Leases

3 Months Ended

Mar. 31, 2022

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 and NW Holdings 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 March 31,
In thousands		2022		2021
Lease revenue
Operating leases		$	18	$	18
Sales-type leases		4,281		4,369
Total lease revenue		$	4,299	$	4,387

Additionally, lease revenue of $0.1 million was recognized for the three months ended March 31, 2022 and 2021 related to operating leases associated with non-utility property rentals. Lease revenue related to these leases was presented in other income (expense), net on the consolidated statements of comprehensive income as it is non-operating income.

Total future minimum lease payments to be received under non-cancellable leases at March 31, 2022 are as follows:


In thousands	Operating		Sales-Type		Total
NW Natural:
Remainder of 2022	$	433	$	12,728	$	13,161
2023	74		16,557		16,631
2024	74		15,867		15,941
2025	66		15,306		15,372
2026	36		14,901		14,937
Thereafter	22		236,820		236,842
Total minimum lease payments	$	705	$	312,179	$	312,884
Less: imputed interest			174,122
Total leases receivable			$	138,057

Other (NW Holdings):
Remainder of 2022	$	38	$	—	$	38
2023	51		—		51
2024	52		—		52
2025	53		—		53
2026	56		—		56
Thereafter	914		—		914
Total minimum lease payments	$	1,164	$	—	$	1,164



NW Holdings:
Remainder of 2022	$	471	$	12,728	$	13,199
2023	125		16,557		16,682
2024	126		15,867		15,993
2025	119		15,306		15,425
2026	92		14,901		14,993
Thereafter	936		236,820		237,756
Total minimum lease payments	$	1,869	$	312,179	$	314,048
Less: imputed interest			174,122
Total leases receivable			$	138,057

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 $4.8 million, $4.4 million and $4.7 million at March 31, 2022 and 2021 and December 31, 2021, 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 three months to 18 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 March 31,
In thousands		2022		2021
NW Natural:
Operating lease expense		$	1,727	$	1,678
Short-term lease expense		$	163	$	220

Other (NW Holdings):
Operating lease expense		$	7	$	18


NW Holdings:
Operating lease expense		$	1,734	$	1,696
Short-term lease expense		$	163	$	220

Supplemental balance sheet information related to operating leases as of March 31, 2022 is as follows:


In thousands	March 31,				December 31,
	2022		2021		2021
NW Natural:
Operating lease right of use asset	$	74,361	$	76,857	$	74,987

Operating lease liabilities - current liabilities	$	1,286	$	1,167	$	1,273
Operating lease liabilities - non-current liabilities	79,125		80,358		79,431
Total operating lease liabilities	$	80,411	$	81,525	$	80,704

Other (NW Holdings):
Operating lease right of use asset	$	55	$	100	$	62


Operating lease liabilities - current liabilities	$	17	$	46	$	23
Operating lease liabilities - non-current liabilities	37		56		37
Total operating lease liabilities	$	54	$	102	$	60

NW Holdings:
Operating lease right of use asset	$	74,416	$	76,957	$	75,049

Operating lease liabilities - current liabilities	$	1,303	$	1,213	$	1,296
Operating lease liabilities - non-current liabilities	79,162		80,414		79,468
Total operating lease liabilities	$	80,465	$	81,627	$	80,764

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


In thousands	March 31,				December 31,
	2022		2021		2021
Weighted-average remaining lease term (years)	18.0		18.9		18.2
Weighted-average discount rate	7.2	%	7.2	%	7.2	%

Headquarters and Operations Center Lease

NW Natural commenced a 20-year operating lease agreement in March 2020 for a new headquarters and operations center in Portland, Oregon. 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 $6.0 million, $4.6 million and $5.7 million as of March 31, 2022 and 2021 and December 31, 2021, respectively.

Maturities of operating lease liabilities at March 31, 2022 were as follows:


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Remainder of 2022	$	5,235	$	18	$	5,253
2023	7,013		6		7,019
2024	7,150		6		7,156
2025	7,185		6		7,191
2026	7,353		6		7,359
Thereafter	116,432		17		116,449
Total lease payments	150,368		59		150,427
Less: imputed interest	69,957		5		69,962
Total lease obligations	80,411		54		80,465
Less: current obligations	1,286		17		1,303
Long-term lease obligations	$	79,125	$	37	$	79,162

As of March 31, 2022, finance lease liabilities with maturities of less than one year were $0.3 million at NW Natural.

Supplemental cash flow information related to leases was as follows:



































	Three Months Ended March 31,
In thousands		2022		2021
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	1,733	$	1,669
Finance cash flows from finance leases		$	75	$	544
Right of use assets obtained in exchange for lease obligations
Operating leases		$	14	$	154
Finance leases		$	100	$	74


Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	6	$	16







NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,739	$	1,685
Finance cash flows from finance leases	$	75	$	544
Right of use assets obtained in exchange for lease obligations
Operating leases	$	14	$	154
Finance leases	$	100	$	74

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 $2.2 million, $1.9 million and $2.1 million at March 31, 2022 and 2021 and at December 31, 2021, respectively.