Company Quick10K Filing
Quick10K
Northwest Natural Gas
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$64.80 29 $1,870
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-04 Other Events
8-K 2018-12-31 Regulation FD, Other Events, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-26 Regulation FD, Other Events, Exhibits
8-K 2018-10-02 Off-BS Arrangement, Exhibits
8-K 2018-10-01 M&A, Shareholder Rights, Officers, Amend Bylaw, Regulation FD, Other Events, Exhibits
8-K 2018-09-24 Other Events, Exhibits
8-K 2018-09-10 Off-BS Arrangement, Exhibits
8-K 2018-09-07 Other Events
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-07-27 Officers
8-K 2018-06-22 Enter Agreement
8-K 2018-05-24 Shareholder Vote, Other Events
8-K 2018-03-21 Other Events
8-K 2018-03-13 Enter Agreement, Exhibits
CQP Cheniere Energy Partners
LNG Cheniere Energy
ATO Atmos Energy
UGP Ultrapar Holdings
NFG National Fuel Gas
OGS One Gas
NJR New Jersey Resources
SR Spire
SJI South Jersey Industries
SMLP Summit Midstream Partners
NWN 2018-09-30
Part I. Financial Information
Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 ex311q32018.htm
EX-31.2 ex312q32018.htm
EX-31.3 ex313q32018.htm
EX-31.4 ex314q32018.htm
EX-32.1 ex321q32018.htm
EX-32.2 ex322q32018.htm

Northwest Natural Gas Earnings 2018-09-30

NWN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-qq32018.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
[  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to____________
Commission file number 1-15973
 
Commission file number 1-38681
nwn4chz.jpg
 
nwnholdingshza01.jpg
NORTHWEST NATURAL GAS COMPANY
 
NORTHWEST NATURAL HOLDING COMPANY
(Exact name of registrant as specified in its charter) 
 
(Exact name of registrant as specified in its charter) 
Oregon
93-0256722
 
Oregon
82-4710680
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive offices)  (Zip Code)
Registrant’s telephone number:  (503) 226-4211

 
220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive offices)  (Zip Code)
Registrant’s telephone number:  (503) 226-4211

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
NORTHWEST NATURAL GAS COMPANY Yes[ X ]  No[   ]
 
NORTHWEST NATURAL HOLDING COMPANY Yes[ X ]  No[   ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   
NORTHWEST NATURAL GAS COMPANY Yes[ X ]  No[   ]
 
NORTHWEST NATURAL HOLDING COMPANY Yes[ X ]  No[   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
NORTHWEST NATURAL GAS COMPANY
 
NORTHWEST NATURAL HOLDING COMPANY
Large Accelerated Filer [    ]
 
Large Accelerated Filer [ X ]
Accelerated Filer [    ]
 
Accelerated Filer [    ]
Non-accelerated Filer [ X ]
 
Non-accelerated Filer [    ]   
Smaller Reporting Company [    ]
 
Smaller Reporting Company [    ]
Emerging Growth Company [    ]
 
Emerging Growth Company [    ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
NORTHWEST NATURAL GAS COMPANY Yes[   ]  No[ X ]
 
NORTHWEST NATURAL HOLDING COMPANY Yes[   ]  No[ X ]
 
At October 26, 2018, 28,844,682 shares of Northwest Natural Holding Company's Common Stock (the only class of Common Stock) were outstanding, and 28,844,190 shares of Northwest Natural Gas Company's Common Stock (the only class of Common Stock) were outstanding, all of which were held by Northwest Natural Holding Company.
 
This combined Form 10-Q is separately filed by Northwest Natural Holding Company and Northwest Natural Gas Company. Information contained in this document relating to Northwest Natural Gas Company is filed by Northwest Natural Holding Company and separately by Northwest Natural Gas Company. Northwest Natural Gas Company makes no representation as to information relating to Northwest Natural Holding Company or its subsidiaries, except as it may relate to Northwest Natural Gas Company and its subsidiaries.
 



NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
For the Quarterly Period Ended September 30, 2018

TABLE OF CONTENTS

PART 1.
FINANCIAL INFORMATION
Page
 
 
 
 
 
 
 
Unaudited Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to the safe harbors created by such Act. Forward-looking statements can be identified by words such as anticipates, assumes, intends, plans, seeks, believes, estimates, expects, and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the following:
plans, projections and predictions;
objectives, goals or strategies;
assumptions, generalizations and estimates;
ongoing continuation of past practices or patterns;
future events or performance;
trends;
risks;
timing and cyclicality;
earnings and dividends;
capital expenditures and allocation;
capital or organizational structure, including restructuring as a holding company;
climate change and our role in a low-carbon future;
growth;
customer rates;
labor relations and workforce succession;
commodity costs;
gas reserves;
operational and financial performance and costs;
energy policy, infrastructure and preferences;
public policy approach and involvement;
efficacy of derivatives and hedges;
liquidity, financial positions, and planned securities issuances;
valuations;
project and program development, expansion, or investment;
business development efforts, including acquisitions and integration thereof;
asset dispositions and outcomes thereof;
pipeline capacity, demand, location, and reliability;
adequacy of property rights and headquarter development;
technology implementation and cybersecurity practices;
competition;
procurement and development of gas supplies;
estimated expenditures;
costs of compliance;
credit exposures;
seasonality of gas utility earnings;
rate or regulatory outcomes, recovery or refunds;
impacts or changes of laws, rules and regulations;
tax liabilities or refunds, including effects of tax reform and related timing variances;
levels and pricing of gas storage contracts and gas storage markets;
outcomes, timing and effects of potential claims, litigation, regulatory actions, and other administrative matters;
projected obligations, expectations and treatment with respect to retirement plans;
availability, adequacy, and shift in mix, of gas supplies;
effects of new or anticipated changes in critical accounting policies or estimates;
approval and adequacy of regulatory deferrals;
effects and efficacy of regulatory mechanisms; and
environmental, regulatory, litigation and insurance costs and recoveries, and timing thereof.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future operational or financial performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in NW Natural's 2017 Annual Report on Form 10-K, Part I, Item 1A “Risk Factors” and Part II, Item 7 and Item 7A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk,” and in Part I, Items 2 and 3, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk”, respectively of Part II of this report.


3



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

4



ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

 

Three Months Ended September 30,
 
Nine Months Ended September 30,
In thousands, except per share data
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
91,239

 
$
86,213

 
$
479,441

 
$
516,413

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of gas
 
25,538

 
27,239

 
175,697

 
223,855

Operations and maintenance
 
37,569

 
34,267

 
115,120

 
106,710

Environmental remediation
 
1,022

 
1,355

 
7,528

 
10,920

General taxes
 
7,589

 
7,540

 
24,792

 
23,423

Revenue taxes
 
3,522

 

 
20,731

 

Depreciation and amortization
 
21,485

 
20,352

 
63,507

 
60,529

Other operating expenses
 
625

 

 
2,157

 

Total operating expenses
 
97,350

 
90,753

 
409,532

 
425,437

Income (loss) from operations
 
(6,111
)
 
(4,540
)
 
69,909

 
90,976

Other income (expense), net
 
(312
)
 
139

 
(1,139
)
 
(624
)
Interest expense, net
 
9,006

 
9,208

 
27,051

 
28,311

Income (loss) before income taxes
 
(15,429
)
 
(13,609
)
 
41,719

 
62,041

Income tax (benefit) expense
 
(4,285
)
 
(5,722
)
 
11,191

 
24,456

Net income (loss) from continuing operations
 
(11,144
)
 
(7,887
)
 
30,528

 
37,585

Loss from discontinued operations, net of tax
 
(650
)
 
(608
)
 
(1,783
)
 
(3,041
)
Net income (loss)
 
(11,794
)
 
(8,495
)
 
28,745

 
34,544

Other comprehensive income:
 
 
 
 
 
 
 
 
Amortization of non-qualified employee benefit plan liability, net of taxes of $55 and $98 for the three months ended and $166 and $275 for the nine months ended September 30, 2018 and 2017, respectively
 
154

 
150

 
461

 
423

Comprehensive income (loss)
 
$
(11,640
)
 
$
(8,345
)
 
$
29,206

 
$
34,967

Average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
28,815

 
28,678

 
28,787

 
28,653

Diluted
 
28,815

 
28,678

 
28,846

 
28,734

Earnings (loss) from continuing operations per share of common stock:
 
 
 
 
 
 
 
 
Basic
 
$
(0.39
)
 
$
(0.28
)
 
$
1.06

 
$
1.32

Diluted
 
(0.39
)
 
(0.28
)
 
1.06

 
1.31

Loss from discontinued operations per share of common stock:
 
 
 
 
 
 
 
 
Basic
 
$
(0.02
)
 
$
(0.02
)
 
$
(0.06
)
 
$
(0.11
)
Diluted
 
(0.02
)
 
(0.02
)
 
(0.06
)
 
(0.11
)
Earnings (loss) per share of common stock:
 
 
 
 
 
 
 
 
Basic
 
$
(0.41
)
 
$
(0.30
)
 
$
1.00

 
$
1.21

Diluted
 
(0.41
)
 
(0.30
)
 
1.00

 
1.20


See Notes to Unaudited Consolidated Financial Statements


5



NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 
 
September 30,
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
29,965

 
$
15,780

 
$
3,472

Accounts receivable
 
25,125

 
21,930

 
66,236

Accrued unbilled revenue
 
16,351

 
15,974

 
62,381

Allowance for uncollectible accounts
 
(394
)
 
(459
)
 
(956
)
Regulatory assets
 
41,241

 
49,504

 
45,781

Derivative instruments
 
2,871

 
2,073

 
1,735

Inventories
 
53,064

 
59,135

 
47,577

Gas reserves
 
16,916

 
16,218

 
15,704

Other current assets
 
20,376

 
17,285

 
24,949

Discontinued operations current assets (Note 16)
 
12,644

 
2,106

 
3,057

Total current assets
 
218,159

 
199,546

 
269,936

Non-current assets:
 
 
 
 
 
 
Property, plant, and equipment
 
3,370,388

 
3,148,545

 
3,204,635

Less: Accumulated depreciation
 
996,994

 
954,782

 
960,477

Total property, plant, and equipment, net
 
2,373,394

 
2,193,763

 
2,244,158

Gas reserves
 
70,556


87,876

 
84,053

Regulatory assets
 
333,917

 
345,352

 
356,608

Derivative instruments
 
861

 
1,555

 
1,306

Other investments
 
65,113

 
69,245

 
66,363

Goodwill
 
6,563

 

 

Other non-current assets
 
12,844

 
4,192

 
6,505

Discontinued operations non-current assets (Note 16)
 

 
204,078

 
10,817

Total non-current assets
 
2,863,248

 
2,906,061

 
2,769,810

Total assets
 
$
3,081,407

 
$
3,105,607

 
$
3,039,746


See Notes to Unaudited Consolidated Financial Statements


6



NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 
 
September 30,
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
 
 
 
 
 
 
 
Liabilities and equity:
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Short-term debt
 
$
100,500

 
$

 
$
54,200

Current maturities of long-term debt
 
84,940

 
21,995

 
96,703

Accounts payable
 
80,143

 
87,123

 
111,021

Taxes accrued
 
13,074

 
11,933

 
18,883

Interest accrued
 
9,453

 
9,854

 
6,773

Regulatory liabilities
 
37,504

 
34,659

 
34,013

Derivative instruments
 
8,828

 
8,968

 
18,722

Other current liabilities
 
35,497

 
27,218

 
39,942

Discontinued operations current liabilities (Note 16)
 
13,003

 
1,201

 
1,593

Total current liabilities
 
382,942

 
202,951

 
381,850

Long-term debt
 
724,654

 
757,429

 
683,184

Deferred credits and other non-current liabilities:
 
 
 
 
 
 
Deferred tax liabilities
 
274,315

 
572,293

 
270,526

Regulatory liabilities
 
606,175

 
363,838

 
586,093

Pension and other postretirement benefit liabilities
 
212,249

 
212,259

 
223,333

Derivative instruments
 
3,016

 
3,926

 
4,649

Other non-current liabilities
 
140,475

 
134,123

 
135,292

Discontinued operations - non-current liabilities (Note 16)
 

 
12,106

 
12,043

Total deferred credits and other non-current liabilities
 
1,236,230

 
1,298,545

 
1,231,936

Commitments and contingencies (Note 15)
 


 


 


Equity:
 
 
 
 
 
 
Common stock - no par value; authorized 100,000 shares; issued and outstanding 28,844, 28,713, and 28,736 at September 30, 2018 and 2017, and December 31, 2017, respectively
 
455,499

 
447,129

 
448,865

Retained earnings
 
290,059

 
406,081

 
302,349

Accumulated other comprehensive loss
 
(7,977
)
 
(6,528
)
 
(8,438
)
Total equity
 
737,581

 
846,682

 
742,776

Total liabilities and equity
 
$
3,081,407

 
$
3,105,607

 
$
3,039,746


See Notes to Unaudited Consolidated Financial Statements



7



NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended September 30,
In thousands
 
2018
 
2017
 
 
 
 
 
Operating activities:
 
 
 
 
Net income
 
$
28,745

 
$
34,544

Adjustments to reconcile net income to cash provided by operations:
 
 
 
 
Depreciation and amortization
 
63,507

 
60,529

Regulatory amortization of gas reserves
 
12,056

 
12,036

Deferred income taxes
 
3,954

 
17,287

Qualified defined benefit pension plan expense
 
4,450

 
3,923

Contributions to qualified defined benefit pension plans
 
(11,690
)
 
(15,400
)
Deferred environmental expenditures, net
 
(10,547
)
 
(10,468
)
Amortization of environmental remediation
 
7,528

 
10,920

Regulatory revenue deferral from the TCJA
 
6,983

 

Other
 
1,541

 
2,522

Changes in assets and liabilities:
 
 
 
 
Receivables, net
 
83,194

 
90,311

Inventories
 
(5,134
)
 
(5,372
)
Income taxes
 
(5,809
)
 
(216
)
Accounts payable
 
(22,929
)
 
(29,282
)
Interest accrued
 
2,680

 
3,888

Deferred gas costs
 
2,372

 
13,419

Other, net
 
(3,588
)
 
28

Discontinued operations
 
1,216

 
4,187

Cash provided by operating activities
 
158,529

 
192,856

Investing activities:
 
 
 
 
Capital expenditures
 
(158,795
)
 
(145,274
)
Other
 
(1,661
)
 
(1,131
)
Discontinued operations
 
(619
)
 
(167
)
Cash used in investing activities
 
(161,075
)
 
(146,572
)
Financing activities:
 
 
 
 
Repurchases related to stock-based compensation
 

 
(2,034
)
Proceeds from stock options exercised
 
1,368

 
3,711

Long-term debt issued
 
50,000

 
100,000

Long-term debt retired
 
(22,000
)
 
(40,000
)
Change in short-term debt
 
46,300

 
(53,300
)
Cash dividend payments on common stock
 
(38,387
)
 
(40,390
)
Stock purchases related to acquisitions
 
(7,951
)
 

Other
 
(291
)
 
(2,012
)
Cash provided by (used in) financing activities
 
29,039

 
(34,025
)
Increase in cash and cash equivalents
 
26,493

 
12,259

Cash and cash equivalents, beginning of period
 
3,472

 
3,521

Cash and cash equivalents, end of period
 
$
29,965

 
$
15,780

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Interest paid, net of capitalization
 
$
22,821

 
$
22,859

Income taxes paid, net of refunds
 
22,047

 
11,581

See Notes to Unaudited Consolidated Financial Statements

8



NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)

 
 
September 30,
In thousands, except share amounts
 
2018
 
 
 
Assets:
 
 
Current assets:
 
 
Cash and cash equivalents
 
$
20,000

Total current assets
 
20,000

Total assets
 
$
20,000

 
 
 
Equity:
 
 
Common stock - no par value; authorized 100,000,000 shares; 100 issued and outstanding at September 30, 2018
 
$
20,000

Total equity
 
$
20,000


See Notes to Unaudited Consolidated Financial Statements

9



NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
In thousands
 
Inception through September 30, 2018
 
 
 
Financing activities:
 
 
Capital contributions
 
$
20,000

Cash provided by financing activities
 
20,000

Increase in cash and cash equivalents
 
20,000

Cash and cash equivalents, at inception
 

Cash and cash equivalents, end of period
 
$
20,000


See Notes to Unaudited Consolidated Financial Statements


10




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION

On October 1, 2018, Northwest Natural Gas Company (NW Natural) and Northwest Natural Holding Company (NW Holdings) completed the reorganization into a holding company structure. NW Holdings is now the parent holding company of NW Natural, NW Natural Water Company, LLC (NWN Water) and other subsidiaries previously held by NW Natural. For further discussion, see Note 17. These financial statements and accompanying notes are for the period ending September 30, 2018 and reflect the organizational structure prior to the reorganization.

The accompanying consolidated financial statements represent the consolidated results of NW Natural and all companies NW Natural directly or indirectly controlled, either through majority ownership or otherwise as of September 30, 2018. NW Natural's regulated local gas distribution business, referred to as the utility segment, is NW Natural's core operating business and serves residential, commercial, and industrial customers in Oregon and southwest Washington. The other category primarily includes the non-utility portion of the Mist gas storage facility that provides storage services for utilities, gas marketers, electric generators, and large industrial users from facilities located in Oregon. In addition, prior to the reorganization NW Natural held regulated water services, other investments, and other non-utility activities reported as other.

NW Natural's direct and indirect wholly-owned subsidiaries as of September 30, 2018 include:

NW Natural Energy, LLC (NWN Energy);
NW Natural Gas Storage, LLC (NWN Gas Storage);
Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation;
Northwest Energy Corporation (Energy Corp);
NWN Gas Reserves LLC (NWN Gas Reserves);
NNG Financial Corporation (NNG Financial);
 
NW Natural Water Company, LLC (NWN Water);
Falls Water Co., Inc. (Falls Water);
Cascadia Water, LLC (Cascadia);
Northwest Natural Holding Company (NW Holdings); and
NWN Merger Sub, Inc. (NWN Holdco Sub).

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

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

Investments in corporate joint ventures and partnerships that the registrant does not directly or indirectly control, and for which it is not the primary beneficiary, include NWN Energy's investment in Trail West Holdings, LLC (TWH), which is accounted for under the equity method, and NNG Financial's investment in Kelso-Beaver Pipeline. The consolidated financial statements are presented after elimination of all intercompany balances and transactions. In this report, the term “utility” is used to describe NW Natural's regulated gas distribution business, and the term “non-utility” is used to describe the non-utility portion of the Mist gas storage facility and other non-utility investments and business activities.

Information presented in these interim consolidated financial statements is unaudited, but includes all material adjustments management considers necessary for a fair statement of the results for each period reported including normal recurring accruals. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in NW Natural's 2017 Annual Report on Form 10-K (2017 Form 10-K), taking into consideration the changes mentioned below in this Note 1 and in Notes 4 and 15, as reflected in Exhibit 99.1 to the Current Report on Form 8-K (Form 8-K) filed on September 24, 2018. A significant part of NW Natural's business is of a seasonal nature; therefore, results of operations for interim periods are not necessarily indicative of full year results.

During the second quarter of 2018, we moved forward with NW Natural's long-term strategic plans, which include a shift away from the California gas storage business. In June 2018, NWN Gas Storage, a wholly-owned subsidiary, entered into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in its wholly-owned subsidiary, Gill Ranch, subject to various regulatory approvals and closing conditions. We have concluded that the pending sale of Gill Ranch qualifies as assets and liabilities held for sale and discontinued operations. As such, for all periods presented, the results of Gill Ranch have been presented as a discontinued operation on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch have been classified as discontinued operations assets and liabilities on the

11



consolidated balance sheets. See Note 16 for additional information. Additionally, we reevaluated reportable segments and concluded that the remaining gas storage activities no longer meet the requirements to be separately reported as a segment. The non-utility portion of the Mist gas storage facility is now reported as other, and all prior periods reflect this change. See Note 4, which provides segment information. These reclassifications had no effect on the prior year's consolidated results of operations, financial condition, or cash flows.

NW Holdings was formed on March 7, 2018. The accompanying financial statements for NW Holdings are provided in accordance with Exchange Act Rules 13a-13 and 15d-13. There was no income statement activity for NW Holdings during the period ended September 30, 2018 and thus no income statement is provided for NW Holdings. Prior to completing the reorganization, NW Holdings received a $20.0 million capital contribution.

Notes to the consolidated financial statements reflect the activity of continuing operations for all periods presented, unless otherwise noted. Note 16 provides information regarding discontinued operations.

2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are described in Note 2 of the 2017 Form 10-K. There were no material changes to those accounting policies during the nine months ended September 30, 2018 other than those incorporated in Note 5, Note 13, and Note 16 relating to revenue, business combinations and goodwill, and discontinued operations, respectively. The following are current updates to certain critical accounting policy estimates and new accounting standards.
  
Industry Regulation  
In applying regulatory accounting principles, NW Natural capitalizes or defers certain costs and revenues as regulatory assets and liabilities pursuant to orders of the Oregon Public Utilities Commission (OPUC), Washington Utilities and Transportation Commission (WUTC) or Idaho Public Utilities Commission (IPUC), which provide for the recovery of revenues or expenses from, or refunds to, utility customers in future periods, including a return or a carrying charge in certain cases.

12



Amounts deferred as regulatory assets and liabilities were as follows:


Regulatory Assets
 
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
Current:
 
 
 
 
 
 
Unrealized loss on derivatives(1)
 
$
8,828

 
$
8,887

 
$
18,712

Gas costs
 
461

 
1,851

 
154

Environmental costs(2)
 
5,633

 
6,362

 
6,198

Decoupling(3)
 
11,990

 
15,663

 
11,227

Income taxes
 
2,217

 
4,378

 
2,218

Other(4)
 
12,112

 
12,363

 
7,272

Total current
 
$
41,241

 
$
49,504

 
$
45,781

Non-current:
 
 
 
 
 
 
Unrealized loss on derivatives(1)
 
$
3,016

 
$
3,926

 
$
4,649

Pension balancing(5)
 
72,291

 
57,599

 
60,383

Income taxes
 
19,267

 
36,591

 
19,991

Pension and other postretirement benefit liabilities
 
165,741

 
172,687

 
179,824

Environmental costs(2)
 
63,464

 
63,339

 
72,128

Gas costs
 
14

 
48

 
84

Decoupling(3)
 
829

 
1,025

 
3,970

Other(4)
 
9,295

 
10,137

 
15,579

Total non-current
 
$
333,917

 
$
345,352

 
$
356,608

 
 
Regulatory Liabilities
 
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
Current:
 
 
 
 
 
 
Gas costs
 
$
20,716

 
$
16,459

 
$
14,886

Unrealized gain on derivatives(1)
 
2,862

 
2,020

 
1,674

Decoupling(3)
 
1,697

 
314

 
322

Other(4)
 
12,229

 
15,866

 
17,131

Total current
 
$
37,504

 
$
34,659

 
$
34,013

Non-current:
 
 
 
 
 
 
Gas costs
 
$
1,409

 
$
1,015

 
$
4,630

Unrealized gain on derivatives(1)
 
861

 
1,555

 
1,306

Decoupling(3)
 
119

 

 
957

Income taxes(6)
 
223,841

 

 
213,306

Accrued asset removal costs(7)
 
375,257

 
356,106

 
360,929

Other(4)
 
4,688

 
5,162

 
4,965

Total non-current
 
$
606,175

 
$
363,838

 
$
586,093

(1) 
Unrealized gains or losses on derivatives are non-cash items and therefore, do not earn a rate of return or a carrying charge. These amounts are recoverable through utility rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement.
(2) 
Refer to footnote (3) per the Deferred Regulatory Asset table in Note 15 for a description of environmental costs.
(3) 
This deferral represents the margin adjustment resulting from differences between actual and expected volumes. 
(4) 
Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge.
(5) 
Refer to footnote (1) of the Net Periodic Benefit Cost table in Note 8 for information regarding the deferral of pension expenses.
(6) 
This balance represents estimated amounts associated with the Tax Cuts and Jobs Act. See Note 9.
(7) 
Estimated costs of removal on certain regulated properties are collected through rates.

We believe all costs incurred and deferred at September 30, 2018 are prudent. All regulatory assets and liabilities are reviewed annually for recoverability, or more often if circumstances warrant. If we should determine that all or a portion of these regulatory assets or liabilities no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances in the period such determination is made.


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New Accounting Standards
We consider the applicability and impact of all accounting standards updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on NW Natural's consolidated financial position or results of operations.

Recently Adopted Accounting Pronouncements
STOCK COMPENSATION. On May 10, 2017, the FASB issued ASU 2017-09, "Stock Compensation - Scope of Modification Accounting." The purpose of the amendment is to provide clarity, reduce diversity in practice, and reduce the cost and complexity when applying the guidance in Topic 718, related to a change to the terms or conditions of a share-based payment award. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this update were effective for NW Natural beginning January 1, 2018, and will be applied prospectively to any award modified on or after the adoption date. The adoption did not have a material impact to financial statements or disclosures.

RETIREMENT BENEFITS. On March 10, 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost." The ASU requires entities to disaggregate current service cost from the other components of net periodic benefit cost and present it with other current compensation costs for related employees in the income statement. Additionally, the other components of net periodic benefit costs are to be presented elsewhere in the income statement and outside of income from operations, if that subtotal is presented. Only the service cost component of the net periodic benefit cost is eligible for capitalization. The amendments in this update were effective for us beginning January 1, 2018.

Upon adoption, the ASU required that changes to the income statement presentation of net periodic benefit cost be applied retrospectively, while changes to amounts capitalized must be applied prospectively. As such, the interest cost, expected return on assets, amortization of prior service costs, and other costs have been reclassified from operations and maintenance expense to other income (expense), net on the consolidated statement of comprehensive income for the three and nine months ended September 30, 2017. NW Natural did not elect the practical expedient which would have allowed us to reclassify amounts disclosed previously in the pension and other postretirement benefits footnote disclosure as the basis for applying retrospective presentation. As mentioned above, on a prospective basis, the other components of net periodic benefit cost will not be eligible for capitalization, however, they will continue to be included in the pension regulatory balancing mechanism.

The retrospective presentation requirement related to the other components of net periodic benefit cost affected the operations and maintenance expense and other income (expense), net lines on the consolidated statement of comprehensive income. For the three and nine months ended September 30, 2017, $1.4 million and $4.0 million of expense was reclassified from operations and maintenance expense and included in other income (expense), net, respectively.

GOODWILL. On January 26, 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." The ASU removes Step 2 from the goodwill impairment test and under the amended guidance an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount in which the carrying amounts exceeds the fair value of the reporting unit. The amendments in this standard are effective for us beginning January 1, 2020 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. NW Natural early adopted ASU 2017-04 in the third quarter ended September 30, 2018. The adoption of this ASU did not materially affect the financial statements and disclosures.

STATEMENT OF CASH FLOWS. On August 26, 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." The ASU adds guidance pertaining to the classification of certain cash receipts and payments on the statement of cash flows. The purpose of the amendment is to clarify issues that have been creating diversity in practice. The amendments in this standard were effective for us beginning January 1, 2018, and the adoption did not have a material impact to financial statements or disclosures as NW Natural's historical practices and presentation were consistent with the directives of this ASU.

FINANCIAL INSTRUMENTS. On January 5, 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The new standard was effective for us beginning January 1, 2018, and the adoption did not materially impact financial statements or disclosures.

REVENUE RECOGNITION. On May 28, 2014, the FASB issued ASU 2014-09 "Revenue From Contracts with Customers." The underlying principle of the guidance requires entities to recognize revenue depicting the transfer of goods or services to customers at amounts the entity is expected to be entitled to in exchange for those goods or services. The ASU also prescribes a five-step approach to revenue recognition: (1) identify the contract(s) with the customer; (2) identify the separate performance obligations in the contract(s); (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when, or as, each performance obligation is satisfied. The guidance also requires additional disclosures, both qualitative and quantitative, regarding the nature, amount, timing and uncertainty of revenue and cash flows.


14



The new accounting standard and all related amendments were effective for us beginning January 1, 2018. NW Natural applied the accounting standard to all contracts using the modified retrospective method. The new standard is primarily reflected in the consolidated statement of comprehensive income and Note 5. The implementation of the new revenue standard did not result in changes to how NW Natural currently recognizes revenue, and therefore, no cumulative effect or adjustment to the opening balance of retained earnings was required. The implementation did result in changes to the disclosures and presentation of revenue and expenses. The comparative information for prior years has not been restated. There is no material impact to financial results and no significant changes to NW Natural's control environment due to the adoption of the new revenue standard on an ongoing basis.

As previously discussed, the adoption of the new revenue standard did not impact the consolidated balance sheet or statement of cash flows but did result in changes to the presentation of the consolidated statements of comprehensive income. Had the adoption of the new revenue standard not occurred, operating revenues for the three and nine months ended September 30, 2018 would have been $87.7 million and $458.7 million, compared to the reported amounts of $91.2 million and $479.4 million under the new revenue standard, respectively. Similarly, absent the impact of the new revenue standard, operating expenses would have been $93.9 million and $388.8 million, compared to the reported amounts of $97.4 million and $409.5 million under the new revenue standard for the three and nine months ended September 30, 2018, respectively. The effect of the change was an increase in both operating revenues and operating expenses of $3.5 million and $20.7 million for the three and nine months ended September 30, 2018, respectively, due to the change in presentation of revenue taxes. As part of the adoption of the new revenue standard, we evaluated the presentation of revenue taxes under the new guidance and across NW Natural's peer group and concluded that the gross presentation of revenue taxes provides the greatest level of consistency and transparency. Prior to the adoption of the new revenue standard, a portion of revenue taxes was presented net in operating revenues and a portion was recorded directly on the balance sheet. During the three and nine months ended September 30, 2018, NW Natural recognized $3.5 million and $20.7 million in revenue taxes in operating revenues and operating expenses, respectively. In comparison, for the three and nine months ended September 30, 2017, NW Natural recognized $3.7 million and $23.0 million in revenue taxes, of which $2.3 million and $13.3 million were recorded in operating revenues and $1.4 million and $9.7 million were recorded on the balance sheet, respectively. The change in presentation of revenue taxes had no impact on utility margin, net income or earnings per share.

Recently Issued Accounting Pronouncements
CLOUD COMPUTING. On August 29, 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The purpose of the amendment is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amended guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently assessing the effect of this standard on financial statements and disclosures.

RETIREMENT BENEFITS. On August 28, 2018, the FASB issued ASU 2018-14, "Changes to the Disclosure Requirements for Defined Benefit Plans." The purpose of the amendment is to modify the disclosure requirements for defined benefit pension and other postretirement plans. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amended presentation and disclosure guidance should be applied retrospectively. We are currently assessing the effect of this standard on disclosures.

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

ACCUMULATED OTHER COMPREHENSIVE INCOME. On February 14, 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This update was issued in response to concerns from certain stakeholders regarding the current requirements under U.S. GAAP that deferred tax assets and liabilities are adjusted for a change in tax laws or rates, and the effect is to be included in income from continuing operations in the period of the enactment date. This requirement is also applicable to items in accumulated other comprehensive income where the related tax effects were originally recognized in other comprehensive income. The adjustment of deferred taxes due to the new corporate income tax rate enacted through the Tax Cuts and Jobs Act (TCJA) on December 22, 2017 recognized in income from continuing operations causes the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects) to not reflect the appropriate tax rate. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA and require certain disclosures about stranded tax effects. The amendments in this update are effective for us beginning January 1, 2019, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the federal corporate income tax rate in the TCJA is recognized. The

15



reclassification allowed in this update is elective, and we are currently assessing whether NW Natural will make the reclassification. This update is not expected to have a material impact on financial condition.

DERIVATIVES AND HEDGING. On August 28, 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities." The purpose of the amendment is to more closely align hedge accounting with companies’ risk management strategies. The ASU amends the accounting for risk component hedging, the hedged item in fair value hedges of interest rate risk, and amounts excluded from the assessment of hedge effectiveness. The guidance also amends the recognition and presentation of the effect of hedging instruments and includes other simplifications of hedge accounting. The amendments in this update are effective for us beginning January 1, 2019. Early adoption is permitted. The amended presentation and disclosure guidance is required prospectively. We are currently assessing the effect of this standard on financial statements and disclosures.

LEASES. On February 25, 2016, the FASB issued ASU 2016-02, "Leases," which revises the existing lease accounting guidance. Pursuant to the new standard, lessees will be required to recognize all leases, including operating leases that are greater than 12 months at lease commencement, on the balance sheet and record corresponding right-of-use assets and lease liabilities. Lessor accounting will remain substantially the same under the new standard. Quantitative and qualitative disclosures are also required for users of the financial statements to have a clear understanding of the nature of NW Natural's leasing activities. On November 29, 2017, the FASB proposed an additional practical expedient that would allow entities to apply the transition requirements on the effective date of the standard. Additionally, on January 25, 2018, the FASB issued ASU 2018-01, "Land Easement Practical Expedient for Transition to Topic 842", to address the costs and complexity of applying the transition provisions of the new lease standard to land easements. This ASU provides an optional practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under the current lease guidance. The standard and associated ASUs are effective for us beginning January 1, 2019. We are currently assessing NW Natural's lease population and material contracts to determine the effect of this standard on financial statements and disclosures. Refer to Note 14 of the 2017 Form 10-K for NW Natural's current lease commitments.

3. EARNINGS PER SHARE

Basic earnings per share are computed using net income and the weighted average number of common shares outstanding for each period presented. Diluted earnings per share are computed in the same manner, except using the weighted average number of common shares outstanding plus the effects of the assumed exercise of stock options and the payment of estimated stock awards from other stock-based compensation plans that are outstanding at the end of each period presented. Antidilutive stock awards are excluded from the calculation of diluted earnings per common share.

Diluted earnings (loss) from continuing operations per share are calculated as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In thousands, except per share data
 
2018
 
2017
 
2018
 
2017
Net income (loss) from continuing operations
 
$
(11,144
)
 
$
(7,887
)
 
$
30,528

 
$
37,585

Average common shares outstanding - basic
 
28,815

 
28,678

 
28,787

 
28,653

Additional shares for stock-based compensation plans (See Note 6)
 

 

 
59

 
81

Average common shares outstanding - diluted
 
28,815

 
28,678

 
28,846

 
28,734

Earnings (loss) from continuing operations per share of common stock - basic
 
$
(0.39
)
 
$
(0.28
)
 
$
1.06

 
$
1.32

Earnings (loss) from continuing operations per share of common stock - diluted
 
$
(0.39
)
 
$
(0.28
)
 
$
1.06

 
$
1.31

Additional information:
 
 
 
 
 
 
 
 
Antidilutive shares
 
73

 
96

 
4

 
15


4. SEGMENT INFORMATION

We primarily operate in one reportable business segment, which is NW Natural's local gas distribution business and is referred to as the utility segment. During the second quarter of 2018, we moved forward with long-term strategic plans, which include a shift away from the California gas storage business, by entering into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in Gill Ranch, subject to various regulatory approvals and closing conditions. As such, we reevaluated reportable segments and concluded that the gas storage activities no longer meet the requirements of a reportable segment. Ongoing, non-utility gas storage activities, which include interstate storage and asset management activities at the Mist gas storage facility, are now reported as other. NW Natural also has regulated water operations, other investments, and

16



business activities not specifically related to the utility segment, which are aggregated and reported as other. We refer to NW Natural's local gas distribution business as the utility and all other activities as non-utility.

Local Gas Distribution
NW Natural's local gas distribution segment is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to customers in Oregon and southwest Washington. As a regulated utility, NW Natural is responsible for building and maintaining a safe and reliable pipeline distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for firm and interruptible transportation of gas over interstate pipelines to bring gas from the supply basins into its service territory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the OPUC or WUTC. Gas distribution 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. As of December 31, 2017, approximately 89% of NW Natural's customers are located in Oregon and 11% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of utility total volumes delivered and 90% of utility margin. Industrial customers largely account for the remaining volumes and utility margin. A small amount of utility margin is also derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other service fees.
Industrial sectors served by NW Natural include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries; government and educational institutions; and electric generation.
In addition to NW Natural's local gas distribution business, the utility segment also includes the utility portion of the Mist underground storage facility, the North Mist gas storage expansion in Oregon, and NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp.

Other
Regulated water operations, non-utility investments, and other business activities are aggregated and reported as other. Other includes NWN Gas Storage, a wholly-owned subsidiary of NWN Energy, and the non-utility portion of the Mist facility in Oregon and third-party asset management services. Earnings from non-utility assets at the Mist facility are primarily related to firm storage capacity revenues. Earnings from the Mist facility also include revenue, net of amounts shared with utility customers, from management of utility assets at Mist and upstream pipeline capacity when not needed to serve utility customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity have not been included in utility rates, or 33% of the pre-tax income when the costs have been included in utility rates. The remaining 20% and 67%, respectively, are recorded to a deferred regulatory account for crediting back to utility customers.

Other also includes NNG Financial, non-utility appliance retail center operations, NWN Water, which consolidates the regulated water operations and is pursuing other investments in the water sector itself and through its wholly-owned subsidiaries Falls Water and Cascadia, NWN Energy's equity investment in TWH, which is pursuing development of a cross-Cascades transmission pipeline project and NW Holdings, which was used in effecting the holding company reorganization of NW Natural through its wholly-owned subsidiary NWN Holdco Sub. See Note 1 for information regarding changes to NW Natural's organizational structure subsequent to September 30, 2018.

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.


17



Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segments of continuing operations. See Note 16 for information regarding the discontinued operation, Gill Ranch.
 
 
Three Months Ended September 30,
In thousands
 
Utility
 
Other
 
Total
2018
 
 
 
 
 
 
Operating revenues
 
$
85,077

 
$
6,162

 
$
91,239

Depreciation and amortization
 
21,127

 
358

 
21,485

Income (loss) from operations
 
(9,780
)
 
3,669

 
(6,111
)
Net income (loss) from continuing operations
 
(11,983
)
 
839

 
(11,144
)
Capital expenditures
 
55,914

 
511

 
56,425

2017
 
 
 
 
 
 
Operating revenues
 
$
81,126

 
$
5,087

 
$
86,213

Depreciation and amortization
 
20,023

 
329

 
20,352

Income (loss) from operations
 
(8,624
)
 
4,084

 
(4,540
)
Net income (loss) from continuing operations
 
(10,349
)
 
2,462

 
(7,887
)
Capital expenditures
 
50,009

 
932

 
50,941


 
 
Nine Months Ended September 30,
In thousands
 
Utility
 
Other
 
Total
2018
 
 
 
 
 
 
Operating revenues
 
$
461,525

 
$
17,916

 
$
479,441

Depreciation and amortization
 
62,436

 
1,071

 
63,507

Income from operations
 
59,521

 
10,388

 
69,909

Net income from continuing operations
 
24,930

 
5,598

 
30,528

Capital expenditures

156,609


2,186


158,795

Total assets at September 30, 2018(1)
 
2,972,066

 
96,697

 
3,068,763

2017
 
 
 
 
 


Operating revenues
 
$
503,947

 
$
12,466

 
$
516,413

Depreciation and amortization
 
59,541

 
988

 
60,529

Income from operations
 
81,661

 
9,315

 
90,976

Net income from continuing operations
 
31,980

 
5,605

 
37,585

Capital expenditures
 
143,128

 
2,146

 
145,274

Total assets at September 30, 2017(1)
 
2,835,860

 
63,563

 
2,899,423

Total assets at December 31, 2017(1)
 
2,961,326

 
64,546

 
3,025,872

(1)
Total assets exclude assets related to discontinued operations of $12.6 million, $206.2 million, and $13.9 million as of September 30, 2018, September 30, 2017, and December 31, 2017, respectively.

Utility Margin
Utility margin is a financial measure used by the chief operating decision maker (CODM) consisting of utility operating revenues, reduced by the associated cost of gas, environmental recovery revenues, and revenue taxes. The cost of gas purchased for utility customers is generally a pass-through cost in the amount of revenues billed to regulated utility customers. Environmental recovery revenues represent collections received from customers through the environmental recovery mechanism in Oregon. These collections are offset by the amortization of environmental liabilities, which is presented as environmental remediation expense in operating expenses. Revenue taxes are collected from utility customers and remitted to taxing authorities. The collections from customers are offset by the expense recognition of the obligation to the taxing authority. By subtracting cost of gas, environmental remediation expense, and revenue taxes from utility operating revenues, utility margin provides a key metric used by the CODM in assessing the performance of the utility segment.


18



The following table presents additional segment information concerning utility margin:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In thousands
 
2018
 
2017
 
2018
 
2017
Utility margin calculation:
 
 
 
 
 
 
 
 
Utility operating revenues
 
$
85,077

 
$
81,126

 
$
461,525

 
$
503,947

Less: Utility cost of gas
 
25,593

 
27,239

 
175,864

 
223,855

          Environmental remediation expense
 
1,022

 
1,355

 
7,528

 
10,920

Revenue taxes(1)
 
3,522

 

 
20,731

 

Utility margin
 
$
54,940

 
$
52,532

 
$
257,402

 
$
269,172

(1) 
The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and all related amendments on January 1, 2018. This change had no impact on utility margin results as revenue taxes were previously presented net in utility operating revenue. For additional information, see Note 2.

5. REVENUE

The following table presents disaggregated revenue from continuing operations:
 
 
Three months ended September 30, 2018
In thousands
 
Utility
 
Other
 
Total
Local gas distribution revenue
 
$
82,358

 
$

 
$
82,358

Gas storage revenue, net
 

 
2,415

 
2,415

Asset management revenue, net
 

 
2,714

 
2,714

Appliance retail center revenue
 

 
1,033

 
1,033

    Revenue from contracts with customers
 
82,358

 
6,162

 
88,520

 
 
 
 
 
 
 
Alternative revenue
 
1,994

 

 
1,994

Leasing revenue
 
725

 

 
725

    Total operating revenues
 
$
85,077

 
$
6,162

 
$
91,239

 
 
Nine months ended September 30, 2018
In thousands
 
Utility
 
Other
 
Total
Local gas distribution revenue
 
$
455,312

 
$

 
$
455,312

Gas storage revenue, net
 

 
7,189

 
7,189

Asset management revenue, net
 

 
6,974

 
6,974

Appliance retail center revenue
 

 
3,753

 
3,753

    Revenue from contracts with customers
 
455,312

 
17,916

 
473,228

 
 
 
 
 
 
 
Alternative revenue
 
5,285

 

 
5,285

Leasing revenue
 
928

 

 
928

    Total operating revenues
 
$
461,525

 
$
17,916

 
$
479,441


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

NW Natural does 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 Natural does not have any material contract liabilities.

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


19



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

NW Natural applied the significant financing practical expedient and has not adjusted the consideration it expects to receive from utility customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, NW Natural does not disclose the value of unsatisfied performance obligations as of September 30, 2018.

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

Leasing revenue. Leasing revenue primarily consists of rental revenue for small leases of utility-owned property to third parties. The transactions are accounted for as operating leases and the revenue is recognized on a straight-line basis over the term of the lease agreement. Lease revenue is excluded from revenue from contracts with customers.

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

Asset management revenue. Asset management revenue is generally recognized over time using a straight-line approach over the term of each contract, and the amount of consideration received and recognized as revenue is dependent on a variable pricing model. Variable revenues earned above guaranteed amounts are estimated and recognized at the end of each period using the most likely amount approach. Revenues include the optimization of the storage assets and pipeline capacity provided, net of the profit sharing amount refunded to utility customers. Asset management accounts are settled on a monthly basis.

As of September 30, 2018, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $43.8 million. Of this amount, approximately $5.1 million will be recognized during the remainder of 2018, $11.9 million in 2019, $9.2 million in 2020, $8.3 million in 2021, $4.6 million in 2022 and $4.7 million thereafter. The amounts presented here are calculated using current contracted rates. On October 12, 2018, NW Natural filed a rate petition with FERC for revised maximum cost-based rates, which incorporated the new federal corporate income tax rate as well as an updated depreciation study. NW Natural does not expect the new FERC rates to have a significant financial impact.

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

6. STOCK-BASED COMPENSATION

Stock-based compensation plans are designed to promote stock ownership in NW Natural, and after October 1, 2018, NW Holdings, by employees and officers of NW Natural and certain approved affiliates. These compensation plans include a Long Term Incentive Plan (LTIP), an Employee Stock Purchase Plan (ESPP), and a Restated Stock Option Plan. For additional information on stock-based compensation plans, see Note 6 in the 2017 Form 10-K and the updates provided below.


20



Long Term Incentive Plan
Performance Shares
LTIP performance shares incorporate a combination of market, performance, and service-based factors. During the nine months ended September 30, 2018, no performance-based shares were granted under the LTIP for accounting purposes. In February 2018, the 2018 LTIP was awarded to participants; however, the agreement allows for one of the performance factors to remain variable until the first quarter of the third year of the award period. As the performance factor will not be approved until the first quarter of 2020, there is not a mutual understanding of the award’s key terms and conditions between NW Natural and the participants as of September 30, 2018, and therefore, no expense was recognized for the 2018 award. NW Natural will calculate the grant date fair value and recognize expense once the final performance factor has been approved.

For the 2018 LTIP, award share payouts range from a threshold of 0% to a maximum of 200% based on achievement of pre-established goals. The performance criteria for the 2018 performance shares consists of a three-year Return on Invested Capital (ROIC) threshold that must be satisfied and a cumulative EPS factor, which can be modified by a total shareholder return factor (TSR modifier) relative to the performance of the Russell 2500 Utilities Index over the three-year performance period. If the target was achieved for the 2018 award, NW Holdings would grant 34,702 shares in the first quarter of 2020.

As of September 30, 2018, there was $1.3 million of unrecognized compensation cost associated with the 2016 and 2017 LTIP grants, which is expected to be recognized through 2019.

Restricted Stock Units
During the nine months ended September 30, 2018, 31,490 RSUs were granted under the LTIP with a weighted-average grant date fair value of $57.37 per share. Generally, the RSUs awarded are forfeitable and include a performance-based threshold as well as a vesting period of four years from the grant date. Generally, an RSU obligates us, upon vesting, to issue the RSU holder one share of common stock plus a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of that portion of the RSU. The fair value of an RSU is equal to the closing market price of common stock on the grant date. As of September 30, 2018, there was $3.4 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through 2023.

7. DEBT

Short-Term Debt
At September 30, 2018, NW Natural had short-term debt of $100.5 million, which was comprised entirely of commercial paper. The carrying cost of commercial paper approximates fair value using Level 2 inputs. See Note 2 in the 2017 Form 10-K for a description of the fair value hierarchy. At September 30, 2018, NW Natural's commercial paper had a maximum remaining maturity of 12 days and average remaining maturity of 7 days.

Long-Term Debt
At September 30, 2018, NW Natural had long-term debt of $809.6 million, which included $5.9 million of unamortized debt issuance costs. Utility long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 2018 through 2048, interest rates ranging from 1.545% to 9.05%, and a weighted average coupon rate of 4.690%. In March 2018, NW Natural retired $22.0 million of FMBs with a coupon rate of 6.60%, and in September 2018, NW Natural issued $50.0 million of FMBs with a coupon rate of 4.110%, due in 2048.

Fair Value of Long-Term Debt
NW Natural's outstanding debt does not trade in active markets. NW Natural estimates the fair value of long-term debt using utility companies with similar credit ratings, terms, and remaining maturities to NW Natural's long-term debt that actively trade in public markets. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2 in the 2017 Form 10-K for a description of the fair value hierarchy.

The following table provides an estimate of the fair value of long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:
 
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
Gross long-term debt
 
$
815,534

 
$
786,700

 
$
786,700

Unamortized debt issuance costs
 
(5,940
)
 
(7,276
)
 
(6,813
)
Carrying amount
 
$
809,594

 
$
779,424

 
$
779,887

Estimated fair value(1)
 
$
833,962

 
$
847,068

 
$
853,339

(1) Estimated fair value does not include unamortized debt issuance costs.


21



8. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS

NW Natural recognizes the service cost component of net periodic benefit cost for the pension and other postretirement benefit plans 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 the pension and other postretirement benefit plans:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
Pension Benefits
 
Other Postretirement
Benefits
 
Pension Benefits
 
Other
Postretirement
Benefits
In thousands
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
1,757

 
$
1,881

 
$
80

 
$
98

 
$
5,371

 
$
5,621

 
$
239

 
$
295

Interest cost
 
4,336

 
4,484

 
241

 
274

 
12,702

 
13,428

 
723

 
822

Expected return on plan assets
 
(5,143
)
 
(5,112
)
 

 

 
(15,444
)
 
(15,337
)
 

 

Amortization of prior service costs
 
11

 
32

 
(117
)
 
(117
)
 
32

 
95

 
(351
)
 
(351
)
Amortization of net actuarial loss
 
5,650

 
3,656

 
110

 
138

 
14,697

 
10,899

 
332

 
415

Net periodic benefit cost
 
6,611

 
4,941

 
314

 
393

 
17,358

 
14,706

 
943

 
1,181

Amount allocated to construction
 
(659
)
 
(1,581
)
 
(27
)
 
(136
)
 
(2,026
)
 
(4,660
)
 
(82
)
 
(403
)
Amount deferred to regulatory balancing account(1)
 
(3,878
)
 
(1,484
)
 

 

 
(9,381
)
 
(4,519
)
 

 

Net amount charged to expense
 
$
2,074

 
$
1,876

 
$
287

 
$
257

 
$
5,951

 
$
5,527

 
$
861

 
$
778

(1)
The deferral of defined benefit pension plan expenses above or below the amount set in rates was approved by the OPUC, with recovery of these deferred amounts through the implementation of a balancing account. On October 26, 2018 the OPUC ordered that the balancing account be frozen as of October 31, 2018, with recovery subject to future proceedings. Effective November 1, 2018 the OPUC authorized an additional $8.1 million to be included in rates for defined benefit pension plan expenses. Deferred pension expense balances include accrued interest at the utility’s authorized rate of return, with the equity portion of the interest recognized when amounts are collected in rates. See Note 2 in the 2017 Form 10-K.

The following table presents amounts recognized in accumulated other comprehensive loss (AOCL) and the changes in AOCL related to non-qualified employee benefit plans:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In thousands
 
2018
 
2017
 
2018
 
2017
Beginning balance
 
$
(8,131
)
 
$
(6,678
)
 
$
(8,438
)
 
$
(6,951
)
Amounts reclassified from AOCL:
 
 
 
 
 
 
 
 
Amortization of actuarial losses
 
209

 
248

 
627

 
698

Total reclassifications before tax
 
209

 
248

 
627

 
698

Tax (benefit) expense
 
(55
)
 
(98
)
 
(166
)
 
(275
)
Total reclassifications for the period
 
154

 
150

 
461

 
423

Ending balance
 
$
(7,977
)
 
$
(6,528
)
 
$
(7,977
)
 
$
(6,528
)

Employer Contributions to Company-Sponsored Defined Benefit Pension Plans
For the nine months ended September 30, 2018, NW Natural made cash contributions totaling $11.7 million to qualified defined benefit pension plans. NW Natural expects further plan contributions of $3.9 million during the remainder of 2018.

Defined Contribution Plan
The Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). Employer contributions totaled $5.0 million and $4.1 million for the nine months ended September 30, 2018 and 2017, respectively.

See Note 8 in the 2017 Form 10-K for more information concerning these retirement and other postretirement benefit plans.

9. INCOME TAX

An estimate of annual income tax expense is made each interim period using estimates for annual pre-tax income, regulatory flow-through adjustments, tax credits, and other items. The estimated annual effective tax rate is applied to year-to-date, pre-tax income to determine income tax expense for the interim period consistent with the annual estimate.

22



The effective income tax rate varied from the combined federal and state statutory tax rates due to the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in thousands
 
2018
 
2017
 
2018

2017
Income taxes at statutory rates (federal and state)
 
$
(4,136
)
 
$
(5,440
)
 
$
11,097

 
$
24,472

Increase (decrease):
 
 
 
 
 
 
 
 

Differences required to be flowed-through by regulatory commissions
 
(266
)
 
(302
)
 
569

 
1,282

Other, net
 
117

 
20

 
(475
)
 
(1,298
)
Total provision (benefit) for income taxes on continuing operations
 
$
(4,285
)
 
$
(5,722
)
 
$
11,191

 
$
24,456

Effective tax rate for continuing operations
 
27.8
%
 
42.0
%
 
26.8
%
 
39.4
%

The effective income tax rate for the three and nine months ended September 30, 2018 compared to the same periods in 2017 decreased primarily as a result of the TCJA and lower pre-tax income. See "U.S. Federal TCJA Matters" below and Note 9 in the 2017 Form 10-K for more detail on income taxes and effective tax rates.

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

U.S. Federal TCJA Matters
On December 22, 2017, the TCJA was enacted and permanently lowered the U.S. federal corporate income tax rate to 21% from the previous maximum rate of 35%, effective for the tax year beginning January 1, 2018. The TCJA includes specific provisions related to regulated public utilities that provide for the continued deductibility of interest expense and the elimination of bonus depreciation on a prospective basis.

Under pre-TCJA law, business interest expense was generally deductible in the determination of taxable income. The TCJA imposes a new limitation on the deductibility of net business interest expense in excess of approximately 30% of adjusted taxable income beginning January 1, 2018. Taxpayers operating in the trade or business of public regulated utilities are excluded from these new interest expense limitations. There is ongoing uncertainty with regards to the application of the new interest expense limitation to non-regulated operations, primarily with respect to the allocation of interest between regulated and non-regulated trades or businesses. See Note 9 in the 2017 Form 10-K.

The TCJA generally provides for immediate full expensing for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. This would generally provide for accelerated cost recovery for capital investments. However, the definition of qualified property excludes property used in the trade or business of a public regulated utility. The definition of utility trade or business is the same as that used by the TCJA with respect to the imposition of the net interest expense limitation discussed above. As a result, ongoing uncertainty exists with respect to the application of full expensing to non-regulated activities. See Note 9 in the 2017 Form 10-K.

NW Natural had an estimated regulatory liability of $216.6 million and $213.3 million for the change in regulated utility deferred taxes as a result of the TCJA as of September 30, 2018 and December 31, 2017, respectively. These balances included a gross-up for income taxes of $57.4 million and $56.5 million, respectively. It is possible that this estimated balance may increase or decrease in the future as additional authoritative interpretation of the TCJA becomes available, or as a result of regulatory guidance from the OPUC or WUTC. NW Natural anticipates 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 utility rate base which is a component of customer rates. It is not yet certain when the final resolution of these regulatory proceedings will occur, and as result, this regulatory liability is classified as long-term.

As noted in the 2017 Form 10-K, Note 9, the determination to exclude all assets placed in service after September 27, 2017 from bonus depreciation was provisional as provided for under Staff Accounting Bulletin (SAB) 118. During the third quarter, the Internal Revenue Service and Treasury issued Proposed Regulations addressing additional first year tax depreciation under the TCJA. These Proposed Regulations, while not definitive, indicate the IRS' initial interpretation that additional first year bonus depreciation was available for regulated utility assets placed in service after September 27, 2017 but before January 1, 2018. On the basis of these proposed regulations, NW Natural revised the provisional estimate of deferred taxes and income taxes payable. NW Natural recognized increases to prepaid income tax of $7.3 million, deferred income tax liability of $4.0 million, and regulatory liability of $3.3 million during the third quarter of 2018.

Utility rates in effect include an allowance to provide for the recovery of the anticipated provision for income taxes incurred as a result of providing regulated services. As a result of the newly enacted 21% federal corporate income tax rate, NW Natural recorded an additional regulatory liability in 2018 reflecting the estimated net reduction in the provision for income taxes. This revenue deferral is based on the estimated net benefit to customers using forecasted regulated utility earnings, considering

23



average weather and associated volumes, and includes a gross-up for income taxes. As of September 30, 2018, a regulatory liability of $7.2 million, including accrued interest, was recorded to reflect this estimated revenue deferral.

10. PROPERTY, PLANT, AND EQUIPMENT

The following table sets forth the major classifications of property, plant, and equipment and accumulated depreciation of continuing operations:

 
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
Utility plant in service
 
$
3,068,234

 
$
2,934,424

 
$
2,975,217

Utility construction work in progress
 
227,200

 
145,148

 
159,924

Less: Accumulated depreciation
 
978,446

 
937,498

 
942,879

Utility plant, net
 
2,316,988

 
2,142,074

 
2,192,262

Other plant in service
 
69,449

 
64,929

 
65,372

Other construction work in progress
 
5,505

 
4,044

 
4,122

Less: Accumulated depreciation
 
18,548

 
17,284

 
17,598

Other plant, net (1)
 
56,406

 
51,689

 
51,896

Total property, plant, and equipment
 
$
2,373,394

 
$
2,193,763

 
$
2,244,158

 
 
 
 
 
 
 
Capital expenditures in accrued liabilities (2)
 
$
27,692

 
$
41,675

 
$
34,761

(1)
Previously reported non-utility balances were restated due to the assets and liabilities associated with Gill Ranch now being classified as discontinued operations assets and liabilities on the consolidated balance sheets. See Note 16 for further discussion.
(2)
Previously reported capital expenditures in accrued liabilities were restated due to the assets and liabilities associated with Gill Ranch now being classified as discontinued operations assets and liabilities on the consolidated balance sheets. Capital expenditures in accrued liabilities related to Gill Ranch were approximately $0.3 million, $0.1 million, and $0.2 million as of September 30, 2018, September 30, 2017, and December 31, 2017, respectively.

Other plant balances include long-lived assets associated with water operations and non-regulated activities.

Build-to-suit Assets
In October 2017, NW Natural entered into a 20-year operating lease agreement commencing in 2020 for the new headquarters location in Portland, Oregon. NW Natural's existing headquarters lease expires in 2020. The search and evaluation process focused on seismic preparedness, safety, reliability, least cost to customers, and a continued commitment to employees and the communities we serve. The lease was analyzed in consideration of build-to-suit lease accounting guidance, and we concluded that NW Natural is the accounting owner of the asset during construction. As a result, NW Natural recognized $16.0 million and $0.5 million in property, plant and equipment and an obligation in other non-current liabilities for the same amount in the consolidated balance sheet at September 30, 2018 and December 31, 2017, respectively. In 2019, pursuant to the new lease standard issued by the FASB, NW Natural expects to de-recognize the associated build-to-suit asset and liability. See Note 14 in the 2017 Form 10-K.

11. GAS RESERVES

NW Natural has invested approximately $188 million through the gas reserves program in the Jonah Field located in Wyoming as of September 30, 2018. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits recorded as liabilities in the consolidated balance sheets. The investment in gas reserves provides long-term price protection for utility customers through the original agreement with Encana Oil & Gas (USA) Inc. under which NW Natural invested approximately $178 million and the amended agreement with Jonah Energy LLC under which an approximate additional $10 million was invested.

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

Gas produced from the additional wells is included in the Oregon PGA at a fixed rate of $0.4725 per therm, which approximates the 10-year hedge rate plus financing costs at the inception of the investment.


24



The following table outlines net gas reserves investment:
 
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
Gas reserves, current
 
$
16,916

 
$
16,218

 
$
15,704

Gas reserves, non-current
 
170,391

 
171,318

 
171,832

Less: Accumulated amortization
 
99,835

 
83,442

 
87,779

Total gas reserves(1)
 
87,472

 
104,094

 
99,757

Less: Deferred taxes on gas reserves
 
19,377

 
29,298

 
22,712

Net investment in gas reserves
 
$
68,095

 
$
74,796

 
$
77,045

(1)
The net investment in additional wells included in total gas reserves was $5.0 million, $6.0 million and $5.8 million at September 30, 2018 and 2017 and December 31, 2017, respectively.

The investment is included in the consolidated balance sheets under gas reserves with a maximum loss exposure limited to the investment balance.

12. INVESTMENTS

Investments in Gas Pipeline
Trail West Pipeline, LLC (TWP), a wholly-owned subsidiary of TWH, is pursuing the development of a new gas transmission pipeline that would provide an interconnection with NW Natural's utility distribution system. NWN Energy, then a wholly-owned subsidiary of NW Natural, owns 50% of TWH, and 50% is owned by TransCanada American Investments Ltd., an indirect wholly-owned subsidiary of TransCanada Corporation.

Variable Interest Entity (VIE) Analysis
TWH is a VIE, with NW Natural's investment in TWP reported under equity method accounting. We have determined that NW Natural is not the primary beneficiary of TWH’s activities as it only has a 50% share of the entity, and there are no stipulations that allow a disproportionate influence over it. Investments in TWH and TWP are included in other investments in the balance sheet. If we do not develop this investment, the maximum loss exposure related to TWH is limited to the equity investment balance, less its share of any cash or other assets available as a 50% owner. The investment balance in TWH was $13.4 million at September 30, 2018 and 2017 and December 31, 2017. See Note 12 in the 2017 Form 10-K.

Other Investments
Other investments include financial investments in life insurance policies, which are accounted for at cash surrender value, net of policy loans. See Note 12 in the 2017 Form 10-K.

13. BUSINESS COMBINATIONS

On September 13, 2018, NWN Water, then a wholly-owned subsidiary of NW Natural, completed the acquisition of Falls Water Co., Inc., a privately-owned water utility in the Pacific Northwest for preliminary non-cash consideration of $8.5 million, subject to closing adjustments, in the form of 125,000 shares of NW Natural common stock. Falls Water became a wholly-owned subsidiary of NWN Water and marked its first acquisition in the regulated water utility sector. This acquisition aligns with our water sector strategy as the acquisition provides NWN Water entry into Idaho, expands service area, and opens further opportunity for growth. Falls Water is based in Idaho Falls, Idaho and serves approximately 5,300 connections.

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

Preliminary goodwill of $6.6 million was recognized from this acquisition and is attributable to Falls Water's regulated service territory and experienced workforce as well as the strategic benefits expected from this high-growth service territory. NW Natural has included this goodwill in other for segment reporting purposes, and it is not deductible for income tax purposes. No intangible assets aside from goodwill were acquired.

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

25




An impairment analysis has not been performed in the current year, since all goodwill was acquired in the Falls Water acquisition, which closed in the third quarter of 2018. We anticipate that an annual impairment assessment of goodwill will occur in the fourth quarter of each year, beginning in the fourth quarter of 2018.

14. DERIVATIVE INSTRUMENTS

NW Natural enters into financial derivative contracts to hedge a portion of the utility’s natural gas sales requirements. These contracts include swaps, options and combinations of option contracts. These derivative financial instruments are used to manage commodity price variability. A small portion of the derivative hedging strategy involves foreign currency exchange contracts.

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

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

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

Notional Amounts
The following table presents the absolute notional amounts related to open positions on derivative instruments:
 
 
September 30,
 
December 31,
In thousands
 
2018
 
2017
 
2017
Natural gas (in therms):
 
 
 
 
 
 
Financial
 
513,850

 
521,080

 
429,100

Physical
 
760,925

 
750,650

 
520,268

Foreign exchange
 
$