Leases (Notes)

9 Months Ended

Sep. 30, 2019

LEASES

Lease Revenue

Leasing revenue primarily consists of NW Natural's North Mist natural gas storage agreement with Portland General Electric (PGE) which is billed under an OPUC-approved rate schedule and includes an initial 30-year term with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. Under U.S. GAAP, this agreement is classified as a sales-type lease and qualifies for regulatory accounting deferral treatment. The investment in the storage facility is included in rate base under a separately established cost-of-service tariff, with revenues recognized according to the tariff schedule. As such, the selling profit that was calculated upon commencement as part of the sale-type lease recognition was deferred and will be amortized over the lease term. Billing rates under the cost-of-service tariff will be updated annually to reflect current information including depreciable asset levels, forecasted operating expenses, and the results of regulatory proceedings, as applicable, and revenue received under this agreement is recognized as operating revenue on the consolidated statements of

comprehensive income. There are no variable payments or residual value guarantees. The lease does not contain an option to purchase the underlying assets.

NW Natural also maintains a sales-type lease for specialized compressor facilities to provide high pressure compressed natural gas (CNG) services. Lease payments are outlined in an OPUC-approved rate schedule over a 10-year term. There are no variable payments or residual value guarantees. The selling profit computed upon lease commencement was not significant.

Our lessor portfolio also contains small leases of property owned by NW Natural to third parties. These transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement.

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



In thousands	Three months ended September 30, 2019		Nine months ended September 30, 2019
Lease revenue
Operating leases	$	48	$	143
Sales-type leases	4,895		7,039
Total lease revenue	$	4,943	$	7,182

Total future minimum lease payments to be received under non-cancelable leases at NW Natural at September 30, 2019 are as follows:



In thousands	Operating		Sales-Type		Total
Remainder of 2019	$	18	$	4,841	$	4,859
2020	61		18,229		18,290
2021	49		17,518		17,567
2022	45		17,026		17,071
2023	45		16,557		16,602
Thereafter	138		280,937		281,075
Total lease revenue	$	356	$	355,108	$	355,464
Less: imputed interest			205,596
Total leases receivable			$	149,512

The total leases receivable above is reported under the NGD segment and the short- and long-term portions are included within other current assets and assets under sales-type leases on the consolidated balance sheets, respectively. The total amount of unguaranteed residual assets at September 30, 2019 was $3.9 million and is included in assets under sales-type leases on the consolidated balance sheets. Additionally, under regulatory accounting, the revenues and expenses associated with these agreements are presented on the consolidated statements of comprehensive income such that their presentation aligns with similar regulated activities at NW Natural.

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 September 30, 2019
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease expense	$	1,158	$	47	$	1,205
Short-term lease expense	323		—		323

	Nine months ended September 30, 2019
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease expense	$	3,455	$	139	$	3,594
Short-term lease expense	814		—		814

Supplemental balance sheet information related to operating leases as of September 30, 2019 is as follows:



In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease right of use asset	$	3,745	$	172	$	3,917

Operating lease liabilities - current liabilities	$	3,075	$	96	$	3,171
Operating lease liabilities - non-current liabilities	654		78		732
Total operating lease liabilities	$	3,729	$	174	$	3,903

As of September 30, 2019, the weighted average remaining lease term for the operating leases is less than one year 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 3.86% for NW Natural.

Maturities of operating lease liabilities at September 30, 2019 were as follows:



In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Remainder of 2019	$	1,157	$	48	$	1,205
2020	2,013		102		2,115
2021	126		28		154
2022	93		—		93
2023	71		—		71
Thereafter	497		—		497
Total lease payments	3,957		178		4,135
Less: imputed interest	228		4		232
Total lease obligations	3,729		174		3,903
Less: current obligations	3,075		96		3,171
Long-term lease obligations	$	654	$	78	$	732

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 in late 2019 or early 2020 upon substantial completion of the landlord's work. 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 periods of seven years.

Cash Flow Information

Supplemental cash flow information related to leases was as follows:



	Three months ended September 30, 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	$	1,113	$	45	$	1,158

	Nine months ended September 30, 2019
	NW Natural		Other (NW Holdings)		NW Holdings
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	3,319	$	132	$	3,451
Right of use assets obtained in exchange for lease obligations
Operating leases	$	7,054	$	304	$	7,358

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 $0.3 million at September 30, 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