4. SEGMENT INFORMATION

We primarily operate in one reportable business segment, which is our local gas distribution business and which is referred to as the utility segment. During the second quarter of 2018, we moved forward with our long-term strategic plans, which include a shift away from our merchant gas storage business, by entering into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in Gill Ranch, subject to various regulatory approvals and closing conditions. As such, we reevaluated our reportable segments and concluded that the gas storage activities no longer meet the requirements of a reportable segment. Our ongoing, non-utility gas storage activities, which include our interstate storage and optimization activities at our Mist gas storage facility, are now reported as other. We also have other investments and business activities not specifically related to our utility segment, which are aggregated and reported as other. We refer to our local gas distribution business as the utility and all other activities as non-utility.

Local Gas Distribution

Our local gas distribution segment is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to customers in Oregon and southwest Washington. As a regulated utility, we are responsible for building and maintaining a safe and reliable pipeline distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for firm and interruptible transportation of gas over interstate pipelines to bring gas from the supply basins into our service territory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the OPUC or WUTC.

Gas distribution also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers’ end-use facilities for a fee, which is approved by the OPUC or WUTC. As of December 31, 2017, approximately 89% of our customers are located in Oregon and 11% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of our utility’s total volumes delivered and 90% of our utility’s margin. Industrial customers largely account for the remaining volumes and utility margin. A small amount of utility margin is also derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other service fees.

Industrial sectors we serve include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries; government and educational institutions; and electric generation.

In addition to our local gas distribution business, our utility segment also includes the utility portion of our Mist underground storage facility, our North Mist gas storage expansion in Oregon, and NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp.

Other

We have non-utility investments and other business activities, which are aggregated and reported as other. Other includes NWN Gas Storage, a wholly-owned subsidiary of NWN Energy, and the non-utility portion of our Mist facility in Oregon and third-party asset management services. Earnings from non-utility assets at our Mist facility are primarily related to firm storage capacity revenues. Earnings from the Mist facility also include revenue, net of amounts shared with utility customers, from management of utility assets at Mist and upstream pipeline capacity when not needed to serve utility customers. Under the Oregon sharing mechanism, we retain 80% of the pre-tax income from these services when the costs of the capacity have not been included in utility rates, or 33% of the pre-tax income when the costs have been included in utility rates. The remaining 20% and 67%, respectively, are recorded to a deferred regulatory account for crediting back to utility customers.

Other also includes NNG Financial, non-utility appliance retail center operations, NWN Water, which is pursuing investments in the water sector itself and through its wholly-owned subsidiaries FWC Merger Sub, Inc. and Cascadia, NWN Energy's equity investment in TWH, which is pursuing development of a cross-Cascades transmission pipeline project and NWN Holding, which is pursuing the holding company reorganization of NW Natural through its wholly-owned subsidiary NWN Holdco Sub.

All prior period amounts have been retrospectively adjusted to reflect the change in our reportable segments and the designation of Gill Ranch as a discontinued operation.

Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segments of our continuing operations. See Note 15 for information regarding our discontinued operation, Gill Ranch Storage.



	Three Months Ended June 30,
In thousands	Utility			Other		Total
2018
Operating revenues	$	118,515		$	6,052	$	124,567
Depreciation and amortization	20,766			381		21,147
Income from operations	4,545			3,724		8,269
Net income (loss) from continuing operations	(2,970		)	2,631		(339		)
Capital expenditures	43,801			1,239		45,040
2017
Operating revenues	$	130,095		$	4,381	$	134,476
Depreciation and amortization	19,894			330		20,224
Income from operations	13,158			3,277		16,435
Net income from continuing operations	2,137			1,938		4,075
Capital expenditures	54,265			1,142		55,407



	Six Months Ended June 30,
In thousands	Utility		Other		Total
2018
Operating revenues	$	376,448	$	11,754	$	388,202
Depreciation and amortization	41,309		713		42,022
Income from operations	69,301		6,719		76,020
Net income from continuing operations	36,913		4,759		41,672
Capital expenditures	100,695		1,675		102,370
Total assets at June 30, 2018⁽¹⁾	2,907,724		66,293		2,974,017
2017
Operating revenues	$	422,821	$	7,379	$	430,200
Depreciation and amortization	39,518		659		40,177
Income from operations	90,285		5,231		95,516
Net income from continuing operations	42,329		3,143		45,472
Capital expenditures	93,119		1,214		94,333
Total assets at June 30, 2017⁽¹⁾	2,792,011		66,139		2,858,150
Total assets at December 31, 2017⁽¹⁾	2,961,326		64,546		3,025,872


⁽¹⁾	Total assets exclude assets related to discontinued operations of $12.7 million, $207.0 million, and $13.9 million as of June 30, 2018, June 30, 2017, and December 31, 2017, respectively.

Utility Margin

Utility margin is a financial measure used by our chief operating decision maker (CODM) consisting of utility operating revenues, reduced by the associated cost of gas, environmental recovery revenues, and revenue taxes. The cost of gas purchased for utility customers is generally a pass-through cost in the amount of revenues billed to regulated utility customers. Environmental recovery revenues represent collections received from customers through our environmental recovery mechanism in Oregon. These collections are offset by the amortization of environmental liabilities, which is presented as environmental remediation expense in our operating expenses. Revenue taxes are collected from our utility customers and remitted to our taxing authorities. The collections from customers are offset by the expense recognition of the obligation to the taxing authority. By subtracting cost of gas, environmental remediation expense, and revenue taxes from utility operating revenues, utility margin provides a key metric used by our CODM in assessing the performance of the utility segment.

The following table presents additional segment information concerning utility margin:



	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2018		2017		2018		2017
Utility margin calculation:
Utility operating revenues	$	118,515	$	130,095	$	376,448	$	422,821
Less: Utility cost of gas	42,107		53,005		150,271		196,616
Environmental remediation expense	1,882		2,611		6,506		9,565
Revenue taxes⁽¹⁾	4,780		—		17,209		—
Utility margin	$	69,746	$	74,479	$	202,462	$	216,640


⁽¹⁾	The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and all related amendments on January 1, 2018. This change had no impact on utility margin results as revenue taxes were previously presented net in utility operating revenue. For additional information, see Note 2.