LEASES

Lease Revenue

Leasing revenue primarily consists of rental revenue for small leases of property owned by NW Natural to third parties. These transactions are accounted for as operating leases and the revenue is recognized on a straight-line basis over the term of the lease agreement.

Our lessor portfolio also contains a sales-type lease for specialized compressor facilities to provide high pressure gas service. Lease payments are outlined in an OPUC-approved rate schedule over a 10-year term. There are no variable payments or residual value guarantees. The gain computed upon lease commencement was not significant.

The components of lease revenue at NW Natural were as follows:



In thousands	Three months ended March 31, 2019
Lease revenue
Operating leases	$	48
Sales-type leases	60
Total lease revenue	$	108

Total future minimum lease payments to be received under non-cancelable leases at NW Natural at March 31, 2019 are as follows:



In thousands	Operating		Sales-Type		Total
2019 (excluding the three months ended March 31, 2019)	$	94	$	286	$	380
2020	61		212		273
2021	49		198		247
2022	45		186		231
2023	45		173		218
Thereafter	138		478		616
Total lease revenue	$	432	$	1,533	$	1,965
Less: imputed interest			459
Total lease receivable			$	1,074

The total lease receivable above is reported under the NGD segment and included in “Other non-current assets” in the consolidated balance sheet. Additionally, under regulatory accounting, the imputed interest on the sales-type lease is recorded as depreciation expense on the consolidated statement of comprehensive income.

North Mist Gas Storage Expansion Project

In 2016, NW Natural began expanding its gas storage facility near Mist, Oregon to provide long-term, no-notice underground gas storage service to support gas-fired electric generating facilities that are intended to facilitate the integration of more wind power into the region's electric generation mix. This expansion project is in support of a local electric company’s gas-fired electric power generation facilities under an initial 30-year contract with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties.

When the expansion is placed into service during the spring of 2019, the investment will be accounted for as a sales-type lease with regulatory accounting deferral treatment. The investment will be included in rate base under an established tariff schedule already approved by the OPUC, with revenues recognized consistent with the schedule. Billing rates will be updated annually to the current depreciable asset level, forecasted operating expenses, and for differences between actual and expected costs incurred.

Lease Expense

Operating Leases

We have operating leases for land, buildings and equipment. Our primary lease is for NW Natural's headquarters. Our leases have remaining lease terms of one year to 11 years. Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Short-term leases with a term of 12 months or less are not recorded on the balance sheet.

As most of our leases do not provide an implicit rate and are entered into by NW Natural, we use NW Natural's incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments.

The components of lease expense, a portion of which is capitalized, were as follows:



	Three months ended March 31, 2019
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease expense	$	1,142	$	46	$	1,188
Short-term lease expense	160		—		160

Supplemental balance sheet information related to operating leases as of March 31, 2019 is as follows:



In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease right of use asset	$	5,903	$	260	$	6,163

Operating lease liabilities - current liabilities	$	4,477	$	179	$	4,656
Operating lease liabilities - non-current liabilities	1,413		82		1,495
Total operating lease liabilities	$	5,890	$	261	$	6,151

As of March 31, 2019, the weighted average remaining lease term for the operating leases is 1.3 years for NW Natural. The weighted average discount rate used in the valuation of the operating lease right of use assets over the remaining lease term is 3.79% for NW Natural.

Maturities of operating lease liabilities at March 31, 2019 were as follows:



In thousands	NW Natural		Other (NW Holdings)		NW Holdings
2019 (excluding the three months ended March 31, 2019)	$	3,462	$	139	$	3,601
2020	1,980		102		2,082
2021	101		28		129
2022	93		—		93
2023	71		—		71
Thereafter	497		—		497
Total lease payments	6,204		269		6,473
Less: imputed interest	314		8		322
Total lease obligations	5,890		261		6,151
Less: current obligations	4,477		179		4,656
Long-term lease obligations	$	1,413	$	82	$	1,495

Significant Lease Not Yet Commenced

In October 2017, NW Natural entered into a 20-year operating lease agreement for a new headquarters in Portland, Oregon in anticipation of the expiration of the current headquarters lease in 2020. The lease is expected to commence when construction of the asset is completed in late 2019 or early 2020. Total estimated base rent payments over the life of the lease are approximately $160 million. There is an option to extend the term of the lease for two additional seven-year periods.

Cash Flow Information

Supplemental cash flow information related to leases was as follows:



	Three months ended March 31, 2019
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,091	$	43	$	1,134
Right of use assets obtained in exchange for lease obligations
Operating leases	$	6,987	$	304	$	7,291

Finance Leases

NW Natural also leases building storage spaces for use as a gas meter room in order to provide natural gas to multifamily or mixed use developments. These contracts are accounted for as finance leases and typically involve a one-time upfront payment with no remaining liability. The right of use asset for finance leases was $0.2 million at March 31, 2019.

Lease Disclosures Related to Periods Prior to the First Quarter of 2019

Land, buildings, and equipment are leased under agreements that expire in various years, including a 99-year land lease that extends through 2108. Rental costs for continuing operations were $5.9 million, $7.3 million, and $5.9 million for the years ended December 31, 2018, 2017, and 2016, respectively, a portion of which was capitalized.

The following table reflects NW Natural's future minimum lease payments due under non-cancelable operating leases for continuing operations at December 31, 2018. These commitments relate principally to the lease of the office headquarters and underground gas storage facilities.



In thousands	Minimum lease payments
2019	$	5,368
2020	4,812
2021	7,077
2022	7,223
2023	7,304
Thereafter	149,881
Total	$	181,665