Leases (Notes)

12 Months Ended

Dec. 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 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	2023		2022		2021
Lease revenue
Operating leases	$	76	$	74	$	80
Sales-type leases	15,974		17,119		17,471
Total lease revenue	$	16,050	$	17,193	$	17,551

Additionally, lease revenue of $0.6 million, $0.6 million and $0.5 million was recognized for each of the years ended December 31, 2023, 2022, and 2021, 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, 2023 are as follows:


In thousands	Operating		Sales-Type		Total
NW Natural:
2024	$	603	$	15,867	$	16,470
2025	599		15,306		15,905
2026	36		14,901		14,937
2027	22		14,521		14,543
2028	—		13,983		13,983
Thereafter	—		208,316		208,316
Total minimum lease payments	$	1,260	282,894		$	284,154
Less: imputed interest			153,806
Total leases receivable			$	129,088
Other NW Holdings:
2024	$	52	$	—	$	52
2025	53		—		53
2026	56		—		56
2027	57		—		57
2028	58		—		58
Thereafter	800		—		800
Total minimum lease payments	$	1,076	$	—	$	1,076
NW Holdings:
2024	$	655	$	15,867	$	16,522
2025	652		15,306		15,958
2026	92		14,901		14,993
2027	79		14,521		14,600
2028	58		13,983		14,041
Thereafter	800		208,316		209,116
Total minimum lease payments	$	2,336	282,894		$	285,230
Less: imputed interest			153,806
Total leases receivable			$	129,088

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 $5.5 million and $5.1 million at December 31, 2023 and 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 nine months to 16 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, 2023
In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease expense	$	7,244	$	176	$	7,420
Short-term lease expense	925		—		925


	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

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


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Operating lease right of use assets	$	70,728	$	580	$	71,308

Operating lease liabilities - current liabilities	$	2,128	$	205	$	2,333
Operating lease liabilities - non-current liabilities	76,757		410		77,167
Total operating lease liabilities	$	78,885	$	615	$	79,500

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

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


	2023		2022
Weighted-average remaining lease term (years)	16.2		17.2
Weighted-average discount rate	7.3	%	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 regulatory asset on our balance sheet. The balance of the regulatory asset was $8.0 million and $6.9 million as of December 31, 2023 and 2022, respectively.

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


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
2024	$	7,484	$	183	$	7,667
2025	7,362		176		7,538
2026	7,361		153		7,514
2027	7,538		107		7,645
2028	7,719		6		7,725
Thereafter	101,272		6		101,278
Total lease payments	138,736		631		139,367
Less: imputed interest	59,851		16		59,867
Total lease obligations	78,885		615		79,500
Less: current obligations	2,128		205		2,333
Long-term lease obligations	$	76,757	$	410	$	77,167

As of December 31, 2023, 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, 2023
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	$	7,434	$	176	$	7,610
Finance cash flows from finance leases	369		—		369
Right of use assets obtained in exchange for lease obligations
Operating leases	$	659	$	—	$	659
Finance leases	369		101		470


	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

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 $2.6 million and $2.3 million at December 31, 2023 and 2022, respectively.