Leases

3 Months Ended

Mar. 31, 2023

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 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		2023		2022
Lease revenue
Operating leases		$	19	$	18
Sales-type leases		3,979		4,281
Total lease revenue		$	3,998	$	4,299

Additionally, lease revenue of $0.2 million and $0.1 million was recognized for the three months ended March 31, 2023 and 2022, 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 March 31, 2023 are as follows:


In thousands	Operating		Sales-Type		Total
NW Natural:
Remainder of 2023	$	466	$	12,376	$	12,842
2024	613		15,867		16,480
2025	604		15,306		15,910
2026	36		14,901		14,937
2027	22		14,521		14,543
Thereafter	—		222,299		222,299
Total minimum lease payments	$	1,741	$	295,270	$	297,011
Less: imputed interest			162,326
Total leases receivable			$	132,944


Other (NW Holdings):
Remainder of 2023	$	38	$	—	$	38
2024	52		—		52
2025	53		—		53
2026	56		—		56
2027	57		—		57
Thereafter	857		—		857
Total minimum lease payments	$	1,113	$	—	$	1,113

NW Holdings:
Remainder of 2023	$	504	$	12,376	$	12,880
2024	665		15,867		16,532
2025	657		15,306		15,963
2026	92		14,901		14,993
2027	79		14,521		14,600
Thereafter	857		222,299		223,156
Total minimum lease payments	$	2,854	$	295,270	$	298,124
Less: imputed interest			162,326
Total leases receivable			$	132,944

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 $5.2 million, $4.8 million and $5.1 million at March 31, 2023 and 2022 and December 31, 2022, 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 6 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:


	Three Months Ended March 31,
In thousands		2023		2022
NW Natural:
Operating lease expense		$	1,775	$	1,727
Short-term lease expense		80		163

Other (NW Holdings):
Operating lease expense		$	40	$	7


NW Holdings:
Operating lease expense		$	1,815	$	1,734
Short-term lease expense		80		163

Supplemental balance sheet information related to operating leases as of March 31, 2023 and 2022 and December 31, 2022 is as follows:


In thousands	March 31,				December 31,
	2023		2022		2022
NW Natural:
Operating lease right of use asset	$	72,077	$	74,361	$	72,720

Operating lease liabilities - current liabilities	$	1,538	$	1,286	$	1,363
Operating lease liabilities - non-current liabilities	77,840		79,125		78,345
Total operating lease liabilities	$	79,378	$	80,411	$	79,708

Other (NW Holdings):
Operating lease right of use asset	$	622	$	55	$	709

Operating lease liabilities - current liabilities	$	162	$	17	$	151
Operating lease liabilities - non-current liabilities	462		37		620
Total operating lease liabilities	$	624	$	54	$	771

NW Holdings:
Operating lease right of use asset	$	72,699	$	74,416	$	73,429

Operating lease liabilities - current liabilities	$	1,700	$	1,303	$	1,514
Operating lease liabilities - non-current liabilities	78,302		79,162		78,965
Total operating lease liabilities	$	80,002	$	80,465	$	80,479

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,
	2023		2022		2022
Weighted-average remaining lease term (years)	17.0		18.0		17.2
Weighted-average discount rate	7.3	%	7.2	%	7.3	%

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 $7.2 million, $6.0 million and $6.9 million as of March 31, 2023 and 2022 and December 31, 2022, respectively.

Maturities of operating lease liabilities at March 31, 2023 were as follows:


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Remainder of 2023	$	5,402	$	148	$	5,550
2024	7,299		196		7,495
2025	7,185		183		7,368
2026	7,353		140		7,493
2027	7,530		107		7,637
Thereafter	108,901		12		108,913
Total lease payments	143,670		786		144,456
Less: imputed interest	64,292		162		64,454
Total lease obligations	79,378		624		80,002
Less: current obligations	1,538		162		1,700
Long-term lease obligations	$	77,840	$	462	$	78,302

As of March 31, 2023, there were no finance lease liabilities at NW Natural.

Supplemental cash flow information related to leases was as follows:



































	Three Months Ended March 31,
In thousands		2023		2022
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	1,767	$	1,733
Finance cash flows from finance leases		173		75
Right of use assets obtained in exchange for lease obligations
Operating leases		$	—	$	14
Finance leases		173		100



Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	39	$	6

Right of use assets obtained in exchange for lease obligations

Finance leases		$	90	$	—



NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	1,806	$	1,739
Finance cash flows from finance leases		173		75
Right of use assets obtained in exchange for lease obligations
Operating leases		$	—	$	14
Finance leases		263		100

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 $2.4 million, $2.2 million and $2.3 million at March 31, 2023 and 2022 and at December 31, 2022, respectively.