Leases

6 Months Ended

Jun. 30, 2021

Leases [Abstract]

Leases of Lessee Disclosure

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 June 30,				Six Months Ended June 30,
In thousands	2021		2020		2021		2020
Lease revenue
Operating leases	$	25	$	25	$	43	$	53
Sales-type leases	4,368		4,588		8,737		9,178
Total lease revenue	$	4,393	$	4,613	$	8,780	$	9,231

Total future minimum lease payments to be received under non-cancellable leases at June 30, 2021 are as follows:

In thousands	Operating		Sales-Type		Total
NW Natural:
Remainder of 2021	$	36	$	8,701	$	8,737
2022	72		17,026		17,098
2023	64		16,557		16,621
2024	65		15,867		15,932
2025	60		15,306		15,366
Thereafter	229		251,721		251,950
Total lease revenue	$	526	$	325,178	$	325,704
Less: imputed interest			183,237
Total leases receivable			$	141,941
Other (NW Holdings):
Remainder of 2021	$	25	$	—	$	25
2022	50		—		50
2023	51		—		51
2024	52		—		52
2025	53		—		53
Thereafter	970		—		970
Total lease revenue	$	1,201	$	—	$	1,201
NW Holdings:
Remainder of 2021	$	61	$	8,701	$	8,762
2022	122		17,026		17,148
2023	115		16,557		16,672
2024	117		15,867		15,984
2025	113		15,306		15,419
Thereafter	1,199		251,721		252,920
Total lease revenue	$	1,727	$	325,178	$	326,905
Less: imputed interest			183,237
Total leases receivable			$	141,941

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 $4.5 million, $4.1 million and $4.3 million at June 30, 2021 and 2020 and December 31, 2020, 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 two months to 19 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 June 30,				Six Months Ended June 30,
In thousands	2021		2020		2021		2020
NW Natural:
Operating lease expense	$	1,710	$	914	$	3,388	$	2,116
Short-term lease expense	$	349	$	285	$	569	$	483
Other (NW Holdings):
Operating lease expense	$	18	$	40	$	36	$	92
NW Holdings:
Operating lease expense	$	1,728	$	954	$	3,424	$	2,208
Short-term lease expense	$	349	$	285	$	569	$	483

Supplemental balance sheet information related to operating leases as of June 30, 2021 is as follows:

In thousands	June 30,				December 31,
	2021		2020		2020
NW Natural:
Operating lease right of use asset	$	76,211	$	78,464	$	77,328
Operating lease liabilities - current liabilities	$	1,193	$	868	$	1,054
Operating lease liabilities - non-current liabilities	80,043		80,120		80,559
Total operating lease liabilities	$	81,236	$	80,988	$	81,613
Other (NW Holdings):
Operating lease right of use asset	$	83	$	102	$	118
Operating lease liabilities - current liabilities	$	35	$	63	$	51
Operating lease liabilities - non-current liabilities	45		39		62
Total operating lease liabilities	$	80	$	102	$	113
NW Holdings:
Operating lease right of use asset	$	76,294	$	78,566	$	77,446
Operating lease liabilities - current liabilities	$	1,228	$	931	$	1,105
Operating lease liabilities - non-current liabilities	80,088		80,159		80,621
Total operating lease liabilities	$	81,316	$	81,090	$	81,726

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

In thousands	June 30,				December 31,
	2021		2020		2020
Weighted-average remaining lease term (years)	18.7		19.7		19.2
Weighted-average discount rate	7.2	%	7.2	%	7.2	%

Commencement of Significant Lease

NW Natural commenced a 20-year operating lease agreement in March 2020 for a new corporate operations center in Portland, Oregon. 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 was $5.0 million, $2.4 million and $4.2 million as of June 30, 2021 and 2020 and December 31, 2020, respectively.

Maturities of operating lease liabilities at June 30, 2021 were as follows:

In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Remainder of 2021	$	3,445	$	25	$	3,470
2022	6,933		24		6,957
2023	6,986		6		6,992
2024	7,150		6		7,156
2025	7,185		6		7,191
Thereafter	123,784		24		123,808
Total lease payments	155,483		91		155,574
Less: imputed interest	74,247		11		74,258
Total lease obligations	81,236		80		81,316
Less: current obligations	1,193		35		1,228
Long-term lease obligations	$	80,043	$	45	$	80,088

As of June 30, 2021, finance lease liabilities with maturities of less than one year were $0.2 million at NW Natural.

Supplemental cash flow information related to leases was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2021		2020		2021		2020
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,717	$	931	$	3,386	$	2,127
Finance cash flows from finance leases	$	134	$	302	$	678	$	457
Right of use assets obtained in exchange for lease obligations
Operating leases	$	—	$	445	$	154	$	78,433
Finance leases	$	20	$	477	$	94	$	710
Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	17	$	39	$	33	$	91
NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,734	$	970	$	3,419	$	2,218
Finance cash flows from finance leases	$	134	$	302	$	678	$	457
Right of use assets obtained in exchange for lease obligations
Operating leases	$	—	$	445	$	154	$	78,433
Finance leases	$	20	$	477	$	94	$	710

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 $1.9 million, $1.1 million and $1.8 million at June 30, 2021 and 2020 and at December 31, 2020, respectively.