Leases (Notes)

12 Months Ended

Dec. 31, 2022

LEASES

Lease Revenue

Leasing revenue primarily consists of NW Natural's North Mist natural gas storage agreement with PGE which is billed under an OPUC-approved rate schedule and includes an initial 30-year term beginning May 2019 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:


	Year ended December 31,
In thousands	2022		2021		2020
Lease revenue
Operating leases	$	74	$	80	$	88
Sales-type leases	17,119		17,471		18,355
Total lease revenue	$	17,193	$	17,551	$	18,443

Additionally, lease revenue of $0.6 million, $0.5 million and $0.5 million was recognized for each of the years ended December 31, 2022, 2021, and 2020, respectively, 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-cancelable leases at December 31, 2022 are as follows:


In thousands	Operating		Sales-Type		Total
NW Natural:
2023	$	621	$	16,557	$	17,178
2024	612		15,867		16,479
2025	603		15,306		15,909
2026	36		14,901		14,937
2027	22		14,521		14,543
Thereafter	—		222,299		222,299
Total minimum lease payments	$	1,894	$	299,451	$	301,345
Less: imputed interest			165,272
Total leases receivable			$	134,179
Other NW Holdings:
2023	$	51	$	—	$	51
2024	52		—		52
2025	53		—		53
2026	56		—		56
2027	57		—		57
Thereafter	857		—		857
Total minimum lease payments	$	1,126	$	—	$	1,126
NW Holdings:
2023	$	672	$	16,557	$	17,229
2024	664		15,867		16,531
2025	656		15,306		15,962
2026	92		14,901		14,993
2027	79		14,521		14,600
Thereafter	857		222,299		223,156
Total minimum lease payments	$	3,020	$	299,451	$	302,471
Less: imputed interest			165,272
Total leases receivable			$	134,179

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 $5.1 million and $4.7 million at December 31, 2022 and 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 headquarters and operations center. Our leases have remaining lease terms of nine months to 17 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:


	Year ended December 31, 2022
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease expense	$	7,003	$	31	$	7,034
Short-term lease expense	880		—		880


	Year ended December 31, 2021
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease expense	$	6,859	$	58	$	6,917
Short-term lease expense	1,220		—		1,220


	Year ended December 31, 2020
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease expense	$	4,381	$	125	$	4,506
Short-term lease expense	1,010		—		1,010

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


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease right of use assets	$	72,720	$	709	$	73,429

Operating lease liabilities - current liabilities	$	1,363	$	151	$	1,514
Operating lease liabilities - non-current liabilities	78,345		620		78,965
Total operating lease liabilities	$	79,708	$	771	$	80,479

Supplemental balance sheet information related to operating leases as of December 31, 2021 is as follows:


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease right of use assets	$	74,987	$	62	$	75,049

Operating lease liabilities - current liabilities	$	1,273	$	23	$	1,296
Operating lease liabilities - non-current liabilities	79,431		37		79,468
Total operating lease liabilities	$	80,704	$	60	$	80,764

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


	2022		2021
Weighted-average remaining lease term (years)	17.2		18.2
Weighted-average discount rate	7.3	%	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 regulatory asset on our balance sheet. The balance of the regulatory asset was $6.9 million and $5.7 million as of December 31, 2022 and 2021, respectively.

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


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
2023	$	7,169	$	195	$	7,364
2024	7,299		196		7,495
2025	7,185		184		7,369
2026	7,353		140		7,493
2027	7,530		107		7,637
Thereafter	108,901		12		108,913
Total lease payments	145,437		834		146,271
Less: imputed interest	65,729		63		65,792
Total lease obligations	79,708		771		80,479
Less: current obligations	1,363		151		1,514
Long-term lease obligations	$	78,345	$	620	$	78,965

As of December 31, 2022, there were no finance lease liabilities at NW Natural.

Cash Flow Information

Supplemental cash flow information related to leases was as follows:


	Year ended December 31, 2022
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	$	6,993	$	64	$	7,057
Finance cash flows from finance leases	524		—		524
Right of use assets obtained in exchange for lease obligations
Operating leases	$	309	$	668	$	977
Finance leases	270		—		270


	Year ended December 31, 2021
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	$	6,840	$	58	$	6,898
Finance cash flows from finance leases	801		—		801
Right of use assets obtained in exchange for lease obligations
Operating leases	$	223	$	—	$	223
Finance leases	314		—		314


	Year ended December 31, 2020
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	$	4,466	$	131	$	4,597
Finance cash flows from finance leases	835		—		835
Right of use assets obtained in exchange for lease obligations
Operating leases	$	78,539	$	51	$	78,590
Finance leases	1,386		—		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 asset for finance leases was $2.3 million and $2.1 million at December 31, 2022 and 2021, respectively.