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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 529 added, 579 removed, 767 unchanged (59% of the section changed)

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Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations.

Other activities aggregated and reported as other at NW Holdings include NWN Energy's equity investment in Trail West Holdings, LLC (TWH) through August 6, 2020;

NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline);

Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline);

NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities;

and NWN Water, which through itself or its subsidiaries, owns and continues to pursue investments in the water sector.

See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries.

See Note 14 for information on our TWH investment.

In addition, NW Holdings has reported discontinued operations results related to the sale of Gill Ranch Storage, LLC (Gill Ranch).

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Gill Ranch owns a 75% interest in the natural gas storage facility located near Fresno, California known as the Gill Ranch Gas Storage Facility.

The sale was completed on December 4, 2020.

For more information, see "Results of Operations - Discontinued Operations " below.

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All references in this section to earnings per share (EPS) are on the basis of diluted shares.

We use such non-GAAP financial measures to analyze our financial performance because we believe they provide useful information to our investors and creditors in evaluating our financial condition and results of operations.

Such non-GAAP financial measures are used to analyze our financial performance because we believe they provide useful information to our investors and creditors in evaluating our financial condition and results of operations.

Our non-GAAP financial measures should not be considered a substitute for, or superior to, measures calculated in accordance with U.S.

Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP.

Other companies may calculate similarly titled non-GAAP financial measures differently than how such measures are calculated in this report, limiting the usefulness of those measures for comparative purposes.

A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is provided below.

EXECUTIVE SUMMARY

Our core mission is to provide safe, reliable and affordable essential utility services in an environmentally responsible way to better the lives of the public we serve.

Highlights for the year include:

• Added nearly 11,600 natural gas customers in 2020 for an annual growth rate of 1.5% at December 31, 2020;

NW Holdings' financial results and highlights for the year include:

• Added more than 11,400 natural gas customers in 2021 for an annual growth rate of 1.5% at December 31, 2021;

• Continued to provide customers with essential natural gas and water utility services and assist our most vulnerable community members during COVID-19;

• Invested $273 million in natural gas and water utility systems to support growth and greater reliability and resiliency;

• Completed rule-making for Oregon Senate Bill 98 enabling NW Natural to procure renewable natural gas (RNG) for customers and invested in our first development project to convert methane into RNG;

• Invested nearly $294 million in natural gas and water utility systems to support growth, enhance reliability and resiliency, and upgrade technology;

• Signed several agreements under Senate Bill 98 to purchase environmental credits from renewable natural gas for our utility customers;

• Launched a competitive renewable energy business line and hired the president of this business to pursue growth;

• Scored second in the West among large utilities in the 2021 J.D.

Power Gas Utility Residential Customer Satisfaction Study;

• Concluded the Oregon general rate case with a revenue requirement increase to support growth and system investments;

• Filed a multi-year general rate case in Washington requesting a revenue requirement increase;

• Announced that NW Natural is working toward a renewable hydrogen facility with a partner in Oregon;

• Closed five water and wastewater utility transactions in 2020, bringing our total connections to approximately 26,000;

Power Gas Utility Residential Customer Satisfaction Study, making this the 18 th consecutive year customers have ranked NW Natural among the top two utilities;

• Filed an Oregon general rate case requesting a revenue requirement increase to support growth and system investments;

• Concluded the Washington general rate case providing a revenue requirement increase of $8 million over two years;

• Purchased an ownership stake in Avion Water Company, Inc., the largest investor-owned water utility in Oregon, and closed four other water and wastewater utility transactions in 2021, bringing our total connections to approximately 33,000;

• Increased dividends for the 66 th consecutive year to shareholders.

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In millions Amount Amount Amount

Net income from continuing operations $ 70.6 $ 69.0 $ 68.0

Loss from discontinued operations, net of tax — — (1.7)

Consolidated net income $ 81.2 $ 70.6 $ 69.0

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Consolidated net income increased $10.6 million at NW Natural primarily due to the following factors:

• a $15.4 million increase in NGD segment margin driven by the 2020 Oregon and 2019 Washington rate cases and residential customer growth;

• a $7.9 million decrease in other expense, net primarily related to higher 2019 pension expenses (non-service cost component) recognized as part of the settlement and recovery of NW Natural's pension balancing account, which was primarily offset within NGD margin and income tax benefits (as discussed below) and which did not recur in 2020;

• $41.7 million increase in NGD segment margin driven by the 2020 Oregon rate case and residential customer growth;

• $7.9 million increase in asset management revenue primarily due to the 2021 cold weather event discussed below;

• $2.4 million decrease in other income (expense), net driven by higher interest income on regulatory assets and lower pension non-service costs;

partially offset by

• a $13.6 million increase in depreciation expense and general taxes due to property, plant, and equipment additions, as we continued to invest in our gas utility system;

• a $7.0 million increase in income tax expense primarily due to 2019 including an income tax benefit related to the return of deferred TCJA benefits to customers and the regulatory pension disallowance, and higher pre-tax income.

• $19.9 million increase in operations and maintenance expenses due to higher information technology expenses, compensation and benefit costs, and lease expense;

• $8.9 million increase in depreciation expense due to property, plant, and equipment additions as we continued to invest in our gas utility system;

• $7.2 million increase in income tax expense due to an increase in pretax income and Oregon Corporate Activity Tax;

• $3.7 million increase in general taxes primarily due to higher assessed property values;

• $2.1 million increase in interest expense primarily due to lower AFUDC interest income.

Net income from continuing operations increased $8.4 million at NW Holdings primarily due to the following factors:

• a $1.6 million increase in consolidated net income at NW Natural as discussed above;

• a $3.4 million increase in other net income primarily reflecting higher earnings at our water and wastewater utilities that have been acquired since 2019.

• $10.6 million increase in consolidated net income at NW Natural as discussed above;

partially offset by

• $2.2 million decrease in other net income primarily reflecting higher business development and consulting costs at the holding company.

2020 COMPARED TO 2019.

NW Holdings' net income from continuing operations decreased $2.0 million and NW Natural's net income from continuing operations increased $1.0 million.

In March 2019, the OPUC issued an order resolving the remaining open items from NW Natural's 2018 Oregon general rate case regarding recovery of the pension balancing account and treatment of the benefits associated with the TCJA.

As a result of the order, in the first quarter of 2019, NW Natural recorded a disallowance and several benefits and expenses through the consolidated statements of comprehensive income as follows:

Pension balancing account .

Approximately $12.5 million in previously deferred pension expenses were recognized of which approximately $4.6 million was recorded in operations and maintenance expense and $7.9 million was recorded in other income (expense), net.

These charges were offset with a corresponding increase in revenue of $7.1 million and in income tax benefits of $2.7 million as the order required the offset of certain deferred TCJA benefits against the pension balancing account.

Additional TCJA income tax benefits were realized throughout 2019 to offset the remainder of the $12.5 million charge.

NW Natural also recognized a regulatory pension disallowance of $10.5 million with approximately $3.9 million recognized in operations and maintenance expense and $6.6 million recognized in other income (expense), net, partially offset by related discrete income tax benefits of $1.1 million.

Lastly, NW Natural realized $3.8 million of deferred regulatory interest accrued on the pension balancing account.

Deferred TCJA benefits and timing variance.

In addition, the OPUC ordered the return of approximately $6.3 million of excess deferred income taxes associated with plant and gas reserves annually beginning April 1, 2019.

As a result, NW Natural recognized approximately $2.0 million in income tax benefits in the first quarter of 2019.

Reductions to customer billings commenced April 1, 2019 and offset these income tax benefits in total by the end of 2019.

NW Natural will continue reductions to customer billings and recognition of deferred income tax benefits in subsequent years until all benefits have been returned.

The increase of $1.0 million at NW Natural was primarily due to the following factors:

• a $39.0 million increase in NGD segment margin driven by new customer rates from the 2018 Oregon rate case and 2019 Washington rate case, customer growth, and lease revenue from the North Mist storage facility;

the remaining increase primarily relates to $7.1 million in revenues which were offset by pension expenses due to the OPUC order as discussed above;

• a $9.4 million decrease in NGD segment income tax expense p rimarily due to the income tax implications of the March 2019 OPUC order, of which $5.4 million was offset by pension expenses as discussed above, with the remainder driven by the return of deferred TCJA benefit credits to customers and lower pretax income in 2019 compared to 2018;

• a $5.8 million increase in deferred regulatory interest income in other income (expense), net, of which $5.1 million relates to interest recognized in association with the OPUC order discussed above;

• a $34.4 million increase in pension costs within operations and maintenance expense and other income (expense), net, of which $12.5 million relates to costs which were entirely offset by revenues and income tax benefits as discussed above, and $10.5 million relates to the regulatory pension disallowance discussed above.

In addition, there was an $11.4 million increase in pension expenses as NW Natural began collecting ongoing pension costs through customer rates on November 1, 2018 and began collecting deferred pension costs through customer rates on April 1, 2019 rather than deferring a portion to the balancing account;

• a $5.4 million increase in depreciation and amortization primarily due to additional capital expenditures;

• a $5.4 million decrease in non-NGD segment operating revenues due to lower asset management revenues and increased asset management revenue sharing with Oregon customers as a result of the 2018 Oregon rate case;

• a $4.6 million increase in NGD segment interest expense due to higher interest on long- and short-term debt balances;

• a $2.9 million increase in NGD segment operations and maintenance expenses primarily attributable to annual employee cost increases.

The decrease of $2.0 million at NW Holdings was primarily driven by increases in professional service costs and expenses associated with developing the water business, partially offset by the increase of $1.0 million at NW Natural.

Consolidated net income increased $1.6 million at NW Natural primarily due to the following factors:

• $15.4 million increase in NGD segment margin driven by the 2020 Oregon and 2019 Washington rate cases and residential customer growth;

• $7.9 million decrease in other expense, net primarily related to higher 2019 pension expenses (non-service cost component) recognized as part of the settlement and recovery of NW Natural's pension balancing account, which was primarily offset within NGD margin and income tax benefits (as discussed below) and which did not recur in 2020;

partially offset by

• $13.6 million increase in depreciation expense and general taxes due to property, plant, and equipment additions, as we continued to invest in our gas utility system;

• $7.0 million increase in income tax expense primarily due to 2019 including an income tax benefit related to the return of deferred Tax Cut and Jobs Act (TCJA) benefits to customers and the regulatory pension disallowance, and higher pre-tax income.

Net income from continuing operations increased $5.0 million at NW Holdings primarily due to the following factors:

• $1.6 million increase in consolidated net income at NW Natural as discussed above;

• $3.4 million increase in other net income primarily reflecting higher earnings at our water and wastewater utilities that have been acquired since 2019.

2021 COLD WEATHER EVENT.

In February 2021, Portland, Oregon and the surrounding region, like much of the country, experienced a severe winter storm with several days of colder temperatures resulting in elevated natural gas demand and significantly higher spot prices.

Additional market gas purchases and other expenses resulted in approxim ately $29 million o f higher commodity costs, of which approximately $27 million was deferred to a regulatory asset for recovery in future rates.

The result was approximately $2 million of lower natural gas utility margin in the first quarter of 2021.

The higher commodity costs were offset by approximately $39 million of asset management revenue, of which approximately $33 million was deferred to a regulatory liability for the benefit of customers.

COVID-19 AND CURRENT ECONOMIC CONDITIONS.

The novel coronavirus (COVID-19), which was declared a pandemic by the World Health Organization in March 2020, has resulted in severe and widespread global, national, and local economic and societal disruptions.

In Oregon and Washington, where we serve natural gas and water customers, stay-at-home orders were issued in March 2020.

Orders were also issued in March in Idaho and Texas where we also serve water customers.

These and subsequent executive orders required the closure of “non-essential” businesses and permitted the continuation of “essential services.” All of the services provided by NW Natural and NW Natural Water were considered “essential services” under the executive orders applicable to the jurisdictions in which they operate, and we continue to serve our gas and water customers and proceed with capital investments without interruption.

As a critical infrastructure energy company that provides an essential service to our customers, NW Natural has well-defined emergency response command structures and protocols.

In response to the pandemic, NW Natural mobilized its incident command team and business continuity plans in early Mar ch 2020, an d continues to operate under these structures and protocols, with a focus on the safety of our 1,200 employees and the 2.5 million people, business partners and communities we serve.

NW Natural has generally suspended business travel out of our service territory and implemented work-from-home plans for employees wherever possible.

In response to the pandemic, NW Natural initially mobilized its incident command team and business continuity plans in early Mar ch 2020 , with a focus on the safety of our 1,200 employees and the 2.5 million people, business partners and communities we serve.

For employees whose role requires them to work in the field or onsite, we are following CDC, OSHA, and state specific requirements.

Measures include:

following social distancing guidelines;

use of personal protective equipment (PPE) including masks, face coverings and gloves;

enhanced sanitizing protocols;

requiring employee health screenings prior to entering a NW Natural facility;

and other measures intended to mitigate the spread of this disease and keep our employees and customers safe and informed.

Our water companies are following similar protocols.

In addition, we are working with state officials to provide our essential field and onsite workers access to the vaccine during the coming months.

We remain vigilant regarding the safety of our customers and employees.

Currently, our service territories are in various phases of reopening, which has permitted the reopening of many businesses that were considered non-essential.

Certain of the reopened businesses are operating under continued restrictions related to patron capacity for retail stores and outdoor-only seating for restaurants in Oregon, among other restrictions to prevent further spread of COVID-19.

To support our customers in this unusual time, in March 2020, NW Natural temporarily stopped charging late fees and disconnecting customers for nonpayment.

NW Natural also provided Oregon natural gas customers with annual bill credits primarily in June totaling approximately $17.0 million related to NW Natural's revenue sharing mechanism.

Through term sheets with the Oregon and Washington Commissions, we have agreed to timelines for resuming our normal business practices such as beginning collection processes while also providing financial assistance and payment plans to our most vulnerable customers.

From a financial perspective, the initial timing of the onset of the COVID-19 pandemic in March 2020 and resulting economic disruption in the United States coincided with the end of the Pacific Northwest 2019-20 winter heating season and although it has continued into the 2020-21 winter heating season, the financial effects were moderated by our regulated utility business model, our natural gas customer base being predominately residential, and temporary cost savings initiatives that were implemented by management.

For 2020, we estimate the total financial effects of COVID-19 to be approximately $10 million pre-tax with the impact partially mitigated by regulatory deferrals and temporary cost savings measures.

We incurred $4.8 million of COVID-related costs that were deferred to a regulatory asset for recovery in a future period.

These costs included PPE supplies, estimates for bad debts, and interest expense associated with financing related activities undertaken to support liquidity during the pandemic, net of direct cost savings such as lower travel and meals and entertainment expenses.

In addition, we expect to recognize revenue in a future period for an additional $1.3 million related to forgone late fee revenue.

We also experienced additional financial implications of approximately $3.8 million pre-tax that will not be recovered through rates primarily due to lower natural gas distribution margin from customers that stopped natural gas service and lower usage from customers that are not covered under decoupled rate schedules.

The financial impacts were mitigated in part by approximately $3.5 million in temporary cost savings initiatives.

During 2020, NW Natural increased the allowance for uncollectible accounts by $2.4 million to $3.1 million.

Our allowance for residential and commercial uncollectible accounts estimate increased from 0.1% of gas sales to approximately 0.4% of gas sales for the year ended December 31, 2020.

At the onset of the pandemic, in March 2020 as a precaution to strengthen our liquidity and guard against volatile markets as the COVID-19 pandemic unfolded, we took the following steps:

• NW Natural drew $227 million on its credit facility and subsequently repaid the full amount during the second quarter;

• NW Holdings drew $35 million on its credit facility and repaid $27 million as of December 31, 2020;

• NW Natural borrowed $150 million pursuant to a 364-day term loan and subsequently repaid the full amount in October 2020;

• NW Natural issued $150 million 30-year first mortgage bonds with an interest rate of 3.6%, which was primarily to support its capital expenditure program.

The federal CARES Act was signed into law on March 27, 2020 to provide direct and indirect financial support to individuals, businesses, state and local governments, and the healthcare system in response to COVID-19.

As provided for in the CARES Act, we deferred remittance of the employer portion of the Social Security payroll tax from March through December 31, 2020, when the provision ended.

This resulted in $4.7 million of deferred payroll taxes that we expect to remit under the CARES Act guidelines, which require half of the tax liability to be paid by December 31, 2021 and the remaining half to be paid by December 31, 2022.

We have taken additional actions in response to known issues arising from the trends related to the COVID-19 pandemic.

For example, we have enhanced cybersecurity monitoring in response to reports that cybersecurity attackers are more active with much of the economy utilizing work from home protocols.

Like others, we experienced some constraints on our ability to obtain PPE and disinfecting supplies, but currently believe that we have sufficient supplies to continue our work and continue to procure additional supplies and most efficiently utilize those supplies we have on hand.

We have not experienced material disruptions in our supply chain for goods and services to date, but are continuing to actively monitor, and have formulated and continue to evaluate contingency plans as necessary.

We remain vigilant in monitoring how the phased re-openings of the territories in which we operate progress and any reinstitution or possible reinstitution of restrictions, and we are actively monitoring several key metrics.

While we are unable to predict the length, severity or impacts of the COVID-19 pandemic and economic disruptions on our business, the potential for a resurgence or mutation of the virus, or timing, widespread availability and efficacy of vaccine implementation, we have the following expectations and beliefs currently:

In addition, we have enhanced cybersecurity monitoring in response to reports that cybersecurity attackers are more active with the economy utilizing work from home protocols.

The states we operate in have reopened with many businesses beginning to return to normal operating practices;

however, the timing for recovery of businesses and local economies remains difficult to predict and dependent on the future impacts of the COVID-19 pandemic, resurgences or mutations of the virus, including the Delta and Omicron variants, any potential future shutdowns, efficacy and acceptance of vaccines, or any governmental or other requirements related to vaccines or testing.

We currently have the following expectations and beliefs:

• Both NW Natural and NW Natural Water expect their capital projects in 2022 to move forward as planned.

• NW Natural's customer growth rate is affected by both new meter connections and when existing customers close their accounts and disconnect their meters.

Customer growth from construction and conversions remained strong during 2020.

A slow economic recovery could result in a decline in new meter connections, which could adversely affect margin in 2021 and the following periods.

In addition, we are closely monitoring our approximately 70,000 commercial and industrial natural gas meters, as a substantial decline in these meters could materially affect margin in 2021 and the following periods.

disconnection may occur if circumstances require businesses, such as restaurants, retailers, and those in the hospitality sector, to temporarily or permanently close.

When we cease suspending disconnections, we may experience a higher level of disconnections.

We don't anticipate significant residential meter disconnections.

• NW Natural has seen lower utility margin from a reduction in overall sales volumes during the year ended December 31, 2020 attributed to COVID-19, primarily related to the loss of commercial customers as described above.

Due to the seasonality of our gas utility business, we may see more substantial declines in volumes as our peak heating season progresses, depending on the level of reopenings and resiliency of businesses in the communities in which we serve.

• We have not experienced material disruptions in our supply chain for goods and services to date.

Our suppliers may be subject to vaccine mandates and could be impacted by an inability to comply or loss of personnel, which could disrupt supplier performance or deliveries, and negatively impact our business.

We are continuing to actively monitor, and have formulated and continue to evaluate contingency plans as necessary.

• NW Natural's customer growth rate is affected by both new meter connections and when existing customers close their accounts and disconnect their meter s.

Customer growth from construction and conversions remained strong during 2021 and commercial customer counts remained steady.

Any slowdown in economic activity could result in a decline in new meter connections, which could adversely affect operating margins in 2022 and t he following periods.

We have resumed normal collection practices for all customers.

There are several bill assistance options available to residential customers, including the arrearage management program, that was specifically designed to help with bills incurred during the pandemic.

We have not experienced and do not currently anticipate significant residential meter disconnections.

• NW Natural has seen lower utility margin from a reduction in overall sales volumes during 2021 and 2020 attributed to COVID-19.

Due to the seasonality of our gas utility business, we may continue to experience declines in volumes, particularly during our winter heating season, depending on the resiliency of businesses in the communities in which we serve into 2022.

However, volumes do not translate directly to earnings as the majority of our NGD margin is not dependent on volumes.

• While we have begun returning to normal business practices for many commercial and industrial customers in certain jurisdictions, our residential customers' return to normal practices may be extended based on the timing, availability and efficacy of vaccine rollout and timing of economic recovery.

Therefore, the recognition of late and disconnection fee revenue may be delayed beyond our current expectations.

• As the pandemic has continued into the 2020-2021 winter heating season, certain customers are faced with seasonally higher natural gas usage and bills.

This could have a financial strain on our customers and impact their ability to pay their bills in a timely manner thus potentially increasing our working capital needs.

• While we deferred to a regulatory asset certain COVID-related financial impacts as agreed upon with regulators, ultimate recovery of these costs and prudence review will be determined through a separate proceeding and may be subject to modification as a result of those proceedings.

• While we deferred to a regulatory asset certain COVID-related financial impacts as agreed upon with regulators, ultimate recovery of these costs and prudence review will be determined through separate proceedings and may be subject to modification as a result of those proceedings.

The recognition of late fee revenue may also be delayed beyond our current expectations.

See “Results of Operations – Regulatory Matters – COVID-19 Process and Deferral Dockets ” below.

Given the evolving nature of the pandemic and resulting economic conditions, we are continually monitoring our business operations and the larger trends and developments to take additional measures we believe are warranted to continue providing safe and reliable service to our customers and communities while protecting our employees.

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Our water and wastewater utility business is committed to providing its customers with safe, clean, reliable and affordable water and wastewater services, while also continuing to grow organically and through acquisitions.

Our new subsidiary, NW Natural Renewables, is focused on providing renewable natural gas to a variety of sectors.

In 2022, we remain focused on the strategic pillars of our business:

ensuring safe & reliable service;

providing superior customer service;

advancing constructive legislative policies and regulation;

enabling customer growth;

and leading on environmental stewardship and decarbonization.

safe & reliable service;

superior customer service;

constructive legislative policies and regulation;

and driving toward decarbonization.

ENSURING SAFE AND RELIABLE SERVICE.

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We have a legacy of providing excellent customer service and a long-standing dedication to continuous improvement, which has resulted in NW Natural consistently receiving high rankings in the J.D.

Power and Associates customer satisfaction studies and more recently in Escalent's Congent trusted brand and customer engagement residential customer study, earning NW Natural the designation of Customer Champion for the last several years.

During 2020, we also implemented several new customer facing technologies including a new website, a streamlined customer onboarding process, and new Interactive Voice Response (IVR) system.

In 2021, we intend to fully optimize this new technology to enhance our natural gas customers’ experience and meet their evolving expectations.

We'll also plan for the next upgrades, which will be centered on our customers’ most frequent interactions and highest value touchpoints.

Power and Associates customer satisfaction studies.

Additionally, NW Natural earned the designation of Customer Champion in Escalent's Congent trusted brand and customer engagement residential customer study for the last several years.

ADVANCING CONSTRUCTIVE LEGISLATIVE POLICIES AND REGULATION.

NW Natural has a history of working productively with lawmakers and regulators.

Most recently in 2020, rulemaking was completed on the groundbreaking Oregon Senate Bill 98 that allows gas utilities to procure and invest in renewable natural gas for their customers.

In 2021, we'll continue to proactively communicate with policymakers and other stakeholders about what we believe is the important role of the gas system in achieving climate goals for our communities, and work with the American Gas Association to provide education on the role of natural gas in energy infrastructure at the national level.

With regulators, we'll strive to work productively on open proceedings, taking care of customers during the pandemic, and pursuing recovery of deferred costs related to COVID-19.

NW Natural will also continue working with the EPA and other stakeholders on an environmentally protective and cost-effective clean-up for the Portland Harbor Superfund Site.

For example in 2020, rulemaking was completed on the groundbreaking Oregon Senate Bill 98 that allows gas utilities to procure and invest in renewable natural gas for their customers.

In 2022, we intend to continue to proactively communicate with policymakers and other stakeholders about what we believe is the important role of the gas system in achieving climate goals for our communities.

With regulators, we continue to strive to work productively on open proceedings.

For our water utilities, we are focused on working collaboratively with regulators, pursuing efficient approval processes for acquisitions, filing general rate cases where needed to support investments, and engaging in constructive regulatory proceedings.

ENABLING CUSTOMER GROWTH.

Natural gas is a preferred energy choice in our service territory given its affordable, efficient, and reliable qualities and often preferred by homeowners for heating and cooking.

ENABLING GROWTH.

Homeowners in our service territory prefer natural gas for heating and cooking given its affordable, efficient, and reliable qualities.

We are focused on leveraging these key attributes to capitalize on our region's continued strong housing growth.

We'll strive to continue growing our market share in the residential sector and multifamily developments, but believe commercial customer growth may be modest in 2021 as the pandemic has placed additional restrictions on small businesses, such as retail stores and restaurants, in our region.

We'll strive to continue growing our market share in the residential and commercial sectors and multifamily developments.

At NW Natural Water, we continue to be focused on supporting the fast-growing communities we currently serve and continuing our disciplined acquisition strategy.

Finally, we know how important renewables, particularly renewable natural gas, are to addressing climate change.

That is why we began a new business line in 2021 that is committed to leading as the energy market transitions and providing renewable natural gas to the utility, commercial, industrial and transportation sectors.

In 2022, we intend to continue to pursue these renewable opportunities.

LEADING ON DECARBONIZATION.

We are deeply committed to a clean energy future and environmental stewardship.

It's why NW Natural launched a low-carbon initiative in 2017 to reduce emissions in the communities we serve by leveraging our modern natural gas pipeline system in new ways, working closely with customers, policymakers and regulators, and embracing cutting-edge technology.

In 2020, under Oregon SB 98, NW Natural began a partnership with BioCarbN, a developer and operator of sustainable infrastructure projects, to convert methane into RNG.

Under this partnership, NW Natural has the ability to invest up to an estimated $38 million in four separate RNG development projects that will access biogas derived from water treatment at Tyson Foods' processing plants.

In 2021, NW Natural intends to continue striving to execute on our renewable strategy by helping our customers reduce and offset their consumption, to procure and invest in RNG for our customers under Oregon Senate Bill 98, execute on our RNG interconnection projects, continue developing voluntary renewable product offerings for our customers, and explore renewable hydrogen.

NW Natural has been a leader among gas utilities in innovative programs designed to support a low carbon future.

Notable programs have included a decoupling rate structure designed to weaken the link between earnings and gas consumption by customers adopted in 2007, establishment of a voluntary Smart Energy carbon offset program for customers established in 2007, and removal of all known cast iron and bare steel to create one of the tightest and most modern distribution systems in the country.

NW Natural launched a low-carbon initiative in 2017 to reduce emissions in the communities we serve by leveraging our modern natural gas pipeline system in new ways, working closely with customers, policymakers and regulators, and embracing new technology.

In 2020 and 2021, under Oregon Senate Bill 98, NW Natural began investing in and contracting for RNG-energy produced from capturing methane from decomposing organic material, including food, agricultural and forest waste, waste water and landfills, conditioning the methane to pipeline quality and adding it to natural gas systems as an energy source.

RNG has powerful potential to reduce net GHG emissions and we have begun procuring it and its attributes on behalf of customers.

To date, NW Natural has signed agreements with options to purchase or develop RNG for utility customers totaling about 3% of NW Natural's annual sales volume in Oregon.

In 2022, NW Natural intends to continue striving to:

execute on our renewable strategy by helping our customers reduce and offset their consumption, procure and invest in RNG for our customers under Oregon Senate Bill 98, execute on our RNG interconnection projects, continue developing voluntary renewable product offerings for our customers, and explore renewable hydrogen.

We also intend to leverage technology and relationships to examine ways to reduce emissions across the entire value chain from suppliers to end-use heating appliances.

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Earnings and cash flows from natural gas distribution operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington.

They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets.

They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, customer preferences and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets.

See " Most Recent Completed Rate Cases " below.

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The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.

In June 2018, NWN Gas Storage, a wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement for the sale of all of its ownership interests in Gill Ranch, a natural gas storage facility located near Fresno, California.

The sale closed on December 4, 2020.

See Note 19 for more information.

The wholly-owned regulated water businesses of NWN Water, a wholly-owned subsidiary of NW Holdings, are subject to regulation by the utility commissions in the states in which they are located, which currently includes Oregon, Washington, Idaho, and Texas.

Most Recent Completed Rate Cases

On October 16, 2020, the OPUC issued an order concluding NW Natural's general rate case filed in December 2019 (Order).

The Order provides for a total revenue requirement increase of approximately $45 million over revenues from existing rates.

On October 16, 2020, the OPUC issued an order concluding NW Natural's general rate case filed in December 2019 (OPUC Order).

The OPUC Order provides for a total revenue requirement increase of approximately $45 million over revenues from existing rates.

The revenue requirement is based on the following assumptions:

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• Average rate base of $1.44 billion or an increase of $242.1 million since the last rate case.

Under the terms of the Order, NW Natural was authorized to begin to recover the expense associated with the Oregon Corporate Activity Tax (CAT) as a component of base rates.

Under the terms of the OPUC Order, NW Natural was authorized to begin to recover the expense associated with the Oregon Corporate Activity Tax (CAT) as a component of base rates.

See " Corporate Activity Tax " below.

In NW Natural's previous Oregon rate case in March 2019, the OPUC ordered specific terms by which excess deferred income taxes (EDIT) associated with the Tax Cuts and Jobs Act (TCJA) would be provided to customers directly or applied for the benefit of customers.

In NW Natural's previous Oregon rate case in March 2019, the OPUC ordered specific terms by which excess deferred income taxes (EDIT) associated with the TCJA would be provided to customers directly or applied for the benefit of customers.

The Order in the most recent Oregon rate case directs NW Natural to include a true-up credit to customers of approximately $1.0 million as a temporary rate adjustment to be amortized over the 2020-21 PGA year.

In addition, the Order approves the application of NW Natural’s decoupling calculation for the months of November and May to the month of April.

In addition, the OPUC Order approved the application of NW Natural’s decoupling calculation for the months of November and May to the month of April.

The decoupling mechanism is intended to encourage customers to conserve energy without adversely affecting earnings due to reductions in sales volumes.

New rates authorized by the OPUC Order were effective November 1, 2020.

From November 1, 2018 through October 31, 2020, the OPUC authorized rates to customers based on an ROE of 9.4%, an overall rate of return of 7.317%, and a capital structure of 50% common equity and 50% long-term debt.

In March 2019, the OPUC issued an order resolving the remaining matters of the rate case regarding recovery of NW Natural's pension balancing account and the return of tax reform benefits to customers.

For additional information, see "Rate Mechanisms - Pension Cost Deferral and Pension Balancing Account " and "Rate Mechanisms - Tax Reform Deferral " below.

Effective November 1, 2019, the WUTC authorized rates to customers based on an ROE of 9.4% and an overall rate of return of 7.161% with a capital structure of 50.0% long-term debt, 1.0% short-term debt, and 49.0% common equity.

On October 21, 2021, the WUTC issued an order concluding NW Natural's general rate case filed in December 2020 (WUTC Order).

The WUTC Order provides for an annual revenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in the first year beginning November 1, 2021 (Year One), and up to a 3.5% or $3.0 million increase in the second year beginning November 1, 2022 (Year Two).

The increase is based on the following assumptions:

• Cost of capital of 6.814%;

• Average rate base of $194.7 million, an increase of $20.9 million since the last rate case for capital expenditures already expended at the time of filing, with an additional expected $31.2 million increase in Year One, and an additional expected $21.4 million increase in Year Two, with the increases in Year One and Year Two relating to expected capital expenditures in those years.

The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.

New rates authorized by the WUTC Order were effective November 1, 2021.

From November 1, 2019 through October 31, 2021, the WUTC authorized rates to customers based on an ROE of 9.4% and an overall rate of return of 7.161% with a capital structure of 50.0% long-term debt, 1.0% short-term debt, and 49.0% common equity.

The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits to customers.

See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM " and "Rate Mechanisms - Tax Reform Deferral " below.

From January 1, 2009, through October 31, 2019, the WUTC authorized rates to customers based on an ROE of 10.1% and an overall rate of return of 8.4% with a capital structure of 51% common equity, 5% short-term debt, and 44% long-term debt.

See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM " below.

NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services.

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Regulatory Proceeding Updates

2021 WASHINGTON RATE CASE .

On December 18, 2020, NW Natural filed a request for a general rate increase with the WUTC.

The filing includes a requested increase in annual revenue requirements over two years, consisting of an 8.0% or $6.3 million increase in the first year beginning November 1, 2021 (Year One), and a 3.7% or $3.2 million increase in the second year beginning November 1, 2022 (Year Two).

NW Natural is also requesting a $2.2 million, or 3%, offset to rates in the first year via suspension of amortization of a regulatory asset associated with NW Natural’s energy efficiency programs and via application of proceeds from the sale of real property in Portland, Oregon, which would reduce the Year One rate increase to approximately 5%.

The requested increase is intended to recover operating costs and investments made in the distribution system, underground storage facility, operations facilities, including improvements to the resource facility in Vancouver, Washington, and upgrades of critical information technology, including NW Natural’s enterprise resource planning system, and is based upon the following assumptions or requests:

• Capital structure of 50% long-term debt, 1% short-term debt, and 49% common equity;

2022 OREGON RATE CASE .

On December 17, 2021, NW Natural filed a request for a general rate increase with the OPUC.

The filing includes a requested $73.5 million annual revenue requirement increase based upon the following assumptions or requests:

• Capital structure of 50% long-term debt and 50% equity;

• Return on equity of 9.5%;

• Cost of capital of 6.886%;

NW Natural’s filing will be reviewed by the WUTC and other stakeholders.

The process is anticipated to take up to 11 months.

NW Natural has requested that the new rates take effect November 1, 2021.

2020 OREGON & WASHINGTON DEFERRAL.

In December 2020, a vehicle crashed into a Williams NW Pipeline district regulator, causing more than 5,500 NW Natural customers in the Hood River, Oregon area and White Salmon, Washington area to lose natural gas service.

NW Natural recorded a regulatory asset of approximately $0.8 million for costs incurred to restore service.

NW Natural filed requests for deferrals with the OPUC and WUTC and plans to seek recovery of these costs in future ratemaking proceedings.

• Average rate base of $1.73 billion.

The filing includes an increase in average rate base of $294 million compared to the last rate case due to several long-planned investments by NW Natural including the following:

• Upgrading technology including our enterprise resource planning system, cybersecurity and other critical technology systems;

• Supporting distribution system reinforcement and expansion as well as enhancing the resilience of our operating facilities and systems;

• Investing in components of our Mist storage facility, which provides service during peak winter heating months.

The filing requests an additional incremental revenue amount of $8.4 million primarily related to a renewable natural gas investment and technology upgrades and expenses, including cybersecurity items, that are not considered in NW Natural's annual revenue requirement.

NW Natural’s filing will be reviewed by the OPUC and other stakeholders.

The process is anticipated to take up to 10 months with new rates expected to take effect November 1, 2022.

Rate Mechanisms

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2018 Rate Case 2020 Rate Case

(effective 11/1/2020)

2009 Rate Case 2019 Rate Case

(effective 11/1/2020) 2019 Rate Case

(effective 11/1/2019) 2021 Rate Case

(effective 11/1/2021)

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Weather Normalization (WARM) X X

Environmental Cost Recovery X X X

Environmental Cost Recovery X X X X

Interstate Storage and Asset Management Sharing X X X X

** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.

Annually, or more often if circumstances warrant, NW Natural reviews all regulatory assets for recoverability.

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Each year, NW Natural hedges gas prices on a portion of NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges.

NW Natural entered the 2020-21 gas year with its forecasted sales volumes hedged at 53% in financial swap and option contracts, including hedging of 56% in Oregon and 28% in Washington, and 17% in physical gas supplies, including hedging of 18% in Oregon and 13% in Washington.

The percentage of total hedged for Oregon was approximately 74% and approximately 41% for Washington.

NW Natural is also hedged between 1% and 43% f or annual requirements over the subsequent five gas years, which consists of between 1% and 41% in Oregon and between 0% and 58% in Washington.

NW Natural entered the 2021-22 gas year with its forecasted sales volumes hedged at approximately 79% in total.

The total hedged for Oregon was approximately 82%, includ ing 62% in financial hedges and 19% in physical gas supplies.

The total hedged for Washington was approximately 57%, including 44% in financial hedges and 13% in physical gas supplies.

NW Natural is also hedged between 2% and 29% for annual requirements over the subsequent five gas years, which consists of between 2% and 26% in Oregon and between 0% and 50% in Washington.

Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production.

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PGA rate changes were effective November 1, 2021.

Rates and hedging approaches may vary between states due to different rate structures and mechanisms.

Rates may vary between states due to different rate structures, rate mechanisms and hedging policies.

Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby NW Natural is required to select each year an 80% deferral or a 90% deferral of higher or lower actual gas costs compared to estimated PGA prices, such that the impact on NW Natural's current earnings from the incentive sharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively.

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Under the Washington PGA mechanism, NW Natural defers 100% of the higher or lower actual gas costs, and those gas cost differences are passed on to customers through the annual PGA rate adjustment.

During 2021, there was increased volatility and pricing in the current and forward gas markets.

In response to higher than normal volatility in forward gas markets in 2021, NW Natural increased its hedging level for the 2021-22 PGA year in Oregon to 82% compared to 74% in the 2020-2021 PGA year.

EARNINGS TEST REVIEW .

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The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing.

In Oregon, NW Natural has an approved weather normalization mechanism, which is applied to residential and small commercial customer bills.

In Oregon, NW Natural has an approved weather normalization mechanism (WARM), which is applied to residential and small commercial customer bills.

This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average.

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After insurance proceeds are fully amortized, if in a particular year the request to collect deferred amounts exceeds one percent of Washington normalized revenues, then the excess will be collected over three years with interest.

On October 29, 2020, NW Natural's first environmental cost recovery filing was approved by the WUTC covering the period from December 31, 2018 to December 31, 2019.

PENSION COST DEFERRAL AND PENSION BALANCING ACCOUNT.

From 2011 through October 2018, the OPUC authorized a regulatory mechanism in which NW Natural deferred annual pension expenses above the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which included the expectation of higher and lower pension expenses in future years.

During this period the mechanism permitted NW Natural to accrue interest on the account balance at the NGD business' authorized rate of return.

The OPUC ordered the freezing of the account in October 2018 with pension expenses to be recovered through rates beginning November 1, 2018.

In March 2019, the OPUC issued an order outlining how the account would be recovered.

As a result, the following items were recorded in the first quarter of 2019:

• Applied $7.1 million of TCJA benefits deferred from January 1, 2018 to October 31, 2018, as a reduction against the pension balancing account;

• Credited to customers' benefit $5.4 million of deferred income taxes as a reduction against the pension balancing account;

• Reduced the amount of the frozen balancing account by an additional $10.5 million;

• Reduced the interest rate on the pension balancing account from NW Natural's authorized rate of return of 7.317% to 4.3%.

The items above resulted in the recovery of $12.5 million of deferred pension expenses by applying deferred tax benefits against the pension balancing account.

Recognition of these items resulted in higher operations and maintenance expense and other income (expense), net with offsetting benefits recognized in operating revenues and income tax expense.

Additional pension expenses of $10.5 million from the regulatory disallowance were also recognized in operations and maintenance expense and other income (expense), net.

Deferred regulatory interest income of $3.8 million was also realized in other income (expense), net in 2019.

Commencing April 1, 2019, the OPUC also authorized the collection of the remainder of the pension balancing account over ten years in a customer tariff of $7.3 million per year.

Deferred pension expense recoveries, inclusive of the application of the TCJA benefits described above, w ere $7.1 million a nd $16.8 million in 2020 and 2019, respectively.

Pension expense deferrals, excluding interest, were $10.3 million in 2018.

TAX REFORM DEFERRAL.

In December 2017, NW Natural filed applications with the OPUC and WUTC to defer the overall net benefit associated with the TCJA that was enacted on December 22, 2017.

In February 2019, NW Natural and the other parties to the 2018 Oregon rate case agreed upon terms by which the deferred benefits would be returned to customers via a joint stipulation filed with the OPUC.

In March 2019, the OPUC approved the terms in their entirety as follows:

• Applied $7.1 million of TCJA benefits deferred from January 1, 2018 to October 31, 2018, as a reduction against the pension balancing account;

• Credited to customers' benefit $5.4 million of deferred income taxes as a reduction against the pension balancing account;

Commencing April 1, 2019, the OPUC also ordered the following:

• Provide an annual credit to base rates of $3.4 million for excess deferred income taxes to all customers, subject to the average rate assumption method;

• Provide an additional annual credit of $3.0 million to sales service customers for five years;

• An increase in rate base of $15.4 million, and corresponding increase to revenue requirement of $1.4 million.

If NW Natural files a general rate case within five years of the date of the March 2019 order, this revenue requirement may be adjusted as part of that general rate case.

On December 30, 2019, NW Natural filed a general rate case with the OPUC, which is within five years from the date of the March 2019 order and the order in that rate case adjusted this revenue requirement.

For more information, see " Most Recent Completed General Rate Cases " above.

On October 21, 2019 the WUTC issued an order dictating the means by which deferred tax reform benefits would be returned to customers beginning November 1, 2019.

The order directs NW Natural to provide customers with a rate reduction of $2.1 million over one year to reflect the benefit of the lower federal corporate income tax rate accumulating from January 1, 2018 through October 31, 2019, and provides an additional annual rate reduction initially set at approximately $0.5 million to reflect a benefit from the remeasurement of deferred tax liabilities of approximately $15.0 million.

INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING .

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Previously, amounts were credited to Oregon customers in June.

Starting in 2021, Oregon customers will receive this credit in February per the 2020 Oregon rate case order.

Starting in 2021, Oregon customers received this credit in February per the 2020 Oregon rate case order.

In December 2021, the OPUC approved the annual 2022 bill credit for Oregon customer’s share of interstate storage and asset management activities.

The amount will be credited to Oregon customers over three equal installments in January, February and March 2022.

This includes $41.4 million of revenues generated for the November 2020 through October 2021 PGA year.

A majority of this revenue is from the cold weather event in February 2021 discussed above.

Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November.

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Washington $ 3.1 $ 0.7 $ 1.2

HOLDING COMPANY REORGANIZATION.

On October 1, 2018, we completed the reorganization to a holding company structure.

There were a number of conditions under the agreement with the OPUC and the WUTC related to the formation of a holding company structure.

One of the conditions is that, for three years following formation of the holding company, NW Natural was required to provide an annual $500,000 credit to Oregon customers and a $55,000 credit to Washington customers.

The credits to both Oregon and Washington customers were given in conjunction with the respective PGA filings with the rate adjustments commencing on November 1 of the applicable PGA year.

COVID-19 PROCESS AND DEFERRAL DOCKETS .

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and allowing for deferred accounting of COVID-19 related costs.

The term sheet also directs NW Natural to work with the parties to provide bill payment assistance, petition the Oregon legislature for bill payment assistance funding, explore the applicability of decoupling charges for a period of time, and participate in an investigation and discussion surrounding low income customers and social and environmental justice.

The term sheet also directed NW Natural to work with the parties to provide bill payment assistance, petition the Oregon legislature for bill payment assistance funding, explore the applicability of decoupling charges for a period of time, and participate in an investigation and discussion surrounding low income customers and social and environmental justice.

The stipulation incorporating the term sheet was approved by the OPUC in November 2020.

A term sheet was approved by the WUTC in October 2020 that provides similar guidance on key items such as the timing of lifting moratoriums on disconnections, resuming the collection process, and bill assistance and payment plans.

Additionally, both Oregon and Washington approved our applications to defer certain COVID-19 related costs in 2020.

A term sheet was approved by the WUTC in October 2020 that provided similar guidance on key items such as the timing of lifting moratoriums on disconnections, resuming the collection process, and bill assistance and payment plans.

Additionally, both Oregon and Washington approved our applications in 2020 to defer certain COVID-19 related costs.

Costs that may be recoverable include, but are not limited to, the following:

personal protective equipment, cleaning supplies and services, bad debt expense, financing costs to secure liquidity, and certain lost revenue, net of offsetting direct expense reductions associated with COVID-19.

As of December 31, 2020, we estimated that approximately $6.1 million of the financial effects related to COVID-19 in 2020 could be recoverable.

As a result, we recorded a regulatory asset of approximately $4.8 million for incurred costs as of December 31, 2020.

As of December 31, 2021, we believe that approximately $11.2 million of the financial effects related to COVID-19 are recoverable and deferred to a regulatory asset approximately $8.6 million for incurred costs.

In addition, we expect to recognize revenue in a future period for an additional $2.6 million related to forgone late fee revenue.

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Reinstituting Disconnections for Nonpayment:

Residential June 30, 2021 * July 31, 2021 *

Small Commercial December 1, 2020 July 31, 2021 *

Residential August 1, 2021 September 30, 2021

Small Commercial December 1, 2020 September 30, 2021

Large Commercial/Industrial November 3, 2020 October 20, 2020

Resuming Residential Reconnection Fee Charges October 1, 2022 * January 27, 2022 *

Resuming Residential Reconnection Fee Charges October 1, 2022 * March 29, 2022

Reinstituting Late Fees for Nonpayment:

Residential October 1, 2022 * January 27, 2022 *

Small Commercial December 1, 2020 January 27, 2022 *

Residential October 1, 2022 * March 29, 2022

Small Commercial December 1, 2020 March 29, 2022

Large Commercial/Industrial November 3, 2020 October 20, 2020

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Small Commercial Up to 6 months Up to 12 months

Arrearage Forgiveness Program 1% of Retail Revenue 1% of Retail Revenue

Arrearage Management Program 1% of Retail Revenue 1% of Retail Revenue

* Jurisdiction retains discretion to re-evaluate date based on ongoing pandemic and economic conditions.

ARREARAGE MANAGEMENT PROGRAMS.

As part of the approved term sheets, NW Natural established programs in Oregon and Washington to identify and mitigate residential customer arrearages associated with COVID-19.

Under the Oregon program, NW Natural can provide a one-time grant of up to $1,200 per eligible residential customer.

Under the Washington program, income-eligible customers may receive up to $2,500 per year.

Funding for these arrearage management programs may not exceed 1% of retail revenues.

These programs are funded by NW Natural with recovery facilitated through the COVID-19 deferral dockets.

As of December 31, 2021, the amount granted and deferred to a regulatory asset related to these programs was $3.8 million of the $6.8 million in total funds available.

RENEWABLE NATURAL GAS.

On June 19, 2019, the Oregon legislature passed Senate Bill 98 (SB 98), which enables natural gas utilities to procure or develop RNG on behalf of their Oregon customers.

RNG is produced from organic materials like food, agricultural and forestry waste, wastewater, or landfills.

Methane is captured from these organic materials as they decompose and is conditioned to pipeline quality, so it can be added into the existing natural gas system, reducing net GHG emissions.

The bill was signed into law by the governor in July 2019, and subsequently, the OPUC opened a docket in August 2019 regarding the rules for the bill.

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setting voluntary goals for adding as much as 30% renewable natural gas into the state’s pipeline system by 2050;

enabling gas utilities to invest in and own the cleaning and conditioning equipment required to bring raw biogas and landfill gas up to pipeline quality, as well as the facilities to connect to the local gas distribution system;

enabling gas utilities to invest in and own the cleaning

and conditioning equipment required to bring raw biogas and landfill gas up to pipeline quality, as well as the facilities to connect to the local gas distribution system;

and allowing up to 5% of a utility’s revenue requirement to be used to cover the incremental cost or investment in renewable natural gas infrastructure.

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Renewable hydrogen can be used for the transportation system, industrial use, or blended into the natural gas pipeline system.

In its initial RNG contract under SB98, NW Natural began a partnership with BioCarbN, a developer and operator of sustainable infrastructure projects, to convert methane into RNG.

In December 2020, NW Natural exercised its option for the first development project in Nebraska, initiating investment in an estimated $8 million project, which is expected to begin producing RNG in late 2021.

CORPORATE ACTIVITY TAX.

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The CAT is in addition to the state's corporate income tax and imposes a 0.57% tax on certain Oregon gross receipts less a reduction for a portion of cost of goods sold or labor.

The CAT legislation became effective September 29, 2019 and applies to calendar years beginning January 1, 2020.

The CAT legislation became effective September 29, 2019 and applied to calendar years beginning January 1, 2020.

Under the terms of the Order in NW Natural's 2020 Oregon general rate case, NW Natural is authorized to begin to recover the expense associated with the CAT as a component of base rates.

NW Natural is also directed to adjust the amount recovered for the CAT in each annual PGA to reflect changes in gross revenue and cost of goods sold that occur as a result of the PGA.

Beginning on the November 1, 2020 rate effective date, NW Natural expects to recover an additional $3.15 million in revenue requirement for the CAT.

The Order also provides for certain adjustments if there are legislative, rulemaking, judicial, or policy decisions that would cause the calculation methodology used by NW Natural for the CAT to vary in a fundamental way.

Additionally, the CAT deferred from January 2020 through June 2020 will be added to and amortized over the 2020-21 PGA gas year, and the CAT amounts deferred from July 2020 through the effective date of the rate case will be amortized over the 2021-22 PGA year.

Additionally, the CAT deferred from January 2020 through June 2020 was added to and amortized over the 2020-21 PGA gas year, and the CAT amounts deferred from July 2020 through the effective date of the rate case will be amortized over the 2021-22 PGA year.

WATER UTILITIES.

In 2021, NW Holdings, through its water subsidiaries, continued acquiring water utilities.

The following notable transactions received regulatory approval and were closed during 2020:

• Suncadia Water Company, LLC and Suncadia Environmental, LLC — NWN Water of Washington received regulatory approval for the purchase of Suncadia Water in January 2020.

Suncadia Environmental is not currently subject to the WUTC's jurisdiction.

The transaction closed in January 2020.

• T&W Water Service Company — NWN Water of Texas received regulatory approval from the Public Utility Commission of Texas for the T&W Water Service Company acquisition in February 2020 and subsequently the transaction closed in March 2020.

In addition to the acquisitions above, we closed three acquisitions near existing water utilities during 2020.

While COVID-19 has restricted certain activities, we continue to pursue water acquisitions and expect to return to normal business development activities as the pandemic eases and travel and commerce return to previous levels.

For our acquired water utilities, we've begun to assess the need for general rate cases, and in 2020, we filed general rate cases for three water utilities to support infrastructure investments for safety and reliability.

OREGON EXECUTIVE ORDER.

On March 10, 2020, the governor of Oregon issued an executive order (EO) establishing GHG emissions reduction goals of at least 45% below 1990 emission levels by 2035 and at least 80% below 1990 emission levels by 2050 and directed state agencies and commissions to facilitate such GHG emission goals targeting a variety of sources and industries.

Although the EO does not specifically direct actions of natural gas distribution businesses, the OPUC is directed to prioritize proceedings and activities that advance decarbonization in the utility sector, mitigate energy burden experienced by utility customers and ensure system reliability and resource adequacy.

The EO also directs other agencies to cap and reduce GHG emissions from transportation fuels and all other liquid and gaseous fuels, including natural gas, adopt building energy efficiency goals for new building construction, reduce methane gas emissions from landfills and food waste, and submit a proposal for adoption of state goals for carbon sequestration and storage by Oregon’s forest, wetlands and agricultural lands.

These agencies and commissions are currently engaged in various stages of their rulemaking processes and are currently expected to complete those processes in the next 12 to 24 months.

NW Natural is actively engaged with Oregon state regulatory entities and holds a seat on the Oregon Department of Environmental Quality rules advisory committee, which is considering the cap and reduce rules.

NW Holdings purchased an ownership stake in Avion Water Company, Inc., the largest investor-owned water utility in Oregon, and closed on four other transactions in Washington and Idaho, representing approximately 6,500 connections.

NW Holdings signed two additional agreements in Texas and Arizona representing approximately 25,500 connections.

For our acquired water utilities, we have been executing general rate cases, and in 2021, we completed rate cases in Idaho, Oregon and Washington and filed a general rate case for Sunriver Water in Oregon to support infrastructure investments for safety and reliability.

In January 2022, Sunriver Water entered into a settlement agreement with all parties in its rate case, subject to OPUC approval, with new rates effective May 2022.

INTEGRATED RESOURCE PLAN (IRP).

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In addition to these strategies, the 2018 IRP published an emissions forecast for each of these potential futures.

NW Natural expects to file an update to the 2018 IRP in March 2021.

NW Natural filed an update to the 2018 IRP in March 2021 and received acknowledgement of the requested capital projects by the OPUC in September 2021.

The development of an IRP filing is an extensive and complex process that engages multiple stakeholders in an effort to build a robust and commonly understood analysis.

The final product is intended to provide a long-term outlook of the supply-side and demand-side resource requirements for reliable and low cost natural gas service.

The final product is intended to provide a long-term outlook of the supply-side and demand-side resource and compliance requirements for reliable and low cost natural gas service.

The IRP examines and analyses uncertainties in the planning process, including potential changes in governmental and regulatory policies.

As a result of the EO issued by the governor of Oregon, new regulations and requirements are currently being developed in the state of Oregon, which have the potential to impact long-term resource decisions.

In order to reflect the outcomes of the EO proceedings, the time to file NW Natural's next full IRP was extended to July 2022.

As a result of the executive order (EO) issued by the governor of Oregon, new regulations and requirements have been developed resulting in a new program known as the Climate Protection Plan.

The Washington Department of Ecology is currently undergoing rule-making for the Climate Commitment Act.

Both of these policies have the potential to impact long-term resource decisions.

In order to reflect the outcomes of the EO proceedings, the time to file NW Natural's next full IRP was extended to July 2022 as approved by the OPUC and WUTC.

PIPELINE SECURITY.

In May and July 2021, the Department of Homeland Security’s (DHS) Transportation Security Administration (TSA) released two security directives applicable to certain notified owners and operators of natural gas pipeline facilities (including local distribution companies) that TSA has determined to be critical.

The first security directive required notified owners/operators to implement cybersecurity incident reporting to the DHS, designate a cybersecurity coordinator, and perform a gap assessment of current entity cybersecurity practices against certain voluntary TSA security guidelines and report relevant results and proposed mitigation to applicable DHS agencies.

The second security directive requires notified entities to implement a significant number of specified cyber security controls and processes.

NW Natural is currently in the process of evaluating and implementing the security directives while ensuring safe and reliable operations.

The impact on operations or an estimate or range of possible costs cannot be determined at this time.

NW Natural is providing frequent updates to the TSA on NW Natural's progress on achieving the security directives.

NW Natural filed requests with the OPUC and WUTC to defer the costs associated with complying with the second security directive and plans to seek recovery of these costs in future ratemaking proceedings.

As of December 31, 2021, NW Natural has deferred to a regulatory asset $1.0 million of costs incurred to date.

ERP UPGRADE DEFERRALS.

In the fourth quarter of 2020, NW Natural filed requests to defer expenses pertaining to a project to upgrade the existing enterprise resource planning (ERP) system with the OPUC and WUTC.

A stipulation supported by all parties in the Oregon docket was filed and approved by the OPUC in the third quarter of 2021.

Under the settlement agreement, NW Natural can recover 100% of costs incurred up to the $8.55 million estimate of Oregon-allocated costs provided in the docket.

For costs that exceed $8.55 million up to $12 million, 80% may be recovered from customers.

For costs that exceed $12 million, 50% may be recovered.

As of December 31, 2021, NW Natural deferred to a regulatory asset $6.7 million of expenses incurred to date.

Approval of the Washington deferral was resolved as part of the most recent general rate case.

Environmental, Legislation and Regulation Matters

There is a growing international and domestic focus on climate change and the contribution of greenhouse gas (“GHG”) emissions, most notably methane and carbon dioxide, to climate change.

In response, there are increasing efforts at the international, federal, state, and local level to regulate GHG emissions.

Legislation or other forms of regulation could take a variety of forms including, but not limited to, GHG emissions limits, reporting requirements, carbon taxes, requirements to purchase carbon credits, building codes, increased efficiency standards, additional charges to fund energy efficiency activities or other regulatory actions, incentives or mandates to conserve energy, or use renewable energy sources, tax advantages and other subsidies to support alternative energy sources, mandates for the use of specific fuels or technologies, or promotion of research into new technologies to reduce the cost and increase the scalability of alternative energy sources.

These efforts could include legislation, legislative proposals, or new regulations at the federal, state, and local level, as well as private party litigation related to GHG emissions.

We recognize certain of our businesses, including our natural gas business, are likely to be affected by current or future regulation seeking to limit GHG emissions.

International

In early 2021, the U.S.

rejoined the Paris Agreement on Climate, which establishes non-binding targets to reduce GHG emissions from both developed and developing nations.

Under the Paris Agreement, signatory countries are expected to submit their nationally determined contributions to curb GHG emissions and meet the agreed temperature objectives every five years.

On April 22, 2021, the United States federal administration announced the U.S.

nationally determined contribution to achieve a fifty to fifty-two percent reduction from 2005 levels in economy-wide net GHG emissions by 2030.

President Biden’s administration has issued executive orders directing agencies to conduct a general review of regulations and executive actions related to the environment and reestablished a framework for considering the social cost of carbon as part of certain agency cost-benefit analyses for new regulations.

President Biden’s administration continues to consider a wide range of additional policies, executive orders, rules, legislation, and other initiatives to address climate change.

Some of these initiatives may include repeal of policies, executive orders or rules implemented by the prior administration.

Congress has not yet passed any federal climate change legislation and we cannot predict when or if Congress will pass such legislation and in what form.

In the absence of such legislation, the Environmental Protection Agency (EPA) regulates GHG emissions pursuant to the Clean Air Act.

In September 2009, the EPA issued a final rule requiring the annual reporting of greenhouse gas emissions from certain industries, specified large GHG emission sources, and facilities that emit 25,000 metric tons or more of CO 2 equivalents per year.

NW Natural began reporting emission information in 2011.

Under this reporting rule, local natural gas distribution companies like NW Natural are required to report system throughput to the EPA on an annual basis.

The EPA also has required additional GHG reporting regulations to which NW Natural is subject, requiring the annual reporting of fugitive emissions from operations.

Additionally, other federal regulatory agencies are beginning to address greenhouse gas emissions through changes in their regulatory oversight approach and policies.

Washington State

Approximately 11% of NW Natural’s revenues and 27% of new meters are attributable to Washington.

Effective February 1, 2021, building codes in Washington state require new residential homes to achieve higher levels of energy efficiency based on specified carbon emissions assumptions, which calculate electric appliances to have lower on-site GHG emissions than comparable gas appliances.

This increases the cost of new home construction incorporating natural gas depending on a number of factors including home size, equipment configurations, and building envelope measures.

Additionally, changes to commercial codes have been proposed that, if adopted as currently drafted, could restrict or eliminate the use of gas space and water heating in new commercial construction beginning in July 2023.

The Washington legislature is discussing matters relating to climate change and the use of natural gas during their 2022 legislative session.

NW Natural is working with policymakers and a coalition of utilities, labor groups and business coalitions in Washington to help them understand the role of direct use natural gas, and in the coming years renewable natural gas and hydrogen, can play in pursuing more effective policies to reduce GHGs while preserving reliability, resiliency, energy choice, equity, and energy affordability.

Washington has also enacted the Climate Commitment Act (CCA), which establishes a comprehensive program that includes an overall limit for GHG emissions from major sources in the state that declines yearly beginning on January 1, 2023, resulting in an overall reduction of GHG emissions to 95% below 1990 levels by 2050.

The Washington Department of Ecology has been directed to develop rules to create a cap-and-invest program, under which entities, including natural gas and electric utilities, and transportation and other fuel providers, which are subject to the CCA must either reduce their emissions or obtain allowances to cover any remaining emissions.

These rules are expected by the end of 2022.

NW Natural is subject to the CCA and intends to pursue inclusion of CCA compliance costs in rates.

On March 10, 2020, the governor of Oregon issued an executive order (EO) establishing greenhouse gas (GHG) emissions reduction goals of at least 45% below 1990 emission levels by 2035 and at least 80% below 1990 emission levels by 2050 and directed state agencies and commissions to facilitate such GHG emission goals targeting a variety of sources and industries.

Although the EO does not specifically direct actions of natural gas distribution businesses, the OPUC is directed to prioritize proceedings and activities that advance decarbonization in the utility sector, mitigate the energy burden experienced by utility customers and ensure system reliability and resource adequacy.

The EO also directs other state agencies, including the Oregon Department of Environmental Quality (ODEQ) and OPUC, to cap and reduce GHG emissions from transportation fuels and all other liquid and gaseous fuels, including natural gas, adopt building energy efficiency goals for new building construction, reduce methane gas emissions from landfills and food waste, and submit a proposal for adoption of state goals for carbon sequestration and storage by Oregon’s forest, wetlands and agricultural lands.

In December 2021, the ODEQ concluded its rulemaking process and issued final cap and reduce rules for its Climate Protection Program (CPP), which became effective in January of 2022.

The CPP outlines GHG emissions reduction goals of 50% by 2035 and 90% by 2050 from a 1990 baseline.

The first three-year compliance period is 2022 through 2024.

NW Natural is subject to the CPP, and pursuant to this rule, is required to make its first compliance filing in 2025.

We intend to pursue inclusion of compliance costs for the CPP in rates.

We also expect the CPP to be subject to legal challenge from a number of stakeholders.

NW Natural is also engaged in an OPUC Fact-Finding (“Fact-Finding Docket”), opened in response to the EO for the purpose of analyzing the potential natural gas utility bill impacts that may result from the ODEQ’s CPP and to identify appropriate regulatory tools to mitigate potential customer impacts.

The OPUC Staff has indicated that the ultimate goal of the Fact-Finding Docket is to inform future policy decisions and other key analyses to be considered in 2022, after the CPP is in place.

We expect the Oregon Commission to issue a final report in 2022.

The Oregon legislature is discussing matters relating to climate change and the use of natural gas during their 2022 legislative session.

NW Natural is working with policymakers and a coalition of utilities in Oregon to help stakeholders understand the role direct use natural gas, and in the coming years renewable natural gas and hydrogen, can play in pursuing more effective policies to reduce greenhouse gases while preserving reliability, resiliency, energy choice, equity, and energy affordability.

Local Jurisdictions and Other Advocacy

In addition to legislative activities at the state level, ballot measures may be proposed by advocacy groups.

Some local and county governments in the United States also have been proposing or passing renewable energy resolutions, restrictions, taxes, or fees with advocates seeking to accelerate renewable energy goals.

A number of cities across the country, and several in our service territory are currently considering such actions aimed at formalizing climate action goals, including limitations or bans on the use of natural gas in new construction or otherwise.

NW Natural is actively engaged with such cities, local governments, and other advocates, including, among others the city of Eugene, Oregon, in our service territory and is working with these communities to help them understand the ways in which the natural gas system, and renewable fuels, can help them meet their decarbonization goals.

NW Natural Decarbonization Initiatives & Actions

Our customers are currently paying less for their natural gas today than they did 15 years ago.

We expect that compliance with any form of regulation of GHG emissions, including the CPP in Oregon and CCA in Washington as well as voluntary actions under SB 98, will require additional resources and compliance tools.

The developing and changing carbon credit markets and other compliance tool options, decades-long timeframes for compliance, likely changing and evolving laws and energy policy, and evolving technological advancements, all make it difficult to accurately predict long-term tools for and costs of compliance.

Given that CCA rules are in development and the recency of the adoption of the final CPP rules, we have not completed our full integrated resources planning process to identify our compliance obligations and expected costs.

Even as we develop these compliance and cost projections, they will be uncertain and subject to significant change over the nearly 30-year time horizon.

It is our current expectation that costs associated with compliance generally would be recovered in rates and would result in an increase in the prices charged to customers.

The CPP in Oregon is largely tied to the volume of natural gas consumed and as such, we currently expect that CPP cost impacts will be the lowest among residential customers because they generally consume less and highest among industrial customers that use significantly higher volumes of natural gas, with cost increases for commercial customers falling between residential and industrial customers.

The projected customer bill impact of the CPP varies significantly based on forecasting assumptions related to permitted levels of rate recovery, available technologies and equipment, weather patterns and gas usage, customer growth or attrition, allocation of fixed costs among classes of customers, energy efficiency levels, availability, use and cost of renewables, feasibility of broad-scale hydrogen in the natural gas system, and a number of other assumptions used in the complex analysis of integrated resource planning.

It is difficult to assess whether building codes making use of natural gas more expensive for home builders or higher customer bills as compliance costs are included in rates will affect the competitiveness of our business or result in a decline in demand for natural gas.

Both developments could negatively affect our gas utility customer growth.

At the same time natural gas utilities will be subject to GHG emissions regulation, we expect that other energy source providers will be subject to similar, or in some cases stricter or more rapid, compliance requirements that are likely to affect their cost and competitiveness relative to natural gas as well.

For example, President Biden has announced his intention to have a carbon-free electricity sector by 2035, 15 years before the target date of the CCA or CCP.

In June 2021, the State of Oregon enacted HB 2021, a clean electricity bill that requires the

state’s two largest investor-owned electric utilities and retail electricity service suppliers to reduce GHG emissions associated with electricity sold to Oregon customers to 100 percent below baseline levels by 2040 with interim steps, including an 80 percent reduction by 2030 and 90 percent reduction by 2035.

This bill does not replace the separate renewable portfolio standards previously established in Oregon, which sets requirements for how much of the electricity used in Oregon must come from renewable resources.

In Washington, SB 5116, the Clean Energy Transformation Act, requires all electric utilities in Washington to transition to carbon-neutral electricity by 2030 and to 100 percent carbon-free electricity by 2045.

We expect that compliance with these and other laws will substantially increase the cost of energy for electric customers in our service territory.

We are not able to determine at this time whether increased electricity costs will make natural gas use more or less competitive on a relative basis.

We expect these and other trends to drive innovation of, and demand for, technological developments and innovative new products that reduce GHG emissions.

Research and development are occurring across the energy sector, including in the gas sector with work being conducted on gas-fired heat pumps, higher efficiency water and space heating appliances including hybrid systems, carbon capture and development, continued development of technologies related to RNG, and various forms of hydrogen for different applications, among others.

NW Natural continues to take proactive steps in seeking to reduce GHG emissions in our region and is proactively communicating with local, state, and federal governments and communities about those steps.

NW Natural has been a leader among gas utilities in innovative programs.

Notable programs have included a decoupling rate structure designed to weaken the link between earnings and gas consumption by customer adopted in 2007, and establishment of a voluntary Smart Energy carbon offset program for customers established in 2007, and removal of all known cast iron and bare steel to create one of the tightest and most modern distribution systems in the country.

We continue to believe that NW Natural has an important role in providing affordable and equitable energy to the communities we serve.

NW Natural is an important provider of energy to families and businesses in Oregon and southwest Washington.

Yet, the sales of natural gas to our residential and commercial customers account for approximately 6% of Oregon’s GHG emissions according to data for recent years from the State of Oregon Department of Environmental Quality In-Boundary GHG Inventory.

We intend to continue to provide this necessary energy to our communities with the goal of using our modern pipeline system to help the Pacific Northwest transition to a clean energy future.

In 2016, NW Natural initiated a multi-pronged, multi-year strategy to accelerate and deliver greater GHG emission reductions in the communities we serve.

Key components of this strategy include customer energy efficiency, continued adoption of NW Natural's voluntary Smart Energy carbon offset program, and seeking to incorporate RNG and hydrogen into our gas supply.

RNG is produced from organic materials including food, agricultural and forestry waste, wastewater, or landfills.

We believe RNG has powerful potential to reduce net GHG emissions.

Methane that would otherwise be released to the atmosphere is captured from these organic materials as they decompose and is conditioned to pipeline quality, so it can be added into the existing natural gas system.

In 2019, Oregon Senate Bill 98 (SB 98) was signed into law enabling NW Natural to procure RNG on behalf of customers and provided voluntary targets that would allow us to make qualified investments and purchase RNG from third parties.

Under SB 98,NW Natural is actively working to procure RNG supply for customers and is engaging in longer-term efforts to increase the amount of RNG on our system and explore the development of renewable hydrogen through power to gas.

To that end, in 2020 and 2021, NW Natural announced several agreements and investments to procure RNG for its customers.

In addition, NW Natural began a partnership with BioCarbN to invest up to an estimated $38 million in four separate RNG development projects that will access biogas derived from water treatment at Tyson Foods’ processing plants, subject to approval by all parties.

The first project was commissioned in early 2022 with a second underway and planned to be commissioned in early 2023.

To date, NW Natural has signed agreements with options to purchase or develop RNG for utility customers totaling about 3% of NW Natural’s annual sales volume in Oregon.

Business Segment - Natural Gas Distribution (NGD)

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See "Regulatory Matters— Rate Mechanisms " above.

In addition to NW Natural's local gas distribution business, the NGD segment also includes the portion of the Mist underground storage facility used to serve NGD customers, the North Mist gas storage expansion, NWN Gas Reserves, which is a wholly owned subsidiary of Energy Corp., and NW Natural RNG Holding Company, LLC.

The NGD business is primarily seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months.

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NGD net income $ 69.0 $ 63.6 $ 60.8

EPS - NGD segment $ 2.08 $ 2.04 $ 1.99

Diluted EPS - NGD segment $ 2.24 $ 2.08 $ 2.04

Gas sold and delivered (in therms) 1,185 1,143 1,215

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The primary factors contributing to the increase in NGD net income were as follows:

• a $15.4 million increase in NGD margin primarily due to:

▪ a $17.7 million increase due to new customer rates from the 2020 Oregon and 2019 Washington rate cases;

▪ a $7.6 million increase from revenue generated from NW Natural's North Mist storage contract which commenced service in May 2019 and is included within other regulated services within NGD margin;

▪ a $3.9 million increase from customer growth;

• $41.7 million increase in NGD margin primarily due to:

▪ $36.4 million increase due to new customer rates primarily from the 2020 Oregon rate case that went into effect November 1, 2020;

▪ $5.7 million increase from residential customer growth and an increase in industrial customer volumes;

partially offset by

▪ a $7.1 million decrease due to revenue recognized in 2019 as part of the settlement and recovery of NW Natural's pension balancing account, which was entirely offset by pension expenses within operations and maintenance expense and other income (expense), net, and which did not recur in 2020;

▪ a $4.0 million decrease primarily due to lower overrun and entitlement fees;

▪ a $2.7 million decrease driven by warmer than average weather in 2020 compared average weather in 2019;

▪ a $1.3 million decrease related to the temporary suspension of late fees during the COVID-19 pandemic.

▪ $3.6 million decrease primarily driven by a loss from the gas cost incentive sharing mechanism in Oregon.

In addition to the increase in margin, NGD net income for 2021 reflects:

• $19.3 million increase in other NGD operating and maintenance expenses primarily due to higher information technology expenses, compensation and benefits costs, and lease expense;

• $8.9 million increase in depreciation expense due to NGD plant additions as we continued to invest in our gas utility system;

• $5.3 million higher income tax expense reflecting higher pretax income and Oregon CAT;

• $3.3 million increase in general taxes due primarily to higher assessed property values;

partially offset by

• $2.7 million increase in other income (expense), net primarily due to higher interest income on regulatory assets.

Total natural gas sold and delivered in 2021 increased 4% over 2020 primarily due to the recovery of commercial customer activity as pandemic restrictions lifted compared to the prior period and NGD meter growth.

2020 COMPARED TO 2019 .

NGD net income was $63.6 million in 2020 compared to $60.8 million in 2019.

The primary factors contributing to the increase in NGD net income were as follows:

• $15.4 million increase in NGD margin primarily due to:

▪ $17.7 million increase due to new customer rates from the 2020 Oregon and 2019 Washington rate cases;

▪ $7.6 million increase from revenue generated from NW Natural's North Mist storage contract which commenced service in May 2019 and is included within other regulated services within NGD margin;

▪ $3.9 million increase from customer growth;

partially offset by

▪ $7.1 million decrease due to revenue recognized in 2019 as part of the settlement and recovery of NW Natural's pension balancing account, which was entirely offset by pension expenses within operations and maintenance expense and other income (expense), net, and which did not recur in 2020;

▪ $4.0 million decrease primarily due to lower overrun and entitlement fees;

▪ $2.7 million decrease driven by warmer than average weather in 2020 compared average weather in 2019;

▪ $1.3 million decrease related to the temporary suspension of late fees during the COVID-19 pandemic.

In addition to the increase in margin, NGD net income for 2020 reflects:

• a benefit of $12.5 million from pension expenses recognized in 2019 associated with recoveries of NW Natural's pension balancing account which did not recur in 2020.

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The increases in net income above are partially offset by the following:

• an $8.2 million increase in operations and maintenance expense related to higher compensation costs, contractor expenses, and moving and lease costs for a new headquarters and operations center;

• a $13.8 million increase in depreciation and general tax expenses due to NGD plant additions, including the North Mist gas storage facility;

• a $7.3 million decrease in other income (expense), net primarily related to interest income recognized in 2019 associated with the 2019 recoveries of the pension balancing account and ongoing regulatory amortization of the remaining pension balancing account deferral, which began in April 2019;

• a $6.9 million higher income tax reflecting a non-recurring tax benefit associated with the March 2019 Oregon order, partially offset by the ongoing amortization of TCJA benefits.

• $8.2 million increase in operations and maintenance expense related to higher compensation costs, contractor expenses, and moving and lease costs for a new headquarters and operations center;

• $13.8 million increase in depreciation and general tax expenses due to NGD plant additions, including the North Mist gas storage facility;

• $7.3 million decrease in other income (expense), net primarily related to interest income recognized in 2019 associated with the 2019 recoveries of the pension balancing account and ongoing regulatory amortization of the remaining pension balancing account deferral, which began in April 2019;

• $6.9 million higher income tax reflecting a non-recurring tax benefit associated with the March 2019 Oregon order, partially offset by the ongoing amortization of TCJA benefits.

Total natural gas sold and delivered in 2020 decreased 6% over 2019 primarily due to the impact of weather that was 12% warmer than average in 2020 compared to weather that was average in 2019.

2019 COMPARED TO 2018 .

NGD net income was $60.8 million in 2019 compared to $57.5 million in 2018.

The primary factors contributing to the increase in NGD net income were as follows:

• a $39.0 million increase in NGD margin primarily due to:

▪ a $16.2 million increase due to new customer rates from the 2018 Oregon rate case and 2019 Washington rate case;

▪ a $6.1 million increase from customer growth;

▪ an $11.8 million increase from revenue generated from NW Natural's North Mist storage contract which commenced service in May 2019 and is included within other regulated services within NGD margin;

▪ a $7.1 million increase due to revenues recognized in association with recoveries of NW Natural's pension balancing account, which are entirely offset by pension expenses within operations and maintenance and other income (expense), net;

▪ a $3.7 million increase driven by colder than average weather in the first quarter of 2019 coupled with higher fee revenues from interruptible customers as a result of system restrictions;

partially offset by

▪ a $3.2 million decrease due to an adjustment to the tax reform deferral estimate in 2018;

▪ a $1.5 million decrease due to a regulatory disallowance of deferred environmental expenditures as a result of the 2019 Washington rate case.

• a $9.4 million decrease in income tax expense p rimarily due to the income tax implications of the March 2019 OPUC order, of which $5.4 million was offset by pension expenses as discussed above, with the remainder driven by the return of deferred TCJA benefit credits to customers and lower pretax income in 2019 compared to 2018;

• a $5.8 million increase in deferred regulatory inte rest income in other income (expense), net, of which $5.1 million relates to interest recognized in association with the OPUC order discussed above.

The increases were partially offset by:

• a $34.4 million increase in pension costs within operations and maintenance expense and other income (expense), net, of which $12.5 million relates to costs which were entirely offset by revenues and income tax benefits in the March 2019 OPUC order, and $10.5 million relates to the regulatory pension disallowance included in the March 2019 OPUC order.

In addition, there was a $11.4 million increase in pension expenses as NW Natural began collecting ongoing pension costs through customer rates on November 1, 2018 and began collecting deferred pension costs through customer rates on April 1, 2019 rather than deferring a portion to the balancing account;

• a $5.7 million increase in depreciation expense due to NGD plant additions;

• a $4.6 million increase in interest expense driven by $2.3 million higher interest on long term debt, $1.2 million lower AFUDC debt interest income, and $0.9 million higher commercial paper and line of credit interest;

• a $3.3 million decrease in AFUDC equity interest;

• a $2.9 million increase in NGD segment operations and maintenance expenses primarily attributable to annual employee cost increases.

Total natural gas sold and delivered in 2019 increased 8% over 2018 primarily due to the impact of weather that was average in 2019 compared to weather that was 15% warmer than average in 2018.

NATURAL GAS DISTRIBUTION MARGIN TABLE.

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NGD margin $ 479,811 $ 438,110 $ 422,731 $ 41,701 $ 15,379

NGD margin (1)

Residential and commercial sales $ 430,295 $ 385,989 $ 366,974 $ 44,306 $ 19,015

Industrial sales and transportation 32,182 30,800 31,985 1,382 (1,185)

Miscellaneous revenues 1,709 4,671 5,542 (2,962) (871)

Gain (loss) from gas cost incentive sharing (3,381) 267 (1,299) (3,648) 1,566

Other margin adjustments (2)

Other margin (2)

1,633 1,938 13,021 (305) (11,083)

Distribution margin $ 418,994 $ 410,681 $ 383,434 $ 8,313 $ 27,247

Other regulated services 19,082 19,116 12,050 (34) 7,066

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Total meter growth 1.5 % 1.5 %

(1) Amounts reported as margin for each category of meters are operating revenues, which are net of revenue taxes, less cost of gas and environmental remediation expense.

(2) Other margin adjustments include net revenue recoveries of $6.2 million and revenue deferrals of $7.9 million for the years ended December 31, 2019 and 2018, respectively, associated with the decline of the U.S.

(1) Amounts reported as NGD margin for each category of meters are operating revenues less cost of gas, environmental remediation expense and revenue taxes.

(2) Other margin adjustments include net revenue recoveries of $6.2 million for the year ended December 31, 2019 associated with the decline of the U.S.

federal corporate income tax rate.

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From November 1, 2018 through October 31, 2020, average weather was calculated over the period May 31, 1992 through May 30, 2017, as determined in NW Natural's 2018 Oregon general rate case.

Prior to November 1, 2018, average weather was calculated over the period 1986 - 2010, as determined in NW Natural's 2012 Oregon general rate case.

Residential and Commercial Sales

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The remaining customers either opt out of the mechanism or are located in Washington, which does not have a similar mechanism in place.

For more information on the weather mechanism, see "Regulatory Matters—Rate Mechanisms— Weather Normalization Mechanism " above.

For more information on the weather mechanism, see "Regulatory Matters—Rate Mechanisms— WARM " above.

NGD residential and commercial sales highlights include:

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Total operating revenues $ 730.8 $ 661.3 $ 638.9

Sales $ 274.9 $ 272.3 $ 240.0

Alternative revenues:

Weather normalization 9.0 (1.8) 7.6

Decoupling (6.1) (6.6) (0.6)

Amortization of alternative revenue 3.3 2.0 1.9

Total residential NGD margin 281.1 265.9 248.9

Sales 100.2 115.8 103.7

Alternative revenues:

Weather normalization 2.7 (0.7) 2.4

Decoupling 1.1 (5.2) 7.3

Amortization of alternative revenue 0.9 (8.8) (9.6)

Total commercial NGD margin 104.9 101.1 103.8

Total residential and commercial NGD margin $ 386.0 $ 367.0 $ 352.7

Residential margin $ 312.5 $ 281.1 $ 265.9

Commercial margin 117.8 104.9 101.1

Total NGD margin $ 430.3 $ 386.0 $ 367.0

2021 COMPARED TO 2020 .

The increases of $22.4 million in operating revenue and $19.0 million in total residential and commercial NGD margin were primarily the result of new customer rates resulting from the Oregon and Washington rate cases and customer growth.

Sales volume decreased 57.0 million therms, or 8%, primarily due to warmer than average weather in 2020 compared to average weather in 2019 and lower usage from commercial customers related to the pandemic, partially offset by residential customer growth.

The increase of $69.5 million in total residential and commercial operating revenue and $44.3 million in NGD margin were primarily the result of new customer rates in Oregon that took effect on November 1, 2020, growth in residential customer meters, and higher commercial volumes as COVID-19 restrictions and closures were lifted.

Sales volumes increased 25.8 million therms, or 4%, primarily due to growth in residential customer meters and higher commercial volumes as COVID-19 restrictions and closures were lifted.

2020 COMPARED TO 2019 .

The increases of $17.2 million in operating revenue and $14.3 million in total residential and commercial NGD margin were primarily driven by new customer rates from the 2018 Oregon rate case and 2019 Washington rate case as well as sales volume increases of 73.1 million therms, or 11%, due to customer growth and average weather in 2019 compared to warmer than average weather in 2018.

The increase of $22.4 million in operating revenue and $19.0 million in total residential and commercial NGD margin were primarily the result of new customer rates resulting from the Oregon and Washington rate cases and customer growth.

Industrial Sales and Transportation

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Volumes (therms):

Industrial - firm sales 34.3 36.6 35.3

Industrial - firm transportation 162.3 175.7 162.7

Industrial - interruptible sales 48.6 47.4 50.6

Industrial - interruptible transportation 220.4 221.1 218.4

Firm and interruptible sales 90.8 82.9 84.0

Firm and interruptible transportation 390.9 382.7 396.8

Total volumes 481.7 465.6 480.8

Industrial - sales and transportation $ 30.8 $ 32.0 $ 30.8

2020 COMPARED TO 2019 .

NGD volumes decreased by 15.2 million therms, or 3%, and margin decreased by $1.2 million primarily due to lower usage from a small number of industrial customers.

2019 COMPARED TO 2018 .

Industrial sales and transportation volumes increased by 13.8 million therms and NGD margin increased $1.2 million due to an increase in manufacturing activity in NW Natural's service territory.

The increase was partially offset by a reduction in customer count, which was driven by customer elections to switch from industrial to commercial rate schedules.

Miscellaneous Revenues

Margin from miscellaneous revenues includes fee income as well as regulatory revenue adjustments, which reflect current period deferrals to and prior year amortizations from regulatory asset and liability accounts, except for gas cost deferrals which flow through cost of gas.

Decoupling and other regulatory amortizations from prior year deferrals are included in revenues from residential, commercial, and industrial firm customers.

Margin from NGD miscellaneous revenues highlights include:

In millions 2020 2019 2018

Other revenues $ 1.7 $ 4.7 $ 5.5

Firm and interruptible sales $ 12.6 $ 11.6 $ 12.1

Firm and interruptible transportation 19.6 19.2 19.9

Total NGD margin $ 32.2 $ 30.8 $ 32.0

2021 COMPARED TO 2020 .

Margin from miscellaneous revenues decreased due to lower entitlement and curtailment revenues in 2020 as 2019 included higher fee revenue related to a rupture in a critical natural gas pipeline in western Canada in 2018 that disrupted gas supply to the Pacific Northwest.

In addition, margin from miscellaneous revenues was negatively impacted by the moratorium on charging late or reconnection fees during the pandemic in 2020.

NGD total industrial sales and transportation volumes increased 16.1 million therms, or 3%, primarily due to higher usage from multiple customers, most notably in the pulp and paper and chemical manufacturing industries.

NGD margin increased $1.4 million primarily driven by new rates in Oregon that took effect on November 1, 2020.

2020 COMPARED TO 2019 .

Margin from miscellaneous revenues remained flat due to continued entitlement and curtailment revenue in first quarter of 2019 related to the October 2018 Canadian pipeline event.

Other Regulated Services

NGD volumes decreased by 15.2 million therms, or 3%, and margin decreased by $1.2 million primarily due to lower usage from a small number of industrial customers.

Other Regulated Services Margin

Other Regulated Services primarily consist of lease revenues from NW Natural's North Mist storage facility as well as other lease revenues for compressed natural gas assets.

Other regulated services revenue highlights include:

Other regulated services margin highlights include:

In millions 2021 2020 2019

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2021 COMPARED TO 2020 .

Other regulated services margin increased $7.0 million due to the commencement of storage services at the North Mist expansion facility in May 2019.

Other regulated services margin was relatively flat when compared to the prior period.

The North Mist facility did not experience any significant fluctuations in storage service revenue.

See Note 7 for more information regarding North Mist expansion lease accounting.

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Other regulated services margin increased $7.0 million due to the commencement of storage services at the North Mist expansion facility in May 2019.

Cost of gas as reported by the NGD segment includes gas purchases, gas withdrawn from storage inventory, gains and losses from commodity hedges, pipeline demand costs, seasonal demand cost balancing adjustments, regulatory gas cost deferrals, gas reserves costs, and company gas use.

Cost of gas as reported by the NGD segment includes gas purchases, gas withdrawn from storage inventory, gains and losses from commodity hedges, pipeline demand costs, seasonal demand cost balancing adjustments, renewable thermal certificate costs, regulatory gas cost deferrals, gas reserves costs, and company gas use.

The OPUC and WUTC generally require natural gas commodity costs to be billed to customers at the actual cost incurred, or expected to be incurred.

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Further, NW Natural also has a regulatory agreement whereby it earns a rate of return on its investment in the gas reserves acquired under the original agreement with Encana and includes gas from the amended gas reserves agreement at a fixed rate of $0.4725 per therm, which are also reflected in NGD margin.

See "Application of Critical Accounting Policies and Estimates— Accounting for Derivative Instruments and Hedging Activities " below.

See "Application of Critical Accounting Policies and Estimates— Derivative Instruments and Hedging Activities " below.

Cost of gas highlights include:

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Gain (loss) from gas cost incentive sharing $ (3.4) $ 0.3 $ (1.3)

(1) This calculation excludes volumes delivered to industrial transportation customers.

2021 COMPARED TO 2020 .

Cost of gas increased $29.5 million, or 11%, primarily due to a $3.4 million loss from gas cost incentive sharing driven by costs related to the 2021 cold weather event that were not deferred for future recovery.

The remaining increase in cost of gas is primarily the result of a 4% increase in volumes sold driven by customer growth and higher commercial volumes as COVID-19 restrictions and closures were lifted.

For a discussion of the gas cost incentive sharing mechanism, see "Regulatory Matters—Rate Mechanisms— Purchased Gas Adjustment " above.

2020 COMPARED TO 2019 .

Cost of gas increased by $7.9 million, or 3%, primarily due to a 13% increase in average cost of gas consistent with higher gas costs in the PGA;

partially offset by a 7% decrease in volumes sold driven primarily by 12% warmer than average weather during 2020 as compared to average weather in 2019.

2019 COMPARED TO 2018 .

Cost of gas was flat compared to 2018, primarily due to the 10% increase in volumes sold driven by average weather in 2019 compared to warmer than average weather in 2018 and customer growth, primarily offset by a three cent decrease in the average cost of gas.

The effect on net income from NW Natural's Oregon gas cost incentive sharing mechanism resulted in a margin gain of $0.3 million in 2020 compared to margin loss of $1.3 million in 2019 and a slight margin loss in 2018.

In 2020, actual prices were lower than the estimated prices included in customer rates during the period.

In 2019, actual gas prices were higher than those included in rates during the period.

In 2018, actual prices closely aligned with estimated prices included in customer rates.

For a discussion of the gas cost incentive sharing mechanism, see "Regulatory Matters—Rate Mechanisms— Purchased Gas Adjustment " above.

Other activities aggregated and reported as other at NW Holdings include NWN Energy's equity investment in Trail West Holdings, LLC (TWH);

NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline);

Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline);

NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities;

and NWN Water, which owns and continues to pursue investments in the water sector.

Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations.

Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center

See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries.

On August 6, 2020, NWN Energy completed the sale to an unrelated third party of its interest in TWH.

On August 6, 2020, NWN Energy completed the sale of its interest in Trail West Holdings, LLC (TWH) to an unrelated third party.

See Note 13 for further details.

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The remaining 20% is credited to a deferred regulatory account for credit to NGD customers.

Through October 2018, when the capacity used was included in NGD rates, NW Natural retained 33% of pre-tax income with the remaining 67% credited to a deferred regulatory account for credit to NGD customers.

In conjunction with the Oregon rate case, effective November 2018, NW Natural retains 10% of pre-tax income from such storage and asset management services and 90% is credited to NGD business customers.

To the extent that the capacity used is included in NGD rates, NW Natural retains 10% of pre-tax income from such storage and asset management services and 90% is credited to NGD business customers.

The following table presents the results of activities aggregated and reported as other for both NW Holdings and NW Natural:

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NW Holdings other - net income $ 9.7 $ 6.7 $ 4.5

EPS - NW Holdings - other $ 0.22 $ 0.15 $ 0.34

The significant drivers of changes in other net income discussed below apply to both NW Holdings and NW Natural.

Diluted EPS - NW Holdings - other $ 0.32 $ 0.22 $ 0.15

2021 COMPARED TO 2020 .

Other net income increased $3.0 million and $5.2 million at NW Holdings and NW Natural, respectively.

The increase at NW Natural was primarily due to $7.9 million of higher asset management revenue primarily related to the 2021 cold weather event, partially offset by $2.1 million of income tax expense associated with the higher revenue .

The increase at NW Holdings was driven by the increase at NW Natural, partially offset by higher business development and consulting costs at the holding company.

2020 COMPARED TO 2019 .

Other net income increased $2.2 million and decreased $1.1 million at NW Holdings and NW Natural, respectively.

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The increase at NW Holdings was driven by higher earnings from water and wastewater utilities and lower expenses at the holding company, partially offset by the decline in other for NW Natural.

2019 COMPARED TO 2018 .

Other net income decreased $5.3 million and $2.5 million at NW Holdings and NW Natural, respectively.

The decrease at NW Natural was primarily driven by lower asset management revenues and increased asset management revenue sharing with Oregon customers as a result of the 2018 Oregon rate case.

The decrease from other NW Holdings activity was driven by increases in professional service costs and expenses associated with developing the water business.

Consolidated Operations

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2021 COMPARED TO 2020 .

Operations and maintenance expense increased $19.9 million for NW Natural primarily due to the following:

• $7.4 million increase in contractor, professional service fees and license costs related to information technology system upgrades;

• $4.8 million increase related to higher compensation and benefit costs;

• $3.6 million increase in lease expense related to a new headquarters and operations center.

Operations and maintenance expense increased $24.1 million for NW Holdings primarily due to the following:

• $4.2 million increase in other NW Holdings operations and maintenance expense primarily due to higher business development and consulting costs at the holding company;

• $19.9 million increase in operations and maintenance expense at NW Natural as discussed above.

2020 COMPARED TO 2019 .

Operations and maintenance expense decreased $0.2 million for NW Natural primarily due to the following:

• a $7.4 million decrease reflecting pension expense (service cost component) recognized as part of the recovery of NW Natural's pension balancing account settlement in the Oregon rate case, which did not recur in 2020 as discussed below;

• a $0.6 million decrease in workers compensation expense as a result of fewer claims in 2020;

• $7.4 million decrease reflecting pension expense (service cost component) recognized as part of the recovery of NW Natural's pension balancing account settlement in the Oregon rate case, which did not recur in 2020 as discussed below;

• $0.6 million decrease in workers compensation expense as a result of fewer claims in 2020;

partially offset by

• a $4.5 million increase in contractor and professional service expenses, and moving costs, as we moved to a new headquarters and operations center;

• a $1.6 million increase related to higher compensation costs attributable to annual employee cost increases;

• a $1.4 million increase due to higher lease expense for the new headquarters and operations center.

• $4.5 million increase in contractor and professional service expenses, and moving costs, as we moved to a new headquarters and operations center;

• $1.6 million increase related to higher compensation costs attributable to annual employee cost increases;

• $1.4 million increase due to higher lease expense for the new headquarters and operations center.

Operations and maintenance expense in 2020 excludes approximately $2.9 million of COVID-19 related expenses that were deferred to a regulatory asset.

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Operations and maintenance expense increased $1.9 million for NW Holdings primarily due to the following:

• a $2.2 million increase in other NW Holdings operations and maintenance expense primarily due to operating expenses at our water and wastewater utilities that have been acquired since 2019;

• $2.2 million increase in other NW Holdings operations and maintenance expense primarily due to operating expenses at our water and wastewater utilities that have been acquired since 2019;

partially offset by

• a $0.2 million decrease in operations and maintenance expense at NW Natural as discussed above.

2019 COMPARED TO 2018 .

Operations and maintenance expense increased $21.5 million and $13.9 million for NW Holdings and NW Natural, respectively, primarily due to the following factors:

• a $12.5 million increase in pension expenses, consisting of:

• a $4.6 million increase from recovery of amounts in NW Natural's pension balancing account upon receipt of an OPUC accounting order in March 2019, which was offset within NGD margin and income tax benefits;

• a $4.0 million increase from higher pension costs as NW Natural began collecting ongoing pension costs through customer rates on November 1, 2018 and began collecting deferred pension costs through customer rates on April 1, 2019 rather than deferring a portion to the balancing account;

• a $3.9 million increase from a regulatory pension disallowance as a result of the March 2019 OPUC order in the Oregon general rate case.

The remaining change was primarily attributable to annual employee cost increases.

The $7.6 million increase in other NW Holdings operations and maintenance expense was primarily due to expenses associated with developing the water business in 2019.

• $0.2 million decrease in operations and maintenance expense at NW Natural as discussed above.

Depreciation and Amortization

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2021 COMPARED TO 2020 .

Depreciation and amortization expense increased $11.2 million for NW Natural, primarily due to NGD plant additions and the North Mist gas storage facility that began operations and depreciating in May 2019.

Depreciation and amortization expense increased $8.9 million for NW Natural, primarily due to additional capital investments in the distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers.

Depreciation and amortization expense increased $9.8 million for NW Holdings, primarily due to a $0.9 million increase in other NW Holdings depreciation and amortization related to water and wastewater acquisitions and an $8.9 million increase at NW Natural as discussed above.

2020 COMPARED TO 2019 .

Depreciation and amortization expense increased by $6.3 million and $5.4 million for NW Holdings and NW Natural, respectively, primarily due to NGD plant additions that included investments in natural gas transmission and distribution systems supporting customer growth, safety, reliability, facility upgrades, and enhanced technology.

In addition, the North Mist gas storage facility began operations and began depreciating in May 2019.

The increase in other NW Holdings depreciation and amortization was primarily due to depreciation expense at acquired water and wastewater entities.

Depreciation and amortization expense increased $12.2 million for NW Holdings, primarily due to a $1.0 million increase in other NW Holdings depreciation and amortization related to water and wastewater acquisitions and an $11.2 million increase at NW Natural as discussed above.

Other Income (Expense), Net

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2021 COMPARED TO 2020 .

Other income (expense), net changed $2.4 million at NW Natural primarily due to higher interest income on regulatory assets and lower pension non-service costs.

Other income (expense), net changed $1.3 million at NW Holdings driven by the change at NW Natural discussed above, partially offset by a gain recognized in the prior period related to the sale of Trail West.

Other income (expense), net primarily consists of regulatory interest, pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.

2020 COMPARED TO 2019 .

Other income (expense), net increased $7.9 million at NW Natural primarily due to higher 2019 pension expenses (non-service cost component) recognized as part of the settlement and recovery of NW Natural's pension balancing account, which did not recur in 2020.

Other income (expense), net increased $8.9 million at NW Holdings due to an increase of $1.0 million in other NW Holdings activity and a $7.9 million increase at NW Natural as discussed above.

2019 COMPARED TO 2018 .

Other income (expense), net, decreased $19.2 million and $19.4 million at NW Holdings and NW Natural, respectively.

The decrease was primarily driven by activity in NW Natural's pension balancing account as described below.

In addition, net interest income on deferred regulatory accounts increased $5.5 million primarily due to $5.1 million of deferred equity interest income recognized in 2019 in conjunction with amortization of the pension balancing account.

Interest income from the equity portion of AFUDC decreased $3.3 million, primarily driven by the placement of the North Mist facility into service in May 2019.

Pension Balancing Account

From 2011 through October 31, 2018, NW Natural had OPUC approval to defer certain pension costs in excess of what was recovered in customer rates.

This pension cost deferral was recorded to a regulatory balancing account, which stabilized the amount of pension expense recognized each year in the consolidated statements of comprehensive income (loss).

Total pension cost deferrals, excluding interest, were $10.3 million and $6.5 million for the years ended December 31, 2018 and 2017, of which $7.9 million and $4.1 million was recognized in other income (expense), net, respectively.

In October 2018, the OPUC issued an order freezing the pension balancing account and directing that future pension expense would be recovered through rates with an increase of $8.1 million to revenue requirement.

In March 2019, the OPUC issued another order allowing for the application of certain deferred revenues and tax benefits from the TCJA to reduce NW Natural's pension regulatory balancing account.

A corresponding total of $12.5 million in pension expenses were recognized, of which $7.9 million was recognized in other income (expense), net in the consolidated statements of comprehensive income in the first quarter of 2019, with offsetting benefits recorded within operating revenues and income taxes.

The order also directed NW Natural to reduce the balancing account by an additional, disallowed, $10.5 million, of which $6.6 million was charged to other income (expense), net in the consolidated statements of comprehensive income.

Amortization of the remaining amount of the balancing account began in the second quarter of 2019 in accordance with the order.

Total amortization of the balancing account for the year ended December 31, 2019, inclusive of the $12.5 million recovery mentioned

above, was $16.8 million, of which $10.7 million was recorded to other income (expense), net.

See Note 10 and "Regulatory Matters— Pension Cost Deferral and Pension Balancing Account " for more information regarding the pension balancing account.

Interest Expense, Net

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2021 COMPARED TO 2020 .

Interest expense, net, increased $2.1 million at NW Natural primarily due to lower AFUDC debt interest income and higher interest on long-term debt.

Interest expense, net, increased $1.4 million at NW Holdings primarily due to the increase at NW Natural discussed above, partially offset by lower interest expense on the credit agreement at NW Holdings.

2020 COMPARED TO 2019 .

Interest expense, net, decreased $0.4 million at NW Natural primarily due to $1.7 million of lower interest on commercial paper borrowings, partially offset by $0.6 million of higher interest on long-term debt balances.

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Interest expense, net, increased $0.4 million at NW Holdings primarily due to $0.8 million higher interest on outstanding credit agreement balances, partially offset by a $0.4 million decrease at NW Natural as discussed above.

2019 COMPARED TO 2018 .

Interest expense, net of amounts capitalized increased $5.6 million and $4.3 million at NW Holdings and NW Natural, respectively.

The increase at NW Natural was primarily driven by $2.3 million higher interest on long term debt balances, $1.2 million lower AFUDC debt interest income, and $0.9 million higher commercial paper and line of credit interest.

The additional increase at NW Holdings was driven by interest on long-term debt at NWN Water and interest on NW Holdings' line of credit.

Income Tax Expense

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2021 COMPARED TO 2020 .

The effective tax rate increased by 6.9% and 6.1% at NW Holdings and NW Natural, respectively.

The increase in the effective tax rate is primarily due to the 2019 tax implications of the March 2019 OPUC order, including the return of deferred TCJA benefits to customers and the regulatory pension disallowance.

The effective tax rate increased 2.7 and 2.9 percentage points at NW Holdings and NW Natural, respectively.

The increase in the effective tax rate is primarily due to Oregon Corporate Activity Tax, the majority of which is incurred because of Oregon regulated operations and for which rate recovery began on November 1, 2020.

2020 COMPARED TO 2019 .

The effective tax rate decreased by 10.2% and 9.5% at NW Holdings and NW Natural, respectively.

The reduction was driven by the return of tax reform benefits to customers, including $5.4 million in tax benefits recognized in association with the OPUC 2018 Oregon rate case order which was offset by pension expenses.

See "Executive Summary - Deferred TCJA benefits and timing variance " above.

The effective tax rate increased 6.9 and 6.1 percentage points at NW Holdings and NW Natural, respectively.

The increase in the effective tax rate is primarily due to the 2019 tax implications of the March 2019 OPUC order, including the return of deferred Tax Cuts and Jobs Act benefits to customers and the regulatory pension disallowance.

Discontinued Operations

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Subsequent changes in the fair value will be recorded in earnings.

The completion of the sale resulted in an after-tax gain of $5.9 million.

The completion of the sale resulted in an after-tax gain of $5.9 million for the year ended December 31, 2020.

The results of Gill Ranch Storage have been determined to be discontinued operations until the date of sale and are presented separately, net of tax, from the results of continuing operations of NW Holdings for all periods presented.

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When additional capital is required, debt or equity securities are issued depending on both the target capital structure and market conditions.

These sources of capital are also used to fund long-term debt retirements and short-term commercial paper maturities.

These sources of capital are also used to fund long-term debt retirements and short-term commercial paper

See " Liquidity and Capital Resources " below and Note 9.

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As of December 31, 2021 and 2020, NW Natural's consolidated capital structure included common equity of 44.2% and 42.1%, long-term debt of 44.7% and 43.2%, and short-term debt including current maturities of long-term debt of 11.1% and 14.7%, respectively.

During 2020, changes to NW Natural's capital structures were primarily due to increases in short-term debt and the issuance of long-term debt.

Changes to NW Holdings' capital structure were primarily due to increases in short-term debt at NW Natural.

During 2021, NW Natural's capital structure changed primarily due to the issuance of long-term debt and capital contributions from NW Holdings.

NW Holdings' capital structure changed primarily due to issuances of common stock and increases in short-term debt at NW Holdings.

See further discussion below in "Cash Flows — Financing Activities " .

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NW Holdings and NW Natural may also pre-fund their respective capital expenditures when long-term fixed rate environments are attractive.

For example, as the COVID-19 pandemic developed, in early to mid-March, markets displayed significant volatility.

In response to that volatility and possible implications for the availability of access to the capital markets, NW Natural and NW Holdings undertook a number of measures to increase cash on hand to ensure ample liquidity.

On March 20, 2020, NW Natural borrowed $122.0 million under its multi-year credit facility, which was not backing commercial paper.

As of December 31, 2020, the credit facility was paid back in full.

Similarly, on March 20, 2020, NW Holdings borrowed $35.0 million under its multi-year credit facility, of which $27.0 million had been paid back as of December 31, 2020.

On March 23, 2020, NW Natural entered into a $150.0 million, 364-day term loan credit agreement, and borrowed the full amount on closing.

The term loan was paid back in full and terminated in 2020.

On March 31, 2020, NW Natural issued and sold $150.0 million aggregate principal amount of 3.60% first mortgage bonds (FMBs).

These actions were taken as a precaution to support sufficient cash on hand under a variety of financial

sector circumstances that could develop.

Currently, NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.

NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.

In August 2021, NW Holdings initiated an at-the-market (ATM) equity program by entering into an equity distribution agreement under which NW Holdings may issue and sell from time to time shares of common stock, no par value, having an aggregate gross sales price of up to $200 million.

NW Holdings is under no obligation to offer and sell common stock under the ATM equity program, which expires in August 2024.

Any shares of common stock offered under the ATM equity program are registered on NW Holdings’ universal shelf registration statement filed with the SEC.

During the year ended December 31, 2021, NW Holdings issued and sold 375,720 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $17.5 million, net of fees and commissions paid to agents of $0.4 million.

As of December 31, 2021, NW Holdings had issued and sold 375,720 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $17.5 million, net of fees and commissions paid to agents of $0.4 million.

For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities.

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NW Holdings long-term debt, if any, and equity issuances are primarily used to provide equity contributions to NW Holdings’ operating subsidiaries for operating and capital expenditures and other corporate purposes.

Over the next three years, we estimate NW Holdings’ and NW Natural's combined incremental capital needs to be in the range of $600 million to $700 million.

NW Holdings intends to use raised capital to support NW Natural, NW Natural Water, and NW Natural Renewables operating and capital expenditure programs.

NW Holdings' issuance of securities is not subject to regulation by state public utility commissions, but the dividends from NW Natural to NW Holdings are subject to regulatory ring-fencing provisions.

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See " Long-Term Debt " below for more information regarding NWN Water debt.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Natural may not pay dividends or make distributions to NW Holdings if NW Natural’s credit ratings and common equity ratio, defined as the ratio of equity to long-term debt, fall below specified levels.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Natural may not pay dividends or make distributions to NW Holdings if NW Natural’s credit ratings and common equity ratio, defined as the ratio of equity to long-term

debt, fall below specified levels.

If NW Natural’s long-term secured credit ratings are below A- for S&P and A3 for Moody’s, dividends may be issued so long as NW Natural’s common equity ratio is 45% or more.

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At December 31, 2021 and 2020, NW Natural satisfied the ring-fencing provisions described above.

Based on several factors, including current cash reserves, committed credit facilities, its ability to receive dividends from its operating subsidiaries, in particular NW Natural, and an expected ability to issue long-term debt and equity securities in the capital markets, NW Holdings believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, investing, and financing activities as discussed in " Contractual Obligations " and " Cash Flows " below.

NW HOLDINGS DIVIDENDS.

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The amount and timing of dividends payable on common stock is at the sole discretion of the NW Holdings Board of Directors.

Natural Gas Distribution Segment

For the NGD business segment, short-term borrowing requirements typically peak during colder winter months when the NGD business borrows money to cover the lag between natural gas purchases and bill collections from customers.

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NW Natural's long-term debt and contributions from NW Holdings are primarily used to finance NGD capital expenditures, refinance maturing debt, and provide temporary funding for other general corporate purposes of the NGD business.

Based on its current debt ratings (see " Credit Ratings " below), NW Natural has been able to issue commercial paper and long-term debt at attractive rates and has not needed to borrow or issue letters of credit from its back-up credit facility.

In the event NW Natural is not able to issue new debt due to adverse market conditions or other reasons, NW Natural expects that near-term liquidity needs can be met using internal cash flows, issuing commercial paper, receiving equity contributions from NW Holdings, or, for the NGD segment, drawing upon a committed credit facility.

Based on its current debt ratings (see " Credit Ratings " below), NW Natural has been able to issue commercial paper and long-term debt at attractive rates.

In the event NW Natural is not able to issue new long-term debt due to adverse market conditions or other reasons, NW Natural expects that near-term liquidity needs can be met using internal cash flows, issuing commercial paper, receiving equity contributions from NW Holdings, or drawing upon a committed credit facility.

NW Natural also has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt securities.

As previously described, NW Natural drew on its credit facility, secured a term loan, and issued FMBs to ensure ample liquidity during market volatility resulting from the commencement of the COVID-19 pandemic.

In the event senior unsecured long-term debt ratings are downgraded, or outstanding derivative positions exceed a certain credit threshold, counterparties under derivative contracts could require NW Natural to post cash, a letter of credit, or other forms of collateral, which could expose NW Natural to additional cash requirements and may trigger increases in short-term borrowings while in a net loss position.

NW Natural was not required to post collateral at December 31, 2021.

However, if the credit risk-

related contingent features underlying these contracts were triggered on December 31, 2020, assuming long-term debt ratings dropped to non-investment grade levels, NW Natural could have been required to post $0.1 million in collateral with our counterparties.

See "Credit Ratings" below and Note 15.

Other items that may have a significant impact on NW Natural's liquidity and capital resources include NW Natural's pension contribution requirements and environmental expenditures.

PENSION CONTRIBUTION.

NW Natural expects to make contributions to its company-sponsored defined benefit plan, which is closed to new employees, over the next several years until the plan is fully funded under the Pension Protection Act rules, including the rules issued under the Moving Ahead for Progress in the 21st Century Act (MAP-21), as amended.

See "Application of Critical Accounting Policies— Accounting for Pensions and Postretirement Benefits " below and Note 10 for more information.

PENSION CONTRIBUTIONS.

NW Natural does not expect to make contributions to its company-sponsored defined benefit plan, which is closed to new employees, over the next several years under applicable laws and regulations.

See "Application of Critical Accounting Policies— Pensions and Postretirement Benefits " below and Note 10 for more information.

ENVIRONMENTAL EXPENDITURES.

NW Natural expects to continue using cash resources to fund environmental liabilities.

NW Natural expects to continue using cash resources to fund environmental liabilities for future environmental remediation or action.

NW Natural has authorizations in Oregon and Washington to defer costs related to remediation of properties that are owned or were previously owned by NW Natura l.

In Oregon, a Site Remediation and Recovery Mechanism (SRRM) is currently in place to recovery prudently incurred costs allocable to Oregon customers, subject to an earnings test.

In Oregon, a Site Remediation and Recovery Mechanism (SRRM) is currently in place to recover prudently incurred costs allocable to Oregon customers, subject to an earnings test.

On October 21, 2019 the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers beginning November 1, 2019.

S ee Note 17 and "Results of Operations—Regulatory Matters— Environmental Cost Deferral and Recovery " above.

Based on several factors, including current credit ratings, NW Natural's commercial paper program, current cash reserves, committed credit facilities, and an expected ability to issue long-term debt and receive equity contributions from NW Holdings, NW Natural believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, investing, and financing activities as discussed in " Contractual Obligations " and " Cash Flows " below.

Based on several factors, including current credit ratings, NW Natural's commercial paper program, current cash reserves, committed credit facilities, and an expected ability to issue long-term debt and receive equity contributions from NW Holdings, NW Natural believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, and investing and financing activities as discussed in " Cash Flows " below.

NW NATURAL DIVIDENDS.

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The amount and timing of dividends payable on common stock is subject to approval of the NW Natural Board of Directors.

OFF-BALANCE SHEET ARRANGEMENTS.

Except for certain lease and purchase commitments, NW Holdings and NW Natural have no material off-balance sheet financing arrangements.

See " Contractual Obligations " below.

Contractual Obligations

The following table shows contractual obligations from continuing operations at December 31, 2020 by maturity and type of obligation:

Payments Due in Years Ending December 31,

In millions 2021 2022 2023 2024 2025 Thereafter Total

Short-term debt maturities $ 231.5 $ — $ — $ — $ — $ — $ 231.5

Long-term debt maturities 60.0 — 90.0 — 30.0 744.7 924.7

Interest on long-term debt 40.3 38.6 37.7 34.6 34.0 446.0 631.2

Postretirement benefit payments (1)

26.8 27.5 28.4 29.1 29.7 161.9 303.4

Operating leases 6.8 6.8 7.0 7.1 7.2 123.8 158.7

Gas purchases (2)

83.5 — — — — — 83.5

Gas pipeline capacity commitments 85.6 87.8 82.1 77.1 74.4 516.3 923.3

Other purchase commitments (3)

0.8 5.3 4.7 5.9 5.0 13.3 35.0

Other long-term liabilities (4)

18.2 — — — — — 18.2

NW Natural Total 553.5 166.0 249.9 153.8 180.3 2,006.0 3,309.5

Other (NW Holdings)

Short-term debt maturities 73.0 — — — — — 73.0

Short- and long-term obligations (5)

35.9 0.4 0.4 0.4 0.3 2.0 39.4

NW Holdings Total $ 662.4 $ 166.4 $ 250.3 $ 154.2 $ 180.6 $ 2,008.0 $ 3,421.9

(1) Postretirement benefit payments primarily consists of two NW Natural items:

(1) estimated pension and other postretirement plan payments, which are funded by plan assets and future cash contributions, and (2) required payments to the Western States multiemployer pension plan due to NW Natural's withdrawal from the plan in December 2013.

(2) Gas purchases include contracts which use price formulas tied to monthly index prices.

The commitment amounts presented incorporate the December 2020 first of month index price for each supply basin from which gas is purchased.

For a summary of gas purchase and gas pipeline capacity commitments, see Note 17.

Gas and Pipeline Capacity Purchase Agreements

NW Natural has signed agreements providing for the reservation of firm pipeline capacity under which it is required to make fixed monthly payments for contracted capacity.

The pricing component of the monthly payment is established, subject to change, by U.S.

or Canadian regulatory bodies, or is established directly with private counterparties, as applicable.

In addition, NW Natural has entered into long-term agreements to release firm pipeline capacity.

NW Natural also enters into short-term and long-term gas purchase agreements.

Refer to Note 16 for gas and pipeline capacity purchase commitments.

NW Natural Renewables is a newly formed and non-utility regulated subsidiary of NW Natural Holdings established to pursue non-regulated renewable natural gas activities.

In September 2021, a subsidiary of NW Natural Renewables and a subsidiary of EDL, a global producer of sustainable distributed energy, executed agreements to develop two production facilities that are designed to convert landfill waste gases to renewable natural gas (RNG).

Testing and commissioning of the production facilities is expected to occur in 2023.

Upon completion of each facility, the subsidiary of NW Natural Renewables is committed to make cash payments totaling $50.1 million to partially fund the infrastructure required to condition biogas and connect gas production to existing regional pipeline networks.

Alongside these development agreements, a subsidiary of NW Natural Renewables and a subsidiary of EDL executed agreements designed to secure a 20-year supply of RNG for NW Natural Renewables.

At December 31, 2021, the amount of RNG purchases based on prices and quantities specified in the agreements are as follows:

approximately $9.2 million in 2023, $10.5 million in 2024, $21.0 million in 2025, $21.0 million in 2026 and $584.0 million thereafter.

Other Purchase Agreements

Other purchase commitments primarily consist of remaining balances under existing purchase orders and gas storage agreements.

(4) Other long-term liabilities includes accrued deferred compensation plan liabilities for executives and directors.

The timing of these payments are uncertain;

however, these payments are unlikely to all occur in the next 12 months.

(5) Short- and long-term obligations include short- and long-term debt obligations and other immaterial liabilities.

In addition to known contractual obligations listed in the above table, NW Natural has also recognized liabilities for future environmental remediation or action.

The exact timing of payments beyond 12 months with respect to those liabilities cannot be reasonably estimated due to numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of site investigations.

See Note 18 for a further discussion of environmental remediation cost liabilities.

At December 31, 2020, 606 of NW Natural's natural gas distribution employees were members of the Office and Professional Employees International Union (OPEIU) Local No.

In November 2019, union employees ratified a new collective bargaining agreement that took effect on December 1, 2019, expires on May 31, 2024, and is effective thereafter from year to year unless either party serves notice of its intent to negotiate modifications to the collective bargaining agreement.

At December 31, 2021, the amount due over the duration of the purchase agreements totaled $48.1 million.

Except for these certain purchase commitments, NW Holdings and NW Natural have no material off-balance sheet financing arrangements.

Short-Term Debt

The primary source of short-term liquidity for NW Holdings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities it may enter into from time to time.

The primary source of short-term liquidity for NW Natural is from the sale of commercial paper, available cash from a multi-year credit facility, and short-term credit facilities.

NW Natural has a separate commercial paper program and separate bank facilities.

In addition to issuing commercial paper or bank loans to meet working capital requirements, including seasonal requirements to finance gas purchases and accounts receivable, short-term debt may also be used to temporarily fund capital requirements.

The primary source of short-term liquidity for NW Natural is from the sale of commercial paper, available cash from a multi-year credit facility, and short-term credit facilities it may enter into from time to time.

In addition to issuing commercial paper or entering into bank loans to meet working capital requirements, including seasonal requirements to finance gas purchases and accounts receivable, short-term debt may also be used to temporarily fund capital requirements.

For NW Natural, commercial paper and bank loans are periodically refinanced through the sale of long-term debt or equity contributions from NW Holdings.

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See “Credit Agreements” below.

At December 31, 2020 and 2019, NW Holdings had short-term debt outstanding of $304.5 million and $149.1 million, respectively.

The weighted average interest rate of NW Holdings' short-term debt outstanding at December 31, 2020 and 2019 was 0.5% and 2.0%, respectively.

NW Natural had short-term debt outstanding of $231.5 million and $125.1 million, respectively.

The weighted average interest rate of NW Natural's short-term debt outstanding at December 31, 2020 and 2019 was 0.4% and 2.0%, respectively.

In June 2021, NW Natural entered into a $100.0 million 364-Day Term Loan Credit Agreement (Term Loan) and borrowed the full amount.

All principal and interest under the Term Loan was repaid in December 2021.

At December 31, 2021 and 2020, NW Natural's short-term debt outstanding of $245.5 million and $231.5 million, respectively, consisted of commercial paper borrowings.

At December 31, 2021 and 2020, NW Holdings' short-term debt outstanding of $389.5 million and $304.5 million, respectively, consisted of the commercial paper outstanding at NW Natural and $144.0 million and $73.0 million, respectively, of balances outstanding under the credit agreement at NW Holdings.

The weighted average interest rate of commercial paper at NW Natural at December 31, 2021 and 2020 was 0.3% and 0.4%, respectively.

The weighted average interest rate on the credit agreement at NW Holdings at December 31, 2021 and 2020 was 1.1% and 1.2%, respectively.

Credit Agreements

NW Holdings has a $100 million credit agreement, with a feature that allows it to request increases in the total commitment amount, up to a maximum of $150 million.

The maturity date of the agreement is October 2, 2023, with available extensions of commitments for two additional one-year periods, subject to lender approval.

NW Holdings has a $200 million sustainability-linked credit agreement, with a feature that allows it to request increases in the total commitment amount, up to a maximum of $300 million.

The maturity date of the agreement is November 3, 2026, with available extensions of commitments for two additional one-year periods, subject to lender approval.

All lenders under the NW Holdings credit agreement are major financial institutions with committed balances and investment grade credit ratings as of December 31, 2021 as follows:

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NW Holdings was in compliance with this covenant at December 31, 2021 and 2020, with consolidated indebtedness to total capitalization ratios of 60.5% and 58.6%, respectively.

The agreement also requires NW Holdings to maintain debt ratings (which are defined by a formula using NW Natural's credit ratings in the event NW Holdings does not have a credit rating) with Standard & Poor's (S&P) and Moody's Investors Service, Inc.

The NW Holdings credit agreement also requires NW Holdings to maintain debt ratings (which are defined by a formula using NW Natural's credit ratings in the event NW Holdings does not have a credit rating) with Standard & Poor's (S&P) and Moody's Investors Service, Inc.

(Moody’s) and notify the lenders of any change in its senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies.

A change in NW Holdings' debt ratings by S&P or Moody’s is not an event of default, nor is

the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement.

A change in NW Holdings' debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement.

Rather, interest rates on any loans outstanding under the credit agreements are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreements when ratings are changed.

NW Holdings does not currently maintain ratings with S&P or Moody's.

Interest charges on the credit agreement are indexed to the London Interbank Offered Rate (LIBOR).

The agreement contains a provision to transition to an equivalent replacement rate upon the phase-out of LIBOR in 2022.

The NW Holdings credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Holdings’ independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline.

Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.

Interest charges on the NW Holdings credit agreement are indexed to the London Interbank Offered Rate (LIBOR).

The agreement contains provisions addressing the end of the use of LIBOR as a benchmark rate of interest and a mechanism for determining an alternative benchmark rate of interest without an amendment to the credit agreement.

If the provisions are triggered, LIBOR would be replaced by a secured overnight financing rate (SOFR)-based rate, if one can be determined, or, if not, LIBOR may be replaced by a rate selected by NW Holdings and the administrative agent under the agreement.

The replacement rate is also subject to a spread adjustment which may be positive, negative or zero.

NW Holdings had no letters of credit issued and outstanding at December 31, 2021 and 2020.

NW Holdings had a $1.0 million letter of credit issued and outstanding, separate from the aforementioned credit agreement, at December 31, 2019 for purposes of facilitating the Suncadia acquisition, which was extinguished after the close of the transaction in February 2020.

NW Natural has a multi-year credit agreement for unsecured revolving loans totaling $300 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $450 million.

The maturity date of the agreement is October 2, 2023 with an available extension of commitments for two additional one-year periods, subject to lender approval.

NW Natural has a sustainability-linked multi-year credit agreement for unsecured revolving loans totaling $400 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $600 million.

The maturity date of the agreement is November 3, 2026 with an available extension of commitments for two additional one-year periods, subject to lender approval.

All lenders under the NW Natural credit agreement are major financial institutions with committed balances and investment grade credit ratings as of December 31, 2021 as follows:

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The principal amount of borrowings under the credit agreement is due and payable on the maturity date.

There were no outstanding balances under this credit agreement at December 31, 2020 or 2019.

There were no outstanding

balances under this credit agreement at December 31, 2021 or 2020.

The credit agreement requires NW Natural to maintain a consolidated indebtedness to total capitalization ratio of 70% or less.

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NW Natural was in compliance with this covenant at December 31, 2021 and 2020, with consolidated indebtedness to total capitalization ratios of 55.8% and 57.9%, respectively.

The agreement also requires NW Natural to maintain credit ratings with S&P and Moody’s and notify the lenders of any change in NW Natural's senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies.

The NW Natural credit agreement also requires NW Natural to maintain credit ratings with S&P and Moody’s and notify the lenders of any change in NW Natural's senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies.

A change in NW Natural's debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement.

Rather, interest rates on any loans outstanding under the agreement are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreement when ratings are changed.

Rather, interest rates on any loans outstanding under the credit agreement are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreement when ratings are changed.

See " Credit Ratings " below.

Interest charges on the credit agreement are indexed to LIBOR.

The agreement contains a provision to transition to an equivalent replacement rate upon the phase-out of LIBOR.

The NW Natural credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Natural’s independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline.

Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.

Interest charges on the NW Natural credit agreement are indexed to LIBOR.

If the provisions are triggered, LIBOR would be replaced by a secured overnight financing rate (SOFR)-based rate, if one can be determined, or, if not, LIBOR may be replaced by a rate selected by NW Natural and the administrative agent under the agreement.

The replacement rate is also subject to a spread adjustment which may be positive, negative or zero.

Credit Ratings

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Each rating should be evaluated independently of any other rating.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Holdings and NW Natural are required to maintain separate credit ratings, long-term debt ratings, and preferred stock ratings, if any.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Holdings and NW Natural are required to maintain separate credit ratings, long-term debt ratings, and preferred stock ratings, if any.

Long-Term Debt

Issuance of Long-Term Debt

In November 2021, NW Natural issued $130.0 million of First Mortgage Bonds (FMBs) with an interest rate of 3.08% due in 2051.

Issued as a sustainability bond, net proceeds from the sale of the FMBs were added to the general funds of NW Natural and used for general corporate purposes, while an amount equivalent to the net proceeds from the sale of the bonds was or will be allocated to finance and/or refinance, in whole or in part, investments in one or more new or existing projects of NW Natural deemed to be an eligible project in the bond offering.

Projects deemed eligible for the FMB offering included expenditures related to RNG and hydrogen generation and infrastructure, programs related to energy efficiency, expenditures related to operations or service centers that have or are expected to receive LEED Gold or Platinum certification, and expenditures and program investments related to enabling opportunities for diverse business enterprises.

In June 2021, NWN Water, a wholly-owned subsidiary of NW Holdings, entered into a five-year term loan agreement for $55.0 million .

The loan carried an interest rate of 0.90% at December 31, 2021, which is based upon the one-month LIBOR rate.

The loan is guaranteed by NW Holdings and requires NW Holdings to maintain a consolidated indebtedness to total capitalization ratio of 70% or less.

Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and

accelerate the maturity of all amounts outstanding.

NW Holdings was in compliance with this covenant at December 31, 2021, with a consolidated indebtedness to total capitalization ratio of 60.5%.

Retirement of Long-Term Debt

The following NW Natural debentures were retired in the periods indicated:

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Total $ 60 $ 75 $ 30

In June 2019, NWN Water, a wholly-owned subsidiary of NW Holdings, entered into a two-year term loan agreement for $35.0 million .

The loan carried an interest rate of 0.70% at December 31, 2020, which is based upon the one-month LIBOR rate.

The loan is guaranteed by NW Holdings and requires NW Holdings to maintain a consolidated indebtedness to total capitalization ratio of 70% or less.

Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding.

NW Holdings was in compliance with this covenant at December 31, 2020, with a consolidated indebtedness to total capitalization ratio of 58.6%.

In March 2020, NW Natural issued $150.0 million of FMBs with an interest rate of 3.60%, due in 2050.

In February 2020, NW Natural retired $75.0 million of FMBs with an interest rate of 5.37%.

$10.0 million of FMBs with an interest rate of 9.05% and $50.0 million of FMBs with an interest rate of 3.18% will mature in August and September 2021, respectively.

See "Financial Condition— Contractual Obligations " above for long-term debt maturing over the next five years.

In June 2019, NW Natural Water, a wholly-owned subsidiary of NW Holdings, entered into a two-year term loan agreement for $35.0 million.

The loan was repaid in June 2021 upon its maturity date.

Maturities and Interest on Long-Term Debt

Maturities and payment of interest on long-term debt for each of the annual periods through December 31, 2026 and thereafter are as follows:

In millions Long-term debt maturities Interest on long-term debt

2022 $ — $ 42.6

2023 90.0 41.7

2025 30.0 38.0

2026 55.0 36.0

Thereafter 819.7 513.9

NW Natural Total $ 994.7 $ 710.8

Other NW Holdings:

2022 $ 0.3 $ 0.8

2026 55.3 0.7

Thereafter 1.9 0.2

Other NW Holdings Total $ 58.5 $ 5.7

2022 $ 0.3 $ 43.4

2023 90.4 43.0

2024 0.3 40.0

2025 30.3 39.3

2026 110.3 36.7

Thereafter 821.6 514.1

NW Holdings Total $ 1,053.2 $ 716.5

Bankruptcy Ring-fencing Restrictions

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Natural is required to have one director who is independent from NW Natural management and from NW Holdings and to issue one share of NW Natural preferred stock to an independent third party.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Natural is required to have one director who is independent from NW Natural management and from NW Holdings and to issue one share of NW Natural preferred stock to an independent third party.

NW Natural was in compliance with both of these ring-fencing provisions as of December 31, 2021 and 2020.

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Changes in our operating cash flows are primarily affected by net income or loss, changes in working capital requirements, and other cash and non-cash adjustments to operating results.

Operating activity highlights include:

In millions 2021 2020 2019

Cash provided by operating activities $ 143.0 $ 185.3 $ 168.8

In millions 2020 2019 2018

Cash provided by operating activities $ 146.2 $ 186.2 $ 173.5

NW Natural cash provided by operating activities $ 141.5 $ 148.5 $ 186.9

NW Holdings cash provided by operating activities $ 160.4 $ 145.3 $ 186.0

The significant drivers of changes in cash provided by operating activities discussed below apply to both NW Holdings and NW Natural.

2021 COMPARED TO 2020 .

The significant factors contributing to the $7.0 million decrease at NW Natural cash flow provided by operating activities were as follows:

• $58.1 million increase in net deferred gas costs as the actual costs during the 2020-21 winter season were 21% above the PGA estimates primarily due to the 2021 cold weather event as opposed to gas costs in the 2019-20 winter season that were in line with estimates embedded in the PGA,

• $26.5 million decrease due to increased receivables;

partially offset by

• $51.7 million increase in the regulatory incentive sharing mechanism related to revenues earned from Mist gas storage and asset management activities primarily related to the 2021 cold weather event, and

• $19.4 million of lower contributions to the defined benefit pension plan.

The $15.1 million increase in NW Holdings cash flow provided by operating activities were driven by the above factors affecting NW Natural, in addition to:

• $14.0 million increase due to lower income and other taxes, and

• $9.7 million increase due to lower deferred environmental expenses.

2020 COMPARED TO 2019 .

The significant factors contributing to the $40.7 million and $38.4 million decreases in NW Holdings and NW Natural cash flow provided by operating activities, respectively, were as follows:

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• a decrease of $41.1 million in net deferred gas costs as the actual costs during the 2019-20 winter season were in line with estimates embedded in the PGA as opposed to gas costs in the 2018-2019 winter season that were 14% above PGA estimates.

2019 COMPARED TO 2018 .

The significant factors contributing to the $16.5 million and $12.7 million increases in NW Holdings and NW Natural cash flow provided by operating activities, respectively, were as follows:

• an increase of $27.5 million at NW Holdings and $24.9 million at NW Natural due to net income tax refunds in 2019 compared to payments in 2018.

The refunds were primarily due to bonus depreciation taken on NW Natural's North Mist gas storage expansion which was placed into service in May 2019, as well as $6.0 million in income taxes paid in 2018 and refunded to NW Natural in 2019;

• an increase of $10.6 million from collections of both current and deferred pension expenses as a result of NW Natural's Oregon rate case;

• an increase of $4.6 million due to lower contributions paid to qualified defined benefit pension plans;

partially offset by

• a net decrease of $28.5 million at NW Natural from changes in receivables, inventories, and accounts payable, primarily reflecting increased gas purchase expenditures from average weather in 2019 compared to warmer-than average weather in 2018 as well as higher gas costs than those included in customer rates.

During the year ended December 31, 2021, NW Natural contributed $9.6 million to its qualified defined benefit pension plan, compared to $29.0 million for 2020 and $11.0 million in 2019.

The amount and timing of future contributions will depend on market interest rates and investment returns on the plans’ assets.

The American Rescue Plan, which was signed into law on March 11, 2021, includes a provision for pension relief that extends the amortization period for required contributions from 7 to 15 years and provides for the stabilization of interest rates used to calculate future required contributions.

As a result, NW Natural does not expect to make any plan contributions during 2022.

The a mount and timing of future contributions will depend on market interest rates and investment returns on the plans’ assets.

NW Holdings and NW Natural have lease and purchase commitments relating to our operating activities that are financed with cash flows from operations.

For information on cash flow requirements related to leases and other purchase commitments, see “Financial Condition— Contractual Obligations ” above and Note 17.

For information on cash flow requirements related to leases and other purchase commitments, see Note 7 and Note 16.

Investing Activities

Investing activity highlights include:

In millions 2021 2020 2019

Cash used in investing activities $ (294.3) $ (303.8) $ (217.5)

Capital expenditures (273.0) (223.5) (214.6)

In millions 2020 2019 2018

Cash used in investing activities $ (264.1) $ (243.1) $ (238.5)

Capital expenditures (266.0) (221.4) (214.3)

NW Natural cash used in investing activities $ (275.7) $ (264.1) $ (243.1)

NW Holdings cash used in investing activities $ (300.1) $ (294.3) $ (303.8)

2021 COMPARED TO 2020 .

Cash used in investing activities increased $11.6 million at NW Natural and $5.8 million at NW Holdings, respectively.

The increase at NW Natural is primary driven by an increase in capital expenditures of $12.2 million for customer growth, system reinforcement, and technology.

The increase at NW Holdings is driven by the $14.5 million purchase of an equity method investment and $12.5 million of proceeds from the sale of discontinued operations in the prior year, partially offset by a $37.0 million decrease in cash paid for acquisitions.

2020 COMPARED TO 2019 .

Cash used in investing activities decreased $9.5 million at NW Holdings and increased $21.0 million and NW Natural, respectively.

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The increase in cash used at NW Natural was due to continued capital expenditures for customer growth, system reinforcement, and technology, partially offset by lower leasehold improvement expenditures at the new corporate operations center and $8.1 million of proceeds from the sale of assets.

2019 COMPARED TO 2018 .

Cash used in investing activities increased $86.3 million and $4.6 million at NW Holdings and NW Natural, respectively.

The increase at NW Natural was driven by continued capital expenditures for customer growth, system reinforcement, and technology, as well as leasehold improvement additions at NW Natural's new corporate operations center.

The increase was partially offset by lower capital expenditures due to the completion of the North Mist gas storage expansion in May 2019.

The increase at NW Holdings was driven by $55.9 million higher expenditures for acquisitions, net of cash acquired.

NW Natural capital expenditures for 2022 are expected to be in the range of $310 million to $350 million and for the five-year period from 2022 to 2026 are expected to range from $1.3 billion to $1.5 billion.

NW Natural Water is expected to invest approximately $15 million in 2021 related to maintenance capital expenditures for water and wastewater utilities currently owned or under a purchase and sale agreement, and for the five-year period from 2021 to 2025 capital expenditures are expected to invest approximately $40 million to $50 million.

NW Natural Water is expected to invest approximately $15 million in 2022 related to maintenance capital expenditures for water and wastewater utilities owned as of December 31, 2021, and for the five-year period from 2022 to 2026 capital expenditures are expected to invest approximately $60 million to $70 million.

The timing and amount of the core capital expenditures and projects for 2022 and the next five years could change based on regulation, growth, and cost estimates.

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Financing Activities

Financing activity highlights include:

In millions 2021 2020 2019

Cash provided by financing activities $ 171.8 $ 115.5 $ 57.8

Proceeds from issuances of CP, maturities greater than 90 days 195.0 — —

Change in short-term debt, net (39.6) (68.5) 163.3

Change in long-term debt 75.0 145.0 (47.0)

Proceeds from common stock issued — 93.0 —

Cash dividend payments on common stock (55.4) (53.3) (51.3)

In millions 2020 2019 2018

Cash provided by financing activities $ 122.4 $ 54.9 $ 69.8

Proceeds from issuances of CP, maturities greater than 90 days 195.0 — —

Change in short-term debt, net (88.6) (92.4) 163.3

Change in long-term debt 75.0 110.0 (47.0)

Cash dividend payments on common stock (55.4) (53.4) (38.4)

NW Natural cash provided by financing activities $ 139.3 $ 122.4 $ 54.9

NW Holdings cash provided by financing activities $ 131.4 $ 171.8 $ 115.5

2021 COMPARED TO 2020 .

Cash provided by financing activities increased $16.9 million at NW Natural primarily driven by higher short-term debt borrowings of $297.6 million and $116.0 million in capital contributions by NW Holdings, partially offset by $390.1 million of lower proceeds from and repayments of commercial paper with maturities greater than 90 days.

Cash provided by financing activities decreased $40.4 million at NW Holdings primarily due to $390.1 million of lower proceeds from and repayments of commercial paper with maturities greater than 90 days, partially offset by higher other short-term debt borrowings of $319.6 million and cash proceeds of $17.5 million from the ATM equity program.

2020 COMPARED TO 2019 .

Cash provided by financing activities increased $56.3 million and $67.5 million at NW Holdings and NW Natural, respectively.

The increase in cash provided by financing activities at NW Natural was primarily driven by $198.8 million of higher borrowings of short-term debt, net, and $2.0 million of higher cash dividends paid.

The increases were partially offset by decreases of $35.0 million in long-term borrowing and the $93.2 million in capital contribution from NW Holdings to NW Natural in 2019.

The increase at NW Holdings was primarily due to $223.9 million higher in short-term borrowing, partially offset by decreases of $93.0 million in common stock issuance proceeds and $70.0 million lower repayments of long-term debt.

2019 COMPARED TO 2018 .

Cash provided by financing activities increased $57.7 million and decreased $14.9 million at NW Holdings and NW Natural, respectively.

The decrease in cash provided by financing activities at NW Natural was primarily driven by $255.7 million in higher repayments of short-term debt compared to 2018 and $15.0 million higher cash dividends paid.

The decrease was partially offset by net issuances of $110.0 million in long-term debt in 2019 compared to net repayments of $47.0 million in 2018, as well as a capital contribution from NW Holdings to NW Natural of $93.0 million.

The increase at NW Holdings was primarily due to proceeds of $93.0 million from the June 2019 issuance of NW Holdings common stock, the issuance of $35.0 million of long-term debt at NW Natural Water, and short-term debt issuances of $24 million at NW Holdings.

These increases were partially offset by the debt activity at NW Natural described above.

The increases were partially offset by decreases of $35.0 million in long-term debt borrowings and $93.2 million in capital contributions from NW Holdings to NW Natural in 2019.

The increase at NW Holdings was primarily due to $223.9 million higher in short-term borrowings, partially offset by decreases of $93.0 million in common stock issuance proceeds and $70.0 million lower repayments of long-term debt.

Pension Cost and Funding Status of Qualified Retirement Plans

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See “Application of Critical Accounting Policies and Estimates – Pensions and Postretirement Benefits ” below.

Pension expense for NW Natural's qualified defined benefit plan, which is allocated between operations and maintenance expenses, capital expenditures, and through October 31, 2018, the deferred regulatory balancing account, totaled $18.4 million in 2020, an increase of $1.9 million from 2019.

Pension expense for NW Natural's qualified defined benefit plan, which is allocated between operations and maintenance expenses and capital expenditures totaled $16.6 million in 2021, a decrease of $1.8 million from 2020.

The fair market value of pension assets in this plan increased to $399.2 million at December 31, 2021 from $373.9 million at December 31, 2020.

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The qualified defined benefit pension plan was underfunded by $104.7 million at December 31, 2021.

NW Natural plans to make contributions during 2021 of $20.1 million.

See Note 10 for further pension disclosures.

As a result, NW Natural does not expect to make any plan contributions during 2022.

The amount and timing of future contributions will depend on market interest rates and investment returns on the plan's asset s.

See Note 10 for information regarding employer contributions and estimated future benefit payments and other pension disclosures.

Contingent Liabilities

Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies.

See “ Application of Critical Accounting Policies and Estimates ” below.

See “Application of Critical Accounting Policies and Estimates— Environmental Contingencies ” below.

At December 31, 2021, NW Natural's total estimated liability related to environmental sites was $115.8 million.

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The NGD segment is regulated by the OPUC and WUTC, which establish the rates designed to recover specific costs of providing regulatory services, and, to a certain extent, set forth special accounting treatment for certain regulatory transactions for which NW Natural records regulatory assets and liabilities.

In general, the same accounting principles as non-regulated

companies reporting under U.S.

In general, the same accounting principles as non-regulated companies reporting under U.S.

GAAP are used.

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Further, it is reasonable to expect the recovery or refund of NW Natural's regulatory assets and liabilities at December 31, 2021 through future customer rates.

If it is determined that all or a portion of these regulatory assets or liabilities no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances against earnings in the period such determination is made.

If it is determined that all or a portion of

these regulatory assets or liabilities no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances against earnings in the period such determination is made.

The net balance in regulatory asset and liability accounts was a net liability of $382.7 million and $308.5 million as of December 31, 2021 and 2020, respectively.

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Estimates of fair value may change significantly from period-to-period depending on market conditions, notional amounts, and prices.

These changes may have an impact on results of operations, but the impact would largely be mitigated due to the majority of derivative activities

being subject to regulatory deferral treatment.

These changes may have an impact on results of operations, but the impact would largely be mitigated due to the majority of derivative activities being subject to regulatory deferral treatment.

For more information on derivative activity and associated regulatory treatment, see Note 2 and Note 15.

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In millions 2021 2020 2019

NGD business net gain on:

Commodity Swaps $ 2.3 $ 17.9 $ 7.4

NGD business net gain on commodity swaps $ 50.9 $ 2.3 $ 17.9

Realized gains and losses from commodity hedges shown above were recorded in cost of gas and were, or will be, included in annual PGA rates.

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See " Regulatory Accounting" above and Note 2, " Industry Regulation ".

In 2011, NW Natural received regulatory approval from the OPUC and began deferring a portion of pension expense above or below the amount set in rates to a regulatory balancing account on the balance sheet.

As part of general rate case proceedings, on October 26, 2018, the OPUC issued an order to freeze NW Natural's pension balancing account as of October 31, 2018.

In March 2019, the OPUC issued an order resolving the remaining open items for NW Natural's 2018 Oregon general rate case regarding recovery of the pension balancing account.

At December 31, 2020, the cumulative amount deferred for future pension cost recovery was $50.5 million, including accrued interest.

The regulatory balancing account includes the recognition of accrued interest on the account balance at NW Natural's authorized rate of return from 2011 through October 31, 2018, and at 4.3% thereafter.

See "Regulatory Matters - Rate Mechanisms - Pension Cost Deferral and Pension Balancing Account " above for more information.

A number of factors, as discussed above, are considered in developing pension and postretirement benefit assumptions.

For the December 31, 2021 measurement date, NW Natural reviewed and updated:

• the weighted-average discount rate assumptions for pensions decreased from 3.16% for 2019 to 2.36% for 2020, and our weighted-average discount rate assumptions for other postretirement benefits decreased from 3.11% for 2019 to 2.34% for 2020.

• the weighted-average discount rate assumptions for pensions increased from 2.36% for 2020 to 2.71% for 2021, and our weighted-average discount rate assumptions for other postretirement benefits increased from 2.34% for 2020 to 2.72% for 2021.

The new rate assumptions were determined for each plan based on a matching of benchmark interest rates to the estimated cash flows, which reflect the timing and amount of future benefit payments.

Benchmark interest rates are drawn from the FTSE Above Median Curve, which consists of high quality bonds rated AA- or higher by S&P or Aa3 or higher by Moody’s;

• the expected annual rate of future compensation increases for bargaining unit employees, which remained consistent with 2019, of 6.50% in 2020 and 3.50% thereafter.

The rate for 2020 reflects a new collective bargaining agreement that took effect December 1, 2019.

The expected annual rate of future compensation was 3.50% for non-bargaining employees;

• the expected long-term return on qualified defined benefit plan assets remains unchanged at 7.25%;

• the mortality rate assumptions were updated from Pri-2012 mortality tables using scale MP-2019 to Pri-2012 mortality tables using scale MP-2020, which partially offset increases of the projected benefit obligation;

• the expected annual rate of future compensation for bargaining unit employees, which was updated from a range of 3.50% to 6.50% for 2020, was 3.50 % in 2021 and thereafter.

The rate increase for non bargaining unit employees is 4.00% in 2022 and 3.50% thereafter.

• the expected long-term return on qualified defined benefit plan assets decreased from 7.25% in 2020 to 7.00% for 2021;

• Mortality assumptions are reviewed annually and are updated for material changes as necessary.

In 2021, mortality rate assumptions were updated from Pri-2012 mortality tables using scale MP-2020 to Pri-2012 mortality tables using scale MP-2021, which partially offset increases of the projected benefit obligati on;

• other key assumptions, which were based on actual plan experience and actuarial recommendations.

At December 31, 2020, the net pension liability (benefit obligations less market value of plan assets) for NW Natural's qualified defined benefit plan decreased $13.1 million compared to 2019.

The decrease in the net pension liability is primarily due to the

$60.9 million increase in plan assets, partially offset by the $47.8 million increase to the pension benefit obligation.

The liability for non-qualified plans increased $2.7 million, and the liability for other postretirement benefits decreased $0.5 million in 2020.

At December 31, 2021, the net pension liability (benefit obligations less market value of plan assets) for the Pension Plan decreased $46.5 million compared to 2020.

The decrease in the net pension liability is primarily due to the $25.3 million increase in plan assets and the $21.3 million decrease to the pension benefit obligation.

The liability for non-qualified plans decreased $2.3 million, and the liability for other postretirement benefits decreased $1.8 million in 2021.

The expected long-term rate of return on plan assets is determined by averaging the expected earnings for the target asset portfolio.

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Qualified defined benefit plans 0.8 N/A

In July 2012, President Obama signed MAP-21 into law.

This legislation changed several provisions affecting pension plans, including temporary funding relief and Pension Benefit Guaranty Corporation (PBGC) premium increases, which shifts the level of minimum required contributions from the short-term to the long-term as well as increasing the operational costs of running a pension plan.

MAP-21 established a new minimum and maximum corridor for segment rates based on a 25-year average of bond yields, which resulted in lower minimum contributions requirements than those under previous regulations.

MAP-21, as amended, provides for the current corridor to be in effect through 2020 and subsequently broaden on an annual basis from 2021 through 2024.

Valuation Allowances

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The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in the jurisdictions in which we operate.

A tax benefit from a material uncertain tax position will only be recognized when it is more likely than not that the position, or some portion thereof, will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of the technical merits.

A tax benefit from a material uncertain tax position will only be recognized when it is more likely

than not that the position, or some portion thereof, will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of the technical merits.

NW Holdings and NW Natural participate in the Compliance Assurance Process (CAP) with the Internal Revenue Service (IRS).

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When significant proposed or enacted changes in income tax rules occur we consider whether there may be a material impact to our financial position, results of operations, cash flows, or whether the changes could materially affect existing assumptions used in making estimates of tax related balances.

On December 22, 2017, H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, also known as the Tax Cuts and Jobs Act (TCJA), was enacted.

The TCJA lowered the U.S.

federal corporate income tax rate to 21% from the existing maximum rate of 35%, effective for our tax year beginning January 1, 2018.

The TCJA includes specific provisions related to regulated public utilities that generally provide for the continued deductibility of interest expense and the elimination of bonus depreciation.

Certain rate normalization requirements for accelerated cost recovery benefits related to regulated plant balances also continue.

See Note 11 for more information on how we are impacted by the TCJA.

With respect to other tax legislation, the final tangible property regulations applicable to all taxpayers were issued on September 13, 2013 and were generally effective for taxable years beginning on or after January 1, 2014.

In addition, procedural guidance related to the regulations was issued under which taxpayers may make accounting method changes to comply with the

The final tangible property regulations applicable to all taxpayers were issued on September 13, 2013 and were generally effective for taxable years beginning on or after January 1, 2014.

In addition, procedural guidance related to the regulations was issued under which taxpayers may make accounting method changes to comply with the regulations.

We have evaluated the regulations and do not anticipate any material impact.

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At December 31, 2021 and 2020, regulatory income tax assets of $2.4 million and $2.5 million, respectively, were recorded by NW Natural, representing probable future rate recovery of deferred tax liabilities resulting from the equity portion of AFUDC.

At December 31, 2020, a regulatory income tax asset of $1.7 million was recorded by NW Natural, representing future recovery of Oregon Corporate Activity Tax that was deferred between January 1, 2020 and October 31, 2020.

At December 31, 2021 and 2020, regulatory income tax assets of $0.4 million and $1.7 million, respectively, were recorded by NW Natural, representing future recovery of Oregon Corporate Activity Tax that was deferred between January 1, 2020 and October 31, 2020.

At December 31, 2021 and 2020, regulatory liability balances, representing the estimated net benefit to NGD customers resulting from the change in deferred taxes as a result of the TCJA, of $189.6 million and $197.8 million, respectively, were recorded by NW Natural.

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However, it is anticipated that until such time that customers receive the direct benefit of this regulatory liability, the balance, net of the additional gross up for income taxes, will continue to provide an indirect benefit to customers by reducing the NGD rate base which determines customer rates for service.

Regulatory orders were issued by Oregon in March 2019 and by Washington in October 2019 addressing the provision of these TCJA tax benefits to customers.

See "Regulatory Matters-Regulatory Proceeding Updates- Tax Reform Deferral " for more information.

NGD rates in effect for Oregon through October 31, 2018 and for Washington through October 31, 2019 included an allowance to provide for the recovery of the anticipated provision for income taxes incurred as a result of providing regulated services.

The provision for income taxes during these periods included an allowance for federal income taxes determined by utilizing the pre-TCJA federal corporate income tax rate of 35 percent.

NW Natural recorded an additional regulatory liability in 2018 and 2019 reflecting the deferral of estimated rate benefit for customers due to the newly enacted 21 percent federal corporate income tax rate.

At December 31, 2019, a regulatory liability of $1.7 million was recorded to reflect this estimated revenue deferral.

The liability has been completely amortized to customers’ benefit as of December 31, 2020.

Environmental Contingencies

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis