Northwest Natural Holding Co 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS Page 1. Management's Reports on Internal Control Over Financial Reporting 72 2. Reports of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 74 3. Consolidated Financial Statements: Consolidated Statements of Comprehensive Income (Loss) of Northwest Natural Holding Company for the Years Ended December 31, 202 2 , 202 1 , and 2020 78 Consolidated Balance Sheets of Northwest Natural Holding Company at December 31, 202 2 and 2021 79 Consolidated Statements of Shareholders’ Equity of Northwest Natural Holding Company for the Years Ended December 31, 202 2 , 202 2 , and 2020 81 Consolidated Statements of Cash Flows of Northwest Natural Holding Company for the Years Ended December 31, 202 2 , 202 1 , and 2020 82 Consolidated Statements of Comprehensive Income (Loss) of Northwest Natural Gas Company for the Years Ended December 31, 202 2 , 202 1 , and 2020 84 Consolidated Balance Sheets of Northwest Natural Gas Company at December 31, 202 2 and 2021 85 Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company for the Years Ended December 31, 202 2 , 202 1 , and 2020 87 Consolidated Statements of Cash Flows of Northwest Natural Gas Company for the Years Ended December 31, 202 2 , 202 1 , and 20 20 88 Notes to Consolidated Financial Statements 89 4. Supplementary Data for the Years Ended December 31, 2022, 2021, and 2020: Financial Statement Schedules Schedule I - Condensed Financial Information of Northwest Natural Holding Company at December 31, 202 2 and 202 1 , and for the Years Ended December 31, 202 2 , 202 1 , and 2020 131 Schedule II – Valuation and Qualifying Accounts and Reserves of Northwest Natural Holding Company and Northwest Natural Gas Company for the Years Ended December 31, 202 2 , 202 1 , and 2020 135 Supplemental Schedules Omitted All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements. 71 NW HOLDINGS MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING NW Holdings management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. NW Holdings' internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). NW Holdings' internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions involving company assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the NW Holdings Board of Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of NW Holdings' assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. NW Holdings management assessed the effectiveness of NW Holdings' internal control over financial reporting as of December 31, 2022. In making this assessment, NW Holdings management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) . Based on NW Holdings management's assessment and those criteria, NW Holdings management has concluded that it maintained effective internal control over financial reporting as of December 31, 2022. The effectiveness of internal control over financial reporting as of December 31, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this annual report. /s/ David H. Anderson David H. Anderson President and Chief Executive Officer /s/ Frank H. Burkhartsmeyer Frank H. Burkhartsmeyer Senior Vice President and Chief Financial Officer February 24, 2023 72 NW NATURAL MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING NW Natural management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. NW Natural's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). NW Natural's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions involving company assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the NW Natural Board of Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of NW Natural's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. NW Natural management assessed the effectiveness of NW Natural's internal control over financial reporting as of December 31, 2022. In making this assessment, NW Natural management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) . Based on NW Natural management's assessment and those criteria, NW Natural management has concluded that it maintained effective internal control over financial reporting as of December 31, 2022. /s/ David H. Anderson David H. Anderson President and Chief Executive Officer /s/ Frank H. Burkhartsmeyer Frank H. Burkhartsmeyer Senior Vice President and Chief Financial Officer February 24, 2023 73 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Northwest Natural Holding Company Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Northwest Natural Holding Company and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 74 Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accounting for the Effects of Regulatory Matters As described in Note 2 to the consolidated financial statements, there were $457.9 million of regulatory assets and $938.2 million of regulatory liabilities as of December 31, 2022. As disclosed by management, the Company has operations that are subject to the actions of regulators which establish rates in general rate cases and other proceedings which are designed to recover specific costs of providing regulatory services for which management records regulatory assets and liabilities. Regulatory accounting requires management to account for deferred expenses (or deferred revenues) as regulatory assets (or regulatory liabilities) on the balance sheet. When the recovery of these regulatory assets from, or refund of regulatory liabilities to, customers is approved, management recognizes the expense or revenue on the income statement at the same time the adjustment to amounts is included in rates charged to customers. The principal considerations for our determination that performing procedures relating to the Company’s accounting for the effects of regulatory matters is a critical audit matter are the significant judgment by management in assessing the potential outcomes and related accounting impacts of rate cases and other proceedings. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the recovery of regulatory assets and the settlement of regulatory liabilities. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of rates cases and other proceedings, including the probability of recovery of regulatory assets and the settlement of regulatory liabilities and related accounting and disclosure impacts. These procedures also included, among others (i) evaluating the reasonableness of management’s assessment regarding the probability of recovery of regulatory assets and settlement of regulatory liabilities, (ii) evaluating the sufficiency of the disclosures in the consolidated financial statements, and (iii) testing the regulatory assets and liabilities, including those subject to regulatory proceedings, also involved considering the provisions and formulas outlined in rate orders, other regulatory correspondence, and the application of relevant regulatory precedents. /s/ PricewaterhouseCoopers LLP Portland, Oregon February 24, 2023 We have served as the Company’s auditor since 1997. 75 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of Northwest Natural Gas Company: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Northwest Natural Gas Company and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of comprehensive income (loss), of shareholder's equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accounting for the Effects of Regulatory Matters As described in Note 2 to the consolidated financial statements, there were $457.9 million of regulatory assets and $937.2 million of regulatory liabilities as of December 31, 2022. As disclo sed by management, the Company has operations that are subject to the actions of regulators which establish rates in general rate cases and other proceedings which are designed to recover specific costs of providing regulatory services for which management records regulatory assets and liabilities. Regulatory accounting requires management to account for deferred expenses (or deferred revenues) as regulatory assets (or regulatory liabilities) on the balance sheet. When the recovery of these regulatory assets from, or refund of regulatory liabilities to, customers is approved, management recognizes the expense or revenue on the income statement at the same time the adjustment to amounts is included in rates charged to customers. The principal considerations for our determination that performing procedures relating to the Company’s accounting for the effects of regulatory matters is a critical audit matter are the significant judgment by management in assessing the potential outcomes and related accounting impacts of rate cases and other proceedings. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the recovery of regulatory assets and the settlement of regulatory liabilities. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of rates cases and other proceedings, including the probability of recovery of regulatory assets and the settlement of regulatory liabilities and related accounting and disclosure impacts. These procedures also included, among others (i) evaluating the reasonableness of management’s assessment regarding the probability of recovery of regulatory assets 76 and settlement of regulatory liabilities, (ii) evaluating the sufficiency of the disclosures in the consolidated financial statements, and (iii) testing the regulatory assets and liabilities, including those subject to regulatory proceedings, also involved considering the provisions and formulas outlined in rate orders, other regulatory correspondence, and the application of relevant regulatory precedents. /s/ PricewaterhouseCoopers LLP Portland, Oregon February 24, 2023 We have served as the Company’s auditor since 1997. 77 NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended December 31, In thousands, except per share data 2022 2021 2020 Operating revenues $ 1,037,353 $ 860,400 $ 773,679 Operating expenses: Cost of gas 429,635 292,314 262,755 Operations and maintenance 224,667 204,227 180,129 Environmental remediation 12,389 9,938 9,691 General taxes 41,031 38,633 35,078 Revenue taxes 41,826 34,740 30,291 Depreciation 116,707 113,534 103,683 Other operating expenses 3,621 3,897 3,701 Total operating expenses 869,876 697,283 625,328 Income from operations 167,477 163,117 148,351 Other income (expense), net 1,203 ( 12,559 ) ( 13,944 ) Interest expense, net 53,247 44,486 43,052 Income before income taxes 115,433 106,072 91,355 Income tax expense 29,130 27,406 21,082 Net income from continuing operations 86,303 78,666 70,273 Income from discontinued operations, net of tax — — 6,508 Net income 86,303 78,666 76,781 Other comprehensive income (loss): Change in employee benefit plan liability, net of taxes of $( 1,511 ) for 2022, $( 219 ) for 2021, and $ 1,025 for 2020 4,195 593 ( 2,848 ) Amortization of non-qualified employee benefit plan liability, net of taxes of $( 286 ) for 2022, $( 320 ) for 2021, and $( 244 ) for 2020 795 905 679 Unrealized gain on interest rate swaps, net of taxes of $( 47 ) for 2022 129 — — Comprehensive income $ 91,422 $ 80,164 $ 74,612 Average common shares outstanding: Basic 33,934 30,702 30,541 Diluted 33,984 30,752 30,599 Earnings from continuing operations per share of common stock: Basic $ 2.54 $ 2.56 $ 2.30 Diluted 2.54 2.56 2.30 Earnings from discontinued operations per share of common stock: Basic $ — $ — $ 0.21 Diluted — — 0.21 Earnings per share of common stock: Basic $ 2.54 $ 2.56 $ 2.51 Diluted 2.54 2.56 2.51 See Notes to Consolidated Financial Statements 78 NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, In thousands 2022 2021 Assets: Current assets: Cash and cash equivalents $ 29,270 $ 18,559 Accounts receivable 168,906 101,495 Accrued unbilled revenue 89,048 82,169 Allowance for uncollectible accounts ( 3,296 ) ( 2,018 ) Regulatory assets 117,491 72,391 Derivative instruments 194,412 48,130 Inventories 87,096 57,262 Other current assets 61,286 59,288 Total current assets 744,213 437,276 Non-current assets: Property, plant, and equipment 4,261,566 3,997,243 Less: Accumulated depreciation 1,147,166 1,125,873 Total property, plant, and equipment, net 3,114,400 2,871,370 Regulatory assets 340,432 314,579 Derivative instruments 5,045 10,730 Other investments 95,704 89,278 Operating lease right of use asset, net 73,429 75,049 Assets under sales-type leases 134,302 138,995 Goodwill 149,283 70,570 Other non-current assets 91,518 56,757 Total non-current assets 4,004,113 3,627,328 Total assets $ 4,748,326 $ 4,064,604 See Notes to Consolidated Financial Statements 79 NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, In thousands 2022 2021 Liabilities and equity: Current liabilities: Short-term debt $ 258,200 $ 389,500 Current maturities of long-term debt 90,697 345 Accounts payable 180,667 133,486 Taxes accrued 15,625 15,520 Interest accrued 10,169 7,503 Regulatory liabilities 248,582 112,281 Derivative instruments 28,728 10,402 Operating lease liabilities 1,514 1,296 Other current liabilities 64,552 54,432 Total current liabilities 898,734 724,765 Long-term debt 1,246,167 1,044,587 Deferred credits and other non-current liabilities: Deferred tax liabilities 366,022 340,231 Regulatory liabilities 689,578 658,332 Pension and other postretirement benefit liabilities 149,143 166,684 Derivative instruments 20,838 412 Operating lease liabilities 78,965 79,468 Other non-current liabilities 123,438 114,979 Total deferred credits and other non-current liabilities 1,427,984 1,360,106 Commitments and contingencies (see Note 16 and Note 17) Equity: Common stock - no par value; authorized 100,000 shares; issued and outstanding 35,525 and 31,129 at December 31, 2022 and 2021, respectively 805,253 590,771 Retained earnings 376,473 355,779 Accumulated other comprehensive loss ( 6,285 ) ( 11,404 ) Total equity 1,175,441 935,146 Total liabilities and equity $ 4,748,326 $ 4,064,604 See Notes to Consolidated Financial Statements 80 NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Equity In thousands Balance at December 31, 2019 $ 558,282 $ 318,450 $ ( 10,733 ) $ 865,999 Comprehensive income (loss) — 76,781 ( 2,169 ) 74,612 Dividends on common stock, $ 1.91 per share — ( 58,708 ) — ( 58,708 ) Stock-based compensation 4,361 — — 4,361 Shares issued pursuant to equity based plans 2,469 — — 2,469 Balance at December 31, 2020 565,112 336,523 ( 12,902 ) 888,733 Comprehensive income (loss) — 78,666 1,498 80,164 Dividends on common stock, $ 1.92 per share — ( 59,410 ) — ( 59,410 ) Stock-based compensation 3,615 — — 3,615 Shares issued pursuant to equity based plans 4,543 — — 4,543 Issuance of common stock, net of issuance costs 17,501 — — 17,501 Balance at December 31, 2021 590,771 355,779 ( 11,404 ) 935,146 Comprehensive income (loss) — 86,303 5,119 91,422 Dividends on common stock, $ 1.93 per share — ( 65,609 ) — ( 65,609 ) Stock-based compensation 3,228 — — 3,228 Shares issued pursuant to equity based plans 2,978 — — 2,978 Issuance of common stock, net of issuance costs 208,276 — — 208,276 Balance at December 31, 2022 $ 805,253 $ 376,473 $ ( 6,285 ) $ 1,175,441 See Notes to Consolidated Financial Statements 81 NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, In thousands 2022 2021 2020 Operating activities: Net income $ 86,303 $ 78,666 $ 76,781 Adjustments to reconcile net income to cash provided by operations: Depreciation 116,707 113,534 103,683 Regulatory amortization of gas reserves 5,589 13,897 17,779 Deferred income taxes 17,410 14,617 18,667 Qualified defined benefit pension plan expense 5,351 16,556 18,370 Contributions to qualified defined benefit pension plans — ( 9,590 ) ( 28,980 ) Deferred environmental expenditures, net ( 18,160 ) ( 18,187 ) ( 27,871 ) Environmental remediation expense 12,389 9,938 9,691 Gain on sale of discontinued operations, net of tax — — ( 5,902 ) Asset optimization revenue sharing bill credits ( 41,102 ) ( 9,053 ) ( 16,970 ) Other 21,558 20,622 10,028 Changes in assets and liabilities: Receivables, net ( 76,454 ) ( 44,128 ) ( 16,799 ) Inventories ( 29,269 ) ( 14,571 ) 1,262 Income and other taxes 6,908 3,292 ( 10,710 ) Accounts payable 24,508 12,118 ( 15,910 ) Deferred gas costs 12,334 ( 40,541 ) 17,590 Asset optimization revenue sharing 28,937 44,458 ( 7,244 ) Decoupling mechanism 10,922 ( 5,206 ) 2,884 Cloud-based software ( 23,908 ) ( 7,407 ) ( 4,265 ) Other, net ( 12,351 ) ( 18,662 ) 1,340 Discontinued operations — — 1,894 Cash provided by operating activities 147,672 160,353 145,318 Investing activities: Capital expenditures ( 338,602 ) ( 293,892 ) ( 273,016 ) Acquisitions, net of cash acquired ( 94,279 ) ( 1,289 ) ( 38,263 ) Leasehold improvement expenditures ( 761 ) ( 1,364 ) ( 7,878 ) Proceeds from the sale of assets 870 3,926 8,149 Purchase of equity method investment ( 1,000 ) ( 14,450 ) — Proceeds from sale of equity method investment — 7,000 7,000 Proceeds from sale of discontinued operations — — 12,500 Other ( 1,688 ) ( 54 ) 1,654 Discontinued operations — — ( 4,423 ) Cash used in investing activities ( 435,460 ) ( 300,123 ) ( 294,277 ) 82 Year Ended December 31, 2022 2021 2020 Financing activities: Proceeds from common stock issued, net 208,561 17,501 — Long-term debt issued 290,000 185,000 150,000 Long-term debt retired — ( 95,000 ) ( 75,000 ) Proceeds from term loan due within one year — 100,000 150,000 Repayment of term loan — ( 100,000 ) ( 150,000 ) Proceeds from commercial paper, maturities greater than three months — — 195,025 Repayments of commercial paper, maturities greater than three months — ( 195,025 ) — Changes in other short-term debt, net ( 131,300 ) 280,000 ( 39,600 ) Cash dividend payments on common stock ( 62,771 ) ( 55,919 ) ( 55,420 ) Other ( 2,858 ) ( 5,121 ) ( 3,228 ) Cash provided by financing activities 301,632 131,436 171,777 Increase (decrease) in cash, cash equivalents and restricted cash 13,844 ( 8,334 ) 22,818 Cash, cash equivalents and restricted cash, beginning of period 27,120 35,454 12,636 Cash, cash equivalents and restricted cash, end of period $ 40,964 $ 27,120 $ 35,454 Supplemental disclosure of cash flow information: Interest paid, net of capitalization $ 50,823 $ 43,719 $ 42,651 Income taxes paid, net of refunds 2,779 10,555 13,644 See Notes to Consolidated Financial Statements 83 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended December 31, In thousands 2022 2021 2020 Operating revenues $ 1,014,339 $ 843,057 $ 758,748 Operating expenses: Cost of gas 429,861 292,538 262,980 Operations and maintenance 204,845 188,762 168,869 Environmental remediation 12,389 9,938 9,691 General taxes 40,151 38,150 34,459 Revenue taxes 41,627 34,600 30,291 Depreciation 112,957 110,504 101,586 Other operating expenses 3,135 3,332 3,232 Total operating expenses 844,965 677,824 611,108 Income from operations 169,374 165,233 147,640 Other income (expense), net ( 436 ) ( 12,745 ) ( 15,116 ) Interest expense, net 46,338 42,983 40,866 Income before income taxes 122,600 109,505 91,658 Income tax expense 31,036 28,333 21,095 Net income 91,564 81,172 70,563 Other comprehensive income (loss): Change in employee benefit plan liability, net of taxes of $( 1,511 ) for 2022, $( 219 ) for 2021, and $ 1,025 for 2020 4,195 593 ( 2,848 ) Amortization of non-qualified employee benefit plan liability, net of taxes of $( 286 ) for 2022, $( 320 ) for 2021, and $( 244 ) for 2020 795 905 679 Comprehensive income $ 96,554 $ 82,670 $ 68,394 See Notes to Consolidated Financial Statements 84 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, In thousands 2022 2021 Assets: Current assets: Cash and cash equivalents $ 12,977 $ 12,271 Accounts receivable 165,607 99,780 Accrued unbilled revenue 87,482 82,028 Receivables from affiliates 634 261 Allowance for uncollectible accounts ( 3,079 ) ( 1,962 ) Regulatory assets 117,491 72,391 Derivative instruments 194,236 48,130 Inventories 86,207 56,752 Other current assets 57,269 47,378 Total current assets 718,824 417,029 Non-current assets: Property, plant, and equipment 4,148,547 3,931,640 Less: Accumulated depreciation 1,137,231 1,119,361 Total property, plant, and equipment, net 3,011,316 2,812,279 Regulatory assets 340,407 314,539 Derivative instruments 5,045 10,730 Other investments 80,110 74,786 Operating lease right of use asset, net 72,720 74,987 Assets under sales-type leases 134,302 138,995 Other non-current assets 89,994 55,027 Total non-current assets 3,733,894 3,481,343 Total assets $ 4,452,718 $ 3,898,372 See Notes to Consolidated Financial Statements 85 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, In thousands 2022 2021 Liabilities and equity: Current liabilities: Short-term debt $ 170,200 $ 245,500 Current maturities of long-term debt 89,942 — Accounts payable 177,590 131,475 Payables to affiliates 9,175 1,248 Taxes accrued 15,426 15,476 Interest accrued 8,900 7,296 Regulatory liabilities 248,553 112,281 Derivative instruments 28,728 10,402 Operating lease liabilities 1,363 1,273 Other current liabilities 62,019 53,591 Total current liabilities 811,896 578,542 Long-term debt 1,035,935 986,495 Deferred credits and other non-current liabilities: Deferred tax liabilities 362,353 337,717 Regulatory liabilities 688,599 657,350 Pension and other postretirement benefit liabilities 149,143 166,684 Derivative instruments 20,838 412 Operating lease liabilities 78,345 79,431 Other non-current liabilities 114,527 113,934 Total deferred credits and other non-current liabilities 1,413,805 1,355,528 Commitments and contingencies (see Note 16 and Note 17) Equity: Common stock 614,903 435,515 Retained earnings 582,593 553,696 Accumulated other comprehensive loss ( 6,414 ) ( 11,404 ) Total equity 1,191,082 977,807 Total liabilities and equity $ 4,452,718 $ 3,898,372 See Notes to Consolidated Financial Statements 86 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Equity In thousands Balance at December 31, 2019 $ 319,557 $ 513,372 $ ( 10,733 ) $ 822,196 Comprehensive income (loss) — 70,563 ( 2,169 ) 68,394 Dividends on common stock — ( 55,355 ) — ( 55,355 ) Other ( 51 ) — — ( 51 ) Balance at December 31, 2020 319,506 528,580 ( 12,902 ) 835,184 Comprehensive income (loss) — 81,172 1,498 82,670 Dividends on common stock — ( 56,056 ) — ( 56,056 ) Capital contributions from parent 116,009 — — 116,009 Balance at December 31, 2021 435,515 553,696 ( 11,404 ) 977,807 Comprehensive income (loss) — 91,564 4,990 96,554 Dividends on common stock — ( 62,667 ) — ( 62,667 ) Capital contributions from parent 179,388 — — 179,388 Balance at December 31, 2022 $ 614,903 $ 582,593 $ ( 6,414 ) $ 1,191,082 See Notes to Consolidated Financial Statements 87 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, In thousands 2022 2021 2020 Operating activities: Net income $ 91,564 $ 81,172 $ 70,563 Adjustments to reconcile net income to cash provided by operations: Depreciation 112,957 110,504 101,586 Regulatory amortization of gas reserves 5,589 13,897 17,779 Deferred income taxes 16,288 13,223 4,645 Qualified defined benefit pension plan expense 5,351 16,556 18,370 Contributions to qualified defined benefit pension plans — ( 9,590 ) ( 28,980 ) Deferred environmental expenditures, net ( 18,160 ) ( 18,187 ) ( 27,871 ) Environmental remediation expense 12,389 9,938 9,691 Asset optimization revenue sharing bill credits ( 41,102 ) ( 9,053 ) ( 16,970 ) Other 20,448 18,517 9,945 Changes in assets and liabilities: Receivables, net ( 75,177 ) ( 43,030 ) ( 16,540 ) Inventories ( 28,890 ) ( 14,427 ) 1,539 Income and other taxes 6,729 ( 10,405 ) 10,832 Accounts payable 21,375 8,728 ( 18,909 ) Deferred gas costs 12,334 ( 40,541 ) 17,590 Asset optimization revenue sharing 28,937 44,458 ( 7,244 ) Decoupling mechanism 10,922 ( 5,206 ) 2,884 Cloud-based software ( 23,908 ) ( 7,407 ) ( 4,265 ) Other, net ( 12,455 ) ( 17,653 ) 3,872 Cash provided by operating activities 145,191 141,494 148,517 Investing activities: Capital expenditures ( 318,686 ) ( 278,237 ) ( 266,048 ) Leasehold improvement expenditures ( 761 ) ( 1,364 ) ( 7,878 ) Proceeds from the sale of assets 870 3,926 8,149 Other ( 1,688 ) ( 54 ) 1,654 Cash used in investing activities ( 320,265 ) ( 275,729 ) ( 264,123 ) Financing activities: Long-term debt issued 140,000 130,000 150,000 Long-term debt retired — ( 60,000 ) ( 75,000 ) Proceeds from term loan due within one year — 100,000 150,000 Repayment of term loan — ( 100,000 ) ( 150,000 ) Proceeds from commercial paper, maturities greater than three months — — 195,025 Repayment of commercial paper, maturities greater than three months — ( 195,025 ) — Changes in other short-term debt, net ( 75,300 ) 209,000 ( 88,600 ) Cash contributions received from parent 179,388 116,009 — Cash dividend payments on common stock ( 62,667 ) ( 56,056 ) ( 55,355 ) Other ( 2,508 ) ( 4,600 ) ( 3,632 ) Cash provided by financing activities 178,913 139,328 122,438 Increase in cash, cash equivalents and restricted cash 3,839 5,093 6,832 Cash, cash equivalents and restricted cash, beginning of period 20,832 15,739 8,907 Cash, cash equivalents and restricted cash, end of period $ 24,671 $ 20,832 $ 15,739 Supplemental disclosure of cash flow information: Interest paid, net of capitalization $ 44,813 $ 42,395 $ 40,624 Income taxes paid, net of refunds 5,990 26,451 6,100 See Notes to Consolidated Financial Statements 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements represent the respective, consolidated financial results of NW Holdings and NW Natural and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of NW Holdings and NW Natural, which includes separate consolidated financial statements for each registrant. NW Natural's regulated natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment is NW Natural's core operating business and serves residential, commercial, and industrial customers in Oregon and southwest Washington. The NGD segment is the only reportable segment for NW Holdings and NW Natural. All other activities, water and wastewater businesses, and other investments are aggregated and reported as other at their respective registrant. NW Holdings and NW Natural consolidate all entities in which they have a controlling financial interest. Investments in corporate joint ventures and partnerships that NW Holdings does not directly or indirectly control, and for which it is not the primary beneficiary, include NNG Financial's investment in Kelso-Beaver Pipeline and NWN Water's investment in Avion Water Company, Inc., which are accounted for under the equity method. NW Natural RNG Holding Company, LLC holds an investment in Lexington Renewable Energy, LLC, which is also accounted for under the equity method. See Note 13 for activity related to equity method investments. NW Holdings and its direct and indirect subsidiaries are collectively referred to herein as NW Holdings, and NW Natural and its direct and indirect subsidiaries are collectively referred to herein as NW Natural. The consolidated financial statements of NW Holdings and NW Natural are presented after elimination of all intercompany balances and transactions. In June 2018, NWN Gas Storage, a wholly-owned subsidiary of NW Natural at the time and now a wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement that provided for the sale of all of the membership interests in its wholly-owned subsidiary, Gill Ranch Storage, LLC (Gill Ranch). We concluded that the sale of Gill Ranch qualified as assets and liabilities held for sale and discontinued operations. As such, the results of Gill Ranch were presented as a discontinued operation for NW Holdings for all periods presented on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch were classified as discontinued operations assets and liabilities on the NW Holdings consolidated balance sheet. The sale closed on December 4, 2020. See Note 18 for additional information. Notes to the consolidated financial statements reflect the activity of continuing operations for both NW Holdings and NW Natural for all periods presented, unless otherwise noted. Certain reclassifications have been made to conform prior period information to the current presentation. The reclassifications did not have a material effect on our consolidated financial statements. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect reported amounts in the consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates, and changes would most likely be reported in future periods. Management believes the estimates and assumptions used are reasonable . Industry Regulation NW Holdings' principal business is to operate as a holding company for NW Natural and its other subsidiaries. NW Natural's principal business is the distribution of natural gas, which is regulated by the OPUC and WUTC. NW Natural also has natural gas storage services, which are regulated by the FERC, and to a certain extent by the OPUC and WUTC. Additionally, certain of NW Holdings' subsidiaries own water businesses, which are regulated by the public utility commission in the state in which the water utility is located, which is currently Oregon, Washington, Idaho, Texas and Arizona. Wastewater businesses, to the extent they are regulated, are generally regulated by the public utility commissions in the state in which the wastewater utility is located, which is currently Texas and Arizona. Accounting records and practices of the regulated businesses conform to the requirements and uniform system of accounts prescribed by these regulatory authorities in accordance with U.S. GAAP. The businesses in which customer rates are regulated by the OPUC, WUTC, IPUC, PUTC, ACC and FERC have approved cost-based rates which are intended to allow such businesses to earn a reasonable return on invested capital. In applying regulatory accounting principles, NW Holdings and NW Natural capitalize or defer certain costs and revenues as regulatory assets and liabilities pursuant to orders of the applicable state public utility commission, which provide for the recovery of revenues or expenses from, or refunds to, utility customers in future periods, including a return or a carrying charge in certain cases. 89 Amounts NW Natural deferred as regulatory assets and liabilities were as follows: Regulatory Assets In thousands 2022 2021 NW Natural: Current: Unrealized loss on derivatives (1) $ 28,728 $ 10,402 Gas costs 61,223 35,641 Environmental costs (2) 7,392 6,694 Decoupling (3) — 969 Pension balancing (4) 7,131 7,131 Income taxes 2,208 2,568 Other (5) 10,809 8,986 Total current $ 117,491 $ 72,391 Non-current: Unrealized loss on derivatives (1) $ 20,838 $ 412 Pension balancing (4) 32,997 38,302 Income taxes 10,943 12,609 Pension and other postretirement benefit liabilities 101,413 116,440 Environmental costs (2) 104,253 94,636 Gas costs 22,355 15,477 Other (5) 47,608 36,663 Total non-current $ 340,407 $ 314,539 Other (NW Holdings) 25 40 Total non-current -NW Holdings $ 340,432 $ 314,579 Regulatory Liabilities In thousands 2022 2021 NW Natural: Current: Gas costs $ 4,121 $ 70 Unrealized gain on derivatives (1) 194,236 48,130 Decoupling (3) 14,026 4,475 Income taxes (6) 7,166 8,192 Asset optimization revenue sharing 26,368 45,124 Other (5) 2,636 6,290 Total current - NW Natural $ 248,553 $ 112,281 Other (NW Holdings) 29 — Total current - NW Holdings $ 248,582 $ 112,281 Non-current: Gas costs $ 12,644 $ 250 Unrealized gain on derivatives (1) 5,045 10,730 Decoupling (3) 3,814 3,412 Income taxes (6) 174,212 181,404 Accrued asset removal costs (7) 467,742 445,952 Asset optimization revenue sharing 8,401 1,810 Other (5) 16,741 13,792 Total non-current - NW Natural $ 688,599 $ 657,350 Other (NW Holdings) 979 982 Total non-current -NW Holdings $ 689,578 $ 658,332 (1) Unrealized gains or losses on derivatives are non-cash items and, therefore, do not earn a rate of return or a carrying charge. These amounts are recoverable through natural gas distribution rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement. (2) Refer to the Environmental Cost Deferral and Recovery table in Note 17 for a description of environmental costs. (3) This deferral represents the margin adjustment resulting from differences between actual and expected volumes. (4) Refer to Note 10 for information regarding the deferral of pension expenses. 90 (5) Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge. (6) This balance represents estimated amounts associated with the Tax Cuts and Jobs Act. See Note 11. (7) Estimated costs of removal on certain regulated properties are collected through rates. See "Accounting Policies— Plant, Property, and Accrued Asset Removal Costs " below. The amortization period for NW Natural's regulatory assets and liabilities ranges from less than one year to an indeterminable period. Regulatory deferrals for gas costs payable are generally amortized over 12 months beginning each November 1 following the gas contract year during which the deferred gas costs are recorded. Similarly, most other regulatory deferred accounts are amortized over 12 months. However, certain regulatory account balances, such as income taxes, environmental costs, pension liabilities, and accrued asset removal costs, are large and tend to be amortized over longer periods once NW Natural has agreed upon an amortization period with the respective regulatory agency. We believe all costs incurred and deferred at December 31, 2022 are prudent. All regulatory assets are reviewed annually for recoverability, or more often if circumstances warrant. If we should determine that all or a portion of these regulatory assets no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances in the period such determination is made. Regulatory interest income of $ 7.0 million and $ 6.1 million and regulatory interest expense of $ 2.0 million and $ 1.3 million was recognized within other income (expense), net for the years ended December 31, 2022 and 2021, respectively. Environmental Regulatory Accounting See Note 17 for information about the SRRM and OPUC orders regarding implementation. COVID-19 Impact During 2020, our regulated utilities received approval in their respective jurisdictions to defer certain financial impacts associated with COVID-19 such as bad debt expense, financing costs to secure liquidity, lost revenues related to late fees and reconnection fees, and other COVID-19 related costs, net of offsetting direct expense reductions associated with COVID-19. As of December 31, 2022, we believe that approximately $ 18.7 million of the financial effects related to COVID-19 are recoverable. As part of the 2022 Oregon general rate case, NW Natural received approval from the OPUC to recover the 2020 and 2021 COVID-19 deferral beginning November 1, 2022. Approximately $ 10.9 million will be amortized over a two -year period and NW Natural may request recovery of the remaining amount in the third year. Included in the total balance is approximately $ 3.4 million of forgone late fee revenue that will be recognized in future periods as billed. Beginning January 2023, NW Natural will no longer defer any COVID-19 related costs in Oregon. NW Natural expects to recover its COVID-19 deferrals in Washington in a future proceeding. New Accounting Standards NW Natural and NW Holdings consider the applicability and impact of all accounting standards updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on consolidated financial position or results of operations. Recently Adopted Accounting Pronouncements REFERENCE RATE REFORM. In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The purpose of the amendment is to provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference London Inter-Bank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." The purpose of the amendment is to clarify guidance on reference rate reform activities, specifically related to accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting, margining, and contract price alignment (the "discounting transition"). The amendments in ASUs 2020-04 and 2021-01 are effective for all entities as of March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." The purpose of the amendment is to defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. We do not expect the ASUs to materially affect the financial statements and disclosures of NW Holdings or NW Natural. LEASES. In July 2021, the FASB issued ASU 2021-05, "Leases (Topic 842), Lessors - Certain Leases with Variable Lease Payments." The purpose of the amendment is to require lessors to account for certain lease transactions that contain variable lease payments as operating leases. The amendments in this ASU are intended to eliminate the recognition of any day-one loss 91 associated with certain sales-type and direct-financing lease transactions. The changes do not impact lessee accounting. The new guidance was effective on January 1, 2022 and adopted using a prospective approach. The adoption did not materially affect the financial statements and disclosures of NW Holdings or NW Natural. Accounting Policies The accounting policies discussed below apply to both NW Holdings and NW Natural. Plant, Property, and Accrued Asset Removal Costs Plant and property are stated at cost, including capitalized labor, materials, and overhead. In accordance with regulatory accounting standards, the cost of acquiring and constructing long-lived plant and property generally includes an allowance for funds used during construction (AFUDC) or capitalized interest. AFUDC represents the regulatory financing cost incurred when debt and equity funds are used for construction (see “ AFUDC ” below). When constructed assets are subject to market-based rates rather than cost-based rates, the financing costs incurred during construction are included in capitalized interest in accordance with U.S. GAAP, not as regulatory financing costs under AFUDC. In accordance with long-standing regulatory treatment, our depreciation rates consist of three components: one based on the average service life of the asset, a second based on the estimated salvage value of the asset, and a third based on the asset’s estimated cost of removal. We collect, through rates, the estimated cost of removal on certain regulated properties through depreciation expense, with a corresponding offset to accumulated depreciation. These removal costs are non-legal obligations as defined by regulatory accounting guidance. Therefore, we have included these costs as non-current regulatory liabilities rather than as accumulated depreciation on our consolidated balance sheets. In the rate setting process, the liability for removal costs is treated as a reduction to the net rate base on which the NGD business has the opportunity to earn its allowed rate of return. The costs of NGD plant retired or otherwise disposed of are removed from NGD plant and charged to accumulated depreciation for recovery or refund through future rates. Gains from the sale of regulated assets are generally deferred and refunded to customers. For assets not related to NGD, we record a gain or loss upon the disposal of the property, and the gain or loss is recorded in operating income or loss in the consolidated statements of comprehensive income. The provision for depreciation of NGD property, plant, and equipment is recorded under the group method on a straight-line basis with rates computed in accordance with depreciation studies approved by regulatory authorities. The weighted-average depreciation rate for NGD assets in service was approximately 3.0 % for 2022, 2021 and 2020, reflecting the approximate weighted-average economic life of the property. This includes 2022 weighted-average depreciation rates for the following asset categories: 2.5 % for transmission and distribution plant, 2.1 % for gas storage facilities, 6.1 % for general plant, and 6.7 % for intangible and other fixed assets. AFUDC. Certain additions to NGD plant include AFUDC, which represents the net cost of debt and equity funds used during construction. AFUDC is calculated using actual interest rates for debt and authorized rates for ROE, if applicable. If short-term debt balances are less than the total balance of construction work in progress, then a composite AFUDC rate is used to represent interest on all debt funds, shown as a reduction to interest charges, and on ROE funds, shown as other income. While cash is not immediately recognized from recording AFUDC, it is realized in future years through rate recovery resulting from the higher NGD cost of service. Our composite AFUDC rate was 2.8 % in 2022, 0.7 % in 2021, and 1.9 % in 2020. IMPAIRMENT OF LONG-LIVED ASSETS. We review the carrying value of long-lived assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Factors that would necessitate an impairment assessment of long-lived assets include a significant adverse change in the extent or manner in which the asset is used, a significant adverse change in legal factors or business climate that could affect the value of the asset, or a significant decline in the observable market value or expected future cash flows of the asset, among others. When such factors are present, we assess the recoverability by determining whether the carrying value of the asset will be recovered through expected future cash flows. An asset is determined to be impaired when the carrying value of the asset exceeds the expected undiscounted future cash flows from the use and eventual disposition of the asset. If an impairment is indicated, we record an impairment loss for the difference between the carrying value and the fair value of the long-lived assets. Fair value is estimated using appropriate valuation methodologies, which may include an estimate of discounted cash flows. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand plus highly liquid investment accounts with original maturity dates of three months or less. At December 31, 2022, NW Holdings had outstanding checks of $ 5.8 million, substantially all of which is recorded at NW Natural, and at December 31, 2021, NW Holdings had no outstanding checks. These balances are included in accounts payable in the NW Holdings and NW Natural balance sheets. Restricted cash is primarily comprised of funds from public purpose charges for programs that assist low-income customers with bill payments or energy efficiency. These balances are included in other current assets in the NW Holdings and NW Natural balance sheets. There were no transfers between restricted cash and cash and cash equivalents during the years ended December 31, 2022 and 2021. Prior period amounts have been reclassified to conform prior period information to the current presentation. 92 The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Holdings as of December 31, 2022 and 2021: December 31, In thousands 2022 2021 Cash and cash equivalents $ 29,270 $ 18,559 Restricted cash included in other current assets 11,694 8,561 Cash, cash equivalents and restricted cash $ 40,964 $ 27,120 The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of December 31, 2022 and 2021: December 31, In thousands 2022 2021 Cash and cash equivalents $ 12,977 $ 12,271 Restricted cash included in other current assets 11,694 8,561 Cash, cash equivalents and restricted cash $ 24,671 $ 20,832 Revenue Recognition and Accrued Unbilled Revenue Revenues, derived primarily from the sale and transportation of natural gas, are recognized upon delivery of gas or water, or service to customers. Revenues include accruals for gas or water delivered but not yet billed to customers based on estimates of deliveries from meter reading dates to month end (accrued unbilled revenue). Accrued unbilled revenue is dependent upon a number of factors that require management’s judgment, including total natural gas receipts and deliveries, customer use of natural gas or water by billing cycle, and weather factors. Accrued unbilled revenue is reversed the following month when actual billings occur. NW Holdings' accrued unbilled revenue at December 31, 2022 and 2021 was $ 89.0 million and $ 82.2 million, respectively, substantially all of which is accrued unbilled revenue at NW Natural. Revenues not related to NGD are derived primarily from Interstate Storage Services, asset management activities at the Mist gas storage facility, and other investments and business activities. At the Mist underground storage facility, revenues are primarily firm service revenues in the form of fixed monthly reservation charges. In addition, we also have asset management service revenue from an independent energy marketing company that optimizes commodity, storage, and pipeline capacity release transactions. Under this agreement, guaranteed asset management revenue is recognized using a straight-line, pro-rata methodology over the term of each contract. Revenues earned above the guaranteed amount are recognized as they are earned. Revenue Taxes Revenue-based taxes are primarily franchise taxes, which are collected from customers and remitted to taxing authorities. Revenue taxes are included in operating expenses in the statements of comprehensive income for NW Holdings and NW Natural. Revenue taxes at NW Holdings were $ 41.8 million, $ 34.7 million, and $ 30.3 million for 2022, 2021, and 2020, respectively. Accounts Receivable and Allowance for Uncollectible Accounts Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD customers, plus amounts due for gas storage services. NW Holdings and NW Natural establish allowances for uncollectible accounts (allowance) for trade receivables, including accrued unbilled revenue, based on the aging of receivables, collection experience of past due account balances including payment plans, and historical trends of write-offs as a percent of revenues. A specific allowance is established and recorded for large individual customer receivables when amounts are identified as unlikely to be partially or fully recovered. Inactive accounts are written-off against the allowance after they are 120 days past due or when deemed uncollectible. Differences between the estimated allowance and actual write-offs will occur based on a number of factors, including changes in economic conditions, customer creditworthiness, and natural gas prices. The allowance for uncollectible accounts is adjusted quarterly, as necessary, based on information currently available. ALLOWANCE FOR TRADE RECEIVABLES. The payment term of our NGD receivables is generally 15 days. For these short-term receivables, it is not expected that forecasted economic conditions would significantly affect the loss estimates under stable economic conditions. For extreme situations like a financial crisis, natural disaster, and the economic slowdown caused by the COVID-19 pandemic, we enhanced our review and analysis. For the 2022 residential and commercial uncollectible provision, we primarily followed our standard methodology, which includes assessing historical write-off trends and current information on delinquent accounts. Beginning October 1, 2022, new collection rules from the OPUC applied to residential and commercial customers. This included enhanced protections for low-income customers, a return to pre-pandemic time payment arrangements terms, revised disconnection rules during the heating season, and other items. As a result of these Oregon rule changes and our recent collection process experience, we augmented our 93 provision review in the third and fourth quarter for Oregon accounts in the following categories: closed or inactive accounts aged less than 120 days, accounts on payment plans, and all other open accounts not on payment plans. For industrial accounts, we continue to assess the provision on an account-by-account basis with specific reserves taken as necessary. NW Natural will continue to closely monitor and evaluate our accounts receivable and the provision for uncollectible accounts. The following table presents the activity related to the NW Holdings provision for uncollectible accounts by pool, substantially all of which is related to NW Natural's accounts receivable: As of December 31, 2021 As of December 31, 2022 Year ended December 31, 2022 In thousands Beginning Balance Provision recorded, net of adjustments Write-offs recognized, net of recoveries Ending Balance Allowance for uncollectible accounts: Residential $ 1,460 $ 1,974 $ ( 1,062 ) $ 2,372 Commercial 178 546 ( 324 ) 400 Industrial 67 186 ( 65 ) 188 Accrued unbilled and other 313 185 ( 162 ) 336 Total $ 2,018 $ 2,891 $ ( 1,613 ) $ 3,296 ALLOWANCE FOR NET INVESTMENTS IN SALES-TYPE LEASES. NW Natural currently holds two net investments in sales-type leases, with substantially all of the net investment balance related to the North Mist natural gas storage agreement with Portland General Electric (PGE) which is billed under an OPUC-approved rate schedule. See Note 7 for more information on the North Mist lease. Due to the nature of this service, PGE may recover the costs of the lease through general rate cases. Therefore, we expect the risk of loss due to the credit of this lessee to be remote. As such, no allowance for uncollectibility was recorded for our sales-type lease receivables. NW Natural will continue monitoring the credit health of the lessees and the overall economic environment, including the economic factors closely tied to the financial health of our current and future lessees. Inventories NGD gas inventories, which consist of natural gas in storage for NGD customers, are stated at the lower of weighted-average cost or net realizable value. The regulatory treatment of these inventories provides for cost recovery in customer rates. NGD gas inventories injected into storage are priced in inventory based on actual purchase costs, and those withdrawn from storage are charged to cost of gas during the period they are withdrawn at the weighted-average inventory cost. Gas storage inventories mainly consist of natural gas received as fuel-in-kind from storage customers. Gas storage inventories are valued at the lower of average cost or net realizable value. Cushion gas is not included in inventory balances, is recorded at original cost, and is classified as a long-term plant asset. Materials and supplies inventories consist of inventories both related to and unrelated to NGD and are stated at the lower of average cost or net realizable value. NW Natural's NGD and gas storage inventories totaled $ 61.9 million and $ 37.4 million at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, NW Holdings' materials and supplies inventories, which are comprised primarily of NW Natural's materials and supplies, totaled $ 23.5 million and $ 19.9 million, respectively. During 2022 and 2021, NW Natural entered into certain agreements to purchase renewable thermal certificates (RTCs). RTCs are initially recorded at cost and subsequently assessed for impairment based on the lower-of-cost or market model. NW Natural's RTCs inventory totaled $ 1.7 million at December 31, 2022, and all RTCs purchased during 2021 were retired or used on customers behalf prior to December 31, 2021. Gas Reserves Gas reserves are payments to acquire and produce natural gas reserves. Gas reserves are stated at cost, adjusted for regulatory amortization, with the associated deferred tax benefits recorded as liabilities on the balance sheet. The current portion is calculated based on expected gas deliveries within the next fiscal year. NW Natural recognizes regulatory amortization of this asset on a volumetric basis calculated using the estimated gas reserves and the estimated therms extracted and sold each month. The amortization of gas reserves is recorded to cost of gas along with gas production revenues and production costs. See Note 13. Derivatives NW Natural's derivatives are measured at fair value and recognized as either assets or liabilities on the balance sheet. Changes in the fair value of the derivatives are recognized in earnings unless specific regulatory or hedge accounting criteria are met. Accounting for derivatives and hedges provides an exception for contracts intended for normal purchases and normal sales for which physical delivery is probable. In addition, certain derivative contracts are approved by regulatory authorities for recovery or refund through customer rates. Accordingly, the changes in fair value of these approved contracts are deferred as regulatory 94 assets or liabilities pursuant to regulatory accounting principles. NW Natural's financial derivatives generally qualify for deferral under regulatory accounting. NW Natural's index-priced physical derivative contracts also qualify for regulatory deferral accounting treatment. Derivative contracts entered into for NGD requirements after the annual PGA rate has been set and maturing during the PGA year are subject to the PGA incentive sharing mechanism. In Oregon, NW Natural participates in a PGA sharing mechanism under which it is required to select either an 80 % or 90 % deferral of higher or lower gas costs such that the impact on current earnings from the gas cost sharing is either 20 % or 10 % of gas cost differences compared to PGA prices, respectively. For each of the PGA years in Oregon beginning November 1, 2022, 2021, and 2020, NW Natural selected the 90 % deferral of gas cost differences. In Washington, 100 % of the differences between the PGA prices and actual gas costs are deferred. See Note 15. NW Holdings and NW Natural have financial derivative policies that set forth guidelines for using selected derivative products to support prudent risk management strategies within designated parameters. NW Natural's objective for using derivatives is to decrease the volatility of gas prices and cash flows without speculative risk. The use of derivatives is permitted only after the risk exposures have been identified, are determined to exceed acceptable tolerance levels, and are determined necessary to support normal business activities. NW Natural does not enter into derivative instruments for trading purposes. All commodity and foreign exchange derivatives are currently held at NW Natural, and interest rate swaps are held at NW Holdings and NWN Water. Fair Value In accordance with fair value accounting, we use the following fair value hierarchy for determining inputs for our debt, pension plan assets, and derivative fair value measurements: • Level 1: Valuation is based on quoted prices for identical instruments traded in active markets; • Level 2: Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market; and • Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions market participants would use in valuing the asset or liability. In addition, the fair value for certain pension trust investments is determined using Net Asset Value per share (NAV) as a practical expedient, and therefore they are not classified within the fair value hierarchy. These investments primarily consist of institutional investment products. When developing fair value measurements, it is our policy to use quoted market prices whenever available or to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. Fair values are primarily developed using industry-standard models that consider various inputs including: (a) quoted future prices for commodities; (b) forward currency prices; (c) time value; (d) volatility factors; (e) current market and contractual prices for underlying instruments; (f) market interest rates and yield curves; (g) credit spreads; and (h) other relevant economic measures. NW Natural considers liquid points for natural gas hedging to be those points for which there are regularly published prices in a nationally recognized publication or where the instruments are traded on an exchange. Goodwill and Business Combinations NW Holdings, through its wholly-owned subsidiary NWN Water and NWN Water's wholly-owned subsidiaries, has completed various acquisitions that resulted in the recognition of goodwill. Goodwill is measured as the excess of the acquisition-date fair value of the consideration transferred over the acquisition-date fair value of the net identifiable assets assumed. Adjustments are recorded during the measurement period to finalize the allocation of the purchase price. The carrying value of goodwill is reviewed annually during the fourth quarter, or whenever events or changes in circumstance indicate that such carrying values may not be recoverable. The goodwill assessment policy begins with a qualitative analysis in which events and circumstances are evaluated, including macroeconomic conditions, industry and market conditions, regulatory environments, and overall financial performance of the reporting unit. If the qualitative assessment indicates that the carrying value may be at risk of recoverability, a quantitative evaluation is performed to measure the carrying value of the goodwill against the fair value of the reporting unit. The reporting unit is determined primarily based on current operating segments and the level of review provided by the Chief Operating Decision Maker (CODM) and/or segment management on the operating segment's financial results. Reporting units are evaluated periodically for changes in the corporate environment. As of December 31, 2022 and 2021, NW Holdings had goodwill of $ 149.3 million and $ 70.6 million, respectively. All of NW Holdings' goodwill was acquired through the business combinations completed by NWN Water and its wholly-owned subsidiaries. No impairment charges were recorded as a result of the fourth quarter goodwill impairment assessment. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at fair value at the acquisition date, and the fair value of any non-controlling interest in the acquiree. Acquisition-related costs are expensed as incurred. When NW Natural acquires a business, it assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date. When there is substantial judgment or 95 uncertainty around the fair value of acquired assets, we may engage a third party expert to assist in determining the fair values of certain assets or liabilities. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the enactment date period unless, for NW Natural, a regulatory order specifies deferral of the effect of the change in tax rates over a longer period of time. For NW Natural, deferred income tax assets and liabilities are also recognized for temporary differences where the deferred income tax benefits or expenses have previously been flowed through in the ratemaking process of the NGD business. Regulatory tax assets and liabilities are recorded on these deferred tax assets and liabilities to the extent it is believed they will be recoverable from or refunded to customers in future rates. Investment tax credits associated with rate regulated plant additions are deferred for financial statement purposes and amortized over the estimated useful lives of the related plant. NW Holdings files consolidated or combined income tax returns that include NW Natural. Income tax expense is allocated on a separate company basis incorporating certain consolidated return considerations. Subsidiary income taxes payable or receivable are generally settled with NW Holdings, the common agent for income tax matters. Interest and penalties related to unrecognized tax benefits, if any, are recognized within income tax expense and accrued interest and penalties are recognized within the related tax liability line in the consolidated balance sheets. No accrued interest or penalties for uncertain tax benefits have been recorded. See Note 11. Environmental Contingencies Loss contingencies are recorded as liabilities when it is probable a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies. Estimating probable losses requires an analysis of uncertainties that often depend upon judgments about potential actions by third parties. Accruals for loss contingencies are recorded based on an analysis of potential results. With respect to environmental liabilities and related costs, estimates are developed based on a review of information available from numerous sources, including completed studies and site specific negotiations. NW Natural's policy is to accrue the full amount of such liability when information is sufficient to reasonably estimate the amount of probable liability. When information is not available to reasonably estimate the probable liability, or when only the range of probable liabilities can be estimated and no amount within the range is more likely than another, it is our policy to accrue at the low end of the range. Accordingly, due to numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of several site investigations, in some cases, it may not be possible to reasonably estimate the high end of the range of possible loss. In those cases, the nature of the potential loss and the fact that the high end of the range cannot be reasonably estimated is disclosed. See Note 17. Unconsolidated Affiliates NW Holdings, NW Natural and NWN Water have equity interests in businesses which we account for under the equity method as we do not exercise control of the major operating and financial policies. The carrying value of these investments was $ 23.4 million and $ 14.5 million as of December 31, 2022 and 2021, respectively. The business transactions with our equity method investments are not significant. We regularly assesses the profitability and valuation of our investments for any potential impairment. See Note 13 . Cloud Computing Arrangements Implementation costs associated with its cloud computing arrangements are capitalized consistent with costs capitalized for internal-use software. Capitalized implementation costs are included in other assets in the consolidated balance sheets. The implementation costs are amortized over the term of the related hosting agreement, including renewal periods that are reasonably certain to be exercised. Amortization expense of implementation costs are recorded as operations and maintenance expenses in the consolidated statements of comprehensive income. The implementation costs are included within operating activities in the consolidated statements of cash flows. Subsequent Events We monitor significant events occurring after the balance sheet date and prior to the issuance of the financial statements to determine the impacts, if any, of events on the financial statements to be issued. 96 3. EARNINGS PER SHARE Basic earnings or loss per share are computed using NW Holdings' net income or loss and the weighted average number of common shares outstanding for each period presented. Diluted earnings per share are computed in the same manner, except using the weighted average number of common shares outstanding plus the effects of the assumed exercise of stock options and the payment of estimated stock awards from other stock-based compensation plans that are outstanding at the end of each period presented. Anti-dilutive stock awards are excluded from the calculation of diluted earnings or loss per common share. NW Holdings' diluted earnings or loss per share are calculated as follows: In thousands, except per share data 2022 2021 2020 Net income from continuing operations $ 86,303 $ 78,666 $ 70,273 Income from discontinued operations, net of tax — — 6,508 Net income $ 86,303 $ 78,666 $ 76,781 Average common shares outstanding - basic 33,934 30,702 30,541 Additional shares for stock-based compensation plans (See Note 8) 50 50 58 Average common shares outstanding - diluted 33,984 30,752 30,599 Earnings from continuing operations per share of common stock: Basic $ 2.54 $ 2.56 $ 2.30 Diluted 2.54 2.56 2.30 Earnings from discontinued operations per share of common stock: Basic $ — $ — $ 0.21 Diluted — — 0.21 Earnings per share of common stock: Basic $ 2.54 $ 2.56 $ 2.51 Diluted 2.54 2.56 2.51 Additional information: Anti-dilutive shares 2 7 1 4. SEGMENT INFORMATION We primarily operate in one reportable business segment, which is NW Natural's local gas distribution business and is referred to as the NGD segment. NW Natural and NW Holdings also have investments and business activities not specifically related to the NGD segment, which are aggregated and reported as other and described below for each entity. No individual customer accounts for over 10% of NW Holdings' or NW Natural's operating revenues. Natural Gas Distribution NW Natural's local gas distribution segment (NGD) is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to customers in Oregon and southwest Washington. The NGD business is responsible for building and maintaining a safe and reliable pipeline distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for firm and interruptible transportation of gas over interstate pipelines to bring gas from the supply basins into its service territory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the OPUC or WUTC. NGD also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers’ end-use facilities for a fee, which is approved by the OPUC or WUTC. Approximately 88 % of NGD customers are located in Oregon and 12 % in Washington. On an annual basis, residential and commercial customers typically account for around 60 % of total NGD volumes delivered and around 90 % of NGD margin. Industrial customers largely account for the remaining volumes and NGD margin. A small amount of the margin is also derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other service fees. Industrial sectors served by the NGD business include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries; and government and educational institutions. 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 in Oregon, NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp, and NW Natural RNG Holding Company, LLC, a holding company established to invest in the development and procurement of regulated renewable natural gas for NW Natural. 97 NW Natural NW Natural's activities in Other include Interstate Storage Services and third-party asset management services for the Mist facility in Oregon, appliance retail center operations, and corporate operating and non-operating revenues and expenses that cannot be allocated to NGD operations. Earnings from Interstate Storage Services assets are primarily related to firm storage capacity revenues. Earnings from the Mist facility also include revenue, net of amounts shared with NGD customers, from management of NGD assets at Mist and upstream pipeline capacity when not needed to serve NGD customers. Under the Oregon sharing mechanism, NW Natural retains 80 % of the pre-tax income from these services when the costs of the capacity were not included in NGD rates, or 10 % of the pre-tax income when the costs have been included in these rates. The remaining 20 % and 90 %, respectively, are recorded to a deferred regulatory account for crediting back to NGD customers. NW Holdings NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specifically NWN Water, which consolidates the water and wastewater utility operations and is pursuing other investments in the water and wastewater sector through itself and wholly-owned subsidiaries; NWN Water's equity investment in Avion Water Company, Inc.; NWN Gas Storage, a wholly-owned subsidiary of NWN Energy; NWN Energy's equity investment in Trail West Holdings, LLC (TWH) through August 6, 2020; other pipeline assets in NNG Financial; and NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities. For more information on the sale of TWH, see Note 13. Other also includes corporate revenues and expenses that cannot be allocated to other operations, including certain business development activities. Segment Information Summary Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segment and other for continuing operations. See Note 18 for information regarding discontinued operations for NW Holdings. In thousands NGD Other (NW Natural) NW Natural Other (NW Holdings) NW Holdings 2022 Operating revenues $ 989,752 $ 24,587 $ 1,014,339 $ 23,014 $ 1,037,353 Depreciation 111,871 1,086 112,957 3,750 116,707 Income (loss) from operations 152,839 16,535 169,374 ( 1,897 ) 167,477 Net income (loss) from continuing operations 79,690 11,874 91,564 ( 5,261 ) 86,303 Capital expenditures 315,979 2,707 318,686 19,916 338,602 Total assets at December 31, 2022 4,392,699 60,019 4,452,718 295,608 4,748,326 2021 Operating revenues $ 816,887 $ 26,170 $ 843,057 $ 17,343 $ 860,400 Depreciation 109,475 1,029 110,504 3,030 113,534 Income (loss) from operations 147,902 17,331 165,233 ( 2,116 ) 163,117 Net income (loss) from continuing operations 68,988 12,184 81,172 ( 2,506 ) 78,666 Capital expenditures 275,267 2,970 278,237 15,655 293,892 Total assets at December 31, 2021 3,846,112 52,260 3,898,372 166,232 4,064,604 2020 Operating revenues $ 741,072 $ 17,676 $ 758,748 $ 14,931 $ 773,679 Depreciation 100,591 995 101,586 2,097 103,683 Income (loss) from operations 137,724 9,916 147,640 711 148,351 Net income (loss) from continuing operations 63,555 7,008 70,563 ( 290 ) 70,273 Capital expenditures 263,777 2,271 266,048 6,968 273,016 Total assets at December 31, 2020 3,549,868 49,468 3,599,336 157,043 3,756,379 Natural Gas Distribution Margin NGD margin is the primary financial measure used by the CODM, consisting of NGD operating revenues, reduced by the associated cost of gas, environmental remediation expense, and revenue taxes. The cost of gas purchased for NGD customers is generally a pass-through cost in the amount of revenues billed to regulated NGD customers. Environmental remediation expense represents collections received from customers through environmental recovery mechanisms in Oregon and Washington as well as adjustments for the Oregon environmental earnings test when applicable. This is offset by environmental remediation expense presented in operating expenses. Revenue taxes are collected from NGD customers and remitted to taxing authorities. The collections from customers are offset by the expense recognition of the obligation to the taxing authority. By subtracting cost of gas, environmental remediation expense, and revenue taxes from NGD operating revenues, NGD margin provides a key metric used by the CODM in assessing the performance of the NGD segment. 98 The following table presents additional segment information concerning NGD margin: In thousands 2022 2021 2020 NGD margin calculation: NGD operating revenues $ 970,124 $ 797,800 $ 721,950 Other regulated services 19,628 19,087 19,122 Total NGD operating revenues 989,752 816,887 741,072 Less: NGD cost of gas 429,861 292,538 262,980 Environmental remediation expense 12,389 9,938 9,691 Revenue taxes 41,627 34,600 30,291 NGD margin $ 505,875 $ 479,811 $ 438,110 5. COMMON STOCK As of December 31, 2022 and 2021, NW Holdings had 100 million shares of common stock authorized. As of December 31, 2022, NW Holdings had 319,777 shares reserved for issuance of common stock under the Employee Stock Purchase Plan (ESPP) and 394,102 shares reserved for issuance under the Dividend Reinvestment and Direct Stock Purchase Plan (DRPP). At NW Holdings' election, shares sold through the DRPP may be purchased in the open market or through original issuance of shares reserved for issuance under the DRPP. 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, 2022, NW Holdings issued and sold 1,381,728 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $ 69.7 million, net of fees and commissions paid to agents of $ 1.4 million. As of December 31, 2022, NW Holdings had $ 111.1 million of equity available for issuance under the program. The ATM equity program was initiated to raise funds for general corporate purposes, including equity contributions to NW Holdings’ subsidiaries, NW Natural and NW Natural Water. Contributions to NW Natural and NW Natural Water will be used for general corporate purposes. On April 1, 2022, NW Holdings issued and sold 2,875,000 shares of its common stock pursuant to a registration statement on Form S-3 and related prospectus settlement. NW Holdings received net offering proceeds, after deducting the underwriter's discounts and commissions and estimated expenses payable by NW Holdings, of approximately $ 138.6 million. The proceeds are to be used for general corporate purposes, including repayment of its short-term indebtedness and/or making equity contributions to NW Holdings' subsidiaries, NW Natural, NW Natural Water and NW Natural Renewables. Contributions to NW Natural, NW Natural Water and NW Natural Renewables are to be used for general corporate purposes. Of the contributions received by NW Natural, $ 130.0 million was used to repay its short-term indebtedness. Stock Repurchase Program NW Holdings has a share repurchase program under which it may purchase its common shares on the open market or through privately negotiated transactions. NW Holdings currently has Board authorization to repurchase up to an aggregate of the greater of 2.8 million shares or $ 100 million. No shares of common stock were repurchased pursuant to this program during the year ended December 31, 2022. Since the plan’s inception in 2000 under NW Natural, a total of 2.1 million shares have been repurchased at a total cost of $ 83.3 million. 99 The following table summarizes the changes in the number of shares of NW Holdings' common stock issued and outstanding: In thousands Shares Balance, December 31, 2019 30,472 Sales to employees under ESPP 3 Stock-based compensation 46 Sales to shareholders under DRPP 68 Balance, December 31, 2020 30,589 Sales to employees under ESPP 48 Stock-based compensation 49 Equity issuance 376 Sales to shareholders under DRPP 67 Balance, December 31, 2021 31,129 Sales to employees under ESPP 36 Stock-based compensation 42 Equity issuance 4,257 Sales to shareholders under DRPP 61 Balance, December 31, 2022 35,525 6. REVENUE The following table presents disaggregated revenue from continuing operations: Year ended December 31, 2022 In thousands NGD Other (NW Natural) NW Natural Other (NW Holdings) NW Holdings Natural gas sales $ 989,654 $ — $ 989,654 $ — $ 989,654 Gas storage revenue, net — 11,792 11,792 — 11,792 Asset management revenue, net — 6,965 6,965 — 6,965 Appliance retail center revenue — 5,830 5,830 — 5,830 Other revenue 2,510 — 2,510 23,014 25,524 Revenue from contracts with customers 992,164 24,587 1,016,751 23,014 1,039,765 Alternative revenue ( 19,605 ) — ( 19,605 ) — ( 19,605 ) Leasing revenue 17,193 — 17,193 — 17,193 Total operating revenues $ 989,752 $ 24,587 $ 1,014,339 $ 23,014 $ 1,037,353 Year ended December 31, 2021 In thousands NGD Other (NW Natural) NW Natural Other (NW Holdings) NW Holdings Natural gas sales $ 783,027 $ — $ 783,027 $ — $ 783,027 Gas storage revenue, net — 10,830 10,830 — 10,830 Asset management revenue, net — 9,387 9,387 — 9,387 Appliance retail center revenue — 5,953 5,953 — 5,953 Other revenue 1,615 — 1,615 17,343 18,958 Revenue from contracts with customers 784,642 26,170 810,812 17,343 828,155 Alternative revenue 14,694 — 14,694 — 14,694 Leasing revenue 17,551 — 17,551 — 17,551 Total operating revenues $ 816,887 $ 26,170 $ 843,057 $ 17,343 $ 860,400 100 Year ended December 31, 2020 In thousands NGD Other (NW Natural) NW Natural Other (NW Holdings) NW Holdings Natural gas sales $ 710,422 $ — $ 710,422 $ — $ 710,422 Gas storage revenue, net — 9,759 9,759 — 9,759 Asset management revenue, net — 2,532 2,532 — 2,532 Appliance retail center revenue — 5,385 5,385 — 5,385 Other revenue 1,337 — 1,337 14,931 16,268 Revenue from contracts with customers 711,759 17,676 729,435 14,931 744,366 Alternative revenue 10,870 — 10,870 — 10,870 Leasing revenue 18,443 — 18,443 — 18,443 Total operating revenues $ 741,072 $ 17,676 $ 758,748 $ 14,931 $ 773,679 NW Natural's revenue represents substantially all of NW Holdings' revenue and is recognized for both registrants when the obligation to customers is satisfied and in the amount expected to be received in exchange for transferring goods or providing services. Revenue from contracts with customers contains one performance obligation that is generally satisfied over time, using the output method based on time elapsed, due to the continuous nature of the service provided. The transaction price is determined by a set price agreed upon in the contract or dependent on regulatory tariffs. Customer accounts are settled on a monthly basis or paid at time of sale and based on historical experience. It is probable that we will collect substantially all of the consideration to which we are entitled. We evaluated the probability of collection in accordance with the current expected credit losses standard. NW Holdings and NW Natural do not have any material contract assets, as net accounts receivable and accrued unbilled revenue balances are unconditional and only involve the passage of time until such balances are billed and collected. NW Holdings and NW Natural do not have any material contract liabilities. Revenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statements of comprehensive income. Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities. Natural Gas Distribution Natural Gas Sales NW Natural's primary source of revenue is providing natural gas to customers in the NGD service territory, which includes residential, commercial, industrial and transportation customers. NGD revenue is generally recognized over time upon delivery of the gas commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the Oregon and Washington tariffs. Customer accounts are to be paid in full each month, and there is no right of return or warranty for services provided. Revenues include firm and interruptible sales and transportation services, franchise taxes recovered from the customer, late payment fees, service fees, and accruals for gas delivered but not yet billed (accrued unbilled revenue). The accrued unbilled revenue balance is based on estimates of deliveries during the period from the last meter reading and management judgment is required for a number of factors used in this calculation, including customer use and weather factors. We applied the significant financing practical expedient and have not adjusted the consideration NW Natural expects to receive from NGD customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations. Alternative Revenue Weather normalization (WARM) and decoupling mechanisms are considered to be alternative revenue programs. Alternative revenue programs are considered to be contracts between NW Natural and its regulator and are excluded from revenue from contracts with customers. Leasing Revenue Leasing revenue primarily consists of revenues from NW Natural's North Mist Storage contract with Portland General Electric (PGE) in support of PGE's gas-fired electric power generation facilities under an initial 30 -year contract with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. The facility is accounted for as a sales-type lease with regulatory accounting deferral treatment. The investment is included in rate base under an established cost-of-service tariff schedule, with revenues recognized according to the tariff schedule and as such, profit upon commencement was deferred and will be amortized over the lease term. Leasing revenue also contains rental revenue from small leases of property owned by NW Natural to third parties. The majority of these transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement. Lease revenue is excluded from revenue from contracts with customers. See Note 7 for additional information. 101 NW Natural Other Gas Storage Revenue NW Natural's other revenue includes gas storage activity, which includes Interstate Storage Services used to store natural gas for customers. Gas storage revenue is generally recognized over time as the gas storage service is provided to the customer and the amount of consideration received and recognized as revenue is dependent on set rates defined per the storage agreements. Noncash consideration in the form of dekatherms of natural gas is received as consideration for providing gas injection services to gas storage customers. This noncash consideration is measured at fair value using the average spot rate. Customer accounts are generally paid in full each month, and there is no right of return or warranty for services provided. Revenues include firm and interruptible storage services, net of the profit sharing amount refunded to NGD customers. Asset Management Revenue Revenues include the optimization of storage assets and pipeline capacity and are provided net of the profit sharing amount refunded to NGD customers. Certain asset management revenues received are recognized over time using a straight-line approach over the term of each contract, and the amount of consideration received and recognized as revenue is dependent on a variable pricing model. Variable revenues earned above guaranteed amounts are estimated and recognized at the end of each period using the most likely amount approach. Additionally, other asset management revenues may be based on a fixed rate. Generally, asset management accounts are settled on a monthly basis. As of December 31, 2022, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $ 81.4 million. Of this amount, approximately $ 20.3 million will be recognized in 2023, $ 16.2 million in 2024, $ 13.5 million in 2025, $ 9.4 million in 2026, and $ 22.0 million thereafter. The amounts presented here are calculated using current contracted rates. Appliance Retail Center Revenue NW Natural owns and operates an appliance store that is open to the public, where customers can purchase natural gas home appliances. Revenue from the sale of appliances is recognized at the point in time in which the appliance is transferred to the third party responsible for delivery and installation services and when the customer has legal title to the appliance. It is required that the sale be paid for in full prior to transfer of legal title. The amount of consideration received and recognized as revenue varies with changes in marketing incentives and discounts offered to customers. NW Holdings Other NW Holdings' primary source of other revenue is providing water and wastewater services to customers. Water and wastewater service revenue is generally recognized over time upon delivery of the water commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the tariffs established in the state we operate. Customer accounts are to be paid in full each month, and there is no right of return or warranty for services provided. We applied the significant financing practical expedient and have not adjusted the consideration we expect to receive from water distribution and wastewater collection customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations . 7. LEASES Lease Revenue Leasing revenue primarily consists of NW Natural's North Mist natural gas storage agreement with PGE which is billed under an OPUC-approved rate schedule and includes an initial 30 -year term beginning May 2019 with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. Under U.S. GAAP, this agreement is classified as a sales-type lease and qualifies for regulatory accounting deferral treatment. The investment in the storage facility is included in rate base under a separately established cost-of-service tariff, with revenues recognized according to the tariff schedule. As such, the selling profit that was calculated upon commencement as part of the sale-type lease recognition was deferred and will be amortized over the lease term. Billing rates under the cost-of-service tariff will be updated annually to reflect current information including depreciable asset levels, forecasted operating expenses, and the results of regulatory proceedings, as applicable, and revenue received under this agreement is recognized as operating revenue on the consolidated statements of comprehensive income. There are no variable payments or residual value guarantees. The lease does not contain an option to purchase the underlying assets. NW Natural also maintains a sales-type lease for specialized compressor facilities to provide high pressure compressed natural gas (CNG) services. Lease payments are outlined in an OPUC-approved rate schedule over a 10 -year term. There are no variable payments or residual value guarantees. The selling profit computed upon lease commencement was not significant. Our lessor portfolio also contains small leases of property owned by NW Natural to third parties. These transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement. 102 The components of lease revenue at NW Natural were as follows: Year ended December 31, In thousands 2022 2021 2020 Lease revenue Operating leases $ 74 $ 80 $ 88 Sales-type leases 17,119 17,471 18,355 Total lease revenue $ 17,193 $ 17,551 $ 18,443 Additionally, lease revenue of $ 0.6 million, $ 0.5 million and $ 0.5 million was recognized for each of the years ended December 31, 2022, 2021, and 2020, respectively, related to operating leases associated with non-utility property rentals. Lease revenue related to these leases was presented in other income (expense), net on the consolidated statements of comprehensive income as it is non-operating income. Total future minimum lease payments to be received under non-cancelable leases at December 31, 2022 are as follows: In thousands Operating Sales-Type Total NW Natural: 2023 $ 621 $ 16,557 $ 17,178 2024 612 15,867 16,479 2025 603 15,306 15,909 2026 36 14,901 14,937 2027 22 14,521 14,543 Thereafter — 222,299 222,299 Total minimum lease payments $ 1,894 $ 299,451 $ 301,345 Less: imputed interest 165,272 Total leases receivable $ 134,179 Other NW Holdings: 2023 $ 51 $ — $ 51 2024 52 — 52 2025 53 — 53 2026 56 — 56 2027 57 — 57 Thereafter 857 — 857 Total minimum lease payments $ 1,126 $ — $ 1,126 NW Holdings: 2023 $ 672 $ 16,557 $ 17,229 2024 664 15,867 16,531 2025 656 15,306 15,962 2026 92 14,901 14,993 2027 79 14,521 14,600 Thereafter 857 222,299 223,156 Total minimum lease payments $ 3,020 $ 299,451 $ 302,471 Less: imputed interest 165,272 Total leases receivable $ 134,179 The total leases receivable above is reported under the NGD segment and the short- and long-term portions are included within other current assets and assets under sales-type leases on the consolidated balance sheets, respectively. The total amount of unguaranteed residual assets was $ 5.1 million and $ 4.7 million at December 31, 2022 and 2021, respectively, and is included in assets under sales-type leases on the consolidated balance sheets. Additionally, under regulatory accounting, the revenues and expenses associated with these agreements are presented on the consolidated statements of comprehensive income such that their presentation aligns with similar regulated activities at NW Natural. Lease Expense Operating Leases We have operating leases for land, buildings and equipment. Our primary lease is for NW Natural's headquarters and operations center. Our leases have remaining lease terms of nine months to 17 years. Many of our lease agreements include options to 103 extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Short-term leases with a term of 12 months or less are not recorded on the balance sheet. As most of our leases do not provide an implicit rate and are entered into by NW Natural, we use an estimated discount rate representing the rate we would have incurred to finance the funds necessary to purchase the leased asset and is based on information available at the lease commencement date in determining the present value of lease payments. The components of lease expense, a portion of which is capitalized, were as follows: Year ended December 31, 2022 In thousands NW Natural Other (NW Holdings) NW Holdings Operating lease expense $ 7,003 $ 31 $ 7,034 Short-term lease expense 880 — 880 Year ended December 31, 2021 In thousands NW Natural Other (NW Holdings) NW Holdings Operating lease expense $ 6,859 $ 58 $ 6,917 Short-term lease expense 1,220 — 1,220 Year ended December 31, 2020 In thousands NW Natural Other (NW Holdings) NW Holdings Operating lease expense $ 4,381 $ 125 $ 4,506 Short-term lease expense 1,010 — 1,010 Supplemental balance sheet information related to operating leases as of December 31, 2022 is as follows: In thousands NW Natural Other (NW Holdings) NW Holdings Operating lease right of use assets $ 72,720 $ 709 $ 73,429 Operating lease liabilities - current liabilities $ 1,363 $ 151 $ 1,514 Operating lease liabilities - non-current liabilities 78,345 620 78,965 Total operating lease liabilities $ 79,708 $ 771 $ 80,479 Supplemental balance sheet information related to operating leases as of December 31, 2021 is as follows: In thousands NW Natural Other (NW Holdings) NW Holdings Operating lease right of use assets $ 74,987 $ 62 $ 75,049 Operating lease liabilities - current liabilities $ 1,273 $ 23 $ 1,296 Operating lease liabilities - non-current liabilities 79,431 37 79,468 Total operating lease liabilities $ 80,704 $ 60 $ 80,764 The weighted-average remaining lease terms and weighted-average discount rates for the operating leases at NW Natural were as follows: 2022 2021 Weighted-average remaining lease term (years) 17.2 18.2 Weighted-average discount rate 7.3 % 7.2 % Headquarters and Operations Center Lease NW Natural commenced a 20 -year operating lease agreement in March 2020 for a new headquarters and operations center in Portland, Oregon. There is an option to extend the term of the lease for two additional periods of seven years . There is a material timing difference between the minimum lease payments and expense recognition as calculated under operating lease accounting rules. OPUC issued an order allowing us to align our expense recognition with cash payments for ratemaking purposes. We recorded the difference between the minimum lease payments and the aggregate of the imputed interest on the finance lease 104 obligation and amortization of the right-of-use asset as a regulatory asset on our balance sheet. The balance of the regulatory asset was $ 6.9 million and $ 5.7 million as of December 31, 2022 and 2021, respectively. Maturities of operating lease liabilities at December 31, 2022 were as follows: In thousands NW Natural Other (NW Holdings) NW Holdings 2023 $ 7,169 $ 195 $ 7,364 2024 7,299 196 7,495 2025 7,185 184 7,369 2026 7,353 140 7,493 2027 7,530 107 7,637 Thereafter 108,901 12 108,913 Total lease payments 145,437 834 146,271 Less: imputed interest 65,729 63 65,792 Total lease obligations 79,708 771 80,479 Less: current obligations 1,363 151 1,514 Long-term lease obligations $ 78,345 $ 620 $ 78,965 As of December 31, 2022, there were no finance lease liabilities at NW Natural. Cash Flow Information Supplemental cash flow information related to leases was as follows: Year ended December 31, 2022 In thousands NW Natural Other (NW Holdings) NW Holdings Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 6,993 $ 64 $ 7,057 Finance cash flows from finance leases 524 — 524 Right of use assets obtained in exchange for lease obligations Operating leases $ 309 $ 668 $ 977 Finance leases 270 — 270 Year ended December 31, 2021 In thousands NW Natural Other (NW Holdings) NW Holdings Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 6,840 $ 58 $ 6,898 Finance cash flows from finance leases 801 — 801 Right of use assets obtained in exchange for lease obligations Operating leases $ 223 $ — $ 223 Finance leases 314 — 314 Year ended December 31, 2020 In thousands NW Natural Other (NW Holdings) NW Holdings Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 4,466 $ 131 $ 4,597 Finance cash flows from finance leases 835 — 835 Right of use assets obtained in exchange for lease obligations Operating leases $ 78,539 $ 51 $ 78,590 Finance leases 1,386 — 1,386 Finance Leases NW Natural also leases building storage spaces for use as a gas meter room in order to provide natural gas to multifamily or mixed use developments. These contracts are accounted for as finance leases and typically involve a one-time upfront payment with no remaining liability. The right of use asset for finance leases was $ 2.3 million and $ 2.1 million at December 31, 2022 and 2021, respectively. 105 8. STOCK-BASED COMPENSATION Stock-based compensation plans are designed to promote stock ownership in NW Holdings by employees and officers of NW Holdings and its affiliates. These compensation plans include a Long Term Incentive Plan (LTIP) and an ESPP. Long Term Incentive Plan The LTIP is intended to provide a flexible, competitive compensation program for eligible officers and key employees. Under the LTIP, shares of NW Holdings common stock are authorized for equity incentive grants in the form of stock, restricted stock, restricted stock units, stock options, or performance shares. An aggregate of 1,100,000 shares were authorized for issuance as of December 31, 2022. Shares awarded under the LTIP may be purchased on the open market or issued as original shares. Of the 1,100,000 shares of common stock authorized for LTIP awards at December 31, 2022, there were 247,666 shares available for issuance under any type of award. This assumes market, performance, and service-based grants currently outstanding are awarded at the target level. There were no outstanding grants of restricted stock or stock options under the LTIP at December 31, 2022 or 2021. The LTIP stock awards are compensatory awards for which compensation expense is based on the fair value of stock awards, with expense being recognized over the performance and vesting period of the outstanding awards. Forfeitures are recognized as they occur. Performance Shares LTIP performance shares incorporate a combination of market, performance, and service-based factors. The following table summarizes performance share expense information: Dollars in thousands Shares (1) Expense During Award Year (2) Total Expense for Award Estimated award: 2020-2022 grant (3) 29,472 $ 888 $ 888 Actual award: 2019-2021 grant 37,430 $ 1,323 $ 1,323 2018-2020 grant 31,600 $ 2,137 $ 2,137 (1) In addition to common stock shares, a participant also receives a dividend equivalent cash payment equal to the number of shares of common stock received on the award payout multiplied by the aggregate cash dividends paid per share during the performance period. (2) Amount represents the expense recognized in the third year of the vesting period noted above. For the 2019-2021 and 2020-2022 grants, mutual understanding of the award's key terms was established in the third year of the vesting period, triggering full expense recognition in 2021 and 2022, respectively. (3) This represents the estimated number of shares to be awarded as of December 31, 2022 as certain performance share measures have been achieved. Amounts are subject to change with final payout amounts authorized by the Board of Directors in February 2023. The aggregate number of performance shares granted and outstanding at the target and maximum levels were as follows: Dollars in thousands Performance Share Awards Outstanding 2022 Performance Period Target Maximum Expense 2020-22 31,160 62,320 $ 888 2021-23 — — — 2022-24 — — — Total 31,160 62,320 $ 888 Performance share awards are based on the achievement of a three -year ROIC threshold that must be met and a cumulative EPS factor, which can be modified by a TSR factor relative to the performance of the Russell 2500 Utilities Index (2020-2022 performance share awards) or a specified peer group (2021-2023 and 2022-2024 performance share awards) over the three-year performance period. The performance period allows for one of the performance factors to remain variable until the first quarter of the third year of the award period. As the performance factor will not be approved until the first quarter of 2023 and 2024, there is not a mutual understanding of the awards' key terms and conditions between NW Natural and the participants as of December 31, 2022, and therefore, no expense was recognized for the 2021-2023 and 2022-2024 performance period. NW Natural will calculate the grant date fair value and recognize expense once the final performance factor has been approved. If the target is achieved for the 2021-2023 and 2022-2024 awards, NW Holdings would grant for accounting purposes 55,250 and 55,870 shares in the first quarter of 2023 and 2024, respectively. Compensation expense is recognized in accordance with accounting standards for stock-based compensation and calculated based on performance levels achieved and an estimated fair value using the Monte-Carlo method. Due to there not being a mutual understanding of the 2021-2023 and 2022-2024 awards' key terms and conditions as noted above, the grant date fair value has not yet been determined and no non-vested shares existed at December 31, 2022. The weighted-average grant date fair value of non-vested shares associated with the 2020-2022 awards was $ 38.63 per share at December 31, 2022. The 106 weighted-average grant date fair value of shares vested during the year was $ 38.63 per share and there were no performance shares granted during the year and no unrecognized compensation expense for accounting purposes as of December 31, 2022. Restricted Stock Units In 2012, RSUs began being granted under the LTIP instead of stock options under the Restated SOP. Generally, the RSUs awarded are forfeitable and include a performance-based threshold as well as a vesting period of four years from the grant date. The majority of our RSU grants obligate NW Holdings, upon vesting, to issue the RSU holder one share of common stock. The grant may also include a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of that portion of the RSU depending on the structure of the award agreement. The fair value of an RSU is equal to the closing market price of NW Holdings' common stock on the grant date. During 2022, total RSU expense was $ 2.1 million compared to $ 2.0 million in 2021 and $ 2.0 million in 2020. As of December 31, 2022, there was $ 3.5 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through 2026 . Information regarding the RSU activity is summarized as follows: Number of RSUs Weighted - Average Price Per RSU Nonvested, December 31, 2019 79,733 $ 61.17 Granted 33,594 55.58 Vested ( 29,273 ) 59.29 Forfeited ( 1,590 ) 69.71 Nonvested, December 31, 2020 82,464 59.40 Granted 38,160 49.16 Vested ( 31,733 ) 60.06 Forfeited ( 1,164 ) 46.82 Nonvested, December 31, 2021 87,727 54.87 Granted 48,212 46.50 Vested ( 33,054 ) 55.90 Forfeited ( 3,037 ) 56.34 Nonvested, December 31, 2022 99,848 $ 50.44 Employee Stock Purchase Plan NW Holdings' ESPP allows employees of NW Holdings, NW Natural and certain designated subsidiaries to purchase common stock at 85 % of the closing price on the trading day immediately preceding the initial offering date, which is set annually. For the 2022-2023 ESPP period, each eligible employee may purchase up to $ 21,223 worth of stock through payroll deductions over a period defined by the Board of Directors, with shares issued at the end of the subscription period. Stock-Based Compensation Expense Stock-based compensation expense is recognized as operations and maintenance expense or is capitalized as part of construction overhead at the entity at which the award recipient is employed. The following table summarizes the NW Holdings' financial statement impact, substantially all of which was recorded at NW Natural, of stock-based compensation under the LTIP and ESPP: In thousands 2022 2021 2020 Operations and maintenance expense, for stock-based compensation $ 2,877 $ 3,272 $ 3,525 Income tax benefit ( 762 ) ( 866 ) ( 933 ) Net stock-based compensation effect on net income 2,115 2,406 2,592 Amounts capitalized for stock-based compensation $ 351 $ 344 $ 841 107 9. DEBT 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 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. Commercial paper, when outstanding, is sold through two commercial banks under an issuing and paying agency agreement and is supported by one or more unsecured revolving credit facilities. See “ Credit Agreements ” below. At December 31, 2022 and 2021, NW Natural's short-term debt consisted of the following: December 31, 2022 December 31, 2021 In millions Balance Outstanding Weighted Average Interest Rate (1) Balance Outstanding Weighted Average Interest Rate (1) NW Natural: Commercial paper $ 170.2 4.6 % $ 245.5 0.3 % Other (NW Holdings): Credit agreement 88.0 5.3 % 144.0 1.1 % NW Holdings $ 258.2 $ 389.5 (1) Weighted average interest rate on outstanding short-term debt The carrying cost of commercial paper approximates fair value using Level 2 inputs. See Note 2 for a description of the fair value hierarchy. At December 31, 2022, NW Natural's commercial paper had a maximum remaining maturity of 6 days and an average remaining maturity of 5 days. Credit Agreements NW Holdings In November 2021, NW Holdings entered into an amended and restated $ 200.0 million credit agreement, with a feature that allows NW Holdings to request increases in the total commitment amount, up to a maximum of $ 300.0 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. Interest charges on the NW Holdings credit agreement were indexed to the London Interbank Offered Rate (LIBOR) through January 31, 2023. The agreement was amended to replace LIBOR with the secured overnight financing rate (SOFR) beginning February 2023. The SOFR is subject to a 10 basis point spread adjustment. The NW Holdings credit agreement permits the issuance of letters of credit in an aggregate amount of up to $ 40.0 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. The credit agreement 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, 2022 and 2021. 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. 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. There was $ 88.0 million and $ 144.0 million of outstanding balances under the NW Holdings agreement at December 31, 2022 and 2021, respectively. No letters of credit were issued or outstanding under the NW Holdings agreement at December 31, 2022 and 2021. NW Natural In November 2021, NW Natural entered into an amended and restated credit agreement for unsecured revolving loans totaling $ 400.0 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $ 600.0 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. The credit agreement permits the issuance of letters of credit in an 108 aggregate amount of up to $ 60.0 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. Interest charges on the NW Natural credit agreement were indexed to the LIBOR through January 31, 2023. The agreement was amended to replace LIBOR with the SOFR beginning February 2023. The SOFR is subject to a 10 basis point spread adjustment. NW Natural's credit agreement requires NW Natural 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 Natural was in compliance with this covenant at December 31, 2022 and 2021. 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 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. There were no outstanding balances under NW Natural's credit agreement and no letters of credit issued or outstanding at December 31, 2022 and 2021. In February 2023, NW Natural issued a $ 14 million letter of credit through its existing credit agreement. There were no other letters of credit outstanding under the credit agreement. Long-Term Debt NW Holdings At December 31, 2022 and 2021, NW Holdings long-term debt consisted of the following: December 31, 2022 December 31, 2021 In millions Balance Outstanding Weighted Average Interest Rate (1) Balance Outstanding Weighted Average Interest Rate (1) NW Natural first mortgage bonds $ 1,134.7 4.5 % $ 994.7 4.4 % NW Holdings credit agreement 100.0 4.2 % — — % NWN Water credit agreement 50.0 4.2 % — — % NWN Water term loan 55.0 2.5 % 55.0 0.8 % Other long-term debt 6.2 3.5 Long-term debt, gross $ 1,345.9 $ 1,053.2 Less: unamortized debt issuance costs 9.0 8.3 Less: current maturities 90.7 0.3 Total long-term debt $ 1,246.2 $ 1,044.6 (1) Weighted average interest rate for the years ended December 31, 2022 and 2021. Long-term debt at NWN Water is primarily comprised of a five -year term loan agreement for $ 55.0 million, due in 2026. NWN Water entered into this agreement in June 2021 and the interest rate is based upon the one -month SOFR 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, 2022 and 2021, with a consolidated indebtedness to total capitalization ratio of 57.6 % and 60.5 %, respectively. In December 2022, NW Holdings entered into a swap to fix the interest rate on this debt beginning in January 2023 through the loan's maturity. See "Interest Rate Swap Agreements" below for more detail. In September 2022, NW Holdings entered into an 18 -month credit agreement for $ 100.0 million and borrowed the full amount. The interest rate is based on the SOFR. The loan is due and payable on March 15, 2024. The credit agreement prohibits NW Holdings from permitting consolidated indebtedness to be greater than 70 % of total capitalization, each as defined therein and calculated as of the end of each fiscal quarter. Failure to comply with this financial covenant would entitle the lenders to accelerate the maturity of the amounts outstanding under the credit agreement. NW Holdings was in compliance with this financial covenant as of December 31, 2022. In December 2022, NW Holdings entered into a swap to fix the interest rate on this debt beginning in January 2023 through the loan's maturity. See "Interest Rate Swap Agreements" below for more detail. In September 2022, NWN Water entered into an 18 -month credit agreement for $ 50.0 million and borrowed the full amount. The interest rate is based on the SOFR. The loan is due and payable on March 15, 2024. The credit agreement prohibits NWN Water and NW Holdings from permitting consolidated indebtedness to be greater than 70 % of total capitalization, each as defined therein and calculated as of the end of each fiscal quarter. Failure to comply with this financial covenant would entitle the lenders to accelerate the maturity of the amounts outstanding under the credit agreement. NWN Water and NW Holdings were in compliance with this financial covenant as of December 31, 2022. 109 Interest Rate Swap Agreements NW Holdings and NWN Water entered into interest rate swap agreements with major financial institutions that effectively convert variable-rate debt to a fixed rate. Interest payments made between the effective date and expiration date are hedged by the swap agreements. The notional amount, effective date, expiration date and rate of the swap agreements are shown in the table below: In millions Notional Amount Effective Date Expiration Date Fixed Rate NW Holdings $ 100.0 1/17/2023 3/15/2024 4.7 % NWN Water $ 55.0 1/19/2023 6/10/2026 3.8 % NW Natural NW Natural's issuance of First Mortgage Bonds (FMBs), which includes NW Natural's medium-term notes, under the Mortgage and Deed of Trust (Mortgage) is limited by eligible property, adjusted net earnings, and other provisions of the Mortgage. The Mortgage constitutes a first mortgage lien on certain gas properties owned from time to time by NW Natural, including substantially all of NW Natural's NGD property. In July 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein (the Bond Purchase Agreement). The Bond Purchase Agreement provides for the issuance of $ 140.0 million aggregate principal amount of NW Natural's FMBs due in 2052 (the Bonds). The Bonds were issued on September 30, 2022. The Bonds bear interest at the rate of 4.78 % per annum, payable semi-annually on March 30 and September 30 of each year, commencing March 30, 2023, and will mature on September 30, 2052. The Bonds are subject to redemption prior to maturity at the option of NW Natural, in whole or in part, (i) at any time prior to March 30, 2052, at a redemption price equal to 100 % of the principal amount thereof plus a “make-whole” premium and accrued and unpaid interest thereon to the date of redemption, and (ii) at any time on and after March 30, 2052, at 100 % of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption. Maturities and Outstanding Long-Term Debt Retirement of long-term debt for each of the annual periods through December 31, 2027 and thereafter are as follows: In thousands Long-term debt maturities NW Natural: 2023 $ 90,000 2024 — 2025 30,000 2026 55,000 2027 64,700 Thereafter 895,000 Total $ 1,134,700 110 The following table presents debt outstanding as of December 31: In thousands 2022 2021 NW Natural: First Mortgage Bonds: 3.542 % Series due 2023 50,000 50,000 5.620 % Series due 2023 40,000 40,000 7.720 % Series due 2025 20,000 20,000 6.520 % Series due 2025 10,000 10,000 7.050 % Series due 2026 20,000 20,000 3.211 % Series due 2026 35,000 35,000 7.000 % Series due 2027 20,000 20,000 2.822 % Series due 2027 25,000 25,000 6.650 % Series due 2027 19,700 19,700 6.650 % Series due 2028 10,000 10,000 3.141 % Series due 2029 50,000 50,000 7.740 % Series due 2030 20,000 20,000 7.850 % Series due 2030 10,000 10,000 5.820 % Series due 2032 30,000 30,000 5.660 % Series due 2033 40,000 40,000 5.250 % Series due 2035 10,000 10,000 4.000 % Series due 2042 50,000 50,000 4.136 % Series due 2046 40,000 40,000 3.685 % Series due 2047 75,000 75,000 4.110 % Series due 2048 50,000 50,000 3.869 % Series due 2049 90,000 90,000 3.600 % Series due 2050 150,000 150,000 3.078 % Series due 2051 130,000 130,000 4.780 % Series due 2052 140,000 — Long-term debt, gross 1,134,700 994,700 Less: current maturities 90,000 — Total long-term debt $ 1,044,700 $ 994,700 Fair Value of Long-Term Debt NW Holdings' and NW Natural's outstanding debt does not trade in active markets. The fair value of debt is estimated using the value of outstanding debt at natural gas distribution companies with similar credit ratings, terms, and remaining maturities to NW Holdings' and NW Natural's debt that actively trade in public markets. Substantially all outstanding debt at NW Holdings is comprised of NW Natural debt. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2. The following table provides an estimate of the fair value of long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date : December 31, In thousands 2022 2021 NW Natural: Gross long-term debt $ 1,134,700 $ 994,700 Unamortized debt issuance costs ( 8,823 ) ( 8,205 ) Carrying amount $ 1,125,877 $ 986,495 Estimated fair value (1) $ 944,383 $ 1,110,741 NW Holdings: Gross long-term debt $ 1,345,851 $ 1,053,241 Unamortized debt issuance costs ( 8,987 ) ( 8,309 ) Carrying amount $ 1,336,864 $ 1,044,932 Estimated fair value (1) $ 1,148,395 $ 1,174,500 (1) Estimated fair value does not include unamortized debt issuance costs. 111 10. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS NW Natural maintains a qualified non-contributory defined benefit pension plan (Pension Plan) for all eligible employees, non-qualified supplemental pension plans for eligible executive officers and other key employees, and other postretirement employee benefit plans. NW Natural also has a qualified defined contribution plan (Retirement K Savings Plan) for all eligible employees. The Pension Plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund retirement benefits. Effective January 1, 2007 and 2010, the Pension Plan and postretirement benefits for non-union employees and union employees, respectively, were closed to new participants. Non-union and union employees hired or re-hired after December 31, 2006 and 2009, respectively, and employees of NW Natural subsidiaries are provided an enhanced Retirement K Savings Plan benefit. The following table provides a reconciliation of the changes in NW Natural's benefit obligations and fair value of plan assets, as applicable, for NW Natural's pension and other postretirement benefit plans, excluding the Retirement K Savings Plan, and a summary of the funded status and amounts recognized in NW Holdings' and NW Natural's consolidated balance sheets as of December 31: Postretirement Benefit Plans Pension Benefits Other Benefits In thousands 2022 2021 2022 2021 Reconciliation of change in benefit obligation: Obligation at January 1 $ 542,618 $ 566,147 $ 27,223 $ 29,039 Service cost 5,933 6,982 193 238 Interest cost 14,593 13,447 724 684 Net actuarial gain ( 122,168 ) ( 18,587 ) ( 6,234 ) ( 688 ) Benefits paid ( 27,563 ) ( 25,371 ) ( 2,026 ) ( 2,050 ) Obligation at December 31 $ 413,413 $ 542,618 $ 19,880 $ 27,223 Reconciliation of change in plan assets: Fair value of plan assets at January 1 $ 399,217 $ 373,932 $ — $ — Actual return on plan assets ( 93,703 ) 38,712 — — Employer contributions 2,353 11,944 2,026 2,050 Benefits paid ( 27,563 ) ( 25,371 ) ( 2,026 ) ( 2,050 ) Fair value of plan assets at December 31 $ 280,304 $ 399,217 $ — $ — Funded status at December 31 $ ( 133,109 ) $ ( 143,401 ) $ ( 19,880 ) $ ( 27,223 ) At December 31, 2022, the net liability (benefit obligations less market value of plan assets) for the Pension Plan decreased $ 3.3 million compared to 2021. The decrease in the net pension liability is primarily due to the $ 118.9 million decrease in plan assets and the $ 122.3 million decrease to the pension benefit obligation. The liability for non-qualified plans decreased $ 6.9 million, and the liability for other postretirement benefits decreased $ 7.3 million in 2022. NW Natural's Pension Plan had a projected benefit obligation of $ 381.6 million and $ 503.9 million at December 31, 2022 and 2021, respectively, and fair values of plan assets of $ 280.3 million and $ 399.2 million, respectively. The plan had an accumulated benefit obligation of $ 353.4 million and $ 464.4 million at December 31, 2022 and 2021, respectively. The following table presents amounts realized through regulatory assets or in other comprehensive loss (income) for the years ended December 31: Regulatory Assets Other Comprehensive Loss (Income) Pension Benefits Other Postretirement Benefits Pension Benefits In thousands 2022 2021 2020 2022 2021 2020 2022 2021 2020 Net actuarial (gain) loss $ 2,833 $ ( 32,258 ) $ 16,170 $ ( 6,234 ) $ ( 688 ) $ 145 $ ( 5,706 ) $ ( 812 ) $ 3,873 Amortization of: Prior service credit — — — 333 468 468 — — — Actuarial loss ( 11,531 ) ( 21,250 ) ( 18,627 ) ( 426 ) ( 645 ) ( 607 ) ( 1,081 ) ( 1,225 ) ( 923 ) Total $ ( 8,698 ) $ ( 53,508 ) $ ( 2,457 ) $ ( 6,327 ) $ ( 865 ) $ 6 $ ( 6,787 ) $ ( 2,037 ) $ 2,950 112 The following table presents amounts recognized in regulatory assets and accumulated other comprehensive loss (AOCL) at December 31: Regulatory Assets AOCL Pension Benefits Other Postretirement Benefits Pension Benefits In thousands 2022 2021 2022 2021 2022 2021 Prior service credit $ — $ — $ — $ ( 333 ) $ — $ — Net actuarial loss (gain) 102,240 112,182 ( 826 ) 5,834 8,717 15,399 Total $ 102,240 $ 112,182 $ ( 826 ) $ 5,501 $ 8,717 $ 15,399 The following table presents amounts recognized by NW Holdings and NW Natural in AOCL and the changes in AOCL related to NW Natural's non-qualified employee benefit plans: Year ended December 31, In thousands 2022 2021 Beginning balance $ ( 11,404 ) $ ( 12,902 ) Amounts reclassified to AOCL 5,706 812 Amounts reclassified from AOCL: Amortization of actuarial losses 1,081 1,225 Total reclassifications before tax 6,787 2,037 Tax benefit ( 1,797 ) ( 539 ) Total reclassifications for the period 4,990 1,498 Ending balance $ ( 6,414 ) $ ( 11,404 ) In 2023, NW Natural will not amortize any estimated costs from regulatory assets to net periodic benefit costs. The assumed discount rates for NW Natural's Pension Plan and other postretirement benefit plans were determined independently based on the FTSE Above Median Curve (discount rate curve), which uses high quality corporate bonds rated AA- or higher by S&P or Aa3 or higher by Moody’s. The discount rate curve was applied to match the estimated cash flows in each of the plans to reflect the timing and amount of expected future benefit payments for these plans. The assumed expected long-term rate of return on plan assets for the Pension Plan was developed using a weighted-average of the expected returns for the target asset portfolio. In developing the expected long-term rate of return assumption, consideration was given to the historical performance of each asset class in which the plan’s assets are invested and the target asset allocation for plan assets. The investment strategy and policies for Pension Plan assets held in the retirement trust fund were approved by the NW Natural Retirement Committee, which is composed of senior management with the assistance of an outside investment consultant. The policies set forth the guidelines and objectives governing the investment of plan assets. Plan assets are invested for total return with appropriate consideration for liquidity, portfolio risk, and return expectations. All investments are expected to satisfy the prudent investments rule under the Employee Retirement Income Security Act of 1974. The approved asset classes may include cash and short-term investments, fixed income, common stock and convertible securities, absolute and real return strategies, and real estate. Plan assets may be invested in separately managed accounts or in commingled or mutual funds. Investment re-balancing takes place periodically as needed, or when significant cash flows occur, in order to maintain the allocation of assets within the stated target ranges. The retirement trust fund for the Pension Plan is not currently invested in NW Holdings or NW Natural securities. The following table presents the Pension Plan asset target allocation at December 31, 2022: Asset Category Target Allocation Long government/credit 20 % U.S. large cap equity 18 Non-U.S. equity 18 Absolute return strategies 12 U.S. small/mid cap equity 10 Real estate funds 7 High yield bonds 5 Emerging markets equity 5 Emerging market debt 5 113 Non-qualified supplemental defined benefit plan obligations were $ 31.8 million and $ 38.7 million at December 31, 2022 and 2021, respectively. These plans are not subject to regulatory deferral, and the changes in actuarial gains and losses, prior service costs, and transition assets or obligations are recognized in AOCL, net of tax until they are amortized as a component of net periodic benefit cost. These are unfunded, non-qualified plans with no plan assets; however, a significant portion of the obligations is indirectly funded with company and trust-owned life insurance and other assets. Other postretirement benefit plans are unfunded plans but are subject to regulatory deferral. The actuarial gains and losses, prior service costs, and transition assets or obligations for these plans are recognized as a regulatory asset. Net periodic benefit costs consist of service costs, interest costs, the expected returns on plan assets, and the amortization of gains and losses and prior service costs. The gains and losses are the sum of the actuarial and asset gains and losses throughout the year and are amortized over the average remaining service period of active participants. The asset gains and losses are based in part on a market-related valuation of assets. The market-related valuation reflects differences between expected returns and actual investment returns with the differences recognized over a two-year period from the year in which they occur, thereby reducing year-to-year net periodic benefit cost volatility. The service cost component of net periodic benefit cost for NW Natural pension and other postretirement benefit plans is recognized in operations and maintenance expense in the consolidated statements of comprehensive income. The other non-service cost components are recognized in other income (expense), net in the consolidated statements of comprehensive income. The following table provides the components of net periodic benefit cost for NW Natural's pension and other postretirement benefit plans for the years ended December 31: Pension Benefits Other Postretirement Benefits In thousands 2022 2021 2020 2022 2021 2020 Service cost $ 5,933 $ 6,981 $ 6,614 $ 193 $ 238 $ 258 Interest cost 14,593 13,448 16,161 724 684 905 Expected return on plan assets ( 25,698 ) ( 24,232 ) ( 21,865 ) — — — Amortization of prior service credit — — — ( 333 ) ( 468 ) ( 468 ) Amortization of net actuarial loss 12,612 22,475 19,550 426 645 607 Net periodic benefit cost 7,440 18,672 20,460 1,010 1,099 1,302 Amount allocated to construction ( 2,621 ) ( 3,015 ) ( 2,798 ) ( 76 ) ( 93 ) ( 98 ) Net periodic benefit cost charged to expense 4,819 15,657 17,662 934 1,006 1,204 Amortization of regulatory balancing account 7,131 7,131 7,131 — — — Net amount charged to expense $ 11,950 $ 22,788 $ 24,793 $ 934 $ 1,006 $ 1,204 Net periodic benefit costs are reduced by amounts capitalized to NGD plant. In addition, a certain amount of net periodic benefit costs were recorded to the regulatory balancing account, representing net periodic pension expense for the Pension Plan above the amount set in rates, as approved by the OPUC, from 2011 through October 31, 2018. Total amortization of the regulatory balancing account of $ 7.1 million was recognized in each of the years ended December 31, 2022 and 2021, of which $ 2.6 million was charged to operations and maintenance expense and $ 4.5 million was charged to other income (expense). The following table provides the assumptions used in measuring periodic benefit costs and benefit obligations for the years ended December 31: Pension Benefits Other Postretirement Benefits 2022 2021 2020 2022 2021 2020 Assumptions for net periodic benefit cost: Weighted-average discount rate 2.71 % 2.40 % 3.18 % 2.72 % 2.34 % 3.11 % Rate of increase in compensation 3.50 % 3.50 % 3.50 % n/a n/a n/a Expected long-term rate of return 7.00 % 7.25 % 7.25 % n/a n/a n/a Assumptions for year-end funded status: Weighted-average discount rate 5.18 % 2.71 % 2.36 % 5.19 % 2.72 % 2.34 % Rate of increase in compensation (1) 4.00 - 6.00 % 3.50 % 3.50 - 6.50 % n/a n/a n/a Expected long-term rate of return 7.50 % 7.00 % 7.25 % n/a n/a n/a (1) Rate assumption ranges from 4.5 % to 5.0 % in 2023, 4.0 % to 6.0 % in 2024 and 4.0 % thereafter. The assumed annual increase in health care cost trend rates used in measuring other postretirement benefits as of December 31, 2022 was 7.00 % . These trend rates apply to both medical and prescription drugs. Medical costs and prescription drugs are assumed to decrease gradually each year to a rate of 4.00 % by 2029 . 114 Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans; however, other postretirement benefit plans have a cap on the amount of costs reimbursable by NW Natural. Mortality assumptions are reviewed annually and are updated for material changes as necessary. In 2022, mortality rate assumptions remained consistent with 2021, using Pri-2012 mortality tables using scale MP-2021. The following table provides information regarding employer contributions and benefit payments for NW Natural's Pension Plan, non-qualified pension plans, and other postretirement benefit plans for the years ended December 31, and estimated future contributions and payments: In thousands Pension Benefits Other Benefits Employer Contributions: 2021 $ 11,944 $ 2,050 2022 2,353 2,026 2023 (estimated) 2,333 1,586 Benefit Payments: 2020 25,073 1,837 2021 25,371 2,050 2022 27,563 2,026 Estimated Future Benefit Payments: 2023 26,499 1,586 2024 27,029 1,591 2025 27,541 1,586 2026 27,981 1,560 2027 36,485 1,552 2028-2032 145,486 7,345 Employer Contributions to Company-Sponsored Defined Benefit Pension Plan NW Natural makes contributions to its Pension Plan based on actuarial assumptions and estimates, tax regulations, and funding requirements under federal law. The Pension Plan was underfunded by $ 101.3 million at December 31, 2022. NW Natural made no cash contributions to its Pension Plan for 2022. 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 2023. Multiemployer Pension Plan In addition to the NW Natural-sponsored Pension Plan presented above, prior to 2014 NW Natural contributed to a multiemployer pension plan for its NGD union employees known as the Western States Office and Professional Employees International Union Pension Fund (Western States Plan). That plan's employer identification number is 94-6076144. Effective December 22, 2013, NW Natural withdrew from the plan, which was a noncash transaction. Vested participants will receive all benefits accrued through the date of withdrawal. As the plan was underfunded at the time of withdrawal, NW Natural was assessed a withdrawal liability of $ 8.3 million, plus interest, which requires NW Natural to pay $ 0.6 million each year to the plan for 20 years beginning in July 2014. The cost of the withdrawal liability was deferred to a regulatory account on the balance sheet. Payments were $ 0.6 million for 2022, and as of December 31, 2022, the liability balance was $ 5.4 million. For 2021 and 2020, contributions to the plan were $ 0.4 million and $ 0.7 million, respectively, which was approximately 3 % to 5 % of the total contributions to the plan by all employer participants in those years. Defined Contribution Plan NW Natural's Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). NW Natural contributions totaled $ 9.6 million, $ 8.8 million, and $ 8.3 million for 2022, 2021, and 2020, respectively. Deferred Compensation Plans NW Natural's supplemental deferred compensation plans for eligible officers and senior managers are non-qualified plans. These plans are designed to enhance the retirement savings of employees and to assist them in strengthening their financial security by providing an incentive to save and invest regularly. Fair Value Below is a description of the valuation methodologies used for assets measured at fair value. In cases where NW Natural's Pension Plan is invested through a collective trust fund or mutual fund, the fund's market value is utilized. Market values for investments directly owned are also utilized. 115 U.S. EQUITY. These are non-published net asset value (NAV) assets. The non-published NAV assets consist of commingled trusts where NAV is not published but the investment can be readily disposed of at NAV or market value. The underlying investments in this asset class includes investments primarily in U.S. common stocks. INTERNATIONAL/GLOBAL EQUITY. These are Level 1 and non-published NAV assets. The Level 1 asset is a mutual fund, and the non-published NAV assets consist of commingled trusts where the NAV/unit price is not published, but the investment can be readily disposed of at the NAV/unit price. The mutual funds has a readily determinable fair value, including a published NAV, and the commingled trusts are valued at unit price. This asset class includes investments primarily in foreign equity common stocks. LIABILITY HEDGING. These are non-published NAV assets. The non-published NAV assets consist of commingled trusts where NAV is not published but the investment can be readily disposed of at NAV or market value. The underlying investments in this asset class include long duration fixed income investments primarily in U.S. treasuries, U.S. government agencies, municipal securities, mortgage-backed securities, asset-backed securities, as well as U.S. and international investment-grade corporate bonds. OPPORTUNISTIC. These are non-published NAV assets. The non-published NAV assets consist of commingled trusts where NAV is not published but the investment can be readily disposed of at NAV or market value. The underlying investments in this asset class include real estate investment trust equities, high yield bonds, floating rate debt, emerging market debt and a commodity index pool. CASH AND CASH EQUIVALENTS. These are Level 1 and non-published NAV assets. The Level 1 assets consist of cash in U.S. dollars, which can be readily disposed of at face value. The non-published NAV assets represent mutual funds without published NAV's but the investment can be readily disposed of at the NAV. The mutual funds are valued at the NAV of the shares held by the plan at the valuation date. The preceding valuation methods may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Although we believe these valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain investments could result in a different fair value measurement at the reporting date. Investment securities are exposed to various financial risks including interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of NW Natural's investment securities will occur in the near term and such changes could materially affect NW Natural's investment account balances and the amounts reported as plan assets available for benefit payments. 116 The following tables present the fair value of NW Natural's Pension Plan assets, including outstanding receivables and liabilities, of NW Natural's retirement trust fund In thousands December 31, 2022 Investments Level 1 Level 2 Level 3 Non-Published NAV (1) Total US equity $ — $ — $ — $ 68,729 $ 68,729 International / Global equity 26,677 — — 63,827 90,504 Liability hedging — — — 94,823 94,823 Opportunistic — — — 23,903 23,903 Cash and cash equivalents — — — 2,345 2,345 Total investments $ 26,677 $ — $ — $ 253,627 $ 280,304 December 31, 2021 Investments Level 1 Level 2 Level 3 Non-Published NAV (1) Total US equity $ — $ — $ — $ 121,090 $ 121,090 International / Global equity 35,456 — — 88,078 123,534 Liability hedging — — — 118,464 118,464 Opportunistic — — — 33,808 33,808 Cash and cash equivalents — — — 2,321 2,321 Total investments $ 35,456 $ — $ — $ 363,761 $ 399,217 December 31, 2022 2021 Receivables: Accrued interest and dividend income $ 7,703 $ — Total receivables 7,703 — Liabilities: Due to broker for securities purchased ( 7,701 ) — Total investment in retirement trust $ 280,306 $ 399,217 (1) The fair value for these investments is determined using Net Asset Value per share (NAV) as of December 31, as a practical expedient, and therefore they are not classified within the fair value hierarchy. These investments primarily consist of institutional investment products, for which the NAV is generally not publicly available. 11. INCOME TAX The following table provides a reconciliation between income taxes calculated at the statutory federal tax rate and the provision for income taxes reflected in the NW Holdings and NW Natural statements of comprehensive income or loss for December 31: NW Holdings NW Natural Dollars in thousands 2022 2021 2020 2022 2021 2020 Income taxes at federal statutory rate $ 24,241 $ 22,275 $ 19,185 $ 25,746 $ 22,996 $ 19,248 Increase (decrease): State income tax, net of federal 10,139 9,962 6,389 10,504 10,150 6,385 Differences required to be flowed-through by regulatory commissions ( 4,748 ) ( 4,655 ) ( 3,960 ) ( 4,746 ) ( 4,738 ) ( 3,960 ) Other, net ( 502 ) ( 176 ) ( 532 ) ( 468 ) ( 75 ) ( 578 ) Total provision for income taxes $ 29,130 $ 27,406 $ 21,082 $ 31,036 $ 28,333 $ 21,095 Effective tax rate 25.2 % 25.8 % 23.1 % 25.3 % 25.9 % 23.0 % The NW Holdings and NW Natural effective income tax rates for 2022 compared to 2021 changed primarily due to lower income tax amortization in 2022 of the 2020 Oregon Corporate Activity Tax (CAT), which was subject to regulatory deferral when it became effective on January 1, 2020 and then amortized in income tax expense as recovery began in late 2020, 2021, and 2022. The NW Holdings and NW Natural effective income tax rates for 2021 compared to 2020 changed primarily due to Oregon CAT, the majority of which is incurred because of Oregon regulated operations and for which rate recovery began on November 1, 2020. 117 The provision for current and deferred income taxes consists of the following at December 31: NW Holdings NW Natural In thousands 2022 2021 2020 2022 2021 2020 Current Federal $ 5,172 $ 6,508 $ 10,106 $ 7,442 $ 7,570 $ 11,092 State 6,551 6,281 5,971 7,307 7,540 5,357 Total current income taxes 11,723 12,789 16,077 14,749 15,110 16,449 Deferred Federal 11,124 8,289 2,888 10,298 7,915 1,921 State 6,283 6,328 2,117 5,989 5,308 2,725 Total deferred income taxes 17,407 14,617 5,005 16,287 13,223 4,646 Income tax provision $ 29,130 $ 27,406 $ 21,082 $ 31,036 $ 28,333 $ 21,095 The following table summarizes the tax effect of significant items comprising NW Holdings and NW Natural's deferred income tax balances recorded at December 31: NW Holdings NW Natural In thousands 2022 2021 2022 2021 Deferred tax liabilities: Plant and property $ 326,326 $ 310,471 $ 320,121 $ 303,928 Leases receivable 36,873 38,123 36,873 38,123 Pension and postretirement obligations 22,973 23,097 22,973 23,097 Income tax regulatory asset 13,152 14,818 13,152 14,818 Lease right of use assets 21,272 21,362 21,084 21,350 Other 17,050 7,793 17,314 8,003 Total deferred income tax liabilities $ 437,646 $ 415,664 $ 431,517 $ 409,319 Deferred income tax assets: Income tax regulatory liability $ 48,270 $ 50,447 $ 48,018 $ 50,193 Lease liabilities 21,306 21,376 21,102 21,365 Other intangible assets 1,947 3,484 — — Net operating losses and credits carried forward 101 126 44 44 Total deferred income tax assets $ 71,624 $ 75,433 $ 69,164 $ 71,602 Total net deferred income tax liabilities $ 366,022 $ 340,231 $ 362,353 $ 337,717 At December 31, 2022 and 2021, regulatory income tax assets of $ 10.2 million and $ 12.4 million, respectively, were recorded by NW Natural, a portion of which is recorded in current assets. These regulatory income tax assets primarily represent future rate recovery of deferred tax liabilities, resulting from differences in NGD plant financial statement and tax bases and NGD plant removal costs, which were previously flowed through for rate making purposes and to take into account the additional future taxes, which will be generated by that recovery. These deferred tax liabilities, and the associated regulatory income tax assets, are currently being recovered through customer rates. At December 31, 2022 and 2021, regulatory income tax assets of $ 2.9 million and $ 2.4 million, respectively, were recorded by NW Natural, representing future recovery of deferred tax liabilities resulting from the equity portion of AFUDC. At December 31, 2021, a regulatory income tax asset of $ 0.4 million was recorded by NW Natural, representing future recovery of Oregon CAT that was deferred between January 1, 2020 and October 31,2020. In October 2020, the OPUC issued an order providing for recovery of deferred Oregon CAT as well as CAT incurred prospectively beginning November 1, 2020. This asset was fully recovered as of December 31, 2022. At December 31, 2022 and 2021, deferred tax assets of $ 48.0 million and $ 50.2 million, respectively, were recorded by NW Natural representing the future income tax benefit associated with the excess deferred income tax regulatory liability recorded as a result of the lower federal corporate income tax rate provided for by the TCJA. At December 31, 2022 and 2021, regulatory liability balances representing the benefit of the change in deferred taxes as a result of the TCJA of $ 181.4 million and $ 189.6 million, respectively, were recorded by NW Natural. NW Holdings and NW Natural assess the available positive and negative evidence to estimate if sufficient taxable income will be generated to utilize their respective existing deferred tax assets. Based upon this assessment, NW Holdings and NW Natural determined that it is more likely than not that all of their respective deferred tax assets recorded as of December 31, 2022 will be realized. The Company estimates it has net operating loss (NOL) carryforwards of $ 0.1 million for federal taxes and $ 0.1 million for state taxes at December 31, 2022. The federal NOLs do not expire and we anticipate fully utilizing the state NOL carryforward 118 balances before they begin to expire in 2040. California alternative minimum tax (AMT) credits of $ 56 thousand are also available. The AMT credits do not expire. Uncertain tax positions are accounted for in accordance with accounting standards that require an assessment of the anticipated settlement outcome of material uncertain tax positions taken in a prior year, or planned to be taken in the current year. Until such positions are sustained, the uncertain tax benefits resulting from such positions would not be recognized. No reserves for uncertain tax positions were recorded as of December 31, 2022, 2021, or 2020. The federal income tax returns for tax years 2018 and earlier are closed by statute. The IRS Compliance Assurance Process (CAP) examination of the 2019 and 2020 tax years have been completed. There were no material changes to these returns as filed. The 2021 and 2022 tax years are currently under IRS CAP examination. The 2023 CAP application has been filed. Under the CAP program, NW Holdings and NW Natural work with the IRS to identify and resolve material tax matters before the tax return is filed each year. As of December 31, 2022, income tax years 2018 through 2021 remain open for examination by the State of California. Income tax years 2019 through 2021 are open for examination by the States of Oregon, Idaho, and Texas. 12. PROPERTY, PLANT, AND EQUIPMENT The following table sets forth the major classifications of property, plant, and equipment and accumulated depreciation of continuing operations at December 31: In thousands 2022 2021 NW Natural: NGD plant in service $ 3,992,676 $ 3,721,939 NGD construction work in progress 78,897 135,398 Less: Accumulated depreciation 1,115,690 1,098,715 NGD plant, net 2,955,883 2,758,622 Other plant in service 70,368 69,332 Other construction work in progress 6,606 4,971 Less: Accumulated depreciation 21,541 20,646 Other plant, net 55,433 53,657 Total property, plant, and equipment $ 3,011,316 $ 2,812,279 Other (NW Holdings): Other plant in service $ 92,979 $ 57,184 Other construction work in progress 20,040 8,419 Less: Accumulated depreciation 9,935 6,512 Other plant, net 103,084 59,091 NW Holdings: Total property, plant, and equipment $ 3,114,400 $ 2,871,370 NW Natural: Capital expenditures in accrued liabilities $ 24,584 $ 37,537 NW Holdings: Capital expenditures in accrued liabilities $ 25,318 $ 38,333 Accumulated depreciation does not include the accumulated provision for asset removal costs of $ 467.7 million and $ 446.0 million at December 31, 2022 and 2021, respectively. These accrued asset removal costs are reflected on the balance sheet as regulatory liabilities. See Note 2. NW Holdings Other plant balances include long-lived assets associated with water and wastewater operations and non-regulated activities not held by NW Natural or its subsidiaries. NW Natural Other plant balances include non-utility gas storage assets at the Mist facility and other long-lived assets not related to NGD. 119 The weighted average depreciation rate for NGD assets was 3.0 % in 2022, 2021, and 2020. The weighted average depreciation rate for assets not related to NGD was 1.8 % in 2022, 2021, and 2020. 13. INVESTMENTS Investments include gas reserves, financial investments in life insurance policies, and equity method investments. The following table summarizes other investments at December 31: NW Holdings NW Natural In thousands 2022 2021 2022 2021 Investments in life insurance policies $ 49,358 $ 48,178 $ 49,358 $ 48,178 Investments in gas reserves, non-current 22,970 26,608 22,970 26,608 Investments in unconsolidated affiliates 23,376 14,492 7,782 — Total other investments $ 95,704 $ 89,278 $ 80,110 $ 74,786 Investment in Life Insurance Policies NW Natural has invested in key person life insurance contracts to provide an indirect funding vehicle for certain long-term employee and director benefit plan liabilities. The amount in the above table is reported at cash surrender value, net of policy loans. NW Natural Gas Reserves NW Natural has invested $ 188 million through the gas reserves program in the Jonah Field located in Wyoming as of December 31, 2022. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits of $ 5.2 million and $ 6.9 million, which are recorded as liabilities in the December 31, 2022 and 2021 consolidated balance sheets, respectively. NW Natural's investment is included in NW Holdings' and NW Natural's consolidated balance sheets under other current assets and other investments (non-current portion) with the maximum loss exposure limited to the investment balance. The amount of gas reserves included in other current assets was $ 3.4 million and $ 5.4 million as of December 31, 2022 and 2021, respectively. The investment in gas reserves provides long-term price protection and acted to hedge the cost of gas for approximately 3 % and 4 % of NGD gas supplies for the years ended December 31, 2022 and 2021, respectively. Investments in Unconsolidated Affiliates In December 2021, NW Natural Water purchased a 37.3 % ownership stake in Avion Water Company, Inc. (Avion Water), an investor-owned water utility for $ 14.5 million. In July 2022, NW Natural Water increased its ownership stake in Avion Water to 40.3 % for an additional $ 1.0 million. Avion Water operates in Bend, Oregon and the surrounding communities, serving approximately 15,000 customer connections and employing 35 people. The carrying value of the equity method investment is $ 9.4 million higher than the underlying equity in the net assets of the investee at December 31, 2022 due to equity method goodwill. Equity in earnings (loss) of Avion Water is included in other income (expense), net. On August 6, 2020, NWN Energy completed the sale of 100 % of its interest in Trail West Holdings, LLC (TWH) to an unrelated third party for a purchase price of $ 14.0 million, $ 7.0 million of which was paid upon closing the transaction, and $ 7.0 million of which was paid upon the one-year anniversary of the close date. The completion of the sale resulted in an after-tax gain of approximately $ 0.5 million for the year ended December 31, 2020. TWH was a variable interest entity reported under equity method accounting through its sale. The investment in TWH did not meet the criteria to be classified as held for sale or discontinued operations. In 2020, NW Natural began a partnership with BioCarbN to invest in up to four separate RNG development projects that are designed to access biogas derived from water treatment at Tyson Foods’ processing plants, subject to approval by all parties. During the construction phase of the projects, NW Natural determined it is the primary beneficiary and fully consolidates each entity. In 2022, commissioning of the first project, Lexington Renewable Energy LLC (Lexington), was completed and NW Natural determined it was no longer the primary beneficiary and deconsolidated the variable interest entity and recorded the investment in Lexington as an equity method investment. NW Natural accounts for its interest in Lexington using the equity method of accounting because NW Natural does not control but has the ability to exercise significant influence over Lexington's operations after commissioning. There was no gain or loss recognized upon deconsolidation. NW Natural determined the fair value of the investment approximated the carrying value which was primarily comprised of cash and property, plant and equipment. As of December 31, 2022, NW Natural had an investment balance in Lexington of $ 7.8 million. Equity in earnings (loss) of Lexington is included in cost of gas. 120 14. BUSINESS COMBINATIONS 2022 Business Combinations Far West Water & Sewer, Inc. On October 5, 2022, NWN Water completed the acquisition of the water and wastewater utilities of Far West Water & Sewer, Inc. (Far West), which has a combined approximately 25,000 connections in Yuma, Arizona. The acquisition-date fair value of the total consideration transferred, after closing adjustments, was approximately $ 97.0 million, of which $ 88.4 million was cash consideration transferred at closing, $ 8.1 million was contingent consideration, and $ 0.5 million was deferred consideration. The contingent consideration is an earnout payment in an amount equal to the product of (i) the amount, if any, by which the average annual System Operating Revenue for the 2026, 2027, and 2028 years exceeds $ 13.0 million (ii) multiplied by 4 but shall not exceed $ 12.0 million. As of the acquisition date, the contingent consideration had a fair value of $ 8.1 million and was included in other non-current liabilities. The fair value as of the acquisition date was determined using a scenario-based technique using management's best estimate of forecast revenue for the years 2026, 2027, and 2028 discounted to present value. The inputs to determine the fair value of the contingent consideration include estimated future revenue and a risk-adjusted discount rate. The fair value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy per ASC Topic 820. The Far West acquisition met the criteria of a business combination, and as such a preliminary allocation of the consideration to the acquired net assets based on their estimated fair value as of the acquisition date was performed. In accordance with U.S. GAAP, the fair value determination involves management judgment in determining the significant estimates and assumptions used and was made using existing regulatory conditions for net assets associated with Far West. This allocation is considered preliminary as of December 31, 2022, as facts and circumstances that existed as of the acquisition date may be discovered as we continue to integrate Far West. As a result, subsequent adjustments to the preliminary valuation of tangible assets, contract assets and liabilities, tax positions, and goodwill may be required. Subsequent adjustments are not expected to be significant, and any such adjustments are expected to be completed within the one-year measurement period. The acquisition costs were expensed as incurred. Preliminary goodwill of $ 70.8 million was recognized from this acquisition. The goodwill recognized is attributable to Far West's regulated water utility service territory, experienced workforce, and the strategic benefits for both the water utility and wastewater services expected from growth in its service territory. No intangible assets aside from goodwill were recognized. The amount of goodwill that is expected to be deductible for income tax purposes is approximately $ 61.8 million The preliminary purchase price for the acquisition has been allocated to the net assets acquired as of the acquisition date and is as follows: In thousands December 31, 2022 Current assets $ 1,281 Property, plant and equipment 25,744 Goodwill 70,842 Non-current assets 684 Current liabilities ( 1,136 ) Non-current liabilities ( 9,011 ) Total net assets acquired $ 88,404 The amount of Far West revenues included in NW Holdings' consolidated statements of comprehensive income is $ 2.9 million for the year ended December 31, 2022. Earnings from Far West activities for the year ended December 31, 2022 were not material to the results of NW Holdings. Far West is referred to as Foothills Utilities following the closure of the acquisition. Other 2022 Business Combinations During the year ended December 31, 2022, NWN Water and its subsidiaries acquired the assets of six additional businesses qualifying as business combinations. The aggregate fair value of the preliminary consideration transferred for these acquisitions was $ 8.7 million, most of which was preliminarily allocated to property, plant and equipment and goodwill. These transactions align with NW Holdings' water and wastewater sector strategy as it continues to expand its water and wastewater service territories and included: • Belle Oaks Water and Sewer Co., Inc in Texas • Northwest Water Services, LLC in Washington • Aquarius Utilities, LLC in Washington • Valiant Idaho, LLC (The Idaho Club - Sewer) in Idaho • Caney Creek in Texas • Water Necessities, Inc. and Rural Water Co. in Texas 121 2021 Business Combinations During the year ended December 31, 2021, NWN Water and its subsidiaries completed four acquisitions qualifying as business combinations. The aggregate fair value of the consideration transferred for these acquisitions were not material and are not significant to NW Holdings' results of operations. 2020 Business Combinations During the year ended December 31, 2020, NWN Water and its subsidiaries completed two significant acquisitions qualifying as business combinations. The aggregate fair value of the total cash consideration transferred for these acquisitions was $ 38.1 million, most of which was allocated to property, plant and equipment and goodwill. These transactions align with NW Holdings' water sector strategy as it continues to expand its water services territories in the Pacific Northwest and beyond and included: • Suncadia Water Company, LLC and Suncadia Environmental Company, LLC which were acquired by NWN Water of Washington on January 31, 2020, and • T&W Water Service Company which was acquired by NWN Water of Texas on March 2, 2020. T&W Water Service Company is referred to as Blue Topaz Utilities following the closure of the acquisition. Other 2020 Business Combinations During the year ended December 31, 2020, NWN Water completed three additional acquisitions, comprised of four water systems and one wastewater system, which qualified as business combinations. The aggregate fair value of the consideration transferred for these acquisitions was approximately $ 1.5 million. These business combinations were not significant to NW Holdings' results of operations. Goodwill NW Holdings allocates goodwill to reporting units based on the expected benefit from the business combination. We perform an annual impairment assessment of goodwill at the reporting unit level, or more frequently if events and circumstances indicate that goodwill might be impaired. An impairment loss is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value. As a result of all acquisitions completed, total goodwill was $ 149.3 million as of December 31, 2022 and $ 70.6 million as of December 31, 2021. The increase in the goodwill balance was primarily due to additions associated with our acquisitions in the water and wastewater sector. All of our goodwill is related to water and wastewater acquisitions and is included in the other category for segment reporting purposes. The annual impairment assessment of goodwill occurs in the fourth quarter of each year. There have been no impairments recognized to date. 15. DERIVATIVE INSTRUMENTS NW Natural NW Natural enters into financial derivative contracts to hedge a portion of the NGD segment’s natural gas sales requirements. These contracts include swaps, options, and combinations of option contracts. These derivative financial instruments are primarily used to manage commodity price variability. A small portion of NW Natural's derivative hedging strategy involves foreign currency forward contracts. NW Natural enters into these financial derivatives, up to prescribed limits, primarily to hedge price variability related to term physical gas supply contracts as well as to hedge spot purchases of natural gas. The foreign currency forward contracts are used to hedge the fluctuation in foreign currency exchange rates for pipeline demand charges paid in Canadian dollars. In the normal course of business, NW Natural also enters into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of NGD customers. These contracts qualify for regulatory deferral accounting treatment. NW Natural also enters into exchange contracts related to the third-party asset management of its gas portfolio, some of which are derivatives that do not qualify for hedge accounting or only partial regulatory deferral, but are subject to NW Natural's regulatory sharing agreement. These derivatives are recognized in operating revenues, net of amounts shared with NGD customers. Notional Amounts The following table presents the absolute notional amounts related to open positions on NW Natural derivative instruments: At December 31, In thousands 2022 2021 Natural gas (in therms): Financial 852,435 618,815 Physical 463,254 431,628 Foreign exchange $ 7,617 $ 6,268 122 Purchased Gas Adjustment (PGA) Under the PGA mechanism in Oregon, derivatives entered into by NW Natural for the procurement or hedging of natural gas for future gas years generally receive regulatory deferral accounting treatment. In general, commodity hedging for the current gas year is completed prior to the start of the gas year, and hedge prices are reflected in the weighted-average cost of gas in the PGA filing. Rates and hedging approaches may vary between states due to different rate structures and mechanisms. In addition, as required with the Washington PGA filing, NW Natural incorporated and began implementing risk-responsive hedging strategies for its Washington gas supplies. Hedge contracts entered into after the start of the PGA period are subject to the PGA incentive sharing mechanism in Oregon. NW Natural entered the 2022-23 and 2021-22 gas years with forecasted sales volumes hedged at 67 % and 60 % in financial swap and option contracts, and 17 % and 19 % in physical gas supplies, respectively. Hedge contracts entered into prior to the PGA filing, in September 2022, were included in the PGA for the 2022-23 gas year. Hedge contracts entered into after the PGA filing, and related to subsequent gas years, may be included in future PGA filings and qualify for regulatory deferral. Unrealized and Realized Gain/Loss The following table reflects the income statement presentation for the unrealized gains and losses from NW Natural's derivative instruments: December 31, 2022 December 31, 2021 In thousands Natural gas commodity Foreign exchange Natural gas commodity Foreign exchange Benefit (expense) to cost of gas $ 119,935 $ ( 165 ) $ 36,539 $ ( 26 ) Operating revenues (expense) — — ( 26 ) — Amounts deferred to regulatory accounts on balance sheet ( 119,935 ) 165 ( 36,517 ) 26 Total gain (loss) in pre-tax earnings $ — $ — $ ( 4 ) $ — Unrealized Gain/Loss Outstanding derivative instruments related to regulated NGD operations are deferred in accordance with regulatory accounting standards. The cost of foreign currency forward and natural gas derivative contracts are recognized immediately in the cost of gas; however, costs above or below the amount embedded in the current year PGA are subject to a regulatory deferral tariff and therefore, are recorded as a regulatory asset or liability. Realized Gain/Loss NW Natural realized net gains of $ 107.8 million and $ 50.9 million for the years ended December 31, 2022 and 2021, respectively, from the settlement of natural gas financial derivative contracts. Realized gains and losses offset the higher or lower cost of gas purchased, resulting in no incremental amounts to collect or refund to customers. Credit Risk Management of Financial Derivatives Instruments No collateral was posted with or by NW Natural counterparties as of December 31, 2022 or 2021. NW Natural attempts to minimize the potential exposure to collateral calls by diversifying counterparties and using credit limits to manage liquidity risk. Counterparties generally allow a certain credit limit threshold before requiring NW Natural to post collateral against unrealized loss positions. Given NW Natural's credit ratings, counterparty credit limits and portfolio diversification, it was not subject to collateral calls in 2022 or 2021. The collateral call exposure is set forth under credit support agreements, which generally contain credit limits. NW Natural could also be subject to collateral call exposure where it has agreed to provide adequate assurance, which is not specific as to the amount of credit limit allowed, but could potentially require additional collateral posting by NW Natural in the event of a material adverse change. NW Natural's financial derivative instruments are subject to master netting arrangements; however, they are presented on a gross basis in the consolidated balance sheets. NW Natural and its counterparties have the ability to set-off obligations to each other under specified circumstances. Such circumstances may include a defaulting party, a credit change due to a merger affecting either party, or any other termination event. If netted by counterparty, NW Natural's physical and financial derivative position would result in an asset of $ 153.3 million and a liability of $ 3.6 million as of December 31, 2022, and an asset of $ 51.8 million and a liability of $ 3.8 million as of December 31, 2021. NW Natural is exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps with financial counterparties. NW Natural utilizes master netting arrangements through International Swaps and Derivatives Association contracts to minimize this risk along with collateral support agreements with counterparties based on their credit ratings. Additionally, NW Natural uses counterparty, industry, sector and country diversification to minimize credit risk. In certain cases, NW Natural may require counterparties to post collateral, guarantees, or letters of credit to maintain its minimum credit requirement standards. 123 NW Natural's financial derivatives policy requires counterparties to have an investment-grade credit rating at the time the derivative instrument is entered into, and specifies limits on the contract amount and duration based on each counterparty’s credit rating. NW Natural does not speculate in derivatives. Derivatives are used to reduce NW Natural's net market risk and hedge exposure above risk tolerance limits. It is required that increases in market risk created by the use of derivatives is offset by the exposures they modify. We actively monitor NW Natural's derivative credit exposure and place counterparties on hold for trading purposes or require other forms of credit assurance, such as letters of credit, cash collateral, or guarantees as circumstances warrant. The ongoing assessment of counterparty credit risk includes consideration of credit ratings, credit default swap spreads, bond market credit spreads, financial condition, government actions, and market news. A Monte Carlo simulation model is used to estimate the change in credit and liquidity risk from the volatility of natural gas prices. The results of the model are used to establish trading limits. NW Natural's outstanding financial derivatives at December 31, 2022 mature by November 1, 2025. We could become materially exposed to credit risk with one or more of our counterparties if natural gas prices experience a significant increase. If a counterparty were to become insolvent or fail to perform on its obligations, we could suffer a material loss; however, we would expect such a loss to be eligible for regulatory deferral and rate recovery, subject to a prudence review. All of our existing counterparties currently have investment-grade credit ratings. Fair Value In accordance with fair value accounting, NW Natural includes non-performance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of NW Natural counterparties when in an unrealized gain position, or on NW Natural's own credit spread when it is in an unrealized loss position. The inputs in our valuation models include natural gas futures, volatility, credit default swap spreads, and interest rates. Additionally, the assessment of non-performance risk is generally derived from the credit default swap market and from bond market credit spreads. The impact of the credit risk adjustments for all financial derivatives outstanding was immaterial to the fair value calculation at December 31, 2022. As of December 31, 2022 and 2021, the net fair value was an asset of $ 149.7 million and $ 48.0 million, respectively, using significant other observable, or Level 2, inputs. No Level 3 inputs were used in our derivative valuations during the years ended December 31, 2022 and 2021. NW Holdings NW Holdings and NWN Water entered into interest rate swap agreements with major financial institutions that effectively convert variable-rate debt to a fixed rate. Interest payments made between the effective date and expiration date are hedged by the swap agreements. The notional amount, effective date, expiration date and rate of the swap agreements are shown in the table below: In millions Notional Amount Effective Date Expiration Date Fixed Rate NW Holdings $ 100.0 1/17/2023 3/15/2024 4.7 % NWN Water $ 55.0 1/19/2023 6/10/2026 3.8 % Unrealized gains and losses related to these interest rate swap agreements are recorded in AOCI on the consolidated balance sheet and totaled $ 129 thousand, net of tax, as of December 31, 2022. There were no amounts reclassified from AOCI to net income during the year ended December 31, 2022. 16. COMMITMENTS AND CONTINGENCIES Gas Purchase and Pipeline Capacity Purchase and Release Commitments 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. In November 2021, NW Natural and a subsidiary of Archaea Energy entered into a long-term RNG purchase and sale agreement. Under the agreement, NW Natural committed to purchase the environmental attributes generated by Archaea related to up to ten million therms of RNG annually from its portfolio of RNG production facilities for a fixed fee for a period of 21 years. The agreement commenced in 2022, with the full annual quantity beginning in 2025. 124 The aggregate amounts of these agreements at NW Natural were as follows at December 31, 2022: In thousands Gas Purchase Agreements (1) Pipeline Capacity Purchase Agreements Pipeline Capacity Release Agreements 2023 $ 400,370 $ 81,691 $ 8,154 2024 6,376 77,327 7,474 2025 6,426 78,493 3,397 2026 12,003 66,782 — 2027 11,330 66,906 — Thereafter 189,050 432,464 — Total 625,555 803,663 19,025 Less: Amount representing interest 86,250 200,243 989 Total at present value $ 539,305 $ 603,420 $ 18,036 (1) Gas purchase agreements include environmental attributes of RNG. Total fixed charges under capacity purchase agreements were $ 90.2 million for 2022, $ 82.9 million for 2021, and $ 81.8 million for 2020, of which $ 8.3 million, $ 7.7 million, and $ 4.8 million, respectively, related to capacity releases. In addition, per-unit charges are required to be paid based on the actual quantities shipped under the agreements. In certain take-or-pay purchase commitments, annual deficiencies may be offset by prepayments subject to recovery over a longer term if future purchases exceed the minimum annual requirements. Leases Refer to Note 7 for a discussion of lease commitments and contingencies. Environmental Matters Refer to Note 17 for a discussion of environmental commitments and contingencies. 17. ENVIRONMENTAL MATTERS NW Natural owns, or previously owned, properties that may require environmental remediation or action. The range of loss for environmental liabilities is estimated based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites, and an assessment of the probable level of involvement and financial condition of other potentially responsible parties (PRPs). When amounts are prudently expended related to site remediation of those sites described herein, NW Natural has recovery mechanisms in place to collect 96.7 % of remediation costs allocable to Oregon customers and 3.3 % of costs allocable to Washington customers. These sites are subject to the remediation process prescribed by the Environmental Protection Agency (EPA) and the Oregon Department of Environmental Quality (ODEQ). The process begins with a remedial investigation (RI) to determine the nature and extent of contamination and then a risk assessment (RA) to establish whether the contamination at the site poses unacceptable risks to humans and the environment. Next, a feasibility study (FS) or an engineering evaluation/cost analysis (EE/CA) evaluates various remedial alternatives. It is at this point in the process when NW Natural is able to estimate a range of remediation costs and record a reasonable potential remediation liability, or make an adjustment to the existing liability. From this study, the regulatory agency selects a remedy and issues a Record of Decision (ROD). After a ROD is issued, NW Natural would seek to negotiate a consent decree or consent judgment for designing and implementing the remedy. NW Natural would have the ability to further refine estimates of remediation liabilities at that time. Remediation may include treatment of contaminated media such as sediment, soil and groundwater, removal and disposal of media, institutional controls such as legal restrictions on future property use, or natural recovery. Following construction of the remedy, the EPA and ODEQ also have requirements for ongoing maintenance, monitoring and other post-remediation care that may continue for many years. Where appropriate and reasonably known, NW Natural will provide for these costs in the remediation liabilities described below. Due to the numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of several site investigations, in some cases, NW Natural may not be able to reasonably estimate the high end of the range of possible loss. In those cases, the nature of the possible loss has been disclosed, as has the fact that the high end of the range cannot be reasonably estimated where a range of potential loss is available. Unless there is an estimate within the range of possible losses that is more likely than other cost estimates within that range, NW Natural records the liability at the low end of this range. It is likely changes in these estimates and ranges will occur throughout the remediation process for each of these sites due to the continued evaluation and clarification concerning responsibility, the complexity of environmental laws and regulations and the determination by regulators of remediation alternatives. In addition to remediation costs, NW Natural could also be subject to 125 Natural Resource Damages (NRD) claims. NW Natural will assess the likelihood and probability of each claim and recognize a liability if deemed appropriate. Refer to " Other Portland Harbor " below. Environmental Sites The following table summarizes information regarding liabilities related to environmental sites, which are recorded in other current liabilities and other noncurrent liabilities in NW Natural's balance sheet at December 31: Current Liabilities Non-Current Liabilities In thousands 2022 2021 2022 2021 Portland Harbor site: Gasco/Siltronic Sediments $ 9,744 $ 7,582 $ 42,120 $ 42,076 Other Portland Harbor 2,634 2,592 11,270 9,570 Gasco/Siltronic Upland site 16,067 15,711 35,457 36,215 Front Street site 457 1,100 879 811 Oregon Steel Mills — — 179 179 Total $ 28,902 $ 26,985 $ 89,905 $ 88,851 Portland Harbor Site The Portland Harbor is an EPA listed Superfund site that is approximately 10 miles long on the Willamette River and is adjacent to NW Natural's Gasco uplands site. NW Natural is one of over one hundred PRPs, each jointly and severally liable, at the Superfund site. In January 2017, the EPA issued its Record of Decision, which selects the remedy for the clean-up of the Portland Harbor site (Portland Harbor ROD). The Portland Harbor ROD estimates the present value total cost at approximately $ 1.05 billion with an accuracy between - 30 % and + 50 % of actual costs. NW Natural's potential liability is a portion of the costs of the remedy for the entire Portland Harbor Superfund site. The cost of that remedy is expected to be allocated among more than one hundred PRPs. NW Natural is participating in a non-binding allocation process with other PRPs in an effort to resolve its potential liability. The Portland Harbor ROD does not provide any additional clarification around allocation of costs among PRPs; accordingly, NW Natural has not modified any of the recorded liabilities at this time as a result of the issuance of the Portland Harbor ROD. NW Natural manages its liability related to the Superfund site as two distinct remediation projects, the Gasco Sediments Site and Other Portland Harbor projects. GASCO SEDIMENTS. In 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with the EPA to evaluate and design specific remedies for sediments adjacent to the Gasco uplands and Siltronic uplands sites. NW Natural submitted a draft EE/CA to the EPA in May 2012 to provide the estimated cost of potential remedial alternatives for this site. In March 2020, NW Natural and the EPA amended the Administrative Order on Consent to include additional remedial design activities downstream of the Gasco sediments site and in the navigation channel. Siltronic Corporation is not a party to the amended order. In the second quarter of 2021, NW Natural began preliminary design discussions with the EPA for the Gasco sediments site. These preliminary design discussions did not include a cost estimate for cleanup. No design alternatives are more likely than the EE/CA alternatives at this time, and NW Natural expects further design discussion and iteration with the EPA. The estimated costs for the various sediment remedy alternatives in the draft EE/CA for the additional studies and design work needed before the cleanup can occur, and for regulatory oversight throughout the cleanup range from $ 51.9 million to $ 350 million. NW Natural has recorded a liability of $ 51.9 million for the Gasco sediment clean-up, which reflects the low end of the range. At this time, we believe sediments at the Gasco sediments site represent the largest portion of NW Natural's liability related to the Portland Harbor site discussed above. OTHER PORTLAND HARBOR. While we believe liabilities associated with the Gasco sediments site represent NW Natural's largest exposure, there are other potential exposures associated with the Portland Harbor ROD, including NRD costs and harborwide remedial design and cleanup costs (including downstream petroleum contamination), for which allocations among the PRPs have not yet been determined. NW Natural and other parties have signed a cooperative agreement with the Portland Harbor Natural Resource Trustee council to participate in a phased NRD assessment to estimate liabilities to support an early restoration-based settlement of NRD claims. One member of this Trustee council, the Yakama Nation, withdrew from the council in 2009, and in 2017, filed suit against NW Natural and 29 other parties seeking remedial costs and NRD assessment costs associated with the Portland Harbor site, set forth in the complaint. The complaint seeks recovery of alleged costs totaling $ 0.3 million in connection with the selection of a remedial action for the Portland Harbor site as well as declaratory judgment for unspecified future remedial action costs and for costs to assess the injury, loss or destruction of natural resources resulting from the release of hazardous substances at and from the Portland Harbor site. The Yakama Nation has filed two amended complaints addressing certain pleading defects and 126 dismissing the State of Oregon. On the motion of NW Natural and certain other defendants the federal court has stayed the case pending the outcome of the non-binding allocation proceeding discussed above. NW Natural has recorded a liability for NRD claims which is at the low end of the range of the potential liability; the high end of the range cannot be reasonably estimated at this time. The NRD liability is not included in the aforementioned range of costs provided in the Portland Harbor ROD. Gasco Uplands Site A predecessor of NW Natural, Portland Gas and Coke Company, owned a former gas manufacturing plant that was closed in 1958 (Gasco site) and is adjacent to the Portland Harbor site described above. The Gasco site has been under investigation by NW Natural for environmental contamination under the ODEQ Voluntary Cleanup Program (VCP). It is not included in the range of remedial costs for the Portland Harbor site noted above. The Gasco site is managed in two parts, the uplands portion and the groundwater source control action. NW Natural submitted a revised Remedial Investigation Report for the uplands to ODEQ in May 2007. In March 2015, ODEQ approved the Risk Assessment (RA) for this site, enabling commencement of work on the FS in 2016. NW Natural has recognized a liability for the remediation of the uplands portion of the site which is at the low end of the range of potential liability; the high end of the range cannot be reasonably estimated at this time. In October 2016, ODEQ and NW Natural agreed to amend their VCP agreement for the Gasco uplands to incorporate a portion of the Siltronic property formerly owned by Portland Gas & Coke between 1939 and 1960 into the Gasco RA and FS. Previously, NW Natural was conducting an investigation of manufactured gas plant constituents on the entire Siltronic uplands for ODEQ. Siltronic will be working with ODEQ directly on environmental impacts to the remainder of its property. In September 2013, NW Natural completed construction of a groundwater source control system, including a water treatment station, at the Gasco site. NW Natural has estimated the cost associated with the ongoing operation of the system and has recognized a liability which is at the low end of the range of potential cost. NW Natural cannot estimate the high end of the range at this time due to the uncertainty associated with the duration of running the water treatment station, which is highly dependent on the remedy determined for both the upland portion as well as the final remedy for the Gasco sediments site. Other Sites In addition to those sites above, NW Natural has environmental exposures at three other sites: Central Service Center, Front Street and Oregon Steel Mills. NW Natural may have exposure at other sites that have not been identified at this time. Due to the uncertainty of the design of remediation, regulation, timing of the remediation and in the case of the Oregon Steel Mills site, pending litigation, liabilities for each of these sites have been recognized at their respective low end of the range of potential liability; the high end of the range could not be reasonably estimated at this time. FRONT STREET SITE. The Front Street site was the former location of a gas manufacturing plant NW Natural operated (the former Portland Gas Manufacturing site, or PGM). At ODEQ’s request, NW Natural conducted a sediment and source control investigation and provided findings to ODEQ. In December 2015, an FS on the former Portland Gas Manufacturing site was completed. In July 2017, ODEQ issued the PGM ROD. The ROD specifies the selected remedy, which requires a combination of dredging, capping, treatment, and natural recovery. In addition, the selected remedy also requires institutional controls and long-term inspection and maintenance. Construction of the remedy began in July 2020 and was completed in October 2020. The first year of post-construction monitoring was completed in 2021 and demonstrated that the cap was intact and performing as designed. NW Natural has recognized an additional liability of $ 1.3 million for costs associated with the discovery during construction of World War II-era munitions, design costs, regulatory and permitting issues, and post-construction work. OREGON STEEL MILLS SITE. Refer to “Legal Proceedings,” below. Environmental Cost Deferral and Recovery 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 Natural. 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. 127 The following table presents information regarding the total regulatory asset deferred as of December 31: In thousands 2022 2021 Deferred costs and interest (1) $ 47,666 $ 45,122 Accrued site liabilities (2) 118,763 115,773 Insurance proceeds and interest ( 54,784 ) ( 59,564 ) Total regulatory asset deferral (1) $ 111,645 $ 101,331 Current regulatory assets (3) $ 7,392 $ 6,694 Long-term regulatory assets (3) $ 104,253 $ 94,636 (1) Includes pre-review and post-review deferred costs, amounts currently in amortization, and interest, net of amounts collected from customers. (2) Excludes 3.3 % of the Front Street site liability as the OPUC only allows recovery of 96.7 % of costs for those sites allocable to Oregon, including those that historically served only Oregon customers. Amounts excluded from regulatory assets were $ 43 thousand in 2022 and $ 62 thousand in 2021. (3) Environmental costs relate to specific sites approved for regulatory deferral by the OPUC and WUTC. In Oregon, NW Natural earns a carrying charge on cash amounts paid, whereas amounts accrued but not yet paid do not earn a carrying charge until expended. It also accrues a carrying charge on insurance proceeds for amounts owed to customers. In Washington, neither the cash paid nor insurance proceeds received accrue a carrying charge. Current environmental costs represent remediation costs management expects to collect from customers in the next 12 months. Amounts included in this estimate are still subject to a prudence and earnings test review by the OPUC and do not include the $ 5.0 million tariff rider. The amounts allocable to Oregon are recoverable through NGD rates, subject to an earnings test. See " Oregon SRRM " below. Oregon SRRM Collections From Oregon Customers Under the SRRM collection process, there are three types of deferred environmental remediation expense: • Pre-review - This class of costs represents remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediation expenses are recorded at NW Natural's authorized cost of capital. NW Natural anticipates the prudence review for annual costs and approval of the earnings test prescribed by the OPUC to occur by the third quarter of the following year. • Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yet included in amortization. NW Natural earns a carrying cost on these amounts at a rate equal to the five-year treasury rate plus 100 basis points. • Amortization - This class of costs represents amounts included in current customer rates for collection and is generally calculated as one-fifth of the post-review deferred balance. NW Natural earns a carrying cost equal to the amortization rate determined annually by the OPUC, which approximates a short-term borrowing rate. In addition to the collection amount noted above, an order issued by the OPUC provides for the annual collection of $ 5.0 million from Oregon customers through a tariff rider. As NW Natural collects amounts from customers, it recognizes these collections as revenue and separately amortizes an equal and offsetting amount of its deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expense section of the income statement. NW Natural received total environmental insurance proceeds of approximately $ 150 million as a result of settlements from litigation that was dismissed in July 2014. Under a 2015 OPUC order which established the SRRM, one-third of the Oregon allocated proceeds were applied to costs deferred through 2012 with the remaining two-thirds applied to costs at a rate of $ 5.0 million per year plus interest over the following 20 years. NW Natural accrues interest on the Oregon allocated insurance proceeds in the customer’s favor at a rate equal to the five-year treasury rate plus 100 basis points. As of December 31, 2022, NW Natural has applied $ 95.0 million of insurance proceeds to prudently incurred remediation costs allocated to Oregon. Environmental Earnings Test To the extent NW Natural earns at or below its authorized Return on Equity (ROE) as defined by the SRRM, remediation expenses and interest in excess of the $ 5.0 million tariff rider and $ 5.0 million insurance proceeds are recoverable through the SRRM. To the extent NW Natural earns more than its authorized ROE in a year, it is required to cover environmental expenses and interest on expenses greater than the $ 10.0 million with those earnings that exceed its authorized ROE. Washington ECRM Washington Deferral On October 21, 2019, the WUTC issued an order (WUTC Order) establishing the ECRM which allows for recovery of past deferred and future prudently incurred environmental remediation costs allocable to Washington customers through application of insurance proceeds and collections from customers. Environmental remediation expenses relating to sites that previously served both Oregon and Washington customers are allocated between states with Washington customers receiving 3.3 % percent of the costs and insurance proceeds. 128 In accordance with the WUTC Order, insurance proceeds were fully applied to costs incurred between December 2018 and June 2019 that were deemed prudent. Remaining insurance proceeds will be amortized over a 10.5 year period ending December 31, 2029. As of December 31, 2022 , approximately $ 3.9 million of proceeds have been applied to prudently incurred costs. On an annual basis, NW Natural files for a prudence determination and a request to amortize costs to the extent that remediation expenses exceed the insurance amortization. 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. Legal Proceedings NW Holdings is not currently party to any direct claims or litigation, though in the future it may be subject to claims and litigation arising in the ordinary course of business. NW Natural is subject to claims and litigation arising in the ordinary course of business, including the matters discussed above. Although the final outcome of any of these legal proceedings cannot be predicted with certainty, including the matter relating to the Oregon Steel Mills site referenced below, NW Natural and NW Holdings do not expect that the ultimate disposition of any of these matters will have a material effect on their financial condition, results of operations, or cash flows. See also Part II, Item 1, “Legal Proceedings". Oregon Steel Mills Site In 2004, NW Natural was served with a third-party complaint by the Port of Portland (the Port) in a Multnomah County Circuit Court case, Oregon Steel Mills, Inc. v. The Port of Portland. The Port alleges that in the 1940s and 1950s petroleum wastes generated by NW Natural's predecessor, Portland Gas & Coke Company, and 10 other third-party defendants, were disposed of in a waste oil disposal facility operated by the United States or Shaver Transportation Company on property then owned by the Port and now owned by Evraz Oregon Steel Mills. The complaint seeks contribution for unspecified past remedial action costs incurred by the Port regarding the former waste oil disposal facility as well as a declaratory judgment allocating liability for future remedial action costs. No date has been set for trial. In August 2017, the case was stayed pending the outcome of the Portland Harbor allocation process or other mediation. Although the final outcome of this proceeding cannot be predicted with certainty, NW Natural and NW Holdings do not expect the ultimate disposition of this matter will have a material effect on NW Natural's or NW Holdings' financial condition, results of operations, or cash flows. For additional information regarding other commitments and contingencies, see Note 16. 18. DISCONTINUED OPERATIONS NW Holdings On June 20, 2018, NWN Gas Storage, then a wholly-owned subsidiary of NW Natural, entered into a Purchase and Sale Agreement (the Agreement) that provided for the sale by NWN Gas Storage of all of the membership interests in Gill Ranch. Gill Ranch owns a 75 % interest in the natural gas storage facility located near Fresno, California known as the Gill Ranch Gas Storage Facility. On December 4, 2020, NWN Gas Storage closed the sale of all of the membership interests in Gill Ranch and received payment of the initial cash purchase price of $ 13.5 million less the $ 1.0 million deposit previously paid. Furthermore, additional payments to NWN Gas Storage may be made subject to a maximum amount of $ 15.0 million in the aggregate (subject to a working capital adjustment) based on the economic performance of Gill Ranch for each full gas storage year (April 1 of one year through March 31 of the following year) occurring after the closing and the remaining portion of the 2020-2021 gas storage year and will continue until such time as the maximum amount has been paid. The fair value of this arrangement at the closing date was zero based on a discounted cash flow forecast. 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 for the year ended December 31, 2020. 129 The following table presents the operating results of Gill Ranch and is presented net of tax on NW Holdings' consolidated statements of comprehensive income: NW Holdings Discontinued Operations In thousands 2020 Revenues $ 10,193 Expenses Operations and maintenance 7,931 General taxes 198 Depreciation 391 Other expenses and interest 848 Total expenses 9,368 Income from discontinued operations 825 Gain on sale of discontinued operations 8,027 Income from discontinued operations before income tax 8,852 Income tax expense (1) 2,344 Income from discontinued operations, net of tax $ 6,508 (1) Includes income tax expense of $ 2.1 million related to the sale of Gill Ranch for the year ended December 31, 2020. As a result of the disposition of the membership interests of Gill Ranch, there were no assets or liabilities classified as held for sale at December 31, 2020. 19. SUBSEQUENT EVENT On January 6, 2023, NW Natural issued and sold $ 100.0 million aggregate principal amount of its FMBs, 5.43 % Series due January 6, 2053 (the Bonds), to certain institutional investors pursuant to a Bond Purchase Agreement dated December 13, 2022. The Bonds bear interest at the rate of 5.43 % per annum, payable semi-annually on January 6 and July 6 of each year, commencing July 6, 2023, and will mature on January 6, 2053. The Bonds will be subject to redemption prior to maturity at the option of NW Natural, in whole or in part, (i) at any time prior to July 6, 2052, at a redemption price equal to 100 % of the principal amount thereof plus a “make-whole” premium and accrued and unpaid interest thereon to the date of redemption, and (ii) at any time on and after July 6, 2052, at 100 % of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption. The Bond Purchase Agreement also provides for the issuance of $ 80.0 million aggregate principal amount of NW Natural’s FMBs, 5.18 % Series due 2034 ( 5.18 % Bonds) and $ 50.0 million aggregate principal amount of NW Natural’s FMBs, 5.23 % Series due 2038 ( 5.23 % Bonds). The 5.18 % Bonds and the 5.23 % Bonds are expected to be issued on or about August 4, 2023. 130 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL HOLDING COMPANY CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (PARENT COMPANY ONLY) Year Ended December 31, In thousands 2022 2021 2020 Operating expenses: Operations and maintenance $ 3,828 $ 4,837 $ 771 Total operating expenses 3,828 4,837 771 Loss from operations ( 3,828 ) ( 4,837 ) ( 771 ) Earnings from investment in subsidiaries, net of tax 92,727 83,072 78,450 Other income (expense), net 60 ( 143 ) 57 Interest expense, net 4,967 982 1,557 Income before income taxes 83,992 77,110 76,179 Income tax benefit ( 2,311 ) ( 1,556 ) ( 602 ) Net income 86,303 78,666 76,781 Other comprehensive income (loss) from subsidiaries, net of tax 5,108 1,498 ( 2,169 ) Unrealized gain on interest rate swap, net of tax 11 — — Comprehensive income $ 91,422 $ 80,164 $ 74,612 See Notes to Condensed Financial Statements 131 NORTHWEST NATURAL HOLDING COMPANY CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) As of December 31, In thousands 2022 2021 Assets: Current assets: Cash and cash equivalents $ 7,280 $ 265 Receivables from affiliates 9,967 2,180 Other current assets 2,895 11,348 Total current assets 20,142 13,793 Non-current assets: Investments in subsidiaries 1,357,599 1,080,949 Other investments 14 42 Deferred tax assets 520 383 Other non-current assets 486 613 Total non-current assets 1,358,619 1,081,987 Total assets $ 1,378,761 $ 1,095,780 Liabilities and equity: Current liabilities: Short-term debt $ 88,000 $ 144,000 Accounts payable 402 286 Payables to affiliates 14,665 16,105 Other current liabilities 295 243 Total current liabilities 103,362 160,634 Long-term debt 99,958 — Total equity 1,175,441 935,146 Total liabilities and equity $ 1,378,761 $ 1,095,780 See Notes to Condensed Financial Statements 132 NORTHWEST NATURAL HOLDING COMPANY CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) Year Ended December 31, In thousands 2022 2021 2020 Operating activities: Net income $ 86,303 $ 78,666 $ 76,781 Adjustments to reconcile net income to cash used in operations: Equity in earnings of subsidiaries, net of tax ( 92,727 ) ( 83,072 ) ( 78,450 ) Cash dividends received from subsidiaries 62,710 56,057 55,387 Deferred income taxes ( 141 ) ( 212 ) 20 Other 142 119 65 Changes in assets and liabilities: Receivables from affiliates ( 7,787 ) 12,558 ( 12,788 ) Income and other taxes 8,161 1,299 ( 7,451 ) Accounts payable ( 2,499 ) 3,342 8,809 Interest accrued 156 57 77 Other, net ( 211 ) ( 313 ) ( 364 ) Cash provided by operating activities 54,107 68,501 42,086 Investing activities: Contributions to subsidiaries ( 241,497 ) ( 142,405 ) ( 47,194 ) Return of capital from subsidiaries — 26,000 19,000 Cash used in investing activities ( 241,497 ) ( 116,405 ) ( 28,194 ) Financing activities: Proceeds from common stock issued, net 208,561 17,501 — Long-term debt issued 100,000 — — Changes in other short-term debt, net ( 56,000 ) 71,000 49,000 Cash dividend payments on common stock ( 62,771 ) ( 55,919 ) ( 55,420 ) Other 4,615 4,320 3,676 Cash provided by (used in) financing activities 194,405 36,902 ( 2,744 ) Increase (decrease) in cash and cash equivalents 7,015 ( 11,002 ) 11,148 Cash, cash equivalents and restricted cash, beginning of period 265 11,267 119 Cash, cash equivalents and restricted cash, end of period $ 7,280 $ 265 $ 11,267 See Notes to Condensed Financial Statements 133 NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION NW Holdings is an energy services holding company that conducts substantially all of its business operations through its subsidiaries, particularly NW Natural. These condensed financial statements and related footnotes have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X. These financial statements, in which NW Holdings' subsidiaries have been included using the equity method, should be read in conjunction with the consolidated financial statements and notes thereto of NW Holdings included in Item 8 of this Form 10-K. Equity earnings of subsidiaries including earnings from NW Natural were $ 92.7 million, $ 83.1 million, and $ 78.5 million for the years ended December 31, 2022, 2021, and 2020 respectively. There were $ 62.7 million , $ 82.1 million and $ 74.4 million of cash dividends paid to NW Holdings from wholly-owned subsidiaries for the years ended December 31, 2022, 2021 and 2020, respectively. Other Comprehensive Income (Loss) from Subsidiaries Correction During 2021, NW Holdings identified that activities related to other comprehensive income (loss) from subsidiaries had been excluded from the condensed statements of comprehensive income and condensed balance sheets. NW Holdings corrected the previously presented condensed balance sheet for the year ended December 31, 2020, and in doing so, decreased total equity by $ 3.6 million with a corresponding decrease in investment in subsidiaries. In addition, the condensed statement of comprehensive income for the year ended December 31, 2020 was corrected to include other comprehensive loss of $ 2.2 million. NW Holdings has evaluated the effect of the misstatement, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor require amendment of, any previously filed condensed financial statements. 2. DEBT For information concerning NW Holdings' debt obligations, see Note 9 to the consolidated financial statements included in Item 8 of this report. 134 NORTHWEST NATURAL HOLDING COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Deductions In thousands (year ended December 31) Balance at beginning of period Charged to costs and expenses Charged to other accounts Net write-offs Balance at end of period 2022 Reserves deducted in balance sheet from assets to which they apply: Allowance for uncollectible accounts $ 2,018 $ 1,081 $ 1,810 $ 1,613 $ 3,296 2021 Reserves deducted in balance sheet from assets to which they apply: Allowance for uncollectible accounts $ 3,219 $ 724 $ ( 219 ) $ 1,706 $ 2,018 2020 Reserves deducted in balance sheet from assets to which they apply: Allowance for uncollectible accounts $ 673 $ 890 $ 2,333 $ 677 $ 3,219 NORTHWEST NATURAL GAS COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Deductions In thousands (year ended December 31) Balance at beginning of period Charged to costs and expenses Charged to other accounts Net write-offs Balance at end of period 2022 Reserves deducted in balance sheet from assets to which they apply: Allowance for uncollectible accounts $ 1,962 $ 920 $ 1,810 $ 1,613 $ 3,079 2021 Reserves deducted in balance sheet from assets to which they apply: Allowance for uncollectible accounts $ 3,107 $ 780 $ ( 219 ) $ 1,706 $ 1,962 2020 Reserves deducted in balance sheet from assets to which they apply: Allowance for uncollectible accounts $ 672 $ 779 $ 2,333 $ 677 $ 3,107 135 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.