Significant Accounting Policies

9 Months Ended

Sep. 30, 2021

SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies are described in Note 2 of the 2020 Form 10-K. There were no material changes to those accounting policies during the nine months ended September 30, 2021 other than those set forth in this Note 2. The following are current updates to certain critical accounting policy estimates and new accounting standards.

Industry Regulation

In applying regulatory accounting principles, NW Holdings and NW Natural capitalize or defer 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), Idaho Public Utilities Commission (IPUC) or Public Utility Commission of Texas (PUCT), as applicable, 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.

Amounts deferred as regulatory assets and liabilities for NW Holdings and NW Natural were as follows:


	Regulatory Assets
	September 30,				December 31,
In thousands	2021		2020		2020
NW Natural:
Current:
Unrealized loss on derivatives(1)	$	9,818	$	1,459	$	4,198
Gas costs	39,622		5,207		1,979
Environmental costs(2)	7,068		4,440		4,992
Decoupling(3)	1,628		155		361
Pension balancing(4)	7,131		7,131		7,131
Income taxes	2,939		2,208		3,484
Other(5)	12,432		9,140		9,600
Total current	$	80,638	$	29,740	$	31,745
Non-current:
Unrealized loss on derivatives(1)	$	268	$	921	$	2,852
Pension balancing(4)	40,176		45,203		43,383
Income taxes	13,912		16,792		15,368
Pension and other postretirement benefit liabilities	155,077		159,207		170,812
Environmental costs(2)	83,969		84,567		90,623
Gas costs	2,858		110		3,925
Decoupling(3)	118		6		1,031
Other(5)	28,653		17,330		20,893
Total non-current	$	325,031	$	324,136	$	348,887
Other (NW Holdings)	40		40		40
Total non-current - NW Holdings	$	325,071	$	324,176	$	348,927


	Regulatory Liabilities
	September 30,				December 31,
In thousands	2021		2020		2020
NW Natural:
Current:
Gas costs	$	847	$	1,625	$	1,118
Unrealized gain on derivatives(1)	105,175		23,738		13,674
Decoupling(3)	4,484		12,702		11,793
Income taxes	8,217		6,900		8,217
Asset optimization revenue sharing	43,883		9,020		10,298
Other(5)	1,562		5,251		5,262
Total current	$	164,168	$	59,236	$	50,362
Non-current:
Gas costs	$	—	$	69	$	314
Unrealized gain on derivatives(1)	24,555		12,921		6,135
Decoupling(3)	214		874		1,723
Income taxes(6)	186,429		196,558		189,587
Accrued asset removal costs(7)	440,410		421,353		427,960
Asset optimization revenue sharing	—		58		1,231
Other(5)	12,913		16,818		11,843
Total non-current - NW Natural	$	664,521	$	648,651	$	638,793
Other (NW Holdings)	869		870		870
Total non-current - NW Holdings	$	665,390	$	649,521	$	639,663

(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 NGD rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement.

(2)Refer to footnote (3) of the Deferred Regulatory Asset table in Note 17 for a description of environmental costs.

(3)This deferral represents the margin adjustment resulting from differences between actual and expected volumes.

(4)Balance represents deferred net periodic benefit costs as approved by the OPUC.

(5)Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge.

(6)Balance represents excess deferred income tax benefits subject to regulatory flow-through.

(7)Estimated costs of removal on certain regulated properties are collected through rates.

We believe all costs incurred and deferred at September 30, 2021 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 Holdings and NW Natural would be required to write-off the net unrecoverable balances in the period such determination is made.

Supplemental Cash Flow Information

Restricted cash is primarily comprised of funds from public purpose charges for programs that assist low-income customers with bill payments or energy efficiency. Prior period amounts have been reclassified to conform prior period information to the current presentation.

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Holdings as of September 30, 2021 and 2020 and December 31, 2020:


	September 30,				December 31,
In thousands	2021		2020		2020
Cash and cash equivalents	$	19,502	$	35,926	$	30,168
Restricted cash included in other current assets	8,170		5,245		5,286
Cash, cash equivalents and restricted cash	$	27,672	$	41,171	$	35,454

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of September 30, 2021 and 2020 and December 31, 2020:


	September 30,				December 31,
In thousands	2021		2020		2020
Cash and cash equivalents	$	9,697	$	27,133	$	10,453
Restricted cash included in other current assets	8,170		5,245		5,286
Cash, cash equivalents and restricted cash	$	17,867	$	32,378	$	15,739

Accounts Receivable and Allowance for Uncollectible Accounts

Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD customers, plus amounts due for gas storage services. 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 of revenues. A specific allowance is established and recorded for large individual customer receivables when amounts are identified as unlikely to be partially or fully recovered. Inactive accounts are written-off against the allowance after they are 120 days past due or when deemed uncollectible. Differences between the estimated allowance and actual write-offs will occur based on a number of factors, including changes in economic conditions, customer creditworthiness, and natural gas prices. The allowance for uncollectible accounts is adjusted quarterly, as necessary, based on information currently available.

Allowance for Trade Receivables

Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD customers and amounts due for gas storage services. The payment term of these receivables is generally 15 days. For these short-term receivables, it is not expected that forecasted economic conditions would significantly affect the loss estimates under stable economic conditions. For extreme situations like a financial crisis, natural disaster, and the economic slowdown caused by the COVID-19 pandemic, we enhance our review and analysis.

After considering the significant exposure to COVID-19 related job losses in Oregon and Washington state, NW Holdings and NW Natural expanded our standard review procedures for our allowance for uncollectible accounts calculation, including analyzing the unemployment rate and comparing it to historic economic data during the 2007-2009 time period when the country experienced an economic recession. We are also considering other qualitative information including recent customer interactions related to payment plans and credit issues, statistics from our website related to credit inquiries, and bill assistance programs including the arrearage management program. Our provision calculation for residential accounts is estimated based on the factors noted above including a review of percentage of delinquent accounts. For the residential allowance calculation, we consider the funds applied or granted to customers through a variety of assistance programs including the COVID arrearage management programs in Oregon and Washington. During the third quarter of 2021, the normal collection process for residential accounts resumed and the percentage of accounts disconnected for non-payment was also considered in the provision. For commercial accounts, we have resumed normal collection processes and our provision is based on historical write-off trends and current information on delinquent accounts. 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:


	As of						As of
	December 31, 2020		Nine Months Ended September 30, 2021				September 30, 2021
In thousands	Beginning Balance		Provision recorded, net of adjustments		Write-offs recognized, net of recoveries		Ending Balance
Allowance for uncollectible accounts:
Residential	$	2,153	$	1,322	$	(1,111)	$	2,364
Commercial	704		(337)		(303)		64
Industrial	142		(106)		5		41
Accrued unbilled and other	220		96		(83)		233
Total	$	3,219	$	975	$	(1,492)	$	2,702

Allowance for Net Investments in 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 Portland General Electric (PGE) which is billed under an OPUC-approved rate schedule. See Note 7 for more information on the North 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 uncollectability 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 factors closely tied to the financial health of our current and future lessees.

COVID-19 Impact

During 2020, our regulated utilities received approval in their respective jurisdictions to defer certain financial impacts associated with COVID-19 such as bad debt expense, financing costs to secure liquidity, lost revenues related to late fees, and other COVID-19 related costs, net of offsetting direct expense reductions associated with COVID-19. As of September 30, 2021, we deferred to a regulatory asset approximately $7.4 million for incurred costs associated with COVID-19 that we believe are recoverable.

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 Holdings' or NW Natural's consolidated financial position or results of operations.

Recently Adopted Accounting Pronouncements

INCOME TAXES. On December 18, 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income 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 improving consistent application for other areas in Topic 740. The amendments in this ASU were effective beginning January 1, 2021. The amended presentation and disclosure guidance was applied retrospectively. The adoption did not materially affect the financial statements and disclosures of NW Holdings or NW Natural.

REFERENCE RATE REFORM. On March 12, 2020, the FASB issued ASU 2020-04, "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 (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform.