control, or the taking ofany action. or the
failure to act. b1 the Companl rrhich uould adrersely affect Recipient's conlinued participation in any ofsuch plans on at least as
tavorable a basis to Recipient is is the case immediately prior to the earlier of Shareholder Approval, if applicable. or the Change in
Control or thich rrould materiaily reduce Recipient's benefits in the f'uture under any ofsuch plans or depri!e Recipient ofan) material
benefit enjoycd by Recipient immediately prior to the earlier of Shareholder Approval. if applicable, or the Change in Control.
2.8 Forfeiture; Possible Restoration. IfRecipicnt ccases to be a director ofthe Company for any reason or for no
reason. with or without cause. other than becausc ofdcath or physical disability (within the meaning ofSection 22(eX3) ofthe Code), any
RStls that did not vest pursuant to this Section 2 or Section 4.2 at or prior to the time of such termination of board scrvicc shall be
forfeited to the Con)panyl provided, however, that ifRecipient's service as a director is terminated by the Company without Causc or by
the Recipient for Cood Reason after Shareholder Approval but before a Changc in Contml. any RSUs that are forfeited under tlris
sentence shall be restored to the Recipient and vested ifa Change in Control subsequentlv occun within two years.
3. Deliven. As soon as practicable after the RSUs become vested. lhe Company shall deliver to Recipient lhe numberofShares
undcrl-ving the RSUs. Nonvithstanding the foregoing. ifRecipient shall har,e made a ralid election to defer receipt ofthe Shares underlf ing
the RSUs pursuanl to the terms ofthe Company's Defened Compensation Plan for Directon and Executives (the "DCP"), pal ment of
the award shall be made in accordance with that election.
4. Sale ofthe Companv. lfthere shall occur a merger. consolidation or plan oi exchange inr o h ing thc Compan) pursuanl to
which the outstanding shares ofCommon Stock ofthe Company are converted into cash or other stock, sccuritics or property, or a 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. 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 ofshares 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. ifan1. used in determining shares
ofthe surviving corporation to be held by the former holders ofthe Company's Common Stock following the applicable transaction. and
disregarding fractional shares: or
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 162 of2l0
4.2 all ofthe unrested RSUs shall immediatell r'est and the underlying Shares shall bc delirered simultaneously uith the
closing ofthe applicable transaction such that Recipiennrill panicipate as a shareholder in receiving proceeds from such transaction s,i1h
respect to those Shares.
5.1 lf. prior to the vesting ofthe RSUS granled under this Agrecment. the outslanding Common Stock ofthe Company is
increased or decreased or changed into or exchanged for a difl'erent number or kind of shares or other securities ofthe Company by
reason ofany stock split, combination ofshares or dividend payablc in shares, recapitalization or reclassification, appropriate adjustment
shall be made by the Committee in the nunlber and kind of shares subject to the unvested RSlls so that Recipient's proportionate interest
befbre and after lhe occurrence ofthe eYent is maintained. Notrvithstanding the foregoing. the Committee shall hale no obli-sation to effect
an) adjustment that $ould or might result in the issuancc offractional shares. and an1 fractional shares resulting from an\ adiustment ma)
be disregarded or provided for in any manncr determined by lhe Committee. Any such adjustments made by the Committee shall be
conclusive.
5.2 If the outstanding Common Stock ofthe Company is hereafter converted into or exchanged for all ofthe outstanding
Common Stock of a corporation (the "Parent Successor'') as part ofa transaction (the "Transaction") in which the Company becomes a
u holly-owned subsidiary of Parent Succcssor. 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 ofCommon Stock ofthe Company under this Agreement. (c) service as a direclor ofthe
Company for purposes of Section 2 of this Agreement shall include service as a director of either the Company or Parent Successor.
6. Approvals. lhe issuance by the Company ofauthorized and unissued shares or reacquired shares under this Agreernent is
subject to the approval ofthe Oregon I'ublic Utility Commission and the Washington Utilities and Transponation Commission. but no such
approvals shall be required for the purchase of shares on the open market for deliyery to Recipient in satisfaction of its oblisations under
this Agreement. 1he obligations ofthe Company under this Agreement are otherwise subject to thc approval ofstate and federal
authorities or agencies with jurisdiction in the matter. 'l hc Company will use its best efforts to take steps required by statc or federal law
or applicable regulations. incJuding rules and regulations ofthe Securities and Erchange Commission and any stock exchange on rvhich the
Company's shares may thcn be lislcd. in connection uith the arvard under this Agreement. The tbregoing notu,ilhstanding. the Compan1"
shall not be obligated to issue or delivcr Common Stock under this Agreement if such issuance or deliverv would violate applicable state
or federal law.
.1
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 163 of2l0
5. Chanqes in Capital Structurc.
7. Miscellaneous.
7.1 Entire Agreementi Arnetdment. This Agrccment constitutes the entire agreement ofthc parties with regard to the
subjects hereofand may be amended only by written agreement behveen the Company and Recipient.
7.2 Notices. Any notice required or permitted under this Agreement shall be in rvriting and shall be decmed 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. retum receipt requested, postage prepaid, addressed lo lhe Company, Attention: Corporate Secrelary, at its principal executive
offices or to Recipienl al the address of Recipient in the Company's records. or at such olher address as such party may designate by ten
( l0) days' advance written notice to the other party.
7.3 Assignment: Rights and Benefits. Rccipient shall not assign this Agreement or any rights hereunder to any other pafty
or parties \ryithout the prior rlritten consent ofthe Company. The rights and benefits ofthis Agreement shall inure to the benefit ofand be
eniorceable by the Company's successors and assigns and, subject to the foregoing restriction on assignment, be binding upon Recipient's
heirs. executors, administmtors. successors and assigns.
7.4 Funher Action. The pafties agree lo execute such further instruments and lo take such furlher action as may
reasonably be necessary lo carry out the intent ofthis Agreement.
7.5 Applicable Lawl Attornevs' Fees. The lerms and conditions of this Agreement shall bc govemed by the laws ofthe
State ofOreSon, ln the event either parb inslitutes litigation hereunder. the prevailing part! shall be entitled to reasonable attorne)'s' fees
to be set by the trial court and. upon any appeal, thc appellate court.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 164 ol2l0
7.6 Counterparts. This Agreement may bc cxccuted in two or more counterparts. each of which shall be deemed an
original.
lN \VITNESS WHEREOF. the parties herelo have executed this Agreement as ofthe day and year first above written
NORTHWI.]S'I' NATURAL GAS COMPANY
IJr
Title SVP & Chiei Administrati\ e Officer
[Non-employee Director Name]
6
lllacfi li) Tonl
Section 4: EX-10.L (EXHIBIT l0.L)
IN DE]\INITY AGREEI\'I T]N'I'
THIS AGREEMENT is made as of by and between Northwest Natural Gas Company, an Oregon
corporalion (the "Company"). and ("lndemnitee"), a director or officer ofthe Company
RECITALS
A. It is essenlial to the Company to retain and attract as direclors and officers the most capable persons available.
B. The increase in corporate litigation subjects directors and officers to erpensive litigation risks al the same time that the
availabilitl and coverage ofdirectors' and officers' liability insurance have been reduced.
C. lt is now and always has been the express policy ofthe Company to indemnifr its directors and olTicers so as to
provide them rvith the maximum possible protection permitted by law.
D. The Amended and Restated Articles of lncorporalion of the Company ("Restated Articles") require indemniflcation of
the directors and officers ofthe Company to the fullest extent permitted by law. 'l'he Oregon Business Corporation Act (the "Act")
e\pressl\ pro\,ides that the indemnification provisions set fonh in the Act are not exclusive. and therebl contcmplates that contracts ma)
be entered into between lhe Company and members oflhe Board of Directors and olficen with respect to indennification of directon
and officers-
Services to the Company. Indemnitee will scrve or conlinue to serve as a director or officer of thc Company for so long
as lndemnitee is dull, electcd or appointed or until lndemnitee tenders a resignation in rriting or is removed
2. Definitions. As used in this Agreement
(a) The term "Proceeding" includes any threatened. pending or completed aclion, suil or proceeding, arbitrationEXHlBlT 2
mediation or investigation. rlhether brought in the right ofthe Companl' or otherrrise and Nhether ofa civil. criminal. adAl{isffEYMAN. DI
investigati\e nature. in rvhich Indemnitee may be or ma; have been involved as a party or otherwise. by' reason of the $g51.fgf$pglhAff,n
is or was a director or officer ofthe Company or is or was serving at the request of the Company as a director, ofllcer. empFltt ttgqSfb lOof another coryoration, partnership, joint venture, trust or other enterprise, rvhether or not serving in such capacit; at the time anT liabilin
or expense is incurred for which indemnification or reimbursement can be provided under this Agreement.
NOW. THEREI-'ORFl. thc Company and lndcmnitee agree as follows:
L
(b) The term "Expenses" includes. rrithout limitation. expenses of invesligations. judicial or administrative proceedings or
appeals, attorneys' fees and disbursements and an] expenses ofestablishing a right to indemnilication under Section ll ol
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 166 of 210
this Agreement. bul does not include amounts paid in settlement by Indemnitee or the amount ofjudgments or fines against Indemnitee.
(c) References to 'bther enterprise" includes employee benefit plans; references to 'fines" includes an) ercise ta\
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 ofthe Company which imposes duties on. or involves services by. such director, officer. employee or
agent with respecl to an employee benefit plan, its panicipants or beneficiaries; and a person who acted in good failh and in a manner
reasonably believed to be in the best interest ofan employee benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests ofthe Company" as referred to in this Agreement.
3. Indenlnitl in Third-Pafiv Proceedinqs. The Compan.r shall indemnily lndemnitee in accordance n'ith the provisions ofthis
Section 3 if lndemnitee is a party to or threatened to be madc a parly to any Procccding (other than a Proceeding by or in the right of the
Companv to procure ajudgment in its favor) against all Expen ses. j udgments, fines and amounts paid in settlement actually and reasonably
incurred b1' Indemnitec in connection u ith the Proceeding. but only if Indemnitee acted in good faith and in a manner rvhich Indcmnitce
reasonahly believed to be in or not opposed to the best interests ofthe Cornpany and, in the case ofa criminal proceeding. in addition,
had no reasonable caus€ to believe that lndemnitee's conduct was unlawful.
4. Indemnin in Proccedings b\ or in the Right ofthe Cornpanl. The Companl shall indernnit_\ lndenrnitee in accordance rrilh thc
provisions ofthis Section 4 if lndemnitee is a party to or threatened to be made a party to any Proceeding by or in the right ofthe
Compan)' to procure ajudgment in its fa\or against all Expenses actualll and reasonably incuned by lndemnitee in connection s'ith the
defense or settlement ofthe Proceeding. but onll if Indemnitee acted in good faith and in a manner u'hich Indemnilee reasonabll belier,ed
to be in or not opposed lo the best interests ofthe Company. No indemnification for Expenses shall be made under this Section 4 in
respect ofany claim. issue or matter as to which Indemnitee shall have been finally adjudged by a courl to be liable to the Company,
unless and onll to lhe e\tenl that an)., court in $hich the Proceeding uas brought shall determine upon application that. despite the
adjudication ofliabilitl' but in vierv ofall the circumstances ofthe case. Indemnitee is lairly and reasonabl-v entitled to indemnitr.
5. Indemnification ofExoenses ofSuccessful Partr. Not$, ithstanding an-v other prorisions ofthis Agreement. to the e\tent that
Indemnitee has been successful, on the merits or otherwise. in defense ofany Proceeding or in defense ofany claim, issue or matter
therein. including thc dismissal of an action u,ithout prejudice. the Company shall indemni$ lndemnitee against all Expenses incuncd in
connection therewith.
6. Additional lndemniflcation,
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 167 of2l0
(a) The Company agrecs. as set forth in this Section 6(a). to indemni$ lndemnitee to the fullest e\tent permitted b) law.
noh!ithstanding that such indenrnification may not be specifically authorized by the Restated Afiicles. the Companl's Bylaws, the Act or
the
other pro\,isions ofthis Agreement. Accordingly. nonrithstanding anl limitation in Sections J.4 or 5. the Companl shall indemnif
lndemnitee to the fullest exlent permitted by law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including
a Procecding bY or in the right ofthe Compan]'to procure ajudgment in its favor) against alljudgments. fines. amounts paid in settlemcnt
and Expenses actualJy and reasonably incuned by lndemnitee in connection with the Pmceeding. No indemnity shall be made under this
Section 6(a) on account of Indemnitee's conduct which constitutes a breach of Indemnitce's duty of lol altl- to the Companl or its
shareholders or is an act or omission not in good faith or rvhich invoh,es intentional misconduct or a knorring violation ofthe larv.
(b) For purposes ofSection 6(a), the meaning ofthe phrase "to the lullest e\tent permined bl la$" includes. but is nol
limited to:
(i) to the fullest e\tent permitted by the provision oflhe Acl that authorizes or contenlplates additional
indemnification by agreement. or the conesponding provision oIany amendment to or replacement ofthe Act; and
(ii) to the fullesl cxtent authorized or permitted by any amendments to or replacemcnts of the Act adopted afier
thc dale ofthis Agreement that increase the e\tent to thich a corporalion mal indemnit\' its ofTicers and directors.
(c) The Compan) agrees to indemni$' Indemnitee for Erpenses if Indemnitee is called. in connection nith a Proceeding,
as a non-party witness by reason ofthe fact that lndemnilee is or was a director or officer ofthe Company.
7. Exclusions. Nolvithstanding anl provision in this Agreement, the Company shall not be obligated under this Agreement to
make any indemnity in connection rvith any cJaim made againsl Indemnitee:
(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other
indemnity provision. e\cept with respect to any ercess belond the amount paid under any insurance policy or other indemnity provision
(b) for any' transaction from \\hich Indemnitee derived an improper personal benefit:
(c) for an accounting ofptofits made from the purchase and sale (or sale and purchase) by Indemnitee ofsecurities ofthe
Company within the meaning ofSection l6(b) ofthe Securities Exchange Act of 1934. as amended, or similar provisions of state statutory
or common law;
(d) ifa court har ing jurisdiction in the matter shall finalh determine that such indemnification is not lau'fil under an1
applicable stanlte or public policy (and, in this respect. both the Company and lndemnilcc have been advised that the Securities and
Erchange Commission belie\es that indemnification for liabilities arisine under the lederal securities laus
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 168 of2l0
is against public policy and is. therefore. unenforceahle and that claims lor 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 dircctors, 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 ofDirectors ofthe Company. (iii) the Company
provides the indemnification. in its sole discretion. pursuant to the powers vested in the Companv under applicable la$. or (iv) Indemnitee
initiated the Proceeding pursuant to Section ll ofthis Agreement and Indemnitee is successful in rvhole or in pan in the Proceeding.
8. Advances ofExoenses. The Company shall pay the expenses incuned by Indemnitee in any Procceding in advance at the
rvritten request of Indemnitee. if Indemnitee:
(a) fumishes the Companl a written affirmation ofthe lndemnitee's good faith beliefthat lndemnitee is entitled to be
indemnified bl the Companl' under this Agreement: and
(b) furnishes the Companl,a rvritten undenaking to repal the adYance to the ertent that it is ultimately determined that
lndemnitee is not entitled to be indemnified by the Compan).
Advances shall be made without regard to lndemnitee's ability to repay the expenses and without regard to Indemnitee's
ultimate entitlement to indemnification under the other provisions ofthis Agreement. Advances made under this Secrion 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 anl Proceeding. Indemnitee rvill, if a claim in respect of the Proceeding is to be made againsl the Compan)' under th is Agreement. noti!
the Compan) oflhe commencement ofthe Proceeding. The omission to notify the Companl uill not reliele the Companl' from an1'
liabiliiy_, uhich it ma1'have to Indemnitee othenrise than under this Agreement. With respect lo an1 Proceeding as to rvhich lndemnitee
notifies the Compan), ofthe commencement:
(a) The Company will be entitled to parricipate in the Proceeding at its own expense.
(b) Ercept as othenvise provided beloN. the Compan)' ma!'. at its option and jointl)' with an1' other indemnili ing panl
similarll' notified and electing to assume such defense. assume the defense ofthe Proceeding. with legal counsel reasonabl)' satisfactor) to
the Indemnitee. Indemnitee shall ha!e the right to use separate legal counsel in the Proceeding. but the Companl' shall not be liable to
Indemnitee under this Agreement. including Section 8 above, for the fees and expenses of separate legal counsel incuned affer notice from
the Company of its
.l
I]XHIT]IT 2
PALFREYMAN. DI
GEM STATE WATER
Pagc 169 ol2 J0
assumption ofthe defense, unless (i) Indemnitee reasonably concludes that there may be a conflict ofinterest between the Company and
lndemnitee in the conduct ofthe defense ofthe Proceeding or (ii) the Company does not use legal counsel to assume the defense ofsuch
Proceeding. The Company shall not be entitled to assume the defense ofany Proceeding brought by or on behalfofthe Company or as to
llhich lndemnitee shall have made the conclusion provided for in (i) above.
(c) Iftrvo or more persons rvho may be entitled to indemnification tiom the Company. including the lndcmnitce. are
parlies to any Proceeding, the Company may require Indemnitee to use the sarne legal counsel as the other pa ies. Indemnitee shall have
the right to use separate legal counsel in the Proceeding. but the Compan)' shall not be liable to lndemnitee under this Agreement. including
Section 8 above, for the fees and expenses of separate lcgal counsel incurred after notjce from the Company of the requirement to use the
same legal counsel as the other parties. unless the Indemnitee reasonably concludes that there may bc a conflict ofinterest bet\r'een
Indemnitee and any ofthe other parties required by the Company lo be represented by the same legal counsel.
(d) The Companl" shall notbe liable to indemnify lndemnitee under this Agreement for an) amounts paid in settlement of
anl, Proceeding effected \!ithout ils lrritten consent. nhich shall not be unrcasonably uithheld. Indcmnitee shall permit the Compan)'to
settle an! ProceedinB the defense ofrvhich it assumes. except that the Compan) shall not settle an) action or claim in any manner u,hich
would impose an1 penalty or limitation on lndemnitee u ithout Indernnitee's rvritten consent. which rnal be given or withheld in
lndemnitec's sole discretion,
10. Procedure Upon Application for Indemnification. Anf indemnification under Sections 3.4.5 or6 ofthis Agreement shall be
made no later than 90 da1 s afler receipt ofthe u riften request of Indemnitee 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 b)', a court in an enforcemenl action under Section I I ofthis A-ereement. no such indemnification shall be made ifa
determination is made u'ithin such 90-day period by (a) the Board of Directors by a majority vote of a quorum consisting ofdirectors who
were not parties to the Proceeding, or (b) independent legal counsel in a written opinion (which counsel shall be appointed ifa quorum is
not obtainable), that the lndemnitee is not entitled to indemnification under this Agreement.
I l. Enforcement. Indemnitee ma1 enforce any right to indemnit'ication or advances granted bv this Agreement to lndemnitcc in
an) court of competent jurisd iction if(a) thc Compan) denies the claim for indemnification or advances. in u'hole or in pafi. or (b) the
Company does not dispose ofthe claim within 90 days ofa written request for indemnification or advances. Indemnitee. in the
enforcement action. ifsuccessful in \hole or in part. shall be entilled to be paid also the erpensc ofprosecuting the claim. It shall be a
defense to any such enforcemcnl action (other lhan an action broughl to enforce a claim for advancement of Expenses pursuant to Section
8 abovc. illndemnitee has tendered lo the Company the required affirmation and undertaking) that Indemnitee is not entitlcd to
indemnification under this
EXI IIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 170 of2l0
5
Ae.reement. but the burden ofproving this defense shall be on the Companl. Neither a lhilure ofthe Company. (including its Board of
Directors or its shareholders) to make a determination prior to the commencement ofthe enforcement action that indernnification 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 detense to the action or create a presumption that Indemnitce is not entitled to
indemnification under this Agreement or other$ise. The termination olanl Proceeding by judgment. order ofcoufl. settlement. conviction
or upon a plea of nolo-contendere. or its equivalent. shall not. of itself. create a presumption that Indemnitce is not entitled to
indemnitication under this Agrecmcnl or other\\isc-
12. Partial Indemnification. lflndemnitee is entitled under an1 provisions ofthis Agreement to indemnification bl'the Compan)
for some or part ofthe Erpenses. j udgments. fines and amounts paid in setllement actually and reasonably incuned by Indemnitee in the
investigation. defense. appeal or settlement ofanv Proceeding but not. hoNever. for the total amount. the Company shall indemniS
lndemnitee fbr the portion of the Expenses. judgmcnls. fines and amounts paid in settlement to which Indemnitee is entitled.
i3. Nonexclusivitv and Continuin* ofRishts. The indemnillcation provided bl 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 yote
of shareholders or directors, the Act, or otherwise. both as to action in Indemnitee's official capacig, and as to action in another capacitl
tthile holding office. The indemnification under this Agreement shall continue as to Indemnitee eren though lndemnitee ceases to be a
director or officer and shall inure to lhe benefit ofthe heirs and personal representatives of Indemnitee.
14. Business Conbinations. ll any person or group (as defined in Section 1 3(d)(i ) of the Securities Exchange Act of 1934, as
anrended) acquires the legal right to elect a majo ty ofthe Board ofDirectors ofthc Company in a transaction or series oftransactions
that has not received the prior approval ofthe Board of Directors ofthe Company. the Cornpany or its successor, as the case may be,
shall. lbr a period oftu,o lears tbllorving the date that such legal right is acquired (the 'Trigger Date"). maintain anv and all directors and
officers' Iiability insurance in etl'ect prior to the Trig-eer Date that cor ers lndemnitee.
15. SeYerabilitl . lf th is Agreement or ani po(ion of it is invalidated on an1 ground b1 an1 courl of competent j urisdiction. the
Company shall indemnifl lndemnitee as to E.rpenses. judgments. fines and amounts paid in settlement rvith respect to an) Proceeding to
the full extent permitted b) an) applicable portion ofthis Agreement that is not ini,alidated or b1 any other applicable larv or anangement.
16. Subrogalion. ln the event ofpayment under this Agrcement, the Company shall be subrogated to the extent ofsuch payment
to all ofthe rights of recovery of Indemnitee, Indemnitee shall execute all documcnts required and shall do all acts that may be necessary
to secure such rights and to enable the Company etlictivell to bring suit to enlorce such rights.
17. Modification and Waiver. No supplement. modification or amendment of th is Agreement shall be binding unless e\ecuted in
wriling by both parties. No waiver ofany ofthe
6
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 171 of 2 )0
pro\ isions in this A greement shall constitute a $ aiver of anr other pror isions of th is Agreenlent (\\tether or not sim ilar) nor shall anl
$ai\er constitute a continuing \Rirer, unless expressll stated in an) \\ai\er.
18. Notices. All notices. requests. demands and other communications under this Agreement shall bc in rvriting and shall be
deemed to have bcen duly given (a) upon delivery ifdelivered b1 hand to the partv to \\hom the notice or othcr communication shall ha\e
been directed or (b) if mailed by cerritied or registered mail with postage prepaid. on the third business day after the date on $hich it is so
nrailed:
(i) Ifto Indemnitee. at the address indicated on the signature page ofthis Agreement
(ii) Ifto the Company. to
Northwest Natural Cas Company
220 N.W. Second Avenue
Portland, Oregon 97209
Attention: President
or to any other address as may have been fumished to Indemnitee by the Company.
19. Countemarts. The parties may execute this Agreement in two counterparls. each of rvhich shall constitute the original.
20. Applicable Law. This Agreement shall be govemed by and construed in accordance with the law ofthe state ofOregon
21. Successors and Assisns. This Agreement shall be binding upon the Company and its successors and assigns.
7
EXIIIBIT 2
PALFREYMAN. DI
GEM STATE WATER
Page 172 of2l0
l),1 WITNESS WHEREOF. the parties have caused this Agreement to be signed as of the day and year fin;l written above.
NORTIIWEST NAI'URAI- GAS COMPANY
B):
S ignature
Type or Print Name Type or Print Name
T itl.Addrcss
ti
Section 5: EX-10.M (EXHIBIT 10.M)
AMENDED ANI) RESTATED INDEMNITY ACREEMENT
TIIIS ACRIIIIMI-.N'I' is made as of hy and bctwce n Northwe st Natural Holding Company. an Oregon
corporation (the "Company'), as successor in interest to Northwest Natural Cas Company, and
director or officer olthe Company.
("lndemnitee"), a
RECITALS
A. It is essential lo the Company to relain and attract as directors and officers the most capable persons available.
B. The increase in corporate litigation subjects directors and officers to erpensile litigalion risks at the same time that the
availabilig and coverage ofdirectors'and officers' liabilit) insurance hare becn reduced.
C. It is now and always has been the express policy ofthe Company to indemnify its directors and officers so as to
pror,ide them rvith the maximum possible protection permittsd b) la\\.
D. The Amended and Restated Articles of Incorporation ofthe Company (the "Restated Articles") require indemnit'ication
ofthe directors and officers ofthe Company to the fullesl extent permi(ed by law. The Oregon Business Corporation Act (the "Act")
expressll- provides that the indemnll'ication provisions set forth in the Act are n01 exclusive, and thereb)' contemplates that contracls ma)
be entered into between the Company and members ofthe Board ofDirectors and officcrs with respect to indemnification ofdirectors
and officers.
NOW. THERFII"ORFI. the Company and lndemnitee agree as follows:
Services to the Compan!, Indemnitee rvill serye or continue to sen,e as a director or officcr olthc (lorrPanY i.bxillhr 2as Indemnitee is du11" elected or appointed or until Indemnitee tenders a resignation in rvriting or is removed
PALFREYMAN. DI
2. Delinitions. As used in this .Agreement: GEM STATE WATER
(a) The term "Proceeding" includes any threatened. pending or completed action, suit or proceeding, arbitrf,f&: l7l of 210
mediation or investigation. ivhether brought in the right ofthe Compan) or othenvise and rvhether ofa cilil. criminal. adminisrative or
investigatile nature. in uhich Indemnitee ma1'be or ma1, haYe been inYolved as a part)' or othenrise. bl reason ofthe fact that lndemnitee
INDEMNITEE
Br:
Sisnature
rBirck It Iop)
t.
is or was a director or ollicer ofthe Company or is or was serving at the request ofthe Company as a director. officer, employee or agent
of another corporation. partnership, joint venture. trust or other enterprise. whether or not serving in such capacit) at the time any liabilitl
or expense is incuned for rvhich indemnilication or reimbursement can be provided under this Agreement.
(b) The term "Expenses" includes. \\ithout limitation. erpenses of investigations. judicial or administrative proceedings or
appeals. attorneys' fees and
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 174 of2l0
disbursements and ant- e\penses ofestablishing a dght to indemnification under Section ll ofthis Agreement. but does not include
amounts paid in seltlemenl b), Indemnitee or the amount ofjudgments or fines against Indemnitee.
(c) References to'bther enterprise" includes employee benefit plans; references to "fines" includes an) excise ta\
assessed with respecl to any employee benefit plan; references to "serving at the request ofthe Company" includes any service as a
direclor, officer, employee or agent ofthe 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 ofan employee benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests ofthe Company" as referred to in this Agreement.
3. Indemnitr in Third-Pany Proceedines. The Companv shall indemnifl lndemnitee in accordance with the provisions ofthis
Section 3 if Indemnitee is a party to or threatened to be made a party to any Proceeding (other than a Proceeding by or in the right of the
C0mpany to procure a judgmcnt in its favor) against all Drpenses. judgmcnts. fines and amounts paid in settlem€nt actually and reasonabll
incurred by- lndemnitee in connection uith the Proceeding. but only il Indemnitee acted in good faith and in a manner uhich lndemnitee
reasonably believcd to be in or not opposed to the bcst intercsts ofthe Company and, in the case ofa criminal proceeding, in addition,
had no reasonable cause to believe that lndemnitee's conduct rvas unla$tLl.
4. Indemnitl in Procecdings b]' or in the R ight of the Compan,r . '[ he Companl shall indernnitl Indemnitee in accordance rtith the
provisions of this Section 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right ofthe
Companl to procure a judgment in its favor against all Espenses actualll and reasonabll incuned bl lndemnitee in connection $ ith the
defense or settlement of the Proceeding. but onll if Indemnitee acled in good faith and in a manner t hich lndemnitee reasonabll belier ed
to be in or not opposed to the best interests oflhe Company. No indemnification for Expenses shall be made under this Section 4 in
respect ofany claim, issue or matler as lo which Indemnitee shall have been finally adjudged by a court to be liable to the Company.
unless and onl) to the e\lent that an) court in rvhich the Proceeding rvas brought shall determine upon application that. despite the
adjudication ofliability but in vieu'ofall the circumstances o[the case. lndemnitee is fhirll and reasonabll enthled to indemnit].
5. lndem n ification of Ernenses of Successtul Partr. Nohrithstanding any other provisions ofthis Agrccmcnt. to thc e\tcntlhat
Indernnitee has been successful, on the merits or othenlise, in defense ofany Procceding or in defense ofany claim. issue or nratter
therein. including the dismissal olan aclion rvithout prejudice. the Compan) shall indemnifl lndemnitee against all Expenses incuned in
connection thcrc$,ilh.
6. Additional Inderrniilcation.
(a) The Companl agrees, as set fonh in this Section 6(a). to indemni! lndemnitee to the fullest ertent permitted by law.
not\\ ilhstanding that such indemnification ma1
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 175 of 210
not be specifically aulhorized by the Restated Articles, the Company's Bylaws, the Act or the other provisions ofthis Agreement.
Accordingly. notrvithstanding any limitation in Sections 3.4 or 5. the Compan) shall indemnill Indemnitee to the fullest extent permitted by
law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in fie righl ofthe
Company to procure a judgment in its favor) against all .iudgments, lines. amounts paid in settlement and F)rpenses actualll and reasonably
incuned by Indemnitee in connection with the Proceeding, No indemnity shall be made undcr this Section 6(a) on account of Indernnitee's
conduct which constitutes a breach of Indemnitee's duty of loyalty to the Company or its shareholders or is an act or ornission not in good
laith or rrhich invoh,es intentional misconduct or a knou ing r,iolation ofthe larr.
(b) For purposes ofSection 6(a). the meaning ofthe phrase "to the fullcst c\tent permitted b) la$r'includes. but is not
limited to:
(i) to the fullest extent permitted by the provision ofthe Act that authorizes or contemplates additional
indemnification by agreement, or the coresponding provision ofany amendment to or replacement ofth€ Act; and
(ii) to the fullest extent authorized or permitted by any amendments to or replacements ofthe Act adopted after
the date of this Agreement lhat increase the extent to \\hich a corporation ma! indemnill its officers and directors.
(c) The Companl agrees to indemnifl' Indemnitee for Expenses if lndemnitee is called. in connection tith a Proceeding.
as a non-party witness by reason ofthe fact that lndemnitee is or was a director or ollicer ofthe Company.
7. Exclusions. Notwithstanding any provision in this Agreement. the Company shall not be obligated under this Agreement to
make any indemniry in connection with any claim made against Indemnitee:
(a) for which payment has actually been made to or on behaifof Indemnitee under any insurance policy or other
indemnity provision. e\cept uith respect to an)' excess belond the amount paid under anl insurance policl' or other indemnitl" provision:
(b) lor an1 lransaction from uhich lndemnitee derived an improper personal benefit:
(c) for an accounting ofprofits made fiom the purchase and sale (rr sale and purchase) by lndemnitee ofsecurities ofthe
Company within the meaning ofSection l6(b) ofthe Securities Exchange Act of I934. as amended, or similar pmvisions of state statutory
or common law:
(d) ifa court having jurisdiction in the matf€r shall finall) determine that such indemnification is not lau'ful 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 belieres that indemnification for liabilities arising under the federal securities larls
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 176 of2l0
is against public policy and is. therefore. unentbrceable and that claims for indemnification should be submitted to appropriate coufts for
adjudication); or
(e) in connection with any Proceeding (or parl ofany Proceeding) initiated by Indemnitee. or any Proceeding by
Indemnitee against the Company and its directors, officers. employees or olher indemnitees, unless (i) the Company is expressly required
by law lo make the indemnification, (ii) the Proceeding was authorized by the Board of Directors ofthe Company, (iii) the Company
provides the indemnification, in its sole discretion. pursuant to the poners vesled in the Company under applicable law. or (iv) lndemnitee
initiated the Proceeding pursuant to Section I I of this Agreement and Indemnitee is successful in rvhole or in part in the Proceeding.
8. Advances ofExpenses. 1'he Company shall pay the expenses incuned by lndemnitee in any Proceeding in advance at the
u'ritten request of Indemnitee. if Indemnitee:
(a) t'umishes the Company a rvritten affinnation ofthe lndemnitee's good faith beliefthat Indemnitee is entitled to be
indemnified by the Compan) under this Agreement; and
(b) lurnishes the Company a rvritten undeftaling to repa.\ the advance to the extent that it is ultimately determined that
Indemnitee is not entitled to be indemnified b) the Companl.
Advances shall be made without regard to lndemnilee's ability to repay the expenses and without regard to lndemnilee's
ultimate entitlement to indemnification under the other pro!isions ofthis Agreement. Advances made under this Section 8 shall be paid by
the Company to lndemnitee as soon as practicable but in any event within thiny (30) business days after written request by lndemnitee to
the Company pursuant to this Section 8.
9. Notification and Defense of Claim. Not later than thifly (30) days afler receipt by lndemnilee ofnolice ofthe commencement
ofanl Proceeding. lndemnitee till. ifa claim in respect ofthe Proceeding is to be made against the Companl under this Agrcement. notilj
the Company ofthe commencement ofthe Proceeding. The omission to notil) the Companl- rvill not relieve the Companl lrom any
liability rvhich it mav have to Indemnitee otheruise than under this Agreement. With respect to any Proceeding as to which lndemnitee
notifies the Company ofthe commencement:
(a) The Company will be entitled to participate in the Proceeding at its own expense.
(b) Ercept as othenvise provided belol'. the Companl ma).at its option and jointly uith ani other indemniling pan)'
similarly notified and elecling to assume such defense. assume the defense oflhe Proceeding. rvith 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 liable to
Indemnitee under this Agreement, including Section 8 above, for the fees and expenses of separate legal counsel incuned aftcr notice from
the Company of its
.t
FXHIBIT 2
PAt,FREYMAN, T)I
GI]I\4 STATE WATER
Page 177 of 210
assumption ofthe defense, unless (i) lndemnitee reasonably concludes lhat there may be a conflict of inlerest between the Company and
Indemnitee in the conduct ofthe defense ofthe Proceeding or (ii) the Company does not use legal counsel to assume the defense ofsuch
Proceeding. The Company shall not be entitled to assume lhe defense ofany Proceeding brought by or on behalfofthe Company or as to
which Indemnitee shall hare made the conclusion provided for in (i) above.
(c) lfhro or more persons who mav be entitled to indemnification from the Compan). including the Indemnitee, are
parties lo any Proceeding. the Company may require Indemnitee to use the samc 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 Indemnitee under this Agreement. including
Section 8 above, for the fees and expenses ofseparate legal counsel incuned after notice from the Company ofthe requirement to use the
same legal counsel as the other parlies. unless the lndemnitee reasonably concludes that there may be a conflict of interest between
Indemnilee and any ofthe other parlies 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 an) amounts paid in settlement of
anv Proceeding ell'ected without its rvri(en consent. rvhich shall not be unreasonably rvithheld. Indemnitee shall permit the Company to
settle any Proceeding the defense of which it assumes. except that the Compan) shall not settle an) action or claim in any manner which
rvould impose any penaltv or limitation on Indemnitee rvithout lndemnitee's wdtten consent. $hich may be given or ivithheld in
lndemnitee's sole discretion.
10. Procedure Upon Application for Indemnificalion. Anf indemnification under Sections 3.4. 5 or 6 ofthis Agreement shall be
made no later than 90 dal s after receipl of the u ritten request of lndemnitee for indemnification and shall not require that a determination
be made in accordance wilh lhe Act by the persons specified in the Act that indemnification is required under this Agreement. However.
unless it is ordered b)' a court in an enforcement action under Section ll ofthis Agreement. no such indemnification shall be made ifa
determinalion is made rvithin such 90-day period by (a) the Board ofDirectors by a majority vote ofa quorum consisting ofdirectors who
were not parties to the Proceeding, or (b) independent legal counsel in a written opinion (which counsel shall be appointed ifa quorum is
not obtainable). that the Indemnitee is not entitled to indemnif,calion under this Agreement.
I l. Enforcement. Indemnitee may enforce any right to indemnification or adrances granted by this Agreement to Indemnitee in
an) court of competent j urisdiction if(a) the Compan) denies the claim for indemnification or adrances. in rrhole or in part. or (b) the
Company does not dispose ofthe claim within 90 days ofa written request lbr indemnification or advances. Indemnitee, in the
enforcement action. ifsuccessf'ul in rrholc or in pan. shall be entitled to be paid also the erpense ofprosecuting the claim. lt shall be a
def'ense to any such enforcement action (other lhan an action brought to enforce a claim for advancement of Expenses pursuant to Section
8 above, if Indemnitee has tendered to the Company the required allrmation and undertaking) that Indemnitee is not entitled to
indemnifi cation under this
-5
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 178 of210
Agreement. but the burden ofproving this defense shall be on lhc Company. Neither a failure ofthe Company (including its Board of
Directors or its shareholders) to make a determination prior to lhe commcncement ofthe enlbrcement action that indemnification of
lndemnilee is proper in the circumstances. nor an aclual 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 prcsumption that lndemnitee is not entitled to
indemnification under this Agreement or otherwise. The termination of anl Proceeding by judgmcnt, order of court. settlement. conviction
or upon a plea of nolo-c0ntendere. or its equivalent. shall not. ol itself. create a presumption that lndcmnitee is not entitled to
indemnification under this Agreement or other$'ise.
12. Partial Indemnification. Iflndemnitee is entitled under anl provisions of this Agreemcnt to indemnification b) the Company
for some or part ofthe Expenses. judgments. fines and amounts paid in settlement actually and reasonably incuned bl lndemnitee in the
investigalion. defense. appeal or settlement of any' Proceeding but not, ho\rever. for the total amount. the Company shall indernnil-v
lndemnitee for the portion of the Expenses. iudgments. fines and amounts paid in settlement to Nhich Indemnitee is entitled.
li. Nonerclusivitr and Continuitv ofRiehts. The indemnification provided by this Agreement shall not be deemed erclusive ol
any other rights to which Indemnitee may be entitled under the Restated Articles, the Company's Bylaws. any other agreernent, 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 capacitv
uhile holding office. The indemnification under this Agreement shall continue as to lndemnitee even though Indemnitee ceases to be a
director or ofllcer and shall inure to the benefit ofthe heirs and personal representatives of lndemnitee.
14. Busincss Combinations. I f any penon or group (as detined in Scction I 3(d)(3 ) of the Securities Flxchange Act of I 934. as
amended) acquires the legal right to elect a ma.ioriLv of the Board of Directorc ofthe Company in a tmnsaction or series of transactions
that has not received the prior approval of the Uoard of Directors of the Company, the Company or its successor. as th!' casc may be,
shall. for a period of t\o lears lollouing the date that such legal right is acquired (the "Triggcr l)ate'). maintain an1 and all dircclors and
officers' liability insurance in eflcct prior to the Trigger Datc that corers Indemnitee,
15. Sererabili lf this Agreement or anl portion of it is invalidated on any ground by any coufi of competent jurisdiction. the
Companl shall indemnifl lndemnitee as to Erpenses. judgments. fines and amounts paid in settlement with respect to an) Proceeding to
the full ertent permitted b)' an) applicable portion ofthis Agreement that is not invalidated or br anv other applicable lat or anangement.
16. Subroeation. In the event ofpayment under this Agreemenl, the Company shall be subrogated to theextentofsuch payment
to alI ofthe rights ofrecovery of Indemnitee. lndemnitee shall execute al] 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 entbrce such rights.
17. Modification and Waiver. No supplement. modillcation or amendment ofthis Agreement shall be binding unless executed in
writing by both parties. No waiver ofany ofthe
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 179 of2l0
6
provisions in this Agreement shall constitute a rlaiver ofan) other provisions ofthis Agreement (uhether or not similar) nor shall an1
n,aiver conslitute a continuing lvaiver. unless expressly stated in any waiver.
18. Notices. All notices. requests. demands and other communications under this Agreement shall be in $'riting and shall be
deemed to have been duly given (a) upon delivery ifdelivered bl" hand to the pan) to $hom th€ notice or oth€r 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) Ifto Indcmnitee. at lhe address indicalcd on lhe signature page ofthis Agreement.
(ii) If to the Compan),, to
Northwest Natural Holding Company
220 N.W. Second Avenue
Portland, Oregon 97209
Attention: President
or to any other address as may have becn lurnished to lndemnitee by the Company
19.Corr rts. The parties nla) execute this Agreement in 1\\o counterparts. each ofrrhich shall constitute the original.
20. Applicable Law. This Agreemenl shall be govemed by and conslrued in accordance with lhe law ofthe state ofOregon.
2l . Successors and Assigns. This Agreement shall be binding upon the Companv and its successors and assigns.
7
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 180 of 210
lN WITNESS WHEREOF. the parties have caused this Agreement to be signed as ofthe day and year firsl wrifien above.
NORTI IWIST NATURAL HOLDING COM PANY INDIIII{NITEE
Bv Br:
Signaturc Signaturc
Iypc or Print Name
I illc Address
lt
lllack Io Iopr
Section 6: EX-10.Q (EXHIBIT 10.Q)
As amended
effective October l. 2018
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"). eflective October l, 2018. Effective October l, 2018, the Company became a wholly-owned subsidiary of Northwest
Natural Holding Company ("Parcnt") and holders of Company comnron stock became holders of Parenl common stock ("Parent
Cornmon Stock").
PTJRPOSI OF PLAN
'lhe success ofthe Company is dependent upon its ability to attmcl and retain the services ofkey executives ofthe highest competence
and to provide incentives for superior perlormance. 'lhe purpose of the plan is to advance the interests of the Company and its
shareholders through an incentive compensation program that rvill attract and retain key executives and motivate them to achiere
performance goals.
PROGRAM'TF]RM
This Plan is an annual incenlive plan and each new calendar year commences a new Program Tcrm. [:ach Program Term will begin on
January I and conclude on December 31. EXHIBIT 2
PARTICIPATION PALFREYMAN. DI
CEM STATE WATER
All executive officers of thc company and any other highly compensated employees as designated by the Company's Or@@fr8fl add l0
Executive Compensation Committce (the "Committee") are eligible to receive awards ("Awards") under the Executive Annual lncentive
Plan.
Type or Print Name
At the beginning ofeach Program Term. the Committee shall determine eligibility for Arvards and establish for each participant. the target
incentive level as a percentage of year-end annualized based salary ("Target Award"). l his information will be set forth in Exhibit I of the
Plan document for the Program Term. Each such participating employee shall be refened to as a "Participant."
To be eligible for payout ol an Arvard the Pafticipant must have a minimum of three months of service during the ProBram Term. If the
Participant is a nerv employee or is nervll' eligible to participate in the Plan. that Paflicipant must bc in an eligible position on or beforc
September 30 ofthe Program Term and will receive a prorated Award. ln addition, thc Panicipant must bc employcd by the Company or
Parcnt on December 3 l of the Program 'l crm to bc cligible lor payout of the Award lor the Program 'ferm unless the Participant is eligible
for a prorated Award as provided in the next sentence. Eligibility lbr a prorated Award occurs when a Panicipant has three or more
EXHIBIT 2
PALFREYMAN. DI
CEM STATE WATER
Page 182 of2l0
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 o[ the lbllorving: Retiremenl (unless such Retirement results from a termination of the Participant's emplolment b1 the
Company or Parent for Cause). disabilit-v and death. Prorated Awards will be determined by prorating the Panicipant's final Arlard b;'
the number ofdays employed during the Program Term.
"Retirement" shall mean termination olemplolment after Participant is (a) age 63 Nith at least fir'e rears of service as an cmploree oflhe
Company and Parent, or (b) age 55 with age plus years of service (including fractions) as an employee of thc Company and Parent
totaling al least 70.
"Cause shall mean (a) thc rrilliul and continued failure b1 a Participant to perlbrm substantiall) the Participant's assigned duties rrith thc
Companl or Parent (other than an) such failure resulting lrom incapacity due to ph)sical or mental ilJness) after a demand lor substantial
performance is dclivered to the Participant by the Companl or Parent $hich specifically' identifies the manner in which the Panicipant has
not substanlialll pertbrmed such duties. (b) willful commission by a Participant of an acl of lraud or dishonesty resulting in economic or
financial injury to the Compan) or Parent. (c) rvilltul rnisconduct b1 a Panicipant that substantially impairs the Company's or Parent's
business or reputation. or (d) rviJlful gross negligence b1' a Panicipant in the performance of his or her duties.
In the event of a change in job position during the Program 'l'erm, the Committee may. in its dismetion, inmease or decrease the amount of
a Participant's A\ryard to reflect such change-
INCENTIVI I:ORMI.]I.A
The formula lbr calculating Arrards for each Program Term is as lollorrs
Participant
Award
COM PANY PERFORMANCE I]ACTOR
The Company performance goals in the Plan are intended to align the inter€st of Participants with those ofthe shareholders. The goals and
the formula for determining the Company Performance Factor will be established by the Committee at the staft ofeach 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
ma1" be the basis for adjustments shall include. but not be limited to. anl- change in applicable accounting rules or principles: an1 gain or
loss on the disposition ofa business: impairment of assets: dilution caused b!'acquiring a business: tar changes and tax impacts of other
changes: changes in applicable laus
l-argel
Award , [(
Company
Performance X
Factor (CPF)
CPF Factor
Weight
Prioritr i Indir idual
Performance Factor X
(IPF))- (
Pi IPF
Factor
Weight )l
EXHIBIT 2
PALFREYMAN, DI
GE\4 STATE WATER
Page 183 of2l0
and regulations: changes in rate case timing: changes in the Compan) 's slructure; and any other circumstances outside of managemenl's
control.
PRIORITYi INDIVIDUAL PERFORMANCE F'ACI'OR
'lhe P/lPF \\eight used in calculating the Prioriti /lndiv idual Performance Factor u'ill be established for each Participant b_v the Committee
at the beginning of the Program Term and set forth as pafl of E\hibit l. Also included in Exhibit I rvill be the CPF Factor Weight lor the
Company Performance Factor. Priority,/lndividual goals for each Participant will be cstablished al lhe beginning of each Program Term
and performance against lhese goals will be assessed by the Participant's superior and approvcd by the C.E.O. at the end ofthe Program
Term. This assessment rYill result in a rating on a scale of0% to 175%. This rating is called the Priorill /lndir idual Performance Factor.
The Panicipant rvill not receive a payout under the Prioriti /lndilidual Performance component of an Arvard if thc Prioriry/lndividual
Performance Factor is less than 50%.
ADM INISTRATION
Award payouts will be calculated and paid no later than the March 15 following the end ofthe Program Term. Award payouts are subject
to tax withholding unless the Participant made a prior clection to defer the Award payout under the terms of the Defened Compensalion
Plan for Directors and Executives ("DCP").
All Award payouts shall be auditcd by the Internal Audit department and approved by the Committee prior to payment,
The Plan shall be administered b1 the Committee. The Committee shall have the exclusive authority and rcsponsibilitl for all matters in
connection with the operation and administration ol the Plan. Decisions b-v the Committee shall be flnal and binding upon all parties
alfected b1 the Plan. including the benellciaries of Parlicipants.
The Committee may rely on information and recommendations pmvided by management. The Committee may delegate to management
the responsibility for decisions that it may make or actions lhat it may take under lhe terms of the Plan, subject to the Committee's
reserved right to review such decisions or actions and modi$ lhem when necessary or appropriate under the circumstances. The
Committee shall not allow any employee to obtain conlrol over decisions or actions that affect that employce's Plan benefits.
RECOL]PMI-]N I' ON [ARNINGS RESTATIMENT
If al 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 ofa restatement due to the Misconduct ofany 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 an1'
Participant means the positive dift'erence. ifany,
J
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 184 of 210
between (i) the Participant's A\r'ard palout as originalll calculated. and (ii) the Participant's Award payoul as recalculated with the results
for Company performance goals being based on Parent's financial statements as reslated. Excess Bonus Compensation shall not include
any amounts in respect of any individual performance goals or in respecl of Company performance goals that are not measured in wholc
or in parl on financial results reponed in Parent's financial statements. The Committee ma1-. 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 deferred under the DCP, any Excess Bonus Compensation to be repaid with respect to thal
Award shall first be recovered by canceling all or a portion of the amount so defened under the DCP and any interest credited under the
DCP with rcspect to such cancelled amount. The Company may seek direct repayment lrom the Participant of any Excess Bonus
Compensation nol so recovered and may, to the extent permitted by applicable law. oflsel such Excess Bonus Compensation against any
compensation or other amounts o\ cd by the Compan! 10 the Participant. In panicular. Excess Bonus Compensation may bc rccovered
br ofliet against the after-tax procccds of deferred compensation payouts under the DCP. lhe Compan)''s Executire Supplemental
Retirement Income Plan or the Company's Supplemental Executive Retirement Plan at the times such defened compensation 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 a1 the rate used from time to time for crcditing interest under the DCP.
"Misconduct" shall mean (a) rvillful commission by anl person ofan act of fraud or dishonestl- or (b) rvillful gross negligence by an1
person in the performance of his or her duties.
"Change in Control" shall mean the occurrence ofanl ofthe follo\ing e\ents:
(a) The consummation ol:
(i) anl, consolidation. merger or plan of share exchange involving Parent (a "Merger") as a result of which the holders of
outstanding securities ofParent ordinarily having the right to vote for the election ofdirectors ("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 ofthe surviving corporation immediately after the Merger. disregarding any Voting Securities issued to
or retained by such holders in respect of securities ofany other party to the Merger:
(ii) anl consolidation. merger. plan of share exchange or other transaction inlolving the Companl. as a result of \thich
Parent does not continue to hold. directll or indirectll. at least 50% ofthe outstanding securities of lhe Companl ordinarill 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 rclated transactions) of all, or
substantially all, the assets ofParent or the Company;
.1
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 185 of 210
(b) At any time during a period of tno cons€cutive years. individuals who at the beginning of such period constimted Parent's
Board of Directors ("lncumbent Directors") shall cease for any reason to constitute al least a majority thereof; provided. however, that the
term "lncumbent DirectoC'shall also include each new director elected during such two-year period whose nomination or election was
approved by two-thirds ofthe Incumbent Directors then in office: or
(c) Any person (as such term is used in Section l4(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 offel open markct purchases or privatcly negotiated
purchases from anyone other than Parcnl, have become the beneficial owncr (within the meaning of Rule l3d-l under the Securities
Exchange Act of 1934). directly or indirectly. ol Voting Securities representing twenty percent (20%) or more of the combined voting
power ofthe then outstanding Voting Securities.
AMLNDI\4LNTS AN D'f IIRMIN A'IION
The Board has the porver to terminate this Plan at any time or to amend this Plan at an)'time and in an1' manner that it mal- deem
advisable.
IN WITNESS WHEREOF this Plan was duly amended effective as of October I , 201 8.
NORTHWEST NATURAL GAS COMPANY
81: /si DAVID H. ANDERSON
David H. Anderson
President and Chief E\ecuti\ e Officer
i
EXI IIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 186 of2l0
Exhibit I
Effective January 1, 2019
Participants, Target Awards and lndividual Performance
Program Term: January 1,2019 - December 31, 2019
6
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 187 of2l0
Exhibit ll
Company Performance Factor
Program Term: January 1,2019 - December 31,2019
Company Performance Factor Formula:
(Nel Incomc Conlponent x 7t.13%(Opcralions Componcnt x lE.i7%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.
20lr) \l Rr\ull\\l Performance ( omponcnt
50o,'o
t00%
175",1,
Notsa on Nl Component:
1) Values between those shown above will be interpolated using the formula shown below
Regression lnterpolation Line for Nl between $_ and $_ is y = _x -and line for Nlbetween $_ and$_isy=_x-where X is the Nl results for the year
2) Flnal Nl Number will be rounded to two places to the right of the decimal. This will be the same number as reported lo shareholders before
any approved exceptions.
7
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 188 of2l0
I
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 Performance Rating Goal Weight Oper. Component Factor( I )
2019 Operational Goals
Goals Goal Performance Rating Goal Weight
('ustomar Satisfscli(ln
(Orcrallt
Cu!t. S{t,
%
oli
%
Ratins
tw%
100%
l(t.661'k
('urtomer Satisfaclion
(Enrplo! ee/Customcr Inlcraction )
(lu$t. Ssl.
yo
Rating
0%
100%
200%
I $.661vo
lUArket Share & Cro$th
(Tolal Ncw Meter Sets)
'lbtal \eN Ileter Scts Ratins
09'o
t 00%
200%
16.(t61"/"
lla[age Costs in Senice Customc$
(O&l\,1 E\pensc l,er Cuslonrr)
t-rnenrc Per ( ustomer Ratins
09"
to00/.
1000/r
16.667 D/o
llcalth and Safety.Damsges
(Danagesr 9/o ofcalls */ rcsponsc lcss than 60
minulcs)
''l, ( ,ll lt\0.Rslins
00,'.
100%
2ot%
16.661"/"
Ilesllh and Safet!.odor Resp.
(oi) Calls w,/response timc lcss than 60 minutes)
u/o ( all Rsp.Relins
0%
100"/"
1.00%
t 6.661yn
I00%
Notes on Operations GoalS
ll Goal ratings will be inlerpolated between amounts shown.
I r The Goal Performance Rating for each goal is limited to 200%.
I ) The Operations Component is limited to 200olo and the aggregate performance Irom this component for use in the EAIP is limited to 1 75%
8
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 189 of 210
)
Final Notes on Company Performance Factor and General:
l) Final EAIP Participant Awards to participants will be rounded uptothe nearest $1,000.
2) Final Nl results for 20'19 could be adjusted for the impacl of certain events as determined by the OECC
(Back Io l op)
Section 7: EX-10.SS (EXHIBIT 10.SS)
ANNUAL INCENTIVE PLAN
NW Natural Gas Storage LLC
("company", or "the compan"v")
PURPOSE
The purpose ofthe Annual Incentive Plan (AlP) is to recognize and reward Non-Bargaining Unit (NBU) employees who have performed
well and contributed to successful company performance as measured by key performance indicators.
PROGRAM TERM
This Plan is an annual incentive plan and each new calendar year commences a new Program Term. Each Program Term will begin on
January I and conclude on December 31.
PARTICIPATION
All NBU regular employees ofthe company arc cligiblc to participate in the Annual Incentive Plan. For all purposes ofthis AlP, a person
who is an employee of Northwest Natural Gas Company (NW Natural) on f'ull-time assignrnent to the company and designated by the
Company Board of Directors (BOD) shall be considered 1o be a regular cmployee of the company during the period of that lull-time
assignment. In these situations. a designated participant in this AIP shall not be eligible tbr incentile compensation from NW Natural.
NW Natural Ov€rsight
If the President of NWNGS is considered by NW Natural to be an executive officer of NW Natural for purposes of public disclosure.
any decision of the BOD under this AIP that aft'ects an award to the President shall be subject to and conditioncd ,pSn OS-OpE-{lrJ-Bq[].PALFREYMAN, DT
that decision by the Board of Direclors of NW Natural or as delegated by the Board of Directors of NW Natural to hq,0fgflIi{qtp$antF,n
Executive Compensation Committee. Page 190 of2l0
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'emplolment is terminated prior to the palout date of the Program Term due to one of the follouing:
retiremen(*). disabilitl or death. Board approved e\ception due disposition ofan affiliated business $hich results in the participant's
termination ol'employmenl with NWn'GS. Prorated awards will be determined by prorating the Participant's final auard b1 the number of
days employed during the Progrdm Term. In the case ofa Board approved exception due to disposition ofan affiliated business occurring
during the Program Term, the participant's proraled award will be based upon their target award and not aclual Company performance
for the Program Term. Such arvard rvill be paid \'vithin thirt) (30) dals tbllorving the completion of the transition period as defined b1' the
Board, The disposition of Gill Ranch Storage qualifies as Board approved and the Board will define the end ofthe transition period,
However, pafiicipating employees with Company approved Retention Agreements, will be eligible for prorated AIP awards consistent
rvith such agreements,
Emplorees rho transler to or from emplo)ment or full-tinre assignment to Northwest Natural or another subsidiarl'rvill be eligible lbr a
prorated award bascd upon the numberofdays they were eligible to participate in the AIP.
(+) Relirement is defined as a minimum of5lears of senice (tith the compan] or uith an affiliate companl) and age and senice 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 fbr each salary grade are shorvn in Erhibit I to the Plan document for the Plan Year. 'Ihe target inccntive opportunity
is assigned by salary grade and calculated bl mulliplyinS the 'l-arget Incentive percentage times the following for each emplol ec categorl':
NBU Salary Paid/Exempt Annual Base Salary as of[)ecembcr Jl" ol'thc plan rear
NBU Hourly Paid/Non-Exempt Actual eligible earnings. including regular pa). o\ertime pa). & lump sum merit palments
INCf,NTIVE FORMULA
The fbrmula fbr calculating the incentive arvard for the Program Term is as lollous:
Participant Award =
Target Award X (CPF X CPF Factor Weigh| + (lPF X IPF Factor Weight))
COMPANY PERFORMANCE FACTOR (CPF)
Ihc company perlirmrance goals in the Plan are intended to align the interest of Participants with those ofthe com
IIXIIIBIT 2
formula for determining the Company Performance Factor will bc established by the NW Natural Gas Storage, LLC 0oar$Spiry6y11g
(lhe "Board of Direclors") at the start of each Program Term and set forth as Exhibit lla and Exhibit Ilb. After the goals and formula are
o",,lffLF,BEYtr{&N. DI' 6EM STATE WATER
established for a Program Term. the Board of Directors retains discretion to modil.r the goals and formula. including adjusling the
calculation ofanr financial or other goal to eliminate the etlects ofsignilicant ertraordinary'. non-recuning or unplanned items.
INDIVIDUAL PERFORMANCE FACTOR (IPF)
The IPF \aei-qht used in calculating the Individual Perlbrmance Factor will be established for each Participant by the President, subject to
the approval ol the Board of Directors at the beginninB of the Program Term. Indii,idual goals lbr each Participant rvill be established by
the Participant's leader (subject to the approval ofthe President, and for the President subject to the approval ofthe Board of Directors)
at the beginning of each Program Term. Performance against these goals will be assessed by the Participant's leader at the end of the
Prograrn Term (subject to the approval ofthe President. and for the President subject to the approval of the Board of Directors). 1'his
assessment u ill rcsult in a rating on a scale of 0 to L 5 (he *l ndividual Performance Factor"). The Participant rvill not recei\,e an award if
the Individual Pcrformance Factor is less than 0.5.
ADMINISTRATION
Awards will be calculated and paid no later than March I 5 following the end of the Program Term. Awards are subject to tax \.vithholding
unless the Panicipant made a prior election to defer the Award under the terms of the NW Natural Gas Company Deferred
Compensation Plan for Directors and Executives if they are eligible for this plan. All awards shall be audited and approved by the Board
ofDirectors p or to paymenl
The Plan shall be administered by the Board of Directon. llxcept to the extent provided under "NW Natural Oversight" above. The
Board of Directors shall have the exclusive authorit) and responsibiliq for all matters in connection rrith 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 panies affected b1 the Plan. including the beneficiaries of Participants.
The Board of Directors may rely on information and recommendations provided by management. 'l he Board of Directors may delegate to
managernent the responsibility for decisions that it may makc or actions that it may take under thc tcrms ofthe Plan, subjcct to the Board
of Directors reserved right to review such decisions or actions and modify them when necessary or appropriate under the circumstanccs.
The Board of Directors shall not allow any employee to obtain control over decisions or actions that aflect that employee's Plan benefits.
AMENDMENTS AND TERMINATION
The Board of Directors has the pouer 10 terminate this Plan at an) time or to amend this Plan at an! time and in any manner that it ma)
deem advisable.
(tsack lo I op)
Section 8: EX-l0.2 (EXHIBIT l0.Z)
EXHIBIT 2
PALFREYMAN. DI
GEM STATE WATIIR
Page 192 of2l0
PERt-'OR]\4ANCE SHARL LONC TERM INCENTIVE AGR[EI\,IINT
This Agrecmcnt is cntered into as of February . 2019. between )'Jorthwest Natural Holding Company. an Oregon corporalitrn
(thc Company"), and ("Recipient"),
On February .2019, the Organization and Execulive Compensation Committee (the "Committee") ofthe Company's Board of
Directors (the "Board") authorized a perfbrmance-based stock award (the "Award") to Recipient pursuant to Section 6 ofthe
Company's Long Term lncentiYe Plan (the "Plan"). Recipient desires to accept the A\ ard subject to the lerms and conditions ofthis
,Agreement.
NOW. THEREFORE, the parlies agree as follows:
l. Award. Subject to the terms and conditions ofthis Agreement. the Company shall issue or otherwise deliver to the
Recipient the number of shares ofCommon Stock ofthe Company (the "Performance Shares") delermined under this Agreement based
on (a) the performance oflhe Company during lhe three-year period from January l, 2019 to December i l. 2021 (the "Award Period")
as described in Section 2 and (b) Recipient's conlinued employment during 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 amounl ofcash determined
under Section 4 (the "Dividend Equivalent Cash Award"). Recipient's "Target Share Amount" for purposes ofthis Agreement is
shares.
2. Perlbrmance Conditions.
2.1 Payout Factor. Subject to possible reduction under Seclion 3, the number of Performance Shares to be issued or
olherwise delivered to Recipient shall be determined by multiplying the Payout Factor (as defined below) by the Target Share Amount.
The "Payout FactoC' shall be equal to (a) the 'fSR Modifier as determined under Section 2.2, multiplied by (b) the EPS Payout Factor as
determined under Section 2.3 below; provided, howevcr, that the Payout Factor shall not be greater than 200% and thc Payout Factor
shall be 0% if the ROIC Performance Threshold (as defined in Section 2.4 below) is not satisfied. Notwithstanding the foregoing, ifa
Change in Control (as defined in Section 3.7) occurs before the last day ofthe Award Period, the Payout Factor shall be 1007o.
2.2 TSR N4oditier
TSR Percentile Rank TSR Nlodifier
less than 25%
25o/o lo 7 5o/o
more than 75%
10094
125o/o
(b) To determine the Company's "TSR Percentile Rank." the TSR ofthe Company and each ofthe Peer Croup
Companies (as defined below) shall be calculated. and
l00l7.l.l9E I 00555i0-00ljj
EXHIBIT 2
PALFREYMAN. DI
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Pagc 193 o1210
(a) The "l'SR Modifier" shall be determined under the table below based on the TSR Percentile Rank (as
defined below) ofthe Company:
the Peer Group Companies shall be ranked based on their respective TSR's from lorvest to highest. lf the Company's TSR is equal to the
TSR of any other Peer Croup Company, the Company's TSR Percenlile 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 rcsulting amount
expressed as a percentage and rounded to the near€st tenth ofa percentage point. Ifthe Company's TSR is between the'ISRs ofany
two Peer Croup Companies, the TSR Percentile Ranks ofthose two Peer Croup Companies shall be determined as set forth in the
preceding sentence. and lhe Company's TSR Percentile Rank shall be interpolated as follows. 'Ihe excess ofthe Company's TSR over
the TSR ofthe lower Peer Group Company shall be divided by the excess ofthe TSR ofthe higher Pecr Group Company over the TSR
ofthe lower Peer Group Company. The resulting fraction shall be multiplied by the difference between lhe TSR Percentile Ranks ofthe
two Peer Croup Companies. The product ofthat calculation shall be added to the TSR Percentile Rank ofthe lower Peer Group
Company, and the resulting sum (rounded to the nearest tenth ofa percentagc point) shall be the Company's TSR Percentile Rank. I'he
intent ofthis definition of TSR Percentile Rank is to produce the same result as calculated using the PERCENTRANK t'unction in
Microsoft Excel to determine the rank ofthe Company's TSR within the anay consisting ofthe 1'SRs ofthe Peer Croup Companies.
(c) The "Peer Group Companies" consist of those companies that were components of the Russell 2500 Ulilities
Index on October l, 2018 and that continue to be components of the Russell 2500 Utilities lndex through December 3 l. 202 | . Ifthe
Russell 2500 Utilities lndex ceases to be published prior to December 31, 2021, the Peer Group Companies shall consist ofthose
companies that were components ofthe Russell 2500 Utilities Index on October l, 2018 and that continued to have publicly-traded
common stock through Decernber 31, 2021.
(d) The"TSR" forthe Company and each Pe€r Group Company shall be calculated by (l)assumingthat $100
is invested in the common stock ofthe company at a price equal to the average ofthe closing market prices ofthe stock for the period
from October l, 2018 to December 31. 2018. (2) assuming that for each dividend paid on the stock during the Award Period. the
amount equal to the dividend paid on the assumed number ofshares held is reinvesled in additional shares at a price equal lo lhe closing
market price ofthe stock on lhe ex-dividend date for the dividend. and (3) determining the final dollar value ofthe total assumed number
of shares based on the average ofthe closing market prices ofthe stock for the period from October I, 2021 to December 31, 2021.
The "TSR" shall then equal the amount detennined by subtracting $100 fiom the foregoing final dollar value. dividing the result by 100 and
€xpressing the resulting ti"ction as a percenlage.
(e) Ifduring the Award Period any Peer Group Company enters into an agreement pursuant to which all or
substanlially all ofthe slock or assets ofthe Peer Group Company r,rill be acquired by a third party (a "Signed Acquisition"), and ifthe
Signed Acquisition is nol compleled by the end ofthe Award Period. lhen thal company shall not be a Peer Croup Company. Ifa Signed
Acquisition of a Peer Croup Company is terminaled (other than in connection with the execution of another Signed Acquisition) before the
end ofthe Award Period, then that company shall remain a Peer Croup Company. and the TSR lor that Peer Croup
l
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 194 of 210
Company shall be calculated as provided in Scction 2.2(d), except that ifthe announcement ofthe termination ofthe Signed Acquisition
occurs during the last three months ofthe 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 ternrination ol the Signed Acquisition.
2.1 EPS Payout Faclor.
(a) The "EPS Payout Factor" shall be determined under the table below based on the Cumulative EPS
Achievement Perccntagc (as defined below) achieved by the Cornpany lbr the Award Period:
Cumulative EPS Achieyement
Percentage LIPS Pavout Factor
0%
40%
r 00%
I 85%
Ifthe Company's Cumulative EPS Achievement Percentage is between any two data points set forth in the first column ofthe above table.
the EPS Payout Faclor shall be interpolated as follows. The excess ofthe Company's Cumulative EPS Achievenrent Percentage over the
Cumulative EPS Achievement Percenlage ofthe lower data point shall be divided by lhe excess ofthe Cunrulative EPS Achievement
Percentage ofthe higher data point over the Cumulative EPS Achievement Percenlage ofthe lower data point. The resulting fraction shall
bc multiplied by thc diflerence between the EPS Payout Factors in the above table corresponding to the two data points. The product of
that calculation shall be rounded to the nearesl hundredth ofa percentage point and then added to the EPS Payout Factor in the above
table conesponding 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 of a percentage point.
(c) The Company's "Cumulative EPS" forthe Award Period shall equal the sum ofthe Cornpany's diluted
eamings per share ofcommon stock ("EPS") for each ofthe three years in the Award Period. Subject to adjustment in accordance \ryith
Section 2.5 below. the Company's diluted earnings per share ofcommon stock for any year shall be as sct lorth in the audited
consolidated financial statements of the Compan; and its subsidiaries for that year. After giving et'fecl to an1 adjustments required by
Section 2.5, the EPS for each year shall be rounded to the ncarest penny.
(d) The Company's "Cumulative EPS Target" for the Award Period shall equal the sum ofthe EPS targets
approved by the Committee for each ofthe three years in
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 195 of2l0
the Award Period. The EPS target for the firsl year of the Award Period as approved by the Committee is S_. Within the first 90 days
oflhe second year ofthe Award Period. the Committee shall approve the EPS targel for that year, Within the first 90 days ofthe third
year ofthe Award Period, the Committee shall approve the EPS target for that year.
2.4 ROIC Performance Threshold
(a) For purposes of this Agreement- the "ROlC Pertbrmance Threshold" shall be satisfied if thc Companl'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 thc simple average ofthe Company's
ROIC (as delined below) for each ofthc three years in the Award Period. rounded to the nearest hundredth ofa percentage point. The
Company's "ROIC" for any 1'ear shall be calculated by dividing the Company's Adjusted Net lncome (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
pcrcentage point. Subject to adjustment in accordance with Section 2.5 bclow. the Company's "Adjusted Net lncome" tbr anr'year shall
be equal to the Company's net income lbr the year. increased by the Company's interest expense. net for the year and reduced by the
(iompany's interest income (including net interest on defened regulatory accounts) for the year, in each case as set forth in the Company's
Annual Report on Form I 0- K for that year. "Average Long Term Capital" for any year shall mean thc avcrage of the Company's Long
Term Capital (as defined below) as ofthe last day ofthe year and the Company's Long Term Capital as ofthe last day of the prior year.
Subject to adjustment in accordance with Section 2.5 below, [,ong Tcrm Capital" as ofany date shall equal the sum ofthe Company's
(rtal sharcholders' equity as olthat date and the Conlpany's long-term debt (including cuncnt maturities) as ofthat date, in each case as
set lorth on the audited consolidated balance sheet ofthe Company as of that date.
2.5 EPS and ROIC Adiustmcnts. The Comminee may, at any time. approve adjustments to the calculalion of
Cunulative EPS and/or Average ROIC to take into accounl such unanticipated circumstances or signit'icanl, non-recurring or unplanncd
cvents as the Committee may detennine in its sole discretion, and such adiustments 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: ta\ changes and tax impacts of other chanses: changes in applicable laus and rcgulations: changes in rate case timing
changes in the Company's structure; and any other circumstances outside of manaeement's control.
3.1 Except as provided in Sections 3.2,3.3 or 7.2, in order to receive a payout of Perfbrmance Shares, Recipicnt must
be employed by the Company or any parent or subsidiary ofthe L-ompany (the "Employer') on the last day ofthe Award Period.
-1
EXHIBIT 2
PALFREYMAN, DI
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Page 196 of2l0
i. Emplor ment Condition.
3.2 lf Recipient's employment by the Emplo),er is lerminated at any time prior to the end ofthe Award Period because
ofdeath, physical disability (within the meaning ofSection 22(e)(3) ofthe lntemal Revenue Code of 1986 (the "Code")), or Retirement
(unless such Retirement results t'rom a termination of Recipient's emplolment b! the Emplol-er for Cause). Recipient shall be entitled to
receive a pro-rated award. The number of Pcrformance 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 ofdays Recipient was employed by Employer during the Award Period and the denominator of which is the
number ofdays in the Award Period. If Recipient's employmenl by the Ilmployer terminates because of Retiremenl, dealh or physical
disability and a Change in Control subsequenlly occurs before the end of the Award Period, the number of Performance Shares
determined under Section 3.1 shall immediately be paid to Recipient. lf a Change in Control occurs and Recipient's ernplo) ment b), the
Employer subsequently t€rminates before the end olthe Award Period because ofRetirement, death or physical disability. the number of
Performance Shares determined under Section 3.3 shall immediately be paid to Recipient.
.1.3 CIC Acceleration
(a) lfRecipient is a party to a Change in Control Severance Agreement with the Company or a parent or
subsidiary ofthe Companl . Recipient shall immediatel) be paid a pro-rated award if Recipient becomes entitled lo 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 b) multiplying the Target Share Amount by a fraction. the numerator of \vhich 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 Contrcl Severance Benefit" means thc scverance benefit provided fbr in Recipient's Change in Control
Severance Agreement with the Company or a parent or subsidiary ofthe Company; provided, however. that such severance benefit is a
"Change in Control Severance Benefit" for purposes ofthis Agreemenl onl] if. under the terms ofRecipient's Change in Control
Severance Agreement. Recipient becomes enlitled lo lhe severance benefit (i) after a Change in Control ofthe Company has occurred,
(ii) because Recipient's employment with the limployer has been terminaled 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 (iii) because Recipient has
satisfied any olher 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 tenns "change in control." "good reason,"
"cause" and "disabilitv" shall have the meanings set fonh in Recipient's Change in Control Severance Agreement.
(b) lfRecipient is not a party toa Change in Control Severance Agreement with the Company ora parent or
subsidiaq ofthe Companl. Recipient shall immediatell be paid a pro-rated award in the amount slated in Section 3.3(a) if a Change in
Control (as defined in Section 3.7 below) occurs and al any time after the earlier of Shareholder Approval (as defined in Seclion 3.8
below), ifany, or the Change in Control and on or before the
5
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 197 of 210
second anniversary ofthe Changc in Control. (i) Recipient's employment is t€rminated by the Employer (or its successor) without Cause
(as defined in Section 3.6 below), or (b) Recipient's employment is terminated by Recipient lbr Cood Reason (as defined in Section 3.9
below).
3.4 IfRecipient's employment by the Employer is lerminaled at any time prior lo the end ofthe Award Period and
Section i.2,3.3 or 7.2 does not apply to such termination. Recipient shall not be entitled to receive any Pcrformance Shares.
i.5 'Retirement" shall mean termination ofemployment (a) on or after the first anniversary ofthe date of this Agreement,
and (b) after Recipient is (1) age 62 with at leasl five years ofservice as an employee ofthe Company or a parent or subsidiary ofthe
Company. or (2) age 60 with age plus years ofservice (including fractions) as an employee ofthe Company or a parent or subsidiary of
the Company totaling at least 70.
3.6 "Cause" shall mean (a) the rvillful and continued failure by Recipient to peform substantialll Recipient's assigned
duties uith the Employer (other than any such failure resulting from incapacity due to phlsical or mental illness) afler a demand tbr
substantial performance is delivered to Recipient bl the Employer r'ihich specifically identifies the manner in \\'hich Recipient has not
substantiall) performed such duties. (b) uillful commission b1 Recipient ofan act of fraud or dishonestl resulting in economic or llnancial
injun to the Compan),or Emplo)'er. (c) rillful misconduct bi Recipient that substantialll impairs the business or reputation ofthe
Company or Employer. or (d) uilltul gross negligence b) Recipient in the peformance ofhis or her duties.
3.7 For purposes ofthis Agreement. a "Change in (bntrol" olthe Company shall rnean the occurrcnce ofany ofthe
lollorr ing er cnts
(a) The consummation of':
(l) any consolidation, merger or plan ofshare exchange involvinglhe Company (a "Merger") as aresult
of which the holders of outstanding securities of the Company ordinaril,r' having the right to vote lor the election of directors ("Voting
Securities") immediately prior to the Merger do not continue to hold at least 50% ofthe combined voting power ofthe outslanding Voting
Securities ofthe sun,iving corporation or a parcnt corporation ofthe sun'iving corporation immediateh alter the Merger. disregarding an1
Voting Securities issued to or retained by such holders in respect ofsecurilies ofany other pary* to the Mergert or
(2) any consolidation, merger, plan of share exchange or other transaction involving Noflhwest Natural
Cas Company ('NW Natural") as a result ofwhich the Company does not continue to hold. directly or indirectly, at least 50% ofthe
outstanding securities ofNW Natural ordinarill having the right to !otc for the election ofdirectors; or
(3) any sale, lease, exchange or other transfer (in one lransaction or a series ofrelated transactions) of
all, or substantially all, the assets ofthe Company or NW Natural;
6
EXHIBIT 2
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Page 198 of2l0
(b) At anr time during a pcriod oftrr o consecuti\ e ) ears. indir iduals $ ho at the beginning oi such period
constituted the Board ("lncumbent Directors") shall cease for any reason to constitute at least a majority thereof; providcd. however, that
the term "lncumbent Director" shall also include each new dircctor elcct€d during such two-year period whose nomination or election was
approved by two-thirds ofthe Incumbcnt Directors then in oUice: or
(c) Any person (as such term is used in Section l4(d) ofthe Securities Exchange Act of 19i4. olher than the
Company or any employee benefit plan sponsored by the Company or NW ),,latural) shall, as a resull ofa lender or exchangc offer. open
market purchases or privately negotialed purchases from anyone other than the Company, have become the beneficial owner (within the
meaning ofRule l3d-3 under the Securities Exchange Act of l9l4), directly or indirectly, ofVoting Securities representing twenty percent
(20%) or more of the combined voting power ofthe then outstanding Voting Securities.
3.8 For purposes of this Agreement, Shareholder Approval" shall be deemed to have occurred ifthe shareholders of
lhe Company appmve an agreement entered into by the Company, the consummation of which would result in the occurrence ofa
Change in Control.
3.9 For purposes ofthis Agreement, "Good Reason" shall mean the occuncncc after Shareholder Approval, if
applicable. or the Change in Control. ofan_v ofthe follorving circumstances. but onl) if(x) Recipient giles notice to Employer of
Recipient's intent to terminate employment for Good Reason within 30 days after the later of ( l) notice lo Recipient of such
circumstances. or (2) thc Change in Control. and (y) such circumstances are not lully conected by the Employer within 90 days after
Recipient's notice:
(a) the assignment to Recipient of a different title, job or responsibilities that rcsults in a decrease in the lei,el of
Recipient's responsibilit); provided that Good Reason shall not erist if Recipient continues to haye the same or a greater general level of
responsibilit-v for the former Employer operations after the Change in Conftol as Recipient had prior to the Change in Control even though
such responsibilities har,e necessarill' changed due to the formcr Emplol er operations becom ing a subsid iaq or division o f the sun iv ing
company;
(b) a reduction by the Employer in Recipient's base salary as in effect immediatell prior to the earlier of
Shareholder Approval. ifapplicable, or the Change in Controll
(c) the failure b) Flmplover to continue in etlect anl emplol ee benefit or incenti\e plan in uhich Recipient is
participating immediatel) prior to the earlier of Shareholder Approval- if applicable. or the Change in Control (or plans provid ing Recipient
\!ilh at leasl substantialll similar benefits) other than as a resull ofthe normal expiration ofan1, such plan in accordance rvith 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
thilure to act. by Employer which would adversell 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 uhich
uould nraterialll reduce Recipient's benefits in the future under any of such plans or deprive Recipient
7
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 199 of2l0
of an)., material benefit enjoled b1'Recipient immediatel) priortotheea ier ofShareholder Approval, ifapplicable. or the Change in
Control;
(d) the failure by the Emploler to provide and credit Recipi€nt with the number ofpaid vacation days to which
Recipient is then entitled in accordance with the Employer's normal vacation polic,v. 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 ofShareholder Approval. ifapplicable, or the Change in Control except for required travel on the
Emplol'er's business to an e\tent substantiall)' consistent \\'ilh the business travel obligations rrhich Recipient undertook on behalfofthe
Employer prior to the earlier of Shareholder Approval, if applicable, or the Change in Contrcl.
4. Dividend Equivalent Cash Award. The amount ofthe Dividend Equiralenl Cash Auard shall bc dctcrmined b1' multiplving the
number of Performance Shares deliverable to Recipient as determined under Sections 2 and 3 by the total amount ofdividcnds paid per
sharc of the Company's Common Stock for which the dividend record date occured after the beginning of the Award Period and beforc
the date ofdelivery ofthe Perlbmrance Shares.
5. Certification and Parment. At the regularl!' scheduled meeting ofthe Committee held in Februarl ofthe lear immediateli
follorling the final 1'ear ofthe Auard Period (the "Certitication Meeting"), the Committee shall review the Company's results for the
Award Period. Prior to the Certification l\4eeting, the Company shall calculate the number of Performance Shares deliverable and the
amount ofthe Dividend Equivalent Cash Award payable to Recipient. and shall submit these calculations to the Committee. At or prior to
the Certilication Meeting. the Committee shall certiry in $,riting (rvhich may consist ofapprored minutes ofthe Certification Meeting) the
number of Performance Shares deliverable to Recipient and the amount ofthe Dividend tsquivalent Cash Award payable to Recipient.
Subject to applicable tax withholding, the amounts so certified shall be delivered or paid (as applicable) on a datc (the "Payment Date")
that is the later of March l, 2022 or five business days following the Certification Meeting, and no amounts shall be delivered or paid prior
to cerlification. No fractional shares shall be delivered and the number ofPerformance Shares deliverable shall be rounded to the nearest
whole share. Not*ithstanding lhe foregoing. if Recipient shall have made a valid eleclion to defer receipt of Performance Shares or lhe
Dividend Equivalent Cash Award punruant to the terms ofNonhwest Natural's Defened Compensation Plan for Directors and
[,xecutives (the "DCP"). payment ofthe award shall be made in accordance with that election.
6. Tax Withholding. Recipicnt acknowledges that, on the Payment Date when the Perfbrmance Shares are issued or otherwise
delivered to Recipient, the Value (as defined below) on that date ofthe Performance Shares (as well as the amount ofthe Dividend
Equivalent Cash Award) will be treated as ordinary compensation income for federal and state income and FICA tax purposes, and that
the Emploler xilJ be required to rrithhold taxes on these income amounts. To satisfl thc rcquired uithholding amount. the Dmploler shall
fint \\ ithhold all or pan of the Dir idend Equir,alent Cash z\rr ard. and if that is insufficicnt. lhc l-.mplo) r shall u ithhold the number of
Performancc Shares har ing a Value equal to the remaining \r'ithholding amount. For
EXHIBIT 2
PALFREYMAN- DI
CEM STATE WATER
Page 200 of 210
8
purposes ofthis Section 6, the "Value' ofa Performance Share shall be equal to the closing market price tbr Company Common Stock
on lhe last trading day preceding the Payment Date. Notwithstanding the foregoing, Recipienl may elect not to have Performance Shares
$ithheld to cover taxes b), giving notice t0 the Company in rrriting prior to the Paymcnt Datc. in which case the Perfonnance Shares shall
be issued or acquired in the Recipient's name on the Payment Date thereby triggering the tax consequences. but thc Company shall retain
the certificate lbr the Performance Sharcs as securiq until Recipient shall ha\ e paid to the Companv in cash anl required tar rr ithholding
not covered by withholding ofthe Dividend Equivalcnt Cash Award.
7.1 the unvested Performance Shares shall be converted inlo restricled stock units for stock ofthe surviving or acquiring
corporation in the applicable ftansaction, 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, ifan).
used in determining shares ofthe surviving corporation to be held by the lbrmer holders ofthe Compan)'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 pa.v.'ment shall be delivered
simultaneousll \ith the closing ofthe applicable transaction such thal Recipient $ ill participate as a shareholder in receiving proceeds lrom
such transaction with respect 10 those shares, The number of Pedormance Shares to be delivered as a pm-rated award under this Section
7.2 shall be determined by multiplling the Target Share Amount by a fraction. the nunrerator ofrvhich is the number oldays ofthe Arvard
Period elapsed prior to the closing ofthe lransaction and the denominator ofwhich is the number ofdays in the Award Period.
8. Chanqes in CaDital Structure. If the outstanding Common Stock ofthe Company 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
Commiftee in the number and kind of shares subject 10 this Agreement so that the Recipient's proportionate interest before and after the
occunence of the event is maintained
9.1 lfat any time before a Change in Control and within three years after the Payment Date, the Commitlcc determines
that Recipient engaged in any Nlisconduct (as defined below) during the Award Pcriod that contributed to an obligation to restate the
Company's financial statements lor any quader or year in the Award Period or that other\rise has had (or rvill hal,e lvhen publicl;
disclosed) an adverse impact on the Company's common stock price,
9
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 201 of2l0
7. Sale ofthe Comoany. Ifthere shall occur before the Payment Date a merger. consolidation or plan oferchange inr,olving the
Company pursuant to which the outstanding shares ofCommon Stock ofthe Company are converted into cash or other stock, securities
or property. or a sale, lease, exchange or other transfcr (in one ransaction or a series of related transactions) ofall, or substantially all. thc
assets ofthe Company (either, a "Company Sale"). then either:
9. Recoupment On Misconduct.
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 ofthe Dividend Equivalent Cash Award as originally calculated and
certified under Section 5 ofthis Agreemenl, over (b) the number of Performance Shares and the amount ofthe Dividend Equivalent Cash
Award as recalculated (l) for the TSR Modifier, assuming thal the average ofthe closing market prices ofthe Company's common stock
for the period from October l, 2021 to December 31. 2021 was an amount determined appropriate by the Committee in ils 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 l, 202I . and (2) for the EPS Payout Factor and the ROIC Performance Threshold, based on the Company's
financial statements for all years ofthe Award Period as restated. The Committee may, in its sole discretion. reduce the amount ofExcess
LTIP Compensation to be repaid by Recipjenl to take inlo 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 ofthis Agreemenl). Recipient shall repay to the Company 100% ofthe pmceeds
ofsuch sale or sales- The retum of Excess LTIP Compensation is in addition to and separate from any olhcr reliefavailable to the
Company due to Recipient's Nlisconduct.
9.2 "Misconduct" shall mean (a) rvillful commission by Recipient ofan act offraud or dishonesty resulting in economic or
linancial injury to the Company. (b) willful misconduct by Recipient that substantially impairs the Compan.v-'s business or reputation, or (c)
rvillful gross negligence by Recipient in the performance ofhis or her duties.
9.3 Ifany portion ofthe Performance Shares or the Dividend Equivalent Cash Award was deferred under the DCP. the
Excess LTIP Compensation shall firsl be recovered by canceling all or a portion ofthe amounts so deferred 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 ofany Excess LTIP Compensation nol so recovered and may, to the extent pcrmitted by applicable law, offset such
Excess LTIP Compensation against any compensation or other amounts owed b), the Company to Recipient. In particular. Excess LTIP
Compensation may be recovered hy offset against the after-tax proceeds ofdeferred compensatjon payouts under the DCP, Norlh\ryest
Natural's Executive Supplemental Retirement Income Plan or Northwest Naturul's Supplemental Executive Retirement Plan at the times
such defened compensation payouts occur under the terms ofthose plans. Excess LTIP Compensation thal remains unpaid for more than
60 days afler demand by the Company shall accrue interest at the rate used from time to time for crediting interest under the DCP.
10. Aporovals. The obligations ofthe Company under this Agreement are subject to the approval ofstate 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 ofthe Securities and Exchange Commission and anl stock erchange on lhich the
Company's shares ma) then be listed. in connection $ ith the a$ard under this Agreement. The foregoing notNithstanding. the Compan)
shall not be obligated to issue or deliver Common Stock under this Agreement ifsuch issuance or delivery would violate applicable state
or federal law.
t0
EXHIBIT 2
PALFREYMAN. DI
CEM STATE WATER
Page 202 of 210
I I . No Rieht to Emplo\ ment. Nothin I contained in this Agreement shall confer upon Recipient anl' right to be emplo)ed b) ihe
Emplover or to conlinue to provide services to thc Emplover or to interfere in any rvay uith the right ofthe Employer to ternrinatc
Recipient's services al any time for any reason. rvith or without cause.
12. Miscellaneous
l2.l Entire Agreement: Amendment,'lhis Agreement constitutes the entire agreemcnt ofthe parties with regard to the
subjccts hereofand may be amended only by written agreement between the Company and Recipient.
12.2 Notices. An) notice required or permitted underlhis Agreenrent shall be in *riting and shall be deemed sufllcient
when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registcred or certitied
mail, relurn receipt requested, postage prcpaid. addressed to the Company, Attention: Corporate Secretary, at its principal executive
ofllccs, or to Employer. Aflention: Corporate Secretary. at its principal executive olllces, or to Recipicnt at the address of Recipient in the
Company's records, or at such other address as such partv may designate by ten ( l0) days' advance written notice to the othcr party.
12.3 Assienment: Rishts and Benefits. Recipient shall not assign this Agreement or an)' rights hereunder to any other
party or parties without the prior written consent ofthe Companl. The rights and benefits ofthis Agreement shall inure to the benetlt 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.
12.4 Further Action. The parties agree lo execule such llrther instrumenls and to take such funher action as may
reasonably be necessary to carry out the intent ofthis Agreement.
12.5 Applicable Law: Attomevs' fees. The terms and conditions ofthis Agreement shall be govemed by the laws ofthe
State ofOregon. In the event either party institutes litigation hereunder, the pre!ailing party shall be cntitled to reasonable attorneys' fees
to be set by the trial court and, upon any appeal, the appellate court.
12.6 CounterDarts. This Agreement may be executed in two or more counterparts. €achofwhich shall be decmed an
original.
FXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 203 ol2l0
IN WITNESS WHI-IREOF, the parties hereto have executed this Agre ement as of thc da)- and year tirst above written
B1
Iitle
Recipient
rBack -fo Tonl
Section 9: EX-21 (EXHIBIT 21)
Exhibit 21
SUBSIDIARIES OF NORTHWEST NATURAL HOLDING COMPANY
an Oregon Corporation
Name of Subsidiary
Northwest Natural Gas Company (dba Nw Natural)O16gon
Nonhwest Ene.gy Corporationrl'Oregon
NWN Gas Reserves LLCr Oregon
Gill Ranch Storage. LLC Oregon
NW Natural Energy, LLC Oregon
NW Nalural Gas Storage, LLC Oregon
NNG Financial Corporation Oregon
Trail Wesl Holdings, LLC Delaware
Trail West Pipeline, LLC Delaware
BL Credit Holdinqs, LLC Delaware
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER
Page 204 of 210Norlhwest Biogas, LLC Oregon
KB Pipeline Company Oregon
t2
Jurisdiction Organized
NW NaturalWater Company, LLC
NW NaturalWaler ofOregon, LLC
NW NaturalWater of Washington, LLC
Cascadia Water, LLC
NW NaturalWater of ldaho. LLC
Gem State Water Company. LLC
Falls Water Co.. lnc.
Salmon Valley Water Company
r') Subsidiary of Northwest Naturat Gas Company
Oregon
Oregon
Washington
Washington
ldaho
ldaho
ldaho
Oregon
Section 10: EX-23.A (EXHIBIT 23.A)
ll\hiIil 2ln
\tr'c horebt consenl to thc incorporation by relerence in the Registration Statcmcnls on f orm on S-8 (Nos. 333-18700541, lll- 180150-01, ll3-114973-01. lll-
10088i-01. ll3- 139819-01, 133-221347-01 and 333-227687) and Forrn S-3 (No. -333-227662) ofNonhN€st Natural I lolding Compan) ofour report datcd
March l, 2019 relating to the financial slatements. financial stalcmcnl schcdulcs and the effeqiveness of intemal control over financial reponing. which
appcan in lhis form lo-K.
/s/ l)riccwatcrhouseCoopers LLI'
Portland, oregon
March I 2019
ll']irck Io 1op)
Section 1l: EX-23.8 (EXHIBIT 23.8)
Ilrhihit.l.lb
CONSENI OF INDEPENDENT RI,CISTI1RIrD P(IRLIC ACCOIJNTI\(l lrlltM
We hereby consent to the incorporalioo by rcfcrcncc in lhe ReSistrarion Slalemenls on Form S-8 (No l-13-214425)and liorm S-3 (No. 13l-227662'01) of
Nonh$est Natural Gas Compan) of our rcporl dated March l- 2019 relaling to the financial statements and financial sratcnrcnr schcdulc, which anggl-ffi11 ,lhis Form l(}K.
/s/ I,riccaarcrhousccoopers LLp PALFREYMAN' Dl
Portland. Oregon GEM STATE WATER
March 1.2019 Page 205 of2l0
(tsack lo lop )
CO\SEN I OF INDEPENDENT RFGISTFRI]D PUBI,IC ACCOiJNTI\(I I:III]\,1
(llirck To Iop r
Section l2: EX-31.A (EXHIBIT 3l.A)
EXHIBIT 31a
CERTIFICAfION
l, David H Anderson. certify that
I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Norlhwest Natural Gas Company;
2. Based on my knowledge. this report does not contain any untrue stalement of a material facl or omit to state a malerial fact necessary to make
the statements made. in light of lhe circumstances under which such statements were made, not misleading with respect to the period cove.ed by this
report;
3. Based on my knowledge, the financial statements, and olher financial information included in this repon, fairly present in all material respects
the flnancial condition, results of operations and cash flows of the regislrant as of, and for, the periods presented an this reporl;
4. The regislrant s other cerlifying officer and I are responsible for establishing and maintaining disclosure conlrols and procedures (as defined an
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal conlrol over financial reporling (as defined in Exchange Act Rules 13a-15(0 and 15d-'15(f)) for
the regislranl and havel
(a) Designed such disclosure controls and procedures. or caused such disclosure controls and procedures lo be designed under our supervision, to
ensure thal malerial informatlon relating to the regislrant, including its consolidated subsidiaries, is made known to us by others wilhin lhose entities,
particularly during the period in which lhis report is being prepared:
(b) Designed such internalconlroloverfinancialreporling, orcaused such internalcontroloverfinancial reporting to be designed underoursupervision.
to provide reasonable assurance regarding lhe reliabilily of llnancial reporting and the preparation of frnancial stalemenls for external purposes in
accordance with generally accepted accounling pranciples;
(c) Evaluated the effectiveness of the registranl's disclosure conlrols and procedures and presenled in this reporl our conclusions about the
effecliveness ofthe disclosure controls and procedures, as ofthe end oflhe period covered by this report based on such evalualion; and
(d) Disclosed in this report any change in the registrant s internal conlrol over llnancial reporting that occur.ed during the regislranl s most recent fiscal
quaner (lhe regislrant's founh fiscal quarler jn lhe case ofan annual report) lhat has malerially affected. or is reasonably likely lo materially atfect. the
registrant's internal control over financial reporting; and
5. The registrant'$ other certifying officer and I have disclosed, based on our mosl recent evaluation of iniernal control over financial reporling, to
lhe registranl's auditors and the audat committee of the registrant's board of directors (or persons performing the equivalent functions)l
(a) All signaticant deficiencies and material weaknesses in the design or operation of inlernal conlrol over financial reporting which are reasonably likely
to adversely atfecl the registrant's ability to record, process, summaize and report financial information; and
(b) Any fraud, whelher or not material, that involves management or other employees who have a significant role in lhe registrant's anlernal control over
financialreporting.
Date: March 1, 2019
/s/ David H. Anderson
David H. Anderson
President and Chlef Executive Ofiicer
(Bacl To li)n)
Section l3: EX-31.8 (EXHIBIT 3l.B)
EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
Page 206 of2l0
EXHIBIT 31b
CERTIFICATION
l, Frank H. Burkhansmeyer, cerlitr/ lhat:
I have reviewed this annual report on Form 10-K for lhe year ended December 31, 2018 of Norlhwesl Natural Gas Company;
2 Based on my knowledge, this report does nol contain any untrue slatemenl of a malerial fact or omit 10 slate a material fact necessary to make
the statements made, in light of the circumstances under which such slatements were made, not misleading wilh respecl lo lhe period covered by this
reporl;
3. Based on my knowledge, the flnancial stalements, and olher financial information included in this repon, fairly presenl in all malerial respects
the financial condition, resulls of operations and cash flows of the registrant as of, and for. the periods presented in lhis report;
4. The registranl's other certifying officer and I are responsible for establishing and mainiaining disclosure conlrols and procedures (as deflned in
Exchange Act Rules 13a-'15(e) and 15d-15(e)) and internal control over financial reporling (as defined in Exchange Act Rules 13a-15(0 and 15d-15(0) for
the registrant and have:
(a) Designed such disclosure controls and paocedures. or caused such dasclosure conlrols and procedures to be designed under our supervision, to
ensure thal malerial information relating to the regislranl, including ils consolidaled subsidiaries. is made known to us by others wilhin those entities,
particularly during the period in which this report is being prepared,
(b) Designed such internal control over flnancial reporling. or caused such inlernal control over financial reporting lo be desagned under our supervision,
to provide reasonable assurance regarding lhe reliabilily ol financial reporting and lhe preparation of financial slalements for external purposes in
accordance wilh generally accepted accounting principles:
(c) Evaluated the etfectiveness oflhe regiskanl s disclosure conlrols and procedures and presenled in lhis reporl our conclusaons about the
effectiveness ofthe disclosure controls and procedures, as of the end of lhe period covered by lhis report based on such evalualion: and
(d) Disclosed in this report any change in lhe regastranfs inlernal control over llnancial reporling that occurred during the regislrant s most recent fiscal
quarler (the registrant's fourth fiscal quarter in the case of an annual reporl) that has materially affected, or is reasonably likely to materially affect, the
rcgislranl's inlernal control over financial reporlingi and
5. The registrant's olher cenirying officer and I have disclosed, based on our most recenl evalualion of ihlemal control over financial reporting. to
the regislrant's auditors and the audat commitlee oflhe registranl's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operalion of inlernal control over financial reponing which a.e reasonably likely
lo adversely affect the registrant s ability to record, process. summarize and report llnancial information: and
(b) Any fraud, whether or not material, lhat involves managemenl or other employees who have a significanl role in lhe regislranl's internal conkol over
financialreponing.
Frank H. Burkhartsmeyer
Senior Vic€ President and Chief Financial Officer
(Bau["li) Top)
Section 14: EX-31.C (EXHIBIT 3l.C)
Date: March 1, 2019
/s/ Frank H. Burkhartsmeyer
CERTIFICATION
I, David H. Anderson, certi, that:
1 . I have reviewed this annual report on Form 10-K for lhe year ended December 3'l , 2018 of Northwest Natural Holding Company;
EXHIBIT 31c
EXIIIBIT 2
PALFREYMAN. DI
OEM STATE WATER
Page 207 of2l0
2. Based on my knowledge, th is repon does not contain any untrue siatement of a material fact or omil to slate a malerial facl necessary to ma ke
lhe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
reporl;
3. Based on my knowledge, the financial slatements, and othe. financial information included in this report, faarly present in all malerial respecls
the financaal condition, results of operations and cash flows of lhe regislrant as of, and for, the peraods presented in this reporti
4. The registrant's other certifyang offlcer and I are responsible for establishing and maintaining disclosure conl.ols and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over llnancial reporting (as defined in Exchange Act Rules 13a-15(0 and l5d-15(0) for
the registrant and have:
(a) Designed such disclosure conkols and procedures, or caused such disclosure controls and paocedures lo be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known lo us by others within those entities,
panic!larly during the period in which lhis repo.t is beang prepared;
(b) Designed such internal conkol over financial reporting, or caused such internal conkol over flnancial reporting to be designed under our supervision.
to provide reasonable assurance regardang the reliability offinancial reporling and the preparation of financial statements for external purposes in
accordance wilh generally accepted accounting principles;
(c) Evalualed the effectiveness ofthe regislrant's disclosure conlrols and procedures and presented in lhis report our conclusions about the
elfectiveness ofthe disclosure conlrols and procedures. as ofthe end ofthe period covered by this report based on such evalualioni and
(d) Disclosed in this report any change in the registrant's inlernal control over financial reporting that occur.ed during the registrant's mosl recenl fiscal
quarler (the registrant's fourth flscalquarter in the case ofan annual report)that has malerially affected, or is reasonably likely to mate.ially affecl, lhe
regislrant's anternaIcontrol over fi na ncia I reporling: and
5. The registrant s other cerlifoing officer and I have disclosed, based on our most recenl evaluation of internal conlrol over financial reporling, lo
the registrant's audilors and the audil committee of the registranl's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and malerial weaknesses in lhe design or operation ofanlernalconlroloverfinanqal reporling which are reasonably likely
to adversely affect the regast.ant's ability to record, process, summarize and report financial information; and
(b) Any fraud. whether or not malerial. that involves management or other employees who have a significant role in the regislranl's internal conlrol over
financial reponing.
Oate: March '1.2019
/s/ David H Anderson
David H- Anderson
President and Chief Executive Officer
i Ilnck lo L,)p)
Section 15: EX-31.D (EXHIBIT 3l.D)
EXHIBIT 3Id
CERTIFICATION
l. Frank H Burkhartsmeyer. cerlify that:
1. I have reviewed this annual reporl on Form 10-K for the year ended December 3'l , 2018 of Norlhwesl Nalural Holding Company
2. Based on my knowledge, this report does nol contain any untrue stalement of a material fact or omit to stale a material facl necessa,y EXH{IBIT 2
the stalemenls made. in light of the circumstances under whach such slatements were rnade, nol misleading with respecl to the perpALWFEqtMAN. DIreport; cEM srA rE WATER
3. Based on my knowledge, the financial slatements, and otherfinancial information included in this report, fairly present in all ma,SggEfl$,gf210
the financaal condition, results ofoperations and cash flows ofthe registrant as of. and for. the periods presented in this report;
4. The registrant's olher certifying officer and I are responsible for eslabljshing and mainlaining disclosure conlrols and procedures (as deflned in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as dellned in Exchange Act Rules 13a-15(0 and 15d-15(0) lor
the registrant and have:
(a) Designed such disclosure conlrols and procedures, or caused such disclosure controls and procedures to be designed under our supervision. lo
ensure lhat material information relating to the registrant, including its consolidated subsidiaries, ls made known to us by others walhan those entilies,
particularly during the period in which lhis report is being prepared;
(b) Designed such Internal control over financral reporling, or caused such inlernal conlrol over financial reporting to be desrgned under our supervision.
lo provide reasonable assurance regarding the reliability of llnancial reporting and the preparation of financial statements for exlernal purposes in
accordance with generally accepted accounljng principles;
(c) Evalualed the effectiveness of the regislaant s disclosure controls and procedures and presented in this report our conclusions about the
effecliveness of the disclosure conkols and procedures, as of the end of lhe period covered by lhis report based on such evalualion; and
(d) Disclosed in this report any change in lhe registranl s inlernal control over flnancial reponing that occurred during lhe registranl s most recenl fiscal
quarter (lhe registrant s fourth fiscal quarter in lhe case of an annual report) that has materially atfecled, or is reasonably likely lo malerially affecl, the
regiskanl s internal conlrol over financial reporting: and
5. The registrant's olher certifying officer and I have disclosed, based on our most .ecent evalualion of internal conlrol over llnancial reporting, lo
the registrant's audilors and the audil commitlee of the registranl s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencres and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
lo adversely affecl the regislranl's abaljty to record. process, summarize and report finanoal jnformation; and
(b) Any fraud, whether or not material, lhat involves managemenl or other employees who have a significanl role in lhe regislrant s inlernal control over
Iinancialreponing-
Date: March 1 2019
/s/ Frank H. Burkharlsmevea
Frank H. Burkhartsmeyer
SeniorVice President and Chief Financial Ofiicer
Section l6: EX-32.A (EXHIBIT 32.A)
EXHIBIT 32a
NORTHWEST NATURAL GAS COMPANY
Certificate Pursuant to Section 906
of Sarbanes - Oxley Act of 2002
Each ofthe undersagned, DAVID H. ANDERSON, Chief Execr]tive Ofiic€r, and FRANK H. BURKHARTSMEYER, the Chief Financial Offlcer. of
NORTHWEST NATURAL GAS COiTPANY (lhe Company), DOES HEREBY CERTIFY lhatl
1. The Company's Annual Report on Form 10-K for the year ended December 31, 2018 (the Report) fully complies with the requirements ol section 13
(a) or 15(d) ofthe Securities Exchange Act of1934, asamended; and
2. lnformalion contained in the Report fairly presents, an all material respects, the financial condilion and results of operations of the Company.
lN WITNESS WHEREoF, each of the undersigned has caused this anstrumenl to be executed lhis 1sl day of Ma rch 20 19. EXHIBIT 2
PALFREYMAN, DI
CEM STATE WATER
/s/ David H. Anderson Page209of210
David H. Anderson
President and Chief Executive Officer
lBack To Top )
/s/ Frank H. Eurkharl er
Frank H. Burkhartsmeyer
SeniorVice Presidentand Chief Financial Ofiicer
A signed original of ihis wrilten slatement required by Section 906 ofthe Sarbanes-Oxley Acl of2002 has been provided to Northwest NaturalGas
Company and will be relained by Northwesl Natural Gas Company and furnished to lhe Securitaes and Exchange Commission or its staff upon request
(Back To TopJ
Section l7: EX-32.B (EXHIBIT 32.8)
EXHIBIT 32b
NORTHWEST NATURAL HOLDING COMPANY
Certificate Pursuant to Section 906
of Sarbanes - Oxley Act of 2002
Each of the undersigned. DAVID H. ANDERSON, Chiel Executive Offcer, 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 (lhe Report) fully complies with the requarements of section 13
(a) or 15(d) of the Securities Exchange Act of 1934. as amended; and
2. lnformation contained in lhe Report fairly presents. in all malerial respects, lhe flnancial condition and results of operations oI the Company
lN WiTNESS WHEREOF, each of the undersigned has caused this inslrumenl to be executed this 'l sl day of March 2019.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
SeniorVace President and Chief Financial Officer
A signed original of this written slatement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Northwest Natural Holding
Company and will be relained by Northwest Natural Holding Company and furnished lo the Securities and Exchange Commission or ils statf upon
request
EXHIBIT 2
PALFREYMAN. DI
GI]M STATE WATER
Page 210 of2l0
{Back'lo lop)
EXHIBIT 3
GEM STATE WATER COMPANY
- This Exhibit contains trade secret or confidential
material and is filed separately -
EXHIBIT 4
GEM STATE WATER COMPANY
Maps and Other Information Pertaining to
Happy Valley's Water Business System
(3 PAGES)
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EXHIBIT 5
GEM STATE WATER COMPANY
Maps and Other Information Pertaining to
Bitterroot's Water Business System
(s PAGES)
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EXHIBIT 6
GEM STATE WATER COMPANY
Happy Valley Well Logs
(2 PAGES)
:orm 238.7t//8
STATE OF IDAHO
DEPABTMENT OF WATER RESOURCES
WELL DRILLER'S REPORT
gitu l v rqrkct th.t thb r.pon t tild wilh rh. Oir.rrci, D.p.r.nr.ri cl W or B
wlfiin 30dryr.fl.r th. coEpl.tlon or $rdonm.nt ot rh. w.ll.
UsE TYPEWEITEA ON
BALLPOINT PEN
7. WATEF LEVEL
8. WILL TEST DATA
tr p,,mp ,(ariro,l1 Air O Orh.r __-__
g, LITHOLOGIC LOC
l -.__
+Ilr F-
--'t'Ji--r-.-J"
--i+
10.
t1. DRTLtERS CgFTTFtCATtOT{
lAV. cnrlty rhrr .ll mlnlmum *.ll cmrslxdm nandrrdr w.r.
..mpli.d wlrh 4 {l. rlnl6 fi. tlll,a ra$and.
Fn,n N.ni. --/+?EILX -. - -..-.er^ x". 2t ?
eoo,-,,|AfJJagg- . !1f4s - o "n Zjd -74
Slg'ed bv lFlrm Otrh,.ll - EXHIBIT 6
lOqerulotl PALFREYMAN. DI
GEM STATE WATER
^,t
kes, fuL-tut-tAtl* &eulklr*Uu
owncr,'Pc^irNo. ?5-7 I -,lt -7 4' /
1. WELL OIi{NEB
0lO Abando&d ldorrlb. m.lhod ol ob.ndo.'lnp)
2, NA'UBE OF I{OHK
C New wsll / Oocpnxr E B€pl.cs'nent
Hol.
Oi.6,
! lrilCrdon E T.n C Munlclp.l
tr Sro.k tr Wan. Oitpo5el or lnjetlon)( oomorrc
3. PIIOPTISED USE
.lndunrl6ltl 0thd
tnn
40A4 MEIHOO OBILLED
O Robry D Air
ftcuot" tr o0o
C Hyd.a,llcg Olhcr
\I it
rl
Grri^0 rchrd'rlr, N 516.l ll Concr!$ UOth.r'Ihlakr.ra t nr.r Frofi :ro
-ego* idd\.! '--ft* waa + _1fu|ta ;!,'1)ttzr.
--__ incrlra _ lnch.r __ ,at _ta!t___ Indraa .,-._,*.,._ lnch.t .,-_,- flrl ,.*'- ts.t
_ indtk .- Inchlr .- t!!l _loa
w.i c.rlr,o d.lv{ jl06 u$d7 D Ys' nfxow.!. Dtrk.r or r:tu{dl g Yri flloP6rtorrrod? OY.| ltro
Ho* p€.tor.!€d? O Frcrory Q Kntfr tr Torch
Sizc ol p.rlorrtion _ inchrtby _ IEh6Nu6b.r ?t'i To
__ o.rlonrlorr __ l.ot--. ._. Lit
_ p.rlorltlona __ t atparlorarlona ,.fl _- t.rr
uir ,c lir"rrcot o Y;--Ei;
Msnuls.rur.r'r n!fi._
Dl.,n.tr -_-- S,ot rlr. .___S.t rrom _r.il to _._1.{t
oialrel€r _ Slot dr, ,_-Srt lrom _re!l to __t..rGr',sl prctedt O Y6 dNo al Sir. ot srd6l
Placed kom _ _,_--__- lool to -_--- f..t
Sr,rl!.. 3d.r dlpth W$otnl ed in tgrl: trl cdr.t lrour
fr Pu&ttneclnt - t w.ll cutrinD
S.dlins p'@.{ur. ur.d t.'l Slurry ph E T.np, s.tx. ct'int
f.t O!crbo.. ro r.al d.pth
M.lhdt ol joininc caring: O Thrsrdod ts i,Ysld.d U Soleanr
Cl Crmirrdd botweso .rr.t
5. WE t-L CONSTAUCTTON
ll'lodel No. __
6. LOCATION OF IYELL
Skerch Ep idclrloo mun rir6lrylrh wrlrtlnld ion
Lot llo. _,__ Eloct o. ____-
-bE- u 1Lr s*. /? 1 ! / ufl, ^. { lM
E
s loo*.u,
USEADOTTIOI{ALSHEETSI'I{EC€SSANY. FOEWARO THE IIHITE COPY TO THE OEPAATM€NT Page I of2
Subdivirbn Na,I.
Sf .tic w.t r lnvet -Ah/-toot bato.. trnd irl4'x'.2
Fiowhg? tr Y't gryo G.P.M, flow
-
Artsilm cloardln pr$erra _ p.rl,
Contolld by1 E v.lv. [.] Crp Cl PlugTomplrrtlr. oF, Ou.llty _ _
_,__------|-
w.,*nrftd l-4- Yb r^t*a 4-/7" ta '
Ed-*l Rttny :rn
?- wATEn LEVfr- l
sr.rtc w.t!r td,t 1/ / tm uorow t"no
Fr6winr? tr Yc;78- G,P.M, flow
Arllr.n cloftd.h prisu.! _*_- p.r,l.
8, WELL ICST OATA
ili PumD ( soito,:l Ait O oth.r
USE TYPEWRITER OR
RALLPOINT PEN
EXHIBI'I 6
YMAN. DI
GEM STATE WATER
STT\TE OF IDAHO
DEPARTMENT OF WATEB RESOURCES
WELL DRILLER'S REPORT
Strta lnr ra.irkr' tirr rhh nlon h. fl,ad wlth d1aOh.!tor, Dapartmnr of W.trt S6rourca!
wlrhin 30 dry!.It!. ih. sompl.rlol orrb.rdonmantof th!yr.ll.
1. WELL OWNEA
?*,Y-?*I3?'
5, W€I L CONSTRUCTIOI.'
L/,
Conrftlled by: D Vatv. tr CaD O Pluo
Tfinp'r.rt rr _., _-_ oF, Ousllty
g, LITHOLOGiC LOG
Crrin!rchodulnr 4 Stesl O Conc.arc D Olh.r
olar@. freF
=
inrl:,ot 4 tnch.t ..3O4 32iit..t_ laar
-_--. taat
lv.t c lng dr!v! $0. urodI
Wn. oackor or...1u..d7 Ia ENo
Eru"DNoXv*C Frcrory C Knlf.?,1, tnch",h" 4
trom
4r-cn
- !f,- prrrorttronr
-- prrtor.ilo'lr -l]Nl_ rar 3 a-/_--rltr,r
t.at '--- taatparlontlo.r ,a.r _-_. lo3t
fruli ",*" i*t"rr*lr r: vJ ,(-r.ri"
M.nufnciu.6r'r nrn.-
Oirnater__,Slot tlra _Sea rrom _ta!t lo _fodoiaii.rer Sl0r rir. S.t rrom _i.at io _ lost
a,wa pmt*r o v"ifll"tr Sl!. ol trev.l ___
10,
1 1, OFILLEES CEfi TIFICATIOI{
l/W. c.rllry $!t .ll mlnlmlm well coostructlon nond.dr werc
compllcd wldEt tnc rln. tha rl0 tna. r.fiov.d.
{n,ll - rv^x..J{?
**.4*]llru,,t-l{* o*, ?-? -?o
Sirci by {Fir,I O,fhiil){^*J.- - 4"4,-
lop.nro.l
n Abandon.d (dokrib! m.thod ot obrndonlo0)
2, NATUNE Of II'OBK
(omp.ira O Rlpt.c.rnont
Domeiic Oligation DT.n tr Munlclp.l
lfldlrrri.l O Slock Lr Wono Oieposl o. lnj6ction4
3. PROPOSEO USE
El Other
l4 ?/L.. METHOD D'IILLEO
D Rolary tr Air
X c8bh 0 Due o ofic'1jJ Hydr.ulic 0 RcreBc rot{ry
't) F,i
aIlm'rtrl rlu;tD
(FP 15
03rr n.wdnffit
:,taik t lnrp li,.ation muit q.ct wlth writi.n lo..rion
Lot No. __* Block No. ._.-.- _ _
J/E- r 5 u't Y. s*. )1- J. -3L P
E
N
TIOiI OF WELL
^4ln
s
USE ADDITIOIIAL STIEEIS IF N€CESSARY - 'OFWAAD
THE WHITE COPY TO THE D EPAATMENT Page 2 of 2
'om 2IU.7
1/r8
wo.k n.rtod -. t.:-ZlA nn*,* 1-:]_9$A
I
I *-6! YG,
I
M.rhod of ioini.!dalnq :O Wrld.d O Sorvrnt
rl Clrnont 0roulO Wollcualastr T.mp. !{rr lsce cxioe
B Ovrrbor6 10 .o.l di9$
EXHIBIT 7
GEM STATE WATER COMPANY
Bitterroot Well Logs
(2 PAGES)
.lf
PERMTT NO. -96---91-'
2.
3. LOCATION OF WELL by l'g'l dttcdptlon:
skd.n maD lo{dlon atlll tgttt tvih * bn balk'n'
By wnom?
EXIIIBIT 7
PALFREYMAN. I)I
GI-JM S'I'A'I'!, WATER
Pagc lof 2
Use TyPowrllor
OT
Ball Polnt Pen
WELLTESTA:rlPuno o B.!or hnr o Flo*lng An 6hn
Trrp6.lll,! ol Ydt- w't ' eeL' 'n€ttlt doi.? Y.so lloD
O6cdb€ Co.llrcUing
12. LrHOLOGIC LOG: (oolctlb.6r'ht ot 'blndon 'tt)
Dat.: s|!n d 4-13-94 4-28-94
Form 23&7
6/&l
t. DRILUNG
loAHo DEPARTMENT OF WATER FESOUBCES !
WELL DFILLER'S REPOBT O\t/(%- 8716N---!5-'- lo
r 53 tbdh d or so,fi D
;- Eli o o. wsd d
ffi.,*=#;:-ilffi-J1-*
Bodo.n HoLTampaEtta---
r1. STANC WATEN LEVEI-:
-34L-t t u,*rt*. D€ph 'dodsn
no butd
-
Arteclan prossutc
-lb.
Dgscrbe "6€sl F,otl-.....-..-
ods r. io.d d llrDid
5. IYPE OF WONKr{ l&w wel O uocjor nrp.lt trF.rtrdmml D aben&tllnenl
6. DBITI METHOD
(3trud R..6ry d At Folary Dcibto O ou.t-
7. SEALING PFOCEDURES
w.r.th rho. ..d rsr.d? YEt t.!i Ho"?_
A. CASING'LI EN:
J
Top Pd€r or HssdpF._BotDft Tdblp!.-
g. PERFORAIONS/SCNEENS
Lol No. Abd(M 9!d.
4. PROPOSED USEI
O DoDisUc B MonlclP.l
O lrl.flnc O lnlelldr
b Podorsuom
O Monild o kdoato.r
Da
o
tr
oEooooooo
EIEO
,3. DBILLER'S CERNF|GANON
t4/V. o.dty ful a[ mtdmum wo! conlttuc onu|. Umc th. rlo waa Emd.d
!0o
o
o
o
tr
o
tr Fl.m
rm
POIIDERGA
airndtda *.r! conlpllsd whh
w.24
I,,Bd
F.IFIWABD I4I]I'F COPY t., WA'IEF FFSd IE'FA
PoSIEO
-.@4-410 _
x
n 6.rlr llltdolt, w.b, outlhv a T.nFr.t"
3 TOP SOII120I GR\\E E'IIT,DERS3
t80 GRAVIL
40r I GTTENIED GRAV9I,SlB0
100 42 I GR\VB,. COBtsI,ES
20I12045; GRAVE, C@BIES
3015546I SAID
5016046GRAVEL
i11I DE'T"PTCF,D GRANIIE!61
8] JBIIB SI.J@ (IIILIZED
BENMIIIE 0 50 30s!'-s O/EMRE
III
I +2 o25 x
EIIII
440 460 t X2 240
5u.I'.^)
DREJIIIS E
o""q-dt?
&Ert!. d wC s{.
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t,t{ u a nJlr
Nr.)liiiiri).- ,..-..tr
LE;-
FI
LI-
WELL OV'NER
@
llxl lltllT 7
PALittLYNl,^N. I)l
STATE OF IDAHO (iLN'1 S I A l L wA-l l:ltUsE YYPESBITEE oF
DEPARTMENT OF WATER BESOURCES pago l olr aALLPolNr PEI'r
WELL DBILLER'S REPORT
St.te lEw rsqulE thrt lhls rrport ba tll.d wllh ths Dl,sctor, D.p.tlment ol wit.r FtlourEgt
wlthln 30 d.y3 alter th. complctlon or abendonnanl ol th6 w€ll.
KEN RICKELName
PO BOX 1251 IIAII}EN LA(E ID 83835
96-92-N-278D lling.Psrmlt No
Weter Hlgtn Pormil No.
NAIURE OF WOBK
E Nsrv w€ll tr Oeepen€d E Replacem€nltr Welldiamerer inc-r€ass tr Modlllcatlontr Abandon€d {describo abandonmonl or hodllkellon procldurei
such as lln€Is. scr6sn, mal6.lals. plugdoplhs, elc lnlilhologb
log, section 9.)
PFOFOSED USE
Ioomestic tr lrrigdiono lndust.lal D Stock
tr Monilot
O Wasle Oiepo3al or lnjecllon
(s98cify lyF)
I/IEIHOO DBILLED
O Rolery dAh
k4*le o Mud
A{lgor
Other
tr Olhsr
tl,b6 c8sing driv€ she us6d?
W5s a pacler or seal used?
FHoraled?
0 Fov6rs6 rclaryo
C
+etc.)
wELl cot{sTRucfto}r
Cesing sctodrrla: Ef, Slecl O CorElgle O Olher
-
.ffifin* r8''['"n"" . l,:l_#lmi!9t*h". 8 tn"t"" t rl4l
lnches inchos
-
Let
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E Yer
tr Yss
E Yss
No
No
ToGh tr Ou.l
indl6!
o No 1o"/En
C8
tr
Ho, p6rfo6led? tr Factory I Knlla C
size ol p€rlorarion? --]- incho3 by -lllsn6.. Fm
?qo o6rloratlons -----4LZ- l..t --34-3- fe.r
-
pe o.alions
-
laol
-
teel
--
Perlolalions
--
le6t
-
lell
Itrellscr.on ln3tall€d? O Ye! B No
ManulacluGr
-
IYP€
--
Top PackBr or Headpipa
Boflsn ol Tailpipe
Diafioter
-
Slol sizo
-
set lrom
-,e€l
to
-
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Oiamaler
-
Sloi sizc
-
S€t hom
-
,€sl lo
-
l€el
Grdv6lpacksd? tr \ts b No El Sizo ol grevd-
Placod lrom
-
leol b-f6ol
Surlace seet dadn.Eq Mabrlal us€d in soall O Cemenl groul
q genlonila O Puddling cley tr
-
Soaling procodur€ used: O SluIry Pit
r] Temp. surlace cEBing fI OY€rbote lo s6al depth
Method of joini^g casing: tr Threadad rl w€l'led
O Solvonl Wsld tr C6monl6d belw€€n slrele
Describs acc63 Porl
-
LOCATION OF WELL
Slelch mEp bcation mult agr6o vrilh $,ritl6n locallon
Sr,bdlvlslon Namo
-
Lot No- Slock No.
-
Counly KOOTENAl
Addrass ol W€ll Sile
fl . oatLlEn's cEFrfl HC{lloN
U\iv6 coalit thet all mlnlmum w€ll constructlon Slanderd6 ware
compllod wnh at lha tlm6 lh6 .lg wa! .6moved,
Flrm Nqme H20 l'lEl-l sERvrcE Firm No.
582 W MYDEN AVE t2-07-92
Slgnsd by Drilling Suporvlsor
7. WATEF LEVEL
Statlc wator lerot 381
Flor,/ing? tr \6. 6Ho
lget bololv land surtaco.
G.PM, flow
-
Ane3ien clogod.ln pres3uro_ p.!.1.
Conlmll€d by: O \rslv€ D Csp b ntug
Tomperaluro _.E Oual
6. !'ELL IEST DATA
O Punp O Beller E Ak n Olher
-
9. LIIHOLOGIC LOG
DeplhAorE
Dlam From To lliloterlel ?{o
L2 0 SAND, CRAVEL. 3OI'IDERS
IO 60 SAND, CNAVEL. BOULDERS
SAND, GRAVEL, BOULDERS x
i m r'.;rl9".rrm--trI_E[Fr,n Y ks
tvJ.)FhB U
10.
finished L2-07t2-92
I
x
sl,l
loiv!.1 l..i! nano ol rocdl'- r 53 'Eors ov. i[ v. sec -i9- , n. -f- -. D or w b
and
(oeoEtor)eg
SupeIvisoi
I'asa,
I V92
r
r
IT
I,I
f P,.e,.e r-fl-----zia;----- ,
t H-n.".r.d
H
I
T60=-l
l2oo
-l rl
--r
lx
ts
-T l
tl
lx
r---T--L
El_
F
-f ]
rT
rT l
T f lTI
t,ol-too-f4z7lt-:T-l--
+
F
ffi
3o+
--r-
--+-