20210301Palfreyman Direct.pdf

PrestonN. Carter (ISB No. 8462)
Charlie S. Baser (ISB No. 10884)
Givens Pursley LLP
601 W. Bannock St.
Boise, D 83702
Telephone: [phone]
Facsimile: (208) 388-l 300
prestoncarter@ givenspursley. com
charliebaser@ givenspurslelr. com
15460896_4.doc [3988.10j
Attornaysfor Gem 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 TROY HOFFMAN
WATER CORPORATION, INC.
case No. &St^l -uf -2 t-o I
DIRECT TESTIMONY OF JUSTIN PALFREYMAN
ON BEHALF OF GEM STATE WATER COMPANY, LLC
March 1,2021
r BACKGROUND
2 Q. Please state your name and title.
3 A. Justin Palfreyman, President of Gem State Water Company, LLC ("Gem State Water"). I
a also serve as President of NW Natural Water of ldaho, LLC ('NW Natural Water of Idaho") and
5 NW Natural Water Company, LLC ("NW Natural Water").
6 Q. Please summarize your professional experience and educational background.
j A. I have worked for 18 years in strategy, finance and corporate development functions. I most
8 recently worked as a Director inLazard's Power, Energy and Infrastructure Group in New York,
9 where I provided strategic and financial advice to corporations, institutional investors, private
10 equlty funds and government clients. My advisory assignments related to general strategic advice;
11 mergers, acquisitions and divestitures; raising capital; restructurings; corporate
1,2 preparedness/takeover defense; and capital structure optimization. Prior toLazard,I worked in the
13 lnfrastructure Investrnent Banking Group at Goldman Sachs in New York. I also previously held
14 various positions in finance, strategy and business development at both Apex Learning and
15 Accenture in Seattle, Washington.
16 I hold an MBA from the University of Chicago Booth School of Business, a Master's of
1,7 Public Policy from The University of Chicago Irving B. Harris School of Fublic Policy and a
18 Bachelor's of Business Administration from Pacific Lutheran University.
ls a. What is the purpose of your testimony?
20 A. My testimony is offered to provide the Idaho Public Utilities Commission (the
21, "Commission") and Commission Staffwith information regarding Gem State Water's proposed
22 acquisition (the "Transaction") of the assets of the Water Business (the "Water Business Assets") of
23 Troy Hoffinan Water Corporation, Inc. ("Troy Hoffman Wate/').
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PALFREYMAN,DI
GEM STATEWATTR
1 Q. What do you mean by the term .,Water Business?r,
2 A. Troy Hoffinan Water owns and operates water supply and distribution systems. In this
3 testimony, I use the term o'Water Business" to describe Troy Hoffman Water's water supply and
a distribution systems, consistent with how the term ooBusiness" is defined in the Asset purchase
5 Agreement ("Agreement"), attached as Exhibit l.l
6 Q. Please describe NW Natural Water, and the relationship among Gem State Water, NW
z Natural Water of ldaho, and NW Natural Water.
I A. NW Natural Water is a wholly owned subsidiary of NW Natural Holding Company (,.NW
9 Natural Holdings"). NW Natural Holdings, which is headquartered in Portland, Oregon, is a
1 0 publicly owned company with a market cap of approximately $ 1.5 billion. It has revolving credit
11 facilities aggregating to approximately $100 million. NW Natural Holdings' Form lg-K for2020
1.2 filed with the Securities and Exchange Commission is attached as Exhibit 2.
13 NW Natural Water was created to own and operate water utilities, through subsidiaries, in
14 Oregon, Washington, Idaho and Texas. NW Natural Water also has significant financial assets. It
L 5 currently owns and operates seven water utilities, including Gem State Water (through NW Natural
1.6 Water of Idaho) and Falls Water Co., Inc. ("Falls Water"), in the area around Idaho Falls, Idaho.
1-7 Gem State Water is a wholly owned subsidiary of NW Natural Water of Idaho, which is in
18 turn wholly owned by NW Natural Water. Gem State Water has access to the financial resources
1.9 and the utility expertise of NW Natural Water of Idaho, NW Natural Water, NW Natural Holdings,
20 and their affiliates.
21. An organizational chart illustrating NW Natural Holdings' corporate structure is attached as
22 Exhibit 3. The chart has been designated "Confidential" per Commission rules.
I The Asset Purchase Agreement, attached as Exhibit l, is filed as "Confidential" pursuant to the Commission's rules.
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PALFREYMAN, DI
GEM STATEWATER
1 Q. Please describe NW Natural Water's interest in, and recent acquisitions in, the water
z sector.
3 A. In recent years, leadership of the NW Natural family of businesses undertook a
comprehensive strategic review process to identify 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 stategy and plan to pursue opportunities in the water utility and infrastructure sector,
in addition to the ongoing focus on our 162-year-o1d gas utility, storage, and infrastructure business.
We believe that a water strategy is a compelling frt for NW Natural because it builds on our core
competencies of constructing, operating, and maintaining infrasfucture, 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, seven water companies through direct or indirect subsidiaries,
including Gem State Water, which recently acquired the assets of Spirit Lake East Water Company,
Lynnwood Water, Diamond Bar Estates,LLC,Bar Circle "S" 'Water, Inc., Happy Valley Water
System Inc. and Bitterroot Water Co., [nc. Other water utilities acquired by NW Natural Water
include Falls Water; Cascadia Water, LLC, and Suncadia Water Company, LLC, in Washington;
Salmon Valley Water Company, and Sunriver Water, LLC, in Oregon; and T&W Water Service
Company in Texas. 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 Troy
Hoffinan Water Business customers.
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1 a. Do I\W Nafural Water and Gem State Water intend to make any changes to Troy
Hoffman Water contractors as a result of its acquisition of the Troy Hoffman Water Business
Assets?
A. Yes. Gem State Water's employees will assume the roles currently performed by Troy
Hoffman Water's contractors. While Troy Hoffman Water's current contractors will not be retained
after the Transaction closes, the current owners have agreed to provide assistance with the transition
as needed. Leslie Rayner, the licensed water system operator for Gem State Water, will serve as the
licensed water system operator for the water system currently operated by Troy Hoffrnan Water.
Ms. Rayner holds license numbers DWTI-I5876 and DWDI-14223, and,her business address is
250 Northwest Blvd., Suite I I l, Coeur d'Alene, Idaho 83816.
THE TRANSACTION
a. Please describe Troy Hoffman Water.
A' Troy Hoffrnan Water is a regulated water utility. Troy Hoffrnan Water serves
approximately 147 residential customers in and around Kootenai County, Idaho in accordance with
CPCN No. 280. The areas currently served by Troy Hoffrnan Water is in the same vicinity as the
territory served by Gem State Water.
a. Why are NW Natural Water, NW Natural Water of ldaho, and Gem State Water
interested in acquiring the Troy Hoffman 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 Troy
Hoffman Water's Water Business, and Water Business Assets, are well-run and well-maintained.
However, like many water utilities, the water system is in need of capital investrnent to maintain
system integnty. Gem State Water has identified several potential necessary capital investments,
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f including investments in SCADA, AMR metering, and an asbestos cement replacement program.
z Gem State Water intends to conduct a water master planning process to identify capital needs of the
3 systems. This planning process may come in the form of supplementing or revising existing water
4 master plans.
s In addition, NW Natural Water, NW Natural Water of Idaho and Gem State Water will
e provide the professional expertise needed to provide high-quality water services to customers in the
z long term. The proximity of Troy Hoffman Water's service territory means that Gem State Water's
a employees can provide a local presence and seamless transition to the customers of Troy Hoftnan
9 Water.
10 a. Please describe the proposed Transaction to acquire Troy Hoffman Water's Water
11 Business Assets.
1.2 A. Subject to the Commission's approval and other conditions, under the Agreement Gem State
13 Water will acquire all the assets related to the Troy Hoffrnan Water Business from the selling
i.4 parties (Troy Hoffrnan Water, Dalton Square, LLC, Ronald Stadley and Kenneth Munen).
15 As stated above, if the Transaction is approved, Gem State Water will operate the water
rG system currently operated by Troy Hoffman Water. Leslie Rayner, the licensed water system
t1 operator for Gem State Water, will serve as the licensed system operator. Gem State Water
1B employees will assume the responsibilities currently carried out by Troy Hoffrnan Water
19 contractors. While Troy Hoffman Water's owners will not be employed by Gem State Water, they
zo have agreed to provide assistance with the transition as needed.
2i- a. Does Gem State Water seek to change rates through this Transaction?
22 A. No. Gem State Water is not seeking to change rates, rate structure, or other charges for
23 customers of Troy Hoffrnan Water or for Gem State Water customers through the Transaction.
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PALFREYMAN, DI
GEM STATEWATER
t Gem State Water proposes that the current rate structure, rates, and other charges remain the same
2 for each customer group. I understand that Idaho law authorizes the Commission to provide for
: acquisition adjustments in certain circumstances for entities acquiring water utilities in the State, but
a Gem State Water does not seek an acquisition adjustrnent with this particular Transaction, and Gem
5 State Water will not seek any increase to rates as part of this Transaction. Any future rate increases
e would be related to prudent capital investrnents or other increased expenses, and would need to be
z justified at that time. Transaction-related costs have been incurred by NW Natural Holdings, not by
a Gem State Water. The costs will not be passed to Gem State Water and will not be included in any
9 rate case filing. Transaction-related costs include activities related to due diligence, environmental
10 consultants, legal costs, travel costs, and other costs related to negotiations.
11 If the Commission approves the Transaction, Gem State Water will work with Commission
12 Staffto file updated tariffs reflecting the approved rates and charges. If the Commission approves
13 the Transaction, Gem State Water will also work with Commission Staffbefore and during future
L4 rate proceedings to consider consolidation ofrates, rate structure, and other charges as reasonable
15 and appropriate for current Gem State Water customers and current Troy Hoffman Water
16 customers.
1'1 a. Does Gem State Water request any other action from the Commission?
18 A. Yes. Troy Hoffinan Water holds CPCN No. 280. Gem State Water requests that CPCN No.
1'9 280 be transferred to Gem State Water. This will enable Gem State Water to provide service to the
20 current customers of Troy Hoffrnan Water.
27 a. Does Gem State Water have additional information for the Commission?
22 A. Yes. Through its recent acquisitions, and through its interactions with Commission Stafl
23 Gem State Water has identified additional information that may prove useful to the Commission in
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PALrnrYueN, DI
GEU STATEWATER
1 evaluating the proposed Transaction. Maps pertaining to Troy Hoffman Water's Water Business
2 system are affached as Exhibit 4. A list of the Troy Hoffman Water's Water Business Assets, with
3 the information known at this time, are included in the Agreement. If the Transaction is approved,
+ Gem State Water intends to complete a water master planning process for the Troy Hoffman Water
s Business systems; Gem State Water anticipates obtaining additional information regarding the
6 systems and associated Water Business Assets through this process.
7 Meters are currently read in April, June, August, and October, and customers are currently
e billed on a bi-monthly basis throughout the year. Gem State Water intends to maintain this
g schedule for the foreseeable future.
10 Gem State Water provides 24-hotx response to repairs or water quality issues. Customers
11 can call the Gem State Water office phone number, [phone], and the call will be forwarded
1,2 to an answering service if the line cannot be answered.
13 If the Transaction is approved, accounting, financial, and customer records will be kept in
L4 the local office of Gem State Water, 250 Northwest Blvd., Suite I l l, Coeur d'Alene, Idaho 83816.
15 Gem State Water's local office also will be the location for former Troy Hoffman Water customers
1,6 to pay bills, make requests, and otherwise correspond with Gem State Water.
1-7 Gem State Water will publish a notice to the customers of Troy Hoftnan Water in the local
1B newspaper, although I understand that notice is not required.
19 Gem State Water has not identified any particular growth opportunities for Troy Hoffrnan
20 Water. If zoning changes occur, additional connections may become available.
2L a. Does this conclude your testimony?
22 A. Yes.
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PALFREYMAN, DI
GEM STATEWATER
EXHIBIT 1
GEM STATE WATERCOMPANY
- This Exhibit contains trade secret or confidential
mateial and is filed separately -
EXHIBIT 2
GEM STATEWATERCOMPANY
NW Natural Holdings' Form 10-K for 2020
(2t0 PAGE)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washlngton, D.C.20549
FORM lO.KE ANNUAL REPoRT PURSUANT To SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE AcT oF 1934
For the flscal year ended December 3'1,2020
OR! TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _
ilW l{qtu ro I
HOLDIl{GS-
NORTHWEST NATURAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
Commission file number 1-38681
Oregon 8247106E0
(State or other jurisdiction of (l.R.S. Employerincorporation or organization) ldentilication No.)
250 S.W. Taylor StroetPordand Oregon 97204
(Address of principal executive ofices) (Zip Code)
Registranfs telephone number: 150312i26,{,211
Securities registered pu;suant to Section 12(b) of the Act:
<fr il!ff iloturol'
NORTHWEST NATURAL GAS COIIPANY
(Exact name of registrant as specified in its charter)
Commission fle number 'l-15973
Oregon 934256722
(State or other jurisdiction of (l.R.S. Employer
incorporation or organization) ldentification No.)
250 S.W Taylor StreetPortland Oregon 97201
(Address of principal executive offic€s) (Zip Code)
Registranfs telephone number: (503)2264211
Name of each exchange
on which reoistered
New York Stock Exchange
None
4r
Reoistrant Title of each class Tradino Svmbol
Northwest Natural Holding Company Common Stock NWN
Norhwest 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{<nown seasoned issuer, as defined in Rule 405 of the Securities Act.
NORTHWESTNATURALHOLDINGCOMPANY Yes E No tr NORTHWESTNATURALGASCOMPANY
NORTHWEST NATURAL HOLDING COMPANY
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
YestrNotr
lndicate by check mark if the registrant is nol required to file reports pursuant to Section 13 or Section 15(d) of the Act.
NORTHWESTNATURALHOLDINGCOMPANY Yes tr No E NORTHWESTNATURALGASCOMPANY Yes ! No A
lndicate by check mark whether the registrant (1 ) has filed all reports required to be filed by Seclion 13 or 1 5(d) of the Securities Exchange Act of 1 934 during the preceding 12months (or for such shorler period that the registrant was required to file such reports), and (2) has been subjelt to such filing requirements for the past 90 days.
NORTHWESTNATURALHOLDINGCOMPANY Yes B No tr NORTHWESTNATURALGASCOMPANY Yes A No tr
hqi-c?tg-bJ c-heck mark whether th€ registrant has submitted electonically every lnteractive Data File required to be submifted pursuant to Rule 405 of Regulation S-T($232.405 of this chapter) during the preceding '12 months (or for such shorter period that the registrant *as required to submit'such files).
NORTHWESTNATURALHOLDINGCOMPANY YES tr No tr NORTHWESTNATURALGASCOMPANY Yes tr No !
NORTHWEST NATURAL GAS COMPANY
Laee Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
lf an em€rging growth company, indicate by-check mark if the registrant has elec{ed not to use the extend€d transition period for complying with any new or revisod financialaccounting standards provided pursuant to Section 'l 3(a) of the Exchange Act. tr
lndicate by check mark whelher the registrant has filed a report on and attestation lo ib managemenfs assessment of the effectiveness of its intemal control over financialreporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(bl) by the registered public accounting firm that prepared or issued its audit report.
NORTHWESTNATURALHOLDINGCOMPANY Y6S tr No tr NORTHWESTNATURALGASCOMPANY Yes tr No A
lndicate by check mark whether the registrant is a shell company (as defined in Rule 12b'2 of the Exchange Act).
NORTHWESTNATURALHOLDINGCOMPANY Yes ! No E NORTHWESTNATURALGASCOMPANY Yes tr No A
As of the end of the second quarter of 2020, the aggregate market value of the shares of Common Stock of Northwest Natural Holding Company (based upon the closing price
of these shares on the New York Stock Exchange on June 30, 2020) held by non-afliliates was $'l ,682,261,01 1.
At February 16, 2021 ,30,606,665 shares of Northwest Natural Holding Company's Common Stock (the only class of Common Slock) were outstanding. All shares of
Northwest Natural Gas Company's Common Stock (the only class of Common Stock) outstanding were held by Northwest Natural Holding Company.
This combined Form 10-K is separately filed by Northwest Natural Holding Company and Northwest Natural Gas Company. lnformation contained in this document relating to
Northwest Natural Gas Company is filed by Northwest Natural Holding Company and separately by Northwest Natural Gas Company. Northwest Natural Gas Company makes
no representation as to information relating to Northwest Natural Holding Company or its subsidiaries, except as it may relate to Northwest Natural Gas Company and its
subsidiaries.
Northwest Natural Gas Company meets the conditions set forth in General lnstruction (l)(1Xa) and (b) of Form 10-K and is therefore ftling this report with the reduced
disclosure format' oHrBrr 2
DOCUSENTS INCORpORATED By REFERENCE PALFREYMAN, Dl
GEM STATE WATER COMPANY
Page 1 of210
tr
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portions of Northwest Natural Holding Companys Prory Statement, to be filed in connection with the 202'1 Annual Meeting of Shareholders, are incorporated by reference in
Part lll.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page2 ot 210
TABLEOF CONTENTS
Item
PART I
Glossarv of Terms and Abbreviations
Forward-Lookino Statements
Business
Overview
Business Model
Natural Gas Distribution
Other
Environmental Matters
Human Caoital
lnformation About Our Executive Officers
Available lnformation
Risk Factors
Unresolved Staff Comments
Prooerties
Leoal Proceedinos
Mine Safetv Disclosures
Market for Reoistrant's Common Eouitv. Related Stockholder Matters and lssuer
Purchases of Eouitv Securities
Selected Financial Data
Manaoement's Discussion and Analvsis of Financial Condition and Resulls of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supolementarv Data
Chanoes in and Disaoreements with Accountants on Accountino and Financial Disclosure
Controls and Procedures
Other lnformation
Directors. Executive Officers and Coroorate Governance
Executive Compensation
Securitv Ownershio of Certain Beneficial Owners and Manaoement and Related Stockholder Matters
Certain Relationshios and Related Transactions. and Director lndeoendence
Principal Accountanl Fees and Services
Page
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hem 1
Item 1A.
Item 18.
Item 2.
hem 3.
Item 4.
PART II
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cg
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L3
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10
17
1S
't9
31
32
32
32
33
33
34
71
73
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141
147
142
144
144
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145
ls
145
147
152
Itam 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
ftem 98.
PART III
Item 10.
ftem 11.
hem 12.
Item't3.
Item 14.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summarv
EXHIBIT INDEX
SIGNATURES
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EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 3 of210
Table of Contents
GLOSSARY OF TERMS AND ABBREVIATIONS
AFUDC
AOCI /AOCL
ASC
ASU
Average Weather
Bcf
CNG
CODM
Core NGD Customers
Cost of Gas
Decoupling
Demand Cost
EE/CA
Encana
Energy Corp
EPA
EPS
ECRM
FASB
FERC
Firm Service
FMBs
General Rate Case
GHG
GTN
Heating Degree Days
lnterruplible Service
lnterstate Storage Services
IPUC
Allowance for Funds Used During Construction
Accumulated Other Comprehensive lncome (Loss)
Accounting Standards Codifi cation
Accounting Standards Update as issued by the FASB
The 2S-year average of heating degree days based on temperatures established in our last Oregon general rate case
Billion cubic feet, a volumetric measure of natural gas, where one Bcf is roughly equal to 10 million therms
Compressed Natural Gas
Chief Operating Decision Maker, which for accounting purposes is defined as an individual or group of individuals
responsible for the allocation of resources and assessing the performance of the entity's business units
Residential, commercial, and industrial cuslomers receiving firm service from the Natural Gas Distribution business
The delivered cost of natural gas sold to customers, including the cost of gas purchased or withdrawn/produced from storage
inventory or reseryes, gains and losses from gas commodi$ hedges, pipeline demand costs, seasonal demand cost
balancing adjustments, and regulatory gas cost defenals
A natural gas billing rate mechanism, also refened to as a @nseryation tariff, which is designed to allow a utility to
encouragC industrial and small commercial customers to conserve energy while not adversely affecting the utility's earnings
due to reductions in sales volumes
A component in NGD customer rates representing the cost of securing firm pipeline capacity, whether the capacity is used or
not
Engineering Evaluation / Cost Analysis
Encana Oil & Gas (USA) lnc.
Northwest Energy Corporation, a wholly-owned subsidiary of Northwest Natural Gas Company
Environmental Protection Agency
Eamings per share
Environmental Cost Recovery Mechanism, a billing rate mechanism for recovering prudently incurred environmental site
remediation costs allocable to Washington customers through NGD customer billings
Financial Accounting Standards Board
Federal Energy Regulatory Commission; the entity regulating interstate storage services offered by the Mist gas storage
facility
Natural gas service offered to customers under contracts or rate schedules that will not be disrupted to meet the needs of
other customers
First Mortgage Bonds
A periodic filing with state or federal regulators to establish billing rates for utility customers
Greenhouse gases
Gas Transmission Northwest, LLC which owns a transmission pipeline serving California and the Pacific Northwest
Units of measure reflecting temperature-sensitive consumption of natural gas, calculated by subtracting the average of a
day's high and low temperatures from 59 degrees Fahrenheit
Natural gas service offered to customers (usually large commercial or industrial users) under contracts or rate schedules that
allow for intenuptions when necessary to meet the needs of firm service customers
The portion of the Mist gas storage facility not used to serve NGD customers, instead serving utilities, gas marketers, electric
generators, and large industrial users
Public Utility Commission of ldaho; the entity that regulates NW Holdings' regulated water businesses with respect to rates
and terms of service, among other matters
lntegrated Resource Plan
Kelso-Beaver Pipeline, of which 10% is owned by KB Pipeline Company, a subsidiary of NNG Financial Corporation
Liquefied Natural Gas, the cryogenic liquid form of natural gas. To reach a liquid form at atmospheric pressure, natural gas
must be cooled to approximately negative 260 degrees Fahrenheit
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 4 of 21 0
IRP
KB
LNG
3
Table of Contents
MAP-21
Moody's
NAV
NGD
NGD Margin
NNG Financial
NOL
NRD
NW Holdings
NW Natural
NWN Energy
NWN Gas Reserves
NWN Gas Storage
ODEO
OPEIU
OPUC
PBGC
PGA
Portland General
PHMSA
PRP
PUCT
RUFS
RNG
RNG Hold Co
ROD
ROE
ROR
S&P
Sales Service
SEC
SRRM
TCJA
Therm
Transportation Service
U.S. GAAP
A federal pension plan funding law called the Moving Ahead for Progress in the 21st Century Act, July 2012
Moody's lnvestors Service, lnc., credit rating agency
Net Asset Value
Natural Gas Distribution, a segm.ent.of.Northwest Natural.Holding Company and Northwest Natural Gas Company thatprovides reg.ulated natural gas distribution services to residentiall commercial, and industrial customers in Onigoi andSouthwest Washington
A financial measure used by NW. Natural's CODM consisting of NGD operating revenues less the associated cost of gas,franchise taxes, and environmental recoveries
NNG Financial Corporation, a wholly-owned subsidiary of NW Holdings
Net Operating Loss
Natural Resource Damages
Northwest Natural Holding Company
Northwest Natural Gas Company, a wholly-owned subsidiary of NW Holdings
NW Natural Energy, LLC, a wholly-owned subsidiary of NW Holdings
NWN Gas Reserves LLC, a wholly-owned subsidiary of Energy Corp
NW Natural Gas Storage, LLC, a wholly-owned subsidiary of NWN Energy
Oregon Department of Environmental Quality
ffice and Professional Employees lnternational Union Local No. 1 1, AFL-CIO, the Union which represents NW Natural'sbargaining unit employees
Public UtilityCommission of Oregon; the entity that regulates our Oregon natural gas and regulated water businesses withrespect.to rates and terms of service, among other matters; the OPUe also regulates the MiSt gas storage facility'sintrastate storage services
Pension Benefit Guaranty Corporation
Purchased Gas Adjustment, a regulatory mechanism primarily used to adjust natural gas customer rates to reflect changesin the forecasted cost of gas and differehces between.forecaated and actual gas costi from the prior year
Portland General Electric; primary customer of the North Mist gas storage facility
U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration
Potentially Responsible Parties
Public Utility Commission of Texas; the_ entity that regulates NW Holdings' regulated water businesses with respect to ratesand terms of service, among other matters
Remedial lnvestigation / Feasibility Study
Renewable Natural Gas, a source of natural gas derived from organic materials which may be captured, refined, anddistributed on natural gas pipeline systems
NW Natural RNG Holding Company, LLC, a wholly-owned subsidiary of Northwest Natural Gas Company
Record of Decision
Return on Equity, a measure of corporate profitability, calculated as net income or loss divided bv averaqe commonequi$. Authorized ROE refers to the equity rate appioved by a regulatory agency for use in deteimining'irtility revenuerequirements
Rate of Return, a measure of return.on utility.rate base. Authorized ROR refers to the rate of return approved by aregulatory agency and is generally discussed in the context of ROE and capital structure
Standard & Poo/s Financial Services LLC, a credit rating agency and a subsidiary of S&P Global lnc.
Service provided whereby a customer purchases both natural gas commodity supply and transportation from the NGDbusiness
U.S. Securities and Exchange Commission
Site Remediation and Recovery Mechanism, a billing rate mechanism for recovering prudently incuned environmental siteremediation costs allocable to Oregon through NGD customer billings, subject to an damingsiest
The Tax Cuts and Jobs Act enacted on December 22,2017
The basic unit of natural gas measurement, equal to one hundred thousand British thermal units
Service P.rqYidgg whereby a customer purcharees..natural gas directly from a supplier but pays the utility to transport the gasover its distribution system to the customer's facility
Accounting principles generally accepted in the United States of America
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EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 5 of 21 0
Tabh of Contants
wt rc and Transportadon Corvnisebn, 0rc ont'ty that tlguhtar our WashkqrEt n*lrd ges
b rat€s and tdrn3 of sarvico, among otllcr mattors.
regu&d watcr
rcsped
5
B(HIBTT2
PALFREYUIAN, DI
GEM STATEWATERCOMPANY
PageG d2r0
Table of Contents
FO RWARD. LOO KI N G STATEM E NTS
This report contains fonrardJooking statements within the meaning of the u.S. Private securities Litigation Reform Act of 1gg5, which are subject to the safeharbors created by such Act. ForwardJooking statements can be identified by words such as anticipaiei, assumes, intends, plans, seeks, believes, estimates,expects, and similar references to future periods. Examples of fonivardlooking statements include, but aie not limited to, statements ,"g"noing the following:. plans, projections and predictions;. objectives, goals, visions or strategies;. assumptions,generalizationsandestimates;. ongoing continuation of past practices or pattems;. future events or performance;. trends;. risks;. uncertainties;. timing and cyclicality;. economic conditions;. eamings and dividends;. capital expenditures and allocation;. capital ma*ets or loss of capital;. capital or organizational structure;' matters related to climate change and our role in a low+arbon, renewable-energy future;. renewable natural gas and hydrogen;. our strategy to reduce greenhouse gas emissions;. the policies and priorities of the new presidential administration;. growth;. customer rates;. illness or quarantine;. labor relations and workforce succession;. commodity costs;. desirability and cost competitiveness of natural gas;. gas reserv€s;. operational performance and costs;. enorgy policy, infrastructure and preferences;. public policy approach and involvement;. efficacy of derivatives and hedges;. liquidity, financial positions, and planned securities issuances;. valuations;. poect and program development, expansion, or investment;. business development efforts, including acquisitions and integration thereof;. implementation and execution of our water strategy;. pipeline capacity, demand, location, and reliability;. adequacy of property rights and operations center development;. technology implementation and cybersecuritypractices;. competition;
' procurement and development of gas (including renewable natural gas) and water supplies;' estimated expenditures, supply chain and third pafi availability and imiairment;. costs of compliance;. customers bypassing our infrastructure;. credit exposures;. uncollectible account amounts;
: !l.3F-91l"qr]atory outcomes, recovery orretunds, and the availability of public utitity commissions to take action;. rmpacts or changes of executive orders, laws, rules and regulations;. tax liabilities or refunds, including effects of tax legislation;. levels and pricing ofgas storage contracts and gas storage markets;' outcomes, timing and effects o-f potential claims, litigation, regulatory actions, and other administrative matters;' projected obligations, expectations and treatment with respect to reiirement plans;' effects of projections related to, and our ability to mitigate the effects of, the novel coronavirus (COVID-I9) and the economic conditions resulting therefrom;' disruplions caused by social unrest, including related protests or disturbances;. availability, adequacy, and shift in mix, of gas and water supplies;' effects of new or anticipaled changes in critical accounting policies or estimates;. approval and adequacy of regulatory defenals;. effects and efficacy of regulatory mechanisms; and' environmental, regulatory, litigation and insurance costs and recoveries, and timing thereof.
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Fonrvardlooking statements are based on our current expectations and assumptions regarding our business, lhe economy, and other future conditions' Because
fonivard-looking statements relate to the future, they areirui".t to inherent uniertaintiei, risks, and changes in circumstances that are difficult to predict' our
actual results may differ ,"i"mf rv iroln those contemplated by the foruvardJooking statements. we therefore caution you against relying o-n any of these
fonrvard-looking statements. They are neither statements of hiitorical fact nor guarantees or assurances of future performance. lmportant factors that could
cause actual results to differ r"tLri"rrv tro, those in the fonrvard-looking statements are discussed at ltem 1A','Risk Factors'of Part I and lt€m 7. and ltem 7A''
"Managemenfs Discussion and Analysis of Financial condition and Reiults of operations' and "ouantitative and Qualitative Disclosures About Market Risk''
respectively, of Part lt of this report.
Any fonrvard-looking stratement made in this report speaks only as of the date on wlrich it is made. Factors or events that could cause actual results to differ may
emerge from time to time, and it is not possible for u's to predilt a[ of them. we undertake no obligation to publicly update any fonrard'looking statement,
whetlier as a result of new information, future developments or othenrise, except as may be required by law.
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PART I
FILING FORMAT
This annual report on Form 10-K is a combined report being filed by two separate registrants: Northwest Natural Holding Company (NW Holdings), and
Northwest Natural Gas Company (NW Natural). Except where the content clearly indicates othenrise, any reference in the report to 'we,' "us" or'ouf is to the
consolidated entity of NW Holdings and all of its subsidiaries, including NW Natural, which is a distinct SEC registrant that is a wholly-owned subsidiary of NW
Holdings. Each of NW Holdings' subsidiaries is a separate legal entity with its own assets and liabilities. lnformation contained herein relating to any individual
registrant or its subsidiaries is filed by such registrant on its own behalf. Each registrant makes representations only as to itself and its subsidiaries and makes
no other representation whatsoever as to any other company.
Item 8 in this Annual Report on Form 10-K includes separate financial statements (i.e. balance sheets, statements of enmprehensive income, statements of cash
flows, and statements of equity) for NW Holdings and NW Natural, in that order. References in this discussion to the 'Notes' are to the Notes to the
Consolidated Financial Statements in ltem 8 of this report. The Notes to the Consolidated Financial Statements are presented on a combined basis for both
entities except where expressly noted otherwise. All ltems other than ltem 8 are combined for the reporting companies.
ITEM 1. BUSINESS
OWRWEW
On October 1 , 2018, we completed a reorganization into a holding company structure. ln this reorganization, shareholders of NW Natural (the predecessor
publicly held parent company) became shareholders of NW Holdings, on a one-for-one basis, with the same number of shares and same ownership percentage
as they held in NW Natural immediately prior to the reorganization. NW Natural became a wholly-owned subsidiary of NW Holdings. Additionally, certain
subsidiaries of NW Natural were transfened to NW Holdings. As required under generally accepted accounting principles, these subsidiaries are presented as
discontinued operations in the 2018 consolidated results of NW Natural within this report.
NW Holdings is a holding company headquartered in Portland, Oregon and owns NW Natural, NW Natural Water Company, LLC (NWN Water), and other
businesses and activities. NW Natural is NW Holdings'largest subsidiary. NW Natural owns NW Natural RNG Holding Company, LLC, a holding company
established to invest in the development and procurement of renewable natural gas.
NW Natural distributes natural gas to residential, commercial, and industrial customers in Oregon and south$rest Washington. NW Natural and its predecessors
have supplied gas service to the public since 1859, was incorporated in Oregon in 1910, and began doing business as NW Natural in 1997. NW Natural's natural
gas distribution activities are reported in the natural gas distribution (NGD) segment. All other business activities, including certain gas storage activities, water
businesses, and other investments and activities are aggregated and reported as "other'at their respective registrant.
ln addition, NW Holdings reported discontinued operations results related to the sale of Gill Ranch Storage, LLC (Gill Ranch). NW Natural Gas Storage, LLC(NWN Gas Storage), an indirect wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement during the second quarter of 2018 that
provides for the sale of all membership interests in Gill Ranch. Gill Ranch owns a 75% interest in the natural gas storage facility located near Fresno, Califomia
known as the Gill Ranch Gas Storage Facility. On December 4, 2020, NWN Gas Storage closed th6 sale of all of the membership interests in Gill Ranch. See
Note 19 of the Consolidated Financial Statements in ltem 8 of this report for more information.
NATURAL GAS DTSTRAUflON WGD) SEGMENT
Both NW Holdings and NW Natural have one reportable segment, the NGD segment, which is operated by NW Natural. NGD provides natural gas service
through approximately 770,000 meters in Oregon and southwest Washington. Approximately 88% of customers are located in Oregon and 12o/o are located in
southwest Washington.
NW Natural has been allocated an exclusive service tenitory by the Oregon Public Utility Commission (OPUC) and Washington Utilities and Transportation
Commission (WUTC), which includes the major population centers in westem Oregon, including the Portland metropolitan area, most of the Willamette Valley,
the Coastal area from Astoria to Coos Bay, and portions of Washington along the Columbia River. Portland seryes as a major West Coast port and is a key
distribution center. Major businesses located in NW Natural's service territory include retail, manufacturing, and high-technology industries.
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Gustomers
The NGD business serves residential, commercial, and industrial customers with no individual customer accounting for more than 10% of NW Natural's or NW
Holdings' revenues. On an annual basis, residential and commercial customers typically account for approximately 60% of NGD volumes delivered and
approximately 90% of margin. lndustrial and other customers largely account for the remaining volumes and margin.
The following table presents summary meter information for the NGD segment as of December 3'l ,2020:
Number of Meters % of Volumes % of Margin
Residential
Commercial
lndustrial
Othell)
Total
704,675
68,812
989
N/A
38%
21 %
41 %
il o/o
24 o/o
7%
5 o/oN/A
774,476 1O0 o/o 100 %
(t) NGD margin is also affected by other items, including miscellaneous revenues, gains or losses from NW Natural's gas cost incentive sharing mechanism, other margin
adjustments, and other regulated services.
Generally, residential and commercial customers purchase both their natural gas commodity (gas sales) and natural gas delivery services (transportation
services) from the NGD business. lndustrial customers also purchase transportation services, but may buy the gas commodity either from NW Natural or directly
from a third-pafi gas marketer or supplier. Gas commodity cost is primarily a pass-through cost to customers; therefore, profit margins are not materially
affected by an industrial custome/s decision to purchase gas from NW Natural or from third parties. lndustrial and large commercial customers may also select
between firm and interruptible service levels, with firm services generally providing higher profit margins compared to interruptible services.
To help manage gas supplies, industrial tariffs are designed to provide some certainty regarding industrial customers'volumes by requiring an annual service
election, special charges for changes between elections, and in some cases, a minimum or maximum volume requirement before changing options.
Customer growth rates for natural gas utilities in the Pacific Northwest historically have been among the highest in the nation due to lower market saturation as
natural gas became widely available as a residential heating source after other fuel options. We estimate natural gas was in approximately 63% of single-family
residential hom€s in NW Natural's service territory in 2020. Customer growth in our region comes mainly from the following sources: single-family housing, both
new construction and conversions; multifamily housing new construction; and commercial buildings, both new construction and conversions. Single-family new
construction has consistently been our largest source of groMh. Continued customer growth is closely tied to the comparative price of natural gas to electricity
and fuel oil and the economic health of Portland, Oregon and Vancouver, Washington. We believe there is potential for continued growth as natural gas is a
preferred direct energy source due to its affordability, reliability, comfort, convenience, and clean qualities.
Comoetitive Conditions
ln its service areas, the NGD business has no direct competition from other natural gas distributors. However, it competes with other forms of energy in each
customer class. This competition among energy suppliers is based on price, efficiency, reliability, performance, preference, market conditions, technology,
federal, state, and local energy policy, and environmental impacts.
For residential and small to mid-size commercial customers, the NGD business competes primarily with providers of eleckicity, fuel oil, and propane.
ln the industrial and large commercial markets, the NGD business competes with all forms of energy, including competition from wholesale natural gas
marketers. ln addition, large industrial customers could bypass NW Natural's natural gas distribution system by installing their own direct pipeline connection to
the interstate pipeline system. NW Natural has designed custom transportation service agreements with several large industrial customers to provide
transportation service rates that are competitive with the custome/s costs of installing their own pipeline.
Seasonality of Business
The NGD business is seasonal in nature due to hlgher gas usage by residential and commercial customers during the cold winter heating months. Other
categories of customers experience similar seasonality in their usage but to a lesser extent.
Requlation and Rates
The NGD business is subject to regulation by the OPUC and WUTC. These regulatory agencies authorize rates and allow recovery mechanisms to provide the
opportunity to recover prudently incurred capital and operating costs from customers, while also earning a reasonable return on investment for investors. ln
addition, the OPUC and WUTC also regulate the system of accounts and issuance of securities by NW Natural.
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Therms in millions
NW Natural flles general rate cases and rate tariff requests periodically with the OPUC and WUTC to establish approved rates, an authorized return on equity(ROE), an overall rate of return (ROR) on rate base, an authorized capital structure, and other revenue/cost deferial and recovery mechanisms.
NW Natural is also regulated by the Federal Energy Regulatory Commission (FERC). Under NW Natural's Mist interstate storage certificate with FERC, NWNatural is required to file either a petition for rate approval or a cost and revenue study every five years to change or justify maintaining the existing rates for theinterstate storage service.
For further discussion on our most recent general rate cases, see Part ll, ltem 7, "Results of operations-Regulatory Matters-Regu/a tion and Rates.,
Gas Suoply
NW Natural strives to secure sufficient, reliable supplies of natural gas to meet the needs of customers at the lowest reasonable cost, while maintaining pricestability' managing gas purchase costs prudently and supporting our core value of environmental stewardship. This is accomplished inrougt a comprehensivestrategy focused on the following items:' Reliability - ensuring gas resource portfolios are sufiicient to satisfy customer requirements under extreme cold weather conditions;. Diverce Supply - providing diversity of supply sources;' Diverse Contracts - maintaining a variety of contract durations, types, and counterparties;' 9o"t Management and Recovery - employing prudent gas cost management strategies; and' Environmental Stewardship - striving to reduce the carbon content and environmenial impacts of the energy we deliver.
Reliabilitv
The effectiveness of the natural gas distribution system ultimately rests on whether reliable service is provided to NGD customers. To ensure effectiveness, theNGD.business has developed a risk-based methodology in which it uses a planning standard to servethe highest firm sales demand day in any year with ggo/ocertainty.
The projected maximum design day firm NGD customer sales is approximately 10 million therms. of this total, the NGD business is currenlly capable of meetingabout 567o of requirements with gas from storage located w.ithin or adjacent to its service territory, while the remaining supply requirements houh come fromgas purchases under firm gas purchase contracts and recall agreements.
NW Natural segments transportation capacity, which is a natural gas transportation mechanism under which a shipper can leverage its firm pipelinetransportation capacity by separating it into multiple segments with altemaie delivery routes. The reliability of service on these admate routes will varydepending on the constraints of the pipeline system. For those segments with acceptable- reliability, segmentation provides a shipper with increased flexibilityand potential cost savings compared to traditional pipeline service. The NGD business relies on segmintation of fiim pipeline transportation capacity that flowsfrom Stanfield, Oregon to various points south of Molalla, Oregon.
We believe gas supplies would be sufficient to meet existing NGD firm customer demand in the event of maximum design day weather conditions.
The following table shows the sources of supply projected to be used to satisfy the design day sales for the 2O2O-21winter heating season:
Therms PercentSources of NGD supply:
Firm supply purchases
Mist underground storage (NGD only)
Company-owned LNG storage
Off-system storage contract
Pipeline segmentiation capacity
Recall agreements
Total
3.4
3.1
1.9
0.5
0.6
0.4
34 Yo
32 To
'19 %
5 o/o
6 o/o
4 o/o
9.9 1OO o/o
The oPUC and WUTC have lntegrated Resource Planning (lRP) processes in which utilities define different growth scenarios and c,orresponding resourceacquisition strategies in an effort to evaluale supply and demand resource requirements, consider uncertaintils in the planning process and the need forflexibility to respond to changes, and establish a plan for providing reliable service at the least cost.
NW Natural generally files a full IRP biennially for Oregon and Washington with the OPUC and the WUTC, respectively, and files updates between filings. TheOPUC acknowledges NW Natural's action plan, whereas the WUTC provides notice that the lRp
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has met the requirements of the washington Administrative code. oPUC acknowledgment of the IRP does not constitute ratemaking approval of any specific
resource acquisition strategy or expendiiure. However, the OPUC commissioners generally indicate that they w.ould give considerableweight in prudence
reviews to actions consistent with acknowledged plans. The wuTC has indicated the IRP frocess is one factor it will consider in a prudence review' For
additionaf information see Part ll, ltem 7, "Results of operations-Regulatory Matters."
Diversity of Suoply Sources
NW Natural purchases gas ipplies primarily from the Alberta and British columbia provinces of Canada and multiple receipt points in the U.S' Rocky
Mountains to protect against regional supply disruptions and to take advantage of price differentials. Fo( 2020,62% of gas supply came from canada, with the
balance primarily coming from the u.s. Rocky Mountain region. The extractio-n-of ihale gas has increased the.availability of gas supplies throughout North
America. we believe gas supplies available in the westem'united states and canada aL adequate to serve NGD customer requirements for the foreseeable
future. NW Natural continues to evaluate the long-term suppty mx based on projections of gas production and pricing in the U.S. Rocky Mountain region as well
as other regions in North America. NW Natural has also announced its intent to incorporate renewable natural gas (RNG) into its supply portfolio' See
" E nvi ron m e n tal Matters" below.
NW Natural supplements firm gas supply purchases with gas withdrawals from gas.storage facilities, including underground reservoirs and LNG storage
facilities. storage facilities are generally injected with natuial gas during the off-feak months in the spring and summer, and the gas is withdrawn for use during
peak demand months in the winter.
The following table presents the storage facilities available for NGD business supply:
Maximum Daily
Deliverability (therms in
millions)
Gas Storage Facilities
Orvned FacilitY
Mist, Oregon (Mist FacilitY;{t)
Mist, Oregon (North Mist Facility)tz)
Contracted Facility
Jackson Prairie, Washington(3)
LNG Facilities
Owned Facilities
Newport, Oregon
Portland, Oregon
Total
(i) The Mist gas storage facility has a total maximum daily deliverability of 5.4 million therms and a total designed storage capacity of about 16.0 Bcf, of which 3'1 million
therms of daily deiiverability and 10.6 Bcf of storage capacity are reserved.for NGD.business customers.
(2) The North Mist facility is contracted to exclusively serve Porilind General Electric, a local electric utility, and may not be used to serve other NGD customers. see -Norfh
Mist Gas Storage Facilitf below for more information.
(3) The storage faciiity is locitea near chehalis, Washington and is contracted from Northwest Pipeline, a subsidiary of The Williams Companies'
The Mist facility serves NGD segment customers and is also used for non-NGD purposes, primarily for contracts with gas storage customers, including utilities
and third-party marketers. Under regulatory agreements with the oPUc and wuTC, gas storage ai Mist can be. developed in advance of NGD customer needs
but is subject to recall when needed to serve such customers as their demand increaies. When storage capacity is recalled for NGD purposes it becomes part
of the NGD segment. ln 2o20,the NGD business did not recall additional deliverability or associated storage capacity to serve customer needs. The North Mist
facility is contracted for the exclusive use of porfland General Electric, a local electricutility, and may not be used to serve other NGD customers' See "Norfh
Mist Gas Storage Facilitf'below.
Diverse Contract Durations and Tvpes
NW Natural has a diverse portfolio of short-, medium-, and long-term firm gas supply contracts and a variety of contract types including firm and interruptible
supplies as well as supplemental supplies from gas storage facilities'
The portfolio of firm gas supply contracts typically includes the following gas purchase contracts: year-round and winter-only baseload supplies; seasonal supply
with an option to calion aOOitionat daily supplies during the winter heating season; and daily or monthly spot purchases.
3.1
1.3
10.6
4.1
0.5 1.1
0.6
1.3
1.0
0.6
11
6.8 17.4
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Contract Duration Percent of PurchasesLongFtermy€ar or longer)
Short-term (more than one month, less than one year)
Spot (one month or tess)
Total
NW Natural incus monthly demand charges related to firm pipeline transportation contracts. These contracts have expiration dates ranging from 2021 to 2061The- largest pipeline agreements are with Northwest Pipetine. NW Naturai actively works with Northwest pipeline and olhers to renew contracts in advance ofexpiration to ensure gas transportation capacity is sufiicient to meet customer needs.
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23
38
o/o100
Gas supply contracts are renewed or replaced as they expire. During 2020, no individual supplier provided ,10% or more of the NGD business gas supplyrequirements.
Gas Cost Management
The cost of gas sold to NGD customers primarily consists of the following items, which are included in annual purchased Gas Adjustment (pGA) rates: gaspurchases ftom suppliers; charges from pipeline companies to transport gas to our distribution system; g"r itoog" costs; gas reserv€s contracls; and gascommodity derivative contracts.
The NGD business employs a number of strategies to mitigate the cost of gas sold to customors. Th6 primary strategies for managing gas commodity price riskindude:. negotiating fixed prices directly with gas suppliers;
' negotiating financial derivative contracts that: (1) effectively convert floating index prices in physical gas supply contracts to fixed prices (refened to ascommodity price swaps); or (2) efiectively set a ceiling or floor price, or both, on floating ina'erpriced'physii:itiuppty contracis tietenla io as commodityprice options such as calls, puts, and collars);' buying physical gas supplies at a set price and injecting the gas into storage for price stability and to minimize pipeline capacity demand costs; and' investing in gas reserves for longer term price stability. See Note 13 for additional information about our gas reserves.
NW Natural also conracts with an independent energy marketing company to capture opportunitios regarding storage and pipeline capacity when those assetsare not serving the needs of NGD business customers. Asset managoment activities provide opportunities fol cost ol gas savings for iustomers and incrementalrevenues for NW Natural through regulatory incentive-sharing mechanisms. These activities, net of the amount shared, are inclided in other for segmentreporting purposes.
Gas Cost Recoverv
Mechanisms for gas cost recovery are designed to be fair and reasonable, with an appropriate balance between the interests of customers and NW Natural. lngeneral, natural gas distribution rates are designed to recover the costs of, but not to earn a return on, the gas commodity sold. Risks associated with gas costrecovery are minimized by resetting customer rates annually through the PGA and aligning customer and s-hareholder intlrests through the use of sharing,weather normalization, and conservation mechanisms in Oregon. See Part ll, ltem 7, ;Res-ults of Operalions-Reg ulatory Matters, and "Results of Operations-Business Segments-Natural Gas Distribution Operations-Cosl of Gas,'.
Environmental Stewardship
Part of our gas supply strategy is working to reduce the carbon content and the environmental impacts of the energy we deliver. To that end, NW Naturaldeveloped and implemented an emissions screening tool that uses Environmental Protection egincy (EPA) data to calculate the relative emissions intensity ofgas producer operations and prioritize purchases from lower emitting producers. Beginning in Zots, w! began using this emissions iniensity screening toolalongside other purchasing criteria such as price, credit worthiness ina geographic oirerslty. The result nai ueJn a cost-neulral way to reduce carbon emissionsassociated with our natural gas supply.
ln addition, NW Natural is actively working to procure RNG contracts under Oregon Senate Bill g8, and is engaging in longer-term efforts to increase the amountof RNG on our system and explore the development of renewable hydrogen thr6ugh power to gas. See "Eniroin6nfa, Maffers" below.
Transoortatlon of Gas Suoolles
NW Natural's gas distribution system is reliant on a single, bi{irectional interstato transmission pipeline to bring gas supplies into the natural gas distributionsystem. Although dependent on a single pipeline, the pipeline's gas flows into the Portland metroiolitan markeifiom two Oirections: 11) the nortn, which bringssupplies from the British Columbia and Alberta supply basins; and (2) the east, which brings supplies from Alberta as well as the U.S. Rocky Mountain supplybasins.
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During 2020, a total of 757 million therms were purchased under contracts with durations as follows:
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Rates for interstate pipeline transportation services are established by FERC within the u.s. and by Ganadian authorities for services on canadian pipelines'
Gas Distribution
safety and the protection of employees, customers, and our communities at large are, and will remain, top priorities. NW Natural constructs, operates' and
maintains its pipeline distribution system and storage operations with the goal oi ensuring natural gas is deiivered and stored safely, reliably, and efficiently'
NW Natural has one of the most modem distribution systems in the country with no identified cast iron pipe or bare steel main. since the 1980s, NW Natural has
taken a proactive approach to replacement programs "nJp"rtn"i"a *ith the oPUC-and wurc on progressive regulation to further safety and reliability efforts
for the distribution system. ln the past, NW Natural rraa a Jorirecovery program in oregon that encompassed programs for bare steel replacement, transmission
pipeline integrity management, and distribution pipeline integrity management as appropriate'
Natural gas distribution businesses are likely to be subject to greater federal and state regulation i1 lhe !u_tyre' Additional operating and safety regulations ftom
the u.S. Department of Transportation,s pipeline ana Hazardius Materials safety Administration (PHMSA) are currently under development. ln 2016. PHMSA
issued safety requirements for natural gas transmission pip.iin".. ln 2019, PHMSA issued the first of three portions of these regulations which went into effect
on July 1 , 2020 and include up to a l syear timeline ror coinptiance. The remaining portions of the regulations aro anticipated to be issued in 2021' NW Natural
intends to continue to work diligently with industry associations as well as federal ind state regulatorJ to ensure the safety of the system and compliance with
new laws and regulations. Tne-cost! associated with comfliance with federal, state, and locallaws and regulations are expected to be recovered in rates'
North Mist Gas Storaoe Facility
ln May 2019, NW Naturat completed an expansion of its existing gas storage facility near Mist, oregon. The North Mist facility provides long-term, no'notice
underground gas storage service and is dedicated rorerv io po,ir"na Geneial Electric (Pordand General) under a 3O-year contract with options to oxtend up to an
additional so years upon mutual agreement of the parties. porfland General uses the iacility to support its gas-fired electric power generation facilities, which
incorporate renewable energy into the electric grid.
North Mist includes a new roservoir providing 4.1 Bcf of available storage, an additional compressor station-with a contractual capacity of 120,000 dekatherms of
gas per day, no-notice service that can be diawn on l."pioiv, "nJ a rs;ile pipeline to connect to Portland General's Port westward gas plants in clatskanie,
Oregon.
upon placement into service in May 201g, the facility was included in rate base under an established tariff schedule with revenues recognized consistent with
the scinedule. Billing rates will be updated annually to the current depreciable asset level and forecasted operating expenses'
while there are additional expansion opportunities in the Mist storage field, further development is not contemplated at this time and any expansion would be
based on market demand, cost effectiveness, available financing, receipt of future permits, and other rights'
OTHER
certain businesses and activities of NW Holdings and NW Natural are aggregated and reported as other for segment reporting purposes'
NW Natural
The following businesses and activities are aggregated and reported as other under NW Natural, a wholly-owned subsidiary of NW Holdings:
. S.4 Bcf ;f the Mist gas storage facility contracled to other utilities and third-party marketers;. natural gas asset management activities; and. appliance retiail center operations.
Mist Gas Storaoe
The Mist gas storage facility began operations in 1ggg. lt is a 16.0 Bcf facility with 10.6 Bcf used to provide gas storage for the NGD business. The remaining 5'4
Bcf of the-facility is contracted iitn otrtr"r utilities and third-party marketers with these results reported in other.
The overall facility consists of seven depleted natural gas reservoirs, 22 injection and withdrawal wells, a @mpressor station, dehydration and control
equipment, gathering lines, and other related facilities. The capacity at Miit serving other utilities and third-party marketers provides multi'cycle gas storage
services to customers in the interstate and intrastate markets. The jnterstate storage services are offered under a limited jurisdiction blanket certificate issued by
FERC. Under NW Natural,s interstate storage certificate wittr FERC, NW Natural iJrequired to file either a petition for rate approval or a cost and revenue
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study every five years to change or justiry maintaining the existing rates for the interstate storage service. lntrastate firm storage services in Oregon are offeredunder an OPUC-approved rate schedule as an optional service to certain eligible customers. Gas storage revenues from the S.4 Bcf are derived primarily fromfirm service customers who provide energy-related services, including natural gas disfibution, electric gineration, and energy marketing. The ttliit tacilitybenefib from limited competition as there are few storage facilities in the Pacific Northwest region, Therefore, NW Natural iJi6te to acq-uire high-value, mult;year contracts.
Asset Manaqement Activities
NW Natural contracts with an independent energy marketing company to provide asset management services, primarily through the use of natural gas
commodity exchange agreements and natural gas pipeline capacity release transactions. The results of these activities are included in other, excep:t for theasset management revenues allocated to NGD business customers pursuant to regulatory agreements, which are reported in the NGD segment.
NW Holdlnos
These include the following businesses and activities aggregated under NW Holdings:' NW Natural Water Company, LLC (NWN Water) and its water and wastewater utility operations and acquisition activities;. an equity method investment in Trail West Holdings, LLC (TWH);
' a minority interest in the Kelso-Beaver Pipeline held by our wholly-owned subsidiary NNG Financial Corporation (NNG Financial); and' holding company and corporate activities as well as adjustments made in consolidation.
On August 6, 2020, NWN Energy completed the sale to an unrelated third party of its interest in TWH. See Note 14 of the Consolidated Financial Statements inItem 8 of this report for more information.
Water Utilities
Afier a comprehensive strategic planning process, in December 2017, we entered the water utility sector by announcing several acquisitions, which NWN Watersubsequently closed. Through December 31 , 2020, NWN Water serves a total of approximately 63,000 people through26,000 water and wastewaterconnections in the Pacific Northwest and Texas, with an aggregate investment of nearly 9110 million. NW Holdings continues to pursue additional acquisitions ina disciplined manner.
The water and waslewater utilities primarily serve residential and commercial customers. Water distribution operations are seasonal in nature with peak demandduring warmer summer months, while wastewater is less seasonally affected. Entities generally operate in exclusive service tenitories with no direct competitors.Water distribution customer rates are regulated by state utility commissions while the wastewaier businesses we own currently are not rate regulated by utilitycommissions.
ENWRONMENTAL MATTERS
Properties and Facilities
NW Natural owns, or previously owned, properties and
to federal, state, and local laws and regulations related
facilities that are cunently being investigated that may require environmental remediation and are subjectto environmental matters. These laws and regulations may require expenditures over a long time frameto address certain environmental impacb. Estimates of liabilities for environmental costs are difficult to determine with precision because of the various factorsthatcan affect their ultimate disposition. These factors include, but are not limited to, the
the complexig of the site;
changes in environmental laws and regulations at the federal, stiate, and local levels;
the number of regulatory agencies or other parties involved;
following
new technology that renders previous technology obsolete, or experience with existing technology that proves ineffective;
the level of remediation required;
variations between the estimated and actual period of time that must be dedicated to respond to an environmentally-contaminated site; andthe application of environmental laws that impose joint and several liabilities on all potentially responsible parties.
NW Natural has received recovery of a portion of such environmental costs through insurance proceeds, seeks the remainder of such costs through customerrates, and believes recovery of these costs is probable. ln both Oregon and Washington, NW Natural has mechanisms to recover expenses. Oreg-on recoveriesare subject to an earnings test. S6e Part ll, ltem 7, 'Results of Operations-Regulatory Matters-Rat6 Mechanisms- Environmenta! Cost Defenal andRecoveS' , and Note 2 and Note 18 of the Consolidated Financial Statements in ltem 8 of this report for more information.
Greenhouse Gas Matters
We recognize certain of our businesses, including our natural gas business, are likely to be affected by requirements to address greenhouse gas emissions.Future federal, state or local legislation or regulation may seek to limit emissions of greenhouse gases, including both carbon dio;ide (CO2) and methane. Thesepotential laws and regulations may require certain activities to reduce emissions and/or increase the price paid ior energy based on its carbon content.
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Current federal rules require the reporting of greenhouse gas (GHG) emissions. ln September 2009, the EPA issued a final rule requiring the annual reporting of
greenhouse gas emissions from certain industries, specifi6d targe GHe emission sources, and facilities that emit 25,000 metric tons or more of Co2 equivalents
ier y""r. NViNatural began reporting emission information in 2b11. Under this reporting rule, local natural gas _distribution companies like NW Natural are
ieqriir"a to report system throughput-to the EPA on an annual basis. The EPA also has required additional GHG reporting regulations to which NW Natural is
subject, requiring the annual reporting of fugitive emissions from operations'
The Oregon and Washington state governments have identified emission reduction as a priority and continue to consider various GHG reduction initiatives' On
March 16, 2020, the govimor of Orlgon issued an executive order (EO) establishing GHG emissions reduction. goals of at least 457o below 1 990 emission
levels by 2OgS anO albast 80% beloiv 1990 emission levels by 2050 and directed state agencies and commissions to facilitate such GHG emission goals
targeting a variety of sources and industries. Although the EO does not specifically direct actions of natural gas distribution businesses, the OPUC is directed to
pri;ritizj proceedings and activities that advance decarbonization in the utility sector, mitigate energy burden experienced by utility customers and ensure
system reliability an-d resource adequacy. The EO also directs other agenciei to cap and reduce GHG emissions from transportation fuels and all other liquid
and gaseor. fulb, including naturai gas, adopt building energy efficiency goals for new building construction, reduce methane emissions from landfills and food
waste, and submit a propor-"1 for adolilion of state goals for carbon sequestration and storage by Oregon's forest, wetlands and agricultural lands. These
agen"ies and commiisions are cunenly engaged in various stages of iheir rulemaking processes and are currenfly expected to complete-those processes in the
next 12 to 24 months. NW Natural is aciivef engaged with Oregon state regulatory entities and holds a seat on the Oregon Department of Environmental
Quality (DEQ) rules advisory committee, which is considering the cap and reduce rules.
ln Washington, where approximately 10% of NW Natural's revenues and 22o/o of new meters are derived, policy focused on the goal of reducing GHGs and
enhancingienergy effici6ncy measuies for commercial and residential energy customers have been enactod by the Washington State Building Code Council.
Effective Febru ii1 l, zOZ,tiOuilding codes in Washington state require new iesidential and commercial construction to achieve higher levels of energy efficiency
based on specifieb carbon emissio-ns assumptions, which are expected to calculate on-site electric appliances to have lower GHG emissions than comparable
gas appliances, potentially increasing the coit of new building construction incorporating natural gas. Ahho.ugh legislation with similar goals has previously been
[rorlO unsuccessfully in Washingt6n, it is likely that legislatures nationwide and in ourservice territory will continue to work to combat climate change through
iegislative action. NW i'latural is wirking with policymafers and a coalition of utilities in Washington to help them understand the role direct use natural gas, and
inihe coming years renewable natural las ani hydrogen, may play in aggressively pursuing more effective policies to reduce greenhouse gases while
preserving reliability, resiliency, energy choice and energy affordability.
ln addition to legislative activities at the state level, ballot measures may be proposed by advocacy groups. Some local and county governments in the United
States also havi been proposing or passing renewable energy resolutions, iestiictions, taxes or fees with advocates seeking to accelerate renewable energy
goals. A number of cities across-the country, and several in dur service territory are cunently considering such actions aimed at formalizing climate action goals
ind driving down GHG emissions, includini limitations or bans on the use of natural gas in new construction. NW Natural is actively engaged with such cities
and local lovemments in our service tenito-ry and is working to help these communities understand the ways in which the natural gas system, and renewable
fuels on the horizon, can help cities meet th;ir decarbonization goals. With the new United States presidential administration, we also expect new federal rules
and frameworks related to GHG emissions.
While the outcome of these federal, strate or local climate change policy developments cannot be determined at this time, these initiatives could produce a
number of resufts including new regulations, legal actions, additional charges to fund energy efficiency activities, or other regulatory actions. The adoption and
implementation of regulations limitiig GHG emissions could require NW Natural to incur compliance costs associated with our customers' use, which we
cuirently expect to recover through rites and therefore may result in an increase in the prices charged to customers, and a potential decline in the demand for
natural gas.
ln 2017, NW Natural initiated a multi-pronged, multi-year strategy to accelerate and deliver greater GHG emission reductions in the communities we serve. Key
components of this strategy include customer energy efficiency, continued adoption of NW Natural's voluntary Smart Energy carbon offset program, and seeking
to intorporate RNG and t yOrog"n into our gas suppiy. RNG is produced from organic materials including food, agricultural and forestrywaste, wastewater, or
landfills. Methane is captured fiom these orlanic maierials as they decompose and is conditioned to pipeline quality, so it can be added into the existing natural
gas system, reducing net GHG emissions. tn ZO1S, Oregon Senaie Bill 98 (SB 98) was signed into law enabling NW Natural to procure RNG on behalf of
iustomers and provided voluntary targets that would allow us to make qualified investments and purchase RNG from third parties such that up to 30% of the gas
dishibuted to retail customers is RNG-by 2050, and creating a limit of 5% of a utility's revenue requirement that can be used to cover the incremental cost of
RNG. The bill was signed into law by thi governor in July Z-Otg, ana subsequently, the OPUC adopted final rules in July 2020, NW Natural is actively working to
procure RNG supply-for customers, and iJ engaging in longer-term efforts to increase the amount of RNG on our system and explore the development of
ienewable nyorosiei through pon ei to gas. tiDice;Uer ioz}, Nw Natural announced a partnership with BioCarbN, a developer and operator of sustainable
infrastructure proiects, to c6nvert methine into RNG. Under this partnership, NW Natural has the ability to invest up to an estimated $38 million in four separate
RNG developm"nt prqeA. that will access biogas derived from water treatment at Tyson Foods' processing plants, subject to approval by all parties. ln
December 2020, NW Natural exercised its option for the first development project in Nebraska,
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initiating investment in an estimated $8 million project, which we expect will begin producing RNG in late 2021. This is the company's first investment underOregon SB 98.
NW Natural continues to take proactive steps in seeking to reduce GHG emissions in our region and is proactively communicating with local, state and federalgovemments and communities about those steps. We believe that NW Natural has a vital role in providing energy to the communities we serye. Each year, NWN-atural delivers more energy in Oregon than any other utility. The sales of natural gas to our residential and commercial customers account for approximately67o of Oregon's GHG emissions according to data for recent years from the State of Oregon Department of Environmental Quality ln-Boundary e'He tnventoiy.We intend to continue to provide this necessary energy to our communities and to use our modem pipeline system to help the pacific Northwest transition to aclean energy future.
HUMAN CAPITAL
Our core values of integrity, safety, caring, service ethic, and environmental stewardship guide how we engage with customers, stakeholders, shareholders, andcommunities. We actively work to foster these values in our employee culture and to nurture an inclusive and equitable environment that provides opportunities,prioritizes health and safety, and supports growth and learning. We aim to recruit and retain employees who share our core values and reflect our communities.
Emolovees
At December 31,2020, our workforce consisted of the following:
NW Natural:
Unionized employees(r)
Non-unionized employees
Total NW Natural
Other Entities:
Water company employees
Other
Total other entities
Total Employees
(1) MembersoftheOfficeandProfessional Employeeslntemational Union(OPEIU)Local No. 11,AFL-CIO.
606
549
1,155
56
5
61
1,216
NW-Natural's labor agreement with members of OPEIU covers wages, benefits, and working conditions. ln November 2019, NW Natural,s unionized employeesratified a collective bargaining agreement that took effect on December 1, 2019 and extendi to May 31, 2024, and thereafter from year to year unless eitherparty serves notice of its intent to negotiate modifications to the collective bargaining agreement. During calendar year 2020, NW hiatural did not incur any workstoppages (strikes or lockouts), and therefore, experienced zero idle days for the year.
Certain subsidiaries may receive services from employees of other subsidiaries. When such services involve regulated entities, those entities receiving servicesreimburse the entity providing services pursuant to shared services agreements, as applicable.
Safetv
Safety is one of our greatest responsibilities to employees. ln managing the business, we strive to foster a safety culture focused on prevention, opencommunication, collaboration, and a strong service and safety ethic, We believe employee safety is critical to our success. A portion of executives'compensation is tied to achieving our safety metrics, and our Board of Directors regularly reviews company safety metrics. NW Natural's health and safetypolicies and procedures are designed to comply with all applicable regulations, but we aiso work to go beyond compliance by striving to incorporate indusiry bestpractices and benchmarking.
As part of our commitment to employee health and safety, we maintain regular training programs, emergency preparedness procedures, and specific trainingand procedures to identify hazards and handle high-risk emergency situations. Employees tomplete ha;ds;n, scenario-based training at our training facilitiinOregon that allows employees to experience realistic situations in a controlled environment. We also host natural gas safety training eients for first r6spondlrs,which prepares our teams to deliver an integrated, seamless response in the event of an emergency that involves or affecti the naiural gas system.
Our COVID-'|9 response is just one example of our safety culture in action. As a critical infrastructure energy company that provides an essential service to ourcustomers, NW Natural has well-defined emergency response command structures and protocols. ln response to ihe bOVID-19 pandemic, NW Naturalmobilized its incident command team and business continuity plans in early March 2020, and continues to operate under these siructures and protocols, with afocus on the safety of our employees and the people, business partners, and communities we serve. NW Natural has generally suspended business travel
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out of our service tenitory and implemented work-from-home plans for employees wherever possible. For employees whose role requires. them to work in the
fleld, we are following COC, OSffh, and state specific guidance. Measures include: following social distancing guidelines; use of personal protective equipment
(ppi) including masis, face coverings and gloves; enhanced sanitizing protocols; requiring employee health screenings prior to entering a NW Natural facility;
and other measures intended to mitilate the spread of this disease and keep our employees and customers safe and informed, Our water companies are
following similar protocols. As an esiential service provider, our water and natural gas uiility businesses continue to serve our customers without intenuption.
Our expirience and continuing focus on workplace safety have enabled us to preserve business continuity without sacrificing our commitment to the safety of
our employees and the people, business partners, and communities served.
The COVID-19 pandemic also presents challenges for employees'emotional well-being and ability to balance work and family responsibilities. We are
supporting our employees through these unusuil times with the following: frequent employee surveys; virtual meetings on wellness topics; resiliency support;
aaOitionaipsychol;giial supportlervices; processes to facilitate flexibleind reduced-schedule work where possible; and virtual ergonomic assistance to help
remote employees work safely at home,
Emolovee Benefits
To "ttract erpl"yees and meet the needs of our workforce, NW Natural strives to offer competitive benefits packages to employees--The.benefits package
options vary deplnding on type of employee and date of hire. NW Natural continuously looks for ways.to support employees' work-life balance and well'being
airO tnis is ieflei:ted in pnysilit, mentral and financial wellness programs to meel the needs of our employees and help them care for their families. Bonefits
available to employees during 2O2O included, among others: healthcare and other insurance coveragos, wellness resources, retirement and savings plans' paid
time off programs ind flexibE work schedules, culture and community-focused resources and opportunities, and employee recognition programs and discounts.
Emoloyee Development
@itsemployeeswithgrowthanddevelopmentopporfuniti6sthroughformalandinformalprogramsdesignedtobuildskillsand
relationships. These programs incluiei 1i1 a cultuially relevant mentbring program that creates opportunities for career growth by building relationships; (ii) a
tuition assistanc" progra. for qualified educational pursuits; (iii) an inteinal ciass that provides participants with.a big-picture understanding of the industry and
company operations, Lquipping them to see how they contribute to NW Natural's success and identifu opportunities for career growth; (iv) internal and continuing
educationai cuniculum relevant to areas of expertise; and (v) ongoing management and leadership training programs.
Diversity. Eouity and lnclusion
@ttocreatingadiv€rseandinclusivecufturethatreflectsandsupportsthecommunitiesw6serve,andbelieveadiverse,
equitable, and InclusivJwor6orce contributes tJ long-term success. This commitment to diversity also extends to leadership positions, including members of the
ofiicer team and the Board of Directors. Recruiting, fromoting, and retaining diverse talent, building inclusive teams, and creating a culture that embraces
differences are at the core of our workforce strategy. To attract diverse candidates, we work with community groups and organizations to help promote
awareness of job opportunities within diverse communities.
ln 21z1,we launched employee resource groups for Asian-American, African-American, Veteran, Latinx, and LGBT+ employees, which groups are in addition to
our exijting Women's Neilarcirf. We also continue to emphasize employee education, including diversity training for employees at the manager level and above,
diversity triining as part of new hire onboarding, and other diversity, equity, and inclusion education that occurs throughout the year' An area of focus going
foruard- is to undersiand, and increase awarenLss of intemal systems and structures that could limit representation and equity for undenepresented employees.
To that end, we are working toward revising and refocusing new manager and new hire training to include implicit bias, diversity, equity and inclusion, and anti-
racism education.
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INFORMANON ABOUT OUR EXECUTIW OFFICERS
For information conceming executive offcers, see Part lll, ltem '10.
AVAILABLE INFORMATION
NW Holdings and NW Natural file annual, quarlerly and cunent reports and other information with the Securities and Exchange Commission (SEC). The SECmaintains an lntemet site where reports, proxy statements, and other information filed can be read, copied, and requested oiline at its websiie (www.sec.oov),
ln addition, we make available, free of charge, on ourwebsite (www.nwnaturalholdinos.com), ourannuat reports on Form 10-K, quart€rly reports-onT-rm tg-h,cunent r€ports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) and proxy materials filed under Section 14 ofthe Secnrities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after we eieitroniiany nb such material with, or fumish itto, the SEC. We have included our website address as an inactive textual reference onty. lnformation contained on our website is not incorporated by referenceinto this annual report on Form 1GK.
NW Holdings and NW Natural have adopted a Code of Ethics for all employees, offcers, and directors that is available on our website. We intend to discloserevisions and amendments to, and any waivers from, the Codo of Ethics for ofiicers and directors on our website. Our Corporate Govemance Standards,Director lndependence Standards, charters of €ach of the committees of the Board of Directors, and additional information about NW Hotdings and NW Naturalare also available at the website. Copies of these documents may be requested, at no cost, by writing or calling Shareholder Services, Northwest NaturalHolding Company, 250 S.W. Taylor Street, Portland, Oregon 97204, telephone SO3-22t240i.
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ITEM 1A. RISK FACTORS
NW Holdings' and NW Natural's business and financial results are subject to a number of risks and uncertainties, many of which are not within our control, which
could adversely affect our business, financial condition, and results of operations. Additional risks and uncertainties that are not currently known to us or that are
not currenly Uelieved by us to be material may also harm our businesses, financial condition, and results of operations. When considering any investment in NW
Holdings' oi NW Naturai's securities, investors should carefully consider the following information, as well as information contained in the caption 'Fonrvard-
Looking Statements', ltem 7A, and our other documents filed with the SEC. This list is not exhaustive and the order of presentation does not reflect
management's determination of priority or likelihood. Additionally, our listing of risk factors that primarily affects one of our businesses does not mean that such
risk factor is inapplicable to our other businesses.
Legal. Requlatory and Leoislative Risks
REGUI-ATORY RISK. Regulation of NW Hotdings' and NW Naturat's regulated busr,hesses, including changes in the regulatory environment, failure of regulatory
authoities to approve rates which provide for limely reavery of costs and an adequate retum on invested capital, or an unfavorable outcome in regulatory
proceedings may adversely impact NW Holdings' and NW Natural's financial condition and resufts of operations.
The OPUC and WUTC have general regulatory authority over NW Natural's gas business in Oregon and Washington. NW Holdings'regulated water utility
businesses are generally regulated by the public utility commission in the state in which a water business is located. These public utility commissions have broad
regulatory autholity, incl-rrding: the rates charged to customers; authorized rates of return on rate base, including ROE; the amounts and types of securities that
miy be iisued by our regulat,ed utility companies, like NW Natural; services our regulated utility companies provide and the manner in which they provide them;
the nature of investments our utility companies make; defenal and recovery of various expenses, including, but not limited to, pipeline replacement,
environmental remediation costs, capital and information technology investments, commodity hedging expense, and certain employee benefit expenses such as
pension costs; transactions with afiiliated interests; regulatory adjustment mechanisms such as weather adjustment mechanisms, and other matters. The OPUC
also regulates actions investors may take with respect to our utility companies, NW Natural and NW Holdings. Similarly, FERC has regulatory authority over NW
Naturais interstate storage servicei. Expansion of our businesses could result in regulalion by other regulatory authorities. For example, in 2020, NW Holdings'
acquired a water sector business in Texas that is subject to the regulatory authority of the Public Utility Commission of Texas.
The prices regulators allow us to charge for regulated utility service, and the maximum FERC-approved rates FERC authorizes us to charge for interstate
storage and related transportation services, are the most significant factors affecting both NW Natural's and NW Holdings' flnancial position, results of operations
and liquidity. State utility regulators have the authority to disallow recovery of costs they find imprudently incurred or othenrvise disallowed, and rates that
regulaiors illow may be insufficient for recovery of costs we incur. We expect to continue to make expenditures to expand, improve and safely operate our gas
and water utility distribution and gas storage systems. Regulators can deny recovery of those costs. Furthermore, while each applicable state regulator has
established an authorized rate of return foi our regulated utility businesses, we may not be able to achieve the earnings level authorized. Moreover, in the
normal course of business we may place assets in service or incur higher than expected levels of operating expense before rate cases can be filed to recover
those costs (this is commonly referred to as regulatory lag). The failure of any regulatory commission to approve requested rate increases on a timely basis to
recover costs or to allow an adequate return could adversely impact NW Holdings' or NW Natural's financial condition, results of operations and liquidity.
As companies with regulated utility businesses, we frequently have dockets open with our regulators, including a general rate case filed with the WUTC in
December 2020, The regulatory proceedings for these dockets typically involve multiple parties, including governmental agencies, consumer advocacy groups,
and other third parties. Each p6rty tras differing concems, but all generally have the common objective of limiting amounts included in rates. We cannot predict
the timing or ouicome of these proceedings or our pending Washington general rate case, or the effects of those outcomes on NW Holdings' and NW Natural's
results of operations and financial condition.
LEGISLATIVE, COMPLIANCE AND TAXTNG AUTHORITY RISK. NW Holdings and NW Natural are subject to govemmental regulation, and compliance with local,
state and federal requirements, including taxing requirements, and unforeseen changes in or interpretations of such requirements could affect NW Holdings'or
NW Natunl's financial condition and resufts of operations.
NW Holdings and NW Natural are subject to regulation by federal, state and local govemmental authorities. We are required to comply with a variety of laws and
regulationJand to obtain authorizations, permits, approvals and certificates from governmental agencies in various aspects of our business. Significant changes
in iederal, state, or local govemmental leadership can accelerate or amplify changes in existing laws or regulations, or the manner in which they are interpreted
or enforced. For example, the result of the 2020 United States Presidential election is expected to result in leadership changes in many federal administrative
agencies. Moreover, the 2020 election resulted in Democratic conhol of the presidency and both houses of Congress, and as a result, the U.S. Congress and
th; U,S. presidential administration may make substantial changes to fiscal, tax, regulation, environmental, climate and other federal policies' Similarly, local
elections during 2021 may lead to significant policy changes at the state or municipal levels in our service areas that may affect us. ln addition, foreign
governments may
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implement changes to their policies, in response to changes to U.S. policy or otheruise. Although we cannot predict the impact, if any, of these changes to our
businesses, they could adversely affect NW Holdings' or NW Natural's financial condition and results of operations. Until we know what policy changes are made
and how those changes impact our businesses and the business of our competitors over the long term, we will not know it overall, we will benefit from them or
be negatively afiected by them.
We cannot predict changes in laws, regulations, interpretations or enforcement or the impact of such changes. Additionally, any failure to comply with existing or
new laws and regulations could result in fines, penalties or injunctive measures. For example, under the Energy Policy Act of 2005, the FERC has civil authority
under the Natural Gas Act to impose penalties for cunent violations of in excess of $'1.3 million per day for each violation. ln addition, as the regulatory
environment for our businesses increases in complexity, the risk of inadverlent noncompliance may also increase. Changes in regulations, the imposition of
additional regulations, and the failure to comply with laws and regulations could negatively influence NW Holdings'or NW Natural's operating environment and
results of operations.
Additionally, changes in federal, state, local or foreign tax laws and their related regulations, or differing interpretations or enforcement of applicable law by a
federal, state, local or foreign taxing authority, could result in substantial cost to us and negatively affect our resulb of operations. Tax law and its related
regulations and case law are inherently complex and dynamic. Disputes over interpretations of tax laws may be settled with the taxing authority in examination,
through programs like the Compliance Assurance Process (CAP), upon appeal or through litigation, Our judgments may include reserves for potential adverse
outcomes regarding tax positions that have been or plan to be taken that may be subject to challenge by taxing authorities. Changes in laws, regulations or
adverse judgments and the inherent difficulty in quantifying potential tax effects of business decisions may negalively affect NW Holdings' or NW Natural's
financial condition and results of operations.
Furthermore, certain tax assets and liabilities, such as defened tax assets and regulatory tax assets and liabilities, are recognized or recorded by NW Holdings
or NW Natural based on certain assumptions and determinations made based on available evidence, such as projected future taxable income, tax-planning
strategies, and results of recent operations. lf these assumptions and determinations prove to be inconect, the recorded results may not be realized, which may
negatively impact the financial results of NW Holdings and NW Natural.
There is uncertainty as to how our regulators will rellect the impact of the legislation and other govemment regulation in rates. The resulting ratemaking
treatment may negatively affect NW Holdings' or NW Natural's financial condition and results of operations.
REPUTATIONAL RISKS. Customers', legislators', and regulators'opinions of NW Holdings and NW Natural are affected by many factors, including system and
fuel reliability and safety, protection of customer information, rates, media coverage, and public sentiment. To the ertent that customers, legislators, or regulators
have or develop a negative opinion of our busl,hesses, NW Holdings' and NW Natural's financial position, resufts of operations and cash flows could be
adversely affected.
A number of factors can affect custome/s perception of us including: service interruptions or safety concerns due to failures of equipment or fracilities or from
other causes, and our ability to prompty respond to such failures: our ability to safeguard sensitive customer information; the timing and magnitude of rate
increases; and volatility of rates. Customers', legislators', and regulators' opinions of us can also be affected by media coverage, including the proliferation of
social media, which may include information, whether factual or not, that could damage the perception of natural gas, our brand, or our reputation.
Other concerns that have been raised about the use of natural gas include the potential for natural gas explosions and the effec.t of natural gas on indoor air
quality. For example, NW Natural's gas distribution system was struck by a third party resulting in a gas explosion in 2016, and while NW Natural was
determined not to be at fauh, the perception of natural gas as an energy source could have been affected. ln addition, studies and claims by advocacy groups
from time to time question the indoor health and general climate effects from buming natural gas, which may also impact public perception. These shifts in public
sentiment may not only impact further legislative initiatives, but behaviors and perceptions of customers, investors and regulators.
lf customers, legislators, or regulators have or develop a negative opinion of us and our services, or of natural gas as an energy source generally, this could
make it more difficult for us to achieve favorable legislative or regulatory outcomes, Negative opinions could also result in sales volumes reductions or increased
use of other sources of energy, or additional difficulties in accessing capital markets. Any of these consequonces could adversely affect NW Holdings' or NW
Natural's financial position, resutts of operations and cash flows.
REGUT-ATORY ACCOUNTING RISK. ,n the tuturc, NW Holdings or NW Natural may no longer meet the citeria for antinued application of regulatory accounting
practices for all or a portion of our regulated opentions.
lf we can no longer apply regulatory accounting, we could be required to write off our regulatory assets and precluded from the future defenal of costs not
recovered through rates at the time such amounts are incurred, even if we are expected to recover these amounts from customers in the future.
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COVlD.l9 Risk
PUBLIC HEALTH RISK. Ihe recent novel coronavirus (COVID-Ig) pandemic is widespread, severe and unpredictable. The continuation of this outbreak and the
resulting economic conditions, or the emergence of other epidemic or pandemic crises, could mateially and adversely affect NW Holdings' and NW Natural's
business, results of operations, or financial condition.
The novel coronavirus (COVID-19), which was declared a pandemic by the World Health Organization in March 2020, has resulted in widespread and severe
global, national and local economic and societal disruptions. ln late March 2O20, the Govemors of Oregon and Washington issued "stay at home" executive
orders requiring the closure of "non-essential" business and modifications to certain 'essential' businesses. While most of NW Natural's services were, and
continue to be, considered "essential" under existing executive orders, there is no guarantee they will continue to be classified as such. Additionally, while we
have undertaken emergency response command structures and protocols that have operated well, they may not be sufficient to adequately mitigate the effects
of COVID-19 on our operations, particulady in the event the pandemic worsens. The situation is rapidly evolving and dynamic and could ultimately adversely
affect our business by, among other things:. disrupting our access to capital markets or increasing costs of capital affecting our liquidity in the future;. reducing demand for natural gas, particularly from commercial and industrial customers that may be considered "non-essential' businesses under current or
future executive orders or other governmental action, or lhat are suffering slowdowns or ultimately close completely due to COVID-19 effects;. reducing customer growth and new meter additions due to less economic, construction or conversion activity;. subjecting us to legislative or prolonged administrative action that limits our ability to collect on overdue accounts or disconnect gas service for nonpayment,
beyond a period of time acceptable to us;. increasing our operating cosb for emergency supplies, personal protective equipment, cleaning services and supplies, remote technology and other specific
needs during this crisis;. impacting our capital expenditures if construction activilies are suspended or delayed;. sickening or causing a mandatory quarantine of a large percenlage of our workforce, or key workgroups with specialized skill sets, impairing our ability to
perform key business functions or execute our business continuity plans;. adversely affecting the asset values of NW Natural's defined benefit pension plan or causing a failure to maintain sustained growth in pension investments
over time, increasing our contribution requirements;. limiting or curtailing entirely, public utility commissions' ability to approve or authorize applications or other requests we may make with respect to our
regulated businesses;. increasing volatility in the price of natural gas;. impairing the functioning of our supply chain or ability to rely on third parties or business partners; and. creating additional cybersecurity vulnerabilities due to heavy reliance on remote working in our business continuity model.
Additionally, the effects of COVID-19 could create prolonged unfavorable economic conditions, slowed economic growth, or an economic recession that may
result in or be accompanied by unprecedented unemployment rates and declines in the value of homes and investment assets, adversely affecting the income
and financial resources of many domestic households and businesses. lt is unclear whether governmental responses to these conditions will lessen the severity
or duration of any economic downturn. Our operational and financial results would likely be affected by such economic conditions. Less new housing
construction, fewer conversions to natural gas, higher levels of residential foreclosures and vacancies, and personal and business bankruptcies or reduced
spending could all negatively affect our financial condition and results of operations.
The ultimate impact of COVID-19 on our business cannot be predicted and will depend on factors beyond our knowledge or control, including the duration and
severity of the outbreak and resulting economic downturn, actions taken to contain the outbreak and mitigate its public health efiects, and the extent to which
normal economic and operating conditions can resume and when they might do so. Any of these factors could have an adverse effect on our business, outlook,
financial condition, and results of operations and cash flows, which could be significant.
Growth and Strateoic Risks
STRATEGIC TRANSACTIOI{ RISK. NW Holdings' and NW Naturafs ability to successfully complete strategic transactions, including merger, acquisrtion,
divestiture, joint venture, business development projects or other strategic transactions is sublect to signilicanf nbks, including the isk that required regulatory or
governmental approvals may not be obtained, risks relating to unknown problems or liabilities or problems or liabilities undisclosed to us, and the risk that for
these or other reasons, we may be unable to achieve some or all of the benefits that we anticipate from such transactions, which could adversely affect NW
Holdings' or NW Natural's financial condition, resu/fs of operatbns, and cash flows.
From time to time, NW Holdings and NW Natural have pursued and may continue to pursue strategic transactions including merger, acquisition, divestiture, joint
venture, business development projects or other strategic transactions, including RNG projects and acquisitions by NW Holdings in the water sector of a number
of water utilities, wastewater entities and a water services company, with NW Holdings' continuing to seek other such water sector related opportunities. Any
such transactions involve substantial risks, including the following:. purchase or sale transactions that are conlracted for may fail to close for a variety of reasons;. acquired businesses or assets may not produce revenues, eamings or cash flow at anticipated levels, which could, among other things, result in the
impairment of any goodwill associated with such acquisitions;. acquired businesses or assets could have environmental, permitting, or other problems for which contractual protections prove inadequate;
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. there may be difficulties in integration or operation costs of new businesses;
' there may exist liabilities that were not disclosed to us, that exceed our estimates, or for which our rights to indemnification from the seller are limited;' we may be unable to obtain the necessary regulatory or govemmental approvals to close a transaction, receive approvals granted subject to terms that areunacceptable to us;
' we may be unable to achieve the anticipated regulatory treatment of any such transaction as part of the transaction approval or subsequent to closing thetransaction; orr we maY be unable to avoid a sale of assets for a price that is less than the book value of those assets.
One or more of these risks could affect NW Holdings' and NW Natural's financial condition, results of operations, and cash flows.
BuSlNEss DEVELOPilIENT RISK' NWHoldlngs' and NW Natural's busthess development prcjects may encounter unanticipafed obstacres, cosfs, changes ordelays that could result in a proiect becoming impaired, which coutd negatively impact NW Uodings' ir NW Natural's financiat condition, resuns of ope-rationsand cash flows.
Business development projects involve many risks. We are currently engaged in several business devetopment projects, including, but not limited to, severalwater, wastewater and RNG projects. We may also engage in other business development projects such as investments in additi6nal long-term gas reserves,CNG refueling stations, pou/er to gas or hydrogen projects or other projects intended to reducscarbon emissions. These projects ,ay noi be successful.Additionally, we may not be able to obtain required governmental permits and approvals to complete our projects in a cosi-emcient or'timely manner, potentiallyresulting in delays or abandonment of the projects. We could also experience issues such as: technological ihallenges; inefiective scalabiliiy; startup andconstruction delays; construction cost overruns; disputes with contractors; the inability to negotiate acciptable agreements such as rights-oi-way, easements,construction, gas supply or other material contracts; changes in customer demand, perception or commitment; public opposition b pijects; changes in marketprices; and operating cost increases. Additionally, we may be unable to finance our business development projicts at acceptable costi or within a scheduledtime frame necessary for completing the project. Any of the foregoing risks, if realized, could result in the project becoming impaired, and such impairment couldhave an adverse effect on NW Holdings' or NW Nalural's financial condition and results of operations.
JOTNT PARTNER RlsK. lnvesting in buslness development projects through partnerships, joint ventures or other busrhess afiangements affects our ability tomanage cefiain risks and could adversely impact NW Holdings' or NW Natural's financial condition, resu/fs of operations and cash flows.
We use joint ventures and other business anangements to manage and diversif, the risks of certain development projects, including NW Natural,s gas reservesagreements and RNG projects. NW Holdings or NW Natural may acquire or develop part-ownership interests in otireiprojects in thdfuture, includin-g but notlimited to' water, wastewater, RNG or hydrogen projects, Under these anangements, we may not be able to fully direci ttrl management and policie-s of thebusiness relationships, and other participants in lhose relationships may take action confaryto our interests, including making oierational decisions thaf couldnegatively affect our costs and liabilitios. ln addition, other participants may withdraw from the project, divest important assets, become financially distressed orbankrupt, or have economic or other business interests or goals that are inconsistent with ours.
NW Natural's gas reserves arangements, which operate as-a hedge backed by physical gas supplies, involve a number of risks, including: gas production thatis significantly less than the expected volumes, or no gas volumes; operating costsihat are highei than expected; inherent risks of gas pr6auaion, includingdisruption to operations or a complete shut-in of the field; and one or more participants in one of these gas reserves arangements becoming financially ins6lventor acting contrary to NW Natural's interests. For example, Jonah Energy, the counterparty in NW Natural's gas reserves anangement, has experienced recentcredit rating downgrades. While NW Natural intends to continue monitoring Jonah Energy's financial condition and take approfriate actions to preserve NWNatural's interests' it does not control Jonah Energy's financial condition or continued performance under the gas reserves arrangement. The cost of the originalgas reserves venture is cunently included in customer rates and additional wells under that arrangement are recovered at specifii costs, the occupence of oneor more of these risks could affect NW Natural's ability to recover this hedge in rates. Further, new gas reserves anangements have not been approved forindusion in rates, and regulators may ultimately determine. to not include all or a portion of future transactions in rates. The realization of any of the abovementioned situations could adversely impact NW Holdings'or NW Natural's financial condition, results of operations and cash f,ows.
CUSTOiIER GROWTH RISK NW Holdings' and NW Natural's NGD margin, eamings and cash flow may be negatively affected if we are unable to sustaincustomer 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,to the new construction housing market, conversions of customers to natural gas from other energy sources and growing commercial use of natural gas. Ttri tasirecession slowed new construction. While new home construction has resumed and the multi-family composition ias beln higher than its pre-recession pace,overall construction has not refurned to the pre-recession pace, and there are predictions of an impending n6w recessionary iycle. lnsufficient growth in
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ln the residential and commercial markets, NW Natural's NGD business competes primarily with suppliers of eleckicity, fuel oil, and propane' ln the industrial
market, NW Natural competes with suppliers of all forms of energy. Competition among these forms of energy is based on price, efficiency, reliability'
performance, market conditions, technology, environmental impiits and public percepiion. Technological improvemenls in other energy sources such as heat
pumps, bafteries or other alternative tectriologies could erode NW Natural's competitive advantage. lf natural gas prices rise relative to-other energy sources, or
if the cost, environmental impaci or puulic perieption of such other energy sources improves relaiive to natural gas, it may negatively affect NW Natural's ability
to attract new customers or ietain our exisiing residential, commercial and industrial customers, which could have a negative impact on our customer growth rate
and NW Holdings' and NW Natural's results of operations'
our natural gas storage operations compete primarily with other storage facilities and pipelines. Natural gas storage is an increasingly competitive business' with
the ability to-expand Jr build new storage capacity in Califomia, the U.lS. Rocky Mountains and elsewhere in the U.S. and Canada. lncreased competition in the
natural gis stoiage business could red-uce the demand for our natural gas stoiage services, drive prices down for our storage business, and adversely affect our
ability ti renew oi replace existing contracts at rates sufficient to maintiin cunent revenues and cash flows, which could adversely affect NW Holdings' and NW
Natural's financial condition, results of operations and cash flows.
Ooerational Risks
openarrNo nrsrc rra nsporting and stoing natural gas and distibuting natura! gas and water involves numerous nsks that may result in accidents and other
openting risks and cosfs, somZ or ail of wiich mayhot be fully covereV by insunnce, and which could adversely affect NW Holdings' or NW Natural's financial
condition, resufts of operations and cash flows.
NW Holdings and NW Natural are subject to all of the risks and hazards inherent in the businesses of gas distribution and storage, and water distribution,
including:. earthquakes, wildfires, floods, storms, landslides and other severe weather incidents and natural hazards;
. leaks or losses of natural gas, water or wastewater, or contamination of natural gas or water by chemicals or compounds, as a result of the malfunction of
equipment or facilities or othenrvise;. damages from third parties;. operator enors;. negative performance by our storage reservoirs, facilities, or wells that could cause us to fail to meet expected or forecasted operational levels or contractual
commitments to our customers;. problems maintaining, or the malfunction of pipelines, wellbores and related equipment and facilities that form a part of the infrastructure that is critical to
the operation of our gas and water distribution and gas storage facilities;. presence of chemicals or other compounds in naturil gas that could adversely afiect the performance of the system or end-use equipment;
. collapse of underground storage reservoirs;. inadequate supplies of natural gas orwater;. operating costs that are substantially higher than expected;. migratioi of natural gas through fauits ii the rock or to some area of the reservoir where existing wells cannot drain the gas effectively, resulting in loss of
the gas;. bloriouts (uncontrolled escapes of gas from a pipeline or well) or other accidents, lires and explosions; and. risks and jrazards inherent in the drilling operations associated with the development of gas storage facilities, and wells.
For example, TC pipelines, Lp (TC pipelines) has identified the presence of a chemical substance, dithiazine, at several facilities on the system of its subsidiary,
Gas Transmission Northwest (dfru), inO those of some upstream and downstream connecting pipeline facilities. A portion of NW Natural's gas supplies from
Canada are transported on oiN's iipetines. TC pipelines reports that dithiazine can drop out of gas streams in a powdery form at some points of pnessure
reduction (for example, at a regulaioi;, and that in incidents where a sufficient quantity of the material accumulates in certain places, improper functioning of
equipmeni can occur, which "ai ,esuii in increased preventative and corrective action costs. While NW Natural has not detected significant quantities of
Oiiniizine on its system to date, we continue to monitor and could discover increased levels of dithiazine or other compounds on NW Natural's system that could
affect the performance of the system or end-use equipment.
These risks could result in disruption of service, personal injury or loss of human life, damage to and destruction of property and equipment, pollution or other
environmental damage, breaches of our contractual commiiments, and may result in curtailment or suspension of operations, which in turn could lead to
significant costs and'iost revenues. Further, because our pipeline, storage and distribution facilities are in or near populated areas, including residential areas,
commercial business centers, and industriai sites, any loss of human life or adverse financial outcomes resulting from such events could b-e significant. We could
be subject to lawsuits, claims, and criminal and civil enforcement actions. Additionally, we may not be able to maintain the level or types of insurance we desire,
and the insurance coverage we do obtain may contain large deductibles or fail to cover certain hazards or cover all potential losses. The occurrence of any
operating risks not covere? by insurance could adversely affect NW Holdings' or NW Natural's financial condition, results of operations and cash flows'
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these markets, for economic, political or other reasons could adversely affect NW Holdings'or NW Natural's utility margin, earnings and cash flows.
RISK OF COI{lpETlTlON, Our NGD business rs subTecf fo increased competition which could negatively affed NW Holdings' or NW Natural's resufts of opentions.
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SAFETY REGULATIoN RISK. NW Holdings and NW Natural may experience increased federul, state and local regutation of the safety of our systems and
operations, which could adversely affect NW Holdings'or NW Natural's operating costs and financial resufts.
The safety and protection of the public, our customers and our employees is and will remain our top priority. We are committed to consistently monitoring andmaintaining our distribution systems and slorage operations to ensure that natural gas and water is acquired, stored and delivered safely, reliably and ertcienty.Given recent high-profile natural gas explosions, leaks and accidents in other parts of the country involving both distribution systems and storage facilities, weanlicipate that the natural gas industry may be the subject of even greater federal, state and local regulatory oversight. For example, in2O2O, the protecting ourlnfrastructure of Pipelines and Enhancing Safety Act (PIPES Ac$ reauthorization was signed into law increasing regulations for natural gas transmission and
distribution pipelines. Among other things, the PIPES Act includes new mandates for the Pipeline and Hazardous Materials Safety Administration (PHMSA) torequire operators to update and implement various pipeline safety plans and processes.
ln addition, our workplaces are subject to the requirements of the Department of Transportation, through the Federal Motor Carrier Safety Administration, andthe Occupational Safety and Health Administration, as well as state statutes and regulations that regulate the protection of the health and safety of workers. Thefailure to comply with these requiremenb or general industry standards, including keeping adequate records or preventing occupational injuries or exposure,
could expose us to civil or criminal liability, enforcement actions, and regulatory fines and penalties that may not be recoverable through our rates and couldhave a material adverse effect on our business, linancial condition, results of operations and cash flows.
We intend to work diligently with industry associations and fod€ral and state regulators to seek to ensure compliance with these and other new laws. We expectthere to be increased costs associated with compliance, and those costs could be significant. lf these costs are not recoverable in our customer rates, they couldhave a negative impact on NW Holdings'and NW Natural's operating costs and financial results.
RELIANCE ON THIRD PARTIES TO SUPPLY NATURAL GAS RISK. NW Natural rclies on third parties to supply the natunl gas in its NGD segment, and limitationson NW Natural's ability lo obtain supplies, or failure to receive expected supplies for which il has contncted, could have in adverse impaci on NW Holdings, orNW Natunl's financial resufts.
NW Natural's ability to secure natural gas for current and future sales depends upon its ability to purchase and receive delivery of supplies of natural gas from
third parties. NW Natural, and in some cases, its suppliers of natural gas, does not have control over the availability of natural gas supplies, competition for thosesupplies, disruptions in those supplies, priority allocations on trErnsmission pipelines, or pricing of those supplios. Additionally, third parties on whom NW Naturalrjlies may fail to deliver gas for which it has contracted. For example, in October, 2018, a 36-inch pipeline near Prince Geoige, British Columbia owned byEnbridge ruptured, disrupting natural gas flows from Canada into Washington while the ruptured pipeline and an adjacent pipeline were assessed and the
luptgred pipeline was ropaired. Once repaired, pressurization levels for those pipelines were reduced for a significant period of time for assessment and testing.Similarly, in December 2020, gas supply to approximately 5,500 of NW Natural's customers was disrupted foi a few days as a result of a vehicle crashing into iWilliams Northwest Pipeline facility. lf NW Natural is unable or limited in its ability to obtain natural gas from its current iuppliers or new sources, it may not beable.to meet customers' gas requirements and would likely incur costs associated with actions necessary to mitigate service disruptions, both of which couldsignificantly and negatively impact NW Holdings' and NW Natural's results of operations.
SINGLE TRANSPORTATION PIPELINE RISK. Nl,y Nalural relies on a single pipeline company for the transpoftation of gas lo its seruice territory, a disruption ofwhich could adversely impact its ability to meet customers' gas requirements, which coutd signiticantty and negativety impact NW Holdings' and NW Natural's
resufts of operations.
NW Natural's distribution system is directly connected to a single intorstate pipeline, which is owned and operated by Northwest Pipeline. The pipeline's gas
flows are bi-directional, transporting gas into the Portland mehopolitan market from two directions: (1) the north, wtrittr brings suppiies from the British Columbiaand Alberta supply basins; and (2) the east, which brings supplies from the Alberta and the U.S. Rocky Mountain supply balins.'li there is a rupture orinadeq_uate capacity in, or supplies to maintain adequate prossures in, the pipeline, NW Natural may not be able to meet its customers'gas requirements and wewould likely incur costs associated with actions necessary to mitigate service disruptions, both of which could significanfly and negativety impait NW Holdings'and NW Natural's results of operations.
THIRD PARTY PIPELINE RISK. NW Holdings' and NW Natun/'s gas storage buslnesses depend on third-party pipelines that connect our stonge facitities to
interstate pipelines, the failure or unavailability of which could adversely affect NW Hotdings' or NW Naturat's financia! condition, resu/fs of operations and cashllows.
Our gas storage facilities are reliant on the continued operation of a third-party pipeline and other facilities that provide delpery options to and from our storagefacilities. Because we do not own all of these pipelines, their operations are not within our control, lf the thhd-party pip6line to which we are connected were tobecome unavailable for cunent or future withdrawals or injections of natural gas due to repairs, damage to the inftastructure, lack of capacity or other reasons,our ability to operate
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GEM STATEWATER COMPANY
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efiicien1y and satisry our customers' needs could be compromised, thereby potentially having an adverse impact on NW Holdings'or NW Natural's financial
condition, results of operations and cash flows.
WORKFORCE RISK. NW Hold,n gs' and NW Nafurat's business es are heavity dependent on being able to attract and retain qualified employees and maintain a
competitive cosf strucfure with market-based salaries and employee benefits, and workforce disruptions could adversely affecl NW Holdings' or NW Natural's
ope ratio n s and resu/ts.
NW Holdings, and NW Natural's ability to implement our business strategy and serve our cuslomers is dependent upon our continuing ability to attract and retain
diverse, tal;nted professionals and a iechnically skilled worKorce, and being able to transfer the knowledge and expertise of our workforce to new and
increasingly diverse employees as our largely older workforce retires. A significant portion of our worKorce is cunently eligible or will reach retirement eligibility
within the next five years, which will require that we attract, train and retain skilled workers to prevent loss of institutional knowledge or skills gaps. Without an
appropriately skilbd workforce, our ability to provide quality service and meet our regulatory requirements will be challenged and this could negatively impact
NW Hb6ings, and NW Natural;s eamingi. Additionally, just over half of NW Natural workers are represented by the OPEIU Local No. 11 AFL-CIO, and are
covered by1 collective bargaining agreement that exiends to May 31, 2024. Disputes with the union representing NW Natural employees over terms and
conditionjof their agreeme-nt, oriaillre to timely and effectively renegotiate the agreement upon its expiration, could result in instability in our labor relationship
or other labor disruplions thai could impact the iimely delivery 6t gas ana other services from our utility and storage facilities, which could strain relationships with
custome6 and state regulators and cause a loss of revenuei. The collective bargaining agreements may also limit our flexibility in dealing with NW Natural's
wor6orce, and the abilifo to change work rules and practices and implement other efficiency-related improvements to successfully compete in today's
challenging marketplace, which may negatively affect NW Holdings' and NW Natural's financial condition and results of operations.
Environmental Risks
EtVtnotmermL LIABluw RtsK. Cerrain of NW Natural's, and possibly NW Hotdings', prcperties and facilities may pose environmental risks requiing
remediation, the costs of which are difficuft to estimate and which could adversely affect NW Holdings' and NW Natural's financial condition, results of
opentions, and cash flows.
NW Natural owns, or previously owned, properties that require environmental remediation or other action. NW Holdings or NW Natural may now, or in the future,
own other properties ih"t requir" environmental remediation or other action. NW Natural and NW Holdings accrue all material loss contingencies relating to
these propertils. A regulatory asset at NW Natural has been recorded for estimated costs pursuant to a deferral order from the OPUC and WUTC. ln addition to
maintaining regulator/defenab, ruW Natural settled with most of its historical liability insurers for only a portion of the costs it has incuned to date and expects to
incur in the future. To the extent amounts NW Natural recovered from insurance are inadequate and it is unable to recover these defened costs in utility
customer rates, NW Natural would be required to reduce its regulatory assets which would result in a charge to earnings in the year in which regulatory assets
are reduced. ln addition, in Oregon, the dPUC approved the SRRM, which limits recovery of defened amounts to those amounts which satisfr an annual
prudence review and an earninls test that requirel NW Natural to contribute additional amounts toward environmental remediation costs above approximately
btg miltion in years in which NW Natural earns above its authorized ROE. To the extent NW Natural earns more than its authorized ROE in a year, it would be
required to cover environmental expenses greater than the $10 million with those eamings that exceed its authorized ROE. The OPUC ordered a review of the
SRRM in 2018 or when we obtain greater c-ertainty of environmental costs, whichever occurred first. We submitted information for review in 201 8, and believe
we could be subject to further revielv. Similarly, in October 2019, the WUTC authorized an ECRM, which allows for recovery of certain past deferred and future
prudenfly incuned remediation costs allocable to Washington through application of insurance proceeds and collections from customers, subject to an annual
i:ruaencl determination. These ongoing prudence reviewl, or with iespect to the SRRM, the eamings test, or the periodic review could reduce the amounts NW
Natural is allowed to recover, and CouE adversely affect NW Holdings' or NW Natural's financial condition, results of operations and cash flows.
Moreover, we may have disputes with regulators and other parties as to the severity of particular environmental matters, what remediation efforts are
appropriate, whetirer naturai resources wire damaged, and the portion of the costs or claims NW Natural or NW Holdings should bear. We cannot predict with
cihainty ttre amount or timing of future expenditures related to environmental investigations, remediation or other action, the portions of these costs allocable to
NW Natural or NW Holdings, or disputes or litigation arising in relation thereto.
Environmental liability estimates are based on current remediation technology, industry experience gained at similar sites, an assessment of probable level of
responsibility, and the financial condition of other potentially responsible parties. However, it is dfficult to estimate such costs due to uncertainties sunounding
the course of environmental remediation, the preliminary niture'of certain site investigations, natural recovery of the site, unavoidable limitations associated with
environmental invesligations and remedial technologies, evolving science, and the application of environmental laws that impose joint and several liabilities on
all potentially responsible parties. These uncertainties and disputes arising therefrom could lead to further adversarial administrative proceedings or litigation'
witir associated costs and uncertain outcomes, all of which could adversely affect NW Holdings' or NW Natural's financial condition, results of operations and
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GEM STATE WATER COMPANY
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ENVIRONiTIENTAL REGULATION COITIPLI,ANCE RISK. Nt/y Hordings and NW Natural are subject to environmental regulations for our ongoing buslnesses,
compliance with which could adversely affect our opentions or financial resu/fs.
NW Holdings and NW Natural are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local governmental
authorities relating to protection of the environment, including those legal requirements that govern discharges of substances into the air and water, the
management and disposal of hazardous substances and waste, groundwater quality and availability, plant and wildlife protection, and other aspects of
environmental regulation. For example, our natural gas operations are subject to reporting requirements to the Environmental Protection Agency (EPA) and the
Oregon Department of Environmental Quality (ODEQ) regarding greenhouse gas emissions. These and other cunent and future additional environmental
regulations could result in increased compliance costs or additional operating restrictions, which may or may not be recoverable in customer rates or through
insurance. lf these costs are not recoverable, or if these regulations reduce the desirability or cost-competitiveness of natural gas, they could have an adverce
efiect on NW Holdings'or NW Natural's operations or financial condition.
GLOBAL CLIIUIATE CHAI{GE RISK. Ourbusinesses rnay be subject to physica/ nsks associaled with climate change, all of which could adversely atrect NW
Holdings' or NW Natural's financial condrtion, results of operutions and cash flows.
Climate change may cause physical risks, including an increase in sea level, intensified storms, water scarcity, wildfire susceptibility and changes in weather
conditions, such as changes in precipitation, average temperatures and extreme wind or olher extreme weather events or climate conditions. A significant
portion of the nation's gas infrastructure is located in areas susceptible to storm damage that could be aggravated by wetland and banier island erosion, which
could give rise lo gas supply interruptions and price spikes.
These and other physical changes could resuh in disruptions to natural gas production and transportation systems potentially increasing th6 cost of gas and
affecting our natural gas businesses' ability to procure or transport gas to meet customer demand. These changes could also affect our distribution systems
resulting in increased mainlenance and capital costs, disruption of service, regulatory actions and lower customer satisfaction. Similar disruptions could occur in
NW Holdings' water utility businesses. Additionatly, to the extent that climate change adversely impacts the economic health or weather conditions of our service
territory directly, it could adversely impact customer demand or our customers'ability to pay. Such physical risks could have an adverse effect on NW Holdings'
or NW Natural's financial condition, results of operations, and cash flows.
PUBUC PERCEPTIOI,I AND POLICY FtlSK. Changes in public sentiment or public policy with respect to natunl gas, including through local, state or federal laws
or legislation or other regulation (including ballot initiatives or execulive orders), could adversely affect NW Holdings' or NW Natural's financial condition, resulfs
of opentions and cash flows.
There are a number of international, federal, state, and local legislative, legal, regulatory and other initiatives being proposed and adopted in an attempt to
measure, conkol or limit the effects of global warming and climate change, including greenhouse gas (GHG) emissions such as carbon dioxide and methane.
For example, cap and trade bills were considered in the 2019 and 2020 Oregon legislative sessions, and failed each time due to a lack of quorum for a vote. ln
Washington, similar legislation seeking to reduce GHG emissions in a variety of ways have been unsuccessfully pursued, lt is expected that there will be
continued efforts to address climate change in the 2021 legislative sessions through legislation that seeks to limit GHG emissions, disadvantages direct natural
gas usage, or promotes electrification, in both Oregon and Washington. The Washington State Building Code Council adopted a statewide residential building
code that incorporates carbon reduction measures. ln Oregon, largely as a result of the inability of the Oregon legislature to pass GHG legislation, in March,
2020, the Oregon Governor issued an executive order establishing GHG emissions reduction goals of at least 45% below 1990 emission levels by 2035 and at
least 80% below 1990 emission levels by 2050 and directing state agencies and commissions to facilitate such GHG emission goals. Although the order does
not specifically direc{ actions of natural gas distribution businesses, the OPUC is directed to prioritize proceedings and activities that advance decarbonization in
the utility sector, mitigate energy burden experienced by utility customers and ensure system reliability and resource adequacy. The executive order also directs
olher agencies to cap and reduce GHG emissions from transportation fuels and all other liquid and gaseous fuels, including natural gas, adopt building energy
efficiency goals for new building construction, reduce methane gas emissions from landfills and food waste, and submit a proposal for adoption of state goals for
carbon sequestration and storage by Oregon's forest, wetlands and agricultural lands. At this time, we are unable to predict the impact of the executive order on
NW Natural. As an executive order, any implementation is reliant on stiate agency rule-making. The scope and content of any state commission or agency rules,
as well as the time to propose, adopt and implement any such rules, has not been fully determined, but is expected to be subslantially complete in the next 12 to
24 months.
A number of local jurisdictions are also reviewing their own GHG regulations. For example, one smalljurisdiction in NW Natural's service tenitory, Eugene,
Oregon, is seeking to pursue reductions in GHG emissions by negotiating for GHG targets, carbon offsets and increased use of RNG in their system. Such
current or future legislation, regulation or other initiatives (including ballot initiatives or ordinances) could impose on our natural gas businesses operational
requirements or restrictions, additional charges to fund energy efficiency initiatives, or levy a tax based on carbon content, ln addition, while no such bans
currently exist in NW Natural's operating tenitories, certain municipalities, such as Berkeley, California, are moving to restrict new natural gas hookups in
residential and other buildings. Other jurisdictions have considered requiring the conversion of buildings to electric heat, or othenrise adopting policies or
incentives to encourage the use of electricity in lieu of natural gas. Such restrictions could
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GEM STATE WATER COMPANY
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adversely impact customer growth or usage, and could adversely impact our ability to recover costs and maintain reasonable customer rates.
NW Natural believes natural gas has an important role in moving the Pacific Northwest to a low carbon future, and to that end is developing programs and
measures to reduce carbon emissions. However, NW Natural's efforts may not happen quicldy enough to keep pace with legislation or other regulation, legal
changes or public sentiment, or may not be as effective as expected.
Any of these initiatives, or our unsuccessful response to them, could result in us incurring additional costs to comply with the imposed restrictions, provide a cost
or other competitive advantage to energy sources other than natural gas, reduce demand for natural gas, restrict our ability to add new construction meters,
impose costs or restrictions on end users of natural gas, impact the prices we charge our customers, impose increased costs on us associated with the adoption
of new infrastructure and technology to respond to such requirements, and could negatively impact public perception of our services or products that negatively
diminishes the value of our brand, all of which could adversely affect NW Holdings' or NW Natural's business operations, financial condition and results of
operations.
Buslness Continuitv and Technolooy Risks
BUSTNESS CONTINUITY RISK. NW Holdings and NW Natural may be adversely impacted by local or nafional disasfers, pandemic illness, political unrest, tenoist
actMties, cyber-attacks or data breaches, and other extreme events to which we may not be able to promptly respond, which could adversely affect NW
Holdings' or NW Natural's operations or financial condition.
Local or national disasters, pandemic illness (including COVID-19), political unrest, tenorist activities, cyber-attacks and data breaches, and other extreme
events are a threat to our assets and operations. Companies in critical infrastructure industries may face a heightened risk due to being the target ol and having
heightened exposure to, acts of terrorism or sabotage, including physical and security breaches of our physical infrastructure and information technology
systems in the form of cyber-attacks. These attacks could, among other things, target or impact our technology or mechanical systems that operate our
distribution, transmission or storage facilities and result in a disruption in our operations, damage to our system and inability to meet customer requirements. ln
addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural gas or other necessary commodities that
could affect our operations. Threatened or actual national disasters or terrorist activilies may also disrupt capital or bank markets and our ability to raise capital
or obtain debt financing, or impact our suppliers or our customers directy. Local disaster, protests or pandemic illness could result in disruption of our
infrastructure or part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. A slow or
inadequate response to events may have an adverse impact on our operations and earnings. We may not be able to maintain sufficient insurance to cover all
risks associated with local and national disasters, pandemic illness, tenorist activities, cyber-attacks and other events. Additionally, large scale natural disasters
or terrorist attacks could destabilize the insurance industry making the insurance we do have unavailable, which could increase the risk that an event could
adversely affect NW Holdings' or NW Natural's operations or financial results.
RELTANCE ON TECHNOLOGY RISK. NW Holdings' and NW Natural's et7orfs to integrute, consolidate and streamline each of their operctions has resulted in
increased reliance on technology, the failure of which could adversely affect NW Holdings' or NW Natural's financial condition and resufts of operations.
NW Holdings and NW Natural have undertaken a variety of initiatives to inlegrate, standardize, centralize and streamline operations. These efforts have resulted
in greater reliance on technological tools such as, at NW Natural: an enterprise resource planning system, a digital dispatch system, an automated meter
reading system, a web-based ordering and tracking system, and other similar technological tools and initiatives. Our future success will depend, in part, on our
ability to anticipate and adapt to technological changes in a cost-effective manner and to offer, on a timely basis, services that meet customer demands and
evolving industry standards. New technologies may emerge that could be superior to, or may not be compatible with, some of our existing technologies, and may
require us to make significant expenditures to remain competitive. We continue to implement technology to improve our business processes and customer
interactions. ln addition, our various existing information technology systems require periodic modifications, upgrades and/or replacement. For example, NW
Natural intends to upgrade its SAP system and replace its customer information system in the near future.
There are various risks associated with these systems in addition to upgrades and replacements, including hardware and software failure, communications
failure, data distortion or destruction, unauthorized access to data, misuse of proprietary or confidential data, unauthorized control through electronic means,
programming mislakes and other inadvertent errors or deliberate human acts. ln addition, we are dependenl on a continuing f,ow of important components to
maintain and upgrade our information technology systems. Our suppliers may face production or import delays due to natural disasters, strikes, lock-outs,
political unresl or other such circumstances. Technology services provided by third-parties also could be disrupted due to events and circumstances beyond our
control which could adversely impact our business, financial condition and results of operations.
Any modifications, upgrades, system maintenance or replacements subject us to inherent costs and risks, including potential disruption of our intemal control
structure, substantial capital expenditures, additional administrative and operating expenses, retention of sufiiciently skilled personnel to implement and operate
the new systems, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our cunent systems. ln
addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our
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business and operations, if not anticipated and appropriately mitigated. There is also risk that we may not be able to recover all costs associated with projects to
improve our technological capabilities, which may adversely affect NW Holdings' or NW Natural's financial condition and results of operations.
CYBERSECURITY RISK, NW Holdings' and NW Natural's slafus as an infnstructure seruices provider aupled with its reliance on technology could resuft in a
security breach which could adversely affect NW Holdings' or NW Natural's financial condition and results of operations.
Although we take precautions to protect our technology systems and are not aware of any material security breaches to date, there is no guarantee that the
procedures we have implemented to protoct against unauthorized access to secured data and systems, including our industrial controls and other information
technology systems, are adequate to safeguard against all security breaches or other ryber attacks. Additionally, the facilities and systems of clients, suppliers
and third party service providers could be vulnerable to the same cyber risks as our facilities and systems, and such third party systems may be interconnected
to our systems both physically and technologically. Therefore, an event caused by cyberattacks or other malicious act at an interconnected third party could
impact our business and facilities similarly. As these potential cyber security attacks become more common and sophisticated, we could be required to incur
costs to strengthen our systems or obtain specific insurance ooverage against potential losses. Our businesses could experience breaches of security pertaining
to sensitive customer, employee, and vendor information maintained by us in the normal cource of business, which could adversely affect our reputation,
diminish customer confidence, disrupt operations, materially increase the costs we incur to protect against these risks, and subject us to possible financial
liability or increased regulation or litigation, any of which could adversely affect NW Holdings' or NW Natural's financial condition and results of operations,
Financial and Economic Risks
HOLDING COiIPANY DMDEND RISK As a holding company, NW Holdings depends on its openting subsidianes, including NW Natural, to meet ftnancial
obligations and the ability of NW Holdings to pay dividends on its common stock is dependent on the receipt of dividends and other payments from its
subsidlaneg including NW Natural.
As a holding company, NW Holdings'only significant assets are the stock and membership interests of its operating subsidiaries, which at this time is primarily
NW Natural. NW Holdings' direct and indirect subsidiades are separate and distinct legal entities, managed by their own boards of directors, and have no
obligation to pay any amounts to their respective shareholders, whether through dividends, loans or other payments. The ability of these companies to pay
dividends or make other distributions on their common stock is subject to, among other things: their results of operations, net income, cash flows and financial
condition, as well as the success of their business strategies and general economic and competitive conditions; the prior rights of holders of existing and future
debt securities and any future prefened stock issued by those companies; and any applicable legal restrictions.
ln addition, the ability of NW Holdings' subsidiaries to pay upstream dividends and make other distributions is subject to applicable state law and regulatory
restrictions. Under the OPUC and WUTC regulatory approvals for the holding company formation, if NW Natural ceases to comply with credit and capital
structure requirements apprc,ved by the OPUC and WUTC, it will not, with limited exceptions, be permitted to pay dividends to NW Holdings. Under the OPUC
and WUTC orders authorizing the holding company reorganization, NW Natural may not pay dividends or make distributions to NW Holdings if NW Natural's
credit ratings and common equity levels fall below specified ratings and levels. lf NW Natural's long-term secured credit ratings are below A- for S&P and A3 for
Moody's, dividends may be issued so long as NW Natural's common equity is 45% or above, lf NW Natural's long-term secured credit ratings are below BBB for
S&P and Baa2lor Moody's, dividends may be issued so long as NW Natural's common equity is 46% or above. Dividends may not be issued if NW Natural's
long-term secured credit ratings fall to BB+ or below for S&P or Bal or below for Moody's, or if NW Natural's common equity is below zl4%. The ratio is
measured using common equity and long-term debt excluding imputed debt or debt-like lease obligations, and is determined on a preceding or projected 13-
month basis.
EiIPLOYEE BENEFIT RISK. fhe cost of providing pension and posfietirement heafthcare beneffs is subject to changes in pensrbn assels and liabilities, changing
employee demographics and changing actuarial assumptions, which may have an adverse effect on NW Holdings' or NW Natural's financial condition, resu/ts of
operations and cash fonrs.
Until NW Natural dosed the pension plans to new hires, which for non-union employees was in 2006 and for union employees was in 2009, it provided pension
plans and postretirement healthcare benefits to eligible full-time utility employees and retirees. Approximately 40% of NW Natural's current utility employees
were hired prior to these dates, and therefore remain eligible for these plans. Other businesses we acquire may also have pension plans. The costs to NW
Natural, or the other applicable businesses we may acquire, for providing such ben€tits is subject to change in the market value of the pension assets, changes
in employee demographics including longer life expectancies, increases in healthcare costs, cunent and future legislative changes, and various actuarial
calculations and assumptions. The actuarial assumptions used to calculate our future pension and postretirement healthcare expenses may differ materially from
actual results due to significant ma*et fluctualions and changing withdrawal rates, wage rates, interest rates and other factors. These differences may result in
an adverse impact on the amount of pension contributions, pension expense or other postretirement benefit costs recorded in future periods. Sustained declines
in equity markets and reductions in bond rates may have a material adverse effect on the value of the pension fund assets and liabilities. ln these circumstances,
NW Natural may be required to recognize increased contributions and pension
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expense earlier than it had planned to the extent that the value of pension assets is less than the total anticipated liability under the plans, which could have a
negative impact on NW Holdings' and NW Natural's financial condition, results of operations and cash flows.
HEDGING RISK. NkV Nafural's isk management policies and hedging activities cannot eliminate the isk of commodity price movements and other financial
market isks, and its hedging activities may expose it to additional liabilities for which rate recovery may be disallowed, which could result in an adverse impact
on NW Holdings' and NW Natural's operating revenues, cosfs, derivative assets and liabilities and operating cash frows.
NW Natural's gas purchasing requirements expose it to risks of commodity price movements, while its use of debt and equity financing exposes it to interest
rate, liquidity and other financial market risks. NW Natural attempts to manage these exposures with both financial and physical hedging mechanisms, including
its gas reserves transactions which are hedges backed by physical gas supplies. While NW Natural has risk management proceduros for hedging in place, they
may not always work as planned and cannot entirely eliminate the risks associated with hedging. Additionally, NW Natural's hedging activities may cause it to
incur additional expenses to obtain the hedge. NW Natural does not hedge its entire interest rate or commodity cost exposure, and the unhedged exposure will
vary over time. Gains or losses experienced through hedging activities, including carrying costs, generally flow through NW Natural's PGA mechanism or are
recovered in future general rate cases. However, the hedge transactions NW Natural enters into for utility purposes are subject to a prudence review by the
OPUC and WUTC, and, if found imprudent, those expenses may be, and have been previously, disallowed, which could have an adverse efiect on NW
Holdings' or NW Natural's financial condition and results of operations.
ln addition, NW Natural's actual business requirements and available resources may vary from forecasts, which are used as the basis for its hedging decisions,
and could cause its exposure to be more or less than anticipated. Moreover, if NW Natural's derivative instruments and hedging transactions do not qualifr for
regulatory deferral and it does not elect hedge accounting treatment under U.S, GAAP, NW Holdings' or NW Natural's results of operations and financial
condition could be adversely affected,
NW Natural also has credit-related exposure to derivative countemarties. Counterparties owing NW Natural or its subsidiaries money or physical natural gas
commodities could breach their obligations. Should the counterparties to these arrangements fail to perform, NW Natural may be forced to enter into alternative
anangements to meet its normal business requirements. ln that event, NW Holdings'or NW Natural's financial results could be adversely afiected. Additionally,
under most of NW Natural's hedging arrangements, any downgrade of its senior unsecured long-term debt credit rating could allow its counterparties to require
NW Natural to post cash, a letter of credit or other form of collateral, which would expose NW Natural to additional costs and may trigger significant increases in
borrowing from its credit facilities or equity contribution needs from NW Holdings, if the credit rating downgrade is below investment grade. Further, based on
current interpretations, NW Natural is not considered a 'swap dealer' or "major swap participant" in 2021 , so NW Natural is exempt from certain requirements
under the Dodd-Frank Act. lf NW Natural is unable to claim this exemption, it could be subject to higher costs for its derivatives activities, and such higher costs
could have a negative impact on NW Holdings' and NW Natural's operating costs and financial results.
GAS PRICE RISK. H,ghernatural gas commodity prices and volatility in the pice of gas may adversely affect NW Natural's NGD business, whereas lower gas
pice volatility may adversely affect NW Natural's and NW Holdings'gas sforage business, in each case negatively affecting NW Holdings' and NW Natural's
results of opentions and cash flows.
The cost of natural gas is affected by a variety of factors, including weather, changes in demand, the level of production and availability of natural gas supplies,
transportation constraints, availability and cost of pipeline capacity, federal and state energy and environmental regulation and legislation, natural disasters and
other catastrophic events, national and worldwide economic and political conditions, and the price and availability of alternative fuels. At NW Natural, the cost we
pay for natural gas is generally passed through to customers through an annual PGA rate adjustment. lf gas prices were to increase significantly, it would raise
the cost of energy to NW Natural's customers, potentially causing those customers to conserve or switch to alternate sources of energy. Signifcant price
increases could also cause new home builders and commercial developers to select alternative energy sources. Decreases in the volume of gas NW Natural
sells could reduce NW Holdings or NW Natural's eamings, and a decline in customers could slow growth in future earnings. Additionally, because a portion (10%
or 2Oo/o) of any difference between the estimated average PGA gas cost in rates and the actual average gas cost incurred is recognized as current income or
expense, higher average gas costs than those assumed in setting rates can adversely affect NW Holdings'and NW Natural's operating cash flows, liquidity and
results of operations. Additionally, notwithstanding NW Natural's cunent rate structure, higher gas costs could resull in increased pressure on the OPUC or the
WUTC to seek other means to reduce NW Natural's rates, which also could adversely affect NW Holdings'and NW Natural's results of operations and cash
flows.
Higher gas prices may also cause NW Natural to experience an increase in short-term debt and temporarily reduce liquidity because it pays suppliers for gas
when it is purchased, which can be in advance of when these costs are recovered through rates. Significant increases in the price of gas can also slow collection
efforts as customers experience increased difficulty in paying their higher energy bills, leading to higher than normal delinquent accounts receivable resulting in
greater expense associated with collection efiorts and increased bad debt expense.
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INABILITY TO ACCESS GAPITAL MARKET RISK. NW Holdings' or NW Naturat's inabitity to access capital, or significant increases in the cost of capita!, couldadversely affect NW Holdings' or NW Natural's tinancial condition and results of operations.
NW Holdings' and NW Natural's ability to obtain adequate and cost effective short-term and long-term financing depends on maintaining investment grade creditprofiles as well as the existence of liquid and stable financial.markets. NW Holdings relies on aciess to equity and bank markets to finance equity coitributionsto subsidiaries and other business requirements. NW Natural relies on access to capital and bank markets, including commercial paper and bond markets, tofinance its operations, construction expenditures and other business requirements, and to refund maturing debt thaicannot le funOea entirely by intemal cashflows. Disruptions in capital markets, including but not limited to, the ongoing COVID-19 pandemic or political unrest, could adversely affect our i6ility to accessshort-term and long-term financing. Our access to funds under committed credit facilities, which are cunenfly provided by a number of banks, is dependent onthe ability of the participating banks to meet their funding commitments. Those banks may not be able to meei their funding commitments if they experienceshortages of capital and liquidity. Disruptions in the bank orcapital financing markets as i result of economic uncertainty, dhanging or increasei regulation of thefinancial sector, or failure of major financial institutions, or disruptions in credit markets, could adversely affect NW Holdings, an-O 1'W Natural,s acdss to capitaland negatively impact our ability to run our businesses and make strategic investments.
NW Natural is cunently rated by S&P and Moody's and a negative change in its credit ratings, particularly below investment grade, could adversely affect its costof bonowing and access to sources of liquidity and capital.
Such a downgrade could further limit its access to bonowing under available cr€dit lines. Additionally, downgrades in its cunent credit ratings below investmentgrade could cause additional delays in NW Natural's ability to access the capilal ma*ets while it seeks supflemental state regulatory apprJvd, which couldhamper its ability to access credit markets on a timely basis. NW Holdings' credit profile is largely support6d Oy ttW Natural's iredit iatings and any negativechange in NW Natural's credit ratings would likely negatively-impact NW Holdings'ac@ss to iourcei of liquidiiy and capital and cost of b'onowing. n cr;Oitdorngrade to NW Natural, or resulting negative impact on NW Holdings, could also require additionat supilort in tfre torh of letters of credit, cash or other formsof collateral and otherwise adversely affect NW Holdings' or NW Natural's financial condition and results oi operations.
lllPAlRIrENT OF LONG'LIVED ASSETS OR GOODWTLL RISK. lmpairments of the value of long-tived assots or goodwitl could have a mateial effect on NWHoldings' or NW Natural's financial andition, or results of operations.
NW Holdings and NW Natural review the carrying value of long-lived assets other than goodwill whenever events or changes in circumstances indicate thecarrying amount of the assets might not be recoverable. The determination of recoverability is based on the undiscounted-net cash flows expected to resuft fromthe operation ofsuch assets. Projected cash flows depend on the future operating costs and projected revenues associated with the asset.
We review the carrying value of goodwill annually or whenever events or changes in circumstances indicate that such carrying value may not be recoverable. Agoodwill. impairment analysis begins with a qualitative analysis of evenE and circumstances. lf the qualitative assossment indicates that the carrying value maybe at risk, we will perform a quantitative assessmonl and recognize a goodwill impairment for any amount in which the fair value of a reporting unit exceeds itjfair value' NW Holdings'total goodwill was $69.2 million as of December 31,2020 and $49.9 mil[ion as of December 31, 2019. The increase in the goodwillbalance was due to additions associated with acquisitions in the water sector. All of our goodwill is related to water and wastewater acquisitions. There havebeen no impairments recognized for the water and wastewater acquisitions to date. Any impairment charge taken with respect to our long-lived assets orgoodwill could be material and could have a material effect on NW Holdings'or NW Naturai's financial condition and results of operationsi.
CUSTOIilER COI{SERVATIOi{ RISK. Cuslomers' conseruation effofts may have a negative impact on NW Hotdings' and NW Naturats reyenues.
An increasing national focus on energy conservation, including improved building practices and appliance efficiencies may result in increased energyconservation by customerc. This can decrease NW Natural's sales of natural gas and adversely affect NW Holdings' or NIV Natural's results of opeiitionsbecause revenues are collected mostly through volumetric rates, based on lhe amount of gas iold. ln Oregon, NW Natural has a conservation tariff which isdesigned to recover lost utility margin due to declines in residential and small commercial customers'consirmption. However, NW Natural does not have aconservation tariff in Washington that provides it this margin prolection on sales to customers in that state, Similar conservation risks exist for water utilities.Customerc' conservation efforts may have a negative impact on NW Holdings' and NW Natural's financial condition, revenues and results of operations.
WEATHER RISK. Warmer than average weather may have a negative impact on our revenues and resufts of operations.
We are exposed to weather risk in our natural gas business, primarily at NW Natural. A majority of NW Natural's gas volume is driven by gas sales to spaceheating residential and commercial customers during the winter heating s6ason. Cunent NW Natural rates are baled on an assumption oi "rerage weather.Warmer than average weather typically results in lower gas sales. Colder weather typically results in higher gas sales. Although the effects of warmer or colderweather on utility margin in Oregon
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are expected to be mitigated through the operation of NW Natural's weather normalization mechanism, weather variations from normal could adversely affect
ugtity rirargin because liw Natural may be required to purchase more or less gas at spot rates, which may be higher or lower than the rates assumed in its PGA'
Also, a portion of Nw Natural's oregon residential and commercial customerdusually less than 10%) have opted out of the weather normalization mechanism,
and approximalely 12%of its custoirers are located in Washington where it dols nothave a weather normalization mechanism. These effects could have an
adverii effect on NW Holdings' and NW Natural's financial condition, results of operations and cash flows.
Water Business Risks
WATER SECTOR BUSINESS. NW Hotdings has entered the water sector through the acquisition of a number ol water and wastewater companies. water and
wastewater businesses are subjectto a number of isks in addition to fhe n'sks descibed above.
Although the water businesses are not cunently expected to materially contribute
above that could adversely affect their results
to the results of operations of NW Holdings, these businesses are subject to
risks, in addition to those described of operations, including:
contamination of water supplies,including water provided to customers with naturally occuning or human-made substances or other hazardous materials;
intenuptions in water supplies and service, natural disasters and droughts;
conservation effrcrts by customers;
regulatory requirements and proceedings; and
weather conditions.
Significant losses, liabilities or impairments arising ftom these businesses may adversely afiect NW Holdings' financial position or results of operations.
lNvEsTlutENT RISK. NW Holdin gs' expectations with respect to the financial results of its investments in water operations are based on vaious assumptions and
beliefs that may not prove accirate, resufting in failures or delays in achieving expected retums or performance'
NW Holdings, expansion into the water sector is an important component of its growth strategy. Although NW Holdings expects its water and wastewater utility
operations-will result in various benefits, including expinding customer bases, providing investment opportunities through inftastructure development and
enhancing regulatory relationships within the locil communilies served, NW Holdings may not be able to realize these or other benefits' Achieving the
anticipate? bjnefits is subject to a number of uncertainties, including whether the businesses acquired can be operated in the manner intended and whether
costs to finance the acquisitions and investments will be consistent ivith expectiations. Events outside of our control, including but not limited to regulatory
changes or developments, could adversely affect our ability to realize the anticipated benefits from building NW Holdings' water platform- The integration of . .
newti acquireo wa'ter businesses may be unpredictable, "uu;".t to delays or changed circumstances, and such businesses may not perform in accordance with
or, "*p"it"tions. ln addition, anticipaied costs, level of manigement's attention and internal resources to achieve the integration of the acquired businesses
miy differ signilicanly from our cunent estimaies resulting in iailures or delays in achieving expected retums or performance. lf NW Holdings' expectations
regarding the financial results of its investments in water operations prove to'be inaccurate, it may adversely affect NW Holdings' financial position or results of
operations.
ITEM 18. UNRESOLVED STAFF COMMENTS
We have no unresolved staff comments'
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ITEM 2. PROPERTIES
NW Natural's Natural Gas Distribution Prooerties
NW Natural's natural gas pipeline system consists of approximately 14,000 miles of distribution and transmission mains and approximately 10,000 miles ofservice lines located in its territory in Oregon and southwest Washington. ln addition, the pipeline system includes servioe pipetines, meters and regulators, andgas regulating and metering stations. Natural gas pipeline mains are located in municipal streets or alleys pursuant to franihise or occupation ordinances, incounty roads or state highways pursuant to agreements or permits granted pursuant to statute, or on lands of others pursuant lo easements obtained from theowners of such lands. NW Natural also holds permits for the crossing of numerous railroads, navigable waterways and smaller tributaries throughout our entireservice tenitory.
NW Natural owns service building facilities in Portland, Oregon, as well as various satellite service centers, garages, warehouses, and other buildings necessaryand useful in the conduct of its business. Resource centers are maintained on owned or leased premises at convenient points in the disfibution sys-tem toprovide service within NW Natural's service terrilory. NW Nalural also owns LNG storage facilities in Portland and near tewport, Oregon.
NW Natural commenced a 2}-year lease in March 2020 for a new corporate operations center in Pordand, Oregon.
Nrvl/ Natural's Mortgage and Deed of Trust (Mortgage) is a first mortgage lien on substantially all of the property constituting NW Natural's natural gas distributionplant balances.
These properties are used in the NGD segment.
NW Natural's Natural Gas Storage Propertles
NW Natural holds leases and other property interests in approximately 12,0N net acres of underground natural gas storage in Oregon and easements and otherproperty interests related to pipelines associated with theso facilities. NW Natural owns rights to depleted gas reiervoirs near Mist, bregon that are continuing tobe developed and operated as underground gas storage facilities. NW Natural also holds all future storagC rights in certain other areas of the Mist gas field iriOregon in addition to other leases and property interests.
A portion of these properties are used in the NGD segmenl.
NWN Water's Dlstribution Properties
NWN Water owns and maintains water distribution pipes, storage, wells and other infrastructure and wastewater tr6atment facilities, and holds related leasesand other property interests in Oregon, Washington, ldaho and Texas. Pipelines are located in municipal streots or alleys pursuant io franchise or occupationordinances, in county roads or state highways pursuant to agreements or permits granted pursuant to statute, or on lands'of others pursuant to eas€mentsobtained from the owners of such lands. These properties are usod by entities that ar6 aggregated and reported as other under N\Al Holdings.
We consider all of our properties cunently used in our operations, both owned and leased, to be well maintiained, in good operating condition, and, along withplanned additions, adequate for our present and foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
Other than the proceedings disclosed in Note 18, we have only nonmaterial litigation in the ordinary course of business.
ITEM 4. MINE SAFEry DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUIry SECURITIES
NW Holdings' common stock is listed and trades on the New York Stock Exchange under the symbol NWN.
There is no established public trading market for NW Natural's common stock.
As of February 16,2021, there were 4,614 holders of record of NW Holdings' common stock and NW Holdings was the sole holder of NW Natural's common
stock.
The following table provides information about purchases of NW Holdings' equity securities that are registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended, during the quarter ended December 31'2020:
lssuer Purchases of Eouitv Securities
Total Number of Shares
Purchased as Part of
Period
Total Number
of Shares Purchased(1)
Average
Price Paid per Share
Publiclv Announced Plans or' Proqrams(2)
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the Plans or
Programs(z)
Balance foruvard
10t01t20-10131120
11t01t20-11130120
12t01t20-12131120
Total
2,124,528 $16,732,648
1,556 49.30
1,556 2 124,528 $ 16,732,M8
During the quarter ended December 31 , 2020, no shares of NW Holdings common stock were purchased on the open market to meet the requirements of our Dividend
Reinvlstment and Direct Stock purchase plan. However, 1,556 shares of NW Holdings common stock were purchased on the open market to meet the requirements of
share.based compensation programs. During the quarter ended December 31, 2020, no shares of NW Holdings common stock were accepted as payment for stock
option exercises pursuant to the NW Natural Restated Stock Option Plan.
Dlring the quarter ended December 31,2020, no shares of NW Holdings common stock were repurchased pursuant to the NW Holdings Board of Directors'approved
share-repurchase program. ln May 2019, we received NW Holdings Board of Directors approval to extend the repurchase program through May 2022. For more
information on this program, see Note 5.
ITEM 6. SELECTED FINANCIAL DATA
Omitted in accordance with SEC regulations.
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$
$
$
(1)
t2)
Table of Contents
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERAT]ONS
The following is management's assessment of NW Holdings' and NW Natural's financial condition, including the principal factors that affect resutts of operations.Thediscussion-coverstheyearsendedDecember3l,2oro,2olg,and2018andreferstotheconsolidatedresuftsof NWHoldings,thesubstantialmajorityofwhich consist of the operating results of NW Natural. when signific,ant activity exists at NW Holdings that do€s not exisl at NW Natural, additional disclosure hasbeen provided. References in this discussion to 'Notes' are to the Notes to the consolidated Finaicial statements in ltem g of ttris report.
-
NW Natural's natural gas distribution -activities are report3{!1 the natural g_qs distributio-n (NGD) segment. The NGD s€gmenr also inc-ludes NWN Gas Reserves,which is a whollv-owned subsidiary of Energy corp, the NG.D-portion or NW ultuiar'"raiii-itoiJdtZiiiiiv-ii <irig"n, an-d Nw Natural RNG Hotding company,LLC. other activities aggregated a'nd reported as bther at NW'Naturat inauae ine non-Neo JtorZgeidii'iitv at'uiJtiJ*e1;;;;i;;;a!ement services andthe appliance retail center oper-ations- ^other activitielaggregated and reported as ottrer aillw- niroi.gi'ftild; NWrl E;;ArC"qi,itv-inrEit n"nt in Trail westHoldings, LLC (TWH) through August 6, 2020; NNG Fin-a-nciil's investmdnt in keiio-e""vei Fipeiil; iftB pirfi;."); and NWN water, which through itsetf or itssubsidiaries, owns and continues to pursue investments in the water sector. see Note + tor turttrer oiicussi,in oi riur nusinesi ;;6;i;il'"ther, as well as ourdirect and indirect wholly-owned sub3idiaries. See Note 14 for information on our fuH investment.
ln addition, NW Holdings has reported discontinued operations results related to the sale of Gill Ranch storage, LLc (Gill Ranch). NW Natural Gas storage, LLC(Nw.\ Gas storage), an indirect wholly-owned subsidiary of NW Holdings, entered inlo.a Purchase ana sate"nireement during the second quarter of 2o1g thatproMded for the sale of all membership interesb in Gi[ Aanch. Gill Ranih own s a 75% interest in nJ nat i"i ga:s storage facility located near Fresno, califomiaknown as the Gill Ranch Gas storage Facility. For more information, see 'Results of Operations - oiscoiiinffii operatrbns, below.
NoNGAAP FINANCIAL tEAsuREs. ln addition to presentin-g.the- results of operations and eamings amounts in total, certain financial measures are expressed incents per share, which are non'GMP financial moasures. Al references in this sidion to eJningl peiirrii" il'psf are on the basis of diluted shares. we usesuch non'GAAP financial me..asures to analyze-our financial performance uecausi we ueriere irieVrlr&i-dilridt r information to our invostors and creditors inevaluating our financial condition and resulti of operations, our non-GnAF nn-antai measures sh6uH not be considered a substitute for, or superior to,measures calculated in accordance with U.S. GAAP,
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EXECUTIVE SUMMARY
Our core mission is to provide safe, reliable and affordable essential utility services in an environmentally responsible way to better the lives of the Public we
serve. Highlights for the year include:
customers in 2020 for an annual growth rate ol 1 .5o/o at December 31 , 2020;Added nearly 1 1,600 natural gas
services and assist our most vulnerable community members during COVID-19;Continued to provide customers with essential natural gas and water utility
lnvested $273 million in natural gas and water utility systems to support growth and greater reliability and resiliency;
customers and invested in our firstCompleted rule-making for Oregon Senate Bill 98 enabling NW Natural to procure renewable natural gas (RNG) for
development project to convert methane into RNG;
Scored second in the West among large utilities in the 2020 J.D. Power Gas UtilitY Residential Customer Satisfaction Study;
Concluded the Oregon general rate case with a revenue requirement increase to support growth and system investments;
Filed a multi-year general rate case in Washington requesting a revenue requirement increase;
Announced that NW Natural is working toward a renewable hydrogen facility with a partner in Oregon;
Closed five water and wastewater utility transactions in 2020, bringing
lncreased dividends for the 6$h consecutive year to shareholders'
our total mnnections to approximately 26'000; and
Key financial highlights for NW Holdings include
2020 2019 2018
Amount Per Share Amount Per Share Amount Per Share
ln millions 70.3 $ 2.30 $6.5 0.21
65.3 $ 2.19 $ 67.3 $ 2.33(2.7) (0.0e)
$ 64.6 $ 2.24
Net income from continuing operations
lncome (loss) from discontinued operations, net of tax
Consolidated net income
$
(3.6)(0.12)
$ 76.8 $2.51 $ 61.7$ 2.07
Key financial highlights for NW Natural include:
2020 20'19 2018
Amount Amount Amount
ln 70.6 $69.0 $68.0
(1.7)Net income from continuing operations
Loss from discontinued operations, net of trax
Consolidated net income
Natural gas distribution margin
$
$
70.6 $
438.1 $
6e.0 $
422.7 $
66.3
383.7
2020 COMPARED TO 2019. Consolidated net income increased g1.6 million at NW Natural primarily due to the following factors:
. a $1 5.4 million increase in NGD segment margin driven by the 2020 oreg,on-and 2ol d washington rate cases and residential customer growth; and
. a $7.9 million decrease in other expense, net primarily r"t"t"o to higher. io19 pension elPepel (L91-s.9ryice cost component) recognized as part of the
setlement and recovery of NW Natural,s pension u"i'in"ing icCourit, which *i. prirrriiiofrset witnin NGD margin anci income tax benefits (as discussed
below) and which did not recur in 2020; partially offset by. a $13.6 million increase in depreciation expense anJgeierat taxes due to property, plant, and equipment additions, as we continued to invest in our gas
utility system; and. a $7.0 million increase in income tax expense primarily due to 2019 including an income tax benefit related to the retum of defened rcJA benefits to
customers and the regulatory pension disallowance, and higher pre-tax income.
Net income from continuing operations increased $5.0 million at NW Holdings primarily due to the following factors:
. a $1.6 million increase in consolidated net income at NW Natural as discussed above; and
. a $3.4 million increase in other net income primarily reflecting higher eamings at our water and wastewater utilities that have been acquired since 2019'
2019 COMPARED TO 201g. NW Holdings'net income from continuing operations decreased $2.0 million and NW Natural's net income from continuing operations
increased $1.0 million.
ln March 2019, the OPUC issued an order resolving the remaining open items from NW Natural's 2018 Oregon general rate casg-ry9^arll19.recovery of the
pension balancing account and treatment of the benefits associatid with the TCJA. As a result of the order,ln the first quarter of 20'19, NW Natural recorded a
disallowance and several benefits and expenses through the consolidated statements of comprehensive income as follows:
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Pension balanclng account. Approximately $12.5 million in prwiously defened pension expenses were recognized of which approximately $4.6 million wasrecorded in operations and maintenance expense and $7.9 million was recorded in other income (expense), net. These charges were offset with acorresponding increase in revenue of $7.1 million and in income tax benefits of $2.7 million as theorder required the offset oicertain defened TCJA benefitsagainst the pension balancing account. Additional TCJA income tax benefits were realized throughout 2019 to offset the remainder of the 912.5 million charge.
NW Natural also recognized a regulatory pension disallowance of $10.5 million with approximately $3.9 million recognized in operations and maintenanceexpense and $6.6 million recognized in other income (expense), net, partially ofiset by related distrete income tax binefits of |i1.i million. Lasily, NW Naturalrealized $3.8 million of defened regulatory interest accrued on the pension balancing account.
Deferred TCJA benellte and timing varlance. ln addition, the OPUC ordered the retum of approximately $6.3 million of excess defened income taxes associatedwith plant and gas reserves annually beginning April 1, 2019. As a result, NW Natural recognized approximately g2.0 million in income tax benefits in the firstquarter of 2019. Reductions to customer billings commenced April 1, 2019 and ofhet these income'tax benefits in total by the end of 2019. NW Natural willcontinue reductions to customer billings and recognition of defened income tax benefits in subsequent years until all benLfits have been returned.
The increase of $1.0 million at NW Natural was primarily due to the following factors:' a $39.0 million increase in NGD segment margin driven by new customer rates from the 2018 Oregon rate case and 2019 Washington rate case, customergrowth, and lease revenue from the North Mist storage facility; the remaining increase primarily relates to $7.1 million in revenues ihich were ofiset bypension expenses due to the OPUC order as discussed above;
' a $9.4 million decrease in NGD segment income tiax expense primarily due to the income tax imptications of the March 2O1g OPUC order, of which $S.4million was ofiset by pension expenses as discussed above, with the remainder driven by the reiurn of defened TCJA benefit credits to customers and lowerpretiax income in 2019 compared to 2018; and' a $5.8 million increase in defened regulatory interest income in other income (expense), net, of which $5.1 million relates to interest recognized inassociation with the OPUC order discussed above; offset by' a $34.4 million increase in pension costs within operations and maintenance exp€nse and other income (expense), net, of which $,12.S million relates tocosts which were entirely offset by revenu€s and income tax benefits as discussed above, and $10.5 miliion relates to the regulatory pension disallowancediscussed above. ln addition, there was an $1 1.4 million increase in pension expenses as NW Natural began collecting ongoing penion costs throughcustomer rates on November 1 , 2018 and began collecting deferred pension costs through customer ratei on April t , iOt S rathei than defening a p6rtion tothe balancing account;
' a $5.4 million increase in depreciation and amortization primarily due to additional capital expenditures;' a $5.4 million decrease in non-NGD segment operating revenues due to lower asset management revenues and increased asset management revenuesharing with Oregon customem as a result of the 2018 Oregon rate case;' a $4'6 million increase in NGD segment interest expense due to higher interest on long- and short-term debt balances; and' a $2.9 million increase in NGD segment operations and maintenance expenses primarily attributable to annual employee cost increases.
The decrease of $2.0 million at NW Holdings was primarilydriv-en by increases in professional service costs and expenses associated with developing the waterbusiness, partially ofrset by the increase of $1.0 million at NW Natural.
COVID'19 AND CURRENT ECONOilIC CONDflONS. The novel coronavirus (COVID-19), which was declared a pandemic by the World Health Organization inMarch 2020, has resulted in severe and widespread global, national, and local economic and socielal disruptions. ln Oregon and Washington, where we servenatural gas and water cuslomers, stay-at-home orders were issued in March 2020. Orders were also issued in March in ldaho and Texas where we also servewater customers. These and subsequent executive orders required the closure of "non-essential" businesses and permitted the continuation of "essentialservices.'All of the services provided by NW Nahrral and NW Natural Water were considered "essential services" under the executive orders applicable to thejurisdictions in which they operate, and we continue to serve our gas and water customers and proceed with capital investments without intenupiion.
As a critical infrastructure energy company that provides an essential service to our customers, NW Natural has well-defined emergenry response commandstructures and protocols. ln response to the pandemic, NW Natural mobilized its incident command team and business continuity pians-in early March 2020, andcontinues to operate under these structures and protocols, with a focus on the safety of our 1,200 employees and the 2.5 million people, business partners andcommunities we serve. NW Natural has generally suspended business travel out of our service territory and implemented work-from-home plans for employeeswierever possible. For employees whose role requires them to work in the field or onsite, we are following CDC, OSHA, and state specific requirements. '
Measures include: following social distancing guidelines; use of personal protective equipment (PPE) including masks, face coverings and gloves; enhancedsanitizing protocols; requiring employee health screenings prior to entering a NW Natural facility; and other measures intended to m'itigate tle spread of thisdt9e31e and keep our employees and customers safe and informed. Our water companies are iollowing similar protocols. ln addition, ive are working with stateoffcials to provide our essential field and onsite workers access to the vaccine during the coming months. We remain vigilant regarding the safety oiourcustomers and employees.
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Currengy, our service tenitories are in various phases of reopening, which has permitted the reopening of many businesses that were considered non-essential'
Certain oi the reopened businesses are operating under coniinued'restrictions ielated to patron capacity for retail stores and outdoor-only seating for restaurants
in Oregon, among other restrictions to prevent further spread of COVID-19.
To support our customers in this unusual time, in March 2020, NW Natural temporarily stopped charging late fees and disconnecting customers for nonpayment.
Nw ilaiural also provided oregon natural gas customers with annual bill creoiti primarily in'June totaling approximately $17.0 million related to NW Natural's
revenue sharing mechanism. Through term sheets with the Oregon and Washington Commissions, we have agreed to timelines for resuming our normal
business practiies such as beginnin-g collection processes whilJ also providing financial assistance and payment plans to our most vulnerable customers.
From a financial perspective, the initial timing of the onset of the COVID-19 pandemic in March 2020 and resulting economic disruption in.the United States
coincided with the end of the pacific Northwest 2019-20 winter heating season and although it has continued into the 2020'21 winter heating season, the
financial effects were moderated by our regulated utility business modl-el, our natural gas customer base being predominately residential, and temporary cost
savings initiatives that were implemented by managemenl. For 2020, we estimate the total financial effects of CoVID-19 to be approximately $10 million pre-tax
with tie impact partially mitigatLo by regulaiory oeflrrals and temporary costsaving_s measures. We incurred $4.8 million of CoV|D-related costs that were
defened to a regulatory ass6t for re'cov"ry in a future period. Theie coits included PPE supplies, estimates for bad debts, and interest expense associated with
financing related activiiies undertaken to support liquidity during the pandemic, nel of direct cost savings such as lower travel and meals and entertainment
erpen.js. ln addition, we expect to recognizi revenue iir a futrire period for an additional $1.3 million related to forgone late fee revenue..we also experienced
additional financial implicatioii of"ppioiir"t"ly $3.8 million pre-tax that will not be recovered through rates primarily due to lower natural gas distribution
margin from customers that stopped natural gai service and io*er usag" from customers that are not covered under decoupled rate schedules. The financial
impicts were mitigated in part by approximately $3.5 million in temporary cost savings initiatives.
During 2020, NW Natural increased the allowance for uncollectible accounts by $2.4 million to $3.1 million. Our allowance for residential and commercial
uncoliectible accounts estimate increased lrom 0.1o/o of gas sales to approximately 0.4olo of gas sales for the year ended December 31 , 2020'
At the onset of the pandemic, in March 2020 as a precaution to strengthen our liquidity and guard against volatile markets as the COVID-19 pandemic unfolded'
we took the following stePs::-- -NW flitrr"f diiw $227 million on its credit facility and subsequently repaid the full amount during the second quarter;
. NW Holdings drew $35 million on its credit facility and repaid $27 million as of December 31, 2020;
. NW Natural borrowed 9150 million pursuant to a364day term loan and subsoquently repaid the full amount in October 2020; and
. NW Natural issued gtdO million 36-year first mortgage b-onds with an interest rate of 3.6%, which was primarily to support its capital expenditure prcgram.
The federal CARES Act was signed into law on March 27 ,2020 to provide direct and indirect financial support to individuals, businesses, state and local
govemments, and the healthcaie system in response to COVID-19. As provided for in the CARES Act, we deferred remittrance of the employer portion of the
Sociat Securiiy payroll tax from Maich through becember g1, 2020, when the provision ended. This resulted in $4.7 million of defened payroll taxes that we
expect to remit under the CARES Act guideli-nes, which require half of the tax iiaoitity to be paid by December 31, 2021 and the remaining half to be paid by
December 31 ,2022.
We have taken additional actions in response to known issues arising from the trends related to the COVID-19 pandemic. For example, we have enhanced
cybersecurity monitoring in response to reports that cybersecurity attickers ar6 more active with much of the economy utilizing work from home protocols. Like
oihers, *e eiperienced some constraints on our ability to obtain
-lrPE and disinfecting supplies, but currently believe that we have sufficient supplies to continue
our work and continue to procure additional supplies ind most efficiently utilize those supplies we have on hand. We have not experienced material disruptions
in our supply chain for goods and services to daie, but are continuing to actively monitor, and have formulated and continue to evaluate contingency plans as
necessary.
We remain vigilant in monitoring how the phased re-openings of the territories in which we operate progress and any reinstitution or Possible reinstitution of
restrictions, and we are activel/monitoring several key metrics, While we are unable to predict the length, severity or impacts of the C-oVlD-19 pandemic and
economic disruptions on our business, thj potential for a resurgence or mutation of the virus, or timing, widespread availability and efficacy of vaccine
implementation, we have the following expectations and beliefs currently:. Both NW Natural and NW Natural Water expect their capital projects in2O21 lo move fonrard as planned'
. NW Natural,s customergrowth rate is afeAbO by both new meter connections and when existing customers close their accounts and disconnect their
meters. customer growth from construction and conversions remained strong during 2020. A slow economic recovery could result in a decline in new meter
connections, which could adversely affect margin in 2o21 and the following periods. ln addition, we are closely monitoring our approximately 70'000
commercial and industrial natural gas meters, as a substantial decline in these meters could materially affect margin in 2021 and the following periods' A
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disconnection may occur if circumstances require businesses, such as restiaurants, retailers, and those in the hospitality sector, to temporarity orpermanently close' When we cease suspending disconnections, we may experience a higher level of disconnections. We don,t anticipate significantresidential meter disconnections.
' NW Natural has seen lower utility margin from a reduction in overall sales volumes.during the year ended December 31, 2020 attributed to COVID-1g,primarily related to the loss of commercial customers as described above. Due to the seisonaiity of il!". utility business, "r" ,"y i"" more substantialdeclines in volumes as our peak heating season progresses, depending on the level of reopeninls anJ risiliency of businesses in the communities in whichwe sorve. However, volumes do not translate directly to eamings as the majority of our NGb maigin is not dependent on volumes.' While we have begun retuming to normal business practices for many commercial and industrial iustomers in certain jurisdictions, our residentialcustomers' retum lo normal practices may be extenrted based on the liming, availability and efficacy of vaccine rollout and timing of economic recovery.Therefore, the recognition of late and disconnection f9e evenue may be oJlayed beyond our curr"nt -rp"a"tionr.
' As the pandemic has continued into the 2020-2021 winter heating season, ce-rtain customerc are faced with seasonally higher natural gas usage anct bills.This could have a financial strain on our customers and impact thLir ability to pay their bills in a timely manner tfrus potentially increasing our working capitalneeds.' While we defened to a regulatory asset certain COVID-related financial impacts as agreed upon with regulators, ultimate recovery of these costs andprudence review will be determined through a separate proceeding and may be subjJct b modification is a result of tho." proo6Ain!..
Given the evolving nature of the pandemic and resulting economic conditions, we are. continually monitoring our business operations and the larger trends anddevelopments to take additional measures we believe are wananted to continue providing safe ind reliable-service to our customers and communities whileprotecting our employees.
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2021 oUTLOOK
ENSURING SAFE AND RELTABLE SERVICE. Delivering our products safely and reliably to customers, while keeping our employees safe' is our first priority' At
NW Natural, we remain focused on safety and emergency response through hand+oh, scenario-based training for employees' third-party contractors, and first
responders. The reliability, resiliency and safety ot our ga's .vJt", i. "rili"Il and 1o this end, we remain focused on investing in necessary upgrades and
replacing key system components, preventing thhd-party damages, and performing.regular inspections and assessments. safety for our gas infrastructure also
includes maintaining and strengthening our cybersecrri( oerenies, upgiading te/teclnology systems, such as our enterprise risk planning system and
customer information system over the next several yeari, and preparih! for large-scate eme-rgency events, such as seismic hazards. our water and wastewater
utilities are focused on executing on their capitat exienaiiure pi"n" to e-nsure ;ntinued safe ind reliable service to customers and enhancing plans to be able to
readily prioritize capital investments.
pRovlDlNG supERloR cusrolrER EXPERIENCE. we have a legacy of providing excellent customer service and a long-standing dedication to continuous
improvement, which has resulted in NW Natural consistentty r""6iriig trigtr ranki-ings in the J.D. Power and Associates customer satisfaction studies and more
recengy in Escalent,s congent trusted brand and crstoreilngagemEnt iesidentia] customer study, earning NW Natural the designation of customer champion
for the last several years. During 2020, we also implemented Jevlral new customer facing technologies including a new website, € streamlined customer
onboarding process, and new literactive voice Response (lVR) system. ln 2021,we inteid to fully optimize this new technology to enhance our natural gas
customers, experience and meet their evolving expectationl. we'li also plan for the next upgrades, which will be centered on our customers' most frequent
interactions and highest value touchpoints'
AOVANCTNG CONSTRUCTTVE LEG|SI-ATME POL|CIES At{D REGULATTON. NW Natural has a history of working productively with lawmakers and regulators' Most
recenfly in2o2o,rulemaking was completed on the groundbreaking oregon senate Bill 98 that allows gas utilities to procure and invest in renewable natural gas
for their custom erc. ln 2o21",we,ll continue to proactiveti communiLte riitn pdicymakers and other stakeholders about what we believe is the important role of
the gas system in achieving climate goals for our commlnities, and work wiin the American Gas Association to provide education on the role of natural gas in
energy infrastructure at the'nitional ievel. with regulators, we'il striu" to work productively on open proceedings, taking care of customers during the pandemic,
and pursuing recovery of deferred costs related to covto-ts. NW Natural will'also continue working with th6 EPA and other stakeholders on an environmentally
protoctive and cost-effective clean-up for the portland Harbor Superfund Site. For our water utilities, we are focused on working collaboratively with regulators,
pursuing efiicient approval processes for acquisitions, tiiing geneiar rate cases where needed to support investments, and engaging in constructive regulatory
proceedings.
ENABLING CUSTOITER cRowTH. Natural gas is a prefened energy choice in our service territory given its affordable' efficient' and reliable qualities and often
preferred by homeowners for heating and cooking. we are focuset on leveraging these key attriLules to capitalize on our region's continued strong housing
growth. We,ll strive to continue growing our market share in the residential sectoi and multiiamily developments, but believe commercial customer growth may
be modest in 2021 as the pandemic has placed additional restrictions on small businesses, such as retail stores and restaurants, in our region. At NW Natural
water, we continue to be tocused on supporting the fastgrowing communities we cunently serve and continuing our disciplined acquisition strategy'
LEADING ON DECARBONTZATION. we are deeply committed to a clean energy future and environmental stewardship' lts why NW Natural launched a low-
carbon initiative in 2017 to reduce emissions in the communities we serve by-leveraging our modern natural ga_s pipeline system in new ways, working closely
with customers, policymakers and regulators, ano emuracing cutting-edge t6cnnordy. in 2020, under.oregon sB 98, NW Natural began a partnership with
BiocarbN, a developer anJ op"r"tor-ot rrstainable infrastru-cture poiecis, to convei-methane into RNG. under this partnership, NW Natural has the ability to
i.r"rt ,p io ". estimated $3ti miilion in four separate RNG development projects that will access biogas derived from water treatment at ryson Foods'
processing plants. ln 2021, NW Natural intends to continue striving to execute on our renewable straiegy by helping ourcustomers reduce and offsettheir
consumption, to procure and invest in RNG for our customers und-er oregon Senate Bill 98, execute on our RNG interconnection proiects, continue developing
voluntary renewable product offerings for our customers, and explore ren-ewable hydrogen. We also intend to leverage technology and relationships to examine
ways to ieduce emissions across thL entire value chain from suppliers to end-use heating appliances.
We expect to make significant progress on our long-term objectives in the coming year. Our natural gas distribution business is focused on providing safe,
reliable, and afiordable energY in an environmentally responsible way to better the lives of the public we serve. Our water and wastewater utility business is
committed to providing its customers with safe, clean, reliable and affordable water and wastewater services,while also continuing to grow organically and
through acquisitions. ln2021, we remain focused on the strategic pillars of our business: ensuring safe & reliable service; providing superior customer service;
advancing constructive legislative policies and regulation; enabling customer growth; and leading on environmental stewardship and decarbonization
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NW Holdings dividend highlights include:
Per common share 2020 2019 2018paid1.9125 1.9025 $
ln January 2021, the Board of Directors of NW Holdings d-e9119! a quarterly dividend on NW Holdings oommon stock of $0.4g00 per share, payable onFebruary 12, 2021' to shareholders of record on Januiry 29, 2021, rinectini an indicated annual dividend rate of $1.92 per sharel
see 'Financial condition - Liquidity and capital Resources' for more information regarding the NW Holdings and NW Natural dividend policies and regulatoryconditions on NW Natural dividends to its parent, NW Holdings.
RESULTS OF OPERATIONS
Reoulalory ilafters
Regulation and Rates
ilATURAL GAs DlsTRlBUTloN. NW Natural's natural gas distribution business is subject to-regulation by the OpUC and WUTC with respect to, among othermatters, rates and terms of service, systems of accounts, and issuances of securitiei by NW i,latural. ti zozot,approximately gg% of NGD customors werelocated in oregon, with the remaining 12% in washington. Earnings and cash flowsfrom natural gas aistriuuiion operations are largely determined by rates setin general rato cases and other proceedings in oregon and.washinglon. They are a!s9 affected o-i"eairrer, ine local economies in oregon and washington, thepace of customer growth in the residential, commercial, and industrill marketi, and NW ttaturalslOltit'y to rb*"in price competitive, control expenses, andobtrain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including 6p;Aiil expenses and investment cosh in plant andother Egulatory assets. See "Most Recent Completed Rate Cales" below.
MIST INTERSTATE GAs STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OpUC, WUTC, and the Federal EnergyRcgulatory-C-omrnission (FERC) with respect to, among other malers, ratls and terms oiservice.-rne opdc also regulates the intrastate storage services atMist' while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to beset at or below the cost of service as approved by each agency in their last regulatory filing. The opUC scnedule g0 rates are tied to the FERC rates, and areupdated whenever NW Natural modifies FERC maximum rates.
orHER' ln June 2018, NWN Gas Storage, a wholly-owned subsidiary of NW Holdings, entered into a purchase and sale Agreement for the sale of all of itsownership interests in Gill Ranch, a.n9fu.ral gas.sl6rage facility locar6d near rresnolialifornia. rrre iare croilo on December 4, 2020. See Note 19 for moreinformation. The wholly-owned regulated wJter busin6sses ofNwN watei. ryt'oiryo"rneo suosioiary & Nw tiotoings, are subject to regulation by the utilitycommissions in the states in which they are located, which cunently includes oielirn, Washington,-ldat o, "no i"r"".
Most Recent Completed Rate Cases
oREGoN' on october 16'2020, the oPUc issued an order.concluding NW Natural's general rate case filed in December 2019 (order). The order provides for atotal revenue requirement increase of approximately $45 million over rlvenues from eiisting rates. The ,evenre requirement is based on the followingassumptions:. Capital structure of 50% common equity and S0% long-term debt;. Return on equity of g.4o/o;. Cost of capital of 6.965%; and. Average rate base of $1.,14 billion or an increase ot $242,1 million since the lasf rate case.
Under the terms of the order, NW Natural was authorized to begin to recover the expense associated with the Oregon Corporate Activity Tax (CAT) as acomponent of base rates. See *Corporate Activity Tax" below.
ln NW Natural's previous oregon rate case in March 2019, the oPUC ordered spocific t6rms by which excess deferred income taxes (EDIT) associated with theT3* 9'5. ?.n-9 Jobs Act (TCJA) would be provided to customers directly or applied for the beneit of customers. The order in the most i"ceni oregon rate casedirects NW Natural to include a true-up credit to customers of approximatery $t.o million as a temporary rate aajustment to be amortized overthe 2o2o-21 pGAyear.
ln addition, the Order approves the application of NW Natural's decoupling calculation for the months of November and May to the month of April. Thedecoupling mechanism is intended to encourage customers to conserve e-nergy without adversely affecting ""ainga due to reductions in sales volumes.
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DIVIDENDS
Table of Contents
From November 1, 2o1g through october 31 , 2020, the opuc authorized rates to customers based on an RoE ol 9-4o/o, an overall rate of retum ol7 '317%' and
a capital structure of 50% common equity and 50% long-term debt. ln March 2019, the OPUC issued an order resolving the remaining matters of the rate case
regarding recovery of NW Haiurar;s pin.lon balancing iccount and the return of tax reform benefits to customers. For additional information, see "Rate
Mechanisms - pension Cost Detenal and Pension Bilancing Account' and 'Rate Mechanisms- Tax Reform Deferral belant'
WASHINGTON. Effective November 1,2}1g,the wUTC authorized rates to customers based on an ROE ot 9.4% and an overall rate of retum of 7'1617o with a
capital structure of 50.0% longterm debt, 1.0% short-term debt, and 49.0% common equity. The wurc also.authorized the recovery of environmential
remediation expenses allocable to washington cr"tom"is tnrough an Environmental cost itecovery Mechanism (ECRM) and directed NW-Natural to provide
federal tax reform benefits to customers. see ,,Rate Mecrranismi - Environmental cost Defenal and Recovery - washinglon ECRtt'f and "Rate Mechanisms
-Tax Reform Defenal below.
From January 1, 2009, through october 31 , 2019, the wUTC authorized rates to customers based on an ROE ol 10,1o/o and an overall rate of return of 8'4o/o
win a capitaistructure of 51% common equity, 5% short-term debt, and 44% long-term debt'
FERC. NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate
approval or a cost and revenue study to change or justify miint"ining the existing.rates for its interstate storage servicis. on october 12, 2018, NW Natural filed
a rate petition with FERG for revised cost-based miximum rates, which incorporated the new federal corporate income tax rate. The revised rates were effective
beginning November 1, 2018.
NW Natural continuously evaluates the need for rate cases in its jurisdictions.
Requlatory Proceedino Uodates
202t wAsHtNGTON RATE CASE. on Decembe r 1I,2O2O,NW Natural filed a request for a general rate increase with the wUTC. The filing includes a requested
increase in annual revenue requirements over two v""r.,'"""ri"tirg or an aoy"ir 86.3 milli-on increase in the first year beginning !9v-em$r 1, 2021 (Year one)'
and a 3.lo/oor $3.2 million increase in the second v""r ulginning Niovember 1,20i2 (YeatTwo). NW.Naturat is also requesting a $2.2 million' or 3%, offset to
rates in the first year via suspension of amortization of a rigrladry asset associated with NW Natural's energy efficiency programs and via application of
pio"""o. from the sale of relL fropefi in porfland, oregon] which would reduce the Year one rate increase to approximately 5%'
The requested increase is intended to recover operating costs and investments made in the distribution system, underground storage facility' operations
facilities, including improvements to the resource facilit/in Vancouver, Washington, and upgrades of critical information technology, including NW Natural's
enterpriie t"souti" pianning system, and is based upon the following assumptions or requests:
. iapital structure of 5O7o long+erm debt, 1olo shorl-term debt, and 49% common equity;
. Return on equity ol9.4o/o. Cost of capital of 6.913%; and. Average rate base of 9194.7 million, an increase of $20.9 million since the last rate case for capital expenditures already expended at the time of filing, with
an additional expected $31.2 million increase in yeaibne, and an additional expected $21.4 million increase in Year Two, with the increases in Year one
and Year Two relating to expected capital expenditures in those years'
NW Natural's filing will be reviewed by the wUTC and other stakeholders. The process is anticipated to take up to 11 months. NW Natural has requested that
the new rates take effect November 1 , 2021.
2o2o oREGON &WASHTNGTON DEFERRAL. ln December 2020, avehicle crashed into a williams NW Pipetine district regulator' causing more than 5'500 NW
Natural customers in the Hood River, oregon area and white salmon, washington area to lose natural gas service. NW Natural recorded a regulatory asset of -
approximately $0.g million for costs incurred to restore service. NW Natural filed requests for defenals uiitn tne oPUC and WUTC and plans to seek recovery of
these costs in future ratemaking proceedings.
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GEM STATE WATER COMPANY
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Table of Contents
Rate Mechanisms
During 2020 and 2019, NW Natural's key approved rates and recovery mechanisms for each service area included:
Oregon Washington
2018 Rate Case 2020 Rate Case
(effective l'U112020)2009 Rate Case 2019 Rate Case
(ettediye 'l'l.111201e)
Authorized Rate Structure:
ROE
ROR
DebUEquity Ratio
9.4o/o
73%
5$o/ol50o/o
9.40/o
7.0o/o
500/0150%
10.10/o
8.4o/o
49o/J51o/"
9,40/o
7 -2o/o
51o/ol49oh
Key Regulatory Mechanisms:
Purchased Gas Adjustment (PGA)
Gas Cost lncentive Sharing
Decoupling
Weather Normalization (WARM )
Environmental Cost Recovery
lnterstate Storage and Asset Management Sharing
Annually, or more oflen if circumstances warrant, NW Natural reviews all regulatory assets for recoverability. !f NW Natural should determine all or a rcrtion ofthese regulatory assets no longer meet the criteria for continued application of regulatory accounting, ttren -lVW Natural would be required to write-off the netunrecoverable balances against eamings in the period such a determination was made.
PURCHASED GAS ADJusTirENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon and Washington to reflectchanges in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchasei as well as coni;act supplies, gas
cost hedges, gas costs from the withdrawal of storage inventories, the production of gas reserves, interstate pipetine demand costs, temporary rate'adjustments,which amortize balances of deferred regulatory accounts, and the removal of temporary rate adjustments effe&ve for the previous year.
Each year, NW Natural hedges gas prices on a portion of NW Natural's annual sales requirement based on normal weather, including both physical and financialhedges. NW Natural entered lhe 2o2O-21 gas year with its forecasted sales volumes hedged at 53% in financial swap and option coritracts,'iniluding hedging of567o in Oregon and 28o/o in Washington, and 17o/o in physical gas supplies, including hedging of 18% in Oregon and i 3% in Washington. The percentage of 6tathedged for Oregon was approximately 74o/o and approximately 41% for Washington.
NW Natural is also hedged between 1o/o and 43o/o for annual requirements over the subsequent five gas years, which consists of between ,lo/o and 41o/o inOregon and between 0% and 5870 in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent onweather, economic conditions, and estimated gas reserye production. Also, gas storage inventory levels may increase or decrease with storage expansion,changes in storage contracts with third parties, variations in the heat content of the gas, and/or siorage recail by NW Natural.
ln September 2020, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2020. PGA rate changes were effective November 1,2020. Rates and hedging approaches may vary between states due to different rate structures and mechanisms.
Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby NW Natural is required to select each year an B0o/o defenal or a90% deferral of higher or lower actual gas costs compared to estimated PGA prices, such thai the impact on NW Natural's cunent eahings from the incen1vesharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively. For the 2019-20 and 2OZO-21 gas yi"o, NW Naturalse]ected the 90% defenal option. Under the Washington PGA mechanism, NW Natural defers 100* of the higher or lower actual g"-. co.t", and those gas costdifierences are passed on to customers through the annual PGA rate adjustment.
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EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page 43 of 210
X
x
x
x
x
x
x
x
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EARNINGS TEST REvlEW. NW Natural is subject to an annual earnings review in Oregon to determine if the NGD business is earning above its authorized ROE
threshold. lf NGD business earnings exceed i specific ROE level, then 33% of the amount above that level is required to be deferred or refunded to customers.
Under this provision, if NW Naturalselects the 80% defenal gas cost option, then NW Natural retains all earnings up to 150 basis points abore the cunen{y
authorized RoE. lf NW Natural selects the 90% defenal opti6n, then it retains all earnings up to 100 basis points above the cunenfly authorized ROE. For the
2O1g-20 and 2O2L21gas years, NW Natural selected the 907o deferral option. The ROE threshold is subject to adjustment annually baled on movements in
long-term interest ratei. For calendar years 2018, 2019, and 2020, the ROE threshold was 10.48%, 10.24o/o, and 10.40%, respectively. There were no refunds
,"q-rired for 201g and 2019. NW Natuial does not expect a refund for 2020 based on results, and anticipates filing its 2020 earnings test in May 2021.
cAs RESERVES, ln 2011, the opUC approved the Encana gas reserves transaction to provide long-term gas price protection for NGD business customers and
determined costs under the agreemeni would be recovered on an ongoing basis through the annual PGA mechanism' Gas produced from NW Natural's
interests is sold at then pr"raiing market prices, and revenues from Juch sales, net of associated operating and production costs and amortization, are included
in cost of gas. The cost of gas, iicluding a carrying cost for the rate base investment made under the original agreement, is included in Nw Natural's annual
Oregon p6A filing, which iibws HW Nitural to recover these costs through customer rates. The net investment under the original agreement earns a rate of
retum.
ln 2014, NW Natural amended the original gas reserves agreement in response to Encana's sale of its interest in the Jonah field located in Wyoming to Jonah
Energy, Under the amended "gr""r"-nt',rit-h Jonah Energ!, NW Natural has the option to invest in additional wells on a well-by-well basis with drilling costs and
resutliig gas volumes shared it the amended proportioniie working inlerest for each well in which NW Natural invests. Volumes produced from the additional
wells drilled after the amended agreement are inciuded in NW Natural's Oregon PGA at a fixed rate of $0.4725 per therm. NW Natural has not participated in
addltional wells since 2014.
DECOUPLIi{G. ln Oregon, NW Natural has a decoupling mechanism. Decoupling is intended to break the link between eamings and the quantity of gas
consumed by customers, removing any financial inientive to discourage customers'efforts to conserve energy. The oregon decoupling b_aseline usage per
customer was reset in the 2o2o Oiegdl general rate case. The Order in the 2020 oregon general rate case also approved of extending NW Natural's decoupling
calculation for the months of Novem6er ind May to the month of April, This mechanism employs a use-per-customer decoupling calculation, which adjusts
margin revenues to account for the difierence between actual and expected customer volumes. The margin adjustment resulting from differences between
actu-al and expected volumes under the decoupling component is recorded to a defenal account, which is included in the annual PGA filing.
wARtt. ln Oregon, NW Natural has an approved weather normalization mechanism, which is applied to residential and small commercial customer bills. This
mechanism is iesigned to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature
variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average.
The mechanism is applea to bills from December through mid-May of each heating season. The mechanism adjusts the margin component of customers' rates
to reflect average weather, which uses the 2s-year average temperature for each day of the billing period. D_aily average temperatures and 2$year average
temperatures a-re based on a set point temperiture of Sglegrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers.
The collections of any unbilled WARM amounts due to tariff fops and floors are deferred and earn a carrying charge until collected, or returned, in the PGA the
following year. Residlntial and small commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of December 31 '
2O2O, g;/o'ol lolal eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers, which
account for about 12% of total customers. See 'Business Segment-Nafura/ Gas Distibution" below.
INDUSTRIAL TARIFFS. The opUC and wuTc have approved tariffs covering NGD service to major industrial customers, which are intended to give NW Natural
certainty in the level of gas supplies needed to se*" ihis customer group. The approved terms include, among other things, an annual election period, special
pricing provisions for outot-cycie changes, and a requirement that industrial customers complete the term of their service election under NW Natural's annual
PGA tariff.
ENVIRONMENTAL COST DEFERRAL AND RECOVERY. NW Natural has authorizations in oregon and washington to defer costs related to remediation of
properties that are owned or were previously owned by NW Natural. ln Oregon, a Site Remediation and Recovery Mechanism (SRRM) is-currently in place to
iecore, prudently incuned costs aliocable to Oregon iustomers, subject to in earnings test. Effective beginning November 1,2019, the WUTC authorized an
Environmental iost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers.
Oreoon SRRM
UnOe, tne Oegon SRRM collection process, there are three types of defened environmental remediation expense:. pre.review - This class of costs represents remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediation
expenses are recorded at NW Naiural's authorized cost of capital. NW Natural anticipates the prudence review for annual costs and approval of the
earnings test prescribed by the OPUC to occur by the third quarter of the following year.
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EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
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' Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yetincluded in amortization. NW Natural earns a carrying cost on these amounts at a rate equal to the five-year treasii iate plus 100 bisis points.' Amortization - This class of costs represents amounts included in current customer rates for collection and is calcudted as one-fifth of the post-reviewdeferred balance. NW Natural eams a carrying cost equal to the amortization rate determined annually by the OpUC, whicfr approximates a short-termborrowing rate. NW Natural included $4.2 million and 95.1 million of deferred remediation expense apir*eO by the OpUC foriollection during the 2O2O_21and 2019-20 PGA years, respectively.
ln addition, the SRRM also provides for the annual collection of $5.0 million from oregon customers through a tarifi rider. As it collects amounts from customers,NW Natural recognizes these collections as revenue net of any eamings test adjustments and separately imortizes an equal and offsetting amount of the
lefened regulatory asset balance through the environmental remediation operaiing expense line shownieparately in the operating erpenies section of theConsolidated Statements of Comprehensive lncome (Loss). See Note 18 for more information on our environmental matters.
The SRRM eamings test is an annual review of adjusted NGD ROE compared to authorized NGD ROE. To apply the earnings test NW Natural must firstdetermine what if any costs are subject to the test through the following calculation:
Table of Contents
Annual spend
Less: $5.0 million base rate rider
Prior year carry-ove()
$5.0 million insurance + interest on insurance
Total deferred annual spend subject to eamings test
Less: over-earnings adjustment, if any
Add: defened interest on annual soende)
Total amount transferred to post-review
year.(2) Defened interest is added to annual spend to the extent the spend is recoverable.
To the extent the NGD business earns at or below its authorized ROE as defined in the SRRM, the total amount transferred to post-review is recoverablethrough the SRRM. To the extent more than authorized ROE is earned in a year, the amount transferred to post-review would be reduced by those earnings thatexceed its authorized ROE.
For 2020, NW Natural has performed this test, which is anticipated to be submitted to the OPUC in May 2021 . No earnings test adjustment is expected for 2020.
Washinoton ECRM
]!e lcnfu established by the WUTC order effective November 1, 2019 permits NW Natural's recovery of environmental remediation expenses allocable toWashington customers. These expenses represent 3.32% of costs associated with remediation of sites that historically served both Oregon and Washingtoncustomers. The order allows for recovery of past deferred and future prudently incuned remediation costs allocable toWashington ttrro;gh application oiinsurance proceeds and collections from customers. Prudently incuned costs that were defened from the initial deferral authorization in February 2011 through
,11119 .zOt s are to be fully offset with insurance proceeds, with any remaining insurance proceeds to be amortized over a 1o.s year period. On an annual basis,NW Natural will lile for a prudence determination and a request to recover remediation expenditures in excess of insurance amortizations in the following year'scustomer rates. After insurance proceeds are fully amortized, if in a particular year the request to collect deferred amounts exceeds one percent of Wasiingtonnormalized revenues' then the excess will be collected over three years with interest. On October 29, 2020, NW Natural's first environmental cost recorery-filingwas approved by the wUTC covering the period from December 31, 2018 to December 31 , 2019.
PENSTON COST DEFERRAL AND PENSION BALANCTNG ACCOUNT. From 2011 through October 2018, the OPUC authorized a regulatory mechanism in whichNW Natural deferred annual pension expenses above the amount set in rates, with recovery of these deferred amounts through the impiementation of abalancing account, which included the expectation of highe_r and lower pension expenses in future years. During this period thl mechanism permitted NWNatural to accrue interest on the account balance at the NGD business' authorized rate of retum. T-he OPUC orlered'the freezing of the account in October201 8 with pension expenses to be recovered through rates beginning November 1 , 2019.
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GEM STATE WATER COMPANY
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ln March 2019, the OpUC issued an order ouilining how the account would be recovered. As a result, the following items were recorded in the lirst quarter of
2019:.I ApptieagT.l millionof TCJAbenefitsdefenedfromJanuaryl,2Ol8toOctober3l,2Ols,asareductionagainstthepensionbalancingaccount;. Ciiaitea to customers' beneflt $5.4 million of defened income taxes as a reduction against the pension balancing account;
. Reduced the amount of the frozen balancing account by an additional $10.5 million; and. Reduced the interest rate on the pension balancing account from NW Natural's authorized rate of return of 7 -317o/o to 4,3%.
The items above resulted in the recovery of 912.5 million of deferred pension expenses by applying defened tax benefits against the pension balancing account.
Recognition of these items resulted in higher operations and maintenance expense and oiher income (expense), net with offsetting benefits recognized in
operaiing revenues and income tax "rpjn"e. Additional pension erpenses oi $10.5 million from the regulatory disallowance were also recognized in operations
and maintenance expense and other income (expense), net. DeferrLd regulatory interest income of $3.8 million was also realized in other income (expense), net
in 2019.
commencing April 1 , 201g, the opUC also authorized the collection of the remainder of the pension balancing account over ten years in a customer tariff of $7.3
million per y6ar. Defened pension expense recoveries, inclusive of the application of the TCJA benefits described above, were $7.'l million and $16.8 million in
2O2O a;di0'19, respectively. Pension expense deferrals, excluding interest, were $10.3 million in 2018'
TAX REFORil DEFERRAL. ln December 2017, NW Natural filed applications with the oPUc and wUTC to defer the overall net benefit associated with the TCJA
that was enacted on December 22,2012.|n February 2019, NW iliatural and the other parties to the 2018 Oregon rate case agreed upon terms by which the
defened benefits would be retumed to customers via a joint stipulation filed with the OPUC. ln March 2019, the OPUC approved the terms in their entirety as
follows:. Applied $7.1 million of TCJA benefits defened from January 1, 2018 to October 31, 2018, as a reduction against the pension balancing account; and
. Credited to customers' benefit $5.4 million of defened income taxes as a reduction against the pension balancing account;
Commencing April 1, 2019, the OPUC also ordered the following:. provide an annual credit to base rates of $3.4 million for excess defened income taxes to all customers, subject to the average rate assumption method;
. provide an additional annual credit of $3.0 million to sales service customers for five years; and. An increase in rate base of $15.4 million, and conesponding increase to revenue requirement of $1.4 million.
lf NW Natural files a general rate case within five years of the date of the March 2019 order, this revenue requirement may be adjusted as part of that general
rate case. on December 30, 2019, NW Natural filed a general rate case with the oPUc, which is within five years from the date of the March 2019 order and the
order in that rate case adjusted this revenue requirement. For more information, see 'Mosf Recent Completed General Rate Cases' above.
on october 21 , 201g the wuTC issued an order dictating the means by which deferred tax reform benefits would be returned to customers beginning November
1 , 2O1g. The order directs NW Natural to provide customLrs with a ratq reduction of $2.1 million over one year to reflect the benefit of the lower federal corporate
income tax rate accumulating from January 1, 2018 through October 31, 2019, and provides an additional annual rate reduction initially set at approximately
$0.S million to reflect a benefit from the remeasurement of defened tax liabilities of approximately $15'0 million.
INTERSTATE STORAGE AND ASSET MANAGEITENT SHARING. on an annual basis, NW Natural credits amounts to oregon and washington customers as part
of a regulatory incentive sharing mechanism related to net revenues eamed fiom Mist gas storage and asset management activities' Previously, amounts were
creditei to Oiegon customers ii Jrne. Starting in 2021 , oregon customers will receive this credit in February per the 2020 oregon rate case order. Credits are
given to cuslomers in Washington as reductions in rates through the annual PGA filing in November.
The following table presents the credits to NGD customers:
2020 2019 2018ln millions
Oregon
Washington
HOLDING COMPANY REORGANIZATION. on october 1,2018,we completed the reorganization to a holding company structure. There were a number of
conditions under the agreement with the OpUC and the WUTC related to the formation of a holding company structure. One of the conditions is that, for three
y"ars rorb*ing formati6n of the holding company, NW Natural was required to provide an annual $500,OOO credit to Oregon customers and a $55'000 credit to
foashington clstomers, The credits to-both Oregon and Washington customers were given in conjunction with the respective PGA filings with the rate
adjustments commencing on November 1 of the applicable PGA year.
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$
$
17.0 $0.7 $
16.3 $
1.2 $
'|1.7
1.0
covfD'lg PRocEss AND DEFERRAL D0GKETS. During2020, our regulated utilities, other utilities, stakeholders, and public utility commissions worked togetherto-determine the best way to continue protecting utility iustomers durii-ng and after the pandemic. ln September 2020, ihe opUC-issued an order authorizingoPUC staff to execute a term sheet with NW Natural and other parties [o the proceeding, which includes provisions for lifting moratoriums on disconnections fornonpayment and late fees; extending timeframes for repa.yments and deferred payment plans; establishing timelines for reinstitution of service disconnectionand re@nnection fees; and allowing for deferred accounting of covlD-19 relatediosts. The term sheet aiso directs NW Natural to work with the parties toprovide bill payment assistiance, petition the oregon legislaiure for bill payment assistance funding, explore the applicability of decoupling charges for a period oftime, and participate in an investigation and discussion sunounding low income customers and social and environmental justice. The stipulation incorporatingthe term sheet was approved by the oPUC in November 202.0. AtLrm sheet was approved by the wUTC in october 2020 that provides similar guidance on keyitems such as the timing of lifting moratoriums on disconnections, resuming the collection process, and bill assistance and payment plans.
Additionally, both oregon and Washington approved our applications to defer certain COVID-1g related costs in 2020.Costs that may be recoverable include, but are not limited to, the following: personal protective equipment, Jlaning supplies and services, bad debt expense,financing.costs to secure liquidity, and certain lost revenue,-net of offseftiig'direct expense reduciions associated wittr COvto-ts. As of December 31, 2020, weestimated that approximately $6.1 million of the financial effects related to bovto-tg in 2020 could be recoverable. As a result, we recorded a regulatory assetof approximately $4.8 million for incurred costs as of December 31 , 2ozo.ln addition, we expect to recognize revenue in a future period for an additional 91.3million related to forgone late fee revenue.
Table of Contents
The following table outlines some of the key items approved by the respective commissions:
Oreoon
Reinstifu ting Disconnections for Nonpayment:
Residential
sma, commerciar June 3o' 2021 -
December 1, 2020Large CommerciaUlndustrial November 3, 2020Resuming Residential Reconnection Fee Charges October 1 ,2022-Reinstituting Late Fees for Nonpayment:
Residential
smalr commercial october 1 ' 2022*
December 1,2020Large CommerciaUlndustrial November 3,2020Extended Time Payment Anangements:
Residential
smalr commerciar UP to 24 months
Up to 6 monthsAnearage Forgiveness program 1% of Retail Revenue
* Jurisdiction retains discretion to re-evaluate date based on ongoing pandemic and economic conditions.
46
Washlngton
July 31, 2021 '
July 31,2021
October 20, 2020
January27,2022 *
January 27,2022
Jenuary27,2022
October 20, 2020
Up to 18 months
Up to 12 months
1% of Retail Revenue
RENEWABLE NATURAL GAs. On June 1 9, 2019, the Oregon legislature passed Senate Bill 98 (SB98), which enables natural gas utilities to procure or developRNG on.b-ehalf of their oregon customers. RNG is produced froh organil materials like food, airicurturai ano iorestry waste, wastewater, or landfills. Methane iscaptured from these organic materials as they decompose.and is conditioned to pipeline qrriiryl so it can be added into the existing natural gas system,reducing net GHG emissions. The bill was signed into law by the governor in .tuty iors, "nd .ruseqr"nirv, ir'"bpuc opened a do-cret in ergrrt 2019 regardingthe rules for the bill. After working with parties, the opuc adopted final rules in july 2020.
SB98 and the rules outline the following parameters for the RNG program including: setting volunlary goals for adding as much as 30% renewable natural gasinto.the state's pipeline system by 2050; enabling gas utilities to invest in and ownihe qeining and co-nditioning equipment required to bring raw biogas andlandfill gas up to pipeline quality, as well as the facilities to connect to the local gas diskibution-system; and alloiwing up to S% of a utility,s revenue requirementto be used to cover the incremental cost or investment in renewable natural gaJinfrastructure.
Further, the.new law supports all forms of renewable natural gas including renewable hydrogen, which is made from excess wind, solar and hydro power.Renewable hydrogen can be used for the transportation system, indushiii use, or blended iito ihe natural gas pipeline system.
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ln its initial RNG contract under sBgg, Nw Natural began a partnership with BiocarbN, a developer and operator of sustainable infrastructure projects, to
convert methane into RNG. Under this partnership, Nw ltaturat has the ability to invesi up to an estimated $38 million in four separate RNG development
projects that will access biogas derived from water treatment at Tyson Foods; processing plants, subject to approval by all parties' ln December 2020' NW
Natural exercised its option for the first development project in Netraska, initiaiing inveslment in an istimated $8 million project, which is expected to begin
producing RNG in late 2021'
coRpoRATE Aclvtry rAx ln 2019, the State of oregon enacted a corporate Activity Tax (cAT) that is applicable to all businesses with annual oregon gross
revenue in excess of $1 million. The cAT is in addition to the state's corporate incometax and imposes a 0,57.o/-" tax on certain oregon gross receipts less a
reduction for a portion of cost of goods sold or labor. fhe Cnf iegislation became efiective September 29, 2019 and applies to calendar years beginning
January 1,2O2O,Under the termi of the order in NW Natural's 2620 Oregon general rate case, NW Natural is authorized to begin to recover the expense
associated with the cAT as a component of base rates. NW Natural is ado diiected to adjust the amount recovered for the cAT in each annual PGA to reflect
changes in gross revenue and cost of goods sold that occur as a result of the PGA.
Beginning on the Novemb er 1,2020 rate effective date, Nw Natural expects to recover an additional $3.15 million in revenue requirement for the cAT' The
order also provides for certain adjustments if there are r"bigaiire, irr",iotlng, jroicial, or policy decisions that would cause the calculation methodology used by
NW Natural for the CAT to rar}/ in a fundamental way. laiitionatly, the CAT ieferred from January 2020 through June 2020 will be added to and amortized over
lhe 2020-21pGA gas ye"r, ant the cAT amounts difened ftom july 2020 through the effective dite of the rate case will be amortized over the 2021'22 PGA
year.
WATER UTlLllES. ln 202o,NW Holdings, through its water subsidiaries, continued acquiring water utilities. The following notable transactions received
regulatory approval and were closed during 2020:. suncadia water company, tlc anisuncadla Envlronmental, LLC - NWN Water of washington received regulatory approval for the purchase of
suncadia water in ,lanii,ry zoio.Suncadia Environmental is not currenfly subject to the wUTC's jurisdiction. The transaction closed in January 2020'
. T&w water seruice c;il;t - NWN water of rexas received regulat,ory apprwal from _tlte Public -utility
commission of rexas for the T&w water
Service Company acquisition in FeU.ary 2020 and subsequently the transaction closed in March 2020'
ln addition to the acquisitions above, we closed three ae4uisitions near existing.water utilities during 2020' while coVlD-19 has restricted certain activities' we
continue to pursue water acquisitions and expect to retum to normal businesstevelopment activities as the. pandemic eases and travel and commerce retum to
previous levels. For our acquired water utilities, were uetrn to assess the need for general rate cases, and in2020, we filed general rate cases for three water
utilities to support infrastructure investments for safety and reliability'
oREGON EXECUTTVE ORDER. on March 10,z}2},the govemor of oregon issued an executive order (EO) establishing GHG emissions reduction goals of at
least 45% below ,1g90 erirsion t"ret. uy zoss and at liast g0% below i 990 emission levels by 2050 and d.rlected state agencies and commissions to facilitate
such GHG emission goals targeting a variety of sources and industries. Although the Eo does not specifically direct actions of natural gas distribution
businesses, the opuc is directed to prioritize proceeaings and aaivities tnat aivance decarbonization in the utility sector, mitigate energy. burden experienced
by utility customers and eniure system reliability and_reslource adequacy. The EO also directs other agencies to cap and reduce GHG emissions from
transportation fuels and all other liquid and gaseous fueL-, inciuoing'natural gas, adopt building energy efficiency goals for new building construction, reduce
methane gas emissions fiom landfiils and food *"ste, "ni iuomit i proposal toi aooption or slate godts for carbon sequestration and storage by oregon's forest,
weflands and agricultural lands. These agencies and commissions are cunently engaged in various stage-s of their rulemaking processes and are currently
expected to complete those processes in the next 12lo 24 months. NW Naturil is ictivety engaged with oregon state regulatory entities and holds a seat on the
Orlgon Oepartmint ot Envirlnmental Quality rules advisory committee, which is considering the cap and reduce rules'
TNTEGRATED RESOURCE PLAN 0Rp). NW Naturat generally files a full IRP biennially for oregon and washing-ton with the oPUC and WUTC, respectively' NW
Natural joinly filed its 2018 rni rir u6tn oregon an-d wairrihgton in August 2018, and receiv6d both a letter of compliance from the wUTC and acknowledgment
by the opuc in February 201g. The 2018 lR-p included analisis of diffJrent scenarios, examining several poGntial future states and the conesponding least
cost, least risk resource ""qri.ition .tr"tegies. ln addition to ihese strategies, the 2018 IRP publiihed an emissions forecast for each of these potential futures'
NW Natural expects to file an update to the 2018 IRP in March 2021'
The development of an lRp filing is an extensive and complex process that engages multiple stakeholders in an effort to build a robust and commonly
understood analysis. The final product is intended to pr*ii"
"
iong+erm ouflo6t-of the supply-side an_d demand-side resource requirements for reliable and low
cost natural gas service. rne rnp examines and analyses uncertainties in the planning prdieis, including potential changes in governmental and regulatory
policies. As a result of the Eo issued by the governor of oregon, new re-gulations and-requirements are currently being developed in the state of oregon, which
have the potential to impact longterm rosource decisions, lriorder to reflect the outcomes of the Eo proceedings, the time to file NW Natural's next full IRP was
extended to JulY 2022.
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Buslness Seoment - Natural Gas Distributlon fiGD)
NGD margin resulE are primarily affected by customer growth, revenues from rate-base additions, and, to a certain extent, by changes in delivered volumes dueto weather and customers' gas usage patterns. ln Oregon, NW Natural has a conservation tariff (also called the decoupling mechani-sm), which adjusts marginup or down each month through a defened regulatory accounting adjustment designed to offset changes resulting from inireases or delreases in iverage riseby residential and commercial customers. NW Natural also has a weather normalization tariff in Oregon, WARM, which adjusts customer bills up or down tooffset changes in margin resulting from above'or below-average temperatures during the winter healing season. Residential and commercial customers inOreqo,n are allowed to opt out of the weather normalization mechanism, and as of DCcember 31, 2o2o,ipproximately 8% of total eligible customers had optedout. NW Natural does not have a weather normalizatlon mechanism approved for Washington customerc, which account fo r about 12o/o of total customers. Thedecoupling and WARM mechanisms are designed to reduce, but not eliminate, the volatility of customer bills and natural gas distribution eamings. See"Regulatory Matter$-Rafe Mechanr.sms' above.
The NGD business is primarily seasonal in nalure due to higher gas usage by residential and commercial customers during the cold winter heating months,Other categories of customers experience seasonality in their usage but to a lesser extent. Seasonality affects the compa;bility of the results of oiperations ofthe NGD business across quarters but not across years.
NGD segment highlights include:
and therms in EPS data 2020 2019 2018
net
EPS - NGD segment
Gas sold and delivered (ln therms)
NGD margin(t)
(i) See Natural Gas Distribulion Margin Table below for additional detail.
$
$
63.6 $2.08 $
1,143
438.1 $
2.04 $
1215
422.7 $
57.5
1.99
1,',t2E
383.7
2020 COMPARED TO 2019. NGD net income was $63.6 million in 2020 compared to $60.8 million in 2019. The primary factors contributing to the increase inNGD net income were as follows:. a $15.4 million increase in NGD margin primarily due to:
' a $17 .7 million increase due to new customer rates from the 2020 Oregon and 2019 Washington rate cases;' a $7.6 million increase from revenue generated from NW Natural's North Mist storage contralt which commenced service in May 2019 and is includedwithin other regulated services within NGD margin; and. a $3.9 million increase from customer growth; partially ofiset by
' a $7.1 million decrease due to rev€nue recognizod in 2019 as part of the settlement and recovery of NW Natural's pension balancing account, whichwas entirely offset by pension expenses within operations and maintenan@ expense and other income (expense), net, and which di-d not recur in 2O2O;. a $4.0 million decrease primarily due to lower ovemrn and entitlement fees;' a$2.7 million decreass driven by warmer than avorage weather in 2020 compared average weather in 201g; and' a $1 .3 million decrease related to the temporary suspension of late fees during the COVID-1g pandemic.
ln addition to the increase in margin, NGD net income for 2020 reflects:' a benefit of $'t2.5 million from pension expenses recognized in 2019 associated with recoveries of NW Natural's pension balancing account which did notrecur in 2020' Approximately $4.6 million was recorded in operations and maintenance expense and $7.9 million was recorded in other income (expense),
net; and
' a benefit of $10.5 million from a 2019 regulatory pension disallowance which did not recur in 2020.Approximately $3.9 million was recorded in operationsand maintenance expense and $6.6 million was recorded in other income (expense), net.
The increases in net income above are partially offset by the following:' an $8.2 million increase in operations and maintenance expense related to higher compensalion costs, contractor expenses, and moving and lease costs fora new headquarters and operations center;' a $13'8 million increase in depreciation and general tax expenses due to NGD plant additions, including the North Mist gas storage facility;' a $7'3 million decrease in other income (expense), net primarily related to interest income recognized ii 201g associated with th;201g recovories of thepe-nsion balancing account and ongoing rogulatory amortization of the remaining pension balancing account defenal, which began in April 2019; and' a $6.9 million higher income tax reflecting a non-recuning tax benefit associated with the March 2019 Oregon order, partially ofuet by tire ongoingamortization of TCJA benefits.
Total natural gas sold and delivered in 2020 decreased 6% over 2019 primarily due to the impact of weather that was 12% warmer than average in 2020compared to weather that was average in 2019.
48
EXHIBIT 2
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Page 49 of 210
Table of Contents
2019 COilpARED TO 201S. NGD net income was $60.g million in 2019 compared to $57.5 million in 2018. The primary factors contributing to the increase in
NGD net in@me were as follows:. a $39.0 million increase in NGD margin primarily due to:. a 916.2 million increase due to new customer rates from the 2018 Oregon rate case and 2019 Washington rate case;
. a $6.1 million increase from customer growth;. an $1 1 .g million increase from revenue generated ftom NW Natural's North Mist storage contract which commenced service in May 2019 and is
included within other regulated services within NGD margin;. a $7.1 million increase due to revenues recognized in asiociation with recoveries of NW Natural's pension balancing account, which are entirely offset
by pension expenses within operations and maintenance and other income (expense), net; and . .. a $3.7 million increase driven by cplder than "r"r"g" weather in the first quartei of 2019 coupled with higher fee rovenues from intenuptible customers
as a result of system restrictions; partially offset by. a $3.2 million dicrease due to an adjustment to the tax reform defenal estimate in 2018; and
. a $1.s million decrease due to a regulatory disallowance of defened environmental expenditures as a-result of the 2019 Washington rate case'
. a $9.4 million decrease in income tax expense primarlrv ore to the income tax implications of tle M.aph 2019 oPUc order, of which $5.4 million was offset
by pension expenses as discussed above, wittrthe remainder driven by the return of defened TCJA benefit credits to customers and lower pretax income in
2019 compared to 2018; and. a $5.g million increase in defened regulatory interest income in other income (expense), net, of which $5.1 million relates to interest recognized in
association with the OPUC order discussed above.
The increases were partially ofiset by:. a $34.4 million increase in pension costs within operations and maintenance expense and other income (expense), net, of which $12'5 million relates to
costs which were enthely o:ffset by revenues and income tax benefits in the Maich 2019 oPUc order, and $10.5 million relates to the regulatory pension
disallowance included in the March 2o1g opuc order. ln addition, there was a $1 1.4 million increase in pension expenses as NW Natural began collecting
ongoing pension costs through customer rates on November 1, 20'18 and began collecting defened pension costs through customer rates on April 1, 2019
rather than defening a portion to the balancing account;. a $5.7 million increase in depreciation expense due to NGD plant additions;. a $4.6 million increase in interest expense driven by g2.3 million higher interest on long term debt, $1.2 million lower AFUDC debt interest income, and $0'9
million higher commercial paper and line of credit interest;. a $3.3 million decrease in AFUDC equity interest; and. a $2.g million increase in NGD segmenioperations and maintenance expenses primarily attributable to annual employee cost increases.
Total natural gas sold and delivered in 2019 increased 8% over 2018 primarily due to the impact of weather that was average in 2019 compared to weather that
was 15% warmer than average in 2018'
49
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 50 of 210
2018 2020 vs.20'19 2019 vs.2018NGD volumes {therms):
Residential and commercial sales
lnduslrial sales and transportation
Total NGD volumes sold and delivered
Ooeratino revenues:
Residential and commercial sales
lndustrial sales and transportation
Other distribution revenues
Other regulated serviGes
Total operating revenues
Less: Cost of gas
Less: Environmental remediation expense
Less: Revenue taxes
NGD margin
!!q1gi4tt)
Residential and commercial sales
lndustrial sales and transportation
Miscellaneous revenues
Gain (loss) from gas cosl incentive sharing
Other margin adjustments(2)
Distribution margin
Other regulated services
NGD margin
Deoree davs{3)
Avorage(4)
Actual
Percent warmer than average weather
NGD Meters - end of period:
Residential meters
Commercial meters
lndustrial meters
Tolal number of meters
NGD Meter orowth:
Residenlial meters
Commercial meters
lndustrial meters
Total meter growth
677,271
465,626
1,142,897
$ 438,110
385,989
30,800
't,709
267
229
720,528
255,135
't2,337
30,325
9-___-422131-
$
734,347 661,163
480,807 467.040
____1 2131 s4__ ____1 J28,203__
$ 638,884 $ 621,1s256,553 58,7,t313,03s (109)12,056 262
(72,2571 86,951
$
(s7,076)
(15,181)
73,184
't3,767
$ 17,102
(2,160)
13,144
11,794
39,880
608
(1,210)
(243)
9_____998!_
22,462
2,125
(1 1 ,109)
7,066
$ 661,346
58,678
1,926
19,122
74't,072
262,980
9,691
30,291
680,648
255,743
11,127
30,082
20,544
(7,u5)
2,646u
!.___383,616_ $ 1s,37e
$$
$
366,974
3't,985
4,671
(r,29s)
8,350
$ 352,710
30,817
5,il2
(271
(s,608)
$ s83,434
262
19,015 $
(1,185)
(2,s62)
1,566
(8,121)
14,2U
't,'t68
(871)
11,272)
13,958
418,994
19,1 16
410,68't
'r2,0s0
$$8,313
7,066
$ 27,247
't1 788$ 438,110 $ 42,731 $ 383,696 $ 15,379 $ 39,035
2,706
2,384
(1z)yo
2,710
2,709
2,714
2,313
115)Yo
(4)
(12)yo
12,663
(1,046)
(18)
(4)
17 o/o
7U,675
68,812
989
692,012
69,858
1,007
680,134
69,2s9
1,O28
11,878
599
(211
(r) Amounls reported as margin for each category of meters are operating revenues, which are net of revenue taxes, less cost of gas and environmental remediation expense.(2) Other margin adjustmenls include net revenue recoveries of $6.2 million and revenue defenals of g7.9 million for the years ended December 31 , 2019 and 201g,, respectively, associated with the decline of the U.s. federal corporate income tax rate.(3) Heating degree days are units of measure reflecting temperature-sensitive consumption of natural gas, calculated by subtracting the average of a day,s high and lowtemperatures from 59 degrees Fahrenheit.tat {yerasg y.eather represents the 2s'year average of heating degree days. Beginning November '1, 2020, avengeweather is calculated over the period June 1, 1gg4through May 31, 2019, as determined in NW Natural's 2o1o^oregon g6ner3l iate dse- rrom ruowmo.i i, iorl-througrr octouei gi, ioro, "r"rli" *""1,", *",calculated over the period May 31, 1992 through May 30, 2017, is dEtermined tn Nw r.wular;s2oiBb*d;fi;;;fi"t" "r"".
prioi to Novemne"r ,t,2o1a,average
weather was calculated over the period 1986 - 2010, as determined in NW Natural's 2012 Oregon generai ratE;aie.
_______1J1,473_ ______J62,8U_
1.8Yo 1.7 o/o
(1.5)% 0.9 o/o
(1.8)o/o e.qyo
1.5 Yo 1.7 o/o
50
750,42',1 _1 1,599 12,456
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 51 of210
Table of Contents
NATURAL GAs DISTRIBUTION MARGIN TABLE' The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:
Favorableln thousndq except degree day and customer data 2020 2019
Table of Contents
Residential and Commercial Sales
The primary factors that impact results of operations in the residential and commercial markets are customer growth, seasonal weather pafterns, energy prices,
competition from other energy sources, and economic conditions in our service areas, The impact of weather bn margin is significantly reduced through NW
Natural,s weather normalization mechanism in oregon; "pproiir"t"rv 82% of NW Natural's total customers are covered under this mechanism' The remaining
customers either opt out of the mechanism or are located in washiniton, which does not have a similar mechanism in place' For more information on the
weather mechanism, see "Regulatory Matters-Rate Mechanisms-Weather Normalization Mechamsm'above.
NGD residential and commercial sales highlights include:
2020 2019 20't8
ln millions
Volumes (therms):
Residential sales
Commercial sales
Total volumes
9pelagnscvsgJs
Residential sales
Commercial sales
Total operating revenues
IdaIciE,
Residential:
Sales
Altemative revenues:
Weather normalization
Decoupling
Amortization of altemative revenue
Total residential NGD margin
Commercial:
Sales
Altemative revenues:
Weather normalization
Decoupling
Amortization of alternative revenue
Totral commercial NGD margin
Total residential and commercial NGD margin
435.2
242.1
457.2
277.1
411.7
249.5
677.3 734.3 661.2
$460.3 $
201.0
2.4
7.3
(9.6)
104.9 101.1 103.8
$ 386.0 $ 367.0 $ 352.7
EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page 52 ot 210
437.7 $
201.2
4',t8.4
203.3
$ 661.3 $ 638.9 $ 621-7
$274.9 $272.3 $240.O
9.0
(6.1)
3.3
(1.8)
(6.6)
2.0
7.6
(0.6)
1.9
281.1 265.9 248.9
100.2 115.8 103.7
2.7
1.1
0.9
(0.7)
(5.2)
(8.8)
2020 COttpARED TO 2019. The increases ot $22.4million in operating revenue and $19.0 million in total residential and commercial NGD margin were primarily
the result of new customer rates resulting from the oregon and washington rate cases and customer growth. sales volume decreased 57.0 million therms' or
g%, primarily oue to warmerlt,an .r"r"g" weather in 2620 compared to average weather in 2019 and lower usage from commercial customers related to the
pandemic, partially offset by residential customer growth.
2019 coMpARED To 2018. The increases oI $,l7.2million in operating revenue and $14.3 million in total residential and commercial NGD margin were primarily
driven by new customer rates from the 201g oregon rate case and 2otg washington rate case as well as sales volume increases of 73.1 million therms, or 11%,
due to customer growth and average weather in 201 9 compared to warmer than average weather in 20'18.
lndustrial Sales and Transoortation
lndustrial customers have the option of purchasing sales or transportation services. Under the sales service, the customer buys the gas commodity from NW
Natural. Under the transportation service, the customerLrvi ttrr'g". commodity directly from a third-party gas marketer or supplier. The NGD gas commodity
cost is primarily a pass-through cost to customers; trerefoie, NG6 profit margins are not materially affected by an industrial customer's decision to purchase gas
from third parties. lndustrial and large commercial customers may also selecibetween firm and inienuptible service options, with firm services generally
providing higher profit rargi;, co;'pared to interruptible servicei. To help manage gas supplies, industrial.tariffs are designed to provide some certainty
regarding industrial customers, volumes by requiring an annual service eiection *triJtr uec6mes effective November 1, special charges for changes between
elections-, and in some cases, a minimum or maximum volume requirement before changing options.
51
Volumes (therms):
lndustrial - firm sales
lndustrial - firm transportation
lndustrial - interruptible sales
lndustrial - interruptible transportation
Total volumes
Maroin:
lndustrial - sales and transportation
34.3
162.3
48.6
220.4
36.6
175.7
47.4
221.1
35.3
162.7
50.6
218.4
465.6 480.8 467.0
32.0 $30.8$30.8 $
2020 COMPARED TO 2019. NGD volumes decreased by 15.2 million therms, or 3%, and margin decreased by 91.2 million primarily due to lower usage from asmall number of industrial customers.
2019 COMPARED TO 2018. lndustrial sales and transportation volumes increased by 13.8 million therms and NGD margin increased $1.2 million due to anincrease in manufacturing activity in NW Natural's service tenitory. The increase wis partially offset by a reduction in c-ustomer count, which was driven bycustomer elections to switch from industrial to commercial rate schedules.
Miscellaneous Revenues
Margin from miscellaneous revenues includes fee income as well as regulatory revenue adjustments, which reflect cunent period deferrals to and prior yearamortizations from regulatory asset and liability accounts, except for gas cost iefenals wtriih flow tniough cost of gas. Decoupling and other regulatory'amortizations from prior year defenals are included in revenues from residential, commercial, and induslrial firm customeE.
Margin from NGD miscellaneous revenues highlights include:
ln millions 2020 2019 2018
Table of Contents
NGD industrial sales and transportation highlights include:
ln millions 2020 2019 2018
Other revenues $1.7 S 4.7 $5.5
2020 CoMPARED To 2019. Margin from miscellaneous revenues decreased due to lower entidement and curtailment revenues in 2020 as 2019 included higherfee reve,nue related to a rupture in a critical natural gas pipeline in western Canada in 2018 that disrupted gas supply to the pacific Northwest. ln addition,margin from miscellaneous revenues was negatively impacted by the moratorium on charging late or recoinection fees during the pandemic in 2020.
2019 COiTPARED TO 2018. Margin from miscellaneous revenues remained flat due to continued entitlement and curtailment revenue in first quarter of 2019related to the October 2018 Canadian pipeline event.
Other Regulated Services
Other Regulated Services primarily consist of lease revenues from NW Natural's North Mist storage facility as well as other lease revenues for compressednatural gas assets.
Other regulated services revenue highlights include:
ln 2020 2019 2018
North Mist storage services
Other services
Total other regulated services
19.5
(0.4)
$ 11.8
0.3
-.12l
$
0.3
19.1 $0.3
2020 COUPARED TO 2019. Other regulated services margin increased $7.0 million due to the commencement of storage services at the North Mist expansionfacility in May 2019. See Note 7 for more information regarding North Mist expansion lease accounting.
2019 COiTPARED TO 2018. Other regulated services margin increased $1 1.8 million due to the commencement of storage services at the North Mist expansionfacility in May 2019.
52
EXHIBIT 2
PALFREYMAN, DI
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Page 53 of210
Gost of Gas
Cost of gas as reported by the NGD segment includes gas purchases, gas withdrawn from storage inventory, gains and losses from commodity hedges, pipeline
demand costs, seasonal demand cost balancing adjustmenis, regulato[ gas cost deferrals, gas reserves costs, and company 9as use. The oPUC and wUTC
generally require natural gas commodity costs ti ud oirca to cuslomers-aithe actual cost incurred, or expected to be incuned' Customer rates are set each year
so that if cost estimates were met the NGD business would not eam 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- Purciased Gas Adiustmenf above. ln addition to the PGA incentive
sharing mechanism, gains and losses from hedge contracts entered into after annual PGA rates are efiective for Orcgon customers are also required to be
shared and therefore may impact net income. r-urther, NW Natural also has a regulatory agreement whereby it earns a rate of return on its investment in the gas
reseryes acquired under the original agreement with Encana and includes gas from the amended gas reserves agreement at a fixed rate of $0'4725 per therm,
which are also reflected in NGdmargin. See ,Application of Critical Accounting Policies and Estimates-Accounting for Derivative lnstuments and Hedging
Acfivifies' below.
Cost of gas highlights include:
Table of Contents
ln millions where idicated
of gas
Volumes sold (therms)
Average cost of gas (cente per therm)
Gain (loss) from gas cost incentive sharing
2020 2019 2018
$
$
$
263.0
0.35
818
0.31 $
(1.3) $
255.7
747
0.34
760
0.3
$
$
$
2O2O COitpARED TO 2019. cost of gas increased by $7.9 million, or 3%, primarily due to a 13% increase in average cost of gas consistent with higher gas costs
in the pGA; partially offset by a7o/oiecrease in volumes sold driven primarily by 12o/o warmer than average weather during 2020 as compared to average
weather in 2019.
20i9 cotpARED TO 2018. cost of gas was flat compared to 20'18, primarily due to the 10% increase in volumes sold driven by average weather in 2019
compared to warmer than average ieather in 2018 and customer growth, primarily offset by a three cent decrease in the average cost of gas.
The effect on net income ftom Nw Natural's oregon gas cost incentive sharing mechanism resulted in a margin gain of $0.3 million in 2020 compared to margin
lossof $.l.3millionin20lganJaslghtmarginto-ssilzota. [r.2o2},actual priceswerelowerthantheestimatedpricesindudedincustomerratesduringthe
period. ln 2019, actual gas prices were higher than those included in rates during the period. ln 2018, actualprices closely aligned with estimated prices included
in customer rates. For a discussion of thelas cost incentive sharing mechanism, see;Regulatory Matters-Rate Mechanism*Purchased Gas Adiustmenf'
above.
Other
Other activities aggregated and reported as other at NW Holdings include NWN Energys equity investmenl in Trail West Holdings, LLC (TwH); NNG Financial's
investment in Kelso-Beaver iipeline (KB pipeline); and NWN Wlter, which owns andiontinues to pursue investments in the water sector' Other activities
aggregated and reported as oiher at i.tw Hitural include the non-N6D storage activity at Mist as well as asset management seryices and the appliance retail
ciiter-operations.'See Note 4 for further discussion of our business segment and other, as well as our direct and indirect whollyowned subsidiaries.
On August 6, 2020, NWN Energy completed the sale to an unrelated third party of its interest in TWH. See Note 14 for further details.
At Mist, NW Natural provides gas storage services to customers in the interstate and intrastate markets using storage capacjty that has been developed in
advance of NGD customers, rlquiremeits. pre-tax income from gas storage at Mist and asset management services is subject to revenue sharing with NGD
customers.
Under this regulatory incentive sharing mechanism, NW Natural retains 80% of pre-tax income from Mist gas storage services and asset management services
when the underlying costs of the ""pality being used are not included in NGD business rates. The remaining 20% is credited to a deferred regulatory account
for credit to NGD customers.
Through october 201g, when the capacity used was included in NGD rates, NW Natural retained 33% of prttax income with the remaining 67% credited to a
defened regulatory account for credit to NGD customers. ln conjunction with the oregon rate case, effective November 2018, NW Natural retains 10olo of pre-tax
income ftom such storage and asset management services and 90% is credited to NGD business customers.
53
EXHIBIT 2
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GEM STATEWATER COMPANY
Page 54 of210
ln EPS data
NW Natural other - net income
Other NW Holdings activity
NW Holdings other - net income
EPS - NW Holdings - other
Ooerations and Maintenance
Operations and maintenance highlights include:
ln millions
2020 2019 2018
$7.0
(0.3)
8.1 $
(3.6)
10.6
(0.8)
$6.7 $4.5 $9.8
$0.22 $0.1s $0.34
The signiftcant drivers of changes in other net income discussed below apply to both NW Holdings and NW Natural.
2020 COiiPARED TO 2019. Other net income increased $2.2 million and decreased $1.1 million at NW Holdings and NW Natural, respectively. The decrease at
!!W Nalural was primarily due to lower earnings from non-NGD gas storage operations at Mist as a result of l6ss favorable market conditioni. The increase atNW Holdings was driven by higher earnings from water and wastewater utilities and lower expenses at the holding company, partially offset by the decline inother for NW Natural.
2019 COITPARED To 2018. Other net income decreased $5.3 million and $2.5 million at NW Holdings and NW Natural, respectively. The decrease at NW Naturalwas primarily driven by lower asset management revenues and increased asset management revenue sharing with Oregoh customers as a result of the 201gOregon rate case. The decrease from other NW Holdings activity was driven by increases in professional servIce costs ind expenses associated withdeveloping the water business.
Consolidated Ooerations
2020 2019 2018
Table of Contents
The following table presents the results of activities aggregated and reported as other for both NW Holdings and NW Natural:
NW Natural
Other NW Holdings operations and maintenance
NW Holdings
$168.9 $
11.2
169.1
9.1
$ 1s5.2
1.5
-br
$180.1 $178-2
2020 GOMPARED To 2019. Operations and maintenance expense decreased $0.2 million for NW Natural primarily due to the following:' a $7'4 million decrease reflecting pension expense (service cost component) recognized as part of the recovery of NW Natural's-pension balancing accountsettlement in the Oregon rate case, which did not recur in 2020 as discussed below; and' a $0.6 million decrease in workers compensation expense as a result of fewer claims in 2020; partially offset by' a $4'5 million increase in_contractor and professional service expenses, and moving costs, as we moved to a new headquarters and operations center;' a $1.6 million increase related to higher compensation costs attiibutable to annual 6mployee cost increases; and' a $1.4 million increase due to higher lease expense for the new headquarters and operations center.
Operations and maintenance expense in 2020 excludes approximately $2.9 million of COVID-.!9 related expenses that were deferred to a regulatory asset. lnaddition, to mitigate the effects of the financial implications of COVID-I9, management implemented tempoiary cost savings initiatives, which resulted inapproximately $3.5 million of operations and maintenance expense savings.
Operations and maintenance expense increased $1.9 million for NW Holdings primarily due to the following:' a $2.2 million increase in other NW Holdings operations and maintenance expense primarily due to op-erating expenses at our water and wastewater utilitiesthat have been acquired since 2019; partially offset by
' a $0'2 million decrease in operations and maintenance expense at NW Natural as discussed above.
2019 COMPARED TO 20{8. Operations and maintenance expense increased $21 .5 miltion and $13.9 million for NW Holdings and NW Natural, respectively,primarily due to the following factors:. a $12.5 million increase in pension expenses, consisting of:' a $4'6 million increase from recovery of amounts in NW Natural's pension balancing account upon receipt of an OPUC accounting order in March2019, which was offset within NGD margin and income tax benefits;' a $4.0 million increase from higher pension costs as NW Natural began collecting ongoing pension costs through customer rates on November 1,201 8 and began collecting deferred pension costs through customer rates on April 1 , 201 9 rather than deferring a portion to the balancing account;and
' a $3.9 million increase from a regulatory pension disallowance as a result of the March 2019 OPUC order in the Oregon general rate case.
54
EXHIBIT 2
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Page 55 of 210
Table of Contents
The remaining change was primarily attributable to annual employee cost increases.
The $7.6 million increase in other NW Holdings operations and maintenance expense was primarily due to expenses associated with developing the water
business in 2019.
Deoreciation and Amortization
Depreciation and amortization highlights include:
2020 2019 2018ln
$101.6 $
2.1
e0.4 $85.0NW Natural
Other NW Holdings depreciation and amortization
NW Holdings
1.1
$103.7 $ 91.5 $ ss.z
2o2o coi,tpARED To 2019. Depreciation and amortization expense increased $1 1.2 million for NW Natural, primarily due to NGD plant additions and the North
Mist gas storage facility that began operations and depreciating in May 2019.
Depreciation and amortization expense increased $12.2 million for NW Holdings, primarily due to a $1.0 million increase in other NW Holdings depreciation and
amortization related to water and wastewater acquisitions and an $1 1.2 million increase at NW Natural as discussed above.
20.t9 coMpARED To 2018. Depreciation and amortization expense increased by $6.3 million and $5.4 million for NW Holdings and NW Natural, respectively,
primarily due to NGD plant additions that included investments in natural gas trinsmission and distribution systems supporting customer growth, safety,
ieliability, facility upgrades, and enhanced technology. ln addition, the North Mist gas storage facility began operations and began depreciating in May 2019. The
increase in other NW Holdings depreciation and am-ortization was primarily due todepreciation expense at acquired water and wastewater entities.
0.2
Other lncome (Exoense). Net
Other income (expense), net highlights include:
ln millions 2020 2019 2018
NW Natural total other income (expense), net
Other NW Holdings activitY
NW Holdings total other income (expense), net
(3.6)$(15.1) $
1.2
(23.0) $
0.2il----(1,&ilt ers) $ ----(.r)
2O2O COMPARED TO 2019. other income (expense), net, increased $7.9 million at NW Natural primarily due to higher 2019 pension expel:es (non-service cost
component) recognized as part of the settiement and recovery of NW Natural's pension balancing account, which did not recur in 2020. other income (expense),
net, increased $AIg miltion at NW Holdings due to an increase of $1.0 million in other NW Holdings activity and a $7.9 million increase at NW Natural as
discussed above.
2019 COMPARED TO 2018. other income (expense), net, decreased $19.2 million and $19.4 million at NW Holdings and NW Natural, respectively. The decrease
was primarily driven by activity in NW Naturai's pension balancing account as described below. ln addition, net interest income on deferred regulatory accounts
increased $s.s million-prim"rii,y ar" to $5.1 million of defened equity interest income recognized in 2019 in conjunction with amortization of the pension
u"t"n"ing account. lnterest income from the equity portion of AFiJDb decreased $3.3 million, primarily driven by the placement of the North Mist facility into
service in May 2019.
Pension Balancino Account
@31,2o18,NWNaturalhadoPUCapprovaltodefercertainpensioncostsinexcessofwhatwasrecoveredincustomerrates.This
pension cost deferral *as ,""oid"d to a regulatory balancing account, which stabilized tire amount of pension expense recognized each year in the consolidated
statements of comprehensive income ltoss]. rotai pension Jost deferrals, excluding interest, were $10.3 million and $6.5 million for the years ended December
31 , 2018 and 201i , of which $7.9 milliin aia $+.t million was recognized in other income (expense), net, respectively. ln october 2018, the oPUc issued an
order freezing the pension baiancing account and directing that future pension expense would be recovered through rates with an increase of $8.1 million to
revenue requirement.
ln March 201g, the OpUC issued another order allowing for the application of certain defened revenues and tax benefits from the TCJA to reduce NW Natural's
pension regulatory balancing account. A corresponding-totat of $iz.s million in pension expenses were recognized, of which $7.9 million was recognized in other
income lexlpensei, net in thJ consolidated statements of comprehensive income in the first quarter of 2019, with offsetting benefits recorded within operating
revenues and income taxes. The order also directed NW Natural to reduce the balancing account by an additional, disallowed, $10.5 million, of which $6.6
million was charged to other income (expense), net in the consolidated statements of comprehensive income. Amortization of the remaining amount of the
balancing accou-nt began in the second quartei of 2019 in accordance with the order. Total amortization of the balancing account for the year ended December
31, 2019, inclusive of the $12.5 million recovery mentioned
EXHIBIT 2
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GEM STATE WATER COMPANY
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55
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above, was $16.8 million, of which $10.7 million was recorded to other income (expense), net. See Note 10 and "Regulatory Matters- Pension Cost Defenat
and Pension Balancing Accounf'for more information regarding the pension balancing account.
Interest Expense. Net
lnterest expense, net highlights include:
ln millions 2020 2019 2018
NW Natural
Other NW Holdings interest expense
NW Holdings
lncome Tax Exoense
NW Holdings income tax expense highlights include
ln millions
$40.9 $41.3
1.4
$ 37.0
0'1S 3?r
2.2
$43.'.1 $42.7
2020 COMPARED To 2019, lnterest expense, net, decreased $0.4 million at NW Natural primarily due to $1.7 million of lower interest on commercial paper
borrowings, partially offset by $0.6 million of higher interest on long-term debt balances. NW Natural defened to a regulatory asset approximately $1.9 million of
interest on financings undertaken in March 2020 as a precautionary measure to strengthen our liquidity position as the pandemic unfolded.
lnterest expense, net, increased $0.4 million at NW Holdings primarily due to $0.8 million higher interest on outstanding credit agreement balances, partially
offset by a $0.4 million decrease at NW Natural as discussed above.
2019 COiIPARED TO 2018. lnterest expense, net of amounts capitalized increased $5.6 million and $4.3 million at NW Holdings and NW Natural, respectively.
The increase at NW Natural was primarily driven by $2.3 million higher interesl on long term debt balances, $1.2 million lower AFUDC debt interest income, and
$0.9 million higher commercial paper and line of credit interest. The additional increase at NW Holdings was driven by interest on long-term debt at NWN Water
and interest on NW Holdings' line of credit.
2020 2019 2018
lncome tax exp€nse
Effective tax rate
NW Natural income tax expense highlights include:
ln millions
$21.1 $
23.1 %
12.6
16.2 o/o
24.2
26.4%
$
2020 2019 2018
lncome tax expense
Effective tax rate
$21.1 $
23.0 o/o
't4.1 $
16.9 %
24.5
26.4 o/o
2020 COMPARED TO 2019. The effective tax rate increased by 6.9% and 6.1% at NW Holdings and NW Natural, respectively. The increase in the effective tax
rate is primarily due to the 2019 tax implications of the March 2019 OPUC order, including the return of defened TCJA benefits to customers and the regulatory
pension disallowance.
2019 COiIPARED TO 2018. The effective tax rate decreased by 10.2o/o and 9.5% at NW Holdings and NW Natural, respectively. The reduction was driven by the
retum of tax reform benefits to customers, including $5.4 million in tax benefits recognized in association with the OPUC 2018 Oregon rate case order which was
ofiset by pension expenses. See "Executive Summary - Delened TCJA benelits and timing variance' above.
Discontinued Ooerations
On June 20,2018, NWN Gas Storage, a wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement (the Agreement) that provided
for the sale by NWN Gas Storage of all of its membership interests in Gill Ranch. Gill Ranch owns a 75% interest in the natural gas storage facility located near
Fresno, Califomia known as the Gill Ranch Gas Storage Facility.
On December 4, 2020, NWN Gas Storage closed the sale of all the memberships interests in Gill Ranch and received payment of the initial cash purchase price
of $13.5 million less the $1.0 million deposit previously paid. Furthermore, additional payments to NWN Gas Storage may be made subject to a maximum
amount of $15.0 million in the aggregate (subject to a working capital adjustment) based on the economic performance of Gill Ranch each full gas storage year
(April 1 of one year through March 31 of the following year) occurring after the closing and the remaining portion of the 2020-2021 gas storage year and will
continue until such time as the maximum amount has been paid. The fair value of this arrangement at the closing date was zero based on a discounted cash
flow forecast. Subsequent changes in the fair value will be recorded in earnings. The completion of the sale resulted in an after-tax gain of $5.9 million.
EXHIBIT 2
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The results of Gill Ranch Storage have been determined to be discontinued operations until the date of sale and are presented separately, net of tax, from the
results of continuing operationJof NW Holdings for all periods presented. See Note 19 for more information on the Agreement and the results of our
discontinued operations.
FINANCIAL CONDITION
Caoita! Structure
NW Holdings: lo"sterm goal is to maintain a strong and balanced consolidated capital structure. NW Natural targets a regulatory capital structure of 50%
common e{uity aiO Sgyo-long-term debt, which is consistent with approved regulatory allocations in Oregon, which has an allocation of 50% common equity and
S0% long-term debt without ricognition of short-term debt, and Washington, which has an allocation of 50% long-term debt, 1% short-term debt, and 49%
common equity.
When additional capital is required, debt or equity securities are issued depending on both the target capital structure and market conditions. These sources of
capital are also used to fund iong-term debt retirements and short-term commercial paper maturities. See'Liquidity and Capital Resources' below and Note 9.
Achieving our target capital structure and maintaining sufficient liquidity to meet operating requirements is necessary to mainlain attractive credit ratings and
provide access to the capital markets at reasonable costs.
NW Holdings'consolidated capital structure, excluding short-term debt, was as follows:
December 31
2020 2015
Common equity
Long-term debt (including cunent maturities)
Total
NW Natural's consolidated long-term capital structure, excluding short-term debt, was as follows:
48.2o/o
51.8
49.6 o/"
50.4
100.0 %100.0 o/o
December 31,
2020 2019
Common equily
Long-term debt (including cunent maturities)
Total
47.7 o/o
s2.3
49.3 o/o
50.7
100.0 o/o 100.0 %
lncluding short-term debt balances, as of Decembe r 31 ,2020 and 2019, NW Holdings' consolidated capital structure included common equity of 41.47o and
45.7%, iong-term debt of 40.0% and 42.5%, and short-term debt including current maturities of long-term debt of 18.6% and 'l 1 .8%, respectively. As of
December 31, 2020 and 2019, NW Natural's consolidated capital structure included common equity of 42.1o/o and 45.9o/o,long-term deblof 43.2% and 42.9%'
and short-term debt including current maturities of long-term debl of 14.7% and 11.2o/o, respectively.
During 2020, changes to NW Natural's capital structures were primarily due to increases in short-term debt and the issuance of long-term debt. Changes to NW
Holdings'capital structure were primarily due to increases in short-term debt at NW Natural. See further discussion below in "Cash Flows - Financing
Activities".
Liouidity and Capital Resources
ffi31,2o19,NWHoldingshadapproximately$30.2millionand$9.6million,andNWNaturalhadapproximately$10.5million
and $5.9 million, of cash and cash equivalents, respectively. ln order to maintain sufficient liquidity during periods when capital markets are volatile, NW
Holdings and NW Natural may elect io maintain higher cash balances and add short-term borrowing capacity. NW Holdings and NW Natural may also pre-fund
their respective capital expenditures when long-term fixed rate environments are attractive.
For example, as the COVID-19 pandemic developed, in early to mid-March, markets displayed significant volatility. ln response to that volatility and possible
implications for the availability oi access to the capital markets, NW Natural and NW Holdings undertook a number of measures to increase cash on hand to
ensure ample liquidity. On Mirch 20, 2020, NW Natural borrowed $122.0 million under its multi-year credit facility, which was not backing commercial paper' As
of December 31, 2OiO, the credit facility was paid back in full. Similarly, on March 20, 2020, NW Holdings borrowed $35.0 million under its multi-year credit
facility, of which $27.0 million had been paid back as of December 31,2020. On March 23,2020, NW Natural entered into a $150.0 million, 364-day term loan
credif agreement, and borrowed the full amount on closing. The term loan was paid back in full and terminated in 2020. On March 31,2020, NW Natural issued
and soli $1S0.0 million aggregate principal amount of 3.60% first mortgage bonds (FMBs). These actions were taken as a precaution to support sufficient cash
on hand under a variety of financial
EXHIBIT 2
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GEM STATE WATER COMPANY
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sector circumstances that could develop. Cunently, NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and fromoperations and available credit capacity under credit facilities to support funding needs.
NW Holdinos
For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cashfiom a multi-year credit facility, and short-term credit facilitiei. NW Holdings also has a universal shelf relistration statement filed with the SEC for the issuanceof debt and equity securities. NW Holdings long-term d.ebt, if any, anO eqiity issuances are primarily usei to provide equity contributions to NW Holdings,operating subsidiaries for operating and capital expenditures.and gtlheJ-cgrpolate purposes-NW ttotoings' issuance of securities is not subject to regulation bystate public utility commissions, but the dividends from NW.Natural to NW i'toldinjs aie subject to regulitory ri.s-f#.s ;ili.t".. -r'.iw ["roings guaranteesthe debt of its wholly-owned subsidiary, NWN Water. See"Long-Term Debf beloi fomore inforrati-on ieglarding NWN-Water debt.
As part of the ring-fencing conditions agreed upon with the oPUC and WUTC in connection with the holding company reorganization, Nw Natural may not paydividends or make distributions to NW Holdings if NW Natural's credit ratings and common equity ratio, defi;ed al tn6 ratiJof equity io tong+erm ctebt, fall belowspecified levels. lf NW Natural's long-term secured credit ratings are below-A- for S&P and ni for ffoooy's, oividenos may be issued so long as NW Natural,scommon equity ratio is 45% or more. lf NW Natural's long term secured credit ratings are below BBB foi S&p and Baa2 for Moody's, dividends may be issued solong as NW Natural's @mmon equity ratio is 46% or more. Dividends may not be issued if NW Natural's long-term secured credit ratings are BB+ or below forS&P or Bal or below for Moody's, or if NW Natural's common equity ratiois below 44o/o,where the ratio is m-easured using common equity and long-term debtexcluding imputed debt or debt-like lease obligations. ln each caie,-common equity ratios are determined based on a preceding or projected 13-month ave*ge.ln addition, there are certain OPUC notice requirements for dividends in excess of 'SoU" of ruW Nafural's retained earnings.
Additionally, if NW Natural's 99mTon equity (excluding.goodwill and equity associated with non-regulated assets), on a preceding or projected 13-monthaverage basis, is less than 46% of NW Nalural's capital structure, NW Naiural is required to notifu ihe opuc, anJ if th" tommon-equity-fitio arrs below 44%, filea plan with the OPUC to restore its equity ralio lo 44o/o. This condition is designed to ensure NW ilatural continues to be adequately capitalized under theholding company structure, Under the WUTC order, the average common equity ratio must not exceed 56%.
At December 31,2O20 and 2019, NW Natural satisfied the ring-fencing provisions described above.
Based on several factors, including current cash reserves, committ€d credit facilities, its ability to receive dividends from its operating subsidiaries, in particularNW Natural, and an expected ability to issue long-term debt and equity securities in the capital ma*ets, NW Holdings believes its liq"uiaity=is sumcient to meetanticipated near-term cash requirements, including all contracfual obligations, investing, and financing activities as discussed in,Co'ntnc.tuat Obtigations" and"Cash F/ows" below.
Nw HoLDINGS DIVIDENDS. Quarterly dividends have been paid on common stock each year since NW Holdings' predecessor,s stock was first issued to thepublic in 1951. Annual common stock dividend payments per share, adjusted for stock splits, have increased e-ach year since 1g56. The declarations andamount of future dividends to shareholders will depend upon earnings, cash flows, financial condition, f.fw tiaiurat,s ability to pay dividends to NW Holdings andother factors. The amount and timing of dividends payable on common stock is at the sole discretion of the NW Holdings -Boaid
Lf Directors.
Natural Gas Distribution Seoment
Forthe.NGD business segment, short-term bonowing requirements typically peak during colder winter months when the NGD business borrows money to coverthe lag.betw.een natural gas purchases and bill collections tom customers. -sirort-term
liquidity for the NGD business is primarily providea by cash balances,intemal cash flow from operations, proceeds from the sale of commercial paper notes, as welias available cash from ,rttiy""icr"oit iacitiiies, short-term creditfacilities, company-owned life insurance policies, the sale of long-term oe6t, Lna equity contributions from NW Holdings. nvt Narurars [ili"rm debt andcontributions from NW Holdings are primarily used to finance NGD capital expenditures, refinance maturing debt, and provide temporary funding for othergeneral corporate purposes ofthe NGD business.
Based on its cunent debt ratings (see "c/ed,l Raflngs' below), NW Natural has been able to issue commercial paper and long-term debt at attractive rales andhas not needed to bonow or issue letters of credit from its back-up credit facility. ln the event NW Natural is noi able to issue new debt due to adverse marketconditions or other reasons, NW Natural expects that near-term liquidity needs can be met using intemat castr itows, issuing commercial paper, receiving equitycontributions from NW Holdings, or, for the NGD segment, drawing upon a committed.credit faciiity. NW Natural also has a-universal shelf registration statementfiled with the SEC for the issuance of secured and unsecured debt-securities. As previously descri'bed, ttw Naturat drew on its credit facility, secured a termloan, and issued FMBs to ensure ample liquidity during market volatility resulting irom the iommencement of the COVID-l9 pandemic.
ln the event senior unsecured long-tenn debt ratings are downgraded, or outstanding derivative positions exceed a certain credit threshold, counterparties underderivative contracts could require NW Natural to post cash, a letter of credit, or other forms of coilateral, which could expose NW Natural to additional cashrequirements and- may trigger increases in short-term borrowings while in a net loss position. NW Natural was not required to post collateral at December 31,2020. However, if the credit risk-
58
EXHIBIT 2
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GEM STATEWATER COMPANY
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related contingent features underlying these contracts were triggered on December 3 1,2020, assuming long-term debt ratings dropped to non-investment grade
levels, NW Natural could n"r"-u"6. i"qriiualo port $0.1 million in collateral with our counterparties. See'Credit Ratings' below and Note 16'
other items that may have a significant impact on NW Natural's liquidity and capital resources include NW Natural',s pension contribution requirements and
environmental expenditures.
PENSION CONTRIBUTION, NW Natural expects to make contributions to its company-sponsored defined benefit plan, which is closed to new employees, over
the next several years until the plan is fully funded under the pension Protection Act ruies, including the rules issued under the Moving Ahead for Progress in the
21st Century Act (MAp-21), as amended. see 'Application of critical Accounting Policies-Acco unting for Pensions and Postretirement Benefits" below and
Note 10 for more information.
ENVIRONMENTAL EXPENDITURES. NW Natural expects to continue using cash resources to fund environmental liabilities. NW Natural has authorizations in
oregon and washington to defer costs related to remediation of propertiJs that are owned or were previously owned by NW Natural. ln oregon, a Site
Remediation and Recovery Mechanism (SRRM) is cunenfly in place to recovery prudently incurred costs allocable to oregon customers, subject to an earnings
test. on october 21, 2019 the wUTC authorized an Environmental cost Recovery Mechinism (ECRM) for recovery of prudently incurred costs allocable to
washington customers beginning November 1 ,2019. See Hote 1g, and "Results bf operations-Regulatory Matters-Enviro nmental cost Defenal and
Recoverl'above.
Based on several factors, including current credit ratings, NW Natural's commercial paper program, cunent.cash reserves, committed credit facilities, and an
expected ability to issue long-term debt and receive equity contributions trom Nw_nodings, NW Natural believes its liquidity is sufficient to meet anticipated
near-term cash requirements, including all contractual ouiigaiion", investing, and financirig activities as discussed in'contractual obligations" and "cash F/ows'
below.
NW NATURAL DwIDENDS. The declarations and amount of future dividends to NW Holdings will depend upon earnings, cash flows, financial condition, the
satisfaction of opuc and wuTc regulatory ring-fencing restrictions, and other factors. ThL amouni and timing of dividends payable on common stock is subject
to approval of the NW Natural Board of Directors.
oFF.BALANCE SHEET ARRANGEMENTS. Except for certain lease and purchase commitments, NW Holdings and NW Natural have no material off-balance sheet
financing anangements. See "Contractual Oblrgafions" below.
Contractua! Oblioations
@ntractualobligationsfromcontinuingoperationsatDecember31,2020bymaturityandtypeofobligation:
Pavments Due in Years Ending December 31,
2022 2023 2024 2025 Thereafier Totalln millions 2021
NW Natural
Short-term debt maturities
Long-term debt maturities
lnterest on long-term debt
Postretirement benerit paym€nts(l)
Operating leases
Gas Purchases(2)
Gas pipeline capacity commitments
Other purchase commitments(3)
Other long-term liabilities(rt
NW Natural Total
Other (NW Holdings)
Short-term debt maturities
Short- and long-term obligations(5)
NW Holdings Total
87.8
5.3 4.7
$231.5 $
60.0
40.3
26.8
6.8
83.5
85.6
0.8
18.2
$$$$$
74.7
446.0
161.9
123.8
516.3
13.3
231.5
924.7
631.2
303.4
't58.7
83.5
923.3
35.0
18.2
38.6
27.5
6.8
90.0
37.7
28.4
7.0
34.6
29.'.|
7.1
77.1
5.9
30.0
34.0
29.7
7.2
74.4a2.
5.0
553.5 166.0 249.9 153.8 180.3 2,006.0 3,309.5
73.0 73.0
35.9 0.4 0.4 0.4 0.3 2'0 39'4
$ 66214 S reO'+ S 250.3 $ 154,2 $ 180'6 $ 2'008'0 $ 3'4213
0) postretirement benefit payments primarily consists of two NW Natural items: (1) estimated pension and other postretirement plan payments, which are funded by plan
assets and future cash contribution", and (z) required payments to the westem states muliiemployer pension plan due to Nw Natural's withdrawal from the plan in
December 20'13. See Note 10.\2t Gas purchases include contracts which use price formulas tied to monthly index prices. The commitment amounts presented incorporate the December 2020 first of month
inJei price for each supply basin from which gas is purchased. For a summary of gas purchase and gas pipeline capacity commitments' see Note 17'
(3) Other purchase commiiments primarily consiJt of remaining balances under existing purchase orders and gas storage agreements.
59
EXHIBIT 2
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GEM STATE WATER COMPANY
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payrn€nts are unlikely lo all occur in the next 12 months.(5) Short- and long-term obligations include short- and long-term debt obligations and other immaterial liabilities.
ln addition to known contractual obligations listed in the above table, NW Natural has also recognized liabilities for future environmental remediation or action.The exact timing of payments beyonl 12 months with respect to those liabilities cannot be reas;naury estimatea due to numerous uncertainties sunounding thecourse of environmental remediation and the preliminary nature of site investigations. See Note 1g for a further discussion of environmental remediation costliabilities.
At December 31, 2020' 606 of NW Natural's natural gas distribution employees were members of the offce and professionat Employees lntemational union(oPElu) Local No' 1 1 . ln November 2019' union employees ratified a new collective bargaining agreement thit took effect on December 1 , 2olg,expires onMay 3'l ' 2024, and is efiective thereafter from year to year unless either party serves noti-ce orits intent to negotiat" modirications to the coilective bargainingagreem6nt.
Short-Term Debt
The primary source of short-term liquidity for NW Holdings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cashfrom a multi-year credit facility, and short-term credit faciiities il may enter inio from time to time.
The primary source of short-term liquidity for NW Natural is from the sale of commercial paper, available cash from a multi-year credit facility, and short-termcredit facilities' NW Natural has a separate commercial paper program and separate uarit< iacifities. ln addition to issuing commercial paper or bank loans tomeet working capital requirements, including seasonal requhements to financs gas purchases and accounts receivable, short-term debt may also be used totemporarily fund capital requirements. For NW Natural, commercial paper and bink'toans "r" p"noJi."lv;"il.;d il;ilil';;ilii;g-term debt or equityconhibutions from Nw Holdings. commercial paper, when outstanding, is sold through two commerciat uanis unaer an issuing and paying agency agreementand is supported by one or more unsecured revolving credit facilities.s-ee 'CreditAgreements" below,
At Decombor 31' 2020 and 2019, NW Holdings had short-term debt outstanding of $304.5 million and $149.1 million, respectively. The weighted averageinterest rate of NW Holdings'short-term deblbutstanding at December 31,20;o and 201g was 0.5% and2.0o/o,respectively. NW Natural had short-term debtoutstanding of $231.5 million and $125.1 million, respectively. The weighted "r"r"!" interest rate of NW Natural's short-term oeut ogistanding at December 31,2020 and 20't9 was 0.4o/o and 2.0%, respectively.
Gredlt Aoreements
NW Holdinos
NW Holdings has a $100 million credit agreement, with a feature that allows it to request increases in the total commitment amount, up to a maximum of $1 s0million' The maturity date of the agreement is october 2, 2023, with availaote exeniions of commitments for two additional one-year periods, subject to lenderapproval.
All londers under the NW Holdings credit agreement are major linancial institutions with committed balances and investment grade credit ratings as ofDecember 31, 2020 as follows:
ln milliils
AA/Aa
Total
Loan
$ roo
00
Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Holdings if the lender defaulted due to lack offunds or insolvency; however, NW Holdings does not believe this tJk to oe imminent due to the renJeo iirong investment-grade credit ratings.
The NW Holdings credit agreement permits the issuance 9f 1.". t".T of credit in.an aggregate amount of up to $40 million. The principal amount of bonowingsunder the credit agreement is due and payable on the mafurity.date. The credit agricment requires NW Holdings to maintain a consolidated indebtedness tototal capitalization ratio ol 7oo/o ot less- Failure to comply withihis covenant yvouli enttle the lenders to terminaie their lending commitmen6 and accelerate thematurity of all amounts outstanding. Nw Holdings was in compliance with this covenant at December 31 , 2020 and2o1g, with consolidated indebtedness to totalcapitalization ratios of 58.6% and il.3o/o, respectivety.
The agreement also requires NW Holdings to maintain debt ratings (urhich are defined by a formula using NW Natural,s credit ratings in the event NW Holdingsdoes not have a credil rating) with Standard & Poor's (s&P) and [llobay's tnvestors service, tnc. 1Moffij "na
notiry the tenders of any change in its seniorunsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. R inangi in ruw noHings,debt ratings by S&p or Moody,s is notan event of default, nor is
60
EXHIBIT 2
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the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on any loans outstanding
under the credit agreements are tied to debt ratings and tierefore, a change in tie debt rating wouid increase or decrease the cost of any loans under the credit
agreements wheriratings are changed. NW Holdings does not currently maintain ratings with S&P or Moody's'
lnterest charges on the credit agreement are indexed to the London lnterbank offered Rate (LIBOR). The agreement contains a provision to transition to an
equivalent replacement rate upon the phase-out of LIBOR in 2022'
NW Holdings had no letters of credit issued and outstanding at December 31 , 2020 _and 2019. NW Holdings had a $1 '0 million letter of credit issued and
outstanding, separate from the aforementioned creait agieJment, at December 31, 2019 for purposes of ficilitating the suncadia acquisition, which was
extinguished after the close of the transaction in February 2020'
NW Natural
NW Natural has a multi-year credit agreement for unsecured revolving loans totaling $300 million, with a feature that allows NW Natural to request increases in
the total commitment amornt, ,p io i r"rirnum of 9450 million. The maturity date of the agreement is october 2, 2023 with an available extension of
commitments for two additional one-year periods, subject to lender approval.
All lenders under the NW Natural credit agreement are major financial instilutions with committed balances and investment grade credit ratings as of
December 31, 2020 as follows:
Table of Contents
ln millions
Lender
AA/Aa
Total
300s
Loan
$ 300
Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Natural if the lender defaulted due to lack of
funds or insolvency; however, NW Natural does not believe this ristito ue imminent due to the lenders'strong investment{rade credit ratings'
The NW Natural credit agreement permits the issuance of letters of credit in an aggregate amount of up to.$60 million. The principal amount of borrowings under
the credit agreement is due and payable on the maturity date. There wene no outstaniing balances unter this credit agreement at December 31'2020 or 2019'
The credit agreement requires ttw Natural to maintain a consolidated indebtedness to tital capitalization ratio ot 7oo/o or less. Failure to comply with this
covenant would entitle the lenders to terminate tt,eir fenOinl commitments and accelerate the maturity of all amounts outstanding. NW Natural was in
compliance with this covenant at December 31,2020 ana iot g, with consolidated indebtedness to toial capitalization ratios of 57.9% and 54'1o/o, respectively'
The agreement also requires NW Natural to maintain credit ratings with s&P and. Moody's and notify the lend.ers of any change in NW Natural's senior
unsecured debt ratings or senior secured debt ratings, ". "ppri"iur", by guch rating agencies. A chinge in NW Natural's debt ratings by s&P or Moody's is not
an event of default, nor is the maintenance of a specific minimum level of debt rating i condition of drawing upon the credit agreement. Rather, interest rates on
any loans outstanding under the agreement are tied to debt ratings and therefore, alhang" in the debt rating would increase or decrease the cost of any loans
under the credit agre6ment when ratings are changed. See 'Credit Rafings' below.
lnterest charges on the credit agreement are indexed to LlBoR. The agreement contains a provision to transition to an equivalent replacement rate upon the
phase-out of LIBOR.
Credit Ratinos
NW Holdings does not currently maintain ratings with s&p or Moody's. NW Natural's credit ratings are a factor of liquidity, potentially affecting access to the
capital markets including the commercial papei market. NW Naturai's credit ratings also have aiimpact on the cost of funds and the need to post collateral
under derivative mntracts.
The following table summarizes NW Natural's current credit ralings:
S&P Moodv's
Commercial paper (short-term debt)
Senior secured (long-term debt)
Senior unsecured (long-tem debt)
Corporate credit rating
Ratngs ouuook Stable
61
EXHIBIT 2
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Page 62 of 210
P-2
M
Baal
nla
Stable
A-1
AA.
da
A+
The above credit ratings and ratings outlook are dependent upon a number of factors, both qualitative and quantitative, and are subject to change at any time.The disclosure of or reference to these credit ratings is not a recommendation to buy, sell or hold NW Holdings or NW Natural secuiities. Each rating sh-ould beevaluated independently of any other rating.
As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Holdings and NWNatural are required to maintain separate credit ratings, longterm debt ratings, and preferred stock ratings,-if any.
Table of Contents
Lonq-Term Debt
The following NW Natural debentures were retired in the periods indicated:
ln millions
Year Ended December 31.
2020 2019 2018
NW Natural First Mortgage Bonds
Series 6.60% due 2018
Series 1.55% due 20'18
Series 8.31% due 2019
Series 7.63% due 201g
Series 5.37% due 2020
Total
$
75$30$97
ln June 2019, NWN Water, a wholly-owned subsidiary of NW Holdings, entered into a two-year term loan agreement for g3S.0 million. The loan canied aninterest rate of 0.7OYo at December 31,2020, which is based upon the one-month LIBOR rite. The loan is juaranteed by NW Holdings and requires NWHoldings to maintain a consolidated indebtedness to total capitalization ratio of TOYo or less. Failure to comily with this covenant would entifle the lenders toterminale their lending commitmenls and accelerate the maturity of all amounts outstanding. NW Holdings was in compliance with this covenant atDecember 31, 2020, with a consolidated indebtedness to total capitalization ratio of 58.6%.
ln March 2020' NW Natural issued $150.0 million of FMBs with an interest rate of 3.60%, due in 2050. ln February 2020, NW Natural retired $75.0 million ofFMBs with an interest rale ci 5.37o/o.
$10.0 million of FMBs with an interest rate of 9.05% and $50.0 million of FMBs with an interest rate of 3.18% will mature in August and September 2021,respectively.
See "Financial Condition-Contractual Obligations' above for long-term debt maturing over the next fve years.
Bankruotcv Rinq-fencino Restrictions
As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Natural is required tohave one director who is independent from NW Natural management and from NW Holdings and to issue o-ne share of NW ttaturat prefened stock to anindependent third party. NW Natural was in compliance with both of these ring-fencing provisions as of December 31,2020 and 2019. NW Natural may file avoluntary petition for bankruptcy only if approved unanimously by the Board of Directors of NW Natural, including the independent director, and by the holder ofthe prefened share.
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22
:
$$
75
10
20
$
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Gash Flows
Ooeratino Activities
@-*r-per"ting cash flows are primarily affected by net income or loss, changes in working capital requirements, and other cash and non-cash
adjustments to operating results.
Operating activity highlights include:
NW
2020 2015 2018ln millions
$143.0 $185.3 $
NW Natural
168.8Cash provided by operating activities
2020 2019 2018ln millions
Cash provided by operating activities $146.2 $'186.2 $
The significant drivers of changes in cash provided by operating activities discussed below apply to both NW Holdings and NW Natural'
2O2O COMPARED TO 2019. The significant factors contributing to the $42.3 million and $40.0 million decreases in NW Holdings and NW Natural cash flow
provided by operating activities, respectively, were as follows:
a decrease of $25.8 million at NW Natural from increased receivables;
a decrease of $18.0 million due to higher contributions paid to qualified defined benefit pension plans;
million from decreased cash collections from our decoupling mechanism; and
173.5
a decrease of $15.8
a decrease of $1 1.6 million due to higher environmental expenditures; partially offset by
a decrease of $41..1 million in net deierred gas costs as the actual costs during the 20i9-20 winter season were in line with estimates embedded in the PGA
as opposed to gas costs in the 2018-201 I winter season that were 14o/o above PGA estimates.
2Ol9 COMPARED TO 2018. The significant factors contributing to the $16.5 million and $12.7 million increases in NW Holdings and NW Natural cash flow
provided by operating activities, respectively, were as follows:. an inciease ot $11 .S miilion at t tW Hotiingr and $24.9 million at NW Natural due to net income tax refunds in 2019 compared to payments in 2018. The
refunds were primarily due to bonus depreciation taken on NW Natural's North Mist gas storage expansion which was placed into service in May 2019' as
well as $6.0 million in income taxes paid in 2018 and refunded to NW Natural in 2019;. an increase of $10.6 million from collections of both cunent and deferred pension expenses as a result of NW Natural's Oregon rate case; and
. an increase of 94.6 million due to lower contributions paid to qualified defined benefit pension plans; partially offset by
. a net decrease of g2g.5 million at NW Natural from changes in receivables, inventories, and accounts payable, primarily reflecting increased gas purchase
expenditures from average weather in 2019 compared to warmer-than average weather in 2018 as well as higher gas costs than those included in customer
rates.
During the year ended December 31,2020, NW Natural contributed $29.0 million to its qualified defined benefit pension plan, compared to $1 1 .0 million for 2019
and $1 5.5 million in 201g. The amount and timing of future conkibutions will depend on market interest rates and investment returns on the plans' assets. see
Note 10.
NW Holdings and NW Natural have lease and purchase commitments relating to our operating activities lhgt ar.9 financed with cash flows from operations. For
information on cash flow requirements related io leases and other purchase clommitments, see'Financial Condition-Contractual Obligations" above and Note
17.
lnvestino Activities
lnvesting activity highlights include
NW Holdings
2020 2019 2018ln millions
Cash used in investing activities
Capital expenditures
$(2e4.3) $
(273.o)
(303.8) $
(223.5)
NW Natural
1217.5)
(2',t4.6)
2020 2019 2018ln millions
Cash used in investing ac{ivities
Capital expenditures
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$(264.1) $
(266.0)
(243.1) $
(221.41
(238.5)
(214.3)
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2020 GOMPARED To 2019. Cash used in investing activities decreased $9.5 million at NW Holdings and increased $21.0 million and NW Natural, respectively.
The decrease in cash used at NW Holdings was driven by $12.5 million of proceeds from the sale of Gill Ranch and $7.0 million from the sale of Trail West. The
increase in cash used at NW Natural was due to continued capital expenditures for customer grou/th, system reinforcement, and technology, partially offset bylower leasehold improvement expenditures at the new corporate operations center and $8.1 million of proceeds from the sale of assets.
2019 COITIPARED TO 2018. Cash used in investing activities increased $86.3 million and $4.6 million at NW Holdings and NW Natural, respectively. The increase
at NW Natural was driven by continued capital expenditures for customer growth, system reinforcement, and technology, as well as leasehold improvement
additions at NW Natural's new corporate operations center. The increase was partially offset by lower capilal expenditures due to the completion of the North
Mist gas storage expansion in May 2019. The increase at NW Holdings was driven by $55.9 million higher expenditures for acquisitions, net of cash acquired.
NW Natural capital expenditures for 2021 are expected to be in the range of $280 million to $320 million and for the five-year period from 2021 to 2025 are
expected to range from $1 .0 billion to $1.2 billion. NW Natural Water is expected to invest approximately $15 million in 2021 related to maintenance capital
expenditures for water and wastewater utilities currently owned or under a purchase and sale agreement, and for the five-year period from 2021 to 2025 capital
expenditures are expected to invest approximately $40 million to $50 million.
The timing and amount of the core capital expenditures and projects tor 2021 and the next five years could change based on regulation, grou^h, and cost
estimates. Additional investments in our infrastructure during and after 2021 lhat arc not incorporated in the estimates provided above will depend largely on
additional regulations, growth, and expansion opportunities. Required funds for the investments are expected to be internally generated or financed with long-
term debt or equity, as appropriate.
Financino Activities
Financing activig highlights include:
NW Holdings
ln milliils 2020 2019 2018
Cash provided by financing activities
Proceeds from issuances of CP, maturities greater than 90 days
Change in short-term debt, net
Change in long-tem debt
Proceeds from common stoc* issued
Cash dividend payments on common stock
ln millions
$171.8 $
195.0
(3e.6)
75.0
(5s.4)
115.5 $
(68.5)
'145.0
(53.3)
57.8
163.3
(47.0)
(51.3)
93.0
NW Natural
2020 2019 2018
Cash provided by financing activities
Proceeds from issuances of CP, maturities greater than g0 days
Change in short-term debt, net
Change in long-term debt
Cash dividend payments on common stock
$'t22.4 $
195.0
(88.6)
75.0
(55.4)
54.9 $69.8
(s2.4)
't 10.0
(53.4)
'163.3
(47.0)
(38.4)
2020 COITPARED TO 2019. Cash provided by financing activities increased $56.3 million and $67.5 million at NW Holdings and NW Natural, respectively.
The increase in cash provided by financing activities at NW Natural was primarily driven by $198.8 million of higher borowings of short-term debt, net, and $2.0million of higher cash dividends paid. The increases were partially offset by decreases of $35.0 million in long-term borrowing and the $93.2 million in capital
contribution from NW Holdings to NW Natural in 2019.
The increase at NW Holdings was pdmarily due to $223.9 million higher in short-term borrowing, partially offset by decreases of $93.0 million in common stock
issuance proceeds and $70.0 million lower repayments of long-term debt.
2019 COtIPARED TO 2018. Cash provided by financing activities increased $57.7 million and decreased $14.9 million at NW Holdings and NW Natural,
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The decrease in cash provided by financing activities at NW Natural was primarily driven by $255.7 million, in higher repayments of short-term debt compared to
201g and $1S.0 million higher caih dividen-ds paid. The decrease was partially offset by net issuances of $110.0 million in long-term debt in 2019 compared to
net repayments of 947.0 million in 2018, as well as a capital contribution from NW Holdings to NW Natural of $93.0 million'
The increase at NW Holdings was primarily due to proceeds of $93.0 million from the June 2019 issuance of NW Holdings common stock,.the issuance of $35.0
million of long-term debt ati.lw ttaiural Witer, and'short-term debt issuances of $24 million at NW Holdings. These increases were partially offset by the debt
activity at NW Natural described above.
Penslon Cost and Funding Status of Quallfied Retlrement PIans
rdancewithaccountingstandardsforcompensationandretirementbenefits.See.ApplicationofCritical
Accounting policies and Estimates - Pens,bns and Postretirement Benefiis" below. Pension expense for NW Natural's qualified defined benefit plan, which is
allocated f,egeen operations and maintenance expenses, capital expenditures, and through october 31, 2018, the deferred regulatory balancing account,
totaled $18.4 million in 2020, an increase of $1.9 million from 2019. The fair market value of pension assets in this plan increased to$373.9 million at
OecemUeref , 2020 from $313.1 million at December 31, 2019. The increase was due to a gain on plan assets of $54.6 million and $29.0 million in employer
contributions, partially offset by benefit payments of $22.7 million.
Contributions made to NW Natural's company-sponsored qualified defined benefit pension plan are bas6d on actuarial assumptions and estimates, tax
regulations, and funding requirements underied'eral law. T-he qualilied defined benefit pension plan was underfunded by $151.2 million at December 31'2020.
NW Natural plans to make contributions during 2021 of $20.1 million. See Note 10 for further pension disclosures.
Gontinocnt Liabilitica
Loss contingencie6 are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable in
accordance-with accounting standards for contingenciei. See 'Appncafion of'Criticat Accounting Poticies and Estimates" below' At December 31, 2020' NW
Naturals total estimated lia-bility related to environmental sites was $120.5 million. See Note 18 and 'Results of Operations-Regulatory Matters-Rate
Mechanisms-Environmental Cost Defenal and Recovef above.
NW Holdings is not cunenly party to any direct claims or litigation, though in the future it may be subject to claims and litigation arising in the ordinary course of
business.
New Accountino Pronouncements
@ronouncementsthatmayhaveanimpactonourfinancialcondition,resultsofoperations,orcashflows,seeNote2.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESI'I'ATES
ln preparing financial statements in accordance with U.S. GAAP, management exercises judgment to assess the potential outcomes and related accounting
imiaits in ihe selection and application of accounting principles, including making estimates and assumptions that affect reported amounts of assets, liabilities,
revenues, expenses, and relaied disdosures in the financial statements. Management considers critical accounting policies to be those which are most
important to the representation of financial condition and resulls of operations and which require management's most difficult and subjective or complex
judgments, including accounting estimates that could result in materially different amounts if reported under difierent conditions or used different assumptions'
bui most critical estimates and judgments for both NW Holdings and NW Natural include accounting for:. regulatoryaccounting;. revenue recognition;. derivative instruments and hedging activities;. pensions and postretirement benefits;. income taxes;. environmental contingencies; and. impairment of longJived assets and goodwill.
Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit Committees of the Boards of
NW H6bings and NW Natural. Within the context of critical accounting policies and estimates, management is not aware of any reasonably likely events or
circumstances that would result in materially different amounts being reported.
Requlatorv Accountino
ffiNGD segment is reguiated by the OpUC and WUTC, which establish the rates designed to recover specific costs of providing regulatory services, and, to a
certain extenl, set forth ipecial accounting treatment for certain regulatory transactions for which NW Natural records regulatory assets and liabilities. ln general,
the same accounting principles as non-regulated
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companies reporting under U.S. GAAP are used. However, authoritative guidance for regulated operations (regulatory accounting) requires different accountingtreatment for regulated companies to show the effects of such regulation. For example, NW Natural accounts for the cost of gas using a PGA defenal and cosi
recovery mechanism, which is submitted for approval annually to the OPUC and WUTC. See 'Results of Operations-Regulatory Matters-Rate Mechanisms
-Purchased Gas Adiusfinent' above, There are other expenses and revenues that the OPUC or WUTC may require NW Natural to defer for recovery or refund
in future periods. Regulatory accounting requires NW Natural to account for these types of deferred expenses (or defened revenues) as regulatory assets (or
regulatory liabilities) on the balance sheet. When the recovery of these regulatory assets from, or refund of regulatory liabilities lo, customeis is approved, NWNatural recognizes the expense or revenue on the income statement at the same time the adjustment to amounts included in rates charged to customers.
The conditions that must be satisfied to adopt the accounting policies and practices of regulatory accounting include:. an independent regulator sets rates;. the regulator sets the rates to cover specific oosts of delivering service; and' the service territory lacks competitive pressures to reduce rates below the rates set by the regulator.
Because NW Natural's NGD operations satisfo all three conditions, NW Natural continues to apply regulatory accounting to NGD operalions. Future accounting
changes, regulatory changes, or changes in the competitive environment could require NW Natural to discontinue the application of regulatory accounting forsome or all of our regulated businesses. This would require the write-off of those regulatory assets and liabilities that would no longer be probable of recoveryfrom or refund to customers,
Based on cunent accounting and regulatory competitive conditions, NW Natural believes it is reasonable to expect continued application of regulatory
accounting for NGD activities. Further, it is reasonable to expect the reoovery or refund of NW Natural's regulatory assets and liabiliti6s at December 31,2020through future customer rates. lf it is determined that all or a portion of these regulatory assets or liabilities no longer meet the criteria for continued application ofregulatory accounting, then NW Nafural would be required to write-ofi the net unrecoverable balances against eainings in the period such determination is
made. The net balance in regulatory asset and liability accounts was a net liability of $308.5 million and $285.3 million as of December 31,2020 and 2019,
respectively. S6e Note 2 tor more detail on regulatory balances.
Revenue Recoonltion
Revenues, which are derived primarily from the sale, transportation, and slorage of natural gas, are recognized upon the delivery of gas commodity or servicesrendercd to customers.
Accrued Unbilled Revenue
For a description of the policy regarding accrued unbilled revenue, most of which relates to the NGD business at NW Natural, see Note 2. The following tablepresents changes in key metrics if the estimated percentiage of unbilled volume at December 31 was adjusted up or down by 1%:
2020
ln millions 1%Down 1%
Evenue rncr6as6
Margin increase (decreasel(t )
Net income before tax increass (decrease)tt)
(1) lncludes impact of regulatory mechanisms including decoupling mechanism and exdudes the impact of unbilled revenue from water services.
Derivative lnstruments and Hedoinq Actlvllles
NW Natural's gas acquisition and hedging policies set forth guidelines for using financial derivative instruments to support prudent risk management strategies.
These-policies specifically prohibit the use of derivatives for trading or speculative purposes. Financial derivative contracts are utilized to hedge a portion oi
natural gas sale requirements. These contracts include swaps, options, and combinations of option contracts. NW Natural primarily uses these derivative
financial instruments to manage commodity price variability. A small portion of NW Natural's derivative hedging strategy involves foreign cunency exchange
contracts.
Derivative instruments are recorded on lhe balance sheet at fair value. lf certain regulatory conditions are met, then the derivative insbument fair value isrscorded together with an offsotting entry to a regulatory asset or liability account pursuant to regulatory accounting, and no unrealized gain or loss is recognizedin current income or loss. See 'Regulatory Accounting'above for additional information. The gain or loss ftom the iair value of a derivative instrument subject to
regulatory defenal is included in the recovery from, or refund to, NGD business customers in future periods. lf a derivative contract is not subject to regulaiory
dgfenal, then the accounting treatment for unrealized gains and losses is recorded in accordance with accounting standards for derivatives anA neOging whiin is
either in cunent in@me or loss or in accumulated other comprehensive income or loss (AOCI or AOCL). Derivative contracts outstanding at December 31,2020,
2019 and 2018 were measured at fair value using models or other market accepted valuation methodologies derived from observable market data. Estimates of
fair value may change significantly from period-to-period depending on market conditions, notional amounts, and prices. These changes may have an impact onresults of operations, but the impact would largely be mitigated due to the majority of derivative activilies
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0.9
0.'1
0.1
(0.1 )
(0.1)
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being subject to regulatory defenal treatment. For more information on derivative activity and associated regulatory treatment, see Note 2 and Note 16'
The following table summarizes the amount of gains realized from commodity price transactions for the last three years:
2020 2019 2018ln millions
NGD business net gain on:
Commodtty Swaps $2.3 $!7.9 $7.4
Realized gains and losses ftom commodig hedges shown above were recorded in cost of gas and were, or will be, included in annual PGA rates.
Pensions and Postretirement Benefits
NW Natural maintains a qua'i'iiffiii6ii-ri-butory defined benefit pension plan, non4ualified supplemental pension plans for eligible executive officers and
certain key employees, and other postretirementLmployee benefii plans covering ceriain non-union employees. NW Natural also has a qualified defined
contribution plan (Retirement K Savings plan) for all eligible employees. Only the qualified defined benefit pension plan and Retirement K Savings PIan have
pLn assets, wnicir are held in qualifiei trusts to fund tne respeitiv6 retirement benefrts. The qualified defined benefit retirement plan for union and non-union
Lmpoyees was closed to new participants several years ago. Non-union and union employees hired or re-hired after December 31' 2006 and 2009'
resfectivety, and employees oi certain NW Holding! subsiliaries are provided an enhanced Retirement K Savings Plan benefit. The postretirement welfare
Benefit Pla-n for non-union employees was also closed to new participants several years ago.
Net periodic pension and postretirement benefit costs (retirement b€nefit costs) and projected benefit obligatio.ns (benefit obligations) are determined using a
number of key assumptions including discount rates, rate of compensation incieases, retirement ages, mortality rates and an expected long-term return on plan
assets. See Note 10.
Accounting standards also require balance sheet recognition of unamortized actuarial gains and losses and prior service costs in AoCl or AoCL' net of tax'
However, ihe retirement beneit costs related to qualifi6d defined benefit pension and fostretirement benefit plans are generally recovered in rates charged to
NGD customers, which are set based on accounting standards for pensions and postretirement benefit expenses. As such, NW Natural received approval from
the OpUC to recognize the unamortized actuarial gains and lossesand prior service cosls as a regulatory asset or regulatory liability based on expected rate
i"Lr"rv, ratherth-an including it as AoCl orAoCL under @mmon equity. See 'Regulatory Accounting'above and Note 2"lndustry Regulation'.
ln2O11, NW Natural received regulatory approval from the OPUC and began deferring a portion ol pension-exp-ense above or below the amount set in rates to a
regulatory balancing account ontre uatanii sheet. As part of general rate case proceedings, on october 26, 2018, the OPUC issued an order to freeze NW
tta'tural's pension blhncing account as of october 31, 2018. li uarch 2019, the OPUC issued an order resolving the remaining open ile-ms for NW Natural's
2o1g oregon general rate case regarding recovery ofihe pension balancing account. At December 31,2020, the cumulative amount defened for future pension
cost recov-ery ias $S0.5 million, including accrued interesi. The regulatory ialancing account includes the recognition of accrued interest on the account balance
at NW Natural s authorized rate of return from 201 'l through Octob6r 31 , i018, and it +.a% thereafter. See 'Regulatory Matters - Rate Mechanisms - Penstbn
Cost Deferral and Pension Balancing Acaunf above for more information.
A number of factors, as discussed above, are considered in developing pension and postretirement benefit assumptions. For the December 31 ' 2020
measurement date, NW Natural reviewed and updated:. the weighted-average discount rate assumptions for pensions decreased from 3.16% for 2019 to 2.36% tor 2020, and our weighted-average discount rate
"ssurftions for othier postretirement beneiits decreased from 3.1 1% for 2019 lo 2.34o/o tor 2020. The new rate assumptions were determined for each plan
based on a matching of benchmark interest rates to the estimated cash flows, which reflect the timing and amount of future benelit payments. Benchmark
interest rates are drawn from the FTSE Above Median Curve, which consists of high quality bonds rated AA- or higher by S&P or {13_9r higher by Moody's;
. the expected annual rate of future compensation increases for bargaining unit employees, which remained. consistent with 2019, of 6.50% in 2020 and
3.S0% thereafter. The rate tor 2O2O reflects a new collective bargalning igreement that took effect December I ,2019. The expected annual rate of future
compensation was 3.50% for non-bargaining employees;. the expected long-term retum on qualified defined benefit plan assets remains unchanged a17.25%:
. the mortality rate assumptions were updated from Pri-201i mortality tables using scalaMP-2019 to Pti-2012 mortality tables using scale MP-2020, which
partially offset increases of the projected benefit obligation; and. other kly assumptions, which were based on actual plan experience and actuarial recommendations'
At December 91, 2O2O,the net pension liability (benefit obligations less market value of plan assets) for NW Natural's qualified defined benefit plan decreased
$13.1 million compared to 2019. The decrease in the net pension liability is primarily due to the
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$60.9 million increase in plan assets, partially offset by the $47.8 million increase to the pension benefit obligation. The liability for non4ualified plans increased
$2.7 million, and the liability for other postretirement benefits decreased $0.5 million in 2020.
The expected long-term rate of return on plan assets is determined by averaging the expected earnings for the target asset portfolio. ln developing expected
retum, historical actual performance and long-term retum projections are analyzed, which gives consideration to the cunent asset mix and target asset
allocation.
NW Natural believes its pension assumptions are appropriate based on plan design and an assessment of market conditions. The following shows the sensitivity
of retirement benefit costs and benefit obligations to changes in certain actuarial assumptions:
tn
lmpact on 2020
Retirement Benefit
Costs
lmpact on Retirement
Benefit Obligations at
Dec.31,2020Dolla6 in millions
Discount rate:
Qualified defined beneft plans
Non-qualified plans
Other postretirement benefits
Expected long-term return on plan assets:
Qualified defined benefit plans
(0.25) %
$l.s $18.4
1.0
0.9
(0.25) %
0.1
0.8 N/A
ln July 2012, President Obama signed MAP-21 into law. This legislation changod several provisions afiecting pension plans, including temporary funding relief
and Pension Benefit Guaranty Corporation (PBGC) premium increases, which shifts the level of minimum required contributions from the short-term to the long-
term as well as increasing the operational costs of running a pension plan. MAP-21 established a new minimum and maximum corridor for segment rates based
on a 25-year average of bond yields, which resulted in lower minimum contributions requirements than those under previous regulations. MAP-2'| , as amended,
provides for the cunent corridor to be in efiect through 2020 and subsequently broaden on an annual basis from 2021 lhrough 2024.
tncome Taxes
Valuation Allowances
Defened tax assets are recognized to the extent that these assets are believed to be more likely than not to be realized. ln making such a determination,
available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-
planning strategies, and results of recent operations. NW Holdings and NW Natural have determined that all recorded deferred tax assets are more likely than
not to be realized as of December 31 , 2020. See Note 1 1 .
Uncertain Tax Benefits
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in the jurisdictions in which we operate.
A tax benefit from a material uncertain tax position will only be recognized when it is more likely than not that the position, or some portion thereof, will be
sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of the technical merits. NW Holdings and NW
Natural participate in the Compliance Assurance Process (CAP) with the lnternal Revenue Service (lRS). Under the CAP program companies work with the IRS
to identify and resolve material tax matlers before the federal income tax return is filed each year. No resewes for uncertain tax benefits were recorded during
2020, 2019, or 2018. See Note 1 1 .
Tax Leoislation
When significant proposed or enacted changes in income tax rules occur we consider whether there may be a material impact to our financial position, results of
operations, cash flows, or whelher the changes could materially affect existing assumptions used in making estimates of lax related balances.
On December 22, 2017, H.R.1 - An Act to provide for reconciliation pursuant to titles ll and V of the concurrent resolution on the budget for fiscal year 2018, also
known as the Tax Cuts and Jobs Act (TCJA), was enacted. The TCJA lowered the U.S. federal corporate income tax rate lo21o/olrom the existing maximum
rale ol 35o/o, effective for our tax year beginning January 1,2018. The TCJA includes specific provisions related to regulated public utilities that generally provide
for the continued deductibility of interest expense and the elimination of bonus depreciation. Certain rate normalization requirements for accelerated cost
recovery benefits related to regulated plant balances also continue. See Note 11 for more information on how we are impacted by the TCJA.
With respect to other tax legislation, the final tangible property regulations applicable to all taxpayers were issued on September 13, 2013 and were generally
effective for taxable years beginning on or afier January 1, 2014.|n addition, procedural guidance related to the regulations was issued under which taxpayers
may make accounting method changes to comply with the
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regulations. We have evaluated the regulations and do not anticipate any material impact. However, unit-of-property guidance applicable to natural gas
distribution networks has not yet been issued and is expected in the near future. We will further evaluate the effect of these regulations after this guidance is
issued, but believe the current method is materially consistent with the new regulations and do not expect this additional guidance to have a material effect on
our fi nancial statements.
Reoulatorv Matters
Regulatory tax assets and liabilities are recorded to the extent it is probable they will be recoverable from, or refunded to, customers in the future. At
December 31, 2020 and 2019, NW Natural had net regulatory income tax assets of $14.6 million and $16.9 million, respectively, representing future rate
recovery of deferred tax liabilities resulting from difierences in NGD plant financial statement and tax bases and NGD plant removal costs. These regulatory
assets are cunently being recovered through customer rates. At December 31,2020 and 2019, regulatory income tax asseb of $2.5 million and $2.5 million,
respectively, were recorded by NW Natural, representing probable future rate recovery of defened tax liabilities resulting from the equity portion of AFUDC' At
December 31, 2020, a regulatory income tax asset of $1 .7 million was recorded by NW Natural, representing future recovery of Oregon Corporate Activity Tax
that was defened between January 1 ,2020 and October 31, 2020.
At December 3 'l , 2020 and 2019, regulatory liability balances, representing the estimated net benefit to NGD customers resulting from the change in defened
taxes as a result of the TCJA, of $197.8 million and $205.0 million, respectively, were recorded by NW Natural. These balances include a gross up for income
taxes of $52.4 million and $54.3 million, respectively.
The TCJA includes specific guidance for determining the shortest time period over which the portion of this regulatory liability resulting from accelerated cost
recovery of NGD plant may accrue to the benefit of customers to avoid incuning federal normalization penalties. However, it is anticipated that until such time
that customers receive the direct benefit of this regulatory liability, the balance, net of the additional gross up for income taxes, will continue to provide an indirect
benefit to customers by reducing the NGD rate base which determines customer rates for service. Regulatory ordeni were issued by Oregon in March 2019 and
by Washington in October 2019 addressing the provision of these TCJA tax benefits to customers. See "Regulatory Matters-Regulatory Proceeding Updates-Iax
Reform Defenal" for more information.
NGD rates in effect for Oregon through October 31 , 2018 and for Washington through October 31 , 2019 included an allowance to provide for the recovery of the
anticipated provision for income taxes incurred as a result of providing regulated services. The provision for income taxes during these periods included an
allowance for federal income taxes determined by ulilizing the pre-TCJA federal corporate income tax rate of 35 percent. NW Natural recorded an additional
regulatory liability in 2018 and 2019 reflecting the deferral of estimated rate benefit for customers due to the newly enacted 21 percent federal corporate income
tax rate. At December 31,2019, a regulatory liability of $1.7 million was recorded lo reflect this estimated revenue deferral. The liability has been completely
amortized to cuslomers' benefit as of December 31,2020.
Environmental Continqencies
Environmental liabilities are accounted for in accordance with accounting standards under the loss contingency guidance when it is probable that a liability has
been incurred and the amount of the loss is reasonably estimable. Amounts recorded for environmental contingencies take numerous factors into consideration,
including, among other variables, changes in enacted laws, regulatory orders, estimated remediation costs, interest rates, insurance proceeds, participation by
other parties, timing of payments, and the input of legal counsel and third-party experts. Accordingly, changes in any of these variables or other factual
circumstances could have a material impact on the amounts recorded for our environmental liabilities. For a complete discussion of environmental accounting
policies refer to Note 2. For a discussion of current environmental sites and liabilities refer to Note 18. ln addition, for information regarding the regulatory
treatment of these costs and NW Natural's regulatory recovery mechanism, see 'Results of Operations-Regulatory Matters-Rate Mechanisms
-Environmental Cost Defenal and Recovetl above.
lmoairment of Lono-Lived Assets and Goodwill
Lono-Lived Assets
We review the carrying value of longJived assets whenever events or changes in circumstances indicate the carrying amount of the assets might not be
recoverable. Factors that would necessitate an impairment assessment of long-lived assets include a significant adverse change in the extent or manner in
which the asset is used, a significant adverse change in legal factors or business climate that could affect the value of the asset, or a significant decline in the
observable market value or expected future cash flows of the asset, among others.
When such factors are present, we assess the recoverability by determining whether the carrying value of the asset will be recovered through expected future
cash flows. An asset is delermined to be impaired when the carrying value of the asset exceeds the expected undiscounted future cash flows from the use and
eventual disposition of the asset. lf an impairment is indicated, we record an impairment loss for the difference between the carrying value and the fair value of
the long-lived assets. Fair value is estimated using appropriate valuation methodologies, which may include an estimate of discounted cash flows.
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Goodwill and Business Combinations
ln a business combination, goodwill is initially measured as any excess of the acquisitiondate fair value of the consideration transferred over the acquisition{atefair value of the net identifiable assets acquired.
The carrying value of goodwill is reviewed annually during the fourth quarter using balances as of October 1, or whenever events or changes in circumstanceindicate that such carrying values may not be recoverable.
NW Holdings'policy for goodwill assessments begins with.a qualitative analysis in which events and circumstances are evaluat6d, including macroe@nomicconditions, industry and market conditions, regulatory environments, and the overall financial performance of the reporting unit. lf the qualititive assessmentindicates that the carrying value may be at risk of recoverability, a quantitative evaluation is performed to measure t'tre caiying value against the fair value of thereporting unit' This evaluation may involve the assessment of future cash flows and other subjective factors for which unceitainty existiand could impact theestimation of future cash ffows. These factors include, but are not limited to, the amount and timing of future cash ltows, future giowth rates, and the discountrate. Unforeseen events and changes in circumstances or market conditions could advercely affei these estimates, which coui-d resuft in an impairment charge.A qualitative assessment was performed during the fourth quarter of 2020 which indicated a quantitative assessment was not required; thus, no goodwillimpairment was recorded. See Note 2 and Note 15 for additional information.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transfened,measured at fair value at the acquisition date, and the fair value of any non-conuolling intorest in the acquiree. Acquisitioi-related costs ar. expensed asincuned. When NW Natural acquires a business, it assesses the financial assets acquired and liabilities assumed ior appropriate classification and designationin accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date. when there is substantial judgment oruncertainty around the fair value of acquired assets, we may engage a third party expert to assist in determining the fair values of certain assets or liabilities.
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ITEM 7A. OUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NW Holdings and NW Natural are exposed to various forms of market risk including commodity supply risk, commodity price risk, interest rate risk, foreign
currency rijk, credit risk and weather risk. The following describes NW Holdings'ano ttw Natural's exposure to these risks, as applicable.
Gommoditv Suoolv Risk
NW Natural enters into spot, short-term, and long-term natural gas supply contracts, along with associated pipeline transportation contracts, to manage
commodity supply risk. Historically, NW Natural has ananged t6r prrydiiat delivery of an adequate supply of.gas, including gas in Mist storage and off-system
storage facilities, to meet exfect# requirements of core tiGD customers. NW Nitural's long-1sm gas supply contracts are primarily index-based and subject to
monthly re-pricing, a strategy that is intended to substantially mitigate credit exposure to phlsical gls counterparties' Absolute notional amounts under physical
gas contracts relatea to opei positions on derivative instruments ivere 458 million therms and 513 million therms as of December 31 ' 2020 and 2019'
respectively.
Commodity Price Risk
Natural gas commodity prices are subject to market fluctuations due to unpredictable factors including weather, pipeline transportation congestion, drilling
technologies, market speculaiion, and other factors that affect supply and demand. Commodity price risk is managed with financial swaps and physical gas
reserves from a long-term investment in working interests in gas ieases gperated by Jonah En'ergy. These linancial hedge contracts and-gas reserves volumes
are generally included in NW Natural's annual CGA filing for iecovery, lgbject !o-l iegulatory prud'e1ce review. Notional amounts under financial derivative
contracts were $16g.5 million and $123.3 million as of D'ecember 31" 2020 and 2019, respeitively. The fair value of financial swaps, based on market prices at
December gl,2o2o,rn"""nrni""iiredgainof $l2.Smillion,whichwouldresultincasninflowsot$1.3millionin2021 and$12'5millionin2022'andcash
outf,ows of $1.0 million in 2023.
lnterest Rate Rlsk
NW Holdings and NW Natural are exposed to interest rate risk primarily associated with new debt financing needed to fund capital requirements, including future
c,ontractual obligations and maturities of long-term and short-teim debt. lnterest rate risk is primarily managed through the issuance of fixed-rate debt with
varying maturitiEs. NW Holdings and NW Natural may also enter into financial derivative instruments, including interest rate swaps, options and other hedging
instruments, to manage and niitigate interest rate exiosure- Hw Holdings and NW Natural did not have any interest rate swaps outstanding as of December 31,
2020 or 2019.
Foreion Gurrencv Risk
The costs of certain pipeline and off-system storage services purchased from Canadian suppliers are subject to changes in the value of the Canadian currency
in relation to the U.s, "rrrn"y. iorelrin currency firward coniracts are used to hedge against fluctuations in. exchange rates for NW Natural's commodity-related
demand and reservation crra-rfu paii in canadian dollars. Notional amounts unoeitore-ign currency fonrvaqd contracts were $5.9 million and $6.7 million as of
December31,2020 and 2019] respectively. lf all of theioreign currencyfonrard contracti had been settled on December 31,2020, a gain of $0.3 million would
have been realized. See Note 16.
Credit Risk
Credit Exoosure to Natural Gas Suooliers
Certain gas suppliers have either relatively low credit ratings or are not Fted b.y major credit rating agencies. To manage this supply risk, NW Natural purchases
g". frofr" nrrir", of different suppliers at liquid exchangi points. NW Naturaieval'uates and monitors suppliers' creditworthiness and maintains the ability to
require additional financial assuranoes, including depositi, letters of credit, or surety bonds, in case a supplier defaults. ln the event of a supplier's failure to
deliver contracted volumes of gas, the NGD business woid need to replace those volumes at prevailing market prices, which may be higher or lower than the
original transaction prices. NW Natural expects these costs would be subject to its PGA sharing mechanism discussed above. Sincs most of NW Natural's
commodity supply contracts are priced at the daily or monthly market index price tied to liquid exchange points, and NW Natural has adequate storage flexibility,
NW Natural believes it is unliiely a supplier default would have a material adverse effect on its financial condition or results of operations.
Credit Exoosure to Financial Derivative Counteroarties
Based on estimated fair value at December 31, 2020, NW Natural's overall credit exposure relating to commodity contracts is considered-immaterial as it reflects
amounts owed to financial derivative counterparties (see table below). However, changes in naturil gas prices could result in counterparties owing NW Natural
money. Therefore, NW Natural's linancial deiivatives policy requires iounterparties to-have at least in investment{rade credit rating at the time the derivative
instrument is entered into and specific limits on the contract amount and duration based on each counterparty's credit rating' NW Natural actively monitors and
manages derivative credit exposure and places counterparties on hold for trading purposes or requires cash collateral, letters of credit, or guarantees as
circumstances wanant.
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ln millions
The following table summarizes NW Natural's overall fina-ncial swap and option credit exposure, based on estimated fair value, and the conespondingcounterparty Gredit ratings. The table uses credit ratings from S&P and Moody's, reflecting the higher of the Sai or Moody's rating or a middle rating if the entityis split-rated with more than one rating level difference:
2020 2019AA/Aa
NA
Total
$11.2 $
1.6
4.0
1.6
5.6
ln most cases, NW Natural also mitigates the credit risk of financial derivatives by having master netting arrangements with counterparties which provide formaking or receiving net cash settlements. Generally, kansactions of the same tyie in th-e "ar" "rrreniy ttai iave setflement on the same day with a singlecounterparty are netted and a single payment is delivered or received depending on which party is due iunds.
Additionally, NW Natural has master contracts in place with each derivative counterparty, most of which include provisions for posting or calling for collateral.Generally, NW Natural can obtain cash or marketable securities as collateral with one dly's notice. Various coliteral management.i16t"gi". are used to reduceliquidity risk. The collateral provisions vary by counterpartv but are not expected to result in the significant posting of collateral, if any. NW Natural has performedstress tests on the portfolio and concluded the liquidity risk from collateraicalls is not material. Deiivative credit exposure is primarily with investment gradecounterparties rated AA-/Aa3 or higher' Contracts are diversified across counterparties, business types and countries to reduce credit and liquidity risk.
At December 31' 2020' financial derivative credit risk on a volumetric basis was geographically concentrated 43% in the United States and S7o/oin Canada,based on counterparties'location. At December 31,2019, financial derivative cre-ait riskon a volumetric basis was geographicalty concentrated 3g% in theUnited States and 620/o in Canada with our counterparties.
Credit Exoosure to lnsurance Comoanies
credit exposure to insurance companies for loss or damage claims could be material. NW Holdings and NW Natural regularly monitor the financial condition ofinsurance companies who provide general liability insurance policy @verage to NW Holdings, Nw Natural, theii predecessors, and their subsidiaries.
Weather Risk
NW Natural has a weather normalization mechanism in Oregon; however, it is exposed to weather risk primarily from NGD business operations. A largepercentage of NGD margin is volume driven, and cunent rates are based on an assumption of average weath;. NW Natural,s weather normalizationmechanism in oregon is for residential and commercial customers, which is intended to stabilize fire iecovery or NGD business lixed costs and reducefluctuations in customers' bills due to colder or warmer than average weather. Customers in Oregon are allowed to opt out of the weather normalizationmechanism. As of December 31, 2020, approximately 8% of oregon customers had opted out. li addition to the oregon customers opting out, washingtonresidential and commercial customers account for approximate[ 12o/o ol our total customer base and are not covereJ by weather normaliiation, Thecombination of Oregon and Washington customers not covered by a weather normalization mechanism is 18% of all residential and commercial customers. See'Results of Operations-Regulatory M atters-Rate Mechanisms- WA R lvf abov e.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
Manaoement's Reoorts on lnternal Control Over Financial Reoortino
Reoorts of lndeoendent Reqistered Public Accountino Firm
Consolidated Financial Statements:
74
76
2.
3.
EO
81
83
u
86
il.
89
90
91
Consolidated Balance Sheets ot Northwest Natural Holdino Comoanv at December 3'l . 2020 and 2019
con.olid"tud stutements of shareholders' Eouitv of Northwest Natural Holdino comoanv for the Years Ended December 31 2020' 2019'
and 201 8
conrolidut"d stutements of cash Flows of Northwest Natural Holdino comoanv for the Years Ended December 31. 2020. 2019' and 2018
conrolidrted stut"rn"nts of comorehensive lncome (Loss) of Northwest Natural Gas comoanv for the Years Ended December 31' 2020'
2019. and 2018
Consolidated Balance Sheets of Northwest Natura 2gl9
con.olidated statements of shareholder's Eouitv of Northwest Natural Gas comoany for the Years Ended December 31 . 2020 2019' and
2018
con.olidrt"dstat"rentsof cashFlowsof NorthwestNatural GascomoanvfortheYearsEndedDecember31'2020.2019 and2018
Notes to Consolidated Financial Statements
SupplementaryDatafortheYearsEndedDecember3l,2020,2}lg,and20lS:
Financial Statement Schedules
4.
L30
140
Supplemental Schedules Omitted
All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included
elsewhere in the flnancial statements.
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NW HOLDINGS MANAGEMENr|S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NW_Holdings management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-1S(f) or 1Sd-
1 5(f) under the Securities Exchange Act of 1934, as amended. NW Holdings' intemal control over financial reporting is des'igned to provide reasonableassurance regarding the reliability of financial reporting and the preparation of linancial statements for extemil purposes in lccordahce with generally acceptedaccounting principles in the United States of America (U.S. GAAP). NW Holdings' intemal control over financial reporting includes those policies and iroceduresthat:
(i) pertain to the maintenance of records thal, in reasonable detail, accurately and fairly reflect the transactions and dispositions involving company assets;
(ii) provide reasonable assuranoe that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. GAAp,and that receipts and expenditures are being made only in accordance with authorizations oi management and the NW Holdings Board of Directors; and
(iii) provide reasonable assuranoe regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of NW Holdings' assets that couldhave a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree bfcompliance with the policies or procedures may deteriorate.
NW Holdings management assessed the effectiveness of NW Holdings' intemal control over financial reporting as of Decembe r 11, 202O,ln making thisassessm_ent, NW Holdings management used the criteria set forth by the Committee of Sponsoring Organizati6ns of the Treadway Commission (C6SO) inlntemal Control-lntegrated Fnmework (201 3).
pased 9n NW Holdings managemenfs assessment and those criteria, NW Holdings managsment has concluded that it maintained effective internal control overfinancial reporting as of December 31, 2020.
The effectiveness of intemal control over financial reporting as of December 31 ,2020 has been audited by Pricewaterhousecoopers LLp, an independentregistered public accounting firm, as stated in their report which appears in this annual report.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
February 26,2021
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NW NATURAL MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NW Natural management is responsible for establishing and maintaining adequate internal control over financial reporting as delined in Rules 'l3a-15(f) or 'l 5d-
'15(f) under the Securities Exchange Act of '1934, as amended. NW Natural's internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for extemal purposes in accordance with generally accepted
accounting principles in the United States of America (U.S.GAAP). NW Natural's intemal control over financial reporting includes those policies and procedures
that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions involving company assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U'S' GAAP'
and that receipts and expenditures are being made only in accordance with authorizations oi management and the NW Natural Board of Directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of NW Natural's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controli maf uecilme inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
NW Natural management assessed the effectiveness of NW Natural's intemal control over financial reporting as of Decembet 31,2020,1n making this
assessm6nt, NW Natural management used the criteria set forth by the Committee of Sponsoring organizations of the Treadway Commission (CoSo) in
tntemal Control-lntegrated Fnmework (201 3).
Based on NW Natural managements assessment and those criteria, NW Natural management has concluded that it maintained efiective internal control over
financial reporting as of December 31, 2020-
/d-@!4-H.AECaIse!-
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmever
Frank H. BurkhartsmeYer
Senior Vice President and Chief Financial fficer
February 26,2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINC FIRM
To the Board of Directors and Shareholders of Northwest Natural Holding Company
Oplnlons on the Flnancia, S(rtements and lntemal Contol over Flnanclat Reporilng
We have audited the accompanying consolidated balance sheets of Northwest Natural Holding Company and its subsidiaries (the "Company,) as of December31,2020 and 2019, and the related consolidated statements of comprehensive income (loss),lharehoHlrs' equity and cash flows for each Lf the three years inthe period ended December 31,2020, including the related notes and financial statement schedules listed in the iccompanying index (collectively refenld to asthe "consolidated financial statements'). We also have audited the Companys intemal control over financial reporting ai of beiemUe r\l , ZOZO,6ased oncriteria established in lnternal Contol - lntegrated Framework (2013) issued by the Committee of Sponsoring drganilations of the Treadriyay Commission(coso).
ln our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2020 and 20'19, and the results of its operations and its cash flows for each of the three years in the period ended December 3i, 2b20 incgnfglmity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,effective intemal control over financial reporting as of December 31,202O, based on criteria established in lntemal Controi- lntegrated Framework (2013j issuedby the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basls for Oplnlons
The Company's management is responsible for these consolidated financial statements, for maintaining effective intemal control over financial reporting, and forits assessment of the effectiveness of intemal control over financial reporting, included in the accompanying Management's Report on lnternal Control OverFinancial Reporting' Our responsibility is to express opinions on.the Company's consolidated financial siatements ind on the Cbmpany's internal control overEqqqt reporting based on our audits. We are a public accounting firm regisiered with the Public Company Accounting Oversight'Board (United States)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. feAlra securiti6s hws jnd the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB,
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statemants are free of material misstatemenl, whether due to enor or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstalements, whether due to error or ftaud, and performing procedures that respond to those risks. Such proceduros included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated fnancial statements. Our audits also included evaluating the accolinting principles used andsignilicant ostimates made by management, as well as evaluating the overall presentation of the consolidated financial stateirents. Our audit of internal controlover financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessid risk. Oui audits also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Dellnition and Limitatlons of lnternal Control over Financlal Reporting
A company's intemal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting pririciplesl A comp"ny'i internal control overfinancial reporting includes those policies and procedures that (i) pertain to the maintlnance of records tha-t,'in reasonable deiail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded a. neces""ry io permit preparationof financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company ire Uiing mide only inaccordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding preveniion or timlly detection ofunauthorized acquisition, us6, or disposition of the company's assets that could have a material efiect on the financial statements.
Because of its inherent limitations, internal control over fnancial-reporting may not prevent or detect misstatements. Atso, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.
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Crlfrcal Audil nefiers
The critical audit matter communicated below is a mafter arising from the curent period audit of the consolidated financial statements that was communicated or
required to be communicated to the audit committee and that (ij rehtes to accounts or disclosures that are material to the consolidated financial statementrs and
(ii)'involved our especially challenging, subjective, or compbxiudgments. The communication of critical audit matters does not aher in any way our opinion on
the consolidated financial stateme-nt{ tafen as a whole, inO vie are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Accounting for the Etrects of Regulatory Matters
As described in Note 2 to the consolidated financial statements, there were $380.7 million of regulatory assets and $690.0 million of regulatory liabilities as of
December g1, 2o2o.ns oiscloseo by management, the Company has operations that are subject to th'e actions-of regulators which establish rates in general
rate cases and other pro"""ding" *'hich arJdesigned to recoveispecific costs of providing regulatory services for which management records regulatory assets
and liabilities. Regulaiory accou-nting requires management to account for defened expenses (or defened revenues) as regulatory assets (or regulatory
liabilities) on the ialance sheet. Whin the recovery 6f these regulatory assets from, oi refund of regulatory liabilities to, customers is approved, management
recognizes the expense or revenue on the incomsstatement aithe same time the adjustment to amounb is included in rates charged to customers'
The principal considerations for our determination that performing procedures relating to the Company's accounting for the effects oJ regulatory matters is a
critical audit matter are the significant judgment by managementin assessing the potential outcomes and related accounting impacts of rate cases and other
proceedings. This in tum led to a high degree of auditor jidgment, subjectivily and effort in performing procedures and evaluating audit evidence obtained
ielated to ihe recovery of regulatory assets and the settlemont of regulatory liabilities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with lorming our overall opinion on the consolidated financial
statementi. These procedures included t&iing tne effectiveness of 6ntrols relating to management's assessment of rat€ cases and other proceedings,
i"arJi"g the probabifity of recovery of regulat6ry assets and the settlement of reguiatory liabilities and related accounting and disclosure impacts. These
procedires al'so incbdld, "rong 6tn"o ii) evaliating the reasonableness of management's assessment regarding the probability of recovery of regulatory
assets and settlement of regulatiry tiaUitiii6s, (ii) evaiuating the sufficiency of the diCcbsures in the consolidated financial stiatements, and (iii) testing the
iegut"tory assets and liabilit-ies, including thosl subiect to iegulatory proceedings,.also involved considering the provisions and formulas outlined in rate orders'
o$rer regulatory correspondence, and the application of relevant regulatory pr€cedents.
/s/ PricewaterhouseCooPers LLP
Portland, Oregon
February 26,2021
We have served as the Company's auditor since 1997'
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REPORT OF INDEPENDENT REGISTERED PUBL'C ACCOUNTING FIRM
To the Board of Directors and Shareholder of Northwest Natural Gas Company:
Oplnlon on the Flnancla, Steterrrerts
We have audited the accompanying consolidated balance sheets of Northwest Natural Gas Company and its subsidiaries (the "Compan/) as of December 31,2020 and 2019, and the related consolidated statements of comprehensive income (loss), shareholder's equity and cash flows for eacn 6rine three years in theperiod ended December 31,2020, including the related notes and financial statement schedule listed in the accompanying index (collectively refenei to as the"consolidated financial statements"). ln our opinion, the consolidated financial statements present fairly, in all mateiial iesfects, the financiaiposition of theCompany as of December 31 , 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31 ,2020 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Pinciple
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basls for Oplnlon
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company,sconsolidated financial statements based on our audits. We are a public accounting finnregistered with ihe Publit Company eccouniin! Oversight eoirO 1i-rniteOStates) (PCAOB) and are required to be independent with respect to the Company in accJrdance with the U.S. federal securities laws-and theipplicable'rulesand regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the strandards of the PCAOB. Those standards require that we plan andperform the audits to obtain reasonable assurance aboul whether the consolidated financial statements are free of material misstatement, whelher due to erroror fraud. The Company is not required to have, nor were we engaged to perform, an audit of its intemal conlrol over financial reporting. As part of our audits weare required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion onihe eifectiveness of thecompany's intemal control over financial reporting. Accordingly, we express no iuch opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statemenE, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounb and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting-principles used and significant estimates made by management, aswell as evaluating the overall presentation of the consolidated financial statiments. We beiieve that our audits provide a reasonable basis for our opinion.
Crtfrcal Audlt Malters
The critical audit matter communicated below is a matter arising from the cunent period audit of the consolidated financial statements that was communicated orrequired to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial stiatements and(ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion onthe consolidated financial statements, taken as a whole, and we a1e not, by communicating the critical audit matter below, providing a seiarate opinion on thecritical audit matter or on the accounts or disclosures to which it relates.
Accounting for the Effects of Regulatory Matters
As described in Note 2 to the consolidated financial statements, there were $380.6 million of regulatory assets and $689.2 million of regulatory liabilities as ofDecember 31, 2020. As disclosed by management, the Company has op€rations that aro subjeit to th-e aclions of regulators which estiblish rates in generalrate cases and other proceedings which are designed to recover specific costs of providing regulatory services for wliich management records regulalory assetsand.liabilities. Regulatory accounting requires management to account for deferred expen-es (or defined revenues) as regulaiory assets (or regulatory -
liabilities) on the balance sheet. When the recovery of these regulatory assets from, oi refund of regulatory liabilities to, cuJtomeri is approved, itanaglmentrecognizes the expense or revenue on the income statemenl at the same time the adjustment to amountsis included in rates charged io customers.
The principal considerations for our determination that performing procedures relating to the Company's accounting for the efiects of regulatory matters is acritical audit matter are the significant judgment by management in assessing the pot,ential outcomes ind related accounting impacts of-ote cases and otherproceedings. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtainedrelated to the recovery of regulatory assets and the settlement of regulatory liabilities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financialstatements. These procedures included testing the effectiveness of controls relating to management's assessmlnt of rate cases and other proceedings,including the probability of recovery of regulatory assets and the settlement of regulatory liabil-ities and related accounting and disclosure impacts. Theseprocedures also included, among others (i) evaluating the reasonableness of management's assessment regarding the frobability of recovery of regulatoryassets
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Table of Contents
and settlement of regulatory liabilities, (ii) evaluating the suficiency of the disdosures in the consolidated financial statements, and (iii) testing the regulatory
assets and liabilities, incruoing ittose suu;ect to regllatory proceedings, also involved considering the ppvisions and formulas outlined in rate orders, other
regulatory conespondence, and the application of relevant regulatory precedents'
/s/ PricewaterhouseCoopers LLP
Por{and, Oregon
February 26,2021
We have s€rved as tho Company's auditor since 1997.
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NORTHWEST NATURAL HOLDING COMPANY
coNSoLtDATED STATEMENTS OF COMPREHENSTVE TNCOME (LOSS)
Year Ended December 31
ln thousands- exceot per share data 2020 2019 2018
Operating revenues
Operating expenses:
Cost of gas
Operations and maintenance
Environmental remediation
General taxes
Revenue taxes
Depreciation and amortization
Other operating expenses
Total operating oxpenses
lncome from operations
Other income (expense), net
lnterest expense, net
lncome before income taxes
lncome tax expense
Net income from continuing operations
lncome (loss) from discontinued operations, net of tax
Net income
Other comprehensive income (loss):
9l,glg" in employee benefit plan liability, net of taxes of $1,025 for 2020, $956 for 2019, and $(166) for2018
Amortizatior. oJno-n-q_u-alified employee benefit plan liability, net of taxes of $(244) fo r 2020, $(172) tor2019, and $(278) for 2018
Comprehensive income
Average common shares outslanding:
Basic
Diluted
Earnings from continuing operations per share of c,ommon stock:
Basic
Diluted
Earnings (loss) from discontinued operations per share of common stock;
Basic
Diluted
Earnings per share of common stock:
Basic
Diluted
See Notes to Consolidated Financial Statements
$ 773,679 $ 746,372 $ 706,143
262,755
'180,129
9,691
35,078
30,291
103,683
3,701
254,911
178,191
12,337
32,388
30,325
91,496
3,250
602,898
255,519
156,698
1'.!,127
32,172
30,082
85,156
3,227
625,328 573,981
91,355 77,95321,082 12,64270,273 65,3116,508 (3,576)
148,351
(13,e44)
43,052
143,474
(22,836)
42,685
132,162
(3,601)
37,059
91,502
24,191
67,311
(2,742)
$ 74,612 $ 59556 $ 65319
76,781
12,u8')
679
61,735
(2,6s5)
476
29,786
29,859
64,569
476
774
28,803
28,873
2.34
2.33
(0.10)
(0.0s)
2.24
2.24
30,541
30,599
$
$
2.30 $
2.30
2.19 $
2-19
o.21 $
0.21
(0.12) $
(0.12)
2.s1 $
2.5'l
$2.07 $
2.07
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NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31
ln thousands 2020 2019
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable
Accrued unbilled revenue
Allowance for uncollectible accounts
Regulatory assets
Derivative instruments
lnventories
Gas reserves
I ncome taxes receivable
Other current assets
Discontinued operations - cunent assets
Total cunent assets
Non-current assets:
Property, plant, and equipment
Less: Accumulated depreciation
Total property, plant, and equipment, net
Gas reserves
Regulatory assets
Deilvative instruments
Other investments
Operating lease right of use asset
Assets under sales-type leases
Goodwill
Other non-current assets
Total non+unent assets
Total assets
$30,168 $
88,083
57,949
(3,21e)
31,74s
13,678
42,691
11,409
6,000
44,741
9,648
67,137
56,192
(673)
41,529
6,802
43,985
15,278
256
38,004
15Jy
323,245 293,692
3,734,039
1,079,269
3,476,746
1,037.u7
2,6il,770
u,484
348,927
6,135
49,259
77,446
143,759
69,225
49,129
2,438,899
48,394
343,146
3,337
63,333
2,950
146,310
49,929
38,464
3,433,134
$ 3,756,379
3,1U,762
$ 3,428,454
See Notes to Consolidated Financial Statements
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ln thousands
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31
2020 2019
Liabilities and equity:
Cunent liabilities:
Short-term debt
Current maturities of long-term debt
Accounts payable
Taxes accrued
lnterest accrued
Regulatory liabilities
Derivative instruments
Operating lease liabilities
Other cunent liabilities
Discontinued operations - current liabilities
Total cunent liabilities
Long-term debt
Defened credits and olher non-cunent liabilities:
Deferred tax liabilities
Regulatory liabilities
Pension and other postretirement benefit liabilities
Derivative instruments
Operating lease liabilities
Other non-cunent liabilities
Total deferred credits and other non-current liabilities
Commitments and contingencies (see Note 17 and Note 18)
Equity:
Common stock - no par value;.authorized 100,000 shares; issued and outstanding 30,389 and 30,412 alDecember31,2020 and 2019, iespectiv6[
Retained eamings
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
$304,525 $
95,344
97,966
13,812
7,441
50,362
4,198
1,105
52,330
149,'t00
75,109
113,370
11,971
7,451
44,657
2,000
2,101
62,705
13,709627,083 482,173860,081 805,955
319,292
639,663
217,287
2,852
80,621
120,767
295,643
625,717
228,129
609
841
123,388
1,380,482
565,1 12
336,523
(12,s021
1,274,327
558,282
318,450
(10,733)
888,733 865,999s c?563?' @
See Notes to Consolidated Financial Statements
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NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
Accumulated Other
Comprehensive
lncome (Loss)Retained
Earninos
Total
Eouitvln thousands
Balance at December 31, 2017
Comprehensive income
Dividends on common stock, $1.89 per share
Stock-based compensation
Shares issued pursuant to equity based plans
Cash purchase of shares for business combination
Value of shares transferred for business combination
Balance at December 31 , 201 I
Comprehensive income (loss)
Dividends on common stock, $1.90 per share
Stock-based compensation
Shares issued pursuant to equity based plans
lssuance of common stock, net of issuance costs
Reclassification of tax effects from the TCJA
Balance at December 31 , 201 9
Comprehensive income (loss)
Dividends on common stock, $1.91 per share
Stock-based compensation
Shares issued pursuant to equity based plans
Balance at December 31 ,2020
558,2U
4,361
2,469
See Notes to Consolidated Financial Statements
2,469
$ 565,1 12 $ 336,523 $ (12,e02)$ 888,733
$ 448,865 $302,349 $
64,569
(54,736)
(8,438) $
1,250
742,776
65,819
(il,736)
3,020
5,175
(7,945)
8,525
3,0;
5,175
(7,94s)
8,525
457,640
2,601
5,085
92,956
312,182
61,735
(56,833)
(7,1 88)
(2,17sI
762,634
59,556
(56,833)
2,601
5,085
92,956
1,366 (1,366)
318,450
76,78',1
(s8,708)
(10,733)
(2,13
865,999
74,612
(58,708)
4,361
83
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Operating activities:
Net income
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization
Regulatory amortization of gas reserves
Defened income taxes
Qualified defined benefit pension plan expense
Contributions to qualified defined benefit pension plans
Defened environmental expenditures, net
Environmental remediation expense
Regulatory revenue deferral from the TCJA
Regulatory disallowancc of pension costs
Gain on sale of discontinued operations, net of tax
Other
Changes in assets and liabilities:
Receivables, net
lnventories
lncome and other taxes
Accounts payable
Defened gas costs
Decoupling mechanism
Other, net
Discontinued operations
Cash provided by operating activities
lnvesting activities:
Capital expenditures
Acquisitions, net of cash acquired
Leasehold improvement expenditures
Proceeds from the sale of assets
Proceeds from sale of equity method investment
Proceeds from sale of discontinued operations
Other
Discontinued operations
Cash used in investing activities
$ 76,781 $ 61,735 $ 64,56e
103,683
17,779
18,667
18,370
(28,980)
(27,871)
9,691
(5,902)
(6,942)
91,496
19,172
6,317
16,497
(10,970)
(16,226)
12,337
853
10,500
85,156
16,684
14,356
8,108
(15,s40)
(14,528)
11,127
7,929
't3,907 1,596
(16,7e9)
1,262
(10,710)
(15,s10)
17,590
2,8U
(12,467)
1,894
5,844
(5,969)
4,528
(16,485)
(23,471)
18,661
(4,140)
712
181
3,207
(16,904)
16,792
(14,39s)
4,497
(3,41e)
(fl5)143,020 185,298 168,771
(273,016) (223,4711
(38,263) (56,786)(7,878) (18,812)
8,149 659
7,000
12,500
1,654 (3,5l,4)(4,423) (1,827)
(294,277) (303,781)
(214,636)
(873)
(4,41s)
477
, 1,421
573
(r1?,453)
u
EXHIBIT 2
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GEM STATE WATER COMPANY
Page 85 of 210
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
ln thousands 2020 2019 2018
Year Ended December 31
2020 2019 2018
Financing activities:
Proceeds from stock options exercised
Proceeds from common stock issued
Long-term debt issued
Long-term debt retired
Proceeds ftom term loan due within one year
Repayment of term loan
Proceeds from issuances of commercial paper, maturities greater than 90 days
Changes in other short-term debt, net
Cash dividend payments on common stock
Stock purchases related to acquisitions
Other
Cash provided by financing activities
lncrease (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end ol period
68 2,015
92,956
175,000
(30,000)
1,546
150,000
(75,000)
150,000
(150,000)
195,025
(3e,600)
(s5,420)
50,000
(97,000)
(68,520)
(53,339)
163,274
(51,311)
(7,e51)
(715)(3,2e6) (2,6141
171,777 115,498 57,U3
20,520 (2,985) 9,1519,648 12,633 3,472
$ 30,168 $ 9,648 $ 12,6s3
Supplemental disclosure of cash flow information
lnterest paid, net of capitalization
lncome taxes paid (refunded)
$42,651 $
13,6M
41,231 $
(e6)
35,324
27,370
See Notes to Consolidated Financial Statements
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NORTHWEST NATURAL GAS COMPANY
coNSoLtDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31
ln thousands 2020 2019 2018
Operating revenues $ 758,748 $ 739,944 $ 705,571
Operating expenses:
Cost of gas
Operations and maintenance
Environmental remediation
General taxes
Revenue taxes
Depreciation and amortization
Other operating expenses
Total operating 6xpenses
lncome from operations
Other income (expense), net
lnterest expense, net
lncome before income taxes
lncome tax expense
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income
Other comprehensive income (loss):
9!ilSe in employee beneft plan liability, net of taxes of $1,025 tor 2020, $956 for 2019, and $(166) for2018
262,980
168,869
9,691
34,459
30,291
101,586
3,232
255,135
169,091
12,337
32,075
30,325
90,405
3,230
255,743
155,22s
11,127
32,086
30,082
84,986
3,223
61 1,108 592,598 572,472
147,640
(15,1 16)
40,866
147,346
(22,s68)
41,339
133,099
(3,5e9)
36,992
91,658
21,095
83,039
14,065
92,508
24,459
70,563 68,974 68,049
(1,723)
70,563 68,974 66,326
Amortization of non-qualified employee benefit plan liability, net of taxes of $(244) for 2020,g(172)lor201 9, and $(278) for 2Ol 8
(2,848)
679
(2,655)
476
476
774
Comprehensive income $ 68,394 $ 66,795 $ 67,576
See Notes to Consolidated Financial Statements
86
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NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31
2020 2019ln thousands
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable
Accrued unbilled revenue
Receivables from affi liates
Allowance for uncollectible accounts
Regulatory assets
Derivative instruments
lnventories
Gas reserves
Other current assets
Total cunent assets
Non-current assets:
Property, plant, and equiPment
Less: Accumulated dePreciation
Total property, plant, and equipment' net
Gas reseryes
Regulatory assets
Derivative instruments
Other investments
Operating lease right of use asset
Assets under sales-type leases
Other non-current assets
Total non-cunent assets
Total assets
10,453 $
80,035
57,890
660
(3,107)
31,745
13,678
42,325
11,409
37,909
5,919
66,823
56,139
787
(672)
41,929
6,802
43,896
15,278
33,258
282,997 270,159
3,683,776
1,075,446
3,456,075
1,036,593
2,608,330
u,484
348,887
6,135
49,242
77,328
143,759
48,174
2,419,482
48,394
343,146
3,337
49,837
2,760
146,310
38,062
3,316,339 3,051,328
$ 3,599,336 $ 3,321,487
See Notes to Consolidated Financial Statements
87
$
EXHIBIT 2
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GEM STATE WATER COMPANY
Page 88 of 210
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31ln thousands 2020 2019
Liabilities and equity:
Cunent liabilities:
Short-term debt
Current maturities of long-term debt
Accounts payable
Payables to affiliates
Taxes accrued
lnterest accrued
Regulatory liabilities
Derivative inslruments
Operating lease liabilities
Other cunent liabilities
Total cunent liabilities
Long-term debt
Defened credits and other non-cunent liabilities:
Deferred tax liabilities
Regulatory liabilities
Pension and other postretirement benefit liabilities
Derivative instruments
Operating lease liabilities
Other non+urrent liabilities
Total deferred credits and other non-current liabilities
Commitments and contingencies (see Note 17 and Note 1g)
Equity:
Common stock
Retained earnings
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
$ 231,525
59,955
95,170
13,820
13,724
7,338
50,362
4,198
1,054
51,907
529,053
$125,100
74,907
111,641
1,546
11,717
7,441
44,657
2,000
1,979
61,438
442,426
857,265 769,081
318,034
638,793
217,287
2,852
80,559
120,309
309,297
625,717
228,129
609
772
123,260
1,377,834 1,287,784
319,506
528,580
(12,9O2\
319,557
513,372
(10,733)835,184 822,196
$ 3,s99,336 $ 3,321.487
See Notes to Consolidated Financial Statements
88
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NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Common Stock Retained Earnings
Accumulated Other
Comprehensive
lncome (Loss)
Total
Equityln thousands
Balance at December 3't, 2017
Comprehensive income
Dividends on common stock
Stock-based compensation(1 )
Shares issued pursuant to equi$ based plans
Transfer of investments to NW Holdings as of October 1, 2018
Balance at December 31 , 201 8
Comprehensive income (loss)
Dividends on common stock
Capital conhibution from Parent
Reclassification of tax effects from the TCJA
Balance at December 31, 2019
Comprehensive income (loss)
Dividends on common stock
Other
Balance at December 31, 2020
$448,865 $302,349 $
66,326
(41,035)
(8,438) $
1,250
742,776
67,576
(41,035)
2,161
3,075
(s8,88s)
2,161
3,075
(227,64e)168,7U
226,4s2 496,404
68,974
(53,3721
(7,188)
(2,179)
715,668
66,795
(53,372)
93,10593,105
1.366 (1.366)
319,557 513,372
70,563
(5s,3ss)
(10,733)
(2,169)
822,196
68,394
(55,3ss)
(51)(51)
$319,506 $528,s80 $(12,9021 $835,184
(r) Stock-based compensation is based on stock awards of NW Natural to be issued in shares of NW Holdings.
See Notes to Consolidated Financial Statements
89
EXHIBIT 2
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Page 90 of 210
2020 2019 2018Operating activities:
Net income $ 70,563 $ 68,974 $ 66,326Adjustments to reconcile net income to cash provided by operaUons:
Depreciation and amortization
Regulatory amortization of gas reserves
Defened income taxes
Qualified defined benefit pension plan expense
Contributions to qualified defined benefit pension plans
Defened environmental expenditures, net
Environmental remediation exp6nse
Regulatory revenue deferral from the TCJA
Regulatory disallowance of pension costs
Other
Changes in assets and liabilities:
Receivables, net
lnventories
lncome and other taxes
Accounts payable
Deferred gas costs
Decoupling mechanism
Other, net
Discontinued operations
Cash provided by operating activities
lnvesting activities:
Capital expenditures
Leasehold improvement expenditures
Proceeds from the sale of assets
Other
Discontinued operations
Cash used in investing activities
Financing activities:
Proceeds fiom stock oplions exercised
Longterm debt issued
Long-term debt retired
Proceeds from term loan due within one year
Repayment of term loan
Proceeds from issuances of commercial paper, maturities greater than g0 days
Changes in othershort-term debt, net
Cash contributions received from parent
Cash dividend payments on common stock
Other
Discontinued operations
Cash provided by financing activities
lncrease (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Interest paid, net of capitalization
lncome taxes paid (refunded)
101,586
17,779
4,645
18,370
(28,980)
(27,871)
9,691
(7,025)
90,405
19,172
4,046
16,497
(10,970)
(16,226)
12,337
853
10,500
12,317
9,264
(5,ee0)
496
(18,548)
(23,471)
18,661
(2,141)
84,986
16,684
12,330
8,108
(1s,540)
(14,528)
11,127
7,929
883
(16,540)
1,539
10,832
(18,eoe)
17,590
2,8U
(e,935)
(3,e20)
3,212
(7,8s4)
13,937
(14,395)
4,497
(3,458)
3,184146,219 186,176
(266,048) (221,380)(7,878) (18,812)
8,149 659
1,654 (3,544)
150,000
(7s,000)
150,000
(150,000)
195,025
(88,600)
(5s,355)
(3,632)
140,000
(30,000)
(e2,400)
93,155
(53,3721
(2,510)
173,508
1214,328)
(4,4',t5)
477
421
1,368
50,000
(97,000)
163,300
(38,387)
(1,s39)
(7,e51)
69,791
4,837
(20,61 7)@ w,o?n (238,462)
122,438
4,5y
54,873
(2,028)
5,919 7 ,947 3,1 10
$_194!s_ $___sp19_ $__7gz_
$40,624 $
6,1 00
39,927 $
2,479
35,305
27,350
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,ln thousands
See Notes to Consolidated Financial Statements
90
EXHIBIT 2
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Page gl of210
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements represent the respective,.consolidated financial results of NW Holdings and NW Natural and all respective
companies that each registrant direcfly or indirecfly "ontrol., either through maiority ownership or othenlrrise. This is a combined report of NW Holdings and NW
Natural, which indudes separate consolidated financial statements for each registrant'
NW Natural,s regulated natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment is NW Natural's core
operating business and serves iesidential, commercial, and industrial customers in 6regon and souihweit washington. The NGD segment is the only reportable
segment for NW Holdings and NW Natural. All other activities, water businesses, and oiher investments are aggregated and reported as other at their respective
registrant.
NW Holdings and NW Natural consolidate all entities in which they have a controlling financial ilterest: lnvestm.ents in corporate joint ventures and partnerships
that NW Holdings aoes not Jre*ty or inairectry control, ana for which it is not the pri-mary beneficiary, include NNG Financial's investment in Kelso'Beaver
pipeline, which is accounted for under the equity method, and NWN Energy's investmeni in Trail west Holdings, LLc (TWH), which was accounted for under the
equity method through August 6,2o2owhen'it was sold t'o a third party. sLL uote 14 for activity related to TwI. NW Holdings and its direct and indirect
subsidiaries are collectively referred to herein as Hw xoiJinga, "nl Niv Natural and its direct ind indirect subsidiaries are collectively refened to herein as NW
Natural. The consolidated financial statements of Nw xorairigs and NW Natural are presented after elimination of all intercompany balances and transac'tions'
ln June 201g, NWN Gas Storage, a wholly-owned subsidiary of NW Natural at the time and now a wholly-owned subsidiary ol NW Holdings, entered into a
purchase and sale Agreement that provided ror ttre sate oilll of the membership interests in its wholly-owned subsidiary, Gill Ranch storage, LLc (Gill Ranch)'
we concluded that the sale of Gill Ranch qualified as assets and liabilities held for sale and discontinued operations. As such, the results of Gill Ranch were
presented as a discontinued operation for NW Holdingsioi art perioas presented and for NW Natural up until the holding company reorganization was effective
on october 1 , 201 g on the consolidated statements oi "o,
jr"fi"nsive income and cash flows, and the assets and liabilities associated with Gill Ranch were
classified as discontinued opei"iioni".sets and liabilities on the NW Holdings consolidated balance sheet. see Note 19 for additional information' Additionally,
we reevaluated reportable ."g."nt. and concluded that the remaining gas itorage activities no longer met the requirements to be separately reported as a
segment. lnterstate storage services is reported in other under NW tiaiural ana Nw Holdings as applicable, and all prior periods reflect this change' see Note
4, which provides segment information.
Notes to the consolidated financial statements reflect the activity of continuing operations for both NW Holdings and NW Natural for all periods presented, unless
otherwise noted. certain reclassifications have been made to conform prior plriod information to the cunent presentation' The reclassifications did not have a
material effect on our consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLIC'ES
Use of Estimates
The preparation of linancial statements in conformity with generally accepted accounting principles in the United States of America (u.s' GAAP) requires
management to make estimates and assumptions tfiat affict ,"ported amounts in the dnsolidited financial statements and accompanying notes' Actual
amounts could differ from those estimates, and changes would most likely be reported in future periods. Management believes the estimates and assumptions
used are reasonable.
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ln thousands
lndustrv Requlation
NW Holdings' principal business is to operate as a holding company for NW Natural and its other subsidiaries.
NW Natural's principal business is the distribution of natural s3s, lvlich is regulated by the opUC and wuTC. NW Natural also has natural gas storage services,which are regulated by the FERC, and to a certain extent nyine oeuc ano ivutc. Additionally, certain of NW Holdings' subsidiaries own water businesses,which are regulated by the public utility commission in the state in which the water utility is locaied, which is currenfly oregon, Washington, ldaho and Texas.Accounting records and practices ofthe regulated businesses conform to the requirements and uniform system ofaccounts prescribed by these regulatoryauthorities in accordance with U.s. GAAP' The businesses in which customer raies are regulated uy ttre oeuc, wuTc, lpuc, puTC, and FERC have approvedcoshbased rates which are intended to allow such businesses to earn a reasonable return on invesied capital.
ln applying regulatory accounting principles, NW Holdings and NW Natural capitalize or defer certain costs and revenues as regulatory assets and liabilitiespursuant to orders of the applicable state public utility commission, which provide for the recovery of revenues or expenses from, or refunds to, utility customersin future periods, including a return or a carrying charge in certain cases.
Amounts NW Natural deferred as regulatory assets and liabilities were as follows:
Assets
2020 2019Cunenl:
Unrealized loss on derivatives(r)
Gas costs
Environmental cosls€)
DecouPling(3)
Pension balancing(1)
lncome taxes
OfterG)
Total current
Nonrunent:
Unrealized loss on derivatives(r)
Pension balancing(4)
lncome taxes
Pension and other poslretirement benefit liabilities
Environmental costs(2)
Gas costs
DecouplingG)
Otheist
Tolal nonrurrent
Other (NW Holdings)
Total non-current -NW Holdings
$4,198 $
1,979
4,992
361
7,131
3,4U
9.600
2,000
20,140
4,762
1,969
5,939
2,209
4.910$ 31,?45_ -$_1Lg?9_
$ 2,852 g 60943,383 48,2s115,368 17,173't70,812 173,26290,623 87,6243,925 2,866
1,031
20,893 't3,361
$ 348,887 $ u3,146
40$ 348,927 $ 343,146
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ln lhouends
Cunent:
Gas costs
Unrealized gain on derivatives(1)
DscouPling(3)
lncome taxes(6)
Otheds)
Total cunent
Non-cunent:
Gas costs
Unrealized gain on derivatives(1)
DecouPlingG)
Income taxes(6)
Accrued ass€t removal costs0)
Otheds)
Total non-current
Oher (NW Holdings)
Total non-current -NW Holdings
1,118 $
13,674
11,793
8,217
15.560
_8rc2_
-44.657-
3.O74
2,013
3,337
6,378
198,2't9
401,893
13,877
314 $
6,135
1,723
189,587
427,960
$ 638,793 $ 625'717
870
$ 639,663 $ 625'717
-:
1,223
6,622
4,831
8,435
23,s46
$
0) Unrealized gains or losses on derivatives are non-cash items and, therefore, do not earn a rate of return or a carrying charge. These amounts are recoverable through
natural gas distribution raies ai part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement'
t2) Refer to the Environmental cost Defenal and Recovery table in Note 18 for a description of environmental costs.
(3) ftris Oefenat represents the margin adjustment resulting from differences between actual and expected volumes'
(4) Refer to Note 10 for information regarding the defenal of pension expenses'
(s) Balances consist of defenals and amortizations under approved regulatory mechanisms and typically eam a rate of retum or carrying charge'
(6) This balance represents estimated amounts associated with the Tax Cuts and Jobs Act- See Note 1 1.
(7) Estimated costs of removal on certain regulated properties are collec{ed through rates. see "Accounting Policies-Plant, Prowrty, and Accrued Assef Removal cosfs"
below.
The amortization period for NW Natural's regulatory assets and liabilities ranges from less than one year to an indeterminable period. Regulatory deferrals for
gas costs payable are generally amortized over 12 ,ont-n" u"tinning each N-ovember 1 following the gas contract year during which the deferred gas costs are
recorded. similarly, most other regulatory defened accounts aie am6rtizea over 12 months. However,-certain regulatory account balances, such as income
taxes, envlronmental costs, pension liabilities, and accrued asset removal costs, are large and tend to be amortized over longer periods once NW Natural has
agreed upon an amortization period with the respective regulatory agency'
we believe all costs incurred and deferred at December g1, 2o2o are prudent. All regulatory assets and liabilities are reviewed annually for recoverability, or
more often if circumstances warrant. lf we should determine that all or a portion of thise reiulatory assets or liabilities no longer meet the criteria for continued
application of regulatory accounting, then NW l.taturat wouia be required'to write-off the neiunrecoverable balances in the period such determination is made'
Regulatory interest income of g4.g million and 91g.6 million and regulatory interest expense of $1.8 million and $12.3 million was recognized within other income
1ex!ense;, net for the years ended Decemb€r 31 , 2020 and 201 9, respectively'
Environmental Reoulatory Accountino
ffiinesnnuandoPUCordersregardingimplementation'
COVID-i9 lmpact
During 2020, our regulated utilities received approval in their respeclive jurisdictions to defer certain financial impacts associated with CoVID-19 such as bad
debt expense, financing costs to secure liquidity, tost revenues rbtat"o t6 late fees and reconnection fees, and other covlD-l9 related costs, net of offsetting
direct expense reductions alioiiitea *itn 'covlb-19. as a iJsuli, we recorded " ,"gri"tory asset of approximately $4.8 million for incurred costs associated with
COVID-19 that are recoverable.
New Accountino Standards
NW Natural and NW Holdinl-consider the applicability and impact of all accounting standards updates (ASUs) issued by the Financial Accounting Standards
Board (FASB). ASUs not [s[ed below were assessed and deteimined to be either not applicable or are expected to have minimal impact on consolidated
financial position or results of operations.
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$
Table of Contents
Reoulatorv Liabilities
2020 2019
Table of Contents
Recentlv Adooted Accountino Pronouncements
ACCUMULATED OTHER COIIPREHENSIVE INCOME. On February 14,2018, the FASB issued ASU 201842, 'lncome Statement-Reporting Comprehensivelncome: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive lncome.'This update was issued in response to concerns from certiainstakehold€rs regarding the current requirements under U.S. GAAP that defened tax assets and liabilities are adjusted for a change in tax laws or rates, and theeffect is to be included in income from continuing operations in the period of the enactment date. This requirement is also applicaile to items in accumulatedother comprehensive income where the related tax efiects were originally recognized in other comprehensive income. The adjustment of deferred taxes due tothe new corporate income tax rate enacted through the Tax Cuts and Jobs Act (TCJA) on Decamber 22,2017 recognized in income from continuing operationscauses the tiax effects of items within accumulated other comprehensive income (refened to as stranded tax effects) to not reflect the appropriate tax rlte. Tneamendments in this update allow but do not require a reclassification from accumulated other comprehensive inerme to retained eamings for stranded taxefiects resulting from the TCJA and require certain disdosures about stranded tax efiects. NW Naiural adopted and applied the standari in the first quarter of2019. NW Natural elected to reclassi! the stranded tax effects of the TCJA of $1.4 million from accumulated other comprehensive loss to retained earnings inthe period of adoption. Going fonrvard, our policy is that, in the event that regulatlon changes result in stranded tax effecis, such amounts will be redassified fromaccumulated other comprehensive income (loss) to retained earnings in the final period that the related defened tax balance remeasurement is expected toimpact income from continuing operations.
CLOUD COMPUTING. On August 29, 2018, the FASB issued ASU 2018-15, "Custome/s Accounting for lmplementation Costs lncuned in a Cloud ComputingArrangemenl That ls a Service Contract.' The purpose of the-amendment is to align the requirements for capitalizing implementation costs incuned in i hoslinganangement that is a service conbact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Theamendments in this update were effective beginning January 1,2020. Early adoption was permitted, and NW Holdings and NW Natural early adopted ASU2018-15 in the quarter ended March 31 , 2019 utilizing the prospective application methodology. The adoption of this-ASU did not materially affect the financialstatements and disclosures of NW Holdings or NW Natural.
CREDIT LOSSES. On June 16, 2016, the FASB issued ASU 2016-13, 'Measurement of Credit Losses on Financial lnstruments," which applies to financial assetssubiect to credit losses and measured at amortized cost. The new standard rcquires financial asseb measured at amortized cost to be piesented at the netamount expected to be collected and the allowance for credit losses is to be recorded as a valuation account that is deducted from the amortized cost basis. Theamendments in this update were effective beginning January 'l ,2020 and were applied with the modified retrosp€ctive methodology. The adoption of this ASUdid not materially affect the financial stalements and disclosures of NW Holdings or NW Natural.
The majority of NW Holdings'and NW Natural's financial assets are either short-term in nature, such as trade receivables, or relate to leased gas facilities underapproved rate schedules.
DERVAIVES AND HEDGING. On August 28, 2017,[he FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted lmprovements to Accounting forHedging Activities." The purpose of the amendment is to more closely align hedge accounting with compa;ie;' risk management strategies. The ASU amendsthe accounting for risk component hedging, the hedged item in fair value hedges of interest rate risk, and amounts excluded from the aJsessment of hedgeeffectiveness' The guidance also amends the recognition and presentation of the efiect of hedging instruments and includes other simplifications of hedglaccounting. The amendments in this ASU were efiective beginning January 1, 2019 and were ipplieO prospectively to hedging instruments. The adoptio; did nothave an impact on the financial statements or disclosures of NW Holdings or NW Natural.
FAIR VALUE ilIEASUREilEI{T' On August 28,2018, the FASB issued ASU 2018-13, 'Changes to the Disclosure Requirements for Fair Value Measurement.,The purpose of the amendment is to modi! the disclosure requirements for fair value measur€ments. The amendments in this ASU were effective beginningJanuary 1,2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs us6d to -
develop Level 3 fair value measurements and the narrative description of measurement uncertainfi should beippliedprospectively. All other amendmentsshould be applied retrospectively. NW Holdings and NW Natural do not have either Level 3 fair value measurements or transfers between Level 1 or Level 2 intheir cunent portfolios. The adoption did not have an impact on the financial statements or disclosures of NW Holdings or NW Natural.
tElS_E9i On February 25,2016, the FASB issued ASU 201642, "Leases,'wttich revises the existing lease accounting guidance. Pursuant to the new standard(ASC 842"), lessees are required to recognize all leases, including oporating leases that are greateithan 12 months itiease commencement, on the balancesheet and record corresponding right of use assets and lease liabilities. Lessor accounting wili remain substantially the same under the new standard.Quantitative and qualitative disclosures are also required for users of the financial statements to have a clear understanding of the nature of our leasingactivities.
We elected the alternative prospective transition approach for adoption beginning January 1,20'lg. All comparative periods prior to January 1, 2019 will retainthe linancial reporting and disclosure reguirements of ASC 840 "Leases" fASC 840'). ThLre was no cumulative efiect adjusiment to the opening balance ofretained earnings recorded as of January 1 , 2019 for adoption as there were no initial direct costs or other capitalized coits related to the iegacy leases thatneeded to be derecognized upon adoption of ASC 842.
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We elected the land easement optional practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases
under the ASC g40 lease guidance. For the existing lease portfolio, we did not elect the optional practical expedient package to retain the legacy lease
accounting conclusions upon adoption; we re-asseised oui existing contracts under the new leasing standard including whether the contggt meets the definition
of a lease and lease classification. As a result, we determined that-most of our underground gas storage contracts no longer meet the definition of a lease under
the new lease standard.
Upon adoption on January 1,2O1g,NW Holdings recorded an operating lease right of use asset and an associated operating lease liability of approximately $7.3
million, of which $7.0 milibn was recorded at NW Natural. Lease liabilities are measured using NW Naturafsincremental bonowing rate based on information
available at the lease commenoement date in determining the present value of lease payments. See Note 7 for more information.
RETTREMENT BENEFITS. on August 28,2}1g,the FASB issued ASU 2018-14, "Changes to the Disclosure Requirements for Defined Benelit Plans." The
purpose of the amendment is to modify the disclosure requirements for defined benefii pension and other postretirement plans. The amendments in this ASU
weie effective beginning January 1,2020 anawere applied retrospectively. The adoption of this ASU did not materially afect the financial statements and
disclosures of NW Holdings or NW Natural.
Recenfly lssued Accountino Pronouncements
INCOME TAXES. On DecemEFlg, 2O19Jhe FASB issued ASU 2019-12, "lncome Taxes (Topic 740): Simptifying the Accounting for lncome Taxes." The
purpose of the amendment is to reduce cost and complexity related to accounting for income taxes by removing certain exceptions to the general principles and
imjroving consistent application for other areas in Topic 74b. The amendments 6 this ASU are effective beginning January 1 ,2021. Early_adoption is permitted'
The ame-nded presentition and disclosure guidance should be applied retrospectively. We do not expect this ASU to materially affect the financial statements
and disclosures of NW Holdings or NW Natural.
REFERENCE RATE REFORil. on March 12,z}21,the FASB issued ASU 202044, 'Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting." The purpose of the amendment is to provide optional expedients and exceptions for applying generally accepted
accounting principles (GAApj to co-ntracts,'nedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The
amendments in this ASU apply only to contracti, niAging relatonships, and other transactions that reference LIBoR or another reference rate expected to be
discontinued because of reference rate reform. The ameirdments in ihis ASU are effective for all entities as of March 12, 2020 through December 31 , 2022, We
do not expect this ASU to materially affect the financial statements and disclosures of NW Holdings or NW Natural.
Accountino Policies
Ttre accounting policies discussed below apply to both NW Holdings and NW Natural.
Plant. Prooerty. and Accrued Asset Removal Costs
edlabor,materials,andoverhead.lnaccordancewithregulatoryaccountingstandards,thecostof
acquiring and constructing long-lived plant and property generaliy includes an allowance for funds used during construction (AFUDC) or capitalized interest.
Rfi.lOC-represents the regulatiry financing cosi incuned-when d'ebt and equity funds are used for construction (see'AFIJDC below). When constructed assets
are subjeci to market-based rates rather thln cost-based rates, the financing iosts incuned during construction are included in capitalized interest in accordance
with U.S. GAAP, not as regulatory financing costs under AFUDC'
ln accordance with long-standing regulatory treatment, our depreciation rates consist of three components: one based on the average service life of the asset' a
second based on the estimateo iatvige vaiue of the asset, and a third based on the asset's estimated cost of removal. We collect, through rates, the estimated
cost of removal on certain retuhted pioperties through depreciation expense, with a conesponding offset to accumulated depreciation. These removal costs are
non-legal obligations as defiied by riguiatory accounting guidance. Thlrefore, we have included these costs as nonturrent regulatory liabilities rather than as
a""rr-rlat"d iepreciation on our ionsolidated balance iniets. tn the rate setting process, the liability for removal costs is treated as a reduction to the net rate
base on which the NGD business has the opportunity to earn its allowed rate of return.
The costs of NGD plant retired or otheMise disposed of are removed from NGD plant and charged to accumulated depreciation for recovery or refund through
future rates. Gains from the sale of regulated assets are generally defened and refunded to customers. For assets not related to NGD, we record a gain or loss
upon the disposal of the property, "nd-the gain or loss is iecorded in operating income or loss in the consolidated statements of comprehensive income.
The provision for depreciation of NGD property, plant, and equipment is recorded under the group method on a straight-line basis with rates computed in
a""ord"nc" with depreciation studies app.r"'O 6y regulatoryauthorities. The weighted-averige depreciation rate for NGD assets in service was approximately
3.Oo/otor2020,2.g*tor 2019, and 2.gi/,'tor2Otf;,reflectingine approximate weighted-average economic life of the property.This includes 2020 weighted-
average depreciation rates for the
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following asset categoriesi 2.60/o for transmission and distribution planl, 2.Oo/o for gas storage facilities, 6.7% for general plant, and S.1o/o tor intangible and otherfixed assets.
AFUDC. Certain additions to NGD plant include AFUDC, which represents the net cost of debt and equity funds used during construction. AFUDC is calculatedusing actual interest rates for debt and authorized rates for ROE, if applicable. lf short-term debt balances are less than thC total balance of construction work inprogress, then a composite AFUDC rate is used to represent interest on all debt funds, shown as a reduction to interest charges, and on ROE funds, shown asother income. While cash is not immediately recognized from recording AFUDC, it is realized in future years through rate rec6very resulting from the higher NGDcost of service. our composite AFUDC rate was 1.9% in 2020,3.9olo in 2019, and s.2% in 2019.
lxlPAlRirENT oF LoNG'LlvED AssETs. We review the carrying value of long-lived assets whenever events or changes in circumstances indicate the carryingamount of the assets may not be recoverable. Factors that would necessitate an impairment assessment of long-liv6d assets include a significant adversechange in the exlent or manner in which the asset is used, a signmcant adverse change in legal factors or business climate that could affecf the value of theasset, or a significant decline in the observable market value or expected future cash flows of the asset, among others.
When_such factors are present, we assess the recoverability by determining whether the carrying value of the asset will be recovered through expected futurecash flows' An asset is determined to be impaired when the carrying value of the asset exceedsihe expected undiscounted future cash flows from the use andeventual disposition of the asset. lf an impairment is indicated, we record an impairment loss for the difference between the canying value and the fair value ofthe long'{ived assets. Fair value is estimated using appropriate valuation methodologies, which may include an estimate of discounted cash flows.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand plus highly liquid investment accounts with original maturity dates of threemonths or less. At December 31,2020 and 2019, NW Holdings had outstanding checks of g4.4 million and $3.2 million, respectively, iubstantially all of which isrecorded at NW Natural. These balances are included in accounts payable in the .NW Holdings and NW Natural balance sheets.
Restricted cash,is primarily comprised of funds from public purpose charges for programs that assist low-income customers with bill payments or energyefiiciency. As of December 31,2020 and 2019, NW Natural had restricted cash of $5.3 million and $3.0 million, respectively. These balances are included inother current assets in the NW Holdings and NW Natural balance sieets, Changes in these balances are presented in changes in asse6 and liabilities - other,net in the NW Holdings and NW Natural statements of cash flows. There were no transfers b€tween restriited cash and cas[ and cash equivalents during theyears ended December 31 , 2020 and 201 9.
Revenue Recoonition and Accrued Unbilled Revenue
Revenues, derived primarily from the sale and transportation of natural gas, are recognized upon delivery of gas or water, or service to customers. Revenuesindu.de accruals for gas or water delivered but not yet billed to customors based on eitimates of deliverids frim meter reading dates to month end (accruedunbilled revenuo). Accrued unbilled revenue is dependent upon a number of factors that require management's judgment, inciuding total natural gas receiptsand deliveries, customer use of natural gas or water by billing cycle, and weather factors. Accrued unbilled revenuJis reversed thjfollowing month when actualbillings occur. NW Holdings' accrued unbilled revenue at December 3 1 , 2O2O and 2019 was $57.9 million and $56.2 million, respectively, suLstantially all ofwhich is accrued unbilled revenue at NW Natural.
Revenues not related to NGD are derived primarily from lnterstate Storage Services, asset management activities at the Mist gas storage facility, and otherinvestments and business activities. At the Mist underground storage facility, revenues are primai'ly firm service revenues in the form oifixed mbnthlyreservation charges. ln addition, we also have asset management service revenue ftom an independent energy marketing company that optimizes commodity,storage, and pipeline capacity release transactions. Under this agreement, guaranteed asset managoment reienue is recignizia uiing a straight-line, pro-raiamethodology over the term of each contrac{. Revenues eamed above the guaranteed amount are dcognized as they are eirned.
Revenue Taxes
Revenue-based taxes are primarily franchise taxes, which are collected from customers and remitted to taxing authorities. Revenue taxes are included inoperating expenses in the statements of comprehensive income for NW Holdings and NW Natural. All revenu6 taxes are recorded at NW Natural and were$30.3 million, $30.3 million, and $30.1 million for 2020, 2019, and 2018, respectively.
Accounts Receivable and Allowance for Uncollectible Accounts
Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD customers, plus amounts due for gas storageservices' NW Holdings and NW Natural establish allowances for uncollectible accounts (allowance) for trade receivables, including accrued unbilled revenue,based on the aging of receivables, collection experience of past due account balances including payment plans, and historical trends of write-offs as a percent ofrevenues. A specific allowance is established and recorded for large individual customer receivablei when amounts are identified as unlikely to be partially orfully
EXHIBIT 2
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recovered. lnactive accounts are written-off against the allowance after they are 120 days past due or when deemed uncollectible' Differences between the
estimated allowance and actual write-offs will occur based on a number of iactors, incluiing changes in econ-omic conditions, customer creditworthiness, and
natural gas prices. The allowance for uncollectible accounts is adjusted quarterly, as necessary, based on information cunently available.
ALLOWANCE FOR TRADE RECEIVABLES. Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD
customers and amounts aue toigas storage services. The payment term of these receivables is generally 15 days. For these short-term receivables, it is not
expected that forecasted ""onorii" conditions would significanty affect the loss estimates under itable economic conditions. For exteme situations like a
financial crisis, natural oisasterl and the economic slowdown caused by pandemics like coVlD-19, we enhance our review and analysis.
Afler considering the significant exposure to quarantine-related job losses in oregon and Washington state, NW Holdings and NW Natural expanded our
standard review procedures for oui allowance for uncollectible jccounts calculation, including analyzing the signiticant indications of unemployment rate and
comparing to historic ""onori" data during the 2007-2009 time period when the country experienced an economic recession. we then considered other
qualitative information including recent customer interactions related to payment plans ind credit issues, statistics from our website related to credit inquiries,
and economic stimulus provided by the federal government which could have a beneficial impact on residential and commercial customers'abilities to ultimately
make payment on their accounts. our provision calculation for residential and commercial accounts was estimated as a percentage of accounts that no
customer payment was received for gd or more days. For industrial accounts, we continue to analyze those accounts on an account-by-account basis with
specific reserves taken as necessary'
The following table presents the activity related to the NW Holdings provision for uncollectible accounts by pool, substantially all of which is related to NW
Natural's accounts receivable:
Table of Contents
ln thousands
Allowance for uncollectible accounts
related to accounls receivable:
Residential
Commercial
lndustrial
Accrued unbilled and other
Total
As of December 31 20't9 Year ended December 31 2020
Writeoffs recognized, net
As of December 31 2020
Endino Balanceof recoveriesBeoinnino Balance Provision recorded(1)
153
704
142
220
2,153
821
77
166
2,$432 $
57
72
'112
$(438) $
(174)
(7)
(58)
$ 673 $3,223 $ 1ezzl $ e,zts
{1) lncludes g2.3 million that was defened to a regulatory asset for costs associated with COVID-19 that are recoverable in future rates.
ALLOWANCE FOR NET TNVESTMENTS lN SALES.TYPE LEASES. NW Natural currently holds two net investments in sales-type leases' with substantially all of the
net investment balance related to the North Mist natural gas storage agreement with Fortland General Electric (PGE) which is billed under an oPUC-approved
rate schedule. See Note 7 for more information on the N6rth Mist lease. Due to the nature of this service, PGE may recover the costs.of the.lease through
general rate cases. Therefore, we expect the risk of loss due to the credit of this lessee to be remote. As such, no allowance for uncollectibility was recorded for
our sales-type lease receivables. nW Natural will continue monitoring the credit health of the lessees and the overall economic environment, including the
economic iactors closely tied to the financial health of our current and future lessees.
lnventories
NGD gas inventories, which consist of natural gas in storage for NGD customers, are stated at the lower of weighted-average cost or net realizable value' The
regulatory treatment of these inventories provides for costiecovery in customer rates. NGD gas inventories injected into storage are priced in inventory based
on actual purchase costs, and those withdrawn from storage are c'harged to cost of gas during the period they are withdrawn at the weighted-average inventory
cost.
Gas storage inventories, which primarily represented inventories at the Gill Ranch Facility and are included in Discontinued operations - current assets on the
consolidated balance sheets, mainly consist of natural gas received as fuel-in-kind from itorage customers. Gas storage inventories are valued at the lower of
average cost or net realizable value. Cushion gas is not included in inventory balances, is recorded at original cost, and is classified as a long-term plant asset'
Materials and supplies inventories consist of inventories both related to and unrelated to NGD and are stated at the lower of average cost or net realizable value'
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NW Natural's NGD and gas storage inventories totaled $24.7 million and $27.5 million al2O2O and 2019, respectively. At December 31,2020 and 2019, NWHoldings'materials and supplies inventories, which are comprised primarily of NW Natural's materials and supplies, [otaled 918.0 million and $16.5 million,respectively.
Gas Reserves
Gas reserves are payments to acquire and produce natural gas reserves. Gas reserves are stated at cost, adjusted for regulatory amortization, with theassociated deferred tax benefits recorded as liabilities on the balance sheet. The cunenl portion is calculated based on eipected gas deliveries within the nextfiscal year. NW Natural recognizes regulatory amortization of this asset on a volumetric basis calculated using the estimated gas riserves and the estimatedtherms extracted and sold each month. The amortization of gas reserves is recorded to cost of gas along with gas production-revenues and production costs.See Note 13.
Derivatives
NW Natural's derivatives are measured at fair value and recognized as either assets or liabilities on the balance sheet. Changes in the fair value of thederivatives are recognized in eamings unless specific regulatory or hedge accounting criteria are met. Accounling for derivatiies and hedges provides anexc6ption for contracts intended for normal purchases and normal sales for which physical delivery is probable. ln addition, certain derivat]ve contracts areapprov€d by regulatory authorities for recovery or refund through customer rates. Accordingly, thechanges in fair value of these approv€d contracts are defenedas regulatory assots or liabilities pursuant to regulatory accounting principles. NW Natural'sfinancial derivatives generally qualify foi Oefenal under regulatoryaccounting. NW Natural's index-priced physical derivative contracts also quatiff for regulatory defenal accounting treatmeni.
Derivative contracts entered into for NGD requirements after the annual PGA rate has been set and maturing during the pGA year are subject to the pGA
incentive sharing mechanism. ln Oregon, NW Natural participates in a PGA sharing mochanism under which it is required to select either an g0% or 90%delelgl of higher or lower gas costs such that the impact on cunenl eamings from the gas cost sharing is either 20* or 10% of gas cost differences comparedto PGA prices, respectively. For each of the PGA years in Oregon beginning November 1 , 2020,2019, and 2018, NW Natural seiected the 90% defenal of gas
cost differences. ln Washington, 100% of the differences between the PGA prices and actual gas costs are deferred. See Note 16.
NW Natural's financial derivatives policy sets forth the guidelines for using selected derivative products to support prudent risk management strategies withindesignated parameterc. NW Natural's objective for using derivatives is to decrease the volatility of gas prices ind iash flows withoutipeculative riik. The use ofderivatives is permitted only after the risk exposures have been identified, are determined not io eiceeA acceptable tolerance levels, and are determinednecessary to support normal business activities. NW Natural does not enter into derivative instuments for trading purposes. All derivatives for NW Holdings arecurrently held at NW Natural.
Fair Value
ln accordance with fair value accounting, we use the following fair value hierarchy for determining inputs for our debt, pension plan assets, and derivative fairvalue measurements:
' Level 'l: Valuation is based on quoted prices for identical instruments traded in active markets;' Level 2: Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instrumenfs in markets lhat arenot active, and model-based valuation techniques for which all signilicant assumptions are observable in the market; and' Level 3: Valuation is generated from model-based techniques that us6 significant assumptions not observable in the market. These unobservableassumptions reflect our own estimates of assumptions market participants would use in valuing the asset or liability.
ln addition, the fair value for certain pension trust investments is determined using Net Asset Value per share (NAV) as a practical expedient, and therefore theyare nol classified within the fair value hierarchy. These investments primarily consist of institutional investmeniproducts.
When developing fair value measurements, it is our policy to use quoted market prices whenever available or to maximize the use of observable inputs andminimize the use of unobservable inputs when quoted market prices are not available. Fair values are primarily developed using industry-standard models thatconsider various inputs including: (a) quoted future prices for commodities; (b) fonrvard currency pricesj 1c; tmL vabe; iO; volatiiity factors; (e) cunent market andcontractual prices for underlying instruments; (f) market interest rates and yield curves; (g) credit spreadsi and (h) othei ielevant economic measures. NWNatural considers liquid points for natural gas hedging to be those points for which there are regularly published prices in a nationally recognized publication orwhere the instruments are traded on an exchange.
Goodwill and Business Combinations
NW Holdings, through its wholly-owned subsidiary NWN Water and NW Wate/s wholly-owned subsidiaries, has completed various acquisitions that resulted inthe recognition of goodwill. Goodwill is measured as the excess of the acquisitiondate fair value of the consideration transferred over tire acquisitiondate fairvalue of the net identifiable assets assumed. Adjustments are recorded during the measurement period to finalize the allocation of the purchase price. Thecarrying value of goodwill is
98
EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page 99 of210
reviewed annually during the fourth quarter using balances as of October 1, or whenever events or changes in circumstance indicate that such carrying values
may not be recovlrable. rn" go;a*iil ass"""me-nt policy begins with a qualitative analysis in which events and circumstances are evaluated, including
macroeconomic conditions, iniustry and market conditions, iegulatory environments, and overall financial performance of the reporting unit. lf the qualitative
assessment indicates that the carrying value may be at risk otiecoverauility, a quantitative evaluation is performed to measure the carrying value of the goodwill
against the fair value of the reporting init. The reporting unit is determined primarily based on current operating segments and the level of review provided by the
Ciief Operating Decision trlarlr 1C5ou; and/or iegmJnt management on the operating segment's financial results. Reporting units are evaluated periodically
for changes in the corporate environment.
As of Decembe r 31, 2020 and 2019, NW Holdings had goodwill of $69.2 million and $49.9 million, respectively. All of NW Holdings' goodwill was acquired
through the business combinations completed o| Nwtt-water and its wholly-owned subsidiaries. No impairment charges were recorded as a result of the fourth
quarter goodwill impairment assessment.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transfened,
measured at fair value at the acquisition date, Ind the flir value of any non-controlling interest in the acquiree. Acquisition-related costs-are.expensed as
incurred. When NW Natural acquires a business, it assesses the financial assets acquired and liabilities assumed for appropriate classification and designation
in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date. When there is substantial judgment or
uncertainty around the fair value of acquired assets, we may engage a third party expert to assist in determining the fair values of certain assets or liabilities.
Table of Contents
Subseouent Events
We monitor signif,cant events occurring after the balance sheet date and prior to the issuance of the financial statements to determine the impacts, if any' of
events on the financial statements to be issued.
EXHIBIT 2
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Page 100 of 210
lncome Taxes
We account for income taxes under the asset and liability method, which requires the recognition of defened tax assets and liabilities for the expected future tax
consequen@s of events that have been included in the financial statements. Under this metnoa, defened tax assets and liabilities are determined on the basis
of the difierences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
exfeaed to reverse. The effect of a change in tax rates on deferred tax assets and liabilitiesls recognized in income in the enactment date period unless, for
NW Natural, a regulatory order specifies deferral of the effect of the change in tax rates over a longer period of time'
For NW Natural, deferred income tax assets and liabilities are also recognized for temporary differences where the deferred income tiax beneftts or expenses
have previously been flowed th.rln in the ratemaking process of the N-GD business. Regulatory tax assets and liabilities are re@rded on these defened tax
assets and tiabilities to the extent iiis believed they will be recoverable from or refunded to customers in future rates.
Defened investment tax credits on NGD plant additions, which reduce income taxes payable, are defened for financial statement purposes and amortized over
the life of the related plant.
NW Holdings files consolidated or combined income tax retums that include NW Natural. lncome tax expense is allocated on a separate company basis
incorporatiig certain consolidated retum considerations. Subsidiary income taxes payable or receivable are generally settled with NW Holdings, the common
agent for income tax matters.
lnterest and penalties related to unrecognized tax benefits, if any, are recognized within income tax expense and accrued interest and penalties are recognized
within the related tax liability line in the ionsolidated balance sheets. No accrued interest or penalties for uncertain tax benefits have been recorded. See Note
11.
Environmental Continoencies
@asliabilitieswhenitisprobablealiabilityhasbeenincurredandtheamountofthelossisreasonablyestimableinaccordance
with accouniing standards for contingencies. Estimating probable losses requires an analysis of uncertainties that ofien depend upon judgments about potential
actions by third'parties. Accruals forioss contingencies are recorded based on an analysis of potential results.
With respect to environmental liabilities and related costs, estimates are developed based on a review of information available from numerous sources, including
completed studies and site sfecific negotiations. NW Natural's policy is to accrue the full amount of such liability when information is sufficient to reasonably
estimate the amount of probable liabi[[. wnen information is not available to reasonably estimate the probable liability, or when only the range of probable
liabilities can be estima[ed and no amount within the range is more likely than another, it is our policy to accrue at the low end of the range. Accordingly, due to
numerous uncertainties surrounding the course of environmental remed'iation and the preliminary nature of several site investigations, in some cases, it may not
be possible to reasonably estimate'the high end of the range of possible loss. ln those cases, the nature of the potential loss and the fact that the high end of the
range cannot be reasonably estimated is disclosed. See Note 18.
99
Basic earnings or loss per share are computed using NW Holdings' net income or loss and the weighted average number of common shares outstanding for
each period presented. Diluted earnings per share are computed in the same manner, except using the weighted average number of common shares
outstanding plus the effects of the assumed exercise of stock options and the payment of estimated stock awards from other stock-based compensation plans
that are outstanding at the end of each period presented. Anti-dilutive stock awards are excluded from the calculation of diluted earnings or loss per common
share.
NW Holdings'diluted earnings or loss per share are calculated as follows:
ln thous€nds, ex6ot osr share data 2020 2019 2018
Table of Contents
3, EARA"A'GS PER SHARE
Net income from continuing operations
lncome (loss) from discontinued operations, net of tax
Net income
Average common shares outstanding - basic
Additional shares for stock-based compensation plans (See Note 8)
Average @mmon shares outstanding - diluted
Eamings fom continuing operatbns per share of comrmn stock:
Basic
Diluted
Eamings (loss) ftom discontinued operations per share of common stock:
Basic
Diluted
Eamings per sharc of oommon stock:
Basic
Diluted
Additional information:
Antklilutive shares
1. SEGMENT
'NFORMATION
$70,273 $
6,508
6s,311 $
(3,576)
67,311
(2,742\
$ 76,781 $ 61,735 $_64,569_
70
28,803
___9q999_ _2s,999_ ____n,873_
30,541
58
29,786
73
$2.30 $
2.30
2.19 $
2.19
2.U
2.33
(0.10)
(0.0e)
2.24
2.24
2
$
$
$$2.O7
2.O7
o.21
0.21
2.51
2.5'.|
$(0.12) $
(0.'t2)
We primarily operate in one reportable business segment, which is NW Natural's local gas distribution business and is referred to as the NGD segment. During
the second quarter of 2018, we moved forward with long-term strategic plans, which included a shift away from the California gas storage business, by entering
into a Purchase and Sale Agreement that provided for the sale of all of the membership interests in Gill Ranch. See Note 19 for additional information. As such,
we reevaluated reportable segments and concluded that the remaining gas storage activities no longer meet the requirements of a reportable segment.
lnterstate Storage Services and asset management activities at the Mist gas storage facility are now reported as other under NW Natural. NW Natural and NW
Holdings also have investments and business activities not specifically related to the NGD segment, which are aggregated and reported as other and described
below for each entity.
No individual customer accounts for over 10% of NW Holdings'or NW Natural's operating revenues.
Natural Gas Dlstrlbution
NW Natural's local gas distribution segment (NGD) is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related
services to customers in Oregon and southwest Washington. The NGD business is responsible for building and maintaining a safe and reliable pipeline
distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for lirm and intenuptible transportation of gas over interstate
pipelines to bring gas from the supply basins into its service tenitory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the
OPUC or WUTC. NGD also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers' end-use
facilities for a fee, which is approved by the OPUC or WUTC. Approximately 88% of NGD customers are located in Oregon and 12% in Washington. On an
annual basis, residential and commercial customers typically account for around 60% of total NGD volumes delivered and around 90% of NGD margin. lndustrial
customers largely account for the remaining volumes and NGD margin. A small amount of the margin is also derived from miscellaneous services, gains or
losses from an incentive gas cost sharing mechanism, and other service fees.
lndustrial sectors served by the NGD business include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and
electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production
of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries: and government and educational
institutions.
100
EXHIBIT 2
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Table of Contents
ln addition to NW Natural's local gas dishibution business, the NGD segment also includes the portion of the Mist underground storage facility used to serve
NGD customers, the North Mist gas storage expansion in Oregon, NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp, and NW Natural
RNG Holding Company, LLC, a holding company established to invest in the development and procurement of renewable natural gas.
NW Natural
NW Natural's activities in Other include lnterstate Storage Services and third-party asset management services for the Mist facility in Oregon, appliance retail
center operations, and corporate operating and non-operating revenues and expenses that cannot be allocated to NGD operations.
Eamings from lnterstate Storage Services assets are primarily related to firm storage capacity revenues. Eamings from the Mist facility also include revenue, net
of amounts shared with NGD customers, from management of NGD assets at Mist and upstream pipeline capacity when not needed to serve NGD customers.
Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity were not included in
NGD rates, or 10% of the pre-tax income when the costs have been included in these rates. The remaining 20o/o and 90%, respectively, are recorded to a
defened regulatory account for crediting back to NGD customers.
NW Holdinos
NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specifically NWN Water, which consolidates the water and
wastewater utility operations and is pursuing other investments in the water sector through itself and whollyowned subsidiaries; NWN Gas Storage, a wholly-
owned subsidiary of NWN Energy; NWN Energy's equity investment in TWH through August 6, 2020; and other pipeline assets in NNG Financial. For more
information on the sale of TWH, see Note 14. Other also includes corporate revenues and expenses that cannot be allocated to other operations, including
certain business development activities.
All prior period amounts have been retrospectively adjusted to reflect the change in reportable segments and the designation of Gill Ranch as a discontinued
operation for NW Holdings, and the designation of subsidiaries previously owned by NW Natural that are now owned by NW Holdings as discontinued
operations for NW Natural.
Seoment lnformation Summarv
lnter-segment transactions were immaterial for the periods presented. The following table presents summary linancial information concerning the reportable
segment and other for continuing operations. See Note 19 for information regarding discontinued operations for NW Holdings and NW Natural.
,n f/pusands NGD
Other(NW Natural)NW Natural
Other(NW Holdinosl NW Holdinos
2020
Operating revenues
Depreciation and amortization
lncone (oss) iom op€rations
Net income (loss) from continuing operations
Capital exponditurog
Total assets at December 31, 2020
m$
Operating revenues
Depreciation and amortization
lncome (loss) from operations
N6t lncorne (loss) from continuing operatlons
Capital expenditures
Total assets at Decsmbsr 31, 2019(1,
2018
Operating revenuos
Depreciation and amortization
lncome (loss) from operations
Net income (loss) from continuing operations
Capital exponditurss
Total assets at December 31, 2018(1)
$741,072 $
100,591
137,724
63,555
263,n7
3,549,868
720,528 $
89,41s
135,918
60,828
219,880
3,273,8:!5
680,648 $
83,732
118,095
57,49',1
212,323
3,141,969
17,676 $
995
9,916
7,008
2,271
49,468
19,416 $
990
11,428
8,146
1,500
47,652
24,923 $
1,2il
15,004
10,558
2,005
50,767
758,748 $
101,586
147,UO
70,563
266,O48
3,599,336
739,944 $
90,405
147,346
68,974
221,380
3,321,487
705,571 $
84,9E6
133,099
68,049
214,328
3,',t92,736
6,428 $
I,O9t
(3,872\
(3,663)
2,O9'.|
91,833
572 $
170
(e37)
(738)
308
36,657
773,679
103,683
14E,351
70,273
273,016
3,756,379
746,372
91,496
143,474
65,311
223,471
3,413,320
706,143
85,1 56
132,162
67,311
214,636
3,229,393
14,931
2,097
711
(2e0)
6,968
1 57,043
$
$
$
() Total assets for NW Holdings exclude assets related to discontinued operations of $15.1 million and $13.3 million as of December 31, 2019, and 2018, respectively.
101
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GEM STATEWATER COMPANY
Page 102 of210
Table of Contents
Natural Gas Distribution Marqin
NGD margin is a financial measure used by the CODM, consisting of NGD operating revenues, reduced by the associated cost of gas, environmentalremediation expense, and revenue taxes. The cost of gas purchased for NGD customers is generally a pass-through cost in the amount of revenues billed toregulated NGD customers. Environmental remediation expense represents collections received from customers through environmental recovery mechanisms inOregon and Washington as well as adjustments for the Oregon environmental earnings test when applicable. This is offset by environmental remediation
expense presented in operating expenses. Revenue taxes are collected from NGD customers and remifted to taxing authorities. The collections from customersare offset by the expense recognition of the obligation to the taxing authority. By subtracting cost of gas, environmental remediation expense, and revenue taxesfrom NGD operating revenues, NGD margin provides a key metric used by the CODM in assessing the performance of the NGD segment.
The following table presents additional segment information concerning NGD margin:
ln thusnds 2020 2019 2018
NGD margin calculation:
NGD operating revenues
Other regulated servi@s
Total NGD operating revenues
Less: NGD cost of gas
Environmental remediation expense
Revenue taxes
NGD margin
$721,950 $
19,122
708,472 $
12,056
680,386
262
741,O72
262,980
9,691
30,291
720,528
255,135
12,337
30,325
680,648
255,743
11,127
30,082
$ 438,110 g__4ry 3 1_ !______gsxggg_
5. COMMON SIOCK
As of December 31,2020 and 2019, NW Holdings had 100 million shares of common stock authorized. As of December 31, 2020, NW Holdings had 203,923shares reserved for issuance of common stock under the Employee Stock Purchase Plan (ESPP) and 271,949 shares reserved for issuance under the Dividend
Reinvestment and Direct Stock Purchase Plan (DRPP). At NW Holdings'eleclion, shares sold through the DRPP may be purchased in the open markel orthrough original issuance of shares reserved for issuance under the DRPP.
The Restated Stock Option Plan (SOP) was terminated with respect to new grants in 2012; however, options granted before the Restated SOP was terminatedremain outstanding until the earlier of their expiration, forfeiture, or exercise. Options are now exercisable for shares of NW Holdings common stock. There were9,438 options outstanding at December 31, 2020, which were granted prior to termination of the plan.
On June 7 , 2019, NW Holdings completed the issuance of 1 ,437,500 shares of common stock, inclusive of the overallotment option granted to the undenarriters,which was exercised in full- All shares were issued on June 7, 2019 at an offering price of $67.00 per share. The issuance resulted in proceeds to NW Holdings
of $93.0 million, net of discounts and expenses. The issuance was executed to raise funds for general comorate purposes, including for equity contributions t6NW Holdings' subsidiaries, that are reflected as equity transfers on occurrence. Contributions received by NW Natural were also used, in part, to repay short-term indebledness.
Stock Reourchase Prooram
NW Holdings has a share repurchase program under which it may purchase its common shares on the open market or through privately negoliated transactions
NW Holdings currently has Board authorization through May 2022 to repurchase up to an aggregate of the greater of 2.8 million shares or 9100 million. Noshares of common stock were repurchased pursuant to this program during the year ended December 31,2020. Since the plan's inception in 2000 under NWNatural, a total of 2.1 million shares have been repurchased at a total cost of $83.3 million.
102
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Table of Contents
The following table summarizes the changes in the number of shares of NW Holdings'common stock issued and outstanding:
ln thousands Shares
Balance, December 31, 2017
Sales to employees under ESPP
Stock-based compensation
Sales to shareholders under DRPP
Balance, December 31, 2018
Sales to employees under ESPP
Stock-based compensation
Equity issuance
Sales to shareholders under DRPP
Balance, December 31, 2019
Sales to employees under ESPP
Stock-based compensation
Sales to shareholders under DRPP
Balance, December 31, 2020
28,736
19
64
61
28,880
18
83
1,438
53
30,472
3
46
68
30,589
6, REI/ENUE
The following table presents disaggregated revenue from continuing operations:
Year ended December 31 2020
ln thousands NGD
Other(NW Natural)NW Natural
Other(NW Holdinss)NW Holdinos
Natural gas sales
Gas storage revenue, net
Asset management revenue, net
Appliance retail center revenue
Other revenue
Revenue ftom contracts with customers
$ 710,422 $$ 710,422
9,759
2,532
5,385
1,337
729,435
$$ 710,422
9,759
2,532
5,385
't6,268
744,366
9,759
2,532
5,385
1,337 14,931
711,759 17,676 14,931
Altemative revenue
Leasing revenue
Total operating revenues
10,870
18,443
10,870
18,443
10,870
18,M3
$ 741,072 $ 17,676 $ 758,748 $ 14,931#--:$ 773,679
Year ended December 3'l 2019
Other
(NW Natural)
Other
ln thousands NGD NW Natural (NW NW Holdings
Natural gas sales
Gas storage rev6nue, net
Asset management revenue, net
Appliance retail center revenue
Other revenue
Revenue from contracts with customers
$ 729,296 $$729,296 $
10,240
3,705
5,471
$729,296
10,240
3,705
5,471
7,275
10,240
3,705
5,471
u7 u7 6,428
6,428730,143 19,416 749,559 755,987
Altemative revenue
Leasing revenue
Total operating revenues
(20,s84)
11,369
(20,e84)
11,369
(20,984)
1 1,369
!__ ?n,52s_ s______191L9- $___-_?3s,e44_ S_____U?g_$746.372
NW Natural,s revenue represents substantially all of NW Holdings' revenue and is recognized for both registrants when the obligation to customers is satisfied
and in the amount expected to be received in exchange for transferring goods or providing services. Revenue from contracts with customers contains one
performance obligation that is generally satisfied oveitime, using the output method based on time elapsed, due to the continuous nature of the service
provided. The transaction price is determined by a set price agreed upon in the contract or dependent on regulatory tariffs. Customer accounts are settled on a
monthly basis or paid at time of sale and based on historical experience. lt is probable that we will collect substantially all of the
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103
Table of Contents
consideration to which we are entitled. We evaluated the probability of collection in accordance with the current expected credit losses standard.
NW Holdings and NW Natural do not have any material contract assets, as net accounts receivable and accrued unbilled revenue balances are unconditional
and only involve the passage of time until such balances are billed and collected. NW Holdings and NW Natural do not have any material contract liabilities.
Revenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statements of
comprehensive income, Revenue-based taxes are primarily franchise tax6s, which are collected from NGD customers and remitted to taxing authorities.
Natural Gas Dlstrlbutlon
Natural Gas Sales
NW Natural's primary source of revenue is providing natural gas to customers in the NGD service territory, which includes residential, commercial, industrial and
transportation customers. NGD revenue is generally recognized over time upon delivery of the gas commodity or service to the customer, and the amount of
consideration received and recognized as revenue is dependent on the Oregon and Washington tariffs, Customer accounts are to be paid in full each month,
and there is no right of retum or wananty for services provided. Revenues include firm and interruptible sales and transportation services, franchise taxes
recovered from the customer, late payment fees, service fees, and accruals for gas delivered but not yet billed (accrued unbilled revenue), The accrued unbilled
r€venue balance is based on estimates of deliveries during the period from the last meter reading and management judgment is required for a number of factors
used in this calculation, including customer use and weather factors.
We applied the significant financing practical expedient and have not adjusted the consideration NW Natural expects to receive ftom NGD customers for the
efiects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we
do not disclose the value of unsatisfied performance obligations.
Altemative Revenue
Weather normalization (WARM) and decoupling mechanisms are considered to be altemative revenue programs. Alternative revenue programs are considered
to be contracts between NW Natural and its regulator and are exduded ftom revenue from contracts with customers.
Leasino Revenue
Leasing revenue primarily consists of revenues from NW Natural's North Mist Storage contract with Portland General Electric (PGE) in support of PGE's gas-
fired electric power generation facilities under an initial 30-year contract with options to extend, totaling up to an additional 50 years upon mutual agreement of
the parties. The facility is accounted for as a sales-type lease with regulatory accounting defenal treatnent. The investment is included in rate base under an
established cost-of-service tarifi schedule, with revenues recognized according to the tarifi schedule and as such, profit upon commencement was defened and
will be amortized over the lease term. Leasing revenue also contiains rental revenue ftom small leases of property owned by NW Natural to third parties. The
majority of these transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement. Lease revenue is
excluded ftom revenue from contracts with customers. See Note 7 for additional information.
NW Natural Other
Gas Storaoe Revenue
NW Natural's other revenue includes gas storage activity, which includes lnterstate Storage Services used to store natural gas for customers. Gas storage
revenue is generally recognized over time as the gas storage service is provided to the customer and the amount of consideration received and recognized as
revenue is dependent on set rates defined per the storage agreements. Noncash consideration in the form of dekatherms of natural gas is received as
consideration for providing gas injection services to gas storage customers. This noncash consideration is measured at fair value using the average spot rate.
Customer accounts are generally paid in full each month, and there is no right of return or wananty for services provided, Revenues include firm and interruptible
storage services, net of the profit sharing amount refunded to NGD customers.
Ass6t Manaoement Revenue
Revenues include the optimization of third-party storage assets and pipeline capacity and are provided net of the profit sharing amount refunded to NGD
customers. Certain asset management revenues received are recognized over time using a straight-line approach over the term of each contract, and the
amount of consideration received and recognized as revenue is dependent on a variable pricing model. Variable revenues earned above guaranteed amounts
are estimated and recognized at the end of each period using the most likely amount approach. Additionally, other asset management revenues may be based
on a fixed rate. Generally, asset management accounts are settled on a monthly basis.
As of December 3'l, 2020, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was
approximately $88.4 million. Of this amount, approximately $19.0 million will be recognizedin 2021, $19.4 million in 2022, $17.8 million in2O23, $14.0 million in
2024, and $18.2 million thereafter. The amounls presented here are calculated using cunent contracted rates.
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Table of Contents
Apoliance Retail Center Revenue
NW Nat,.lral .wns and operaies iin appliance store that is open to the public, where customers can purchase natural gas home appliances..Revenue from the
sale of appliances is recognized at the point in time in which the appliance is transfened to the third party responsible for delivery and installation services and
when the customer has legal tifle to the appliance. lt is required tnat ttre sale be paid for in full prior to transfer of legal title. The amount of consideration received
and recognized as revenue varies with changes in marketing incentives and discounts offered to customers'
NW Holdinos Other
Nrfl HoldingsTnmary source of other revenue is providing water and wastewater services to customers. Water and wastewater service revenue is generally
recognizedlver time upon delivery of the water commodity or service to the customer, and the amount of consideration received and recognized as revenue is
depjndent on the tariffs established in the state we operatL. Customer accounts are to be paid in full each month, and there is no right of retum or warranty for
services provided.
We applied the significant financing practical expedient and have not adjusted the consideration we expect to receive from water diskibution and wastewater
collection customers for the effectJof a significant financing component as all payment anangements are settled annually. Due to the election of the right to
invoice practical expedient, we do not disclose the value of unsatislied performance obligations.
7, LEASES
Lease RevenueGi!;[-g r"uenue primarily consists of NW Natural's North Mist natural gas storage agreement with PGE which is billed under an OPUC-approved rate schedule
and inc]udes an initial 3g-year term with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties- Under U.S. GAAP' this
agreement is classified as a sales-type lease and qualifies for regulatory accounting defenal treatment. The investment in the storage facility is included in rate
bise under a separately establishei cost-of-service tariff, with revenues recognized according to the tariff schedule. As such, the selling profit that was
calculated upon commencement as part of the sale-type lease recognition was defened and will be amortized over the lease term. Billing rates under the cost-
of-service tariff will be updated annually to reflect cunent information including depreciable asset levels, forecasted operating expenses, and the results of
regulatory proceedings, as applicable, ind revenue received under this agreement is recognized as operating revenue on the consolidated statements of
comprehensive incoie. Theie are no variable payments or residual value guarantees. The lease does not contain an option to purchase the underlying assets'
NW Natural also maintains a sales-type lease for specialized compressor facilities to provide high pressure compressed natural gas (CNG) services. Lease
payments are oulined in an OpUg-iilproved rate schedule over a 10-year term. There are no variable payments or residual value guarantees. The selling profit
computed upon lease commencement was not significant.
Our lessor portfolio also contains small leases of property owned by NW Natural to third parties. These transactions are accounted for as operating leases and
the revenue is recognized over the term of the lease agreement.
The components of lease revenue at NW Natural were as follows:
Yearended December3l,
ln thousands 2020 2019
Lease revenue
Operating leases
Sales-type leases
Total lease revenue
$88$171
18,355 11 198
1 1,369$ 18"143
EXHIBIT 2
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GEM STATE WATER COMPANY
Page 106 of210
105
thousands
2021
2022
2023
2024
2025
Thereafter
Total lease rcvenue
Less: imputed interest
Total leases receivable
Total
59
55
47
47
43
52
$17,518
17,026
16,557
15,867
15,306
17,577
17,081
16,604
15,914
15,349
251,773251721
303 $333,995
189,501
$ 334,298
$144,494
The total leases receivable above is reported under the NGD segment and the short- and long-term portions are included within other cunent assets and assetsunder sales-type leases on the consolidated balance sheets, respectively. The total amount of unguaranteed residual assets was $4.3 million and $4.0 million atDecember 31, 2020 and 2019, respectively, and is included in assets under sales-type leases on the consolidated balance sheets. Additionally, under regulatoryaccounting, the revenues and expenses associated with these agreements are presented on the consolidated statements ofcomprehensive income such that -
their presentation aligns with similar regulated activities at NW Natural.
Additionally, future minimum lease payments of $0.5 million for each of the years ending 2021 and 2022 are to be received under non-cancelable operatingleases associated with non-utility property rentals. For each of the years ended December 31,2020 and 2019, approximately $0.5 million of lease revenue ispresented in other income (expense), net on the consolidated statements of comprehensive income as it is non-operating income.
Lease Exoense
Ooeratino Leases
We have operating leases for land, buildings and equipment. Our primary lease is for NW Natural's operations center. Our leases have remaining lease terms ofone year to 19 years. Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they arereasonably certain to be exercised. Short-term leases with a term of 12 months or less are not recorded on the balance sheet.
As most of our leases do not provide an implicit rate and are entered into by NW Natural, we use an estimated discount rate representing the rate we wouldhave incurred to finance the funds necessary to purchase the leased asset and is based on information available at the lease commencehent date indetermining the present value of lease payments.
The components of lease expense, a portion of which is capitalized, were as follows:
Year ended December 31, 2020
ln thousands NW Natural
Other(NW Holdinqs)NW Holdinss
$
Table of Contents
Total future minimum lease payments to be received under non-cancelable leases at NW Natural at December 31,2020 are as follows:
Operating lease expense
Short-term lease expense
$
$
4,381 $
1,010 $
125
Year ended December 31, 2019
$
$
4,506
1,010
ln thousands NW Natural
Other(NW Holdinqs)NW Holdings
Operating lease expense
Short-term lease expense
$
$
$
$
4,620 $
1,146 $
4,811
1,146
191
EXHIBIT 2
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Page 107 of210
106
NW Natural Hold NWln thousands
Operating lease right of use assets
Operating lease liabilities - current liabilities
Operating lease liabilities - non-current liabilities
Total operating lease liabilities
77,328 $118 $77,446
$1,054 $
80,559
$ 1,105
80,621
$ 81,726$113$ 81,613
Other
51
62
Supplemental balance sheet information related to operating leases as of December 31,2019 is as follows:
Table of Contents
Supplemental balance sheet information related to operating leases as of December 31, 2020 is as follows:
Other
NW Natural NWln thousands
Operating lease right of use assets
Operating lease liabilities - currenl liabilities
Operating lease liabilities - non-current liabilities
Total operating lease liabilities
$
2,760 $
1,979 $
772
190 $
122 $
69
2,950
2,',!01
841
$ 2,751 $191 $2,942
The weighted-average remaining lease terms and weighted-average discount rates for the operating leases at NW Natural were as follows:
2020 2019
Weighted-average remaining lease term (years)
Weighted-average discount rate
19.2 1.0
3.98 %7.23%
Commencement of Sionificant Lease
NW Natural commenced a 26@T6perating lease agreement in March 2020lor a new corporate operations center in Portland, Oregon. Total estimated base
rent payments over the life of t'he lease are ipproximitely g159.4 million. There is an option to extend the term of the lease for two additional periods of seven
years.
There is a material timing difference between the minimum lease payments and expense recognition as calculated under operating lease accounting rules'
OpUC issued an order ailowing us to align our expense recognition with cash payments for ratemaking purposes. We recorded the difference between the
minimum lease payments anaihe aggre;ate of the imputed interest on the finance lease obligation and amortization of the right-of-use asset as a regulatory
asset on our balance sheet. The balance of the regulatory asset as of December 31, 2020 was $4.2 million.
Maturities of operating lease liabilities at December 31,2020 were as follows:
ln thousands NW Natural
Other
(NW Holdings)NW Holdings
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total lease obligations
Less: current obligations
Long-term lease obligations
$6,760 $
6,849
6,986
7,150
7,185
123,784
$52,:6,812
6,916
6,986
7,150
7,185
123,784
158.714
77.10'.1
81,613
1,054
$80,559 $
As of December 31,2020, finance lease liabilities with maturities of less than one year were $0.7 million at NW Natural
107
119
6
158,833
77,107
113
51
81,726
1.'t05
62 $ 80,621
EXHIBIT 2
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GEM STATE WATER COMPANY
Page 108 of210
Table of Contents
Cash Flow lnformation
Supplemental cash flow information related to leases was as follows:
ln thousands
Year ended December 3'1, 2020
NW Natural
Other
(NW Holdinss)NW HoldingsCash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Finance cash flows from finance leases
Right of use assets obtained in exchange for lease obligations
Operating leases
Finance leases
ln thousands
$
$
$
$
4,466
78,539 $
1,386 $
835
$
$835
51
131 $
$
$
$
4,597
78,590
1,386
Year ended December 3'l 2019
NW Natural
Other
(NW Holdings)NW HoldingsCashpaid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Finance cash flows from finance leases
Right of use assets obtained in exchange for lease obligations
Operating leases
Finance leases
$
$
$
$
4,47 $
120 $
7,20s $
312 $
't20
182
372
$
$
$
$
4,629
7,577
312
Finance Leases
NW Natural also leases building storage spaces for use as a gas meter room in order to provide natural gas to multifamily or mixed use developments. Thesecontracts are accounted for as finance leases and typically involve a one-time upfront payment with no rimaining liability: The right of use asset for financeleases was $1.8 million and $0.5 million at December 31,2020 and 2019, respectively.
8. STOCK.BASED COMPENSATION
Stock-based compensation
compensation plans include
plans are designed to promote stock ownership in NW Holdings by employees and officers of NW Holdings and its affiliates. Thesea Long Term lncentive Plan (LTIP), an ESPP, and a Restated SOp.
Lono Term lncentive PIan
The LTIP is intended to provide a flexible, competitive compensation program for eligible officers and key employees. Under the LTlp, shares of NW Holdingscommon stock are authorized for equity incentive grants in the form of stock, restricted stock, restricted itock'units, stock options, or performance shares. Anaggregate of 1,1 00'000 shares were authorized for issuance as of December 31,2020. Shares awarded under the LTlp may be purchased on the open marketor issued as original shares.
Of the 1,100,000 shares of common stock authorized for LTIP awards at December 91,2oz},there were 43s,7S8 shares available for issuance under any typeof award. This assumes market, performance, and service-based grants cunently outstanding are awarded at the target level. There were no outstanding grantsof restricted stock or stock options under the LTIP at December 3i, 2o2o or 2019. The LTIP itock awards are compensatory awards for which compensationexpense is based on the fair value of stock awards, with expense being recognized over the performance and vesting period of the outstanding awards.Forfeitures are recognized as they occur.
Performance Shares
LTIP performance shares incorporate a combination of market, performance, and service-based factors. The following table summarizes performance shareexpense information:
Expense During Total Expense forAward Yeal2) AwardDollars in Shares(1)
Estimated award:
201&2020 grant{3) 31,600 $ Z,tgt $ 2,137Actual award:2017-2019grant 41,537 $ 572 $ 1,9712016-2018 grant 2A,218 $ sgs $ r,atg(r) ln addition to common stock shares, a participant also receives a dividend equivalent cash payment equal to the number of shares of common stock received on the awardpayout multiplied by the aggregate cash dividends paid per share during the performance peiod.
't08
EXHIBIT 2
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GEM STATEWATER COMPANY
Page 109 of210
Table of Contents
(2) Amount repr€sents the expense recognized in the third year of the vesting period noted above. For the 2018-202o granl, mutual understanding of the award's key terms
was established in the third year of the vesting period, triggering full expense recognition in 2020.
(3) This represents the estimated number of shares io be awiied a-s of December 3t,2ozo as certain performance share measures have been achieved. Amounts are
subject to change with final payout amounts authorized by the Board of Directors in February 2021.
The aggregate number of performance shares granted and outstanding at the target and maximum levels were as follows:
Performance Share Awards Outstanding 2020
ExpenseTarget
Dollarc in thousands
Performance Period Maximum
31,825 63,650 $2,1372018-20
2019-21
2020-22
Total 31,825 63,650 $137
performance share awards are based on the achievement of a three-year RolC threshold that must be met and a cumulative EPS factor, which can be modified
by a TSR factor relative to the performance of the Russell 2500 Utilities lndex over the lhree-year performance period. The performance period allows for one of
the performance factors to remain variable until the first quarter of the third year of the award'period. As the performance factor will not be approved until the first
quarter of 2021 and 2O22,there is not a mutual understanding of the awardi' key terms and conditions between NW Natural and the participants as
of December 31, 2o2o,and therefore, no expense was recog;ized for the 2019-2021 and 202o-2022 performance period. NW Natural will calculate the grant
date fair value and recognize expense once'the final perforriance factor has been approved. lf the target is achieved for the 201 9-2021 and 2020-2022 awards,
NW Holdings would grant for accounting purposes 3d,170 and 31,830 shares in the first quarter ol 2021 and 2022, respectively.
Compensation expense is recognized in accordance with accounting standards for stock-based compensation and calculated based on performance levels
achieved and an estimated fair-value using the Monte-Carlo method. Due to there not being a mutual understanding of the 2019-2o21-and2020-2022 awards'
key terms and conditions as noted above,-the grant date fair value has not yet been determined and no non-vested shares existed at December 31 ' 2020. The
weighted-average grant date fair value of non-vested shares associated with the 2018-2020 awards was $78.96 per share at December 31 ,2020. The weighted-
"r"Lg" grant oite-tair value of shares vested during the year was $78.96 per share and there were no performance shares granted during the year and no
unrec6gn'ized compensation expense for accounting purposes as of December 3'l ,2O20.
Restricted Stock Units
ln 2o12,RSUs began being granted under the LTlp instead of stock options under the Restated SoP. Generally, the RSUs awarded are forfeitable and include
a performance-based thresh6ld as well as a vesting period of four years from the grant date. Upon vesting, the RSU holder is issued one share of common stock
plus a cash payment equal to the total amount of dividends paid per share.between the grant date and-vesting date of that portion of the RSU. The fair value of
an RSU is equal to ttre ctosin! mart<ei price of NW Holdingsi *rron stock on the granidate. During 2020, total RSU expense was $2.0 million compared to
$1.8 million in 2019 and $1.g million in 201g. As of Deceribe r 3'l,2)2O,lhere was $3.7 million of unrecognized compensation cost from grants of RSUs, which is
expected to be recognized over a period extending through 2025.
lnformation regarding the RSU activity is summarized as follows:
Weighted -
Average
Price Per RSUNumber of RSUs
Nonvested, December 31, 2017
Granted
Vested
Forfeited
Nonvested, December 31 , 201 8
Granted
Vested
Forfeited
Nonvested, December 31, 2019
Granted
Vested
Forfeited
Nonvested, December 31, 2020
82,680
36,018
(35,778)
(3.187)
56.47
65.29
54.22
63.89
79,733
33,594
(29,2731
fi 590)
61.17
55.58
59,29
69.71
82,4il $59.40
109
EXHIBIT 2
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Page 110 of210
u,522 $
32,450
(32,68e)
(1.603)
53.90
57.59
50.75
5S.95
Table of Contents
Restated Stock Ootion Plan
The NW Natural Restated SOP was terminated for new option grants in 2012; however, options granted before the plan terminated remain outstanding until the
earlier of their expiration, forfeiture, or exercise and are now exercisable for shares of NW Holdings common stock. Any new grants of stock options will be made
under NW Holdings' LTIP, however, no option grants have been awarded since 2012 and all stock options were vested as of December 3 1, 2015.
Options under the Restated SOP were granted to officers and key employees designated by a commiftee of the Board of Directors. All options were granted atan option price equal to the closing market price on the date of grant and may be exercised for a period of up to 1 O years and seven days from the date ofgrant. Option holders may exchange shares they have owned for at least six months, valued at the current market price, to purchase shares at the option price.
lnformation regarding the Restated SOP activity is summarized as follows:
Option
Shares
Weighted -
Average
Price Per Share
lntrinsic
Value
Balance outstanding and exercisable, December 3'l ,2017
Exercised
Forfeited
Balance outstanding and exercisable, December 31,2018
Exercised
Forfeited
Balance outstanding and exercisaHe, December 31, 2019
Exercised
Expired
Balance outstanding and exercisable, December 31,2020
91,688
(35,450)
(300)
44.43 $
43.61
43.29
1.4
0.8
nla
55,938
(4s,000)
44.96
44.79
0.9
1.0
nla
10,938
(1,s00)
45.67
45.24
0.3
nla
9,438 $45.74
The weighted-average remaining life of options exercisable and oubtanding at December 31,2020 was 0.17 years.
Emoloyee Stock Purchase PIan
NW Holdings' ESPP allows employees of NW Holdings, NW Natural and certain designated subsidiaries lo purchase common stock at 85% of the closing price
on the. trading day immediately preceding the initial offering date, which is set annually. For the 2020-2021 ESPP period, each eligible employee may purchase
up to $21,232 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 Gomoensation Exoense
Stock-based compensation expense is recognized as operations and maintenance expense or is capitalized as part of construction overhead at the entity atwhich the award recipient is employed. The following table summarizes the NW Holdings' financial statement impact, substantially all of which was recorded atNW Natural, of stock-based compensation under the LTIP, Restated SOP and ESPP:
lnthousands 2020 2019 2018
Operations and maintenance expense, for stock-based compensation
lncome tax benelit
Net stock{ased compensation effect on net income (loss)
Amounts capitalized for stock-based compensation
$3,525 $
(e33)
2,172 S
(575)
2,489
(65e)
2,592 1,597 1,830
$u1 $430 $531
9. DEBT
Short-Term Debt
The primary source of short-term liquidity for NW Holdings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash
from a multi-year credit facility, and short-term credit facilities it may enter into from time to time.
The primary source of short-term liquidity for NW Natural is from the sale of commercial paper, its multi-year credit facilities, and short-term credit facilities it may
enter into from time to time. ln addition to issuing commercial paper or bank loans to meet working capital requirements, including seasonal requirements to
finance gas purchases and accounts receivable, short-term debt may also be used to temporarily fund capital requirements. For NW Natural, commercial paper
and bank loans are periodically refinanced through the sale of long-term debt or equity contributions from NW Holdings. NW Natural's commercial paper is sold
through two commercial banks under an issuing and paying agency agreement and is supported by one or more unsecured revolving credit facilities. See "Credrf
Agreernents" below.
110
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Table of Contents
At December 31,2020 and 2019, NW Holdings had short-term debt outstanding of $304.5 million and $149.1 million, respectively. The weighted average
interestrateof NWHoldings'short-termdebtbutstandingatDecember3'l,2O2Oand2019was0.5% and2.Oo/o,respectively.AtDecemberSl,2020 and2019,
NW Natural had g231.5 million and $125.1 million of commercial paper outstanding, respectively. The weighted average interest rate of commercial paper
outstanding at December 31,2020 and 2019 was 0.4% and 2.0%, respectively.
The carrying cost of commercial paper approximates fair value using Level 2 inputs. See Note 2 for a description of the fair value hierarchy. At December 31,
2020, NW Natural's commercial paper had a maximum remaining maturity of 166 days and an average remaining maturity of 47 days.
Credlt Agreements
NW Holdinos
tn OctoUer ZOtS, NW Holdings entered into a $100.0 million credit agreement, with a feature lhat allows it to request increases in the total commitment amount,
up to a maximum of g1S0.0 million. The maturity date of the agreement is October 2, 2023, with available extensions of commitments for two additional one-year
periods, subject to lender approval.
The NW Holdings credit agreement permits the issuance of lettens of credit in an aggregate amount of up to $40.0 million. The principal amount of bonowings
under the crediiagreement is due and payable on the mafurity date, The credit agreement requires NW Holdings to maintain a consolidated indebtedness to
total capitalization ratio of 70% or less.'Failure to comply with this covenant would entitle the lenders to terminate their lending commitrnents and accelerate the
maturity of all amounts outstanding. NW Holdings was in compliance with this covenant at December 31 , 2020 and 2019.
The agreement also requires NW Holdings to maintain debt ratings (which are delined by a formula using NW Natural's credit ratings in the event NW Holdings
does not have a credit rating) with Standard & Poor's (S&P) and Moody's lnvestors Service, lnc. (Moody's) and notify the lenders of any change in its senior
unsecured debt ratings orseniorsecured debt ratings, as applicable, by such rating agencies. A change in NW Holdings'debt ratings by S&P or Moody's is not
an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on
any loans outstanding under the credit agreements are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any
loans under the credii agreements when ratings are changed. NW Holdings does not cunently maintain ratings with S&P or Moody's.
There was $73.0 million and $24.0 million of outstanding balances under the NW Holdings agreement at December 31, 2O2O and 2019, respectively. No letters
of credit were issued or outstanding under the NW Holdings agreement at December 31,2020 and 2019. NW Holdings had a $1.0 million letter of credit issued
and outstanding, separate from the aforementioned credit agreement, at December 31, 2019 for the purposes of facilitating the Suncadia acquisition. This letter
of credit was extinguished upon the close of the transaction in February 2020.
NW Natural
tn OctoOer ZOtA, NW Natural entered into a multi-year credit agreement for unsecured revolving loans totaling $300.0 million, with a feature that allows NW
Natural to request increases in the total commitment amount, up to a maximum of $450.0 million. The maturity date of the agreement is October 2, 2023 with
available extensions of commitments for two additional one-year periods, subject to lender approval. The credit agreement permits the issuance of letters of
credit in an aggregate amount of up to $60.0 million. The principal amount of bonowings under the credit agreement is due and payable on the maturity date'
There were no oufutanding balances under NW Natural's credit agreement and no letters of credit issued or outstanding at December 31 , 2020 and 2019.
NW Natural's credit agreement require NW Natural to maintain a consolidated indebtedness to total capitalization ratio ol70Yo or less. Failure to comply with this
covenant would entitle the lenders to terminate their lending commitments and accelerate the maturlty of all amounts outstanding. NW Natural was in
compliance with this covenant at December 31 ,2020 and 2019.
The credit agreement also requires NW Natural to maintain credit ratings with S&P and Moody's and notiry the lenders of any change in NW Natural's senior
unsecured dlbt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in NW Natural's debt ratings by S&P or Moody's is not
an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on
any loans outstanding under the credit agreement are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any
loans under the credit agreement when ratings are changed.
't11
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Table of Contents
Lono-Term Debt
NW Holdinos
At December 31, 2020 and 2019, NW Holdings had long-term debt outstanding of $955.4 million and $881 .1 million, respectively; which included $7.5 millionand $5.7 million of unamortized debt issuance costs at NW Natural, respectively. NW Holdings' long-term debt is primariiy comprised of debt held at its wholly-owned subsidiaries NW Natural (shown below) and NWN Water. Long-term debt at NWN Water is primarily comprised of a two-year term loan agreement foi
$35.0 million, due in 2021. NWN Water entered into this agreement in June 2019 and the loan carried an interest rale of 0.70Yo it December 31:2121,which isbased upon the one-month LIBOR rate. The loan is guaranteed by NW Holdings and requires NW Holdings to maintain a consolidated indebtedness to total
capitalization ratio ol TOY, or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate thematurity of all amounts outstanding. NW Holdings was in compliance with this covenant at December 31, 2020, with a consolidated indebtedness to total
capitalization ratio of 58.6%.
NW Natural
NW Natural's issuance of FMBs, which includes NW Natural's medium-term notes, under the Mortgage and Deed of Trust (Mortgage) is limited by eligibleproperty, adjusted net earnings, and other provisions of the Mortgage. The Mortgage constitutes a first mortgage lien on substantially all of ruW N-atural,s Ne Oproperty.
Maturities and Outstandino Lono-Term Debt
Retirement of long-term debt for each of the annual periods through December 31,2025 and thereafter are as follows:
ln thousands Long-term debt maturities
NW Natura!
2021
2022
2023
2024
2025
Thereafrer
Total
The following table presents debt outstanding as of December 31
ln thousands
$60,000
90,000
30,000
74,7@
$924,700
2020 20'19
NW Natural
First Mortoaoe Bonds:
5.370% Series due 2020
9.050% Series due 2021
3.176% Series due 2021
3.542olo Series due 2023
5.620% Series due 2O23
7.720% Series due 2025
6.520% Series due 2025
7.050% Series due 2026
3.211% Series due 2026
7.000% Series dud 2027
2.822% Series due 2027
6.650% Series dua 2027
6.650% Series due 2028
3.141% Series due 2029
7.740% Series due 2030
7.850o/o Series due 2030
5.820% Series due 2032
5.660% Series due 2033
5.250% Series due 2035
4.000o/o Series due 2042
4.1360lo Series due 2046
3.685% Series due 2047
4.1 10% Series due 2048
3.E69% Series due 2049
3.600% Series due 2050
Longterm debt, gross
Less: current maturities
Total longFterm debt
$
10,000
50,000
50,000
40,000
20,000
10,000
20,000
35,000
20,000
25,000
'19,700
10,000
50,000
20,000
10,000
30,000
40,000
10,000
50,000
40,000
75,000
50,000
90,000
150,000
75,000
10,000
50,000
50,000
40,000
20,000
10,000
20,000
35,000
20,000
25,000
19,700
'10,000
50,000
20,000
10,000
30,000
40,000
10,000
50,000
40,000
75,000
50,000
90,000
$
924,700
60,000
849,700
75,000
s_____991299_ g_____221,r00_
EXHIBIT 2
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112
Table of Contents
First Mortoaoe Bonds
ln ]vlarch 2020, NW Natural issued $150.0 million of FMBs with an interest rate of 3.600%, due in 2050.
Retirements of Lono-Term Debt
ln February 2020, NW Natural retired $75.0 million of FMBs with an interest rate of 5.370%
Fair Value of Long-Term Debt
@tstandingdebtdoesnottradeinactivemarkets.Thefairvalueofdebtisestimatedusingnaturalgasdistributioncompanies
with similar credit ratings, terms, and remaining maturities to NW Holdings' and NW Natural's debt that actively trade in public markets. Substantially all
outstanding debt at NW Holdings is comprised of NW Natural debt. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note
2.
The following table provides an estimate of the fair value of NW Holdings' long-term debt, including current maturities of long-term debt, using market prices in
efiect on the valuation dale:
December 31,
ln 2020 2019
Gross long-term debt
Unamortized debt issuance costs
Carrying amount
Estimated fair value(t)
(1 ) Estlmated fair value dGs not include unamortized dsbt issuanG costs.
$962,905 $886,776
(5,7121
$
$
955,425 $
1,136,31 1 $
881,064
957,268
The following table provides an estimate of the fair value of NW Natural's long-term debt, including current maturities of long-term debt, using market prices in
effect on the valuation date:
December 31
2020 2019ln thou*Ns
Gross long-tem debt
Unamortized debt issuance costs
Canying amounl
Estimated fair value(l)
(1)Estimatod fair value does nol include unamortized debt issuance @sts.
$924,700
(7.480)
849,700
t5.712\
$
$
$
917,220 $
't,097,348 $
843,S88
9't9,835
10. PENSION AND OTHER POSTREIIREMENT AE'VEF'T COSTS
NW Natural maintains a qualified non-contributory defined benefit pension plan (Pension Plan), non-qualified supplemental pension plans for eligible executive
officers and other key employees, and other postietirement employee benefit plans. NW Natural also has a qualified defined contribution plan (Retirement K
Savings plan) for all Lligible Lmployees. The Pension Plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund retirement
benefits.
Effective January 1,2007 and 2010, the Pension Plan and postretirement benefits for non-union employees and union employees, respectively, were closed to
n6w participants.
Non-union and union employees hired or re-hired after December 31, 2006 and 2009, respectively, and employees of NW Natural subsidiaries are provided an
enhanced Retirement K Savings Plan benefit.
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Table of Contents
ln thousands
The following table provides a reconciliation of the changes in NW Natural's benefit obligations and fair value of plan assets, as applicable, for NW Natural'spension and other postretirement benefit plans, excluding the Retirement K Savings Plan, and a summary of the funded status and amounts recognized in NWHoldings'and NW Natural's consolidated balance sheets as of December 31 :
Postretirement Benefit Plans
Pension Benefits Other Benefits
2020 2019 2020 2019
Reconciliation of change in benefit obligation:
Obligation at January 1
Service cost
lnterest cost
Net actuarial loss
Benefits paid
Obligation at December 31
$515,668 $
6,614
16,161
52,777
(25,073)
455,568 $
6,308
18,683
s8,269
(23,160)
29,568 $
258
90s
145
(1,837)
28,'t72
244
1,117
1,809
(1,774\
s 566,'t47 $ 515,668 $ 29,039 $ 29,568
Reconciliation of change in plan assets:
Fair value of plan assets at January 'l
Actual retum on plan assets
Employer contributions
Beneltts paid
Fair value of plan assets at December 31
Funded status at December 31
$313,051 $
54,600
31,354
(25.073)
257,797 $
65,104
13,310
(23,160)
1,837
(1.837)
1,774
(1,7741
$
$ 373,932 $ 313,051 $s$ (192,215)!___(2m.61?l_ !__ rrr.o3r) s rrs s68t
At December 31,2020, the net liability (benefit obligations less market value of plan assets) for lhe Pension Plan decreased $13.1 million compared to 2019.The d-ecrease in the net pension liability is primarily due to the $60.9 million increase in plan assets, partially offset by the $47.8 million increase to the pensionbenefit obligation' The liability for non-qualified plans increased $2.7 million, and the liability for other postretirement'benefits decreased $0.S miflion in 2020.
NW Natural's Pension Plan had a projected benefit obligation of $525.1 million and $477.3 million at December 3 1, 2O2O and 2019, respectively, and fair valuesof plan assets of $373.9 million and $313.1 million, respectively. The plan had an accumulated benefit obligation of 9480.0 million and d+ga.g miflion atDecember 31,2020 and 2019, respectively.
The following table presents amounts realized through regulatory assets or in other comprehensive loss (income) for the years ended December 31:
Requlatory Assets Other Comorehensive Loss (lncome)
Pension Benefits Other Postretirement Benetils Pension Benefits
ln thouwds 2020 2019 2018 2020 2019 2018 2020 20't9 2018
Net actuarial loss (gain)
Amortization of:
Prior service (cosg oedit
Actuarial loss
Total
$ 16,170 $ 10,424 $ 14,26,t $145 $
468
't,809 $
468
(327) $
468
3,873$ 3,595$ (677)
17')(42)(18,627) (14,0s7) (18,761) (607) (36e) (448) (e23) (64S) (1,052)
The following table presents amounts recognized in regulatory assets and accumulated other comprehensive loss (AOCL) at December 31
Reoulatorv Assets
Pension Benefits Other Postretirement Benefits
AOCL
Pension Benefits
ln thousmds 2020 2019 2020 2019 2020 2019
Prior service cost (credit)
Net actuarial loss
Total
$$$(801) $ (1,270) $$
'164,446 166,903 7,167
$6,366
7,629
9__-qff9_
't7,434
$ 17,4u
14,484
$ 14,484$ 164,,146 $___166,999_
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Page 115 of 210
ln thousands
Beginning balance
Amounts reclassified to AOCL
Amounts redassified from AOCL:
Amortization of actuarial losses
Reclassification of slB6ded ran 6ffgct5(t)
Total reclassifications before tax
Tax expense
Total reclassifications for the period
Ending balance
$(10,733) $
(3,873)
(7,188)
(3,611)
923 648
(1,366)
(4,32s)
7U
(2,e50)
781
(2,16s) (3,545)
s.-[2'e02t s---0gE1
(r) Reclassification of $1.4 million of income tax effects resulting from the TCJA from accumulated other comprehensive loss to retained eamings was made pursuant to the
adoption of ASU 201'842. See Note 2.
ln 2021, NW Natural will amortize an estimated 920.8 million from regulatory assets to net periodic benefit costs, consisting of $21 .3 million of actuarial losses
offset by $0.5 million of prior service credits'
The assumed discount rates for NW Natural's pension Plan and other postretirement benefit plans were determined independently baseg on the FTSE Above
Median Curve (discount rate curve), which uses high quality corporatebonds rated AA- or higher by S&P or Aa3 or higher by Moody's. The dismunt rate curve
was applied to match the estimated cash flows in each of the plans to reflect the timing and amount of expected future benefit payments for these plans.
The assumed expected long-term rate of return on plan assets for the Pension Plan was developed using a weighted-average of the expected returns for the
target asset portfolio. ln developing the expected long-term rate of return assumption, consideration was given to the historical performance of each asset class
in wfricn the plan's assets are invested and the target asset allocation for plan assets.
The investment strategy and policies for pension plan assets held in the retirement trust fund were approved by the NW Natural Retirement Committee, which is
composed of senior management with the assistance of an outside investment consultant. The policies set forth the guidelines and objectives governing the
inveitment of plan assets. plan assets are invested for total return with appropriate consideration for liquidity, portfolio risk, and retum expectations' All
investments aie expected to satisfy the prudent investments rule under the Employee Retirement lncome security Act of 1974. The approved asset classes may
include cash and short-term investmenti, fixed income, common stock and convertible securities, absolute and real return strategies, and real estate. Plan
assets may be invested in separately managed accounts or in commingled or mutual funds. lnvestment re-balancing takes placo periodically as needed, or
when significant cash flows occur, in order to maintain the allocation of assets within the stated target ranges, The retirement trust fund is not currently invested
in NW Holdings or NW Natural securities.
The following table presents the Pension Plan asset target allocation at December 31,2020:
Tarqet Allocation
Table of Contents
The following table presents amounts recognized by NW Holdings and Nw Natural in AOCL and the changes in AOCL related to NW Natural's non-qualified
employee benefit plans:
Year ended December 31.
2020 20'lI
Asset Cateoorv
Long govemmenUcredit
U.S. large cap equity
Non-U.S, aquity
Absolute retum strategies
U.S. smalUmid cap equity
Real estate funds
High yield bonds
Emerging markets equity
Emerging market debt
20 o/o
18
't8
12
10
7
5
5
5
Non-qualified supplemental defined benefit plan obligations were $41 .O million and $38.3 million at December 31 , 2020 and 2019, respectively' These plans are
not subject to ,elutato.y defenal, and the changes in actuarial gains and losses,. prior service costs, and transition assets or obligations are recognized in AoCL,
net of tix until thiy are amortized as a componlnt of net periodic benefit cost. These are unfunded, non-qualified plans with no plan assets; however, a
significant portion -of
the obligations is indirectly funded with company and trust-owned life insurance and other assets.
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Table of Contents
Other postretirement benefit plans are unfunded plans but are subject to regulatory defenal. The actuarial gains and losses, prior service costs, and transition
assets or obligations for these plans are recognized as a regulatory asset.
Net periodic benefit costs consist of service costs, interest costs, the expected retums on plan assets, and the amortization of gains and losses and prior service
costs. The gains and losses are the sum of the actuarial and asset gains and losses throughout the year and are amortized over the average remaining serviceperiod of active participants. The asset gains and losses are based in part on a market-related valuation of assets. The markelrelated valuition reflect!
differences between expected retums and actual investment returns with the differences recognized over a two-year period from the year in which they occur,thereby reducing year-to-year net periodic benefit cost volatility.
The service cost component of net periodic benefit cost for NW Natural pension and other postretirement benefit plans is rec,ognized in operations and
maintenance expense in the consolidated statements of comprehensive income. The other non-service cost components are recognized in other income(expense), net in the consolidated statements of comprehensive income. The following table provides the components of net periodic benefit cost for NW
Natural's pension and other postretirement benefit plans for the years ended December 31:
Pension Benefits Other Benefits
ln ilDusnds 2020 2019 2018 2020 2019 2018
Servics mst
lnterest cost
Expeded retum on plan assets
Amortization of prior service cost (credit)
Amortization of net actuarial loss
Net periodic benefit cost
Amount allocated to construction
Amount deferred to regulatory balancing account
Net periodic benefit cost charged to expens€
Regulatory pension disallowance
Amortization of regulatory balancing account
Net amount charged to expense
$6,6't4 $
16,161
(21,865)
6,308 $
18,684
(20,8s4)
7
14,7U
7,'.185 $
16,991
(20,63s)
43
19,813
244 $
1,1 16
(468)
368
258
905
(468)
607
(s8)
$282
964
(468)
19,550 444
,226,30220,460
(2,798\
18,849
(2,493)
23,393
(2,76/-I
(10,314)
't,260
(86)(e8)
17,662
7,131
s_____24Jgg_
16,356
10,500
16,841
10,315 1,2U
$ 43,697 $_].qg!_ s__1t91_$ 1,174 $ 1,128
1,174 1,128
Net periodic benefit costs are reduced by amounts capitalized to NGD plant. ln addition, a certain amount of net periodic benefit costs were recorded to the
regulatory balancing account, representing net periodic pension expense for the Pension Plan above the amouni set in rates, as approved by the OpUC, from2011 through October 31,2018.
ln March 2019, the OPUC issued an order concluding the NW Natural 201 8 Oregon rate case. The order allowed for the application of certain deferred revenuesand tax benefits from the TCJA to reduce NW Natural's pension regulatory balancing account. A corresponding total of $12.5 million in pension expenses were
recognized in operating and maintenance expense and other income (expense), net in the consolidated statements of comprehensive income in the first quarter
oI 2019, with offsetting benefits recorded within operating revenues and income taxes. The order also directed NW Natural to reduce the balancing account by
an additional $10.5 million, of which $3.9 million was charged to operations and maintenance expense and $6.6 million was charged to other income (expense),
net in the consolidated statements of comprehensive income. Amortization of the remaining amount of the balancing account began in the second quarter of2019 in accordance with the order.
Total amortization of the regulatory balancing account of $7.1 million and $16.8 million was recognized in 2020 and 201 9, respectively, of which $2.6 million and
$6.2 million was charged to operations and maintenance expense, respectively, and $4.5 million and $10.6 million was charged to other income (expense), net,respectively' Total defenals of the regulatory balancing accountwere $10.3 million in 2018, of which $2.4 million was defened from operations and maintenance
expense and $7.9 million was defened from other income (expense), net.
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Table of Contents
The following table provides the assumptions used in measuring periodic benefit costs and benefit obligations for the years ended December 31
Pension Benefits other Postretirement Benelits
2020 20't9 2018 2020 2019 2014
Assumptions for net periodic benefit cost:
Weighted-average discount rate 318 Yo 4.19 Yo 3-51 Yo 3'11 o/o 4'13 o/o 3'44 o/o
Rate of incaease in compensation 3.50 % 3.2$3.50% 3.254,50Yo nla nla da
Expected long-term rate of return 7 .25 o/o 7.50 Yo 7 .50 Yo nla nla nla
Assumptions for year-end funded status:
Weighted-average discount rate 2.96 % 3.16 % 4.20 Yo 2'?4 Yo 3'11 o/' 4'13 Yo
Rate of increase in compensation(t) 3.50-6'50% 3.506'50% 3.254.500/o nla nla ila
Expected long-term rate of return 7.25 yo 7 .25 Yo 7.50 Yo nla nla rila
(r) Rate assumption is 6.50% in 2020 and 3.50% thereafter. The 2O2O compensation increase assumption was a result of the 201 9 execution of a new collective bargaining
agreement with unionized members of NW Natural effective December 1 , 2019.
The assumed annual increase in health care cost trend rates used in measuring other postretirement benefits as of Decembet 31,2020 was 6-25%. These trend
rates apply to both medical and prescription drugs. Medical costs and prescription drugs are assumed to decrease gradually each year to a rale of 4.75o/o by
2026.
Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans; however, other postretirement benefit
plans have a cap on the amount of costs reimbursable by NW Natural.
Mortality assumptions are reviewed annually and are updated for material changes as necessary. ln 2020, mortality rate assumptions were updated from Pri-
2012 m;rtality tables using scale Mp-2019 io pn-2012 mortality tables using scale MP-2020, which partially offset increases of the projected benefit obligation.
The following table provides information regarding employer contributions and beneJit payments for Nw Natural's Pension Plan, non4ualified pension plans' and
olher postreiiremeni benefit plans for the years ended December 31, and estimated future conhibutions and payments:
Pension Benefits Other Benefitsln thouwds
Employer Contributions:
201 S
2020
202'l (estimated)
Benefit Payments:
2018
2019
2020
Estimated Future Benefit Payments:
2021
2022
2023
2024
2025
2A2&24fi
13,310 $
31,362
22,465
21,9't8
23,160
25,073
1,774
1,837
1,654
1,674
1,774
1,837
1,654
1,664
1,694
1,690
1,678
7,815
24,609
25,29
26,083
26,807
27,399
145,287
Emplover contributions to company€,ponsored Defined Benefit Pension Plan
NWNaturalmakescontributestimates,taxregulations,andfundingrequirementsunderfederallaw.
The pension protection Act of 2006 (the Act) established funding requirements for defined benefit plans. The Act establishes a 100% funding target over seven
years for plan years beginning after becember 31, 2008. tn Juty-zot), President Obama signed the Moving Ahead for Progress in the 21st Century Act (MAP-
2t; into dw, w'nicn chaiged iveral provisions affecting pension plans, including temporary funding relief and Pension Benefit Guaranty Corporation (PBGG)
premium increases, whiCh shifts the ievel of minimum required contributions from the short-term to the longterm as well as increasing the operational costs of
iunning a pension plan. MAp-21 established a new minimum and maximum conidor for segment rates based on a 2s-year average of bond yields, which
resulted in lower minimum contributions requirements than those under previous regulations. MAP-21, as amended, provides for the cunent corridor to be in
effect through 2O2O and subsequently broaden on an annual basis from 2021 lhrough 2024.
1',t7
EXHIBIT 2
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GEM STATE WATER COMPANY
Page 1 18 of 210
$
Table of Contents
The Pension Plan was underfunded by $1S1.2 million at December 31, 2020. NW Natural made cash contributions totaling $29.0 million to its pension plan for2020. During 202'1, NW Natural expects to make contributions of approximately $20.1 million to this plan.
llultiemplover Penslon Plan
ln addition to the NW Natural-sponsored Pension Plan presented above, prior to 2014 NW Natural contributed to a multiemployer pension plan for its NGD unionemployees known as the Westem States Office and Professional Employees lnternational Union Pension Fund (Westem States Plan). That plan's employeridentification number is 94-6076144. Effective December 22, 2013, NW Natural withdrew from the plan, which was a noncash transaition. Vested participants
will receive all benefits accrued through the date of withdrawal. As the plan was underfrrnded at the time of withdrawal, NW Natural was assessed a withdrawalliability of $8.3 million, plus interest, which requires NW Natural to pay $0.6 million each year to the plan for 20 years beginning in July 2014. The cost of thewithdrawal liability was deferred to a regulatory account on the balance sheet.
Payments were $0.7 million lor 2O2O, and as of December 31 , 2020 the liability balance was $6.1 million. Contributions to the plan were $0.6 million for each of2019 and 2018, which was approximately 5% to 6% of the total contributions to the plan by all employer participants in those years.
Defined Contribution Plan
NW Natural's Retirement K Savings
contributions totaled $8.3 million, $7
Stock Ownership Plan.
Plan is a qualified defined contribution plan under lntemal Revenue Code Sections 401(a) and 401(k). NW Natural
.0 million, and $6.5 million for 2020, 2019, and 2018, respectively. The Retirement K Savings Plan indudes an Employee
Deferred Comoensation Plans
NW Natural's supplemental defened compensation plans for eligible ofiicers and sonior managers are non-qualified plans. These plans are designed to enhancethe retirement savings of employees and to assist them in strengthening their financial security by providing an inc€ntive to save and invest regularly.
Falr Value
Below is a description of the valuation methodologies used for assets moasured at fair value. ln cases where NW Natural's Pension Plan is invested through acollective trust fund or mutual fund, the fund's markel value is utilized. Market values for invostments directy owned are also utilized.
U.S. EQUIW. These are non-published net asset value (NAV) assets. The non-published NAV assets consist of commingled trusts where NAV is not published
but the investment can be readily disposed of at NAV or market value. The underlying investments in this asset class inciudes investments primarily in U.S.common stocks.
INTERNATIONAUGLOBAL EQUfrY. These are Level 1 and non-published NAV assets. The Level 1 asset is a mutual fund, and the non-published NAV assetsconsist of commingled trusts where the NAV/unit price is not published, but the investment can be readily disposed of at the NAV/unit piice. The mutual fundshas a readily determinable fair value, including a published NAV, and the commingled trusts are valued at unit price. This asset dass includes investmentsprimarily in foreign equity common stocks.
LIIABILITY HEDGING. These are non-published NAV assets. The non-published NAV assets consist of commingled trusts where NAV is not published but the
investment can be readily disposed of at NAV or market value. The underlying investments in this asset class include long duration fixed income investmentsprimarily in U.S. treasuries, U.S. government agencies, municipal securities, mortgage-backed securities, asset-backed securities, as well as U.S. andinternational investment{rade corporate bonds.
OPPORTUNEIC. These are non-published NAV assets consisting of commingled trusts where the investments can be readily disposed of at unit price, and a
hedge fund of funds where the valuation is not published. This hedge fund of funds is winding down. Based on recent disposiiions, NW Natural beiieves the
remaining investment is fairly valued, The hedge fund of funds is valued at the weighted average value of investments in various hedge funds, which in turn arevalued at the closing price of the underlying securities. This asset class includes investments in emerging market debt, leveraged loans, RElTs, high yield bonds,a commodities fund, and a hedge fund of funds.
ABSOLUTE RETURN STRATEGY. This is a non-published NAV asset consisting of a hedge fund of funds where the valuation is not published. This hedge fund offunds is winding down. Based on recent dispositions, NW Natural believes lhe remaining investment is fairly valued. The hedge fund of funds is valued Lt the
weighted average value of investments in various hedge funds, which in turn are valued at the closing price of the underlying iecurities. This asset classprimarily includes investments in common stocks and fixed income securities.
CASH AND CASH EQUIVALENTS. These are Level 1 and non-published NAV assets. The Level 1 assets consist of cash in U.S. dollars, which can be readilydisposed of at face value, The non-published NAV assets represent mutual funds without published NAVs but the investment can be readily disposed of at theNAV. The mutual funds are valued at the NAV of the shares held by the plan at the valuation date.
118
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Table of Contents
The preceding valuation methods may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values' Although we
believe these valuation methods are ippropriate and consistent with other market participants, the use of different methodologies or assumptions to determine
the fair value of certain investments could result in a different fair value measurement at the reporting date.
lnvestment securities are exposed to various financial risks including interest rate, market, and credit risks. Due to the level of risk associated with certain
investment securities, it is reasonably possible that changes in the values of NW Natural's investment socurities will occur in the near term and such changes
could materially affect NW Natural's investment account balances and the amounts reported as plan assets available for benefit payments'
The following tables present the fair value of NW Natural's Pension Plan assets, including outstanding receivables and liabilities, of NW Natural's retirement trust
fund:
ln thousands
lnvestments
December 31 2020
Level 1 Level 2 Level 3
Non-Published
NAV(1)Total
US equity
lntemational / Global equity
Liability h€dging
Opportunistic
Cash and cash equivalents
Total investmenls
$$$117,7U
78,092
111,041
25,625
2,2%
$117,7U
117,26
111,U1
25,625
2.295
39,1't4
$ 39,114 $-e_$ 334,817 $ 373,931
December 31,2019
lnvestments Level 1 Level 2 Level 3
Non-Published
NAV(I)Total
US equity
lntomational / Global equity
Liability hedging
opportunis-tc
Cash and cash equivalents
Total investrnents
$$$$95,604 $
74,337
93,028
9,864
7,049
95,6M
107,505
93,028
9,864
7,049
33,168
$ 33,168 $-$s__*27e,882_ E__U1999_
December 31
2020 2019
Receivables:
Accrued interest and dividend income
Total rec€ivables
Liabilities:
Dug to broker for securities purcfiased
Total investment in retirement trust
$6,429 $ 3,243
3,2436429
6,429 3.242
s 373,931 $ 313,051
(1) The fair value for these investments is determined using Net Asset Value per share (NAV) as of December 3'1, as a practical expedient, and therefore they are not
119
EXHIBIT 2
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Page 120 of 210
Table of Contenls
ll.INCOMETN(
The following table provides a reconciliation between income taxes calculated at the statutory federal tax rate and the provision for income taxes reflected in theNW Holdings and NW Natural statements of comprehensive income or loss for December 3i:
NW Holdinos NW Natural
Dollarc in thoufinds 2020 2019 2018 2020 20't9 2018
lncome taxes at federal statutory rate
lncrease (decrease):
Stiate income tax, net of federal
Differ€nces requir€d to be llowed-through by rogulatorycommissbns
Defened tax rate differenlial post-TCJA
Regulatory setdement
Other, net
Tolal prcvision lor income taxes
Effective tax rate
$ 19,185 $
6,389
(3,e60)
16,370 $
4,422
(5,7721
't9,222
4,927
$19,248 $
6,385
(3,960)
17,438
4,716
(5,772)
$19,434
4,982
1,302
(75)
(1,129)
1,fi2
(76)
(1,129)
(532)$ 21193_
(1,2491 . (1,184)
$ 24,191
(578)(1,188)(1,184)
$-_?llse_$ 12,U2 !_?1,0e5_
23.0 0/o
$ 14,065
23.1 o/o '16.2 Yo 26.4 o/o:16.9 % 26.4 0/o
The NW Holdings and NW Natural effective income tax rates for 2020 compared to 2019 changed primarily as a result of higher pre-tax income, the OregonCorporate Activity Tax effective January 1 ,2020, and amortization of excess deferred income tax benefits is ordered by reg=ulatory commissions. The NWHoldings and NW Natural effective income tax rates for 2019 compared to 2018 changed primarily as a result of lower pre-tix income and amortization ofexcsss defened income tax benefits as ordered by regulatory commissions.
The provision for current and deferred income taxes consists of the following at December 31:
NW NW Natural
ln thusnds 2020 2019 2018 2020 2019 2018
Cunent
Federal
State
Tohl curent income taxes
Defened
Federal
State
Total defened income taxes
lncome tax provision
$ 10,106
5,971
16,077
2,888
2,1't7
5,005
$ 2't,o82
$ s,530
1,667
7,197
1,515
3,930
5,45
$ 12,il2
$ 8,953
3,785
12,738
9,001
2,452
11,453
$ 24,191
$ 11,092
5,357
16,449
't,921
2,725
4,646
$ 2$9!_
$ 6,755
2,101
8,856
1,340
3,869
5,209
$ 14,06s_
$ 9,127
3,846
12,973
9,025
2,461
1't,486
$ 24,459
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Table of Contents
The following table summarizes the tax effect of significant items comprising NW Holdings and Nw Natural's deferred income tax balances recorded at
December 31:
NW NW Natural
2020 201920202019ln thousilds
Defened tax liabilities:
Plant and propertY
Leases receivable
Pension and postretirement obligations
lncome tax regulatory asset
Lease right of use assets
Other
Total defened income tax liabilities
Deferred income tax assets:
lncome tax regulatory liability
Lease liabilities
Other intangible assets
Net operating losses and credits carried foMard
Other
Total defened income tax assets
Tolal net defered income tax liabilities
$297,078 $
39,396
25,066
17,104
21,613
269,886 $
40,1 3s
22,635
't 9,382
778
748
290,105 $
39,396
25,066
17,104
21,596
281,M4
40,1 33
22,635
19,382
731
407
$ 52,590
21,622
4,485
861
1,407
$ 80,96s
$ 400,257 $ 353,562 $ 393,267 $ 364,332
$il,259 $
775
2,723
162
52,366 $ 54,259
80
.181
$ 57,919 $75.233 $ 55,035
$ 319.292 $ 295,643 $ 318,034 $ 309,297
-
EXHIBIT 2
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GEM STATE WATER COMPANY
Page 122 ot 210
728
48
,60621
At December g1, 2o2o and 20.1g, regulatory income tax assets of $14.6 million and $16.9 million, respectively, were recorded by Nw Natural, a portion of which
is recorded in cunent assets. These-regulaiory income tai assets primarily represent future rate recovery o1 defened tax liabilities, resulting from differences in
peo pi"niti""ncial statement and 12x Sases ind NGD fiant removat cos[s, r,rinich were previously floweb through for rate making purposes and to take into
account the additional future taxes, which will be generdted by that recovery. These deferred tax liabilities, and the associated regulatory income tax assets' are
"r"*trv oiing ieCovered ttrrougtluitiler iates] At oecemder g1 ,2020 ano zot g, regulatory income tax.assets of $2.5 million and $2.5 million, respectively,
wire reloraea- uy NW Natural, ripresenting future recovery ot.agrgtrea tax liabilities reiutting irom the equity portion of AFUDC' At December 31' 2020,
i"grratory incom'e tax asseti 6t $i .z millioi'were recorded'by NW Natt43!, representing futuie recov.ery 6f dregon corporate Activity tax that was deferred
between January t , zozo anooaober 31, 2020. tn OctoUei 2OZO, the OPiJc'issued ai order providin! for recovery of deferred oregon cAT as well as cAT
incurred prospectively beginning November 1, 2020
At December 3 1,2020 and 201g, deferred tax assets of $52.4 million and $54.3 million, respectively, were r-ecorded by NW Natural representing the future
income tax benefit associated with the excess deferred income tax regulatory liability recorded as a result of the lower federal corporate income tax rate provided
for by the TCJA. At December 31 , zO2O and 2019, regulatory liability balances representing the benefit of the change in deferred taxes as a result of the TCJA of
$tgl.8 mittion and $205.0 million, respectively, were recorded by NW Natural.
NW Natural's natural gas utility rates include an allowance to provide for the recovery of the anticipated Pl9Yltlo.n for income taxes incuned as a result of
pilriii,ig ;grritea iirrices. As j result of the zt perceni realral corporale income iax rate enacied in 2017 , NW Natural recorded an additional regulatory
ii;[itiit il zbi aind 2019 reflecting the deferrat of the- estimated rate 6enefit for customers. The deferral period for oregon ended on october 31' 2018 coincident
*iih;;; rates beginning ttovembir 1, 2o11.The deferral period for Washington ended on october 31 , 2019 coincident with new rates beginning November 1 ,
2019. At December 31 , zoril,-a'iegur;torv riiuiiitv "i Si .z ririllion was record6d to reflect this estimated revenue defenal. The liability has been completely
amortized to customers' benefit as of December 31' 2020-
NW Holdings and NW Natural assess the available positive and negative evidence to estimate if sufficient taxable income will be generated to utilize their
respective 6xisting deferred tax assets. Based upon this as.""sreit, NW Holdings and NW Natural determined that it is more likely than not that all of their
respective defened tax assets recorded as of December 31,2020 will be realized.
The Company estimates it has net operating loss (NOL) carryfonnards of $0.3 million for federal taxes and $1 1.5 million for state taxes at December 31 , 2020.
We anticipate fully utilizing these NOL carrfon arb ba6ncei before they begin to expire in 2030 for federal and 2023 for state. Oregon Energy lncentive
program ielp) "r6aitr, ca]ifornia alternative minimum tax (AMT) credits ind Idaho investment tax credits (lTC) of $0.1 million are also available. The EIP credits
expires in 2025. The AMT credits do not expire. The ITC credits expire in 2033'
Uncertain tax positions are accounted for in accordance with accounting standards that require an assessment of the anticipated settlement outcome of material
uncertain tax positions taken in a prior year, or planned to be taken in the current year. Until such positions are sustained, the uncertain tax benefits resulting
from such positions would not be iecognized. r.lo rese*es for uncertain tax positions were recorded as of Decembet 31,202o,2019' ot 2018.
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The federal income tax retums for tax years 2016 and earlier are closed by statute. The IRS Compliance Assurance Process (CAp) examination of the 2O1l and201 8 tax years have been completed. There were no material changes to these refums as filed. The 2019 and 2O2O tax years are cunenfly under IRS CApexamination. Our 2021 CAP application has been filed. Under the CAP program, NW Holdings and NW Natural work wittr tne tRS to identiiy and resolve materialtax matters before the tax retum is filed each year.
As of December 31, 2020, income tax years?016 through 201g remain open for examination by the State of Califomia. lncome tax years 2018 and 2019 areopen for examination by the State of ldaho. The State of Oregon examined the Oregon corporaie income tax retums for tax years 2itlS, 2016, and 2017. Nomaterial changes occuned as a result of this examination. Tax years 2018 and 2010 are open for examination by the State of Oregon. '
U.S. Federal TCJA Matters
On December 22, 2017, the TCJA was enacted and permanently lowered the U.S. federal corporate income tax rate to 21Yo trom the previous maximum rate of357o, effective for the trax year beginning January 1, 2018. The TCJA included specific pmvisions related to regulated public utilities that provide for thecontinued deductibility of interest expense and the elimination of bonus tax depreciation for property both acquired and placed into service on or after January 1,2018.
Under pre-TCJA law, business interest was generally deductible in the determination of taxable income. The TCJA imposed a new limitation on the deductibilityof.net business interest expense in excess of approximatefy 30 qgrcent of adjusted taxable income. Taxpayers oporating in the trade or business of a regulatedutility are exduded from these new interest expense limitations. Final U.S. Treasury Regulations became effective in November of 2020 which provide a-deminimis rule whereby if 90 percent or more of a taxpayer's adjusted asset basis is allocable to regulated utility activities, then all of the businesi interest expenseof that taxpayer is deemed to be excepted business interest of the regulated utility activity and is thereby not limited under the TCJA. As a result of the deminimis rule, NW Holdings and NW Natural anticipate that business interest expense will not be limited under the TCJA.
The TCJA generally provides for immediate full expensing for qualified property both acquired and placed in service after Septembe r 27 , 2017 and beforeJanuary 1,2023. This would generally provide for accelerated cost recovery for capital investments. However, the definition of qualified property excludesproperty used in the trade or business of a regulated utility. Final U.S. Treasury Regulations were published in September of 2Oi I whicti clirifidO that bonus taxdepreciation would not be available for regulated utility activity assets both acquired and placed in service by NW Holdings or NW Natural on or after January 1,2018. Final U'S. Treasury Regulations released in September of 2O2O darified that long production period p'roperty acquired before Septemb er 27 , 2O,llcontinues to qualiff for bonus depreciation in the year placed in service consistent with pre-TCJA law.
NW Natural previously filed applications with the OPUC and WUTC to defer the NGD net income tax benefits resulting from the TCJA. ln March 2019, the OpUCis^sued an order addressing the regulatory amortization of the income tax benefits from the TCJA that NW Nafural defined for Oregon customers in December of2017. Under the order, NW Natural will provide the benefit of these TCJA income tax defenals to Oregon customers through ongoing annual credits to customerbase rates and as a one-time recovery of a portion of the pension balancing aerount regulatory assetbalance. On an annualizea Uasis, it is anticipated that theincome tax benefits from the provision of these TCJA benefits to customers should approximaie the reduction to pretax income that occurs as a result of thecustomer base rate credits and one-lime recovery of a portion of the pension balancing account.
ln October 2019, the WUTC issued an order addressing the regulatory amortization of the income tax benefits from the TCJA that NW Natural deferred forWashington customers in December of 2017. Under the order, NW Natural provided defered income tax benefits from the TCJA to customers through base ralecredits beginning November 1, 2019.
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12. PROPERTY, PLANT, AND EQUIPMENT
The following table sets forth the major classifications of property, plant, and equipment and accumulated depreciation of continuing operations at December 31
2020 2019ln lhousnds
NW Natural:
NGD plant in service
NGD work in progress
Le6s: AccxJmulated depreciation
NGD plant, net
Other plant in service
Other construction work in progress
Less: Accumulated depreciation
Other plant, net
Total property, plant, and equipment
Other (NW Holdlngs):
Other plant in service
Lsss: Accumulatod depreciation
Other plant, net
NYll Holdlngs:
Total proporty, plant, and equipment
$3,548,543 $
63,901
3,302,049
84,965
1105!,809 1,017,931
2,556,635 2.369.083
66,300
5,032
19,637
63,513
5,548
18.862
51,695 50.399
$2.608.330 $2,419,482
$50,263 $
3.823
20,671
1.2il
46,440 19.417
s 2.654.770 $ 2,438,899
32,s02
Accumulated depreciation does not include the accumulated provision for asset removal costs of $428.0 million and $401'9 million at December 31' 2020 and
2019, respectivety. Ttrese accrued asset removal costs are reflected on the balance sheet as regulatory liabilities. See Note 2.
NW Natural and NW Holdlnga:
Capital expenditures in accrued liabilities $25,129 $
NW Holdinos
6i6dl-Unt Uafances include longJived assets associated with water operations and non-regulated activities not held by NW Natural or its subsidiaries.
123
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NW Natural
616}pt"r* Uafances include long-lived assets not related to NGD and longJived assets that may be used to support NGD operations.
The weighted average depreciation rate for NGD assets was 3.0% in2020,2.9o/oin 2019, and 2,8% in 2018. The weighted average depreciation rate for assets
not related to NGD was 1 .8% in 2020, 1 .8% in 2019, and 2.2o/o in 201 8.
ln May 2019, NW Natural placed its North Mist gas storage expansion facility into service and commenced storage services to the facility's single customer,
pGE. Under U.S. GAAP, this agreement is clasiified as i sales-type lease and qualifies for regulatory accounting defenal treatment. Accordingly, the project
was de-recognized from propeiy, plant and equipment upon leaie @mmencement and the investment balance is presented net of the curent portion of
scheduled bilings within assets under sales-type leases on the consolidated balance sheets. A total of $146.0 million was de'recognized from plant on the lease
commencement date. The facility is included within rate base for ratemaking purposes. See Note 7 for information regarding leases, including North Mist.
,3. GAS RESERYES
NW Natural has invested $188 million through the gas reserves program in the Jonah Field located in Wyoming as of December 31 , 2020. Gas reserves are
stated at cost, net of regulatory amortizationl with the associated deferred tax benefits recorded as liabilities in the consolidated balance sheets. The investment
in gas reserves providei long-ierm price proiection for NGD customers through the original agreement with Encana oil & Gas (USA) lnc. under which NW
Naiural investeO $t Zg mittion and the amended agreement with Jonah Energy LLC under which an additional $1 0 million was invested.
Table of Contents
NW Natural entered into the original agreements with Encana in 201 1 under which NW Natural holds working interests in certain sections of the Jonah Field.Gas produced !n these sections is sold at prevailing market prices, and revenues from such sales, net of ass-ociated operating and production costs andamortization, are credited to the NGD cost of gas. The cosl of gas, including a carrying cost for the rate base investment, is included in the annual Oregon pGA
filing, which allows NW Natural to recover these costs through customer rates. The investment under the original agreement, less accumulated amortization anddefened tiaxes, eams a rate of return.
ln March 2014' NW Natural amended the original gas reseryes agreement in order to facilitate Encana's proposed sale of its interest in the Jonah field to JonahEnergy. Under the amendment, NW Natural ended the drilling program with Encana, but increased its working interests in its assigned sections of the Jonahfield. NW Natural also retained the right to invest in new wells with Jonah Energy. Under the amended agreerient there is still the-option to invest in additionalwells on a well-by-well basis with drilling costs and resulting gas volumes shared at NW Natural's amendld proportionate working interest for each well in whichil invests. NW Natural elected to participate in some of the additional wells drilled in2014, but has not participaied in additional wllls since 2014. However, theremay be the opportunity to participate in more wells in the future.
Gas produced from the additional wells is included in the Oregon PGA at a fixed rate ol $0.4725 per therm, which approximates the 1o-year hedge rate plusfinancing cosls at the inception of the investment.
Gas reserves acted to hedge the cost of gas for approximately 5o/o,5o/o and 6% of NGD gas supplies for the years ended Decemb er 31,2020,201g, and 201g,respectively.
The following table outlines NW Natural's net gas reserves investment at December 31:
ln housands 2020 2019
Gas reserves, cunent
Gas reserves, nonturrent
Less: Accumulated amortization
Total gas reseryes(l)
Less: Defoned taxes on gas reserves
Net investment in gas reserves
$11,409 $
175,898
15,278
172,029
141,414 123,635
63,672
15,5,t5
45,893
10.572
s________9s,321_ S______ 4s, 1 5?(t) The net investment in additional wells induded in total gas reserves was g3.0 million and $3.g million at December 31, 2020 and 201g, respectively.
NW Natural's investment is included in NW Holdings'and NW Natural's consolidated balance sheets under gas reserves with the maximum loss exposurelimited to the investment balance.
14.INVESTMENTS
lnvestments include financial investments in life insurance policies, and equity method investments in certain partnerships and limited liability companies. Thefollowing table summarizes other investments at December 31:
NW Holdings NW Natural
ln thousands 2020 20't9 2020 20'19
lnvestments in life insurance policies
lnvestments in gas pipeline
Other
Total oth6r invostrnents
$49,241 $
18
49,837 $
13,472
24
49,241 $49,837
$ 49,2s9:$63,3:!3 s__le2Il_ !__{e,8s?_
EXHIBIT 2
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Page 125 ol 210
lnvestment in Life Insurance Policies
NW Natural has invested in key person life insurance contracts to provide an indirect funding vehicle for certain long-term employee and director benefit planliabilities. The amount in the above table is reported at cash sunender value, net of policy blns.
lnvestments in Gas Pioeline
On August 6,2020, NWN Energy completed the sale ol 100o/o of its interest in Trail West Holdings, LLC ffWH) to an unrelated third party for a purchase price of$14'0 million, $7.0 million of which was paid upon closing the transaction, and $7.0 million is to 6e paid upon the one-year anniversary oi the close date. Thecompletion of the sale resulted in an after-tax gain of approximately 90.5 million.
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TWH was a variable interest entity reported under equity method accounting through its sale. The investment in TWH did not meet the criteria to be classified as
held for sale or discontinued operations. The investment balance in TWH was $1 3.4 million at December 3'l , 2019-
,5. BUS,,VESS COMBINATIONS
2020 Business Combinations
@31,2o2o,NWNWateranditssubsidiariescompletedtwosignificantacquisitionsqualifyingasbusinesscombinations.The
aggrelate iair value of the preliminary cash consideration transferred for these acquisitions was $38.1 million, most of which was preliminarily allocated to
doperty, plant and equipment and g6od*itt. These transactions align with NW Holdings'water sector strategy as it continues to expand its water services
territories in the Pacific Northwest and beyond and included:. Suncadia Water Company, LLC and buncadia Environmental Company, LLC which were acquired by NWN water of Washington on January 31'2020, and
. T&W Water Service iompany which was acquired by NWN Water of Texas on March 2,2020.
As each of these acquisitions met the criteria of a business combination, a preliminary allocation of the consideration to the acquired net assets based on their
estimated fair value as of the acquisition date was performed. The allocation for eactr of these business combinations is considered preliminary as of Decembe.r.
31, 2020, as facts and circumstances that existed as of the acquisition date may be discovered as we continue to integrate these businesses. ln acrordance with
U.3. enep, the fair value determination involves managementludgment in determining the significant estimates and assumptions used and was made using
existing regulatory conditions for net assets associated-with Suirca-aia Water Company, tLC anO T&W Water Service Company. This allocation is considered
pretimi-nariasofbecember3l,2020,asfactsandcircumstancesthatexistedasoftheacquisitiondatemaybediscoveredaswecontinuetointegratethe
acquired businesses. As a result, subsequent adjustments to the preliminary valuation of tangible assets, contract assets and liabilities, tax positions, and
goddwill may be required. Subsequent adlustments are not expected to be iignificant, and any such adjustments are expected to bo completed within the one-
y6ar measurement period for all acquisitions described above.
Total preliminary goodwill of 918.2 million was recognized from the acquisitions described above. No intangible assets aside from goodwill were acquired. The
gooOriitt recogniz6d is attributable to the regulated water utility service ierritories, experienced workforces, and the strategic benefits from both the water and
wastewater utilities expecteJ from growttr iritheir service terriiories. The total amount of goodwill that is expected to be deductible for income tax purposes is
approximately $16.5 million. The aiquisition costs associated with each business combination were expensed as incuned. The results of these business
combinationj were not material to the consolidated financial results of NW Holdings for the year ended December 31 ' 2020.
Other Business Combinations
iltheyearendedDecember31,2020,NWNWatercompletedthreeadditionalacquisitions,comprisedoffourwatersystemsandonewastewatersystem,
which qualified as business combinations. The aggregate fair value of the preliminary consideration transferred for those acquisitions was approximately $1.5
million. These business combinations were not significant to NW Holdings' results of operations.
2019 Business Comblnations
Sunriver6iTiV sr, 2019, NWN Water of Oregon, a wholly-owned indirect subsidiary of NW Holdings, completed the acquisition of Sunriver W_ater.LLC and Sunriver
Environmental LLC (collectively referrEd to as Sunriver), a privatelyowned water utility and wastewat€rlreatment company located in Sunriver, Oregon that
serves app.oximately g,400 connections, The acquisitiondite fair value of the total consideration transferred, after closing adjustments, was approximately
$5s.0 miition in cash consideration. The transaction aligns with NW Holdings'water sector strategy as lt continues to expand its water utility service tenitory in
the Pacific Northwest and begins to pursue wastewater investment opportunities.
The Sunriver acquisition met the criteria of a business combination, and as such a preliminary allocation of the consideration to the acquired assets based on
their estimated fair value as of the acquisition date was performed. ln accordance with U.S. GAAP, the fair value determination was made using existing
regulatory conditions for assets associated with Sunrivei Water LLC as well as existing market conditions and standard valuation approaches for asseb
associated with Sunriver Environmental LLC in order to alloeate value as determined by an independent third party assessor for certain assets, which involved
the use of management judgment in determining the significant estimates and assumptions used by the assessor, with the remaining difference from the
consideration transfened being recorded as goodwill. The acguisition costs were expensed as incurred.
Final goodwill of $41.1 million was recognized from this acquisition. The goodwill recognized is attributable to Sunriver's regulated water utility service territory'
experi-enced wor6orce, and the strategil benefits for both the water utility and wastewiter services expected from growth in its service tenitory. No intangible
assets aside from goodwill ,n"r" acqui-r"d. The total amount of goodwill tirat is expected to be deductible for income tax purposes is approximately $50.0 million.
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Page 126 ol 210
Current assets
Property, plant and equipment
Goodwill
Defened tax assets
Cunent liabilities
Total net assets acquired
$222
12,866
41,054
828
(22)
$ t4,948
The amount of Sunriver revenues included in NW Holdings' consolidated statements of comprehensive income was $6.6 million for the year endedDecember 31, 2020. Earnings included in NW Holdings' consolidated statements of comprehensive income was $1 .6 million for the yeai ended December 31 ,2020.
Other Business Combinations
During 2019' NWN Water completed three additional acquisitions qualifying as business combinations. The aggregate fair value of the preliminary considerationtransferred for these acquisitions was approximately $2.0 million. These business combinations were not signifrcant to NW Holdings' results of operations.
Goodwlll
NW Holdings allocates goodwill to reporting units based on the expected benefit fiom the business combination. We perform an annual impairment assessmentof goodwill at the reporting unit level, or more frequently if events and circumstances indicate that goodwill might be impaired. An impairment loss is recognized ifthe carrying value of a reporting unit's goodwill exceeds its fair value.
As a result of all acquisitions completed, total goodwill was $69.2 million as of December 31, 2O2O and $49.9 million as of Decembe r 31,201g. The increase inthe goodwill balance was primarily due to additions associated with our acquisitions in the water sector. All of our goodwill is related to water and wastewateracquisitions and is included in the other category for segment reporting purposes. The annual impairment assessrirent of goodwill occurs in the fourth quarter ofeach year. There have been no impairments recognized to date.
1 6. DERIVATIW INSTRUMENTS
NW Natural enters into financial derivative contracts to hedge a portion of the NGD segment's natural gas sales requirements. These contracts include swaps,options, and combinations of option contracts. These derivative financial instruments are primarily used to manage commodity price variability. A small portibn ofNW Natural's derivalive hedging strategy involves foreign currency forward contracts.
NW Natural enters into these financial derivatives, up to prescribed limits, primarily to hedge price variability related to term physical gas supply contracts as wellas to hedge spot purchases of natural gas. The foreign currency fonivard contracts are used to hedge the fluctuation in foreignturren-"y erinang" rates forpipeline demand charges paid in Canadian dollars.
ln the normal course of business, NW Natural also enters into indexed-price physical fomard natural gas commodity purchase contracts and options to meet therequirements of NGD customers. These contracts qualif, for regulatory deferral accounting treatment.
NW Natural also enters into exchange contracts related to the third-party asset management of its gas portfolio, some of which are derivatives that do not qualifyfor hedge accounting or only partial regulatory deferral, but are subject to NW Natural's regulatory sharing agreement. These derivatives are recognized inoperating revenues, net of amounts shared with NGD customers.
Notional Amounts
The following table presents the absolute notional amounts related to open positions on NW Natural derivative instruments:
ln thuends
At December 31
2020 2019
Table of Contents
The final purchase price for the acquisition has been allocated to the net assets acquired as of the acquisition date and is as follows:
ln thousands May 31,202O
Natural gas (in thems):
Financial
Physical
Foreign exchange $
784,400
457,593
5,896 $
EXHIBIT 2
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Page 127 ot 210
65 1,540
512,849
6,650
126
Table of Contents
Purchased Gas Adiustment (PGA)
@fortheprocurementorhedgingofnaturalgasforfuturegaSyearsgenerallyreceiveregulatorydeferralaccounting
treatment. ln general, commodity hedging for the current gas year is completed prior to the start of the gas year, and hedge prices are reflected in the weighted-
average cost 6f gas in the pGA ftfing. -naies ana hedging Lppioaches may vary between states due to different rate structures and mechanisms' ln addition' as
requir6d with thJWashington pGA iling, NW Naturaiiniorporated and began implementing risk-responsive hedging strategiesJor its Washington gas supplies.
Hedge contracts enteredlnto after the itart of the PGA period are subject io the PGA incentive sharing mechanism in oregon. NW Natural entered lhe 2020-21
ana 2O,tg-ZO gas years with forecasted sales volumes hedged at 53% and 52% in financial swap and option contracts, and 17% and 19% in physical gas
supplies, resplctively. Hedge contracts entered into prior to the PGA filing, in September 2020, were included in the PGA for the 2020-21 gas year. Hedge
contracts entered into affer the pGA filing, and related to subsequent gas years, may be included in future PGA filings and qualify for regulatory defenal.
Unrealized and Realized Gain/Loss
@atementpresentationfortheunrealizedgainsandlossesfromNWNatural'sderivativeinstruments,whichalso
represents all derivative instruments at NW Holdings:
December 31 2020 December 31 2019
Natural gas
commoditv Foreidn exchanoe
Natural gas
commoditv Foreion exchanoeln thoufinds
Benefit (expense) to cost of gas
Operating rsvenu€s (expense)
Amounts deferred to regulatory accounts on balance sheet
Total gain (loss) in pre-tax eamings
(312)
I (1?6t E -_
Speculative
$7,y2 $
(1,212)
(6.306)
312 $9,863 $
(s68)
(9,376)
102
(021
Unrealized Gain/Loss
OrtstanAing derirati* instruments related to regulated NGD operations are deferred in accordance with regulatory accounting standards. The cost of foreign
currency foiward and natural gas derivative coniracts are recognized immediately in the cost of gas; however, costs above or below the amount embedded in
the current year PGA are subject to a regulatory defenal tariff and therefore, are recorded as a regulatory asset or liability.
Realized Gain/Loss
NW Natrral *alired net gains of $2.3 million and $17.9 million for the years ended December 31,2020 and 2019, respectively, from the settlement of natural
gas financial derivative contracts. Realized gains and losses ofiset thehigher or lower cost of gas purchased, resulting in no incremental amounts to collect or
refund to customers.
Credit Risk Manaoement of Financial Derivatives lnstruments
cember31,2o2oor2019.NWNaturalattemptstominimizethepotentialexposureto
collateral calls by diversifying counterparties and using credit limits to manage liquidity risk. Counterparties generally allow a certain credit limit threshold before
requiring NW Njtural to posicollateral against unrealiied loss positions. Given NW Natural's counterparty credit limits and portfolio diversification, it was not
sublectio collateral calls in 2020 or 2019-. The collateral call exposure is set forth under credit support agreements, which generally contain credit limits. NW
Natural could also be subject to collateral call exposure where it has agreed to provide adequate assurance, which is not specific as to the amount of credit limit
allowed, but could potentially require additional collateral in the event of a material adverse change.
Based upon current commodity financial swap and option contracts outstanding, which reflect unrealized gains of $13.1 million at December 31 , 2020' we have
estimated the level of collaterai demands, with and without potential adequate assurance calls, using current gas prices and various credit downgrade rating
scenarios for NW Natural as follows:
Credit Ratino Downorade Scenarios
BBBJBaa3(Current
Ratinos) A+/A3 BBB+/Baa1 BBB/Baa2ln thousands
Wth Adequate Assurance Calls
Without Adequate Assurance Calls
$
$
$
$
$
$
$
$
$
$
51
51
NW Natural's financial derivative instruments are subject to master netting arrangements; however, they are presented on a gross basis in the consolidated
balance sheets. NW Natural and its counterparties have the ability to setoff obligations to each other under specified circumstances' Such circumstances may
include a defaulting party, a credit change due to a merger affecting either party, or any other termination event.
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lf nefted by counterparty, NW Natural's physical and financial derivative position would result in an asset of $14.1 million and a liability of $1.3 million as of
December 31, 2020, and an asset of $9.4 million and a liability of $1.9 million as of December 3'1, 2019.
NW Natural is exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps with financial counterparties. NWNatural utilizes master nefting anangements through lnternational Swaps and Derivatives Association contracts to minimize this risk along with collateral support
agreements with counterparties based on their credit ratings. ln certain cases, NW Natural requires guarantees or letters of credit from counterparties to meet its
minimum credit requirement standards.
NW Natural's financial derivatives policy requires counterparties to have an investmentgrade credit rating at the time the derivative instrument is entered into,
and specifies limits on the contract amount and duration based on each counterparty's credit rating. NW Natural does not speculate with derivatives. Derivatives
are used to hedge exposure above risk tolerance limits. lncreases in market risk created by the use of derivatives is offset by the exposures they modify.
We actively monitor NW Natural's derivative credit exposure and place counterparties on hold for trading purposes or require other forms of credit assurance,
such as letters of credit, cash collateral, or guarantees as circumstances wanant. The ongoing assessment of counterparty credit risk includes consideration of
credit ratings, credit default swap spreads, bond market credit spreads, financial condition, government actions, and market news. A Monte Carlo simulation
model is used to estimate the change in credit and liquidity risk from the volatility of natural gas prices. The results of the model are used to establish trading
limits. NW Natural's outstanding financial derivatives al December 31 ,2020 mature by October 31 , 2022.
We could become materially exposed to credit risk with one or more of our counterparties if natural gas prices experience a significant increase. lf a counterparty
were to become insolvent or fail to perform on its obligations, we could suffer a material loss; however, we would expect such a loss to be eligible for regulatory
defenal and rate recovery, subject to a prudence review. All of our existing counterparties cunently have investment-grade credit ratings.
Fair Value
ln accordance with fair value accounting, NW natural includes non-performance risk in calculating fair value adjustments. This includes a credit risk adjustment
based on the credit spreads of NW Natural counterparties when in an unrealized gain position, or on NW Natural's own credit spread when it is in an unrealized
loss position. The inputs in our valuation models include natural gas futures, volatility, credit default swap spreads, and interest rates. Additionally, the
assessment of non-performance risk is generally derived from the credit default swap market and from bond market credit spreads. The impact of the credit risk
adjustrnents for all outstanding derivatives was immaterial to the fair value calculation at December 31 ,2020. As of December 31,2020 and 2019, the net fahvalue was an asset of $12.8 million and $7.5 million, respectively, using significant other observable, or Level 2, inputs. No Level 3 inputs were used in ourderivative valuations during the years ended December 31,2020 and 2019.
1 7. COITMITMENTS AA'D CONTINGENCIES
Gas Purchase and Pioeline Gaoacity Purchase and Release Commitments
NW Natural has signed agreements providing for the reservation of firm pipeline capacity under which it is required to make fixed monthly payments for
contracted capacity. The pricing component of the monthly payment is established, subject to change, by U.S. or Canadian regulatory bodies, or is established
directly with private counterparties, as applicable. ln addition, NW Natural has entered into long-term agreements to release firm pipeline capacity. NW Natural
also enters into short-term and long-term gas purchase agreements.
The aggregate amounts of these agreements were as follows at December 31, 2020:
Gas
Purchase
Pipeline
Capacity
Purchase
Pipeline
ln thousands
2022
2023
2024
2025
Thereafler
Total
Less: Amount representing interest
Total at present value
83,475 77,748 $
80,646
78,503
73,472
71,313
516,291
7,892
7,182
3,632
3,632
3,027
83,475
25
897,973
89,303
25,365
162
$83,450 $808,670 $ 25,203
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Release
$
Table of Contents
Total fixed charges under capacity purchase agreements were $81.8 million for 2020, $82.2 million tor 2019, and $82.6 million for 2018, of which $4.8 million,
$4.3 million, anO $e.g million, respectively, related to capacity releases. ln addition, per-unit charges are required to be paid based on the actual quantities
shipped under the agreements. ln certain take-or-pay purchase commitments, annual deficiencies may be offset by prepayments subject to recovery over a
longer term if future purchases exceed the minimum annual requirements.
Leases
Refer to Note 7 for a discussion of lease commitments and contingencies.
Environmental illatters
Refer to Note 18 for a discussion of environmental commitments and contingencies.
18. ENVIRONMENTAL MATTERS
NW Natural owns, or previously owned, properties that may require environmental remediation or action. The range of loss for environmental liabilities is
estimated based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites, and an assessment of the
probable level of involvement and financial condition of other potentially responsible parties (PRPs). When amounts are prudently expended related to site
iemediation of those sites described herein, NW Natural has recovery mechanisms in place to collect 96.7% of remediation costs allocable to Oregon customers
and 3.3% of costs allocable to Washington customers.
These sites are subject to the remediation process prescribed by the Environmental Protection Agency (EPA) and the Oregon Department of Environmental
Quality (ODEa). Th-e process begins with a remedial investigation (Rl) to determine the nature and extent of contamination and then a risk assessment (RA) to
establish whether the contamination at the site poses unacceptable risks to humans and the environment. Next, a feasibility study (FS) or an engineering
evaluation/cost analysis (EEICA) evaluates various remedial altematives. lt is at this point in the process when NW Natural is able to estimate a range of
remediation costs and record a reasonable potential remediation liability, or make an adjustment to the existing liability. From this study, the regulatory agency
selects a remedy and issues a Record of Decision (ROD). After a ROD is issued, NW Natural would seek to negotiate a consent decree or consent judgment for
designing and implementing the remedy. NW Natural would have the ability to further refine estimates of remediation liabilities at that time.
Remediation may include treatment of contaminated media such as sediment, soil and groundwater, removal and disposal of media, institutional controls such
as legal restrictions on future property use, or natural recovery. Following construction of the remedy, the EPA and ODEQ also have requirements for ongoing
mainienance, monitoring and other post-remediation care that may continue for many years. Where appropriate and reasonably known, NW Natural will provide
for these costs in the remediation liabilities described below.
Due to the numerous uncertainties sunounding the course of environmential remediation and the preliminary nature of several site investigations, in some cases,
NW Natural may not be able to reasonably estimate the high end of the range of possible loss. ln those cases, the nature of the possible loss has been
disclosed, as has the fact that the high end of the range cannot be reasonably estimated where a range of potential loss is available. Unless there is an estimate
within the range of possible losses that is more likely than other cost estimates within that range, NW Natural records the liability at the low end of this range' lt is
likely changes in these estimates and ranges will occur throughout the remediation process for each of these sites due to the continued evaluation and
claritcation conceming responsibility, the complexity of environmental laws and regulations and the determination by regulators of remediation alternatives. ln
addition to remediation costs, NW Natural could also be subject to Natural Resource Damages (NRD) claims. NW Natural will assess the likelihood and
probability of each claim and recognize a liability if deemed appropriate. Refer to "Other Poftland HarboP belw.
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Table of Contents
Environmental Sites
The following table summarizes information regarding liabilities related to environmental sites, which are recorded in other current liabilities and other noncurrenlliabilities in NW Natural's balance sheet at December 31:
Current Liabilities Non-Current Liabilities
ln thousands 2020 2019 2020 2019
Portland Harbor site:
Gasco/Silhonic Sediments
Other Portland Harbor
Gasco/Siltronic Upland site
Central Service Center site
Front Skeet site
Oregon Steel Mills
Total
7,596 $
1,942
14,887
3,816
11,632 $
2,ils
14,203
10,847
43,725 $
7,O20
40,250
46,082
6,920
43,616
179
1,107
175$ 28,241 $ 39,225 $ 92,281 $ 96,797
Portland Harbor Site
The Portland Harbor is an EPA listed Superfund site that is approximately 10 miles long on the Willamette River and is adjacent to NW Natural,s Gasco uplandssite. NW Natural is one of over one hundred PRPs, each jointly and severally liable, at ihe Superfund site. ln January 2017, the EpA issued its Record ofDecision, which selects the remedy for the clean-up of the Portland Harbor site (Portland Harbor ROD). The Portland Harbor ROD estimates the present valuetotal cost at approximately $1.05 billion with an accuracy between -30% and +50% of actual costs.
NW Natural's potential liability is a portion of the costs of the remedy for the entire Portland Harbor Superfund site. The cost of that remedy is expected to beallocated among more than one hundred PRPs. NW Natural is participating in a non-binding allocation process with the other pRps in an effort to resolve itspotential liability. The Portland Harbor ROD does not provide any additional clarification around allocation of costs among pRps; accordingly, NW Natural hasnot modified any of the recorded liabilities at this time as a result of the issuance of the Portland Harbor ROD.
NW Natural manages its liability related to the Superfund site as two distinct remediation projects, the Gasco/Siltronic Sediments and Other porland Harborprojects.
GASCO/SILTRONIC SEDITI ENTS. ln 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with the EpA toevaluate and design specific remedies for sediments adjacent to the Gasco uplands and Siltronic uplands sites. NW Natural submitted a draft EE/CA to the EpAin May 2012 to provide the estimated cost of potential remedial altematives for this site. ln March 2020, NW Natural and the EpA amended the AdministrativeOrder on Consent to include additional remedial design activities downstream of the Gasco sediments site and in the navigation channel. Siltronic Corporation isnot a party to the amended order. At this time, the estimated costs for the various sediment remedy alternatives in the draft EE/CA for the additional studies anddesign work needed before the cleanup can occur, and for regulatory oversight throughout the cleinup range from $51.3 million to $350 million. NW Natural hasrecorded a liability of $51.3 million for the Gasco sediment clean-up, which reflects the low end of the iange-. At this time, we believe sediments at the Gascosediments site represent the largest portion of NW Natural's liability related to the Portland Harbor site disiussed above.
OTHER PORTLAND HARBOR. While we believe liabilities associated with the Gasco/Siltronic sediments site represent NW Natural's largest exposure, there areother potential exposures associated with the Portland Harbor ROD, including NRD costs and harbonrvide remedial design and cleanup-costs (including
downstream petroleum contamination), for which allocations among the PRPs have not yet been determined.
NW Natural and other parties have signed a cooperative agreement with the Portland Harbor Natural Resource Trustee council to participate in a phased NRDassessment to estimate liabilities to support an early restoration-based settement of NRD claims. One member of this Trustee council, the yakama Nation,withdrew from the council in 2009, andin2017, filed suit against NW Natural and 29 other parties seeking remedial costs and NRD assessment costsassociated with the Portland Harbor site, set forth in the complaint. The complaint seeks recovery of allegid costs totaling $0.3 million in connection with theselection of a remedial action for the Portland Harbor site as well as declaratory judgment for unipecifieJ future remediallction costs and for costs to assess theinjury, loss or destruction of natural resources resulting from the release of hazardous substances at and from the Portland Harbor site. The yakama Nation has
file_d two amended complaints addressing certain pleading defects and dismissing the State of Oregon. On the motion of NW Natural and certain otherdefendants the federal court has stayed the case pending the outcome of the non-binding allocation proceeding discussed above. NW Natural has recorded aliability for NRD claims which is at the low end of the range of the potential liability; the high end of the range cannot be reasonably estimated at this time. TheNRD liability is not included in the aforementioned range of costs provided in the Portland Harbor ROD.
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$
Table of Contents
Gasco Uolands Site
A predec€ssor of NW Natural, porland Gas and Coke Company, owned a former gas manufacturing plant that was closed in 1958 (Gasco site) and is adjacent
toihe porland Harbor site described above. The Gasco site hai been under invesiigation by NW Natural for environmential contamination under the oDEQ
Voluntary Cleanup program (VCp). lt is not included in the range of remedial costs for the Portland Harbor site noted above. The Gasco site is managed in two
parts, the uplands portion and the groundwater source control action.
NW Natural submitted a revised Remedial lnvestigation Report for the uplands to ODEQ in May 2007. ln March 20't5, ODEO approved Remedial Assessment
(RA) for this site, enabling commencement of work on the FS in 2016. NW Natural has recognized a liability for the remediation of the uplands portion of the site
wniifr is at the low end of the range of potential liability; the high end of the range cannot be reasonably estimated at this time.
ln October 2016, ODEQ and NW Natural agreed to amend their VCP agreement to incorporate a portion of the Siltronic property adjacent to the Gasco site
formerly owned by poriland Gas & Coke between 1939 and 1960 into the Gasco RA and FS, excluding the uplands for Siltronic. Previously, NW Natural was
condudting an inv-estigation of manufactured gas plant constituents on the entire Siltronic uplands for ODEQ. Siltronic will be working with ODEQ directly on
environmental impacts to the remainder of its property.
ln September 2013, NW Natural completed construction of a groundwater source control system, including a water treatment station, at the Gasco site. NW
Natural has estimated the cost associated with the ongoing oferation of the system and has recognized a liability which is atlhe low end of the range of potential
cost. NW Natural cannot estimate the high end of the iange at ttris time due to the uncertainty associated with the duration of running the water treatment
station, which is highly dependent on the remedy determined for both the upland portion as well as the final remedy for Gasco sediment exposure.
Other Sitesjif-OOtio,r to ttrose sites above, NW Natural has environmental exposures at three other sites: Cenkal Service Center, Front Street and Oregon Steel Mills' NW
Natural may have exposure at other sites that have not been identified at this time. Due to the uncertainty of the design of remediation, regulation, timing of the
remediation and in the case of the Oregon Steel Mills site, pending litigation, liabilities for each of these sites have been recognized at their respective low end of
the range of potential liability; the high end of the range could not be reasonably estimated at this time.
CENTRAL SERVICE CENTER SITE. The investigative phase to characterize the existing site has been completed and determined by the oregon Department of
Environmental euality (DEe) to be suflicient ti allow for the issuance of a Conditional No Further Action (cNFA). NW Natural is now conducting ongoing
environmental monitoring aciivities through 2024 in order to meet the conditions which were included within the CNFA.
FRONT STREET SITE. The Front Street site was the former location of a gas manufacturing plant NW Natural operated (the former Portland Gas Manufacturing
site, or pGM). At ODEe's request, NW Natural conducted a sediment and source control investigation and provided findings to ODEQ. ln December 2015, an
FS on the former Portland Gas Manufacturing site was completed.
ln July 2017, ODEQ issued the pGM RoD. The ROD specifies the selected remedy, which requires a combination of dredging, capping, treatment' and natural
,""orery. ln addition, the selected remedy also requirei institutional controls and long-term inspection and maintenance. ln September 2020, NW Natural
revised its estimate of the remaining cosito construct the remedy to be approximatety $7.1 million. Further, NW Natural has recognized an additional liability of
$4.9 million for munitions and desig-n costs, regulatory and permitting issues, and poit-construction work. Construction of the remedy began in early July 2020
and was completed in October 2020.
oREGoN STEEL lilllLs SITE. Refer to "Legal Proceedings," below.
Envlronmental Cost Deferral and Recoverv
NW Natural has authorizafiffi@n anE W6shington to defer costs related to remediation of properties that are owned or were previously owned by NW
Natural. ln Oregon, a Site Remediatioi and Recovery Mechanism (SRRM) is currently in place to recover prudently incuned costs allocable to Oregon
customers, subject to an earnings test. On october il,zO'ts the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of
prudenfly incuned costs allocable to washington customers beginning November 1,2019.
131
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Defsred coets and $/t4,516 $
120,352
(6e,253)
36,673
135,662
(79,e49)
Accrued site liabilities(2)
lnsurance proceeds and lnterest
Total regulatory asset deferral(l)
Cuntnt regulatory ess€b{3}
Longterm regulatory assets(3)
$95,615 $92,386
$4,992 $4,762
87,62490,623 $(!) lncludes pre-review and post-review defensd costs, amounts curently in amortizalion, and interost, net of amounts collected from customers. ln Oregon, NW Naturaleams a carrying charge on cash amounts paid, whereas amounts accrued but not yet paid do not eam a carrying charge until expended. NW Naturaialso accrues acarrying charge on insurance proceeds for amounts owed t9 clltgmers: ln Washingflon, neither the cash paid noi insurance proceeds accrue a carrying charge.(2) Excludes 3'3% of the Front Str€et site liability, or $0.2 million in 2O2O and $0.4 million in 2019, as th6 OPUd only allows rec,over of g6.7% of costs for those sites allocayeto Oregon, including those that historically served only Oregon customers.(:) Environmental costs relate to specific sites approved for regulatory defenal by the OPUC and WUTC. ln Oregon, NW Natural €ams a carrying charge on cash amountspaid, whereas amounts accrued lut not yet p€id do not earn a carrying charge until expended. lt also accru-es i canying charge on insurlnie fri:ieeds for amounts owedto customers. ln Washington, ne-ither the cash paid.nor insurance proceeds received abcrue a carrying cturge. Cun6ntinviro-nmental cosS reiresent rem€diation costsmanlgement expects to collect from customers in the next 12 months. Amounts included in this esitimate ari still subject to a prudence and ea'nrings test review Uy ttreOPUC and do not include the $5.0 million tarifi rider. The amounts allocable to Oregon are recoverable through NGD rates, sitiect to an eamingsiest. See ; O;"&; -
SRRitf below.
Oreoon SRRIII
Collections From Oreoon Customers
Under the SRRM collection process, there are three types of defened environmental remediation expense:' Pre-review - This class of costs repres6nts remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediationexpenses are recorded at NW Natural's authorized cost of capital. NW Natural anticipates the prudence review for annual costs and approval of theeamings test prescribed by the OPUC lo occur by the third quarter of the following year.
' Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yetincluded in amortization. NW Natural earns a carrying cost on these amounts at a rate equal to the five-year treasury iate plus 100 bisis points.' Amortization - This class of costs represents amounts included in cunent customer rates for collection and is generally calculated as one-fifth of the post-review deferred balanc,e. NW Natural earns a carrying cost equal to the amortization rate determined annually by the bPUC, wtrictr approximates a short-term borrowing rate.
ln addition to the collection amount noted above, an order issued by the OPUC provides for the annual collection of $5.0 million from Oregon customers througha tariff rider. As NW Natural collects amounts from customers, it recognizes these collections as revenue and separately amortizes an eqial and offsettingamount of its defened regulatory asset balance through the environmental remediation operating expense line shown sLparately in the operating expensJsection of the income statement.
NW Natural received total environmental insurance proceeds ol approximately $150 million as a result of setflements from litigation that was dismissed in July2014. Under a 2015 OPUC order which established the SRRM, on+third of the Oregon allocated proceeds were applied to costs deferred through 2012 with theremaining two-thirds applied to costs at a rate of $5.0 million per year plus inlerest over the following 20 years. NW Natural accrues interest on the Oregonallocated insurance proceeds in the custome/s favor at a rate equal to the five-year treasury rate plus 1ti0 basis points. As of December 3'1, 2020, NW Naturalhas applied $83.2 million of insurance proceeds to prudently incuned remediation costs allocated to Oregon.
Environmental Earninos Test
To the extent NW Natural earns at or below its authorized Retum on Equity (ROE) as defined by the SRRM, remediation expenses and interest in excess of the$5.0 million tarifi rider and $5.0 million insurance proceeds are recoverable through the SRRM. To the extent NW Natural eams more than its authorized ROE ina year, it is required to cover envircnmentral expenses and interest on expenses greater than the $'10.0 million with those eamings that exceed its authorizedROE.
Washinoton ECRM
Washinoton Defenal
On October 21, 20'19, the WUTC issued an order (WUTC Order) establishing the ECRM which allows for recovery of past defened and future prudently incunedenvironmental remediation costs allocable to Washington customers through application of insurance proceeds and colleclions from customers. Environmentalremediation expenses relating to sites that previously served both Oregon and Washington customers are allocated between states with Washington customersreceiving 3.3% percent of the costs and insurance proceeds.
132
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$
Table of Contents
The following table presents information regarding the total regulatory asset defened as of December 31
ln thousands 2020 2019
Table of Contents
As a result of the WUTC Order, in the fourth quarter of 2019, approximately $3.0 million of prudently incuned costs deferred from the initial deferral authorization
in February 2011 through November 201g were fully offset with insurance iroceeds. ln addition, approximately $'1.5 million of disallowed defened environmental
remediation expenses incuned prior to the deferral authorization were charged to environmental remediation expense.
lnsurance proceeds will be fully applied to costs incurred between December 2018 and June 201 9 once deemed prudent in future rate proceedings. Remaining
insurance proceeds will be amortized over a 10.5 year period ending December 31 , 2029. on an annual basis, NW Natural will file for a prudence determination
and a request to amortize costs to the extent that iemediation "rp"is". exceed the insurance amortization. After insurance proceeds are fully amortized, if in a
particulai year the request to collect defened amounts exceeds one percent of Washington normalized revenues, then the excess will be collected over three
years with interest.
Leoa! Proceedinos
N\ / H"ldingr i. "ot crrnently party to any direct claims or litigation, though in the future it may be subject to claims and litigation arising in the ordinary course of
business.
NW Natural is subject to claims and litigation arising in the ordinary course of business, including the matters discussed above. Although the final outcome of
any of these legal proceedings cannot-be predicted'with certainty, including the mafter described below, NW Natural and NW Holdings do not expect that the
ultimate disposition of any of these matters will have a material effect on financial condition, resutts of operations, or cash flows.
Oreoon Steel Mills Site
ln 2004, NW Natural was served with a third-party complaint by the Port of Portland (the Port) in a Multnomah County Circuit Court case, Oregon Steel Mills, lnc.
v. The port of por[and. The port alleges that'in the 1940s and-1950s petroleum wastes generated by NW Natural's predecessor, Portland Gas & Coke
Company, and .tO other third-party dJfendants, were disposed of in a waste oildisposal iacility operated by the United States or Shaver Transportation Company
on piop"rty then owned uy tni eort ano now owned by ivraz oregon Steel Mills. The complaint seeks contribution for unspecified past remedial action costs
incuneO uy tne eort 1."gariing the former waste oil dis-posal facility-as well as a declaratory judgment allocating liability for future remedial action costs. No date
has been set for trial. ln Augrist 20'17, the case was stayed pending the outcome of the Portlano Ha6or allocation process or other mediation. Although the final
outcome of this proceedingLnnot be predicted with ce'rtainty, NW-Natural and NW Holdings do not expect the ultimate disposition of this matter will have a
material efiect on NW Natural's or NW Holdings'financial condition, results of operations, or cash flows.
For additional information regarding other commitments and contingencies, see Note 17.
1 9. D,SCONTruUED OPERATIONS
NW Holdings
On June 20,zo1g, NWN Gas Storage, then a wholly-owned subsidiary of NW Natural, entered into a Purchase and Sale Agreement (the Agreement) that
provided foi the sale by NWN Gas Storage of all of ihe membership interests in Gill Ranch. Gill Ranch owns a 75% interest in the natural gas storage facility
iocated near Fresno, California known as the Gill Ranch Gas Storage Facility'
on December 4, 2020, NWN Gas Storage closed the sale of all of the membership interests in Gill Ranch and received paynent of the initial cash purchase
price ot $tS.S mlilion less the $1.0 millioi deposit previously paid. Furthermore, additional payments to NWN Gas Storage may be made subject to a maximum
amount of 915.0 million in the aggregate (suolect io a working capital adjustment) based on the economic performance of Gill Ranch for each full gas storage
year (April 1 of one year tnrougfr-laaict Si of the following yiar) bccuning after the closing and the remaining portion of the 202u2021 gas storage year and will
continue until such time as the maximum amount has beei'paid. The fair value of this arrangement at the closing date was zero based on a discounted cash
flow forecast. Subsequent changes in the fair value will be recorded in earnings. The completion of the sale resulted in an after-tax gain of $5.9 million.
EXHIBIT 2
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Page 134 of 2'10
2018
Revenues
Expenses
Operations and maintenance
General traxes
Depreciation and amortization
Other exponses and interest
Total expenses
lncome (loss) from discontinued oporations
Gain on sale of discontinued operations
$10,193 $
7,931
1S8
391
848
5,301 $
8,587
219
423
931
3,579
5,77',!
479
430
609
9,368 10,160 7,289
825
8,027
(4,85e)(3,710)
lncome (loss) from discontinued operations before income tax 8,852 (4,859)
(1.283)
(3,710)
(968)lncome lax expense (benefit)(1)2,U4
lncome (loss) from discontinued operations, net oftax $ 6,508
(1) lncludes income tax expense of 92.1 million related to the sale of Gill Ranch for the year ended oeffiGr11762O.
-
!____e!zgl 9__eJ42L
As a result of the disposition of the membership interests of Gill Ranch, there were no assets or liabilities classified as held for sale at Decemb er 31, 2020. Theassets and liabilities of the discontinued operations classified as held for sale in the consolidated balance sheet at December 31 , 2019 include the following:
NW Holdings Discontinued
ln thousnds
Table of Contents
The following table presents the operating results of Gill Ranch and is presented net of tax on NW Holdings' consolidated statements of comprehensive income:
NW Holdings Discontinued ODerations
ln thousands. ex@Dl per share data 2020 2019
2019
Assels:
Accounts receivable
lnventories
Other cunent assets
Property, plant, and equipment, nel
Operating lease right of use asset
Other nonrurrent assels
Total discontinued operations assets - current assets(r)
$333
695
457
13,284
118
247$ 1s,134
1,250
u8
116
11.495
Liabilities:
Accounts payable
Other cunent liabilities
Operating lease liabilities
Other non-current liabilities
Total discontinued operations liabilities - current liabilities(l)$ 13,709(1) The total assets and liabilities of Gill Ranch were classified as curent because it was probable that the sale would be completed within one year.
NW Natural
As part of the holding company reorganization in October 2018, NWN Energy, NWN Gas Storage, Gill Ranch, NNG Financial, NWN Water, and NW Holdings,which were direct and indirect subsidiaries of NW Natural prior to the reorganization, are no longer subsidiaries of NW Naturai. See Note 1 for additionalinformation. As a result, NW Natural's financial statements reflect amounts related to these entities as discontinued operations for all periods presented. Theexpenses included in the results of discontinued operations are the direct operating expenses incuned by the entitiesthat may be reasonably segregated fromthe costs of NW Natural's continuing operations.
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Table of Contents
The following table presents the operating results prior to the holding company reorganization effective october 1 ,2o18 ot NWN Energy, NWN Gas Storage, Gill
Ranch, NNG Financial, NWN Water, and NW Holdings, which were-historrcaily reporteo within the gas storage segment and other, and is presented net of tax on
NW Natural's consolidated statements of comprehensive income:
NW Natural Discontinued
Operations
tn thousands. exmt share ddta 2018
Revenues
Expenses
Operations and maintenance
General taxes
Depreciation and amortization
other expenses and intersst
Total expenses
Loss from discontinued operations before lncome tax
lncome tax benefit
Loss ftom discontinued operations, net of tax
$3,016
4,151
448
420
342
5.361
(2,3/ist
$22\
s (1,723)
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Table of Contents
SCHEDULE I- CONDENSED FINANCIAL INFORMATION OF NORTHWEST NATURAL HOLDING COMPANY
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(PARENT COMPANY ONLY)
Year ended December Year ended December
31,2019
lnception through
December 31, 2018ln thousands 31 2020
Operating expenses:
Operations and maintonance
Total operating expenses
Loss from operalions
Earnings from investment in subsidiaries, net of tax
Other income (expense), net
lnterest expense, net
lncome before income traxes
lncome tax benefit
Net income
$771 $2,747 $838
771 2,747 838
(77U
78,450
57
1,s57
(2,7471
u,328
(221
726
(838)
36,469
36
53
76,179
(602)$ zo,zet
60,833 35,614
(e02)
$ 61,73s
(225)
$ 35,839
See Notes to Condensed Financial Statements
136
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Table of Conten!S
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
As of December 31
ln thousands 2020 2019
Assets:
Current assets:
Cash and cash equivalents
Receivables from affiliates
lncome taxes receivable
Other cunent assets
Tolal cunent assets
Non-cunent assets:
lnvestments in subsidiaries
Other investments
Deferred tax assets
Other non-current assets
Totial non-cunent assets
Total assets
$11,267
14,738
6,000
6,223
119
1,950
256
4,600
38,228 6,925
939,741 888,477
17
171
213
24
191
245
940,142 888,937
$978,370 $895,862
Liabilities and equity:
Cunent liabilities:
Short-term debt
Accounts payable
Payables to affiliates
Taxes accrued
Other cunent liabilities
Total cunent liabilities
Equity:
Common stock
Retained eamings
Total equity
Total liabilities and equitY
$73,000 $
119
12,912
24,000
612
3,697
127
3749
86,080 28,473
847,193
45,097
840,364
27,025
892,290
$ 978,370
867,389
$ 89s,862
See Notes to Condensed Financial Statements
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Table of Contents
NORTHWEST NATURAL HOLDING COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
ln thousands
Year ended
December 31,
2020
Year ended
December 31,2019
lnception through
December 31, 20'18
Operating activities:
Net income
Adjustments to reconcile net income to cash used in operations:
Equity in earnings of subsidiaries, net of tax
Cash dividends received from subsidiaries
Deferred income taxes
Other
Changes in assets and liabilities:
Receivables, net
lncome and other taxes
Accounts payable
lnterest accrued
Other, net
Cash provided by (used in) operating activities
lnvesting activities:
Contributions to subsidiaries
Retum of capital from subsidiaries
Cash used in investing activities
Financing activities:
Proceeds from stock options exercised
Proceeds from common stock issued
Changes in other short-term debt, net
Cash dividend payments on common stock
Capital contributions
Other
Cash (used in) provided by financing activities
lncrease (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash eguivalents, end of period
$76,781 $
(78,450)
55,387
20
65
61,735 $35,839
(36,469)(64,328)
53,439
(1s8)
66
7
't5
112,788)
(7,4511
8,809
77
(364)
846
4,325
(s,177)
(32)
(346)
(58s)
(9,034)
9,304
32
(44\
42,086 50,330 (e35)
(47,1s4)
19,000
(157,591)
3s,000
(1,804)
(28,194\(122,s91)(1,804)
68 2,015
92,956
24,000
(53,33e)
49,000
(55,420)(12,9231
20,000
(32713,608 2,737
(2,744)68,369 6,750
11,148
119ret
(3,892)
4,011
4,011
$119 $4,011
See Notes to Condensed Financial Statements
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NOTES TO CONDENSED FINANCIAL STATEMENTS
,. BAS'S OF PRESENTATION
NW Holdings is an eneryy servicss holding company that conducts substantially all of its business operations through its subsidiaries, particularly NW Natural.
These condenseo finanilal statements and relaied footnotes have been preparbd in accordance with Rule 12-04, Schedule I of Regulation S'X. These financial
statements, in which NW Holdings'subsidiaries have been included using the equity method, should be read in conjunction with the consolidated financial
statements and notes thereto of NW Holdings included in ltem 8 of this Form 10-K.
Equity eamings of subsidiaries including eamings from NW Natural were $78.5 million, $il.3 million, and $36.5 million for the years ended December 31 ,2020,
2019, and 2018 respectively.
There were $74.4 million and $88.4 million of cash dividends paid to NW Holdings from wlrollyowned subsidiaries for the years ended December 31,2020 and
201 9, respectively, and none for the year ended December 31 , 201 8'
Condensed Statements of Cash Flows Gonection
atedtodividendsreceivedfromsubsidiarieshadbeenreportedascashflowsfromfinancingactivitiesand
shoufi have'been prese-nted as operating and investing activities. NW Holdings conected the previously presented cash flows for dividends received from
subsidiaries and in doing so, the statemenis of cash flowl for the year ended December 31 , 201 I was adjusted to decrease net cash flows used ftom financing
activities by $8S.a milio,-n, with a corresponding increase in net cash fows provided by operating and used in investing activities oI !53.4 million and $35.0
million, rejpectively. NW Holdings has evaluaied the efiect of the misstatement, both qualitatively and quantitatively, and concluded that it did not have a
material impact on, nor require amendment of, any previously filed condensed financial statements.
2. DEBT
For information concerning NW Holdings' debt obligations, see Note 9 to the consolidated financial statements included in ltem 8 of this report.
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NORTHWEST NATURAL HOLDING COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions Deductions
Balance at Charged to costs and Charged to other Balance at end of
ln thousds December accounts Net write.offs
2020
Reserves deducted in balance sheet from assets to
which they apply:
Allowance for uncollectible accounts
2019
Reserves deducted in balance sheot from assets lo
which they apply:
Allowance for uncollectible accounts
2018
Reserves deducted in balance sheet from assets to
which they apply:
Allorance for uncollectible accounts
$673 $890 $2,333 $677 $3,2't9
$977 $450
680
$$7il $673
$956 $$$659 $977
NORTHWEST NATURAL GAS GOMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions Deductions
Balance at beginning
of period
Charged to costs and Charged to other
Net write-offs
Balance at end of
periodln ahousands (year eded December 31 )expenses accounts
2020
Reserves deducted in balance sheet from assets to
which they apply:
Allorance for uncollectible ac@unts
2019
R€serves deducted in balance sheet ftom asseb to
which they apply:
Allowance for uncollectible accounts
2018
Reserves deducted in balance sheet from assets to
which they apply:
Allowance for uncollectible accounts
$672 $779 $2,333 $677 $3,107
672
975
$975
956
$450
678
$$753
659
$
$$$$$
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
NW Holdings and NW Natural management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer,
completed an evaluation of the efiectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-1 5(e) and 1 5d-1 5(e) of
the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon this evaluation, the Chief Executive Ofiicer and Chief Financial Officer of
each registrant have concluded that, as of the end of the period covered by this report, disdosure controls and procedures were efiective to ensure that
information required to be disclosed by each such registrant and included in reports filed or submitted under the Exchange Act is recoded, processed,
summarized, and reported within the time periods specmed in the Securities and Exchange Commission (SEC) rules and forms and that such information is
accumulated and communicated to management of each registrant, including the Chief Executive fficer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
(b) Changes in lntemal Control Over Financial Reporting
NW Holdings and NW Natural management are responsible for establishing and maintaining adequat€ intemal contlol over financial reporting, as such term is
defined in the Exchange Act Rule 13a-15(0. There have been no changes in intemal control over financial reporting that occuned during the quarter ended
December 31, 2020 that have materially afiec{ed, or are reasonably likely to materially affect, internal control over fnancial reporting for NW Holdings and NW
Natural.
The statements contained in Exhibit 31.1, Exhibit 31.2, Exhibit 31.3, and Exhibit 31.4 should be considered in light of, and read together with, the information set
forth in this ltem 9(a).
ITEM 98. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The "lnformation Concerning Nominees and Continuing Directors", "Delinquent Section 16(a) Reports" and "Corporate Govemance" contained in NW Holdings'
definitive Proxy Statement for the 2021 Annual Meeting of Shareholders is hereby incorporated by reference.
EXECUTIVE
Name
Age
Dec.31
at.2020 Positions held durino last five vears(l)
David H. Anderson*59
56
51
48
51
58
42
55
M
61
45
41
President and Chief Executive Offlcelz) (201e ); Chief Operating Officer and President (201 5-
2016); Executive Vice President and Chief Operating Officer (2014-2015); Executive Vice
President Operations and Regulation (2013-2014\; Senior Vice President and Chief Financial
Officer (20&-2013).
Senior Vice President and Chief Financial Officer(2) (2017-l; President and Chief Executive
Officer of Renewables, Avangrid Renewables (201*20171; Senior Vice President of Finance,
lberdrola Renewables Holdings, lnc. (2012-20151.
Vice President and Chief lnformation Officer (2017- ); Chief lnformation Officer, WorleyParsons(America's DiVision) (2016-20171; Executive Service'Delivery Manager for SAP, BritishPetroleum (201 1 -201 5).
Vice President, Chief Compliance Ofiicer and Corporate Secretarf2) (201e ); Vice President and
Corporate Secretary (201$2016); Senior Legal Counsel (2O11-2014): Assistant Corporate
Secretary (2010-2014).
Senior Vice President, Operations and Chief Marketing Ofiicer (2018- ); Senior Vice President,
Communications and Chief Marketing Officer (2018); Vice President, Communications and ChiefMarketing Officer (2015-2018); Chief Marketing & Communications Olficer (2013-2014); Chief
Corporate Communications Officer (20 1 1 -20 1 3).
Vice President, Engineering and Utility Operations (201& ); Senior Director, Utility Operations(2014-20181; Direc{or, Utility Operations (2013-2014); Process Director (2007-2013).
Vice President, Strategy and Business Development (2017- l; President NW Natural Water(2018- ); Vice President, Business Development (2016-20'l'7); Director, Power, Energy and
lnfrastructure Group, Lazard, Freres & Co. (2009-2016).
Vice President, Chief Human Resources and Diversity Officer (2018- ); Senior Director of Human
Resources (2018); Senior Manager, Organizational Effectiveness and Talent Acquisition (2015-
2017); Senior Associate, Point B (2014-2015); Director, Executive Development Center,
Willamette University (201 1 -201 5).
Senior Vice President, Regulation and General Counsel(2) (2016- ); Senior Vice President andGeneral Counsel (2015-2016); Vice President, Legal, Risk and Compliance (2013-2015); Deputy
General Counsel (2010-201 3); Chief Governance Officer and Corporate Secretary (2008-2014).
Vice President, Gas Supply and Utility Support Services (2019- ); President and Chief Executive
Ofiicer, NW Natural Gas Storage, LLC and Gill Ranch Storage, LLC (2011- ).
Vice President, Public Affairs and Sustainability (2019- ); Government and Community Affairs
Director (2018-2019); State Affairs Manager, Port of Portland 12015-2018); Business and Rail
Relations Manager, Port of Portland (2007-2015).
Vice President, Chief Accounting Officer, Controller and Treasurel2) (2017- l; Chief Financial
Officer (lnterim), Treasurer, Chief Accounting Ofiicer and Controller (2016-2017); Chief
Accounting Officer, Conholler and Assistant Treasurer (2016); Controller (2013-2015); Acting
Controller (2013); Accounting Director (2012-2013).
Frank H. Burkhartsmeyer'
James R. Downing
Shawn M. Filippi.
Kimberly A. Heiting
Jon G. Huddleston
Justin B. Palfreyman
Melinda B. Rogers
Mardilyn Saathoff
David A. Weber
Kathryn M. Williams
Brody J. Wlson*
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OIRECTOR (NORTHWEST NATURAL GAS COIIPANY ONLY)*
Name
Age
Dec.31
at.2020 Positions held durino last five vears(l)
Steven E. Wynne**68 Executive Vice President, Moda, lnc., a privately+eld healthcare insurance company (2012- ); Dir€ctor, FLIR
Systems, lnc. ('1999- ); Director, JELD-WEN Holding lnc. (2012-l; Director, Pendleton Woolen Mills, lnc.(201& ); Director, Lone Rock Resouroes, lnc. (201& ); Director, Citifod lnc. (2013-2019); Trustee, Willamette
University (1999- ); Trustee, Portand Center Stage (2012-2019)i Executive Vice President, JELD-WEN, lnc.
(20'11-2612)i Preiident and Chief Executive fficer, SBI lntemational, Ltd. (200,+2007): Partner, Ater Wynno
LLP (2001-2002t 200$20(M); Presadent and Chief Executive fficer, Adidas ('1995-2000).
Mr. Wynne's senior management experience with a varisty of companies, board service on a number of
public'and privat€ companfes and lohgstanding legal praciice in thb areai of corporate finance, securities
bnd mergers and acquisitions qualiry him to provide insight and guidance in the areas of corporate
govemance, strategic planning, enterprise risk management, financ€ and operations.
' Exocrrlive Oficer of Northwost NatuEl HoHing Company and Northwsst Nabral Gas Company.
Mstng of ShaEholdoE.(t) Unless othoMiss specifsd, all positions ll6ld at Northwost Natural Gas Company.(2) Pogition held al Northwest Natural Holding Company (beginning March 2018) and Nodhwest Natrral Gas Company.
Each executive ofiicer sorves successive annual terms; present terms end at the 2021 annual meeting. There are no family relationships among our executive
offcers, directors or any person chosen to become one of our officers or directors. NW Holdings and NW Natural have adopted a Code of Ethics (Code)
applicable to all employees, officers, and directors that is available on our website al www.nwnaturalholdinos.com. We intend to disclose on our website at
www.nwnaturalholdinos.com any amendments to the Code or waivers of the Code for executive officers and directors.
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ITEM 11. EXECUTIVE COMPENSATION
The information concerning "Executive Compensation", "Report of the Organization and Executive Compensation Committee", and "Compensation Committeelnterlocks and lnsider Participation" contained in NW Holdings'definitive Proxy Statement for the 2021 Annual Meeting of Shareholders is hereby incorporatedby reference. lnformation related to Executive Officers as of December 31,2020 is reflected in Part lll, ltem 10, above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
As of February 16, 2021 , NW Holdings owned 100o/o of the outstanding common stock of NW Natural.
The following table sets forth information regarding compensation plans under which equity securities of NW Holdings are authorized for issuance as ofDecember 31, 2020 (see Note 8 to the Consolidated Financial Statements):
(a) (b) (c)
Plan Cateqorv
Number of securities to be
issued upon exercise ofoutstanding options,
wanants and rights
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
Weighted-average
exercise price of
outstanding options,
wanants and rights tn column (a))
Equity compensation plans approved by socurity holders:
Long Term lncentive Plan (LTIP) (1x2)
Restated Stock Option Plan
Employee Stock Purchase Plan
Equity compensation plans not approved by security holders:
Executive Defened Compensation Plan (EDCP)13)
Directors Deferred Compensation Plan (DDCP)(3)
Defened Compensation Plan for Directors and Executives (DCP){4)
Total
181,2E9
9,438 $
50,839 $
nla
45.74
37.78
435,758
153,084
953
4'.1,215
213,721
49r,455
nla
nla
nla
nla
nla
nla
588,842
(r) Awards may be granted under the LTIP as Performance Share Awards, Restricted Stock Units, or stock options. Shares issued pursuant to Performance Share Awardsand Restricted Stock Units under the LTIP do not include an exercise price, but are payable when the award criteria are satisfied. The number of shares shown in column(a) include 82,464 Restricted Stock Units and 98,825 Performance Share Awards, reflecting the number of shares to bs issued as performance share awards underoutstanding Performance Share Awards if target performance levels are achieved. lf the maximum awards were paid pursuant to the Performance Share Awardsoutstanding at December 31, 2020, the number of shares shown in column (a) would increase by 98,825 shares, reflecting the maximum share award ol 200% of target,and the number of shares shown in column (c) would decrease by the same amount of shares. No stock options or other types of award have been issued under the LTlp.\2t The number of shares shown in column (c) includes shares that are available for future issuance under the LTIP as Restriiied Stock Units, performance Share Awards, orstock options at December 31, 2020.(3) Prior to Januar 1, 2005, defened amounts were credited, at the participant's election, to either a "cash account" or a "stock account." lf defened amounts were credited tostock accounts, such accounts were credited with a number of shares of NW Natural (now NW Holdings) common stock based on the purchase price of the common stockon the next purchase date under our Dividend Reinvestment and Direct Stock Purchase Plan, and such accounts were credited with additional sirares based on thedeemed reinvestment of dividends. Cash accounts are credited quartedy with interest at a rate equal to Moody's Average Corporate Bond yield plus two percentage
points, subject to a 6% minimum rate. At the election of the participant, defened balances in the stock accounis are payable aiter termination of Aoard service oremployment in a lump sum, in installments over a period not to exceed '10 years in the case of the DDCP, or 15 years in the case of the EDCp, or in a combination oflump sum and installments. Amounts credited to stock accounls are payable solely in shares of common stock and cash for fractional shares, and amounts in the abovetable represent the aggregate number of shares credited to participants stock accounts. We have contributed common stock to the trustee of the Umbrella Trusts suchthat the Umbrella Trusts hold approximately the numbor of shares of common stock equal to the number of shares credited to all participants' stock accounts.(4) Effective January 1, 2005, the EDCP and DDCP were closed to new participants and replaced with the DCP. The DCP continuos the basic provisions of the EDCp andDDCP under which defened amounts are credited to either a "cash accounf' or a "stock account." Stock accounts represent a right to receive shares of NW Holdingscommon stock on a deferred basis, and such accounts are credited with additional shares based on the deemed reinvestment of dividends. Effective January 1 , 20-07,cash accounts are credited quarterly with interest at a rate equal to Moody's Average Corporate Bond Yield. Our obligation to pay deferred compensation in accordancewith the terms of the DCP will generally become due on retirement, death, or other termination of service, and will be paid in a lump sum or in installments of five, 10, or 15years as elected by the participant in accordance with the terms of the DCP. Amounts credited to stock accounts are payable soleiy in shares of common stock and cashfor fractional shares, and amounts in the above table represent the aggregate number of shares credited to participanis' stock accounts. We have contributed common
stock to the trustee of the Supplemental Trust such that this trust holds approximately the number of common shares equal to the number of shares credited to allparticipants' stock accounts. The right of each participant in the DCP is that of a general, unsecured creditor of NW Natural.
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The information captioned "Beneficial Ownership of Common Stock by Directors and Executive officers" and "security ownership of Common Stock of Certain
Beneficial Owners. contained in NW Holdings' definitive Proxy Statement for the 202'1 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information captioned "Transactions with Related Persons" and "Corporate Governance" in NW Holdings' definitive Proxy Statement for the 2021 Annual
Meeting of Shareholders is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
NW Holdinosffi6fr7ilon captioned ,2020 and2019 Audit Firm Fees" in NW Holdings' definitive Proxy Statement for the 2021 Annual Meeting of Shareholders is hereby
incorporated by reference.
NW Natural
ifffi-tb*ing table shows the fees and expenses of NW Natural, paid or accrued for the integrated audits of the consolidated financial statements and other
services proiiaeo by NW Natural's independent registered public accounting firm, PricewaterhouseCoopers LLP, for fiscal years 2020 and 2019:
ln thousands 2020 20't9
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
1,273 $
31
22
3
1,222
31
22
3
$
$ 1,329 $ 1,278
AUDIT FEES. This category includes fees and expenses for services rendered for the integrated audit of the_consolidated financial statements included in the
Annual Report on rorni 1d-x and the review of the quarterly financial statements included in the Quarterly Reports on Form 10-Q. The integrated audit includes
the review of our internal control over financial reporting in iompliance with Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act). ln addition,
amounts include fees for services routinely provided uy tne auaitor in connection with regulatory filings, including issuance of consents and comfort letters
relating to the registration of Company securities and assistance with the review of documents filed with the SEC.
AUDITfiELATED FEES. This category includes fees for assurance and related services that are reasonably related to the performance of the audit or review of
our financial statements and intemal control over financial reporting, including fees and expenses related to consultations for financial accounting and reporting,
in addition to fees for EPA assurance letters.
TAX FEES. This category includes fees for tax compliance, and review services rendered for NW Natural's income tax returns.
ALL OTHER FEES. This category relates tO services other than those described above. The amount reflects payments for accounting research tools in each of
2O2O and2019.
PRE.APPROVAL pOLtCy FOR AUDTT AND NON.AUDIT SERVICES. The Audit committee of NW Natural approved or ratified 100 percent o12020 and 2019
services for audit, audit-related, tax services and all other fees, including audit services relating to compliance with Section 404 of the Sarbanes-Oxley Act. The
chair of the Audit Committee of NW Natural is authorized to pre-approve non-audit services between meetings of the Audit Committee and must report such
approvals at the next Audit Committee meeting.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. A list of all Financial Statements and Supplemental Schedules is incorporated by reference to ltem 8.
2. List of Exhibits filed:
Reference is made to the Exhibit lndex commencing on page 148'
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ITEM 16. FORM 1O-KSUMMARY
None.
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lable of Contents
Exhibit Number
NORTHWEST NATURAL HOLDING GOMPANY
NORTHWEST NATURAL GAS COMPANY
Exhibit lndex to Annual Report on Form 10-K
For the Fiscal Year Ended December 31,2020
Document
.3a.
3b.
JU.
.3d.
*4a,
Amended and Restated Articles of lncorDorati
Amended and Restated Bvlaws of Northwest Natural Holdino Comoanv (incoroorated bv reference to Exhibit 3.1 to the Form 8-K filed ADril 7.
2020. File No. 1-38681).
Amended and Restated Bvlaws of Northwest Natural Gas Comoanv (incoroorated bv reference to Exhibit 3.2 to the Form 8-K filed ADril 7. 2020.
File No. 1-'15973).
Copy of lndenture, dated as of June 1, 1991, between Northwest Natural Gas.Complrny and Banters Trust Comqany (!P yfgT P-e_{s:he-BankTnisi Company Afuericas is successor), Trustee, relating to Northwest Natural Gas Company's Unsecured Debt Securities (incorporated by
reference to Exhibit 4(e) in File No. 3364014).
.1 to the Form 1 0-Q for the ouarter ended June 30.
2019. File No. 1-3868'1 ).
Copy of Mortgage and Deed of Trust of Northwest Natural Gas Compqny, dated as of July 1.,.1946 (Mortgage and.PSg.A.otl.f!),to Barkers Trust
ft6i,inom OeJts-ctre Bank Trust Company Americas is the sucressor), Trustee (incorporaied by.referencC to Exhiblt 7(i) in File No' 2{491); anO
|opi6i 6i Srpiiertntai inOentures tioJ.i tnrough 14 to the Mortgad6 and Dee'd of Trust, datd-d-respedively, as of June 1, 1949, March 1, 1954,
A-"iiii.lgsoiFJ6'ruil i. i0s9, iutv i, ts6t, .,i;iuary 1, 1964, tuirEtr t, 1e66, Decembei 1, 1e69, April 1, i97,1, .lqlqew- 1, 1975, December 1,
i5i-5.' jutv i'iSBi. juhe i . 1985 alid November 1, 1085 (incorporated by reference to Exhibit 4(d) in File No. 33-1929); Supplemental lndenture
pi,.is tdind Mortil#a;d o-eeo oiiiirlt, aateo ds ot.luiy l, igae (nbd as Exhibit 4(c) in^File ftt9. ss;zf.!^ep); Supplemental lqp91t_u_r911!9s. to,
i7'"ni iaio th; M"oridage;doe;d oiiruai, oitCa, respirctivety, ai of.November 1,'1088, october_1, 1989 and.july.1,,1990 (inco-rqolal* uv
reference to Exhibit 4(t)'in File No. 334048?); Supplemdntal lnd-enture No. 19 to the Mortgage and Deed of Trust, dated as of June 1 , 1991
(incorporated by reference to Exhibit 4(c) in File No. 3344014)'
.4b.
.4c.
.4d.
-4e.
*4t.
-
-4h.
-4i.
147
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Table of Contents
AL
:4t
.10
* 10.1
-10.2
21
23a.
23b.
31.1
31.2
31.3
31.4
*"32.1
'.32.2
101.
104.
Descriotior] gf seculitieq JeqililqreE,unqer gqqtloJt l2 of the Exchanoe Acl of 1 934 (incoroorated bv reference to Exhibit 4j to Form 1 0-K for thevear ended December 31 . 201 9. File No. 1-38681 ).
Subsidiaries of Northwest Natural Holding Comoany.
Consent of PricewaterhouseCoooers LLP - NW Holdinos.
Consent of PricewaterhouseCoooers LLP - NW Natural.
geltificatio! qf Prinqipgl=Elgcutive Ofiicer of Northwest Natural Gas Companv Pursuant to Rule 13a-14(a)/15d-14(a). Section 302 of theSarbanes-Oxlev Act of 2002.
9e{ificatiqn gf PrlnQip?l=Etfrgncial Officer of Northwest Natural Gas Comoanv Pursuant to Rule 13a-14(a)/15d-14(a). Section 302 of theSarbanes-Oxlev Act of 2002.
ge{ificatio! gf Pringiogl=Elgcutive Officer of Northwest Natural Holdinq Companv Pursuant to Rule 13a-14(a)/15d-14(a). Section 302 of theSarbanes-Oxlev Act of 2002.
9e(ificatio! .qf Prinqiogl=Erl.ancial Officer of Northwest Natural Holdinq Comoanv Pursuant to Rule 'l3a-14(a)/15d-14(a). Section 302 of theSarbanes-Oxley Act of 2002.
9er,tificatio! qf Pringio?l=Elqcutive Officer and Princioal Financial Officer of Northwest Natural Gas Comoanv Pursuant to Section 906 of theSarbanes-Oxlev Act of 2002.
Ce(ificatio! qf Prinqio?l=Elgcutive Officer and Princioal Financial Officer of Northwest Natural Holdino Comoanv Pursuant to Section 906 of theSarbanes-Oxlev Act of 2002.
The following materials brmatted in lnline Extensible Business Reporting Language (lnline XBRL):(i) Consolidated Statements of lncome;(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Cash Flows; and
(iv) Related notes.
The cover page lpm !h.e Company's Annual Report on Form 10-K for the year ended December 31, 2020, formatted in lnline XBRL andcontained in Exhibit 101.
Executive Compensation Plans and Anangements:
-10a.
Exgcutivq S=tfp.leggnl?l Reqlelle,lt lncome Plan. 2018 Restatement (incoroorated herein bv reference to Exhibit 10.6 to the Form B-K datedOctober 1. 2018. File No. 1-38681).
148
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-1 0b.
'10c.
.10d.
.10e.
.10f.
-10o.
r1 0h.
.10i.
.10i.
.10k.
.101.
.10m.
.10n.
10a.
"10o.
.10o.
.10r.
.1 0s.
Restated Stock Ootion Plan. as amended effective December 14. 2006 {incoroorated bv reference to Exhibit 10c to Form 10-K for 2006. File No.
1 -1 5973).
Executive Annual lncentive Plan. effective Januarv 1 . 2020 (incoroorated bv reference to Exhibit 10o to Form '10-K for 2019. File No. 1-1 5973)'
Executive Annual lncentive Plan. effective Januarv 1. 2021.
149
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fgnTt of Perfgllgllce$=lEre+:ong Te:rB=l!=cgltive Aoreement under Lono Term lncentive Plan (2020-2022) (incoroorated bv reference to Exhibit10x to Form 10-K for 2019. File No. 1-3868't).
Form of Performance Share Lono Term lncentive Aoreement under Lono Term lncentive Plan (2021-2023).
-10t.
.1 0u.
-10v.
10w.
.10x.
-10y.
102.
.1Oaa.
*'l0bb.
*1 Occ.
*1odd.
.1 Oee.
.1off.
*10oo.
.1 ohh.
-10ii.
-1oii.
-1 0kk.
't 0fl.
Form of Restricted Stock Unit Award Aoreement under Lono Term lncentive Plan (2021).
For!}9!RsjltriEle4 S=tgg! l]nit Award Aoreement under Lono Term lncentive Plan (2019) (incoroorated bv reference to Exhibit 1Occ to Form 1O-Kfor 2018. File No. 1-38681).
ed bv reference to Exhibit lOll toForm 10-K for 2019. File No. 1-38681).
Annual lncentive Plan for NW Natural Gas Storaoe. LLC. as amended effective Januarv 1. 2021.
EXHIBIT 2
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150
Tabb of Contents
1n6eordr{ by rafe rnoae hdbdod*purduant to ltim 60.lOX32XiD of Regub$on $K thb cartfioab b not bclng 'tf,ef for prlrpores d Secffon 18 of the Seculilcs Ex0tunge Aci of t93{, e3
amqded.
15'l
g(HlElr2
PALFREYMAII, Dl
GEM STATE WATER COMPAT.IY
PegB t52 ot2t0
Table of Contents
S'GA'ATURES
Pusuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each registrant has duly caused this reporl to be signed on itsbehalf by the undersigned, thercunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters havin! referenceto such company and its subsidiaries.
NORTHWEST NATURAL HOLDIIG COTPAI{Y
Bv: /s/ David H. Andercon
David H. Andercon
President and Chlef Executive Officer
Date: February 26,2021
NORTHWEST NATURAL GAS CO]UIPANY
Bv: /s/ David H. Anderson
David H. Anderson
President and Chief Execulive fficer
Date: February 26,2021
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EXHIBIT 2
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GEM STATE WATER COMPANY
Page 153 of210
Table of Contents
pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated. The signatures of each of the undersigned shall be deemed to relate only to matters having reference to the below
named company and its subsidiaries.
NORTHWEST NATURAL HOLDING COMPANY
Slgnature Tltle Date
/s/ David H. Anderson Principal Executive Officer and Director February 26,2021
David H. Anderson
PresirJent and Chi6f Ex€cutive Officer
/s/ Frank H. Burkhartsmev€r Principal Financial fficer February 26,2021
Frank H. Burkhartsmeyer
Senior Vice Presidont and Chief Financial Officar
/s/ Brody J. Wilson Principal Accounting Ofiicer February 26,2021
Brody J. Wilson
McePresident, Treasurer, Chief Accounting fficer and Controller
/s/ Tirnothv P. Bovle Direc'tor
Timothy P. Boyle
/s/ John D. Carler Director
John D. Carter
/s/ Monica Enand Director
Monica Enand
/sr' C. Scott Gibson Director
C. Scott Gibson
/s/ Tod R. Hamachek Director
Tod R. Hamachek
/sr/ Karen Lee Director February 26,2021
Karen Lee
/s/ Dave McCurdv Direc'tor
Dave McCurdy
/s/ Nathan l. Partain Director
Nathan l. Partain
/s/ Jane L. Peverett Director
Jano L. Peverett
/sy' Kenneth Thrashor Director
Kennsth Thrashel
/s,/ Malia H. Wasson Director
Malia H. Wasson
/s,/ Charles A. Wilhoite Director
Charles A. Wilhoite
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
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Table of Contents
NORTHWEST NATURAL GAS COTIPANY
Slonaturc Tltle Drta
/s/ David H. Anderson Principal Executlve Officer and Director February26,2021
David H. Anderson
PresHent and Chief Executive fficer
/sy' Frank H- Burkhartsmawr Principal Financial Offi cor February 26,2021
Frank H. Burkha(smever
Senior Vice Presidentlnd Chief Financial fficer
kt J. Wlson Principal Accounting fficer February26,2021
Brody J. lMlson
Mce President, Treasurer, Chief Accounting Officerand Conholler
/s/ Timothv P. Bovla Dir€ctor
Timothy P. Boyle
/s/ John D. Carter Director
John D, Carter
/s/ Monica Enand Dir6ctor
Monica Enand
/s/ C. Scoft Gibson Director
C. Scott Glbson
/s/ Tod R. Hamachok Diroc'tor
Tod R, Hamachek
/sy' Karen Lee Director
Karen Lee
/s/ Dave McCurdv Director February 26,2021
Dave Mc€urdy
/sy' Nathan l.Partaln Director
Nathan l. Partain
/s/ Jane L. Psverett Director
Jan€ L. Peverett
/d Kenneth Thrasher Director
Kenneth Thrasher
/s/ Malia H. Wasson Director
Malia H. Wasson
/sr/ Charles A Wilhoite Diroctor
Chades A. Wilhoite
/s/ Steven E. Wynne Director
Steven E. h&nne
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PALFREYMAN, DI
GEM STATE WATER COMPANY
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Exhibit 3b
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
NORT}IWEST NATURAL GAS COMPANY
These Amended and Restated Articles of Incorporation of Northwest Natural Gas Company (Restated Articles of Incorporation)
supersede its theretofore existing articles of incorporation and all amendments thereto.
ARTICLE I
The name of this corporation is NORTHWEST NATURAL GAS COMPANY, and its duration shall be perpetual.
ARTICLE II
The purposes of the corporation are to engage in any lawful activity for which corporations may be organized under the Oregon Business
Corporation Act.
ARTICLE III
e. The aggregate number of shares ofcapital stock which the corporation shall have authority to issue is 103,500,001 shares, divided
into 3,500,000 shares of Preferred Stock, issuable in series as hereinafter provided, 100,000,000 shares of Common Stock, and one
share of Limited Voting Junior Preferred Stock, $l par value (the "Junior Preferred Stock").
B. A statement of the preferences, limitations and relative rights of each class of capital stock of the corporation, namely, the Preferred
Stock, the Common Stock, and the Junior Preferred Stock, of the variations in the relative rights and preferences as between series of
the Preferred Stock, insofar as the same are fixed by these Restated Articles of Incorporation, and of the authority vested in the board
ofdirectors ofthe corporation to establish series ofPreferred Stock and to fix and determine the variations in the relative rights and
preferences as between series insofar as the same are not fixed by these Restated Articles of Incorporation, is as follows:
Preferred Stock
The shares ofthe Preferred Stock may be divided into and issued in series. Each series shall be so designated as to distinguish the
shares thereoffrom the shares ofall other series ofthe Preferred Stock and all other classes ofcapital stock ofthe corporation. To
the extent that these Restated Articles oflncorporation shall not have established series ofthe Preferred Stock and fixed and
determined the variations in the relative rights and preferences as between series, the board of directors shall have authority, and
is hereby expressly vested with authority, to divide the Preferred Stock into series and, within the limitations set forth in these
Restated Articles of Incorporation and such limitations as may be provided by law, to fix and determine the relative rights and
preferences ofany series ofthe Preferred Stock so established. Such action by the board ofdirectors shall be expressed in a
resolution or resolutions adopted by it prior to the issuance of shares of each series, which resolution or resolutions shall also set
forth the distinguishing designation of the particular series of the Preferred Stock established thereby. Without limiting the
generality ofthe foregoing, authority is hereby expressly vested in the board ofdirectors so to fix and determine with respect to
any series ofthe Preferred Stock:
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Exhibit 3b
(a) The rate ofdividend and the relative preference ofeach series in the payment ofdividends;
(b) The price at which and the terms and conditions on which shares may be redeemed;
(c) The amount payable upon shares in the event ofvoluntary and involuntary liquidation and the relative preference ofeach serieson liquidation;
(d) Sinking fund provisions, if any, for the redemption or purchase of shares;
(e) The terms and conditions, if any, on which shares may be converted if the shares of any series are issued with the privilege ofconversion; and
(0 Any other relative right or preference as permitted by law.
All shares of the Preferred Stock of the same series shall be identical except that shares of the same series issued at different times
may vary as to the dates from which dividends thereon shall be cumulative; and all shares of the Preferred Stock, irrespective of
series, shall constitute one and the same class ofstock and shall be identical except as to the designation thereof, the date or datesfrom which dividends on shares thereof shall be cumulative, and the relative rights and preferences set forth above in clauses (a)
through (f) of this subdivision, as to which there may be variations between different series. Except as otherwise may be provided bylaw or by the resolutions establishing any series ofPreferred Stock in accordance with the foregoing provisions ofthis subdivision,whenever the written consent, affirmative voten or other action on the part of the holders of the Prefined Stock may be required forany pu{pose, such consent, vote or other action shall be taken by t}e holders ofthe Preferred Stock as a single class inespective of
series and not by different series.
2- The holders ofshares ofthe Preferred Stock ofeach series shall be entitled to receive dividends, when and as declared by the boardof directors, out of any funds legally available for the payment of dividends, at the annual rate fixed and determined with respectto each series either by these Restated Articles of Incorporation or in accordance with subdivision III. B. 1., and no more,payable quarterly on the 15th day of February, May, August and November in each year or on such other date or dates as the
board of directors shall determine in the resolutions establishing such series. Such dividends shall be cumulative in the case of
shares ofeach series either from the date ofissuance ofshares ofsuch series or from the first day ofthe current dividend period
within which shares of such series shall be issued, as the board of directors shall determine, so that if dividends on all
outstanding shares ofeach particular series ofthe Preferred Stock, at the annual dividend rates fixed and detennined either by
these Restated Articles of Incorporation or in accordance with subdivision III. B. I ., shall not have been paid or declared and setapart for payment for all past dividend periods and for the then current dividend periods, the deficiency shall be fully paid or
dividends equal thereto declared and set apart for payment at said rates before any dividends on the Common Stock shall be paid
or declared and set apart for payment. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividendpayment or payments which may be in arrears.
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Exhibit 3b
3. In the event of any dissolution, liquidation or winding up of the corporation, before any distribution or payment shall be made to
the holders of the Common Stock, the holders of the Preferred Stock of each series then outstanding shall be entitled to be paid
out ofthe net assets ofthe corporation available for distribution to its shareholders the respective amounts per share fixed and
determined with respect to each series either by these Restated Articles of Incorporation or in accordance with subdivision III. B.
1., and no more. If upon dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary, the net
assets of the corporation available for distribution to its shareholders shall be insufficient to pay the holders of all outstanding
shares of preferred Stock of all series the full amounts to which they shall be respectively entitled as aforesaid, the net assets of
the corporation so available for distribution shall be distributed to the holders ofPreferred Stock in accordance with the relative
preferences ofeach series ofpreferred Stock established either by these Restated Articles oflncorporation or in accordance with
subdivision IIL B. I . For the purposes of this subdivision, any dissolution, liquidation or winding up which may arise out of or
result from the condemnation or purchase of all or a major portion of the properties of the corporation by (i) the United States
Government or any authority, agency or instrumentality thereof (ii) a State of the United States or any political subdivision,
authority, agency or instrumentatity thereol or (iii) a district, cooperative or other association or entity not organized for profit,
shall be deemed to be an involunta-ry dissolution, liquidation or winding up; and a consolidation, merger or amalgamation of the
corporation with or into any other corporation or corporations shall not be deemed to be a dissolution, liquidation or winding up
of the corporation, whether voluntary or involuntary'
4. The holders of shares ofthe Preferred Stock shall have no right to vote in the election of directors or for any other purpose, except
as may be otherwise provided by law or by resolutions establishing any series ofPreferred Stock in accordance with subdivision
III. B. I . Holders of preferred Stock shall be entitled to notice of each meeting of shareholders at which they shall have any right
to vote, but shall not be entitled to notice ofany other meeting ofshareholders.
Common Stock
5. Subject to the limitations set forth in subdivision III. B. 2. (and subject to the rights of any class of stock hereafter authorized),
dividends may be paid upon the Common Stock when and as declared by the board of directors of the corporation out of any
funds legally available for the payment of dividends.
6. Subject to the limitations set forth in subdivision IIL B. 3. (and subject to the rights of any other class of stock hereafter
authorized), upon any dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary, the net assets
of the corporation shall be distributed ratably to the holders of the Common Stock.
7. Except as may be otherwise provided by law or by the resolutions establishing any series ofPreferred Stock in accordance with
subdivision III. B. 1., the holders of the Common Stock shall have the exclusive right to vote for the election of directors and for
all other purposes. In the election of directors of the corporation, every holder of record of any share or shares of the Common
Stock ofthe corporation shall have the right to cast as many votes for one candidate as shall equal the number ofsuch shares
multiplied by the number of directors to
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Exhiblt 3b
be elected, or to distribute such number of votes among any two or more candidates for such election.
8. Upon the issuance for money or other consideration ofany shares ofcapital stock ofthe corporation, or ofany security convertible
into capital stock ofthe corporation, no holder ofshares ofthe capital stock, irrespective ofthe class or kind thereof, shall have
any preemptive or other right to subscribe for, purchase or receive any proportionate or other amount ofsuch shares ofcapital
stock, or such security convertible into capital stock, proposed to be issued; and the board ofdirectors may cause the corporation
to dispose ofall or any ofsuch shares ofcapital stock, or ofany such security convertible into capital stock, as and when said
board may determine, free of any such right, either by offering the same to the corporation's then shareholders or by otherwise
selling or disposing ofsuch shares ofother securities, as the board ofdirectors may deem advisable.
Junior Preferred Stock
9. The Junior Preferred Stock is not entitled to receive or participate in any dividends, and no dividends shall be paid thereon.
10. Subject to the limitations set forth in these Restated Articles of Incorporation and subject to the rights of any other classes of stock
of the corporation that may be senior in right to the Junior Preferred Stock, in the event of any dissolution, liquidation or winding
up of the corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of the
Common Stock, the holder of the Junior Preferred Stock shall be entitled to be paid out of the net assets of the corporation
available for dishibution to its shareholders one hundred dollars ($100.00) and no more. For purposes ofthis section, a
consolidation, merger or amalgamation of the corporation with or into any other corporation or corporations shall not be deemed
to be a dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary.
Il. So long as the share ofJuniorPreferred Stock is outstanding, the corporation shall not (a) file apetition forreliefunderthe United
States Bankruptcy Code or (b) authorize its subsidiaries (collectively, the "Regulated Utilities") to file a petition for relief under
the United States Bankruptcy Code (any of the foregoing a "Voluntary Bankruptcy Filing") without the consent of the holder of
the Junior Preferred Stock, which consent may be effected in the following manner: the corporation shall give the holder of the
Junior Preferred Stock written notice ('Notice") at least five business days before making any proposed Voluntary Bankruptcy
Filing. The holder of the Junior Preferred Stock may object to and oppose the Voluntary Bankruptcy Filing by providing written
notice of such objection and opposition (an "Objection Notice") to the Secretary of the corporation within five business days
after receipt of the Notice. The Objection Notice shall speciff the reasons the holder of the Junior Preferred Stock does not
consent to the proposed Voluntary Bankruptcy Filing. If the Secretary receives such an Objection Notice within the five business
day period, then the corporation shall not submit or file or, with respect to any Regulated Utility, approve any such Voluntary
Bankruptcy Filing. If the corporation does not receive an Objection Notice within the five business day period, the holder of the
Junior Preferred Stock will be deemed to have consented to the Voluntary Bankruptcy Filing.
EXHIBIT 2
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GEM STATE WATER COMPANY
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Exhibit 3b
12. No person other than the corporation and the holder ofthe Junior Preferred Stock will have any contractual rights with respect to
thi Junior preferred Stock.
-Except
as provided by applicable law, the holder ofthe Junior Preferred Stock is entitled to receive
notice from the corporation of each meeting of shareholders at which any Voluntary Bankruptcy Filing is proposed to be
considered, but shail not be entitled to nofice of any other meeting or vote of the shareholders. Notwithstanding the foregoing
provisions, the holder of the Junior Preferred Stock shall have no voting rights at any time when the Oregon Public Utilities
Commission (the "Commission") has consented to the redemption of the Junior Preferred Stock pursuant to subdivision III- B.l3
below (and regardless of whether there may then exist any restriction not set forth in said subdivision III. B.13 on the
corporation's ability to redeem the Junior Preferred Stock). Except as provided herein or as otherwise provided by law, the
holder ofthe Junior Preferred Stock has no voting rights for any other purpose.
13. The Junior prefened Stock may be redeemed by the corporation, at its election expressed by resolution of the Board of Directors,
at any time; provided, that the corporation shall not redeem the Junior Preferred Stock without the prior consent ofthe
Commission. The Junior preferred Stock will be redeemed in full upon notice thereof given to the holder of the Junior Preferred
Stock and the payment of the redemption price of one hundred dollars ($100.00). Following such redemption, the holder of the
Junior preferred Stock shall deliver the certificate representing the Jnnior Preferred Stock to the corporation for cancellation;
provided, however, that the delivery of such certificate to the corporation shall not be required as a condition to the redemption,
and the Junior preferred Stock will cease to be outstanding and all rights and obligations ofthe holder thereofwill cease upon
notice and payment as aforesaid, whether or not the certificate representing the Junior Preferred Stock has been so delivered to
the corporation.
14. The holder of the Junior Preferred Stock must be, during the period of ownership, "independent" as defined in the stipulation
approved by Oregon public Utility Commission Order 17526 effective December 28,2017 and any supplement or amendment to
s""t ttip"tution (the "Condition of Eligibility"). If at any time the holder of the Junior Prefened Stock (a "prior holder") (a) does
not meet the Condition of Etigibilify, as determined in good faith by the corporation, (b) gives notice to t}re corporation of such
holder,s intent to resign, or (c) if the holder is natural person or is an entity that has only a single member or shareholder who is a
natural person and the holder or its member or shareholder dies, become disabled, or otherwise is unable to effectively carry out
the responsibilities ofthe holder ofthe Junior Preferred Stock, in each case as determined in good faith by the corporation, the
corporation shall appoint another person to hold the Junior Preferred Stock (a "successor holdeC'). In addition, the corporation
may appoint a successor holder, provided the successor holder meets the Condition of Eligibility, at any time prior to delivering
a Notice. Upon notice to the prior holder by the corporation of the appointrnent of a successor holder and of the effective date
thereof, the successor holder shall become the sole holder ofthe Junior Preferred Stock and the prior holder shall have no further
rights and obligations with respect thereto. On or promptly following the effective date of the appointment of a successor holder,
the prior holder shall deliver the certificate representing the Junior Preferred Stock to the corporation for reissuance to the
successor holder; provided, however, that the delivery ofsuch certificate to the corporation will not be required as a condition to
the appointment oithe successor holder. The holder ofthe Junior Preferred Stock shall give notice to the Secretary ofthe
corporation of any failure to meet the Condition of Eligibility and of such holder's desire to resign, and the authorized
representative of such holder shall
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Exhlbit 3b
give notice to the Secretary of the corporation of the death or disability of such holder, promptly following the determination or
occulrence thereof. The holder ofthe Junior Preferred stock shall have no right to transfer the Junior Preferred Stock to any
person except as provided in this subdivision III.B.l4 or as otherwise consented to by the corporation. The stock certificate or
other evidence ofownership ofthe Junior Preferred Stock shall bear a legend or other prominent notice ofthe restrictions
contained in this subdivision III.B.14.
15. The Junior Preferred Stock shall not be convertible into Common Stock or any other class or series of securities issued by the
corporation.
16. Except as provided herein, ifthe corporation redeems, purchases or otherwise acquires the Junior Preferred Stock, the corporation
shall cancel and not reissue the Junior Preferred Stock.
ARTICLE TV
A. The business and affairs of the corporation shall be managed by a board of directors. Except as provided in subdivision B. below, the
number of members of the board, their classifications and terms of office, and the manner of their election and removal shall be asfollows:
l. The number of directors shall be that number, not less tlran nine or more than fourteen, determined from time to time by
resolution adopted by affirmative vote of a majority of the entire board of directors. The directors shall be divided into three
classes, designated Class I, Class II, and Class III. Each class shall consist, as nearly as possible, ofone-third ofthe total number
of directors. At the 1984 annual meeting of shareholders, Class I directors shall be elected for a one-year term, Class II directors
for a two-year tenn, and Class III directors for a three-year term. At each succeeding annual meeting of shareholders, successors
to directors whose terms expire at that annual meeting shall be of the same class as the directors they succeed, and shall be
elected for three-year terms. Ifthe number ofdirectors should be changed by resolution ofthe board ofdirectors, any increase or
decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as
possible, but in no case shall a decrease in the number ofdirectors shorten the term ofany incumbent director.
2. A director shall hold office until the annual meeting for the year in which his or her term shall expire and until his or her successor
shall have been elected and qualified, subject, however, to prior death, resignation, retirement or removal from office. Any
newly created directorship resulting from an increase in the number ofdirectors and any other vacancy on the board ofdirectors,
however caused, may be filled by the affirmative vote of a majority of the directors then in office, although less than a quorum,
or by a sole remaining director.
3. One or more of the directors may be removed with or without cause by unanimous written consent of holders of the shares entitled
to vote thereon or by the affirmative vote of the holders of not less than two-thirds of the shares entitled to vote thereon at a
meeting ofthe shareholders called expressly for that purpose; provided, however, that for as long as the corporation shall have
cumulative voting, if fewer than all the directors should be candidates for removal, no one of them shall be removed if the votes
cast against his or her removal
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Exhibit 3b
would be sufficient to elect him or her if then cumulatively voted at an election of the class of directors of which he or she shall
be a part.
4. No person, except those persons nominated by the board, shall be eligible for election as a director at any annual or special meeting
of shareholders unless a written request that his or her name be placed in nomination shall be received from a shareholder of
record entitled to vote at such election by the secretary ofthe corporation not later than the latter of(a) the thirtieth day prior to
the date fixed for the meeting, or (b) the tenth day after the mailing of notice of that meeting, together with the written consent of
the nominee to serve as a director.
B. Notwithstanding the provisions of subdivision A. above, whenever the holders of any one or more classes of the capital stock of the
corporation shall have the right, voting separately as a class or classes, to elect directors at an annual or special meeting of
shareholders, the election, term ofoffice, filling ofvacancies and other features ofsuch directorships shall be governed by the
provisions ofthese Restated Articles oflncorporation applicable thereto. Directors so elected shall not be divided into classes unless
expressly provided by such provisions, and during their prescribed terms ofoffice, the board ofdirectors shall consist ofsuch
directors in addition to the directors determined as provided in subdivision A. above.
C. This Article IV may not be repealed or amended in any respect unless such action shall be approved by unanimous written consent of
holders of the shares entitled to vote thereon or by the affirmative vote of the holders of not less than rwo-thirds of the shares entitled
to vote at an election of directors determined as provided in subdivision A. above, at a meeting of the shareholders called expressly
for that purpose.
ARTICLE V
No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for conduct as a
director; provided thai this Article VI shall not eliminate the liability of a director for any act or omission for which such elimination of
liability i; not permitted under the Oregon Business Corporation Act. No amendment to the Oregon Business Corporation Act that further
limits the acts or omissions for which elimination of liability is permitted shall affect the liability of a director for any act or omission
which occurs prior to the effective date of such amendment.
ARTICLE VI
The corporation shall indemnifu to the fullest extent then permitted by law any person who is made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise
linctuding an action, suit or proceeding by or in the right ofthe corporation) by reason ofthe fact that the person is or was a director or
officer ofthe corporation or is or was serving at the request of the corporation as a director or officer of another corporation, partnership,
joint venture, tnrit or other enterprise against all judgments, amounts paid in settlement, fines and such expenses (including attorneys'
fees), actually and reasonably incurred in connection therewith. This Article shall not be deemed exclusive of any other provisions for
indemnification of directors and officers that may be included in any statute, bylaw, agreement, vote of shareholders or directors or
otherwise, both as to action in any official capacity and as to action in another capacity while holding an office.
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GEM STATE WATER COMPANY
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Exhiblt 3b
ARTICLE VII
The initial physical address for the Corporation is One Pacific Square, 220 NW Second Avenue, Portland, Oregon gT2}g,Atfr: General
Counsel. David H. Anderson is an authorized individual with direct knowledge of the operations and business activities of the
Corporation.
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GEM STATEWATER COMPANY
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Exhibit l0ll
AI\NUAL INCENTTVE PLAN
I\"W Natural Gas Storage LLC
(ttcompany", ot ttthe company")
PT'RPOSE
The purpose of the Annual Incentive Plan (AIP) 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 cornmences a new Progmm Term. Each Program Term will begin
on January 1 and conclude on December 31.
PARTICIPATION
All NBU regular employees of the company are eligible to participate in the Annual Incentive Plan. For all purposes of this AIP, a
person whJis * e*pioye" of Northwest Natural Gas Company (NW Natural) on full-time assignmenl to the company and
designated by the Company Board of Directors (BOD) shall be considered to be a regular employee of the company during the
period of thit full-time assignment. In these situations, a designated participant in this AIP shall not be eligible for incentive
compensation from NW Natural.
IYW Natural Oversight
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 affects an award to the President shall be subject to and conditioned upon the apprwal
of that decision by the Board of Directors of NW Natural or as delegated by the Board of Directors of NW Natural to the
Organization and Executive Compensation Committee.
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. In addition, the Participant must be employed on the date of the plan payout to be eligible for any award for the
Program Temr unless the Participants' employm.ent is terminated prior to the payout date of the Program Term due to one of the
following: retirement(*), disability or death, Board approved exception due disposition of an affiliated business which results in the
participant's termination of employment with NWNGS. Prorated awards will be determined by prorating the Participant's final
iwardby the number of days employed during the Program Term. [n the case of a Board approved exception due to disposition of an
affiliated business occurring during the Program Term, the participant's prorated award will be based upon their target award and not
actual Company performance for the Program Term. Such award will be paid within thirty (30) days following
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GEM STATE WATER COMPANY
Page 1&l of210
the completion of the transition period as defined by the Board. The disposition of Gill Ranch Storage qualifies as Board approved
and the Board will define the end of the transition period. However, participating employees with Company approved Reiention
Agreements, will be eligible for prorated AIP awards consistent with such agreements.
Employees who transfer to or from employme-nt or full-time assignment to Northwest Natural or another subsidiary will be eligiblefor a prorated award based upon the number of days they were eligible to participate in the AIP.
(*) Retirement is defined as a minimum of 5 years of service (with the company or with an affiliate company) and age and service
equals 70.
INCENTIVE TARGETS
Target incentive award opportunities will be established by salary grade for each Plan Year and approved by the Board of Directors.
The target incentive levels for each salary grade are shown in Exhibit t to the Plan document for ihe Plan Year. The target incentiveopportunity is assigned by salary grade and calculated by multiplying the Target Incentive percentage times the followlng for each
employee category:
NBU salary Paid/Exempt - Annual Base Salary as of December 3 l"t of the plan year
NBU Hourly Paid/Ilon-Exempt - Actual eligible earnings, including regular pay, overtim e pay, & lump sum merit payments
INCENTIVE T'ORMT'LA
The formula for calculating the incentive award for the Program Term is as follows:
Participant Award =
Target Award X ((CPF X CPF Factor Weight) + (IPF X IpF Factor Weight))
COMPAI{Y PERFORMAI\CE FACTOR (CPF)
The company performance goals in the Plan are intended to align the interest of Participants with those of the company. The goals
and the formula for determining the Company Performance Factor will be established by the NW Natural Gas Storage, LLC Boardof Directors (the "Board of Directors") at the start of each Program Term and set forth as Exhibit ll. After the goals and formula areestablished for a Program Term, the Board of Directors retains discretion to modiff the goals and formula, including adjusting the
calculation of any financial or other goal to eliminate the effects of significant extraordinary, non-recurring or unplanned iiems. -
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INDIVIDUAL PBRFORMANCE FACTOR (IPF)
The IpF weight used in calculating the Individual Performance Factor will be established for each Participant by the President,
subject to the-approval of the Board of Directors at the beginning of the Program Term. Individual goals for each Participant will be
.rtubli.h"d by ihe Participant's leader (subject to the appioval ofthe President, and for the President subject to the approval ofthe
Board of Dirlctors) at thi beginning oi .aih P.ogrurn term. Performance against these goals will be assessed by the Participant's
leader at the end ofthe Progrim Term (subject to the approval ofthe President, and for the President subject to the approval ofthe
Board of Directors). This issessment will result in a-rating on a scale of 0 to 1.5 (the "Individual Performance Factor"). The
Participant will not receive an award if the Individual Perfomrance Factor is less than 0.5.
ADMINISTRATION
Awards will be calculated and paid no later than March 15 following the end of the Program Term. Awards are subject to tax
withholding unless the Participant made a prior election to defer the Award under the terms of the NW Natural Gas Company
Deferred C*ompensation Plan for Directors and Executives if they are eligible for this plan. All awards shall be audited and approved
by the Board of Directors prior to payment.
The plan shall be administered by the Board of Directors. Except to the extent provided under "NW Natural Oversight" above. The
Board of Directors shall have ihe exclusive authority and responsibility for all matters in connection with the operation and
administration of the Plan. Except to the extent provided under "N-W Natural Oversight: above. Decisions by the Board of Directors
shall be final and binding upon all parties affected by the Plan, including the beneficiaries of Participants.
The Board of Directors may rely on information and recommendations provided by management. The Board of Directors may
delegate to management the responsibility for decisions that it may make or actions that it may take under the terms of the Plan,
subjict to the Board of Directors r"served right to review such decisions or actions and modiff them wiennecessary or appropriate
under the circumstances. The Board of Directors shall not allow any employee to obtain control over decisions or actions that affect
that employee's Plan benefits.
AMENDMENTS AND TERMINATION
The Board of Directors has the power to terminate this Plan at any time or to amend this Plan at any time and in any manner that it
may deem advisable.
EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page 166 of210
J
Exhlblt 10o
As amended
effective October 1, 2018
NORTHWEST NATURAL GAS COMPANY
EXECUTIVE ANNUAL INCENTIVE PLAN
This amended Executive Annual Incentive Plan (the "Plan") is executed by Northwest Natural Gas Company, an Oregon corporation(the "Company"), effective October l, 2018. Effective October l, 2018, the Company became a wholly-owned subsidiary of
Northwest Natural Holding Company ("Parent") and holders of Company common stock became holders oi Parent common stock("Parent Common Stock").
PURPOSE OF PLAN
The success of the Company is dependent upon its ability to attract and retain the services of key executives of the highest
competence and to provide incentives for superior performance. The purpose of the plan is to advance the interests of the Comlany
and its shareholders through an incentive compensation program that will altact and retain key executives and motivate them to
achieve performance goals.
PROGRAM TERM
This Plan is an annual incentive plan and each new calendar year cornmences a new Program Term. Each Program Term will begin
on January 1 and conclude on December 3 l.
PARTICIPATION
All executive officers of the company and any other highly compensated employees as designated by the Company,s Organization
and Executive Compensation Committee (the "Committee") are eligible to receive awards ("Awards;') under the Executive Annual
Incentive Plan.
At the beginning of each Program Term, the Committee shall determine eligibility for Awards and establish for each participant, the
target incentive level as a percentage of year-end annualized based salary ("Target Award"). This information will be set forth inExhibit I of the Plan document for the Program Term. Each such participating employee shall be referred to as a "participant.,'
To be eligible for payout of an Award the Participant must have a minimum of three months of service during the program Term. If
the Participant is a new employee or is newly eligible to participate in the Plan, that Participant must be in an eligible position on or
before September 30 of the Program Term and will receive a prorated Award. tn addition, the Participant must be employed by the
Company or Parent on December 31 of the Program Term to be eligible for payout of the Award for the Program Term unless theParticipant is eligible for a prorated Award as provided in the next sentence. Eligibility for a prorated Award occurs when a
Participant has
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 167 of210
Exhibit l0o
three or more months of participation in the Program Term but the Participant's employment is terminated prior to December 31 of
the program Term due to one of the following: Retirement (unless such Retirement results from a termination of the Participant's
employment by the Company or Parent for Cause), disability and death. Prorated Awards will be determined by prorating the
Participant's final Award by the number of days employed during the Program Term.
..Retirement" shall mean termination of employment after Participant is (a) age 62 with at least five years of service as an employee
of the Company and parent, or (b) age 55 with age plus years of service (including fractions) as an employee of the Company and
Parent totaling at least 70.
,,Cause" shall mean (a) the willful and continued failure by a Participant to perform substantially the Participant's assigned duties
with the Company or parent (other than any such failure resulting from incapacity due to physical or mental illness) after a demand
for substantiai performance is delivered to the Participant by the Company or Parent which specifically identifies the manner in
which the participant has not substantially performed such duties, (b) willful commission by a Participant of an act of fraud or
dishonesty resulting in economic or financial injury to the Company or Parent, (c) willful misconduct by a Participant that
substantially impaiis the Company's or Parent's business or reputation, or (d) willful gross negligence by a Participant in the
performance of his or her duties.
In the event of a change in job position during the Program Term, the Committee may, in its discretion, increase or decrease the
amount of a Participant's Award to reflect such change.
INCENTIVE FORMULA
The formula for calculating Awards for each Program Term is as follows
Target
Award x I f r*tffrnactorX"#Jfi:"'). (
Priority/Individual
Performance Factor
(IPF)
P/IPFX Factor
Weight
Participant
Award)l:
COMPANY PERFORMANCE FACTOR
The Company performance goals in the Plan are intended to align the interest of Participants with those of the shareholders. The
goals and the formula for determining the Company Performance Factor will be established by the Committee at the start of each
Frogru- Term and set forth as Exhibit II. The Committee may, at any time, approve adjustments to the calculation of the results
undir any Company performance goal to take into account such unanticipated circumstances or significant, non-recurring or
unplanned events asthe Committee may determine in its sole discretion, and such adjustments may increase or decrease the results.
possible circumstances that may be the basis for adjustments shall include, but not be limited to, any change in applicable accounting
rules or principles; any gain or loss on the disposition of a business; impairment of assets; dilution caused by acquiring a business;
tax changes and tax
2
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 168 of210
Exhlblt 10o
impacts of other changes; changes in applicable laws and regulations; changes in rate case timing; changes in the Company,s
structure; and any other circumstances outside of management,s control.
PRTORITY/INDTVIDUAL PERFORMANCE FACTOR
The PIIPF weight used in calculating the Priorityflndividual Performance Factor will be established for each participant by the
Committee at the beginning of the Program Term and set forth as part of Exhibit I. Also included in Exhibit I will be the CpF Factor
Weight for the Company Performance Factor. Priority/Individual goals for each Participant will be established at the beginning of
each Program Term and performance against these goals will be assessed by the Participant's superior and approved by the C.E.O. atthe end of the Program Term. This assessment will result in a rating on a scale of TYo to 175%. This rating is called thePriorityAndividual Performance Factor. The Participant will not receive a payout under the priorityflndividual performance
component of an Award if the Priority/Individual Performance Factor is less than 50%.
ADMINISTRATION
Award payouts will be calculated and paid no later than the March 15 following the end of the Program Term. Award payouts are
subject to tax withholding unless the Participant made a prior election to defer the Award payout under the terms of the Defened
Compensation Plan for Directors and Executives ("DCP").
All Award payouts shall be audited by the Intemal Audit department and approved by the Committee prior to payment.
The Plan shall be administered by the Committee. The Committee shall have the exclusive authority and responsibility for all mattersin connection with the operation and administration of the Plan. Decisions by the Commiffee shall be final and binding upon allparties affected by the Plan, including the beneficiaries of Participants.
The Committee may rely on information and recommendations provided by management. The Committee may delegate to
management the responsibility for decisions that it may make or actions that it may take under the terms of the plan, subject to theCommittee's reserved right to review such decisions or actions and modiff them when necessary or appropriate under the
circumstances' The Committee shall not allow any employee to obtain control over decisions or actions that affecithat employee,s
Plan benefits.
RECOUPMENT ON EARNINGS RESTATEMENT
If at any time before a Change in Control and within three years after the payout of Awards for a Program Term, parent's financial
statements for that Program Term are the subject of a restatement due to the Misconduct of any person, each Participant whoreceived an Award payout for that Program Term (whether or not such Participant was personally involved in such Misconduct)
shall repay to the Company the Excess Bonus Compensation (as defined below). For purposes of the Plan, "Excess Bonus
Compensation" for any Participant means the positive
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 169 of210
3
Exhlbit 10o
difference, if any, between (i) the Participant's Award payout as originally calculated, and (ii) the Participant's Award payout as
recalculated with the results for Company performance goals being based on Parent's financial statements as restated- Excess Bonus
Compensation shall not include any amounts in respect of any individual performance goals or in respect of Company performance
goals that are not measured in whoie or in part on financial results reported in Parent's financial statements. The Committee may, in
its sole discretion, reduce the amount of Excess Bonus Compensation to be repaid by any Participant to take into account the tax
consequences ofsuch repayment for the Participant.
If any portion of an Award payout was deferred under the DCP, any Excess Bonus Compensation to be repaid with respect to that
Award shall first be recoverediy canceling all or a portion of the amount so deferred under the DCP and any interest credited under
the DCp with respect to such cancelled amount. The Company may seek direct repayment from the Participant of any Excess Bonus
Compensation noi ,o recovered and may, to the extent permitted by applicable law, offset such Excess Bonus Compensation against
*y io-p"nsation or other amounts owed by the Company to the Participant. In particular, Excess Bonus Compensation may be
,..or"r"d by oftset against the after-tax proceeds of deferred compensation payouts under the DCP, the Company's Executive
Supplemental Retirement lncome Plan or the Company's Supplemental Executive Retirement PIan at the times such deferred
compensation payouts occur under the terms of those plans. Excess Bonus Compensation that remains unpaid for more than 60 days
afteidemand Uy it e Company shall accrue interest at the rate used from time to time for crediting interest under the DCP-
..Misconduct, shall mean (a) willful commission by any person of an act of fraud or dishonesty or (b) willful gross negligence by
any person in the performance of his or her duties.
,,Change in Control" shall mean the occurrence of any of the following events:
(a) The consummation of,
(i) any consolidation, merger or plan of share exchange involving Parent (a "Merger") as a result of which the
holders of outstanding securities of Parent ordinarily having the right to vote for the election of directors ("Voting Securities")
immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting
Securities of the surviving corporation or a parent corporation of the surviving corporation immediately after the Merger,
disregarding any Voting Securities issued to or retained by such holders in respect of securities of any other party to the Merger;
(ii) any consolidation, merger, plan of share exchange or other transaction involving the Company as a result of
which parent does not continue to hold, directly or indirectly. at least 50% of the outstanding securities of the Company ordinarily
having the right to vote for the election ofdirectors; or
(iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or
substantially all, the assets of Parent orthe Company;
(b) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted
Parent's Board of Directors ("Incumbent Directors") shall
4
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 170 of210
Exhiblt 10o
cease for any reason to constitute at least a majority thereof; provided, however, that the term "Incumbent Director" shall also
include each new director elected during such two-year period whose nomination or election was approved by trvo+hirds of the
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 of a tender or exchange offer, open market purchases or privately
negotiated purchases from anyone other than Patent, have become the beneficial owner (within the meaning oiRule l3d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing twenty percent (20%) or more of the
combined voting power of the then outstanding Voting Securities.
rhe Board has the power to terminate ,.,, ,,#il,f":::":HH:'il** and in any manner that it may deem
advisable.
IN WITNESS WHEREOF this Plan was duly amended effective as of October l, 2018.
NORTHWEST NATURAL GAS COMPANY
By: /s/ DAVID H. ANDERSON
David H. Anderson
President and Chief Executive Officer
5
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 171 ol 210
Exhlblt 10o
Exhibit I
Effective January 1, 2021
Participants, Target Awards and lndividual Performance
Program Term: January 1,2021- December31,2021
6
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 172 ot210
Company Performance Factor Formula:
Net lncome
Component X71.43o/o(
Exhibit ll
Company Performance Factor
Program Term: January 1,2021- December 31,2021
Exhlbtt 10o
Company
Performance Factor
+
Net lncome Gomponent:
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.
Notes on Nl Component:
1) Values between those shown above will be interpolated using the formula shown below:
Regression lnterpolation Line for Nl between $_ and $_ ir y =- _ and line for Nl between It
and $- is y =
--x
where X is the Nl resulte for the year
2) Final Nl Number will be rounded to two places to the right of the decimal. This will be the same number as reported to shareholders before any
approved exceptions.
7
Operations
Component X28.57o/o
2021 Nl Results NI Performance Component
0o/o
50o/o
10Oo/o
175o/o
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 173 of210
Exhlblt 10o
Operations Component:
The Operations Component (which aligns with NBU incentive goals) for 2021will be determined using the following
formula and table:
Sum of Goa[ Perfounance Rating x Goal Weight
2O21 Operational Goals
Operations Component Factor(l))
Goals Goal Performance Rating Goal Weight
Customer Satlsfactionr)Cust. Sat. Ratino
_Oo/o
-
'l0oo/o
200%
16.6670/o
Customer Satisfaction
(Staff Interaction)
Cust. Sat. Ratino
-oo/o
_100%
2OOo/o
16.667o/o
Martet Share & Growth
(Total New Meter Sets)
IstallJew Ratlno
Meter Sets
_00h
-100o/o
2o0o/o
16-6670/"
Publlc Safety - Damages
(% of calls Wresponse time less than 45 minutes)
o/o Gall Rso. Ratino
_0o/o_ 100%
200o/o
16.667%
Publlc Safety - Odor Response
(% of calls w/response time less than 45 minutes)
o/o Gall Rso. Ratino
-lYo-
100o/o
200o/o
16.6670/o
Employee Safety
Each factor weighted 50%
DART Rate
Days Away Restricted Time
PMVC
No. of Preventable Motor Vehicle Collison
(There will be no payout under this metric in the event
of an on the job employee fatality due to a preventable
safety incident)
DART RateBallng
-0o/o
_ 100%
200%
16.667%
PMVG Ratino_0%
-
1OOo/o
2OOo/"
rOTAL lOOo/o
8
EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page 174 ot210
Exhlblt 10o
Notes on Operations Goals:
1) Goal ratings will be interpolated between amounts shown.
2) The Goal Performance Rating for each goal is limited lo 200%.
3) The Operations Component is limited lo 200o/o and the aggregate performance from this component for use in the EAIP is limited lo 1l5o/o
Flnal Notes on Company Performance Factor and General:
1) Final EAIP Participant Awards to participants will be rounded up to the nearest $1,OOO.
2) Final Nl results for 2021 could be adjusted for the impact of certain events as determined by the OECC.
9
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 175 of210
Exhibit l0w
PERFORMANCE SHARE LONG TERM INCENTIVE AGREEMENT
This Agreement is entered into as of February _,2021, between Northwest Natural Holding Company, an Oregon
corporation (the "Company''), and ("Recipient").
On February 24,2021,the Organization and Executive Compensation Committee (the "Commiffee") of the Company's
Board of Directors (the "Board") authorized a performance-based stock award (the "Award") to Recipient pursuant to Section 6 of
the Company's Long Term lncentive Plan (the "Plan"). Recipient desires to accept the Award subject to the terms and conditions of
this Agreement.
NOW, THEREFORE, the parties agree as follows:
l. Award. Subject to the terms and conditions of this Agreement, the Company shall issue or otherwise deliver to the
Recipient the number of shares of Common Stock of the Company (the "Performance Shares") determined under this Agreement
based on (a) the performance of the Company during the three-year period from January 1,2021to December 31,2023 (the "Award
Period") as described in Section 2 and (b) Recipient's continued employment during the Award Period as described in Section 3. If
the Company issues or otherwise delivers Performance Shares to Recipient, the Company shall also pay to Recipient the amount of
cash determined under Section 4 (the "Dividend Equivalent Cash Award"). Recipient's "Target Share Amount" for purposes of this
Agreement is _ shares
2. Performance Conditions.
2.1 Payout Factor. Subject to possible reduction under Section 3, the number of Performance Shares to be issued or
otherwise delivered to Recipient shall be determined by multiplying the Payout Factor (as defined below) by the Target Share
Amount. The "Payout Factor" shall be equal to (a) the TSR Modifier as determined under Section 2.2, multiplied bV (b) the EPS
Payout Factor as determined under Section 2.3 below; provided, however, that the Payout Factor shall not be greater than200Yo and
the Payout Factor shall be 0% if the ROIC Performance Threshold (as defined in Section 2.4 below) is not satisfied. Notwithstanding
the foregoing, if a Change in Control (as defined in Section 3.7) occurs before the last day of the Award Period, the Payout Factor
shall be 100%.
2.2 TSR Modifier.
(a) The "TSR Modifier" shall be determined under the table below based on the TSR Percentile Rank (as
defined below) of the Company:
TSR Percentile Rank TSR Modifier
less than 25%
25o/o to'75oh
morethanT5o/o
75%
100%
125%
(b) To determine the Company's "TSR Percentile Rank," the TSR of the Company and each of the Peer
Group Companies (as defined below) shall be calculated, and the Peer Group Companies shall be ranked based on their respective
TSR's from lowest to
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 176 of 210
highest. If the Company's TSR is equal to the TSR of any other Peer Group Company, the Company's TSR Percentile Rank shall be
equal to the number of Peer Group Companies with a lower TSR divided by the number that is one less than the total number of Peer
Group Companies, with the resulting amount expressed as a percentage and rounded to the nearest tenth of a percentage point. If the
Company's TSR is between the TSRs of any two Peer Group Companies, the TSR Percentile Ranks of those two Peer Group
Companies shall be determined as set forth in the preceding sentence, and the Company's TSR Percentile Rank shall be interpolated
as follows. The excess of the Company's TSR over the TSR of the lower Peer Group Company shall be divided by the excess of the
TSR of the higher Peer Group Company over the TSR of the lower Peer Group Company. The resulting fraction shall be multiplied
by the difference between the TSR Percentile Ranks of the two Peer Group Companies. The product of that calculation shall be
added to the TSR Percentile Rank of the lower Peer Group Company, and the resulting sum (rounded to the nearest tenth of a
percentage point) shall be the Company's TSR Percentile Rank. The intent of this definition of TSR Percentile Rank is to produce
the same result as calculated using the PERCENTRANK function in Microsoft Excel to determine the rank of the Company's TSR
within the array consisting of the TSRs of the Peer Group Companies.
(c) The "Peer Group Companies" consist of those companies set forth on Exhibit A that continue to have
publicly-haded common stock through December 31,2023.
(d) The "TSR" for the Company and each Peer Group Company shall be calculated by (1) assuming that
$100 is invested in the common stock of the company at a price equal to the average of the closing market prices of the stock for the
period from October 1,2020 to December 31,2020, (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 of shares held is reinvested in additional shares at a price equal to the
closing market price of the stock on the ex-dividend date for the dividend, and (3) determining the final dollar value of the total
assumed number of shares based on the average of the closing market prices of the stock for the period from October 1,2023 to
December 31,2023. The "TSR" shall then equal the amount determined by subtracting $100 from the foregoing final dollar value,
dividing the result by 100 and expressing the resulting fraction as a percentage.
(e) If during the Award Period any Peer Group Company enters into an agreement pursuant to which all or
substantially all of the stock or assets of the Peer Group Company will be acquired by a third party (a "signed Acquisition"), and if
the Signed Acquisition is not completed by the end of the Award Period, then that company shall not be a Peer Group Company. If a
Signed Acquisition of a Peer Group Company is terminated (other than in connection with the execution of another Signed
Acquisition) before the end of the Award Period, then that company shall remain a Peer Group Company, and the TSR for that peer
Group Company shall be calculated as provided in Section 2.2(d), except that if the announcement of the temrination of the Signed
Acquisition occurs during the last three months of the Award Period, for purposes of determining the final dollar value under clause
(3) of Section 2.2(d), the three-month period for which closing market prices are averaged shall be shortened to exclude any trading
days preceding the announcement of the termination of the Signed Acquisition.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page177 of21O
2
2.3 EPS Payout Factor.
(a) The "EPS Payout Factor" shall be determined under the table below based on the Cumulative EPS
Achievement Percentage (as defined below) achieved by the Company for the Award Period:
Cumulative EPS Achievement
Percentage EPS Payout Factor
less than 93%
93%
r00%
105%o or more
0o/o
40%
100%
185%
If the Company's Cumulative EPS Achievement Percentage is between any two data points set forth in the first column of the above
table, the EPS Payout Factor shall be interpolated as follows. The excess of the Company's Cumulative EPS Achievement
Percentage over the Cumulative EPS Achievement Percentage of the lower data point shall be divided by the excess of the
Cumulative EPS Achievement Percentage of the higher data point over the Cumulative EPS Achievement Percentage of the lower
data point. The resulting fraction shall be multiplied by the difference between the EPS Payout Factors in the above table
corresponding to the two data points. The product ofthat calculation shall be rounded to the nearest hundredth ofa percentage point
and then added to the EPS Payout Factor in the above table corresponding to the lower data point, and the resulting sum shall be the
EPS Payout Factor.
(b) The Company's "Cumulative EPS Achievement Percentage" for the Award Period shall equal the
Cumulative EPS (as defined below) divided by the Cumulative EPS Target (as defined below), expressed as a percentage and
rounded to the nearest tenth of a percentage point.
(c) The Company's "Cumulative EPS" for the Award Period shall equal the sum of the Company's diluted
earnings per share of common stock ("EPS") for each of the three years in the Award Period. Subject to adjustment in accordance
with Section 2.5 below, the Company's diluted earnings per share of common stock for any year shall be as set forth in the audited
consolidated financial statements of the Company and its subsidiaries for that year. After giving effect to any adjustments required
by Section 2.5,the EPS for each year shall be rounded to the nearest penny.
(d) The Company's "Cumulative EPS Target" for the Award Period shall equal the sum of the EPS targets
approved by the Committee for each of the three years in the Award Period. The EPS target for the first year of the Award Period as
approved by the Committee is $_. Within the first 90 days of the second year of the Award Period, the Committee shall approve
the EPS target for that year. Within the first 90 days of the third year of the Award Period, the Committee shall approve the EPS
target for that year.
J
EXHIBIT 2
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GEM STATE WATER COMPANY
Page 178 ot 210
2.4 ROIC Performance Threshold.
(a) For purposes of this Agreement, the "ROIC Performance Threshold" shall be satisfied if the Company's
Average RoIC (as defined below) for the Award Period is greater than or equal to _%.
(b) The Company's "Average ROIC" for the Award Period shall equal the simple average of the Company's
ROIC (as defined below) for each of the three years in the Award Period, rounded to the nearest hundredth of a percentage point.
The Company's "ROIC" for any year shall be calculated by dividing the Company's Adjusted Net Income 1as dlfined below) for the
year by the Company's Average Long Term Capital (as defined below) for the year, and rounding the result to the nearest hundredth
of a percentage point. Subject to adjustment in accordance with Section 2.5 below, the Company's "Adjusted Net Income" for any
year shall be equal to the Company's net income for the year, increased by the Company's interest expense, net for the year and
reduced by the Company's interest income (including net interest on deferred regulatory accounts) for the year, in each case as setforth in the Company's Annual Report on Form 10-K for that year. "Average Long Term Capital" for any year shall mean the
average of the Company's Long Term Capital (as defined below) as of the last day of the year and the Company's Long Term
Capital as of the last day of the prior year. Subject to adjustment in accordance with Section 2.5 below, "Long Term Capital" as of
any date shall equal the sum of the Company's total shareholders' equity as of that date and the Company's long-term debt
(including current maturities) as of that date, in each case as set forth on the audited consolidated balance sheet of the Company as of
that date.
2.5 EPS and ROIC Adjustments. The Committee may, at any time, approve adjustments to the calculation of
Cumulative EPS and/or Average ROIC to take into account such unanticipated circumstances or significant, non-recurring or
unplanned events as the Committee may determine in its sole discretion, and such adjustrnents may increase or decrease Cumulative
EPS andlor Average ROIC. Possible circumstances that may be the basis for adjustments shall include, but not be limited to, any
change in applicable accounting rules or principles; any gain or loss on the disposition of a business; impairment of assets; dilution
caused by Board approved business acquisition; tax changes and tax impacts ofother changes; changes in applicable laws and
regulations; changes in rate case timing; changes in the Company's structure; and any other circumstances outside of management's
control.
3. Employment Condition.
3.1 Except as provided in Sections 3.2,3.3 or 7.2, in order to receive a payout of Performance Shares, Recipient
must be employed by the Company or any parent or subsidiary of the Company (the "Employer") on the last day of the Award
Period.
3.2 If Recipient's employment by the Employer is terminated at any time prior to the end of the Award Period
because of death, physical disability (within the meaning of Section 22(e)(3) of the Intemal Revenue Code of 1986 (the'.Code,')), or
Retirement (unless such Retirement results from a termination of Recipient's employment by the Employer for Cause), Recipient
shall be entitled to receive a pro-rated award. The number of Performance Shares to be issued or otherwise delivered as a pro-rated
award under this Section 3.2 shall be determined
4
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 179 of210
by multiplying the number of Performance Shaxes determined under Section2by a fraction, the numerator of which is the number of
days Recipient was employed by Employer during the Award Period and the denominator of which is the number of days in the
Award period. If Reciplent's employment by the Employer terminates because of Retirement, death or physical disability and a
Change in Control subsequently occurs before the end of the Award Period, the number of Performance Shares determined under
Section 3.3 shall immediately be paid to Recipient. If a Change in Control occurs and Recipient's employment by the Employer
subsequently terminates before the end of the Award Period because of Retirement, death or physical disability, the number of
Performance Shares determined under Section 3.3 shall immediately be paid to Recipient.
3.3 CIC Acceleration.
(a) If Recipient is a party to a Change in Control Severance Agreement with the Company or a parent or
subsidiary of the Company, Recipient shall immediately be paid a pro-rated award if Recipient becomes entitled to a Change in
Control Severance Benefit (as defined below). The number of Performance Shares to be issued or otherwise delivered as a pro-rated
award under this Section 3.3 shall be determined by multiplying the Target Share Amount by a fraction, the numerator of which is
the number of days Recipient was employed by the Employer during the Award Period and the denominator of which is the number
of days in the Award Period. A "Change in Control Severance Benefit" means the severance benefit provided for in Recipient's
Change in Control Severance Agreement with the Company or a parent or subsidiary of the Company; provided, however, that such
severance benefit is a "Change in Control Severance Benefit" for purposes of this Agreement only if, under the terms of Recipient's
Change in Control Severance Agreement, Recipient becomes entitled to the severance benefit (i) after a Change in Control of the
Comfany has occurred, (ii) because Recipient's employment with the Employer has been terminated by Recipient for good reason in
accordance with the terms and conditions of the Change in Control Severance Agreement or by the Employer other than for cause,
and (iii) because Recipient has satisfied any other conditions or requirements specified in the Change in Control Severance
Agreement and necesiary for Recipient to become entitled to receive the severance benefit. For purposes of this Section 3.3(a), the
teins "change in control," "good reason,o' "cause" and "disability" shall have the meanings set forth in Recipient's Change in
Control Severance Agreement.
(b) If Recipient is not a party to a Change in Control Severance Agreement with the Company or a parent or
subsidiary of the Company, Recipient shall immediately be paid a pro-rated award in the amount stated in Section 3.3(a) if a Change
in Control (as defined in Section 3.7 below) occurs and at any time after the earlier of Shareholder Approval (as defined in Section
3.8 below), if any, or the Change in Control and on or before the second anniversary of the Change in Control, (i) Recipient's
employment is terminated by the Employer (or its successor) without Cause (as defined in Section 3.6 below), or (b) Recipient's
employment is terminated by Recipient for Good Reason (as defined in Section 3.9 below).
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3.4 If Recipient's employment by the Employer is temrinated at any time prior to the end of the Award Period and
Section 3 .2, 3.3 or 7.2 does not apply to such termination, Recipient shall not be entitled to receive any Performance Shares.
3.5 "Retirement" shall mean termination of employment (a) on or after the first anniversary of the date of this
Agreement, and (b) after Recipient is (1) age 62 with at least five years of service as an employee of the Company or a parent or
subsidiary of the Company, or (2) age 60 with age plus years of service (including fractions) as an employee of the Company or a
parent or subsidiary of the Company totaling at least 70.
3.6 "Cause" shall mean (a) the willful and continued failure by Recipient to perform substantially Recipient's
assigned duties with the Employer (other than any such failure resulting from incapacity due to physical or mental illness) after a
demand for substantial performance is delivered to Recipient by the Employer which specifically identifies the manner in which
Recipient has not substantially performed such duties, (b) willful commission by Recipient of an act of fraud or dishonesty resulting
in economic or financial injury to the Company or Employer, (c) willful misconduct by Recipient that substantially impairs the
business or reputation of the Company or Employer, or (d) willful gross negligence by Recipient in the performance of his or her
duties.
3.7 For purposes of this Agreement, a "Change in Control" of the Company shall mean the occrrrrence of any of the
following events:
(a) The consummation of:
(l) any consolidation, merger or plan of share exchange involving the Company (a "Merger") as a
result of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors
("Voting Securities") immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the
outstanding Voting Securities of the surviving corporation or a parent corporation of the surviving corporation immediately after the
Merger, disregarding any Voting Securities issued to or retained by such holders in respect of securities of any other party to the
Merger; or
(2) any consolidation, merger, plan of share exchange or other transaction involving Northwest
Natural Gas Company ("NW Natural") as a result of which the Company does not continue to hold, directly or indirectly, at least
50% of the outstanding securities of NW Natural ordinarily having the right to vote for the election of directors; or
(3) any sale, lease, exchange or other transfer (in one transaction or a series ofrelated transactions) of
all, or substantially all, the assets of the Company or NW Natural;
(b) At any time during a period of two consecutive years, individuals who at the beginning of such period
constituted the Board ("Incumbent Directors") shall cease for any reason to constitute at least a majority thereof; provided, however,
that the term "Incumbent Director" shall also include each new director elected during such two-year period
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whose nomination or election was approved by twothirds of the lncumbent Directors then in office; or
(c) Any person (as such term is used in Section 14(d) of the Securities Exchange Act of 1934, other than the
Company or any employee benefit plan sponsored by the Company orNW Natural) shall, as a result of a tender or exchange offer,
openmarket purchases or privately negotiated purchases from anyone other than the Company, have become the beneficial owner
(within the mianing of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities
representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities.
3.8 For purposes of this Agreement, "shareholder Approval" shall be deemed to have occurred if the shareholders of
the Company approve an agreement entered into by the Company, the consummation of which would result in the occurrence of a
Change in Control.
3.9 For purposes of this Agreement, "Good Reason" shall mean the occurrence after Shareholder Approval, if
applicable, or the Change in Control, of any of the following circumstances, but only if (x) Recipient gives notice to Employer of
[ecipient's intent to terminate employment for Good Reason within 30 days after the later of (l) notice to Recipient of such
circumstances, or (2) the Change in Control, and (y) such circumstances are not fully conected by the Employer within 90 days after
Recipient's notice:
(a) the assignment to Recipient of a different title, job or responsibilities that results in a decrease in the level
of Recipient's responsibility; provided that Good Reason shall not exist if Recipient continues to have the same or a greater general
level of responsibility for the former Employer operations after the Change in Control as Recipient had prior to the Change in
Control even though such responsibilities have necessarily changed due to the former Employer operations becoming a subsidiary or
division of the surviving company;
(b) a reduction by the Employer in Recipient's base salary as in effect immediately prior to the earlier of
Shareholder Approval, if applicable, or the Change in Control;
(c) the failure by Employer to continue in effect any employee benefit or incentive plan in which Recipient is
participating immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control (or plans providing
Recipiint *ith ut least substantially similar benefits) other than as a result of the normal expiration of any such plan in accordance
with its terms as in effect immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control, or the
taking of any action, or the failure to act, by Employer which would adversely affect Recipient's continued participation in any of
such plans on at least as favorable a basis to Recipient as is the case immediately prior to the earlier of Shareholder Approval, if
applicable, or the Change in Control or which would materially reduce Recipient's benefits in the future under any of such plans or
aepfive Recipient of any material benefit enjoyed by Recipient immediately prior to the earlier of Shareholder Approval, if
applicable, or the Change in Control;
(d) the failure by the Employer to provide and credit Recipient with the number of paid vacation days to
which Recipient is then entitled in accordance with the
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7
Employer's normal vacation policy as in effect immediately prior to the earlier of Shareholder Approval, if applicable, or the Change
in Control; or
(e) the Employer's requiring Recipient to be based more than 30 miles from where Recipient's office is
located immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control except for required travel on
the Employer's business to an extent substantially consistent with the business travel obligations which Recipient undertook on
behalf of the Employer prior to the earlier of Shareholder Approval, if applicable, or the Change in Control.
4. Dividend Equivalent Cash Award. The amount of the Dividend Equivalent Cash Award shall be determined by
multiplying the number of Performance Shares deliverable to Recipient as determined under Sections 2 and3 by the total amount of
dividends paid per share of the Company's Common Stock for which the dividend record date occurred after the beginning of the
Award Period and before the date of delivery of the Performance Shares.
5. Certification and Payment. At the regularly scheduled meeting of the Committee held in February of the year
immediately following the final year of the Award Period (the "Certification Meeting"), the Committee shall review the Company's
results for the Award Period. Prior to the Certification Meeting, the Company shall calculate the number of Performance Shares
deliverable and the amount of the Dividend Equivalent Cash Award payable to Recipient, and shall submit these calculations to the
Committee. At or prior to the Certification Meeting, the Committee shall certi$ in writing (which may consist of approved minutes
of the Certification Meeting) the number of Performance Shares deliverable to Recipient and the amount of the Dividend Equivalent
Cash Award payable to Recipient. Subject to applicable tax withholding, the amounts so certified shall be delivered or paid (as
applicable) on a date (the "Payment Date") that is the later of March I , 2024 or five business days following the Certification
Meeting, and no amounts shall be delivered or paid prior to certification. No fractional shares shall be delivered and the number of
Performance Shares deliverable shall be rounded to the nearest whole share. Notwithstanding the foregoing, if Recipient shall have
made a valid election to defer receipt of Performance Shares or the Dividend Equivalent Cash Award pursuant to the terms of
Northwest Natural's Deferred Compensation Plan for Directors and Executives (the "DCP"), payment of the award shall be made in
accordance with that election.
6. Tax Withholding. Recipient acknowledges that, on the Payment Date when the Performance Shares are issued or
otherwise delivered to Recipient, the Value (as defined below) on that date of the Performance Shares (as well as the amount of the
Dividend Equivalent Cash Award) will be treated as ordinary compensation income for federal and state income and FICA tax
puposes, and that the Employer will be required to withhold taxes on these income amounts. To satisfu the required withholding
amount, the Employer shall first withhold all or part of the Dividend Equivalent Cash Award, and if that is insufficient, the Employer
shall withhold the number of Performance Shares having a Value equal to the remaining withholding amount. For purposes of this
Section 6, the "Value" of a Performance Share shall be equal to the closing market price for Company Common Stock on the last
trading day preceding the Payment Date. Notwithstanding the foregoing, Recipient may elect not to have Performance Shares
withheld to cover taxes by giving notice to the Company in writing prior to the Payment Date, in which case
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the Performance Shares shall be issued or acquired in the Recipient's name on the Payment Date thereby triggering the tax
consequences, but the Company shall retain the certificate for the Performance Shares as security until Recipient shall have paid to
the Company in cash any required tax withholding not covered by withholding of the Dividend Equivalent Cash Award.
7. Sale of the Comoany. If there shall occur before the Payment Date a merger, consolidation or plan of exchange involving
the Company pursuant to which the outstanding shares of Common Stock of the Company are converted into cash or other stock,
securities or property, or a sale, lease, exchange or other transfer (in one transaction or a series ofrelated transactions) ofall, or
substantially all, the assets of the Company (either, a "Company Sale"), then either:
7.1 the unvested Performance Shares shall be converted into restricted stock units for stock of the surviving or
acquiring corporation in the applicable transaction, with the amount and type of shares subject thereto to be conclusively determined
by the Committee, taking into account the relative values of the companies involved in the applicable transaction and the exchange
rate, if any, used in determining shares of the surviving corporation to be held by the former holders of the Company's Common
Stock following the applicable transaction, and disregarding fractional shares; or
7 .2 a pro-rated number of Performance Shares and the related dividend equivalent cash payment shall be delivered
simultaneously with the closing of the applicable transaction such that Recipient will participate as a shareholder in receiving
proceeds from such tansaction with respect to those shares. The number of Performance Shares to be delivered as a pro-rated award
under this Section 7 .2 shallbe determined by multiplying the Target Share Amount by a fraction, the numerator of which is the
number of days of the Award Period elapsed prior to the closing of the transaction and the denominator of which is the number of
days in the Award Period.
8. Changes in Capital Structure. If the outstanding Common Stock of the Company is hereafter increased or decreased or
changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any stock split,
combination of shares or dividend payable in shares, recapitalization or reclassification, appropriate adjustment shall be made by the
Committee in the number and kind of shares subject to this Agreement so that the Recipient's proportionate interest before and after
the occurrence of the event is maintained.
9. Recoupment On Misconduct.
9.1 If at any time before a Change in Control and within three years after the Payment Date, the Committee
determines that Recipient engaged in any Misconduct (as defined below) during the Award Period that contributed to an obligation
to restate the Company's financial statements for any quarter or year in the Award Period or that othennise has had (or will have
when publicly disclosed) an adverse impact on the Company's common stock price, Recipient shall repay to the Company the
Excess LTIP Compensation (as defined below). The term "Excess LTIP Compensation" means the excess of (a) the number of
Performance Shares and the amount of the Dividend Equivalent Cash Award as originally calculated and certified under Section 5 of
this Agreement, over (b) the number of Performance Shares and the amount
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of the Dividend Equivalent Cash Award as recalculated (l) for the TSR Modifier, assuming that the average of the closing market
prices of the Company's common stock forthe period from October 1,2023 to December 31,2023 was an amount determined
appropriate by the Committee in its discretion to reflect what the Company's common stock price would have been if the restatement
had occurred or other Misconduct had been disclosed prior to October | , 2023, and (2) for the EPS Payout Factor and the ROIC
Performance Threshold, based on the Company's financial statements for all years of the Award Period as restated. The Committee
may, in its sole discretion, reduce the amount of Excess LTIP Compensation to be repaid by Recipient to take into account the tax
consequences of such repayment or any other factors. If any Performance Shares included in the Excess LTIP Compensation are sold
by Recipient prior to the Company's demand for repayment (including any shares withheld for taxes under Section 6 of this
Agreement), Recipient shall repay to the Company 100% of the proceeds of such sale or sales. The return of Excess LTIP
Compensation is in addition to and separate from any other relief available to the Company due to Recipient's Misconduct.
9.2 "Misconduct" shall mean (a) willful commission by Recipient of an act of fraud or dishonesty resulting in
economic or financial injury to the Company, (b) willful misconduct by Recipient that substantially impairs the Company's business
or reputation, or (c) willful gross negligence by Recipient in the performance of his or her duties.
9.3 If any portion of the Performance Shares or the Dividend Equivalent Cash Award was deferred under the DCP,
the Excess LTIP Compensation shall first be recovered by canceling all or a portion of the 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 dtect
repayment from Recipient of any Excess LTIP Compensation not so recovered and may, to the extent permitted by applicable law,
offset such Excess LTIP Compensation against any compensation or other amounts owed by the Company to Recipient. In
particular, Excess LTIP Compensation may be recovered by offset against the after-tax proceeds of deferred compensation payouts
under the DCP, Northwest Natural's Executive Supplemental Retirement Income Plan or Northwest Natural's Supplemental
Executive Retirement Plan at the times such deferred compensation payouts occur under the terms of those plans. Excess LTIP
Compensation that remains unpaid for more than 60 days after demand by the Company shall accrue interest at the rate used from
time to time for crediting interest under the DCP.
10. Approvals. The obligations of the Company under this Agreement are subject to the approval of state and federal
authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal
law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange
on which the Company's shares may then be listed, in connection with the award under this Agreement. The foregoing
notwithstanding, the Company shall not be obligated to issue or deliver Common Stock under this Agreement if such issuance or
delivery would violate applicable state or federal law.
I l. No fught to Emplolrment. Nothing contained in this Agreement shall confer upon Recipient any right to be employed by
the Employer or to continue to provide services to the
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Employer or to interfere in any way with the right of the Employer to terminate Recipient's services at any time for any reason, with
or without cause.
12. Miscellaneous.
l2.l Entire Agreemenl Amendment. This Agreement constitutes the entire agreement of the parties with regard to
the subjects hereof and may be amended only by wriffen agreement between the Company and Recipient.
12.2 Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed
sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registered
or certified mail, retum receipt requested, postage prepaid, addressed to the Company, Attention: Corporate Secretary, at its principal
executive offices, or to Employer, Attention: Corporate Secretary, at its principal executive offices, or to Recipient at the address of
Recipient in the Company's records, or at such other address as such party may designate by ten (10) days' advance written notice to
the other party.
12.3 Assignment: Rrghts and Benefits. Recipient shall not assigu this Agreement or any rights hereunder to any
other party or parties without the prior written consent of the Company. The rights and benefits of this Agreement shall inure to the
benefit of and be enforceable by the Company's successors and assigns and, subject to the foregoing restriction on assignment, be
binding upon Recipient's heirs, executors, administrators, successors and assigns.
12.4 Further Action. The parties agree to execute such further instruments and to take such further action as may
reasonably be necessary to carry out the intent of this Agreement.
12.5 Applicable Law: Attomelzs' Fees. The terms and conditions of this Agreement shall be governed by the laws of
the State ofOregon. In the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable
attorneys' fees to be set by the trial court and, upon any appeal, the appellate court.
12.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
NORTHWEST NATI]RAL HOLDING COMPANY
By
Title
RECIPIENT
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EXHIBITA
Peer Group Companies
Atmos Energy Corporation
ONE Gas,Inc.
South Jersey Industries, [nc.
Spire tnc.
Southwest Gas Holdings, Inc.
NiSource Inc.
New Jersey Resources Corporation
Avista Corporation
Black Hills Corporation
MGE Energy,Inc.
NorthWestem Corporation
Unitil Corporation
l3
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 188 of210
Exhlbit l0z
RESTRICTED STOCK UNIT AWARD AGREEMENT
This Agreement is entered into as of February ,2021, between Northwest Natural Holding Company, an Oregon
corporation (the "Company"), ond ("Recipient").
On February 24,2021,the Organization and Executive Compensation Committee (the "Committee") of the Company's
Board of Directors (the "Board") awarded restricted stock units to Recipient pursuant to Section 6 of the Company's Long Term
Incentive Plan (the "Plan"). Recipient desires to accept the award subject to the terms and conditions of this Agreement.
NOW, THEREFORE, the parties agree as follows:
l. Grant of Restricted Stock Units: Dividend Equivalents. Subject to the terms and conditions of this Agreement, the
Company hereby grants to the Recipient _ restricted stock units (the "RSUs"). The grant of RSUs obligates the Company,
upon vesting in accordance with this Agreement, to deliver to the Recipient one share of Common Stock of the Company (a "Share")
for each RSU. Upon vesting of each RSU, the Company also agrees to make a dividend equivalent cash payment with respect to
each vested RSU in an amount equal to the total amount of dividends paid per share of Company Common Stock for which the
dividend record dates occurred after the date of this Agreement and before the date of delivery of the underlying Shares. The RSUs
are subject to forfeiture as set forth in Sections 2.1 and 2.10 below.
2. Vesting: Forfeiture Restriction.
2.1 Vestins Schedule.
(a) All of the RSUs shall initially be unvested. Subject to Sections 2.3,2.4,2.5,2.10 and 5.2, the RSUs shall
vest as follows
(l) one-fourth of the RSUs shall vest on March 1,2022 if the Performance Threshold (as defined in
Section 2.2below) is satisfied for 2021;
(2) an additional one-fourth of the RSUs shall vest on March 1,2023 if the Performance Threshold is
satisfied for 2022;
(3) an additional one-fourth of the RSUs shall vest on March 1,2024 if the Performance Threshold is
satisfied for 2023; and
(4) the final one-fourth of the RSUs shall vest on March 1,2025 if the Performance Threshold is
satisfied for2024.
(b) If the Performance Threshold is not satisfied for any yeax set forth in (1), (2), (3) or (4) above, the RSUs
that would have vested if the Performance Threshold had been satisfied for that year (the "Performance Year") shall be forfeited to
the Company effective as of the last day of the Performance Year. For example, if the Perforrnance Threshold is not
EXHIBIT 2
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Page 189 of210
satisfied for 2021, all RSUs that were scheduled to vest on March 1,2022 shall be forfeited effective as of December 31,2021
(c) If a Change in Control (as defined in Section 2.6 below) occurs, the Performance Threshold shall be
deemed to be satisfied for all Performance Years that were not completed prior to the Change in Control, with the effect that the
RSUs outstanding at the time of the Change of Control shall vest upon completion of the applicable time periods in Section 2.1(a).
2.2 Performance Threshold.
(a) For purposes of this Agreement, the "Performance Threshold" for any year shall be satisfied if the ROE
(as defined below) for that year is greater than the 5 Yr Avg Cost of LT Debt (as defined below) for that year.
(b) The "ROE" for any year shall be calculated by dividing the Company's Adjusted Net Income (as defined
below) for the year by the Average Equity (as defined below) for the year. Subject to adjustment in accordance with Section 2.2(c)
below, the Company's "Adjusted Net Income" for any year shall be equal to the Company's net income attributable to common
shareholders for the year, as set forth in the audited consolidated statement of income of the Company and its subsidiaries for the
year. Subject to adjustment in accordance with Section 2.2(c) below, "Average Equity" for any year shall mean the average of the
Company's total common stock equlty as of the last day of the year and the Company's total common stock equity as of the last day
ofthe prior year, in each case as set forth on the audited consolidated balance sheet ofthe Company and its subsidiaries as ofthe
applicable date.
(c) The Committee may, at any time, approve adjustments to the calculation of ROE to take into account
such unanticipated circumstances or significant, non-recurring or unplanned events as the Committee may determine in its sole
discretion, and such adjustments may increase or decrease ROE. Possible circumstances that may be the basis for adjustments shall
include, but not be limited to, any change in applicable accounting rules or principles; any gain or loss on the disposition of a
business; impairment of assets; dilution caused by Board approved business acquisition; tax changes and tax impacts of other
changes; changes in applicable laws and regulations; changes in rate case timing; changes in the Company's structure; and any other
circumstances outside of management's control.
(d) The "5 Yr Avg Cost of LT Debt" for any year shall mean the average of five numbers consisting of the
Avg Cost of LT Debt (as defined below) for that year and for each of the four preceding years. The "Avg Cost of LT Debt" for any
year shall be equal to the sum of the Weighted Costs (as defined below) calculated for each series or tranche of long-term debt of the
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 calculated by multiplying the Effective Interest Rate (as defined below) on the debt as of that date by the outstanding principal
balance of the debt on that date, and then dividing the resulting amount by the Company's total outstanding principal balance of
long-term debt as ofthat date. The "Effective Interest Rate" for a series or tranche oflong-term debt as ofany date shall be the yield
calculated based on the
2
EXHIBIT 2
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settlement date for the original issuance of the series or tranche, the mafurity date of the series or tranche, the stated annual interest
rate of the series or tranche in effect on that date, the number of interest payments per yeax under the terms of the series or tranche,
the initial borrowing of an amount equal to the principal balance net of Debt [ssuance Costs (as defined below) for the series or
tranche, and the repayment of principal at maturity or otherwise according to the terms of the series or tranche. The "Debt Issuance
Costs" for a series or tranche of longterrn 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 unamortized debt issuance costs and other
costs incurred in connection with retiring debt refinanced with the proceeds of such debt, all as reflected in the Company's
accounting records. For purposes of this Section 2.2(d), the Company's long term debt and the interest rates and outstanding
principal balances of the outstanding series or tranches of long-term debt as of any date shall be those amounts as set forth in the
audited consolidated financial statements of the Company and its subsidiaries for the year ending on that date, and shall in all cases
include the current portion of any long-term debt and exclude borrowings under a revolving credit facility. For the avoidance of
doubt, the Effective Interest Rate for purposes of this Agreement of each series of fixed-rate long-term debt outstanding as of the
date of this Agreement is set forth on Exhibit A hereto.
2.3 Effect of Retirement. Death. or Disability.
(a) If Recipient's employment by the Company or any parent or subsidiary of the Company (the
"Employer") terminates because of Retirement (as defined below), death or physical disability (within the meaning of Section 22(e)
(3) of the Code and a Change in Control has not previously occurred, all outstanding RSUs shall remain outstanding and subject to
potential future vesting upon satisfaction of the Performance Threshold for the applicable years.
(b) If Recipient's employment by the Employer terminates because of Retirement, death or physical
disability and a Change in Control subsequently occurs, all outstanding RSUs shall immediately vest. If a Change in Control occurs
and Recipient's employment by the Employer subsequently terminates because of Retirement, death or physical disability, all
outstanding RSUs shall immediately vest.
(c) The term "Retirement" means termination of employment (1) on or after the first anniversary of the date
of this Agreement, and (2) after the Recipient is (i) age 62 with at least five years of service as an employee of the Company or a
parent or subsidiary of the Company, or (ii) age 55 with age plus years of service (including fractions) as an employee of the
Company or a parent or subsidiary of the Company totaling at least 70; provided, however, that a termination of Recipient's
employment by the Employer for Cause (as defined in Section 2.8 below) shall not constitute a Retirement.
2.4 CIC Acceleration if Pa4v to a Severance Agreement. If Recipient is a party to a Change in Control Severance
Agreement with the Company or a parent or subsidiary of the Company, all outstanding RSUs shall immediately vest if Recipient
becomes entitled to a Change in Control Severance Benefit (as defined below). A "Change in Control Severance Benefit" means the
severance benefit provided for in Recipient's Change in Control Severance
EXHIBIT 2
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GEM STATE WATER COMPANY
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Agreement with the Company or a parent or subsidiary of the Company; provided, however, that such severance benefit is a
"Change in Control Severance Benefit" for purposes of this Agreement only if, under the terms of Recipient's Change in Control
Severance Agreement, Recipient becomes entitled to the severance benefit (a) after a change in control of the Company has
occurred, (b) because Recipient's employment with the Employer has been terminated by Recipient for good reason in accordance
with the terms and conditions of the Change in Control Severance Agreement or by the Employer other than for cause, and
(c) because Recipient has satisfied any other conditions or requirements specified in the Change in Control Severance Agreement
and necessary for Recipient to become entitled to receive the severance benefit. For purposes of this Section 2.4, the terms "change
in control," "good reason," "cause" and "disability" shall have the meanings set forth in Recipient's Change in Control Severance
Agreement.
2.5 CIC Acceleration if Not a Partv to a Severance Agreement. If Recipient is not a party to a Change in Control
Severance Agreement with the Company or a parent or subsidiary of the Company, all outstanding RSUs shall immediately vest if a
Change in Control (as defined in Section 2.6 below) occurs and at any time after the earlier of Shareholder Approval (as defined in
Section 2.7 below), if any, or the Change in Control and on or before the second anniversary of the Change in Control, (a)
Recipient's employment is terminated by the Employer (or its successor) without Cause (as defined in Section 2.8 below), or
(b) Recipient's employment is terminated by Recipient for Good Reason (as defined in Section 2.9 below).
2.6 Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall mean the
occurrence of any of the following events:
(a) The consummation of:
(l) any consolidation, merger or plan of share exchange involving the Company (a "Merger") as a
result of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors
("Voting Securities") immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the
outstanding Voting Securities of the surviving corporation or a parent corporation of the surviving corporation immediately after the
Merger, disregarding any Voting Securities issued to or retained by such holders in respect of securities of any other party to the
Merger; or
(2) any consolidation, merger, plan of share exchange or other transaction involving Northwest
Natural Gas Company ("NW Natural") as a result of which the Company does not continue to hold, directly or indirectly, at least
50% of the outstanding securities of NW Natural ordinarily having the right to vote for the election of directors; or
(3) any sale, lease, exchange or other transfer (in one transaction or a series ofrelated transactions) of
all, or substantially all, the assets of the Company or NW Natural;
4
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 192 of 210
(b) At any time during a period of two consecutive years, individuals who at the beginning of such period
constituted the Board ("Incumbent Directors") shall cease for any reason to constitute at least a majority thereof; provided, however,
that the term "Incumbent Director" shall also include each new director elected during such two-year period whose nomination or
election was approved by two{hirds of the 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 the
Company or any employee benefit plan sponsored by the Company or NW Natural) shall, as a result of a tender or exchange offer,
open market purchases or privately negotiated purchases from anyone other than the Company, have become the beneficial owner
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities
representing twenty percent (20%\ or more of the combined voting power of the then outstanding Voting Securities.
2.7 Shareholder Aflrroval. For purposes of this Agreement, "shareholder Approval" shall be deemed to have
occurred if the shareholders of the Company approve an agreement entered into by the Company, the consummation of which would
result in the occurrence of a Change in Control.
2.8 Cause. For purposes of this Agreement, "Cause" shall mean (a) the willful and continued failure by Recipient to
perfonn substantially Recipient's assigned duties with the Employer (other than any such failure resulting from incapacity due to
physical or mental illness) after a demand for substantial performance is delivered to Recipient by the Employer which specifically
identifies the manner in which Recipient has not substantially performed such duties, (b) willful commission by Recipient of an act
of fraud or dishonesty resulting in economii or financial injury to the Company or Employer, (c) willful misconduct by Recipient
that substantially impairs the business or reputation of the Company or Employer, or (d) willful gross negligence by Recipient in the
performance of his or her duties.
2.9 Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after Shareholder
Approval, if applicable, or the Change in Control, of any of the following circumstances, but only if (x) Recipient gives notice to
Employer of Recipient's intent to terminate employment for Good Reason within 30 days after the later of (l) notice to Recipient of
such circumstances, or (2) the Change in Control, and (y) such circumstances are not fully corrected by the Employer within 90 days
after Recipient's notice:
(a) the assignment to Recipient of a different title, job or responsibilities that results in a decrease in the level
of Recipient's responsibility; provided that Good Reason shall not exist if Recipient continues to have the same or a greater general
level of responsibility for the former Employer operations after the Change in Control as Recipient had prior to the Change in
Control even though such responsibilities have necessarily changed due to the former Employer operations becoming a subsidiary or
division of the surviving company;
(b) a reduction by the Employer in Recipient's base salary as in effect immediately prior to the earlier of
Shareholder Approval, if applicable, or the Change in Control;
5
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 193 of210
(c) the failure by Employer to continue in effect any employee benefit or incentive plan in which Recipient is
participating immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control (or plans providing
Recipient with at least substantially similar benefits) other than as a result of the normal expiration of any such plan in accordance
with its terms as in effect immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control, or the
taking of any action, or the failure to act, by Employer which would adversely affect Recipient's continued participation in any of
such plans on at least as favorable a basis to Recipient as is the case immediately prior to the earlier of Shareholder Approval, if
applicable, or the Change in Control or which would materially reduce Recipient's benefits in the future under any of such plans or
deprive Recipient of any material benefit enjoyed by Recipient immediately prior to the earlier of Shareholder Approval, if
applicable, or the Change in Control;
(d) the failure by the Employer to provide and credit Recipient with the number of paid vacation days to
which Recipient is then entitled in accordance with the Employer's normal vacation policy as in effect immediately prior to the
earlier of Shareholder Approval, if applicable, or the Change in Control; or
(e) the Employer's requiring Recipient to be based more than 30 miles from where Recipient's office is
located immediately prior to the earlier of Shareholder Approval, if applicable, or the Change in Control except for required travel on
the Employer's business to an extent substantially consistent with the business travel obligations which Recipient undertook on
behalf of the Employer prior to the earlier of Shareholder Approval, if applicable, or the Change in Control.
2.lO Forfeiture: Possible Restoration. If Recipient ceases to be employed by the Employer for any reason or for no
reason, with or without cause, other than because of Retirement, death or physical disability (within the meaning of Section 22(e)(3)
of the Code), any RSUs that did not vest pursuant to this Section 2 or Section 5.2 at or prior to the time of such termination of
employment shall be forfeited to the Company; provided, however, that if Recipient's employment is terminated by the Employer
without Cause or by the Recipient for Good Reason after Shareholder Approval but before a Change in Control, any RSUs that are
forfeited under this sentence shall be restored to the Recipient and vested if a Change in Conkol subsequently occurs within two
years.
3. Certification and Delivery. As soon as practicable following the completion of each Performance Year, the Company
shall calculate the ROE and the 5 Yr Avg Cost of LT Debt for that Performance Year, and shall submit those calculations to the
Committee. At orprior to the regularly scheduled meeting of the Committee held in February of the year immediately following
each Performance Year (each, a "Certification Meeting"), the Committee shall certiff in writing (which may consist of approved
minutes of the meeting) whether or not the Performance Threshold was satisfied for that Performance Year. Unless otherwise
required under this Agreement as a result of the occurrence of a Change in Control, no amounts shall be delivered or paid unless the
Committee certifies that the Performance Threshold has been satisfied for the applicable Performance Year. Subject to applicable tax
withholding, on a date (a
6
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 194 of210
"Payment Date") that is on or as soon as practicable after the date any of the RSUs become vested or, if later, five business days
following the Certification Meeting relating to those RSUs, the Company shall deliver to Recipient (a) the number of Shares
underlying the RSUs that vested (rounded down to the nearest whole share), and (b) the dividend equivalent cash payment
determined under Section I with respect to the number of Shares that are delivered; provided, however, that if accelerated vesting of
the RSUs occurs pursuant to Section 2.3(b) as a result of Recipient's Retirement after a Change in Control has previously occurrid,
the Payment Date shall be delayed until a date that is on or as soon as practicable after the earlier of (x) the date the RSUs would
have vested under Section2.l, or (y) the date that is six months after Recipient's separation from service (within the meaning of
Section 409,{ of the Intemal Revenue Code). Notwithstanding the foregoing provisions of this Section 3, if Recipient shall have
made a valid election to defer receipt of the Shares and dividend equivalent cash payment pursuant to the terms of Northwest
Natural's Deferred Compensation Plan for Directors and Executives (the "DCP"), payment of RSUs that vest shall be made in
accordance with that election.
4. Tax Withholding.
4.1 Recipient acknowledges that, on any Payment Date when Shares are delivered to Recipient, the Value (as
defined below) on that date of the Shares so delivered (as well as the amount of the related dividend equivalent cash payment) will
be treated as ordinary compensation income for federal and state income and FICA tax purposes, and that the Employer will be
required to withhold taxes on these income amounts. To satisff the required withholding amount, the Employer shall first withhold
all or part of the dividend equivalent cash payment, and if that is insuffrcient, the Employer shall withhold the number of Shares
having a Value equal to the remaining withholding amount. For purposes of this Section 4, the "Value" of a Share shall be equal to
the closing market price for Company Common Stock on the last trading day preceding the Payment Date.
4.2 Recipient acknowledges that under current tax law, the Employer is required to withhold FICA taxes with
respect to the RSUs at the earlier of (a) the issuance of shares underlying the RSUs or (b) the date after a Change in Control on
which Recipient becomes eligible for Retirement (or the date of the Change in Control if Recipient is eligible for Retirement at the
time of the Change in Control). To satisff the required minimum FICA withholding in the event that subsection (b) applies,
Recipient shall, immediately upon notification of the amount due, pay to the Company in cash or by check amounts necessary to
satisfu 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 Notwithstanding the foregoing, Recipient may elect not to have Shares withheld to cover taxes by giving notice
to the Company in writing prior to the Payment Date, in which case the Shares shall be issued or acquired in Recipient's name on the
Payment Date thereby triggering the tax consequences, but the Company shall retain the certificate for the Shares as security until
Recipient shall have paid to the Company in cash any required tax withholding not covered by withholding of the dividend
equivalent cash payment.
7
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 195 of210
5. Sale of the Compan)r. If there shall occur a merger, consolidation or plan of exchange involving the Company pursuant to
which the outstanding shares of Common Stock of the Company are converted into cash or other stock, securities or property, or a
sale, lease, exchange or other transfer (in one transaction or a series ofrelated transactions) ofall, or substantially all, the assets of
the Company, then either:
5.1 the unvested RSUs shall be converted into restricted stock units for stock of the surviving or acquiring
corporation in the applicable transaction, with the amount and type of shares subject thereto to be conclusively determined by the
Committee, taking into account the relative values of the companies involved in the applicable transaction and the exchange rate, if
any, used in determining shares of the surviving corporation to be held by the former holders of the Company's Common Stock
following the applicable transaction, and disregarding fractional shares; or
5.2 all of the unvested RSUs shall immediately vest and the underlying Shares and related dividend equivalent cash
payment shall be delivered simultaneously with the closing of the applicable transaction such that Recipient will participate as a
shareholder in receiving proceeds from such transaction with respect to those Shares.
6. Changes in Capital Structure. If, prior to the full vesting of all of the RSUs granted under this Agreement, the outstanding
Common Stock of the Company is increased or decreased or changed into or exchanged for a different number or kind of shares or
other securities of the Company by reason of any stock split, combination of shares or dividend payable in shares, recapitalization or
reclassification, appropriate adjustrnent shall be made by the Commiuee in the number and kind of shares subject to the unvested
RSUs so that Recipient's proportionate interest before and after the occurrence of the event is maintained. Notwithstanding the
foregoing, the Committee shall have no obligation to effect any adjustment that would or might result in the issuance of fractional
shares, and any fractional shares resulting from any adjustrnent 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 If at any time before a Change in Control and within three years after any date on which any RSUs vested, (a)
the Company's financial statements for the corresponding Performance Year are the subject of a restatement due to the Misconduct
(as defined below) of any person (whether or not Recipient was personally involved in such Misconduct), and (b) based on the
Company's financial statements as restated, the Performance Threshold was not satisfred for that Performance Year, then Recipient
shall repay to the Company the Shares (the "Excess Shares") and dividend equivalent cash payment (the "Excess Dividends") that
vested under this Agreement on that vesting date. If any Excess Shares are sold by Recipient prior to the Company's demand for
repayment (including any shares withheld for taxes under Section 4 of this Agreement), Recipient shall repay to the Company 100%
of the proceeds of such sale or sales. The Committee may, in its sole discretion, reduce the amount to be repaid by Recipient to take
into account the tax consequences of such repayment for Recipient.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 1 96 of 21 0
8
7.2 If the Committee detennines that Recipient engaged in any Misconduct after the date of this Agreement and
prior to a sale of any of the Shares (the "Tainted Shares"), and this determination is made before a Change in Control and within
three years after the vesting of the Tainted Shares, Recipient shall repay to the Company the Excess Proceeds (as defined below).
The Committee may, in its sole discretion, reduce the amount of Excess Proceeds to be repaid by Recipient to take into account the
tax consequences ofsuch repayment or any other factors. The return ofExcess Proceeds is in addition to and separate from any other
relief available to the Company due to Recipient's Misconduct.
7.3 "Misconduct" shall mean (a) willful commission of an act of fraud or dishonesty resulting in economic or
financial injury to the Company, (b) willful misconduct that substantially impairs the Company's business or reputation, or
(c) willful gross negligence in the performance of the person's duties; provided, however, that such acts shall only constitute
Misconduct if the Committee determines that such acts contributed to an obligation to restate the Company's financial statements for
any quarter or year or otherwise had (or will have when publicly disclosed) an adverse impact on the market price of the Company
Common Stock.
7.4 "Excess Proceeds" shall mean the excess of (a) the actual aggregate sales proceeds from Recipient's sales of
Tainted Shares, over (b) the aggregate sales proceeds Recipient would have received from sales ofTainted Shares at a price per share
determined appropriate by the Committee in its discretion to reflect what the market price of the Company Common Stock would
have been if the restatement had occurred or other Misconduct 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 portion shall be
recovered by canceling the 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 of any Excess Shares, Excess
Dividends and Excess Proceeds not so recovered and may, to the extent permitted by applicable law, offset such amounts against any
compensation or other amounts owed by the Company to Recipient. In particular, such amounts may be recovered by offset against
the after-tax proceeds of deferred compensation payouts under the DCP, Northwest Natural's Executive Supplemental Retirement
Income Plan or Northwest Natural's Supplemental Executive Retirement Plan at the times such deferred compensation payouts occur
under the terms of those plans. Amounts that remain unpaid for more than 60 days after demand by the Company shall accrue
interest at the rate used from time to time for crediting interest under the DCP.
8. Approvals. The obligations of the Company under this Agreement are subject to the approval of state and federal
authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal
law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange
on which the Company's shares may then be listed, in connection with the award under this Agreement. The foregoing
notwithstanding, the Company shall not be obligated to issue or deliver Common Stock under this Agreement if such issuance or
delivery would violate applicable state or federal law.
9
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 197 of210
g. No Right to Employment. Nothing contained in this Agreement shall confer upon Recipient any right to be employed by
the Employer or to continue to provide services to the Employer or to interfere in any way with the right of the Employer to
terminate Recipient's services at any time for any reason, with or without cause.
10. Miscellaneous.
10.1 Entire Agreement: Amendment. This Agreement constitutes the entire agreement of the parties with regard to
the subjects hereof and may be amended only by written agreement between the Company and Recipient.
10.2 Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed
sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registered
or certified mail, return receipt requested, postage prepaid, addressed to the Company, Attention: Corporate Secretary, at its principal
executive offices, or to Employer, Attention: Corporate Secretary, at its principal executive offices, or to Recipient at the address of
Recipient in the Company's records, or at such other address as such party may designate by ten (10) days' advance written notice to
the other party.
10.3 Assignment: Rights and Benefits. Recipient shall not assign this Agreement or any rights hereunder to any
other party or parties without the prior written consent of the Company. The rights and benefits of this Agreement shall inure to the
benefit of and be enforceable by the Company's successors and assigns and, subject to the foregoing restriction on assignment, be
binding upon Recipient's heirs, executors, administrators, successors and assigns.
10.4 Further Action. The parties agree to execute such further instruments and to take such firther action as may
reasonably be necessary to carry out the intent of this Agreement.
10.5 Applicable Law: Attorneys' Fees. The terms and conditions of this Agreement shall be governed by the laws of
the State of Oregon. In the event either party institutes litigation hereunder, the prevailingpat':ry shall be entitled to reasonable
afiorneys' fees to be set by the trial court and, upon any appeal, the appellate court.
10.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original.
10
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 198 of210
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
NORTI{WEST NATURAL HOLDING COMPANY
By
Title
RECIPIENT
ll
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 199 of210
EXHIBITA
EFFECTIVE INTEREST RATES OF OUTSTANDTNG LONG-TERM DEBT
The outstanding series or tranches of long-term debt of the Company outstanding as of the date of this Agreement and the
Effective Interest Rate of each such series or tranche are as follows:
Series
Corp 5000:
9.050 o/o Series due 2021
3.176% Series due 2021
3.542% Series due 2023
5.620% Series due 2023
7 .720 % Series due 2025
6.520% Series due 2025
7.050 % Series due 2026
3.211% Series due 2026
7.000% Series due 2027
6.650% Series due 2027
2.822o/o Series due 2027
6.650 % Series due 2028
3.141% Series due 2029
7.740% Series due 2030
7.850 o/o Series due 2030
5.820 % Series due 2032
5.660o/o Series due 2033
5.250% Series due 2035
4.000% Series due 2042
4.136% Series due 2046
3.685 o/o Series due 2047
4.110 % Series due 2048
3.869 % Series due 2049
3.600 % Series due 2050
Corp 6000:
2.400 % weighted rate Notes
5.000 % Note due 2028
LIBOR Loan - weighted rate
Effective Interest Rate
9.163%
3.3t9%
3.696%
6.360%
8.336%
6.589%
7.121%
3.383Yr
7.062%
6.714o/o
2.966%
6.727%
3.275%
8.433%
8.551o/o
s.913%
5.723Y.
s.316%
4.062%
4.226%
3.754%
4.14s%
3.938%
3.689%
2.400%
s.000%
0.770o/o
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 200 of 21 0
Exhlblt 2l
SUBSIDIARIES OF NORTHWEST NATURAL HOLDING COMPANY
an Oregon Corporation
Name of Subsldiary Jurisdiction Organized
Noilhwest Natural Gas Company (dba NW Natura!)
Northwest Energy Corporation(1 )
NWN Gas Reserves LLC(I)
NW Natural RNG Holding Company, LLC(1)
Lexington Renewable Energy LLQtt)
NW Natural Energy, LLC
NW Natural Gas Storage, LLC
NNG Financial Corporation
Northwest Biogas, LLC
KB Pipeline Company
NW Natural Water Company, LLC
Salmon Valley Water Company
NW Natural Water of Oregon, LLC
Sunstone Water, LLC
Sunstone lnfrastrucfu re, LLC
Sunriver Water LLC
Sunriver Environmental LLC
NW Natural Water of Washington, LLC
Cascadia Water, LLC
Cascadia lnfrastructure, LLC
Suncadia Water Company, LLC
Suncadia Environmental Company, LLC
Oregon
Oregon
Oregon
Oregon
Delaware
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Washington
Washington
Washington
Washington
Washington
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 201 of 210
Exhlbat 21
NW Natural Water of ldaho, LLC
Falls Water Co., lnc.
Gem State Water Company, LLC
Gem State lnfrastructure, LLC
NW Natural Water of Texas, LLC
Blue Topaz Water, LLC
Blue Topaz lnfrastructure, LLC
T & W Water Service Company
ldaho
ldaho
ldaho
ldaho
Texas
Texas
Texas
Texas
(1) Subsidiaryof Northwest Natural Gas Company
EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page 202 of 210
Exhtblt 23a
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOI.JNTING FIRM
We hereby consent to the incorporation by reference in the RegisFation Statements on Fonn S-8 (Nos. 333-187005-01, 333-180350-01 ,333-1349?3-01,333-100885-01,333-139819-01 ,333-221347-01,333-227687,ard333-234539)andFormS-3 (No.333-227662)ofNorthwestNaturalHoldingCompanyofourreport
dated February 26, 2021 relating to the financial statements, financial statement schedules and the effectiveness of internal contol over financial reporting, which
appears in this Form l0-K.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
Febrwry 26,2021
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 203 of 210
Erhibit 23b
CONSENT OF INDEPENDENT REGISTERED PI]BLIC ACCOTJNTING FIRM
We hereby consent to the incorporation by reference in the Regishation Statements on Form S-8 (No. 333-214425) and Form S-3 (No. 333227662-01) of
Northwesi Natural Gas Company of our report dated February 26, 2021 relating to the financial statements and financial statement schedule which appears in this
Form l0-K.
/s/ Pricewaterhousecoopers LLP
Portland, Oregon
February 26,2021
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 204 ot 210
EXHIBIT 31_1
CERTIFICATION
I, David H. Anderson, certify that:
1 . I have reviewed this annual report on Form 1 0-K for the year ended Decemb er 31 , 202O of Northwest Natural Gas Company;
2. Based on my knowledge, this report does not contain any untrue statoment of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as ol and for, the periods presented in this report;
4. The registrant's other certirying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 1 3a-1 5(e) and 1 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 1 3a-1 5(f) and 1 Sd-1 5(f)) for theregistrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal guarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant,s
intemal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of inlernal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All signmcant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's intemal control over financial
reporting.
Date: February 26,2021
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page 205 of 21 0
EXHIB|T 31.2
CERTIFICATION
l, Frank H. Burkhartsmeyer, certify that:
1. I have reviewed this annual report on Form 1 0-K for the year ended December 31 ,2020 of Northwest Natural Gas Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstiances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certiffing officer and I are responsible for establishing and maintaining disclosure controls and procedures (as delined in
Exchange Act Rules 1 3a-1 S(e) and 1 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 1 3a-1 5(0 and 1 5d-1 5(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of linancial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the regiskant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
S. The registrant,s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any faud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: February 26,2021
/s/ Frank H. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 206 of 21 0
EXHIBIT 31.3
CERTIFICATION
I, David H. Anderson, certify that:
1 . I have reviewed this annual report on Form 10-K for the year ended December 31 , 2020 of Northwest Natural Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
stiatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as ol and for, the periods presented in this report;
4. The registrant's other certifuing officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 1 3a-1 5(e) and 1 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 1 3a-1 5(0 and 1 5d-1 5(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certiffing officer and I have disclosed, based on our most recent evaluation of internal control over linancial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any traud, whether or not material, that involves management or other employees who have a significant role in the registrant's intemal control over financial
reporting.
Date: February 26,2021
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
EXHIBIT 2
PALFREYMAN, DI
GEM STATEWATER COMPANY
Page207 ot210
EXH|B|T 31.4
CERTIFICATION
l, Frank H. Burkhartsmeyer, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31,202O of Northwest Natural Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other flnancial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the regishant as of, and for, the periods presented in this report;
4. The registrant's other certifying ofiicer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 1 3a-1 5(e) and 1 5d-1 5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 1 3a-1 5(f) and 1 5d-1 5(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
intemal control over financial reporting; and
5. The registrant's other certifoing officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's intemal control over financial
reporting.
Date: February 26,2021
/s/ Frank H. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 208 of 210
EXHtBtT 32.1
NORTHWEST NATURAL GAS GOMPANY
Certificate Pursuant to Section 906
of Sarbanes - Oxley Act of 2002
Each of the undersigned, DAVID H. ANDERSON, Chief Executive Officer, and FRANK H. BURKHARTSMEYER, the Chief Financial Officer, of NORTHWEST
NATURAL GAS COMPANY (the Company), DOES HEREBY CERTIFY that:
1. TheCompany'sAnnual ReportonFormlO-KfortheyearendedDecember3'1,2020(theReport)fullycomplieswiththerequirementsofsectionl3(a)or
15(d) of the Securities Exchange Act of 1934, as amended; and
2. lnformation contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
lN WITNESS WHEREOF, each of the undersigned has caused this instrument to be executed this twenty-sixth day of February 2021.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmever
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley AcI ol 2002 has been provided to Northwest Natural Gas Company
and will be retained by Northwest Natural Gas Company and furnished to the Socurities and Exchange Commission or its staff upon request.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 209 of 21 0
EXHIBIT 32.2
NORTHWEST NATURAL HOLDING COMPANY
Certificate Pursuant to Section 906
of Sarbanes - Oxley Act of 2002
Each of the undersigned, DAVID H. ANDERSON, Chief Executive Officer, and FRANK H. BURKHARTSMEYER, the Chief Financial Ofiicer, of NORTHWEST
NATURAL HOLDING COMPANY (the Company), DOES HEREBY CERTIFY that:
1 . The Company's Annual Report on Form 1 0-K for the year ended December 31 ,2020 (the Report) fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
2. lnformation contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company'
lN WITNESS WHEREOF, each of the undersigned has caused this instrument to be executed this twenty-sixth day of February 2021.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive fficer
/s/ Frank H. Burkhartsmever
Frank H, Burkhartsmeyer
Senior Vice President and Chief Financial Officer
A signed original of this wriften statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Northwest Natural Holding Company
and will be retained by Northwest Natural Holding Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 2
PALFREYMAN, DI
GEM STATE WATER COMPANY
Page 210 of 210
EXHIBIT 3
GEM STATE WATERCOMPANY
- This Exhibit contains trade secret or confidential
material and is filed separately -
EXHIBIT 4
GEM STATE WATERCOMPANY
Maps
(2 PAGES)
State of ldaho
Department of Water Resources
Water Right
95-8130
MUNIC!PAL
The map depicts the place of use for the water use Iisted above and point(s) of diversion of this right as cunenty
derived from interpretations of the paper records and is used solely for illustrative purposes. Discrepancies between the
computer representation and the permanent document file will be resolved in favor of the actualwater right documents
in the water right file.
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(rroz
04w 03w
0.5 MilesPoint of Diversion
\Ahter Service Area Boundary
Townships
PLS Sections
Quarter Quarters
0 0.125 0.25
EXHIB
PALFREYMAN,
Map produced on February 1'1,2021 GFi, STATF WATFFI COiTPANY
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Page 1 ot 2
State of ldaho
Department of Water Resources
Water Right
95-2117
MUNICIPAL
The map depicts the place of use for the water use listed above and point(s) of diversion of this right as cunenfly
derived from interpretations of the paper records and is used solely for illustrative purposes. Discrepancies between the
mmputer representation and the permanent document file will be resolved in favor of the actual water right documents
in the water right file.
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0.5 MilesoPoint of Diversion
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EXHI
PALFREYMAN,
I
Map produced on February 11,2021
0 0.125 0.25
Page2ol2