Leases (Notes)

6 Months Ended

Jun. 30, 2020

Leases [Abstract]

Leases of Lessee Disclosure

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 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 June 30,				Six Months Ended June 30,
In thousands	2020		2019		2020		2019
Lease revenue
Operating leases	$	25	$	47	$	53	$	95
Sales-type leases	4,588		2,085		9,178		2,145
Total lease revenue	$	4,613	$	2,132	$	9,231	$	2,240

Total future minimum lease payments to be received under non-cancellable leases at NW Natural at June 30, 2020 are as follows:

In thousands	Operating		Sales-Type		Total
Remainder of 2020	$	35	$	9,043	$	9,078
2021	50		17,518		17,568
2022	45		17,026		17,071
2023	45		16,557		16,602
2024	45		15,867		15,912
Thereafter	94		267,027		267,121
Total lease revenue	$	314	$	343,038	$	343,352
Less: imputed interest			195,806
Total leases receivable			$	147,232

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 $4.1 million, $3.8 million and $4.0 million at June 30, 2020 and 2019 and December 31, 2019, 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 one year to 20 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 June 30,				Six Months Ended June 30,
In thousands	2020		2019		2020		2019
NW Natural:
Operating lease expense	$	914	$	1,155	$	2,116	$	2,297
Short-term lease expense	$	285	$	331	$	483	$	491
Other (NW Holdings):
Operating lease expense	40		46		92		92
NW Holdings:
Operating lease expense	$	954	$	1,201	$	2,208	$	2,389
Short-term lease expense	$	285	$	331	$	483	$	491

Supplemental balance sheet information related to operating leases as of June 30, 2020 is as follows:

In thousands	June 30,				December 31,
	2020		2019		2019
NW Natural:
Operating lease right of use asset	$	78,464	$	4,797	$	2,760
Operating lease liabilities - current liabilities	$	868	$	4,141	$	1,979
Operating lease liabilities - non-current liabilities	80,120		634		772
Total operating lease liabilities	$	80,988	$	4,775	$	2,751
Other (NW Holdings):
Operating lease right of use asset	$	102	$	216	$	190
Operating lease liabilities - current liabilities	$	63	$	130	$	122
Operating lease liabilities - non-current liabilities	39		87		69
Total operating lease liabilities	$	102	$	217	$	191
NW Holdings:
Operating lease right of use asset	$	78,566	$	5,013	$	2,950
Operating lease liabilities - current liabilities	$	931	$	4,271	$	2,101
Operating lease liabilities - non-current liabilities	80,159		721		841
Total operating lease liabilities	$	81,090	$	4,992	$	2,942

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

In thousands	June 30,				December 31,
	2020		2019		2019
Weighted-average remaining lease term (years)	19.7		1.1		1.0
Weighted-average discount rate	7.24	%	3.82	%	3.98	%

Commencement of Significant Lease

In October 2017, NW Natural entered into a 20-year operating lease agreement for a new corporate operations center in Portland, Oregon in anticipation of the expiration of the prior corporate operations center lease in 2020. The lease commenced in March 2020 upon substantial completion of the landlord's work. Total estimated base rent payments over the life of the lease are $159.4 million. 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 as of June 30, 2020 was $2.4 million.

Maturities of operating lease liabilities at June 30, 2020 were as follows:

In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Remainder of 2020	$	2,341	$	35	$	2,376
2021	6,761		52		6,813
2022	6,848		18		6,866
2023	6,983		—		6,983
2024	7,146		—		7,146
Thereafter	130,912		—		130,912
Total lease payments	160,991		105		161,096
Less: imputed interest	80,003		3		80,006
Total lease obligations	80,988		102		81,090
Less: current obligations	868		63		931
Long-term lease obligations	$	80,120	$	39	$	80,159

As of June 30, 2020, finance lease liabilities with maturities of less than one year were $0.4 million at NW Natural.

Supplemental cash flow information related to leases was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2020		2019		2020		2019
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	931	$	1,115	$	2,127	$	2,206
Finance cash flows from finance leases	$	302	$	—	$	457	$	—
Right of use assets obtained in exchange for lease obligations
Operating leases	$	445	$	—	$	78,433	$	6,987
Finance leases	$	477	$	—	$	710	$	—
Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	39	$	44	$	91	$	87
Right of use assets obtained in exchange for lease obligations
Operating leases	$	—	$	—	$	—	$	304
NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	970	$	1,159	$	2,218	$	2,293
Finance cash flows from finance leases	$	302	$	—	$	457	$	—
Right of use assets obtained in exchange for lease obligations
Operating leases	$	445	$	—	$	78,433	$	7,291
Finance leases	$	477	$	—	$	710	$	—

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 $1.1 million, $0.3 million and $0.5 million at June 30, 2020 and 2019 and at December 31, 2019, respectively.