Leases

9 Months Ended

Sep. 30, 2020

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:


	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands	2020		2019		2020		2019
Lease revenue
Operating leases	$	18	$	48	$	71	$	143
Sales-type leases	4,588		4,895		13,766		7,039
Total lease revenue	$	4,606	$	4,943	$	13,837	$	7,182

Total future minimum lease payments to be received under non-cancellable leases at NW Natural at September 30, 2020 are as follows:


In thousands	Operating		Sales-Type		Total
Remainder of 2020	$	18	$	4,509	$	4,527
2021	50		17,518		17,568
2022	45		17,026		17,071
2023	45		16,557		16,602
2024	45		15,867		15,912
Thereafter	94		267,027		267,121
Total lease revenue	$	297	$	338,504	$	338,801
Less: imputed interest			192,653
Total leases receivable			$	145,851

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 was $4.2 million, $3.9 million and $4.0 million at September 30, 2020 and 2019 and December 31, 2019, respectively, 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 corporate operations center. Our leases have remaining lease terms of one year to 20 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 an estimated discount rate representing the rate we would have incurred to finance the funds necessary to purchase the leased asset and is 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,				Nine Months Ended September 30,
In thousands	2020		2019		2020		2019
NW Natural:
Operating lease expense	$	746	$	1,158	$	2,862	$	3,455
Short-term lease expense	$	300	$	323	$	783	$	814

Other (NW Holdings):
Operating lease expense	$	17	$	47	$	109	$	139


NW Holdings:
Operating lease expense	$	763	$	1,205	$	2,971	$	3,594
Short-term lease expense	$	300	$	323	$	783	$	814

Supplemental balance sheet information related to operating leases as of September 30, 2020 is as follows:


In thousands	September 30,				December 31,
	2020		2019		2019
NW Natural:
Operating lease right of use asset	$	77,949	$	3,745	$	2,760

Operating lease liabilities - current liabilities	$	1,020	$	3,075	$	1,979
Operating lease liabilities - non-current liabilities	80,830		654		772
Total operating lease liabilities	$	81,850	$	3,729	$	2,751

Other (NW Holdings):
Operating lease right of use asset	$	87	$	172	$	190

Operating lease liabilities - current liabilities	$	61	$	96	$	122
Operating lease liabilities - non-current liabilities	24		78		69
Total operating lease liabilities	$	85	$	174	$	191

NW Holdings:
Operating lease right of use asset	$	78,036	$	3,917	$	2,950

Operating lease liabilities - current liabilities	$	1,081	$	3,171	$	2,101
Operating lease liabilities - non-current liabilities	80,854		732		841
Total operating lease liabilities	$	81,935	$	3,903	$	2,942

The weighted-average remaining lease terms and weighted-average discount rates for the operating leases at NW Natural were as follows:


In thousands	September 30,				December 31,
	2020		2019		2019
Weighted-average remaining lease term (years)	19.4		0.9		1.0
Weighted-average discount rate	7.22	%	3.86	%	3.98	%

Commencement of Significant Lease

In October 2017, NW Natural entered into a 20-year operating lease agreement for a new corporate operations center in Portland, Oregon in anticipation of the expiration of the prior corporate operations center lease in 2020. The lease commenced in March 2020 upon substantial completion of the landlord's work. Total estimated base rent payments over the life of the lease are $159.4 million. There is an option to extend the term of the lease for two additional periods of seven years.

There is a material timing difference between the minimum lease payments and expense recognition as calculated under operating lease accounting rules. OPUC issued an order allowing us to align our expense recognition with cash payments for ratemaking purposes. We recorded the difference between the minimum lease payments and the aggregate of the imputed interest on the finance lease obligation and amortization of the right-of-use asset as a deferred regulatory asset on our balance sheet. The balance of the regulatory asset as of September 30, 2020 was $3.7 million.

Maturities of operating lease liabilities at September 30, 2020 were as follows:


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Remainder of 2020	$	1,665	$	17	$	1,682
2021	6,761		52		6,813
2022	6,849		18		6,867
2023	6,986		—		6,986
2024	7,150		—		7,150
Thereafter	130,969		—		130,969
Total lease payments	160,380		87		160,467
Less: imputed interest	78,530		2		78,532
Total lease obligations	81,850		85		81,935
Less: current obligations	1,020		61		1,081
Long-term lease obligations	$	80,830	$	24	$	80,854

As of September 30, 2020, finance lease liabilities with maturities of less than one year were $0.9 million at NW Natural.

Supplemental cash flow information related to leases was as follows:



































	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands	2020		2019		2020		2019
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	673	$	1,113	$	2,800	$	3,319
Finance cash flows from finance leases	$	215	$	—	$	672	$	—
Right of use assets obtained in exchange for lease obligations
Operating leases	$	106	$	—	$	78,539	$	7,054
Finance leases	$	676	$	—	$	1,386	$	—



Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	18	$	45	$	109	$	132

Right of use assets obtained in exchange for lease obligations
Operating leases	$	—	$	—	$	—	$	304




NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	691	$	1,158	$	2,909	$	3,451
Finance cash flows from finance leases	$	215	$	—	$	672	$	—
Right of use assets obtained in exchange for lease obligations
Operating leases	$	106	$	—	$	78,539	$	7,358
Finance leases	$	676	$	—	$	1,386	$	—

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 assets for finance leases were $1.8 million, $0.3 million and $0.5 million at September 30, 2020 and 2019 and at December 31, 2019, respectively.