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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s assessment of NW Holdings' and NW Natural's financial condition, including the principal factors that affect results of operations. The discussion covers the years ended December 31, 2022, 2021, and 2020 and refers to the consolidated results of NW Holdings, the substantial majority of which consist of the operating results of NW Natural. When significant activity exists at NW Holdings that does not exist at NW Natural, additional disclosure has been provided. References in this discussion to "Notes" are to the Notes to the Consolidated Financial Statements in Item 8 of this report.

NW Natural's natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment also includes NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp, the NGD-portion of NW Natural's Mist storage facility in Oregon, and NW Natural RNG Holding Company, LLC. NW Natural RNG Holding Company, LLC holds an investment in Lexington Renewable Energy, LLC, which is accounted for under the equity method. Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; and NWN Water, which through itself or its subsidiaries, owns and continues to pursue investments in the water and wastewater sector. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries.

In addition, NW Holdings has reported discontinued operations results related to the sale of Gill Ranch Storage, LLC (Gill Ranch). NW Natural Gas Storage, LLC (NWN Gas Storage), an indirect wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement during the second quarter of 2018 that provided for the sale of all 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. The sale was completed on December 4, 2020. For more information, see "Results of Operations - Discontinued Operations" below.

NON-GAAP FINANCIAL MEASURES. In addition to presenting the results of operations and earnings amounts in total, certain financial measures are expressed in cents per share, which are non-GAAP financial measures. All references in this section to earnings per share (EPS) are on the basis of diluted shares. Such non-GAAP financial measures are used to analyze our financial performance because we believe they provide useful information to our investors and creditors in evaluating our financial condition and results of operations. Our non-GAAP financial measures should not be considered a substitute for, or superior to, measures calculated in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than how such measures are calculated in this report, limiting the usefulness of those measures for comparative purposes. A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is provided below.

Diluted EPS - NW Holdings - other(2) 0.20 0.32 0.22

Diluted EPS - Discontinued operations — — 0.21

(1) Total Diluted EPS is equal to the sum of Diluted EPS - NGD segment, Diluted EPS - NW Holdings – other, and Diluted EPS - Discontinued operations.

(2) Non-GAAP financial measure

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EXECUTIVE SUMMARY

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

•Added 8,600 natural gas customers in 2022 for an annual growth rate of 1.1% at December 31, 2022;

•Invested nearly $340 million in natural gas and water utility systems to support growth, enhance reliability and resiliency, and upgrade technology;

•Scored second in the West among large utilities in the 2022 J.D. Power Gas Utility Residential Customer Satisfaction Study, making this the 19th consecutive year customers have ranked NW Natural among the top two utilities;

•Completed construction on Lexington renewable natural gas (RNG) facility procuring environmental benefits for NW Natural customers;

•Received Oregon rate case order providing a revenue requirement increase of approximately $59.4 million, with new rates effective November 1, 2022;

•Closed seven water and wastewater utility transactions in 2022, including our largest water and wastewater acquisition to date in Yuma, Arizona, bringing our total connections to approximately 62,500; and

•Increased dividends for the 67th consecutive year to shareholders.

Key financial highlights for NW Holdings include:

In millions Amount Per Share Amount Per Share Amount Per Share

Income from discontinued operations, net of tax — — — — 6.5 0.21

Key financial highlights for NW Natural include:

In millions Amount Amount Amount

2022 COMPARED TO 2021. Consolidated net income increased $10.4 million at NW Natural primarily due to the following factors:

•$26.1 million increase in NGD segment margin driven by new rates in Oregon and Washington, customer growth, and amortization of deferred balances; and

•$12.3 million increase in other income, net primarily due to lower pension costs; partially offset by

•$16.0 million increase in operations and maintenance expenses due to higher contract labor, amortization expense related to cloud computing arrangements, information technology costs, and professional service fees;

•$3.3 million increase in interest expense primarily due to higher long-term debt balances and higher interest rates;

•$2.7 million increase in income tax expense due to an increase in pretax income;

•$2.5 million increase in depreciation expense due to additional capital investments; and

•$2.0 million increase in general taxes primarily driven by higher property taxes.

Net income from continuing operations increased $7.6 million at NW Holdings primarily due to the following factors:

•$10.4 million increase in consolidated net income at NW Natural as discussed above; partially offset by

•$2.8 million decrease in other net income primarily reflecting higher interest expense at the holding company.

Diluted EPS for NW Holdings decreased $0.02 per share primarily due to a common share issuance on April 1, 2022 and share issuances through NW Holdings' at-the-market program, partially offset by an increase in consolidated net income.

2021 COMPARED TO 2020. Consolidated net income increased $10.6 million at NW Natural primarily due to the following factors:

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

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

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

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

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

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

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

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

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

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

•$2.2 million decrease in other net income primarily reflecting higher business development and consulting costs at NW Holdings.

2021 COLD WEATHER EVENT.In February 2021, Portland, Oregon and the surrounding region, like much of the country, experienced a severe winter storm with several days of colder temperatures resulting in elevated natural gas demand and significantly higher spot prices. Additional market gas purchases and other expenses resulted in approximately $29 million of higher commodity costs, of which approximately $27 million was deferred to a regulatory asset for recovery in future rates. The result was approximately $2 million of lower natural gas utility margin in the first quarter of 2021. The higher commodity costs were offset by approximately $39 million of asset management revenue, of which approximately $33 million was deferred to a regulatory liability for the benefit of customers. During the first quarter of 2022, NW Natural refunded an interstate storage and asset management sharing credit of approximately $41 million to Oregon customers, which was primarily related to the cold weather event in February 2021.

CURRENT ECONOMIC CONDITIONS.We are evaluating and monitoring current economic conditions, which include but are not limited to: inflation, rising interest rates and commodity costs, recessionary pressures, heightened cybersecurity awareness, geopolitical uncertainty, and supply chain disruptions. We have enhanced cybersecurity monitoring in response to reports that cybersecurity attacks have increased and may continue to increase. We have not experienced material disruptions in our supply chain for goods and services to date. Our suppliers may be subject to lack of personnel or disruption in their own supply chain for materials, which could disrupt supplier performance or deliveries, and negatively impact our business. Developers and HVAC suppliers have reported longer lead times for furnaces and other HVAC equipment, which may affect the timing of placing new meters into service particularly those converting to natural gas. However, because any supply chain issues are being experienced by vendors who supply directly to customers and not us, we do not have visibility of and are not able to quantify the number of new meters affected at this time. We are continuing to actively monitor supply chain disruptions, and have formulated and continue to evaluate contingency plans as necessary.

NW Holdings and NW Natural continue to monitor interest rates and financing options for all of its businesses. Interest rates have increased in 2022 resulting from actions taken by the U.S. Federal Reserve to increase short-term rates as inflation remains elevated. NW Natural generally recovers interest expense on its long-term debt through its authorized cost of capital. Certain working capital items, such as the cost of gas, are deferred and accrue interest in Oregon and Washington. Additionally, short-term debt is incorporated in the capital structure in Washington. NW Natural Water's regulated water and wastewater utilities recover interest expense from long-term debt through their respective authorized cost of capital.

2023 OUTLOOK

At NW Natural Holdings, we remain focused on our mission: to provide safe, reliable and affordable utility services and renewable energy in a sustainable way to better the lives of the communities we serve. Our core values of integrity, safety, service ethic, caring and environmental stewardship are the foundation for our success and fundamental to our mission.

Our common goals for each of our business lines is: build and sustain a diverse and inclusive workforce; execute operational priorities to further support safety and reliability for our employees and customers; pursue net carbon neutral energy and sustainable water solutions for our customers, communities and operations, focus on profitable growth across our companies; and work to advance constructive policy and regulation that serves the interest of customers and supports opportunities for growth.

NW Natural

Delivering our products safely and reliably to customers, while keeping our employees safe, is our first priority. At NW Natural, we remain focused on safety and emergency response through hands-on, scenario-based training for our employees. The reliability, resiliency and safety of our gas system is critical and to this end, we remain focused on investing in necessary maintenance and upgrades, preventing third-party damages, and performing regular inspections and assessments. Safety also includes maintaining and strengthening our cybersecurity defenses, upgrading key technology systems, and preparing for large-scale emergency events, such as seismic hazards.

We have a legacy of providing excellent customer service and a long-standing dedication to continuous improvement, which has resulted in NW Natural consistently receiving high rankings in the J.D. Power and Associates customer satisfaction studies. We plan to continue this legacy by combining the expertise of our customer care and field employees with the benefits of new technologies to provide top-notch customer interactions and meet the evolving expectations of our customers.

We are focused on working productively with lawmakers and regulators. In 2023, we intend to continue proactively communicating with policymakers and other stakeholders about what we believe is the important role of the gas system in achieving climate goals for our communities. With regulators, we continue to strive to work productively on open proceedings.

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At the same time, we'll strive to continue growing our business by pursuing and adopting unique energy solutions, executing on our capital investment plans, and managing and promoting adoption of advanced technologies.

We are deeply committed to our core value of environmental stewardship and the vision of a clean energy future. NW Natural has been a leader among gas utilities in innovative programs designed to support a lower carbon future. In 2023, NW Natural intends to continue striving to: execute on our renewable strategy by helping our customers reduce and offset their consumption, work to comply with the Oregon Climate Protection Program (CPP) and Washington Climate Commitment Act (CCA), procure and invest in RNG for our customers, and continue testing hydrogen blending and other hydrogen pilot projects.

NW Natural Water

Our water and wastewater utility business is committed to providing its customers with safe, clean, reliable and affordable water and wastewater services, while growing organically and through acquisitions. These utilities are focused on supporting their fast-growing communities by executing on capital expenditure programs aimed at safety and reliability and filing general rate cases, where needed, to support these investments. In addition, we continue to promote water conservation and sustainable wastewater management through system investments, regulation, policies and customer programs.

NW Natural Renewables

We launched an unregulated business line in 2021 established to invest in renewable energy through the production and supply of lower-carbon fuels. In 2023, we expect to begin earning revenues from the resale of RNG from our first project with EDL, which involves two RNG facilities. We intend to continue pursuing other similar renewable projects and opportunities.

DIVIDENDS

NW Holdings dividend highlights include:

In January 2023, the Board of Directors of NW Holdings declared a quarterly dividend on NW Holdings common stock of $0.4850 per share, payable on February 15, 2023, to shareholders of record on January 31, 2023, reflecting an indicated annual dividend rate of $1.94 per share.

See "Financial Condition - Liquidity and Capital Resources" for more information regarding the NW Holdings and NW Natural dividend policies and regulatory conditions on NW Natural dividends to its parent, NW Holdings.

RESULTS OF OPERATIONS

Regulatory Matters

Regulation and Rates

NATURAL GAS DISTRIBUTION. NW Natural's natural gas distribution business is subject to regulation by the OPUC and WUTC with respect to, among other matters, rates and terms of service, systems of accounts, and issuances of securities by NW Natural. In 2022, approximately 88% of NGD customers were located in Oregon, with the remaining 12% in Washington. Earnings and cash flows from natural gas distribution operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington. They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, customer preferences and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets. See "Most Recent Completed Rate Cases" below.

MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and the Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the intrastate storage services at Mist, while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC intrastate Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.

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

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Most Recent Completed Rate Cases

OREGON. On October 24, 2022, the OPUC issued an order for rates effective November 1, 2022, which authorized a return on equity of 9.4%, a cost of capital of 6.836%, and a capital structure of 50% common equity and 50% long-term debt. After adjustments provided in the order, the order increased the revenue requirement by $59.4 million, and included a rate base of $1.76 billion, or an increase of $320 million since the last rate case. The OPUC also ordered an adjustment to NW Natural’s current line extension allowance methodology to a five times margin approach (which for an average residential customer is currently approximately $2,300), declining to four times margin on November 1, 2023, and three times margin on November 1, 2024. The OPUC further ordered that the costs NW Natural sought to recover related to its Lexington RNG project were reasonable and prudently incurred under Senate Bill 98 and adopted an automatic adjustment clause that allows for NW Natural’s RNG project costs to be added to rates annually on November 1st.

From November 1, 2020 through October 31, 2022, the OPUC authorized rates to customers based on an ROE of 9.4% and a cost of capital of 6.965% with a capital structure of 50% common equity and 50% long-term debt. The OPUC also authorized NW Natural to recover the expense associated with the Oregon Corporate Activity Tax (CAT) as a component of base rates. See "Corporate Activity Tax" in the 2021 Form 10-K. In addition, the OPUC approved the application of NW Natural’s decoupling calculation for the months of November and May to the month of April. The decoupling mechanism is intended to encourage customers to conserve energy without adversely affecting revenue due to reductions in sales volumes.

WASHINGTON.On October 21, 2021, the WUTC issued an order concluding NW Natural's general rate case filed in December 2020 (WUTC Order). The WUTC Order provides for an annual revenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in the first year beginning November 1, 2021 (Year One), and up to a 3.5% or $3.0 million increase in the second year beginning November 1, 2022 (Year Two). The increase is based on the following assumptions:

•Cost of capital of 6.814%; and

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

The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity. New rates authorized by the WUTC Order were effective November 1, 2021.

From November 1, 2019 through October 31, 2021, the WUTC authorized rates to customers based on an ROE of 9.4% and an overall rate of return of 7.161% with a capital structure of 50.0% long-term debt, 1.0% short-term debt, and 49.0% common equity. The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits to customers. See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM" below.

FERC.NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services. On October 12, 2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated the new federal corporate income tax rate. The revised rates were effective beginning November 1, 2018.

NW Natural continuously evaluates the need for rate cases in its jurisdictions.

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Rate Mechanisms

During 2022 and 2021, NW Natural's key approved rates and recovery mechanisms for each service area included:

Oregon Washington

Authorized Rate Structure:

Return on Equity 9.4% 9.4% ** 9.4%

Key Regulatory Mechanisms:

Purchased Gas Adjustment (PGA) X X X X

Gas Cost Incentive Sharing X X

Decoupling X X

Weather Normalization (WARM) X X

RNG Automatic Adjustment Clause X

Environmental Cost Recovery X X X X

Interstate Storage and Asset Management Sharing X X X X

Annually, or more often if circumstances warrant, NW Natural reviews all regulatory assets for recoverability. If NW Natural should determine 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 against earnings in the period such a determination was made.

PURCHASED GAS ADJUSTMENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the withdrawal of storage inventories, the production of gas reserves, interstate pipeline demand costs, renewable natural gas and its attributes, including renewable thermal certificates, temporary rate adjustments, which amortize balances of deferred regulatory accounts, and the removal of temporary rate adjustments effective for the previous year.

Each year, NW Natural hedges gas prices on a portion of NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. During 2021 and 2022, there was increased price volatility in the spot and forward gas markets. In response to higher than normal volatility in forward gas markets in 2022, we are hedged at higher levels for the 2022-23 gas year. As of December 31, 2022, NW Natural's forecasted sales volume was hedged at approximately 84% in total for the 2022-23 gas year compared to 82% in the 2021-22 PGA year. The total hedged for Oregon was approximately 85%, including 67% in financial hedges and 18% in physical gas supplies. The total hedged for Washington was approximately 79%, including 66% in financial hedges and 13% in physical gas supplies.

NW Natural is hedged in total between 21% and 31% for annual requirements over the subsequent two gas years, which consists of between 23% and 30% in Oregon and between 0% and 45% in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production. Also, gas storage inventory levels may increase or decrease with storage expansion, changes in storage contracts with third parties, variations in the heat content of the gas, and/or storage recall by NW Natural. As the Company planned for the 2022-23 gas year, gas price volatility remained high with current and forward gas prices increasing substantially in 2022. We will continue to monitor gas prices as we begin to fill storage and look at hedging plans for future gas years. Gas purchases and hedges entered into for the upcoming PGA year will be included in the Company’s PGA filings in Oregon and Washington.

In September 2022, NW Natural filed its annual PGAs and received OPUC and WUTC approval in October 2022.

Included in the 2022-23 PGA, the OPUC and WUTC approved a new rate mitigation program to address high gas costs, which includes a temporary bill credit for NW Natural’s residential customers, beginning November 1, 2022, with deferral of the temporary bill credit to warmer months when customers typically see lower bills. As of December 31, 2022, the amount deferred to a regulatory asset was $11.5 million. PGA rate changes were effective November 1, 2022. Rates may vary between states due to different rate structures, rate mechanisms and hedging policies.

Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby NW Natural is required to select each year an 80% deferral or a 90% deferral of higher or lower actual gas costs compared to estimated PGA prices, such that

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the impact on NW Natural's current earnings from the incentive sharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively. For the 2021-22 and 2022-23 gas years, NW Natural selected the 90% deferral option. Under the Washington PGA mechanism, NW Natural defers 100% of the higher or lower actual gas costs, and those gas cost differences are passed on to customers through the annual PGA rate adjustment.

EARNINGS TEST REVIEW. NW Natural is subject to an annual earnings review in Oregon to determine if the NGD business is earning above its authorized ROE threshold. If NGD business earnings exceed a specific ROE level, then 33% of the amount above that level is required to be deferred or refunded to customers. Under this provision, if NW Natural selects the 80% deferral gas cost option, then NW Natural retains all earnings up to 150 basis points above the currently authorized ROE. If NW Natural selects the 90% deferral option, then it retains all earnings up to 100 basis points above the currently authorized ROE. For the 2021-22 and 2022-23 gas years, NW Natural selected the 90% deferral option. The ROE threshold is subject to adjustment annually based on movements in long-term interest rates. For calendar years 2020, 2021, and 2022, the ROE threshold was 10.40% in all periods. There were no refunds required for 2020 and 2021. NW Natural does not expect a refund for 2022 based on results, and anticipates filing its 2022 earnings test in May 2023.

GAS RESERVES. In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for NGD business customers and determined costs under the agreement would be recovered on an ongoing basis through the annual PGA mechanism. Gas produced from NW Natural's interests is sold at then prevailing market prices, and revenues from such sales, net of associated operating and production costs and amortization, are included in cost of gas. The cost of gas, including a carrying cost for the rate base investment made under the original agreement, is included in NW Natural's annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The net investment under the original agreement earns a rate of return.

In 2014, NW Natural amended the original gas reserves agreement in response to Encana's sale of its interest in the Jonah field located in Wyoming to Jonah Energy. Under the amended agreement with Jonah Energy, NW Natural has the option to invest in additional wells on a well-by-well basis with drilling costs and resulting gas volumes shared at the amended proportionate working interest for each well in which NW Natural invests. Volumes produced from the additional wells drilled after the amended agreement are included in NW Natural's Oregon PGA at a fixed rate of $0.4725 per therm. NW Natural has not participated in additional wells since 2014.

DECOUPLING. In Oregon, NW Natural has a decoupling mechanism. Decoupling is intended to break the link between revenue and the quantity of gas consumed by customers, removing any financial incentive to discourage customers’ efforts to conserve energy. The Oregon decoupling baseline usage per customer was reset in the 2020 Oregon general rate case. The Order in the 2020 Oregon general rate case also approved of extending NW Natural’s decoupling calculation for the months of November and May to the month of April. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues to account for the difference between actual and expected customer volumes. The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing.

WARM. In Oregon, NW Natural has an approved weather normalization mechanism (WARM), which is applied to residential and small commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through mid-May. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the billing period. Daily average temperatures and 25-year average temperatures are based on a set point temperature of 59 degrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers. The collections of any unbilled WARM amounts due to tariff caps and floors are deferred and earn a carrying charge until collected, or returned, in the PGA the following year. Residential and small commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of December 31, 2022, 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers, which account for about 12% of total customers. See "Business Segment—Natural Gas Distribution" below.

INDUSTRIAL TARIFFS. The OPUC and WUTC have approved tariffs covering NGD service to major industrial customers, which are intended to give NW Natural certainty in the level of gas supplies needed to serve this customer group. The approved terms include, among other things, an annual election period, special pricing provisions for out-of-cycle changes, and a requirement that industrial customers complete the term of their service election under NW Natural's annual PGA tariff.

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

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Oregon SRRM

Under the Oregon 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 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. NW Natural included $6.8 million and $6.3 million of deferred remediation expense approved by the OPUC for collection during the 2022-23 and 2021-22 PGA years, respectively.

In addition, the SRRM also provides for the annual collection of $5.0 million from Oregon customers through a tariff rider. As it collects amounts from customers, NW Natural recognizes these collections as revenue net of any earnings test adjustments and separately amortizes an equal and offsetting amount of the deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expenses section of the Consolidated Statements of Comprehensive Income (Loss). See Note 17 for more information on our environmental matters.

The SRRM earnings test is an annual review of adjusted NGD ROE compared to authorized NGD ROE. To apply the earnings test NW Natural must first determine what if any costs are subject to the test through the following calculation:

Annual spend

Less: $5.0 million base rate rider

Prior year carry-over(1)

$5.0 million insurance + interest on insurance

Total deferred annual spend subject to earnings test

Less: over-earnings adjustment, if any

Add: deferred interest on annual spend(2)

Total amount transferred to post-review

(1) Prior year carry-over results when the prior year amount transferred to post-review is negative. The negative amount is carried over to offset annual spend in the following year.

(2) Deferred interest is added to annual spend to the extent the spend is recoverable.

To the extent the NGD business earns at or below its authorized ROE as defined in the SRRM, the total amount transferred to post-review is recoverable through the SRRM. To the extent more than authorized ROE is earned in a year, the amount transferred to post-review would be reduced by those earnings that exceed its authorized ROE.

For 2022, NW Natural has performed this test, which is anticipated to be submitted to the OPUC in May 2023. No earnings test adjustment is expected for 2022.

Washington ECRM

The ECRM established by the WUTC order effective November 1, 2019 permits NW Natural’s recovery of environmental remediation expenses allocable to Washington customers. These expenses represent 3.32% of costs associated with remediation of sites that historically served both Oregon and Washington customers. The order allows for recovery of past deferred and future prudently incurred remediation costs allocable to Washington through application of insurance proceeds and collections from customers. Prudently incurred costs that were deferred from the initial deferral authorization in February 2011 through June 2019 are to be fully offset with insurance proceeds, with any remaining insurance proceeds to be amortized over a 10.5 year period. On an annual basis, NW Natural will file for a prudence determination and a request to recover remediation expenditures in excess of insurance amortizations in the following year's customer rates. 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.

INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING. On an annual basis, NW Natural credits amounts to Oregon and Washington customers as part of a regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage and asset management activities. In January 2023, the OPUC approved the annual 2023 bill credit for Oregon customer’s share of interstate storage and asset management activities totaling approximately $23.5 million. This includes revenue generated for the November 2021 through October 2022 PGA year. Commercial and industrial customers in Oregon will receive this credit in February 2023. Residential customers in Oregon will receive this credit as a reduction to the temporary rate mitigation adjustment, which begins in March 2023. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November.

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During the first quarter of 2022, NW Natural refunded an interstate storage and asset management sharing credit of approximately $41.1 million to Oregon customers over three equal installments in January, February and March. This includes revenue generated for the November 2020 through October 2021 PGA year. A majority of this revenue is from the cold weather event in February 2021 discussed above.

The following table presents the credits to NGD customers:

COVID-19 PROCESS AND DEFERRAL DOCKETS. During 2020, Oregon and Washington approved our applications to defer certain COVID-19 related costs. Costs that may be recoverable include, but are not limited to, the following: personal protective equipment, cleaning supplies and services, bad debt expense, financing costs to secure liquidity, and certain lost revenue, net of offsetting direct expense reductions associated with COVID-19. As of December 31, 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 when 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.

The following table outlines some of the key items approved by the respective Commissions:

Oregon Washington

Reinstituting Disconnections for Nonpayment:

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

Resuming Residential Reconnection Fee Charges October 1, 2022 **

Reinstituting Late Fees for Nonpayment:

Residential October 1, 2022 **

Small Commercial December 1, 2020 **

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

Arrearage Management Program 1.5% of Retail Revenue 1% of Retail Revenue

** Date is pending a Commission review of its existing credit and collection practices that is expected to be completed over the next year.

ARREARAGE MANAGEMENT PROGRAMS.As part of the approved term sheets, NW Natural established programs in Oregon and Washington to identify and mitigate residential customer arrearages associated with COVID-19. Under the Washington program, income-eligible customers may receive up to $2,500 per year. In March 2022, the Oregon program was expanded to include additional funding and a low-income focus. AMP is funded by NW Natural with recovery facilitated through the COVID-19 deferral dockets. During 2022, NW Natural granted $9.4 million of the total funds available of $9.9 million. The programs in both Oregon and Washington are now closed.

LOW INCOME DISCOUNT TARIFF.In July 2022, NW Natural received approval from the OPUC for an income-qualifying residential bill discount program. The income threshold for program participation is at or below 60 percent of Oregon state median income (SMI). The program provides a bill discount for income-qualifying residential customers at four discount tier levels based on household income compared to SMI, with higher discounts given for lower income levels. Participating customers can self-certify their income and household size to qualify for the program directly with NW Natural or their local Community Action Agency. The program was available for qualifying customers starting November 1, 2022. Costs for the bill discount program include simultaneous recovery from all customers. Costs for the bill discount program, inclusive of start-up and administrative costs of the program, are recoverable in rates. The amount deferred to a regulatory asset as of December 31, 2022 was not significant.

Total Household Income Bill Discount Percentage

Tier 0 At or below 15% SMI 40%

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RENEWABLE NATURAL GAS AND AUTOMATIC ADJUSTMENT CLAUSE. On June 19, 2019, the Oregon legislature passed Senate Bill 98 (SB 98), which enables natural gas utilities to procure or develop RNG on behalf of their Oregon customers. The bill was signed into law by the governor in July 2019, and subsequently, the OPUC opened a docket in August 2019 regarding the rules for the bill. After working with parties, the OPUC adopted final rules in July 2020.

SB 98 and the rules outline the following parameters for the RNG program including: setting voluntary goals for adding as much as 30% renewable natural gas into the state’s pipeline system by 2050; enabling gas utilities to invest in and own the cleaning and conditioning equipment required to bring raw biogas and landfill gas up to pipeline quality, as well as the facilities to connect to the local gas distribution system; and allowing up to 5% of a utility’s revenue requirement to be used to cover the incremental cost or investment in renewable natural gas infrastructure.

Further, the new law supports all forms of renewable natural gas including renewable hydrogen, which is made from excess wind, solar and hydro power. Renewable hydrogen can be used for the transportation system, industrial use, or blended into the natural gas pipeline system.

Pursuant to the 2022 Oregon general rate case, the OPUC ordered that the costs NW Natural sought to recover related to its investment in Lexington Renewables Energy, LLC were reasonable and prudently incurred under SB 98. Furthermore, the OPUC approved an automatic adjustment clause that allows for NW Natural's investments in RNG projects, including operating costs, to be added to rates annually on November 1st, following a prudence review. The mechanism allows NW Natural to defer for recovery or credit the differences between the forecasted and actual costs of the RNG projects, subject to an earnings test that includes deadbands at 50 basis points below and above NW Natural's authorized ROE. For RNG procurement contracts, NW Natural seeks recovery of the costs in the PGA, subject to a prudence review.

CORPORATE ACTIVITY TAX.In 2019, the State of Oregon enacted a Corporate Activity Tax (CAT) that is applicable to all businesses with annual Oregon gross revenue in excess of $1 million. The CAT is in addition to the state's corporate income tax and imposes a 0.57% tax on certain Oregon gross receipts less a reduction for a portion of cost of goods sold or labor. The CAT legislation became effective September 29, 2019 and applied to calendar years beginning January 1, 2020. Under the terms of the Order in NW Natural's 2020 Oregon general rate case, NW Natural is authorized to begin to recover the expense associated with the CAT as a component of base rates. NW Natural is also directed to adjust the amount recovered for the CAT in each annual PGA to reflect changes in gross revenue and cost of goods sold that occur as a result of the PGA.

The Order also provides for certain adjustments if there are legislative, rulemaking, judicial, or policy decisions that would cause the calculation methodology used by NW Natural for the CAT to vary in a fundamental way. Additionally, the CAT deferred from January 2020 through June 2020 was added to and amortized over the 2020-21 PGA gas year, and the CAT amounts deferred from July 2020 through the effective date of the rate case were amortized over the 2021-22 PGA year.

INTEGRATED RESOURCE PLAN (IRP). NW Natural generally files a full IRP biennially for Oregon and Washington with the OPUC and WUTC, respectively. NW Natural jointly filed its 2022 IRP for both Oregon and Washington on September 23, 2022. The 2022 IRP outlines scenarios of future requirements based on a range of outcomes that would provide the least-cost and least-risk resources to meet future demand and environmental compliance obligations. In our most recent filing, we included certain demand and supply side projects that resulted in action plan items which will be evaluated by the OPUC and WUTC. With respect to IRPs generally, the WUTC issues letters of compliance and Oregon acknowledges the IRP. NW Natural anticipates the OPUC and WUTC will take such actions by September 30, 2023.

The development of an IRP filing is an extensive and complex process that engages multiple stakeholders in an effort to build a robust and commonly understood analysis. The final product is intended to provide a long-term outlook of the supply-side and demand-side resource requirements for reliable and low cost natural gas service while also meeting NW Natural's environmental compliance requirements. The IRP examines and analyzes uncertainties in the planning process, including potential changes in governmental and regulatory policies. The CPP in Oregon, as well as the CCA that was passed in Washington, are examples of new policies that result in compliance requirements that need to be included in the planning process.

PIPELINE SECURITY.In May and July 2021, the Department of Homeland Security’s (DHS) Transportation Security Administration (TSA) released two security directives applicable to certain owners and operators of natural gas pipeline facilities (including local distribution companies). The first directive require owners and operators to implement cybersecurity incident reporting to the DHS, designate a cybersecurity coordinator, and perform a gap assessment of current entity cybersecurity practices against certain voluntary TSA security guidelines and report relevant results and proposed mitigation to applicable DHS agencies. The second directive requires entities to implement a significant number of specified cyber security controls and processes. The TSA recently released a third directive renewing the second directive as well as clarifying Operational Technology (OT) scope and providing a risk- and outcome-based framework. The third directive is effective until July 2023. NW Natural is currently evaluating and implementing the security directives and related deliverables. NW Natural frequently updates the TSA on its progress on achieving the security directives.

NW Natural filed requests with the OPUC and WUTC to defer the costs associated with complying with the TSA's security directives. As of December 31, 2022, NW Natural has invested $33.0 million in information and operational technology and has

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deferred to a regulatory asset $6.3 million of related costs. A majority of the capital investment was included in rate base starting November 1, 2022 in Oregon.

NW Natural continues to evaluate the potential effect of these directives on our operations and facilities, as well as the potential total cost of implementation, and will continue to monitor for any clarifications or amendments to these directives. We may seek to request recovery from customers of any additional costs incurred to the extent that incremental expenses and capital expenditures are incurred in the future.

ERP UPGRADE DEFERRALS. In the fourth quarter of 2020, NW Natural filed requests to defer expenses pertaining to a project to upgrade the existing enterprise resource planning (ERP) system with the OPUC and WUTC. A stipulation supported by all parties in the Oregon docket was filed and approved by the OPUC in the third quarter of 2021. Under the settlement agreement, NW Natural will recover 100% of costs incurred up to the $8.55 million estimate of Oregon-allocated costs provided in the docket. Approval of the Washington deferral was resolved as part of the most recent general rate case. NW Natural placed its new ERP system into service in September 2022. As of December 31, 2022, NW Natural deferred to a regulatory asset $9.4 million of expenses incurred to date. On November 1, 2022, NW Natural began recovering all expenses deferred and accruing interest over a 10-year period.

FACT-FINDING DOCKET. NW Natural was engaged in an OPUC Fact-Finding (“Fact-Finding Docket”), opened in response to the executive order issued by the Governor of Oregon, for the purpose of analyzing the potential natural gas utility bill impacts that may result from the ODEQ’s CPP and to identify appropriate regulatory tools to mitigate potential customer impacts. The OPUC Staff indicated that the ultimate goal of the Fact-Finding Docket is to inform future policy decisions and other key analyses. OPUC Staff’s final report was issued on January 31, 2023. The report has a number of recommendations concerning the further investigation of regulatory tools, including: 1) expanded energy efficiency programs, 2) additional analysis in future Integrated Resource Plans of decarbonization measures and trends, and 3) additional rate protections for customers. The OPUC has since closed the Fact-Finding Docket without taking any action on Staff’s final report.

WATER UTILITIES. NWN Water currently serves an estimated 155,000 people through approximately 62,500 connections across five states. NWN Water, through one or more of its subsidiaries, acquired an increased ownership stake in Avion Water Company in Oregon to 40.3%, and acquired the assets of five regulated businesses during 2022, after receiving approval from the respective public utility commissions.

For our regulated water utilities, we have been executing general rate cases.

•In January 2022, we filed a general rate case for Suncadia Water and the WUTC allowed rates to go into effect in May 2022 by operation of law.

•In February 2022, the OPUC adopted a comprehensive stipulation in Sunriver Water's rate case with new rates effective May 2022.

•In June 2022, Avion Water Company filed a general rate case with the OPUC and the OPUC allowed rates to go into effect January 1, 2023.

•In July 2022, Gem State Water Company filed a general rate case with the IPUC and a decision is expected in the first half of 2023.

Environmental Regulation and Legislation Matters

There is a growing international and domestic focus on climate change and the contribution of GHG emissions, most notably methane and carbon dioxide, to climate change. In response, there are increasing efforts at the international, federal, state, and local level to regulate GHG emissions. Legislation or other forms of regulation could take a variety of forms including, but not limited to, GHG emissions limits, reporting requirements, carbon taxes, requirements to purchase carbon credits, building codes, increased efficiency standards, additional charges to fund energy efficiency activities or other regulatory actions, incentives or mandates to conserve energy, or use renewable energy sources, tax advantages and other subsidies to support alternative energy sources, a reduction in rate recovery for construction costs related to the installation of new customer services or other new infrastructure investments, mandates for the use of specific fuels or technologies, bans on specific fuels or technologies, or promotion of research into new technologies to reduce the cost and increase the scalability of alternative energy sources. These efforts could include legislation, legislative proposals, or new regulations at the federal, state, and local level, as well as private party litigation related to GHG emissions. We recognize certain of our businesses, including our natural gas business, are likely to be affected by current or future regulation seeking to limit GHG emissions.

International

In early 2021, the U.S. rejoined the Paris Agreement on Climate, which establishes non-binding targets to reduce GHG emissions from both developed and developing nations. Under the Paris Agreement, signatory countries are expected to submit their nationally determined contributions to curb GHG emissions and meet the agreed temperature objectives every five years. On April 22, 2021, the United States federal administration announced the U.S. nationally determined contribution to achieve a fifty to fifty-two percent reduction from 2005 levels in economy-wide net GHG emissions by 2030.

Federal

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

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certain agency cost-benefit analyses for new regulations. President Biden’s administration continues to consider a wide range of additional policies, executive orders, rules, legislation, and other initiatives to address climate change.

The Inflation Reduction Act of 2022 (IRA) was signed into law in August 2022 and includes several climate and energy provisions. We expect that over a ten year period, the IRA will provide approximately $415 billion of funding through grants, tax credits, and investments to support various initiatives including manufacturing, renewable energy production and consumption, transportation electrification and climate-smart agriculture. The IRA includes tax credits for RNG, hydrogen and carbon capture projects, among other investments. The IRA also includes funding for the EPA to improve GHG reporting and enforcement, as well as a methane fee applicable to activities associated with gas production and processing facilities, transmission pipelines and certain storage facilities, creates a new corporate alternative minimum tax of 15 percent that applies to corporations with average annual financial statement income in excess of one billion dollars, and creates a new 1 percent excise tax on the net stock repurchases by public companies. We are assessing effects of the IRA that are relevant to our businesses, and will continue to do so as it is implemented. The U.S. Congress may also pass federal climate change legislation in the future. We cannot predict when or if Congress will pass such legislation and in what form.

In addition, the EPA regulates GHG emissions pursuant to the Clean Air Act. For example, the EPA requires the annual reporting of greenhouse gas emissions from certain industries, specified emission sources, and facilities. Under this reporting rule, local natural gas distribution companies like NW Natural are required to report system throughput to the EPA on an annual basis. The EPA also has required additional GHG reporting regulations to which NW Natural is subject, requiring the annual reporting of fugitive emissions from operations. Other federal regulatory agencies, including the U.S. Department of Energy and Federal Energy Regulatory Commission, are beginning to address greenhouse gas emissions that may include changes in their regulatory oversight approach, policies and rules.

Other federal agencies have taken or are expected to take actions related to climate change. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed new rules relating to the disclosure of a range of climate-related matters, PHMSA is expected to prepare regulations and other actions to limit methane emissions, the Commodities Futures Trading Commission (CFTC) has indicated it intends to take actions related to oversight of climate-related financial risks as pertinent to the derivatives and underlying commodities markets. Similarly, other federal agencies and regulations, including but not limited to the Consumer Products Safety Commission, the U.S. Department of Treasury, Federal Acquisitions Regulations, and others have indicated impending regulatory actions related to climate change. To the extent these agencies adopt final rules as proposed or in modified form, we or our customers could incur increased costs. These could include internal costs as well as external costs such as the cost of independent experts to provide attestation reports on our GHG emissions data and increased audit costs.

Washington State

In 2022, Washington comprised approximately 12% of NW Natural’s revenues, as well as 1% and 18% of new meters from commercial and residential customers, respectively. Effective February 1, 2021, building codes in Washington state require new residential homes to achieve higher levels of energy efficiency based on specified carbon emissions assumptions, which calculate electric appliances to have lower on-site GHG emissions than comparable gas appliances. This increases the cost of new home construction incorporating natural gas depending on a number of factors including home size, equipment configurations, and building envelope measures. Additionally, the Washington State Building Code Council (SBCC) voted in April 2022 to include updates in the state commercial building energy code that are expected to restrict or eliminate the use of gas space and water heating in new commercial construction. In early November, the SBCC voted to include updates to the state residential building energy code that are expected to restrict the use of gas space and water heating in residential construction, with certain exceptions including for natural gas-fired heat pumps and hybrid fuel systems. The SBBC commercial and residential rules are expected to become effective July 1, 2023. Utilities and other organizations, including NW Natural, are reviewing the proposed building energy code updates, the process by which the updates have been considered, and the legality of the building code updates. We expect the building code changes to be subject to legal challenge.

Washington has also enacted the Climate Commitment Act (CCA), which establishes a comprehensive program that includes an overall limit for GHG emissions from major sources in the state that declines yearly beginning January 1, 2023, resulting in an overall reduction of GHG emissions to 95% below 1990 levels by 2050. The Washington Department of Ecology has adopted rules to create a cap-and-invest program, under which entities, including natural gas and electric utilities, large manufacturing facilities, and transportation and other fuel providers, which are subject to the CCA must either reduce their emissions, purchase qualifying offsets (including RNG) or obtain allowances to cover any remaining emissions. NW Natural is subject to the CCA and intends to pursue inclusion of CCA compliance costs in rates.

Oregon

On March 10, 2020, the governor of Oregon issued an executive order (EO) establishing GHG emissions reduction goals of at least 45% below 1990 emission levels by 2035 and at least 80% below 1990 emission levels by 2050 and directed state agencies and commissions to facilitate such GHG emission goals targeting a variety of sources and industries. Although the EO does not specifically direct actions of natural gas distribution businesses, the OPUC is directed to prioritize proceedings and activities that advance decarbonization in the utility sector, mitigate the energy burden experienced by utility customers and ensure system reliability and resource adequacy. The EO also directs other state agencies, including the Oregon Department of Environmental Quality (ODEQ), to cap and reduce GHG emissions from transportation fuels and all other liquid and gaseous

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fuels, including natural gas, adopt building energy efficiency goals for new building construction, reduce methane gas emissions from landfills and food waste, and submit a proposal for adoption of state goals for carbon sequestration and storage by Oregon’s forest, wetlands and agricultural lands. The OPUC is charged with carrying out the EO to the extent it is consistent with its statutory authority and duties, and in doing so to focus on equitable impacts to low-income customers.

In December 2021, the ODEQ concluded its rulemaking process and issued final cap and reduce rules for its Climate Protection Program (CPP), which became effective in January of 2022. The CPP outlines GHG emissions reduction goals of 50% by 2035 and 90% by 2050 from a 1990 baseline. The first three-year compliance period is 2022 through 2024. NW Natural is subject to the CPP, and pursuant to this rule, is required to make its first compliance filing in 2025. We intend to pursue inclusion of compliance costs for the CPP in rates. The CPP has been subject to legal challenge by a number of utilities, companies and organizations, including NW Natural.

Local Jurisdictions and Other Advocacy

In addition to legislative activities at the state level, advocacy groups have indicated a willingness to pursue ballot measures. Some local and county governments in the United States also have been proposing or passing renewable energy resolutions, restrictions, taxes, or fees seeking to accelerate climate action goals. A number of cities across the country, and several in our service territory are taking action or currently considering actions such as limitations or bans on the use of natural gas in new construction or otherwise. For example, in February 2023, the Eugene City Council passed an ordinance that prohibits the use of natural gas in low rise residential buildings beginning with permits submitted after June of 2023. Similarly, some jurisdictions and advocates are seeking to ban the use of natural gas and certain natural gas appliances inside homes and contend that there are detrimental indoor public health effects associated with the use of natural gas.

NW Natural is actively engaged with federal, state and local policymakers, consumers, customers, small businesses and other business coalitions, economic development practitioners, and other advocates in our service territory and is working with these communities to communicate the role that direct use natural gas, and in the coming years, RNG and hydrogen, can play in pursuing more effective policies to reduce GHGs while supporting reliability, resiliency, energy choice, equity, and energy affordability.

NW Natural Decarbonization Initiatives & Compliance Actions

Our customers are currently paying less for their natural gas today than they did 15 years ago. We expect that compliance with any form of regulation of GHG emissions, including the CPP in Oregon and CCA in Washington as well as voluntary actions under SB 98 or otherwise, will require additional resources and compliance tools, and will increase costs. The developing and changing implementation guidance for the CCA and CPP, evolving carbon credit markets and other compliance tool options, decades-long timeframes for compliance, likely changing and evolving laws and energy policy, and evolving technological advancements, all make it difficult to accurately predict long-term tools for and costs of compliance. In September 2022, NW Natural filed its integrated resource plans (IRPs) with the OPUC and WUTC. Those IRPs comprehensively evaluate resource options available to serve NW Natural's customers' energy, capacity and environmental compliance needs. The resources selected for compliance with the CPP and CCA, and therefore the costs associated with those resources are, in part, dependent upon the resolution of our IRP dockets and the resources selected. While we have modeled compliance with the CCA and CPP in our IRPs, given the recency of the adoption of the final CPP and CCA rules and changing guidance with respect to those rules, the nature of our compliance obligations, the manner in which we intend to comply, and the expected costs of compliance are uncertain and subject to significant change, particularly after the first compliance period, and especially with respect to the CPP, under which programs are still being developed. For the first compliance period under the CCA, we currently anticipate that we will comply by purchasing RNG or attributes to reduce emissions, making full use of offsets available under the CCA, meeting remaining compliance requirements by purchasing allowances through the processes outlined under the CCA, and returning all money received from the sale of free carbon allowances to customers. We intend to pursue costs of compliance with the CCA in rates, and currently believe that the costs to comply could increase non-low income residential bills by an estimated 1.5% to 6% in the first year of compliance.

The CPP in Oregon is largely tied to the volume of natural gas consumed and as such, we currently expect that CPP cost impacts will be the lowest among residential customers because they generally consume less, and highest among industrial customers that use significantly higher volumes of natural gas, with cost increases for commercial customers falling between residential and industrial customers. We currently expect that the majority of our needed emissions reduction in Oregon for the first CPP compliance period of 2022-2025 can be met with purchases of RNG or its attributes, with modest supplemental purchases of Community Climate Investments (CCIs) when that program becomes available. We intend to pursue costs of compliance costs with the CPP in rates and currently believe those costs could increase non-low income residential bills by an estimated 1% to 9% in the first compliance period.

These projected customer bill impacts of the CCA and CPP are estimates, are likely to increase beyond the first compliance period, and are subject to change as these laws are implemented and compliance begins. The costs are also likely to vary significantly based on forecasting assumptions related to permitted levels of rate recovery, available technologies and equipment, weather patterns and gas usage, customer growth or attrition, allocation of fixed costs among classes of customers, energy efficiency levels, availability, use and cost of renewables, feasibility of broad-scale hydrogen in the natural gas system, and a number of other assumptions used in the complex analysis of integrated resource planning.

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We are not currently able to quantify the extent to which current and prospective building code changes, other limitations on natural gas use, or declining line extension allowances provided in rates to cover construction costs for new services, will affect new meter additions, or to what extent carbon compliance costs included in rates will affect the competitiveness of our business and the demand for natural gas service. All of these developments could negatively affect our gas utility customer growth. However, at the same time natural gas utilities will be subject to GHG emissions regulation, we expect that other energy source providers will be subject to similar, or in some cases stricter or more rapid, compliance requirements that are likely to affect their cost and competitiveness relative to natural gas as well. For example, President Biden has announced his intention to have a carbon-free electricity sector by 2035, 15 years before the target date of the CCA or CCP. In June 2021, the State of Oregon enacted HB 2021, a clean electricity bill that requires the state’s two largest investor-owned electric utilities and retail electricity service suppliers to reduce GHG emissions associated with electricity sold to Oregon customers to 100 percent below baseline levels by 2040 with interim steps, including an 80 percent reduction by 2030 and 90 percent reduction by 2035. This bill does not replace the separate renewable portfolio standards previously established in Oregon, which sets requirements for how much of the electricity used in Oregon must come from renewable resources. In Washington, SB 5116, the Clean Energy Transformation Act, requires all electric utilities in Washington to transition to carbon-neutral electricity by 2030 and to 100 percent carbon-free electricity by 2045. We expect compliance with these and other laws will increase the cost of energy for electric customers in our service territory. We are not able to determine at this time whether increased electricity costs will make natural gas use more or less competitive on a relative basis.

We expect these and other trends to drive innovation of, and demand for, technological developments and innovative new products that reduce GHG emissions. Research and development are occurring across the energy sector, including in the gas sector with work being conducted on gas-fired heat pumps, higher efficiency water and space heating appliances including hybrid systems, carbon capture utilization and storage developments, continued development of technologies related to RNG, and various forms of hydrogen for different applications, among others.

NW Natural continues to take proactive steps in seeking to reduce GHG emissions in our region and is proactively communicating with local, state, and federal governments and communities about those steps. NW Natural has been a leader among gas utilities in innovative programs. Notable programs have included a decoupling rate structure designed to weaken the link between revenue and gas consumption by customer adopted in 2007, and establishment of a voluntary Smart Energy carbon offset program for customers established in 2007, and removal of all known cast iron and bare steel to create one of the tightest and most modern distribution systems in the country. We continue to believe that NW Natural has an important role in providing affordable and equitable energy to the communities we serve. NW Natural is an important provider of energy to families and businesses in Oregon and southwest Washington. Natural gas sales to our residential and commercial customers account for approximately 6% of Oregon’s GHG emissions according to the 2019 data from the State of Oregon Department of Environmental Quality In-Boundary GHG Inventory. We intend to continue to provide this necessary energy to our communities with the goal of using our modern pipeline system to help the Pacific Northwest transition to a clean energy future.

In 2016, NW Natural initiated a multi-pronged, multi-year strategy to accelerate and deliver greater GHG emission reductions in the communities we serve. Key components of this strategy include customer energy efficiency, continued adoption of NW Natural's voluntary Smart Energy carbon offset program, and seeking to incorporate RNG and hydrogen into our gas supply. RNG is produced from organic materials including food, agricultural and forestry waste, wastewater, or landfills. We believe RNG has the potential to significantly reduce net GHG emissions because methane that would otherwise be released to the atmosphere can be captured from these organic materials as they decompose and then conditioned to pipeline quality and distributed into our existing system. In 2019, Oregon Senate Bill 98 (SB 98) was signed into law enabling NW Natural to procure RNG on behalf of customers and provided voluntary targets that would allow us to make qualified investments and purchase RNG from third parties.

Under SB 98, NW Natural is actively working to procure RNG supply for customers and increase the amount of RNG on our system and is also exploring the development of renewable hydrogen through power to gas. To that end, in 2020 and 2021, NW Natural announced several agreements and investments to procure RNG for its customers. For example, NW Natural began a partnership with BioCarbN to invest up to an estimated $38 million in four separate RNG development projects that will access biogas derived from water treatment at Tyson Foods’ processing plants, subject to approval by all parties. The first project was commissioned in early 2022 with a second underway and planned to be commissioned in early 2023. To date, NW Natural has signed agreements with options to purchase or develop RNG for utility customers totaling about 3% of NW Natural’s annual sales volume in Oregon.

Business Segment - Natural Gas Distribution (NGD)

NGD margin results are primarily affected by customer growth, revenues from rate-base additions, and, to a certain extent, by changes in delivered volumes due to weather and customers’ gas usage patterns. In Oregon, NW Natural has a conservation tariff (also called the decoupling mechanism), which adjusts margin up or down each month through a deferred regulatory accounting adjustment designed to offset changes resulting from increases or decreases in average use by residential and commercial customers. NW Natural also has a weather normalization tariff in Oregon, WARM, which adjusts customer bills up or down to offset changes in margin resulting from above- or below-average temperatures during the winter heating season. Residential and commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of December 31, 2022, approximately 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers, which account for about 12% of total customers. The decoupling

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and WARM mechanisms are designed to reduce, but not eliminate, the volatility of customer bills and natural gas distribution revenue. See "Regulatory Matters—Rate Mechanisms" above. In addition to NW Natural's local gas distribution business, the NGD segment also includes the portion of the Mist underground storage facility used to serve NGD customers, the North Mist gas storage expansion, NWN Gas Reserves, which is a wholly owned subsidiary of Energy Corp., and NW Natural RNG Holding Company, LLC.

The NGD business is primarily seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months. Other categories of customers experience seasonality in their usage but to a lesser extent. Seasonality affects the comparability of the results of operations of the NGD business across quarters but not across years.

NGD segment highlights include:

Dollars and therms in millions, except EPS data 2022 2021 2020

Diluted EPS - NGD segment $ 2.34 $ 2.24 $ 2.08

(1) See Natural Gas Distribution Margin Table below for additional detail.

2022 COMPARED TO 2021. NGD net income was $79.7 million in 2022 compared to $69.0 million in 2021. The primary factors contributing to the increase in NGD net income were as follows:

•$26.1 million increase in NGD margin primarily due to:

▪$14.9 million increase due to new customer rates from the 2022 Oregon and 2021 Washington rate cases that went into effect November 1, 2022;

▪$6.1 million increase driven by customer growth;

▪$3.0 million increase due to higher usage from colder comparative weather from customers that are not decoupled, net of the loss from the Oregon gas cost incentive sharing mechanism;

▪$2.9 million increase due to the amortization of deferred balances primarily related to COVID-19, cybersecurity, and ERP upgrades; and

•$12.1 million increase in other income, net primarily due to lower pension non-service costs and interest income from the equity portion of AFUDC; partially offset by

•$16.7 million increase in NGD operations and maintenance expenses due to higher contract labor, amortization expense related to cloud computing arrangements, professional service fees, and information technology costs;

•$3.4 million increase in interest expense primarily due to higher long-term debt balances and higher interest rates, partially offset by higher AFUDC debt interest income;

•$2.9 million higher income tax expense reflecting higher pretax income; and

•$2.4 million increase in depreciation expense as we continue to invest in our natural gas utility system and facilities.

Total natural gas sold and delivered in 2022 increased 6% over 2021 primarily due to 1% colder than average weather in 2022 compared to 12% warmer than average weather in 2021.

2021 COMPARED TO 2020. NGD net income was $69.0 million in 2021 compared to $63.6 million in 2020. The primary factors contributing to the increase in NGD net income were as follows:

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

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

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

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

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

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

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

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

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

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

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

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NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:

Favorable (Unfavorable)

NGD volumes (therms):

Operating revenues:

NGD margin(1)

Degree days(2)

Percent colder (warmer) than average weather 1 % (12) % (12) %

NGD meters - end of period:

NGD meter growth:

Residential meters 1.2 % 1.6 %

Commercial meters 0.3 % 0.2 %

Industrial meters 9.5 % (1.1) %

Total meter growth 1.1 % 1.5 %

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

(2) Heating degree days are units of measure reflecting temperature-sensitive consumption of natural gas, calculated by subtracting the average of a day's high and low temperatures from 59 degrees Fahrenheit.

(3) Average weather represents the 25-year average of heating degree days. Beginning November 1, 2022, average weather is calculated over the period June 1, 1996 through May 31, 2021, as determined in NW Natural's 2022 Oregon general rate case. From November 1, 2020 through October 31, 2022, average weather was calculated over the period June 1, 1994 through May 31, 2019, as determined in NW Natural’s 2020 Oregon general rate case.

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Residential and Commercial Sales

The primary factors that impact results of operations in the residential and commercial markets are customer growth, seasonal weather patterns, energy prices, competition from other energy sources, and economic conditions in our service areas. The impact of weather on margin is significantly reduced through NW Natural's weather normalization mechanism in Oregon; approximately 81% of NW Natural's total customers are covered under this mechanism. The remaining customers either opt out of the mechanism or are located in Washington, which does not have a similar mechanism in place. For more information on the weather mechanism, see "Regulatory Matters—Rate Mechanisms—WARM" above.

NGD residential and commercial sales highlights include:

Volumes (therms):

Operating revenues:

NGD Margin:

2022 COMPARED TO 2021. The increase of $150.6 million in total NGD residential and commercial operating revenue and $25.4 million in NGD margin were primarily the result of new customer rates in Oregon and Washington that took effect on November 1, 2022, 1.2% growth in residential customer meters, and higher usage from colder comparative weather from customers that are not decoupled. Sales volumes increased 63.5 million therms, or 9%, primarily due to higher usage driven by comparatively colder weather.

2021 COMPARED TO 2020. The increase of $69.5 million in total residential and commercial operating revenue and $44.3 million in NGD margin were primarily the result of new customer rates in Oregon that took effect on November 1, 2020, growth in residential customer meters, and higher commercial volumes as COVID-19 restrictions and closures were lifted. Sales volumes increased 25.8 million therms, or 4%, primarily due to growth in residential customer meters and higher commercial volumes as COVID-19 restrictions and closures were lifted.

Industrial Sales and Transportation

Industrial customers have the option of purchasing sales or transportation services. Under the sales service, the customer buys the gas commodity from NW Natural. Under the transportation service, the customer buys the gas commodity directly from a third-party gas marketer or supplier. The NGD gas commodity cost is primarily a pass-through cost to customers; therefore, NGD profit margins are not materially affected by an industrial customer's decision to purchase gas from third parties. Industrial and large commercial customers may also select between firm and interruptible service options, with firm services generally providing higher profit margins compared to interruptible services. To help manage gas supplies, industrial tariffs are designed to provide some certainty regarding industrial customers' volumes by requiring an annual service election which becomes effective November 1, special charges for changes between elections, and in some cases, a minimum or maximum volume requirement before changing options.

NGD industrial sales and transportation highlights include:

Volumes (therms):

NGD Margin:

Firm and interruptible sales $ 13.6 $ 12.6 $ 11.6

Firm and interruptible transportation 19.9 19.6 19.2

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2022 COMPARED TO 2021. NGD total industrial sales and transportation volumes increased 4.0 million therms, or 1%, primarily due to higher usage from multiple customers, most notably in the light manufacturing, primary metals, and electric manufacturing industries, partially offset by lower usage from customers in the plastic manufacturing industry. NGD margin increased $1.3 million primarily driven by new rates in Oregon and Washington that took effect on November 1, 2022.

2021 COMPARED TO 2020. NGD total industrial sales and transportation volumes increased 16.1 million therms, or 3%, primarily due to higher usage from multiple customers, most notably in the pulp and paper and chemical manufacturing industries. NGD margin increased $1.4 million primarily driven by new rates in Oregon that took effect on November 1, 2020.

Other Regulated Services Margin

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

Other regulated services margin highlights include:

North Mist storage services $ 19.4 $ 18.9 $ 19.5

Total other regulated services $ 19.6 $ 19.1 $ 19.1

2022 COMPARED TO 2021. Other regulated services margin increased $0.5 million due to an increase in storage service revenue from the North Mist facility. See Note 7 for more information regarding North Mist expansion lease accounting.

2021 COMPARED TO 2020. Other regulated services margin was relatively flat when compared to the prior period. The North Mist facility did not experience any significant fluctuations in storage service revenue. See Note 7 for more information regarding North Mist expansion lease accounting.

Cost of Gas

Cost of gas as reported by the NGD segment includes gas purchases, gas withdrawn from storage inventory, gains and losses from commodity hedges, pipeline demand costs, seasonal demand cost balancing adjustments, renewable natural gas and its attributes, including renewable thermal certificates, regulatory gas cost deferrals, gas reserves costs, and company gas use. The OPUC and WUTC generally require natural gas commodity costs to be billed to customers at the actual cost incurred, or expected to be incurred. Customer rates are set each year so that if cost estimates were met the NGD business would not earn a profit or incur a loss on gas commodity purchases; however, in Oregon we have the incentive sharing mechanism described under "Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment"above. In addition to the PGA incentive sharing mechanism, gains and losses from hedge contracts entered into after annual PGA rates are effective for Oregon customers are also required to be shared and therefore may impact net income. Further, NW Natural also has a regulatory agreement whereby it earns a rate of return on its investment in the gas reserves acquired under the original agreement with Encana and includes gas from the amended gas reserves agreement at a fixed rate of $0.4725 per therm, which are also reflected in NGD margin.See "Application of Critical Accounting Policies and Estimates—Derivative Instruments and Hedging Activities" below.

Cost of gas highlights include:

Average cost of gas (cents per therm) $ 0.49 $ 0.37 $ 0.35

Gain (loss) from gas cost incentive sharing $ (4.9) $ (3.4) $ 0.3

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

2022 COMPARED TO 2021. Cost of gas increased $137.4 million, or 47%, primarily due to a 32% increase in the average cost of gas with the majority of these higher gas costs embedded in the PGA. The remaining increase in cost of gas is primarily the result of a 10% increase in volumes sold, driven by customer growth and comparatively colder weather. For a discussion of the gas cost incentive sharing mechanism, see "Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment" above.

2021 COMPARED TO 2020. Cost of gas increased $29.5 million, or 11%, primarily due to a $3.4 million loss from gas cost incentive sharing driven by costs related to the 2021 cold weather event that were not deferred for future recovery. The remaining increase in cost of gas is primarily the result of a 4% increase in volumes sold driven by customer growth and higher commercial volumes as COVID-19 restrictions and closures were lifted. For a discussion of the gas cost incentive sharing mechanism, see "Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment" above.

Other

Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; NWN Water, which

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owns and continues to pursue investments in the water and wastewater sector; and NWN Water's investment in Avion Water Company, Inc. (Avion Water). Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries. See Note 13 for information on our Avion Water investment.

On August 6, 2020, NWN Energy completed the sale of its interest in Trail West Holdings, LLC (TWH) to an unrelated third party. See Note 13 for further details.

At Mist, NW Natural provides gas storage services to customers in the interstate and intrastate markets using storage capacity that has been developed in advance of NGD customers’ requirements. Pre-tax income from gas storage at Mist and asset management services is subject to revenue sharing with NGD customers. Under this regulatory incentive sharing mechanism, NW Natural retains 80% of pre-tax income from Mist gas storage services and asset management services when the underlying costs of the capacity being used are not included in NGD business rates. The remaining 20% is credited to a deferred regulatory account for credit to NGD customers. To the extent that the capacity used is included in NGD rates, NW Natural retains 10% of pre-tax income from such storage and asset management services and 90% is credited to NGD business customers.

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

NW Natural other - net income $ 11.9 $ 12.2 $ 7.0

Other NW Holdings activity (5.3) (2.5) (0.3)

NW Holdings other - net income $ 6.6 $ 9.7 $ 6.7

Diluted EPS - NW Holdings - other $ 0.20 $ 0.32 $ 0.22

2022 COMPARED TO 2021. Other net income decreased $3.1 million and $0.3 million at NW Holdings and NW Natural, respectively. The decrease at NW Holdings was driven by the decrease at NW Natural, higher interest expense at the holding company, and costs associated with non-regulated renewable natural gas activities.

2021 COMPARED TO 2020. Other net income increased $3.0 million and $5.2 million at NW Holdings and NW Natural, respectively. The increase at NW Natural was primarily due to $7.9 million of higher asset management revenue primarily related to the 2021 cold weather event, partially offset by $2.1 million of income tax expense associated with the higher revenue. The increase at NW Holdings was driven by the increase at NW Natural, partially offset by higher business development and consulting costs at the holding company.

Consolidated Operations

Operations and Maintenance

Operations and maintenance highlights include:

Other NW Holdings operations and maintenance 19.9 15.4 11.2

2022 COMPARED TO 2021. Operations and maintenance expense increased $16.0 million for NW Natural primarily due to the following:

•$6.0 million increase in contract labor for safety and reliability and contracted support for information technology system upgrades;

•$4.1 million increase in amortization expense related to cloud computing arrangements;

•$3.0 million increase in information technology maintenance and support; and

•$2.0 million increase in professional service fees.

Operations and maintenance expense increased $20.5 million for NW Holdings primarily due to the following:

•$16.0 million increase in operations and maintenance expense at NW Natural as discussed above; and

•$4.5 million increase in other NW Holdings operations and maintenance expense primarily due to costs associated with water and wastewater subsidiaries and non-regulated renewable natural gas activities.

2021 COMPARED TO 2020. Operations and maintenance expense increased $19.9 million for NW Natural primarily due to the following:

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

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

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

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

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

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

Depreciation

Depreciation highlights include:

Other NW Holdings depreciation 3.7 3.0 2.1

2022 COMPARED TO 2021. Depreciation expense increased $2.5 million for NW Natural, primarily due to additional capital investments in the distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.

Depreciation expense increased $3.2 million for NW Holdings, primarily due to a $0.7 million increase in other NW Holdings depreciation related to water and wastewater subsidiaries and a $2.5 million increase at NW Natural as discussed above.

2021 COMPARED TO 2020. Depreciation expense increased $8.9 million for NW Natural, primarily due to additional capital investments in the distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers.

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

Other Income (Expense), Net

Other income (expense), net highlights include:

NW Natural total other income (expense), net $ (0.4) $ (12.7) $ (15.1)

Other NW Holdings activity 1.6 0.1 1.2

NW Holdings total other income (expense), net $ 1.2 $ (12.6) $ (13.9)

2022 COMPARED TO 2021. Other expense, net decreased $12.3 million at NW Natural primarily due to lower pension non-service costs and interest income from the equity portion of AFUDC. Costs related to our defined benefit pension plan in 2022 decreased compared to the prior year due to changes in assumptions and gains on plan assets.

Other income, net increased $13.8 million at NW Holdings driven by the change at NW Natural discussed above, in addition to earnings from Avion Water. Other income (expense), net primarily consists of regulatory interest, pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.

2021 COMPARED TO 2020. Other income (expense), net changed $2.4 million at NW Natural primarily due to higher interest income on regulatory assets and lower pension non-service costs. Other income (expense), net changed $1.3 million at NW Holdings driven by the change at NW Natural discussed above, partially offset by a gain recognized in the prior period related to the sale of Trail West.

Interest Expense, Net

Interest expense, net highlights include:

Other NW Holdings interest expense 6.9 1.5 2.2

2022 COMPARED TO 2021. Interest expense, net, increased $3.3 million at NW Natural primarily due to a higher interest rate on a lower commercial paper balance and higher interest rates and a higher level of long-term debt, partially offset by higher AFUDC debt interest income.

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Interest expense, net, increased $8.7 million at NW Holdings primarily due to the increase at NW Natural discussed above and higher interest expense on the credit facility and long-term debt at NW Holdings as a result of higher balances and higher interest rates.

2021 COMPARED TO 2020. Interest expense, net, increased $2.1 million at NW Natural primarily due to lower AFUDC debt interest income and higher interest on long-term debt.

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

Income Tax Expense

NW Holdings income tax expense highlights include:

NW Natural income tax expense highlights include:

2022 COMPARED TO 2021. The effective tax rate decreased 0.6 percentage points at both NW Holdings and NW Natural. The decrease in the effective tax rate is primarily due to lower income tax amortization of the 2020 Oregon Corporate Activity Tax (CAT) in 2022, 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.

2021 COMPARED TO 2020. The effective tax rate increased 2.7 and 2.9 percentage points at NW Holdings and NW Natural, respectively. The increase in the effective tax rate is primarily due to Oregon Corporate Activity Tax, the majority of which is incurred because of Oregon regulated operations and for which rate recovery began on November 1, 2020.

Discontinued Operations

On June 20, 2018, NWN Gas Storage, a wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement (the Agreement) that provided for the sale by NWN Gas Storage of all of its 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 the memberships 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 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.

The results of Gill Ranch Storage have been determined to be discontinued operations until the date of sale and are presented separately, net of tax, from the results of continuing operations of NW Holdings for all periods presented. See Note 18 for more information on the Agreement and the results of our discontinued operations.

FINANCIAL CONDITION

Capital Structure

NW Holdings' long-term goal is to maintain a strong and balanced consolidated capital structure. NW Natural targets a regulatory capital structure of 50% common equity and 50% long-term debt, which is consistent with approved regulatory allocations in Oregon, which has an allocation of 50% common equity and 50% long-term debt without recognition of short-term debt, and Washington, which has an allocation of 50% long-term debt, 1% short-term debt, and 49% common equity.

When additional capital is required, debt or equity securities are issued depending on both the target capital structure and market conditions. These sources of capital are also used to fund long-term debt retirements and short-term commercial paper maturities. See "Liquidity and Capital Resources" below and Note 9. Achieving our target capital structure and maintaining sufficient liquidity to meet operating requirements is necessary to maintain attractive credit ratings and provide access to the capital markets at reasonable costs.

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NW Holdings' consolidated capital structure, excluding short-term debt, was as follows:

December 31,

Long-term debt (including current maturities) 53.2 52.8

NW Natural's consolidated capital structure, excluding short-term debt, was as follows:

December 31,

Long-term debt (including current maturities) 48.6 50.2

As of December 31, 2022 and 2021, NW Holdings' consolidated capital structure included common equity of 42.4% and 39.5%, long-term debt of 45.0% and 44.0%, and short-term debt including current maturities of long-term debt of 12.6% and 16.5%, respectively. As of December 31, 2022 and 2021, NW Natural's consolidated capital structure included common equity of 47.9% and 44.2%, long-term debt of 41.6% and 44.7%, and short-term debt including current maturities of long-term debt of 10.5% and 11.1%, respectively.

During 2022, NW Natural's capital structure changed primarily due to the issuance of long-term debt and capital contributions from NW Holdings. NW Holdings' capital structure changed primarily due to the issuance of long-term debt and common stock at NW Holdings. See further discussion below in "Cash Flows — Financing Activities".

Liquidity and Capital Resources

At December 31, 2022 and December 31, 2021, NW Holdings had approximately $29.3 million and $18.6 million, and NW Natural had approximately $13.0 million and $12.3 million, of cash and cash equivalents, respectively. In order to maintain sufficient liquidity during periods when capital markets are volatile, NW Holdings and NW Natural may elect to maintain higher cash balances and add short-term borrowing capacity. NW Holdings and NW Natural may also pre-fund their respective capital expenditures when long-term fixed rate environments are attractive. NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.

Equity Issuance

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 supplement. 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.

ATM Equity Program

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.

NW Holdings

For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities. NW Holdings also has a universal shelf registration statement filed with the SEC for the issuance of debt and equity securities. NW Holdings long-term debt, if any, and equity issuances are primarily used to provide equity contributions to NW Holdings’ operating subsidiaries for operating and capital expenditures and other corporate purposes. From 2023 through 2025, we estimate NW Holdings’ and NW Natural's combined incremental capital needs to be in the range of $450 million to $550 million. NW Holdings intends to use raised capital to support NW Natural, NW Natural Water, and NW Natural Renewables operating and capital expenditure programs. NW Holdings' issuance of securities is not subject to regulation by state public utility commissions, but the dividends from NW Natural to NW Holdings are subject to regulatory ring-fencing provisions. NW Holdings guarantees the debt of its wholly-owned subsidiary, NWN Water. See "Long-Term Debt" below for more information regarding NWN Water debt.

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As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Natural may not pay dividends or make distributions to NW Holdings if NW Natural’s credit ratings and common equity ratio, defined as the ratio of equity to long-term debt, fall below specified levels. If NW Natural’s long-term secured credit ratings are below A- for S&P and A3 for Moody’s, dividends may be issued so long as NW Natural’s common equity ratio is 45% or more. If NW Natural’s long term secured credit ratings are below BBB for S&P and Baa2 for Moody’s, dividends may be issued so long as NW Natural’s common equity ratio is 46% or more. Dividends may not be issued if NW Natural’s long-term secured credit ratings are BB+ or below for S&P or Ba1 or below for Moody’s, or if NW Natural’s common equity ratio is below 44%, where the ratio is measured using common equity and long-term debt excluding imputed debt or debt-like lease obligations. In each case, common equity ratios are determined based on a preceding or projected 13-month average. In addition, there are certain OPUC notice requirements for dividends in excess of 5% of NW Natural’s retained earnings.

Additionally, if NW Natural’s common equity (excluding goodwill and equity associated with non-regulated assets), on a preceding or projected 13-month average basis, is less than 46% of NW Natural’s capital structure, NW Natural is required to notify the OPUC, and if the common equity ratio falls below 44%, file a plan with the OPUC to restore its equity ratio to 44%. This condition is designed to ensure NW Natural continues to be adequately capitalized under the holding company structure. Under the WUTC order, the average common equity ratio must not exceed 56%.

At December 31, 2022 and 2021, NW Natural satisfied the ring-fencing provisions described above.

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

NW HOLDINGS DIVIDENDS. Quarterly dividends have been paid on common stock each year since NW Holdings’ predecessor’s stock was first issued to the public in 1951. Annual common stock dividend payments per share, adjusted for stock splits, have increased each year since 1956. The declarations and amount of future dividends to shareholders will depend upon earnings, cash flows, financial condition, NW Natural’s ability to pay dividends to NW Holdings and other factors. The amount and timing of dividends payable on common stock is at the sole discretion of the NW Holdings Board of Directors.

NW Natural

For the NGD business segment, short-term borrowing requirements typically peak during colder winter months when the NGD business borrows money to cover the lag between natural gas purchases and bill collections from customers. Short-term liquidity for the NGD business is primarily provided by cash balances, internal cash flow from operations, proceeds from the sale of commercial paper notes, as well as available cash from multi-year credit facilities, short-term credit facilities, company-owned life insurance policies, the sale of long-term debt, and equity contributions from NW Holdings. NW Natural's long-term debt and contributions from NW Holdings are primarily used to finance NGD capital expenditures, refinance maturing debt, and provide temporary funding for other general corporate purposes of the NGD business.

Based on its current debt ratings (see "Credit Ratings" below), NW Natural has been able to issue commercial paper and long-term debt at attractive rates. In the event NW Natural is not able to issue new long-term debt due to adverse market conditions or other reasons, NW Natural expects that near-term liquidity needs can be met using internal cash flows, issuing commercial paper, receiving equity contributions from NW Holdings, or drawing upon a committed credit facility. NW Natural also has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt securities.

In the event senior unsecured long-term debt ratings are downgraded, or outstanding derivative positions exceed a certain credit threshold, counterparties under derivative contracts could require NW Natural to post cash, a letter of credit, or other forms of collateral, which could expose NW Natural to additional cash requirements and may trigger increases in short-term borrowings while in a net loss position. NW Natural was not required to post collateral at December 31, 2022. See Note 15 below.

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

PENSION CONTRIBUTIONS. NW Natural does not expect to make contributions to its company-sponsored defined benefit plan, which is closed to new employees, over the next several years under applicable laws and regulations. See "Application of Critical Accounting Policies—Pensions and Postretirement Benefits" below and Note 10 for more information.

ENVIRONMENTAL EXPENDITURES. NW Natural expects to continue using cash resources to fund environmental liabilities for future environmental remediation or action. NW Natural has authorizations in Oregon and Washington to defer costs related to remediation of properties that are owned or were previously owned by NW 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. See Note 17 and "Results of Operations—Regulatory Matters—Environmental Cost Deferral and Recovery" above.

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

NW NATURAL DIVIDENDS. The declarations and amount of future dividends to NW Holdings will depend upon earnings, cash flows, financial condition, the satisfaction of OPUC and WUTC regulatory ring-fencing restrictions, and other factors. The amount and timing of dividends payable on common stock is subject to approval of the NW Natural Board of Directors.

Gas and Pipeline Capacity Purchase Agreements

NW Natural has signed agreements providing for the reservation of firm pipeline capacity under which it is required to make fixed monthly payments for contracted capacity. The pricing component of the monthly payment is established, subject to change, by U.S. or Canadian regulatory bodies, or is established directly with private counterparties, as applicable. In addition, NW Natural has entered into long-term agreements to release firm pipeline capacity. NW Natural also enters into short-term and long-term gas purchase agreements. Refer to Note 16 for gas and pipeline capacity purchase commitments.

NW Natural Renewables is a newly formed, non-utility regulated subsidiary of NW Natural Holdings established to pursue non-regulated renewable natural gas activities. In September 2021, a subsidiary of NW Natural Renewables and a subsidiary of EDL, a global producer of sustainable distributed energy, executed agreements to develop two production facilities that are designed to convert landfill waste gases to renewable natural gas (RNG). Testing and commissioning of the production facilities is expected to occur in the spring of 2023. Upon completion of each facility, the subsidiary of NW Natural Renewables is committed to make cash payments totaling $50.1 million to partially fund the infrastructure required to condition biogas and connect gas production to existing regional pipeline networks. Alongside these development agreements, a subsidiary of NW Natural Renewables and a subsidiary of EDL executed agreements designed to secure a 20-year supply of RNG for NW Natural Renewables. Following the completion of each facility, we estimate the amount of RNG purchases based on prices and quantities specified in the agreements are as follows: approximately $6.6 million in 2023, $10.5 million in 2024, $21.0 million in 2025, $21.0 million in 2026, $27.3 million in 2027 and $567.8 million thereafter.

Other Purchase Agreements

Other purchase commitments primarily consist of remaining balances under existing purchase orders and gas storage agreements. At December 31, 2022, the amount due over the duration of the purchase agreements totaled $41.1 million. Except for these certain purchase commitments, NW Holdings and NW Natural have no material off-balance sheet financing arrangements.

Short-Term Debt

The primary source of short-term liquidity for NW Holdings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities it may enter into from time to time.

The primary source of short-term liquidity for NW Natural is from the sale of commercial paper, available cash from a multi-year credit facility, and short-term credit facilities 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:

NW Natural:

Other (NW Holdings):

(1)Weighted average interest rate on outstanding short-term debt

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Credit Agreements

NW Holdings

NW Holdings has a $200 million sustainability-linked credit agreement, with a feature that allows it to request increases in the total commitment amount, up to a maximum of $300 million. The maturity date of the agreement is November 3, 2026, with available extensions of commitments for two additional one-year periods, subject to lender approval.

All lenders under the NW Holdings credit agreement are major financial institutions with committed balances and investment grade credit ratings as of December 31, 2022 as follows:

In millions

Lender rating, by category Loan Commitment

Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Holdings if the lender defaulted due to lack of funds or insolvency; however, NW Holdings does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings. There was $88.0 million and $144.0 million of outstanding balances under the NW Holdings agreement at December 31, 2022 and 2021, respectively.

The NW Holdings credit agreement permits the issuance of letters of credit in an aggregate amount of up to $40 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, with consolidated indebtedness to total capitalization ratios of 57.6% and 60.5%, respectively.

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.

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 also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Holdings’ independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.

NW Holdings had no letters of credit issued and outstanding at December 31, 2022 and 2021.

NW Natural

NW Natural has a sustainability-linked multi-year credit agreement for unsecured revolving loans totaling $400 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $600 million. The maturity date of the agreement is November 3, 2026 with an available extension of commitments for two additional one-year periods, subject to lender approval.

All lenders under the NW Natural credit agreement are major financial institutions with committed balances and investment grade credit ratings as of December 31, 2022 as follows:

In millions

Lender rating, by category Loan Commitment

Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Natural if the lender defaulted due to lack of funds or insolvency; however, NW Natural does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings.

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The NW Natural credit agreement permits the issuance of letters of credit in an aggregate amount of up to $60 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. There were no outstanding balances under this credit agreement at December 31, 2022 or 2021. The 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, with consolidated indebtedness to total capitalization ratios of 52.1% and 55.8%, respectively.

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. See "Credit Ratings" below.

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. The NW Natural credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Natural’s independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.

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.

Credit Ratings

NW Holdings does not currently maintain ratings with S&P or Moody's. NW Natural's credit ratings are a factor of liquidity, potentially affecting access to the capital markets including the commercial paper market. NW Natural's credit ratings also have an impact on the cost of funds and the need to post collateral under derivative contracts.

The following table summarizes NW Natural's current credit ratings:

S&P Moody's

Commercial paper (short-term debt) A-1 P-2

Senior secured (long-term debt) AA- A2

Senior unsecured (long-term debt) n/a Baa1

Corporate credit rating A+ n/a

Ratings outlook Stable Stable

The above credit ratings and ratings outlook are dependent upon a number of factors, both qualitative and quantitative, and are subject to change at any time. The disclosure of or reference to these credit ratings is not a recommendation to buy, sell or hold NW Holdings or NW Natural securities. Each rating should be evaluated independently of any other rating.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Holdings and NW Natural are required to maintain separate credit ratings, long-term debt ratings, and preferred stock ratings, if any.

Long-Term Debt

Issuance of Long-Term Debt

In December 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein. The Bond Purchase Agreement provides for the issuance of (i) $100.0 million aggregate principal amount of NW Natural’s First Mortgage Bonds (FMBs), 5.43% Series due 2053 (5.43% Bonds), (ii) $80.0 million aggregate principal amount of NW Natural’s FMBs, 5.18% Series due 2034 (5.18% Bonds) and (iii) $50.0 million aggregate principal amount of NW Natural’s FMBs, 5.23% Series due 2038 (5.23% Bonds) in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The 5.43% Bonds were issued on January 6, 2023, pursuant to the Twenty-fifth Supplemental Indenture to NW Natural’s Mortgage and Deed of Trust, dated as of July 1, 1946, with Deutsche Bank Trust Company Americas as trustee (the Mortgage). The 5.18% Bonds and the 5.23% Bonds are expected to be issued on or about August 4, 2023, pursuant to the Twenty-sixth Supplemental Indenture to the Mortgage.

The 5.43% Bonds will 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 5.43% 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

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(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 5.18% Bonds will bear interest at the rate of 5.18% per annum, payable semi-annually on February 4 and August 4 of each year, commencing February 4, 2024, and will mature on August 4, 2034. The 5.18% 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 May 4, 2034, 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 May 4, 2034, at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.

The 5.23% Bonds will bear interest at the rate of 5.23% per annum, payable semi-annually on February 4 and August 4 of each year, commencing February 4, 2024, and will mature on August 4, 2038. The 5.23% 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 May 4, 2038, 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 May 4, 2038, at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.

In September 2022, NW Holdings entered into an 18-month credit agreement for $100.0 million and borrowed the full amount. The loan carries a variable interest rate based on the SOFR, resulting in a rate of 4.2% at December 31, 2022. 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 loan carries a variable interest rate based on the SOFR, resulting in a rate of 4.2% at December 31, 2022. 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.

In July 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein 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.

In November 2021, NW Natural issued $130.0 million of FMBs with an interest rate of 3.08% due in 2051. Issued as a sustainability bond, net proceeds from the sale of the FMBs were added to the general funds of NW Natural and used for general corporate purposes, while an amount equivalent to the net proceeds from the sale of the bonds was allocated to finance and/or refinance, in whole or in part, investments in one or more projects of NW Natural deemed to be an eligible project in the bond offering. An amount equivalent to the proceeds were allocated to expenditures related to RNG infrastructure, energy efficiency programs, expenditures related to the operations of our LEED Gold certified headquarters building, and expenditures and program investments related to enabling opportunities for diverse and small business enterprises.

In June 2021, NWN Water, a wholly-owned subsidiary of NW Holdings, entered into a five-year term loan agreement for $55.0 million. The loan carried an interest rate of 2.5% at December 31, 2022, which 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, with a consolidated indebtedness to total capitalization ratio of 57.6%. 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.

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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

Retirement of Long-Term Debt

The following NW Natural debentures were retired in the periods indicated:

Year Ended December 31,

NW Natural First Mortgage Bonds:

In June 2019, NW Natural Water, a wholly-owned subsidiary of NW Holdings, entered into a two-year term loan agreement for $35.0 million. The loan was repaid in June 2021 upon its maturity date.

Maturities and Interest on Long-Term Debt

Maturities and payment of interest on long-term debt for each of the annual periods through December 31, 2027 and thereafter are as follows:

In millions Long-term debt maturities Interest on long-term debt

NW Natural:

Other NW Holdings:

Other NW Holdings Total $ 211.2 $ 21.4

NW Holdings:

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Bankruptcy Ring-fencing Restrictions

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Natural is required to have one director who is independent from NW Natural management and from NW Holdings and to issue one share of NW Natural preferred stock to an independent third party. NW Natural was in compliance with both of these ring-fencing provisions as of December 31, 2022 and 2021. NW Natural may file a voluntary petition for bankruptcy only if approved unanimously by the Board of Directors of NW Natural, including the independent director, and by the holder of the preferred share.

Cash Flows

Operating Activities

Changes in our operating cash flows are primarily affected by net income or loss, changes in working capital requirements, and other cash and non-cash adjustments to operating results.

NW Natural cash provided by operating activities $ 145.2 $ 141.5 $ 148.5

NW Holdings cash provided by operating activities $ 147.7 $ 160.4 $ 145.3

2022 COMPARED TO 2021. The significant factors contributing to the $3.7 million increase at NW Natural cash flow provided by operating activities were as follows:

•$52.9 million increase in net deferred gas costs as the actual cost of gas during the year ended December 31, 2022 was higher than the rate embedded in the PGA. In addition, for the year ended December 31, 2021, actual gas costs were 21% above the PGA rate due to the 2021 cold weather event; and

•$12.6 million increase in accounts payable primarily due to a larger volume of gas purchased and the higher cost of gas; partially offset by

•$32.0 million increase in asset optimization revenue sharing bill credits to customers due to the 2021 cold weather event; and

•$32.1 million increase in accounts receivable and accrued unbilled revenue resulting from higher balances due to colder weather.

The $12.7 million decrease in NW Holdings cash flow provided by operating activities were driven by the above factors affecting NW Natural, in addition to lower prepaid income taxes in 2022 compared to 2021.

2021 COMPARED TO 2020. The significant factors contributing to the $7.0 million decrease at NW Natural cash flow provided by operating activities were as follows:

•$58.1 million increase in net deferred gas costs as the actual costs during the 2020-21 winter season were 21% above the PGA estimates primarily due to the 2021 cold weather event as opposed to gas costs in the 2019-20 winter season that were in line with estimates embedded in the PGA,

•$26.5 million decrease due to increased receivables; partially offset by

•$51.7 million increase in the regulatory incentive sharing mechanism related to revenues earned from Mist gas storage and asset management activities primarily related to the 2021 cold weather event, and

•$19.4 million of lower contributions to the defined benefit pension plan.

The $15.1 million increase in NW Holdings cash flow provided by operating activities were driven by the above factors affecting NW Natural, in addition to:

•$14.0 million increase due to lower income and other taxes, and

•$9.7 million increase due to lower deferred environmental expenses.

During the year ended December 31, 2022, NW Natural did not make any cash contributions to its qualified defined benefit pension plan, compared to $9.6 million in 2021 and $29.0 million in 2020. 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. The amount and timing of future contributions will depend on market interest rates and investment returns on the plans’ assets. See Note 10.

NW Holdings and NW Natural have lease and purchase commitments relating to our operating activities that are financed with cash flows from operations. For information on cash flow requirements related to leases and other purchase commitments, see Note 7 and Note 16.

Investing Activities

NW Natural cash used in investing activities $ (320.3) $ (275.7) $ (264.1)

NW Holdings cash used in investing activities $ (435.5) $ (300.1) $ (294.3)

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2022 COMPARED TO 2021. Cash used in investing activities increased $44.6 million at NW Natural and $135.4 million at NW Holdings, respectively. The increase at NW Natural is primary driven by an increase in capital expenditures of $40.4 million. The increase at NW Holdings is driven by the increase at NW Natural and $94.3 million in cash paid for water and wastewater acquisitions.

2021 COMPARED TO 2020. Cash used in investing activities increased $11.6 million at NW Natural and $5.8 million at NW Holdings, respectively. The increase at NW Natural is primary driven by an increase in capital expenditures of $12.2 million for customer growth, system reinforcement, and technology. The increase at NW Holdings is driven by the $14.5 million purchase of an equity method investment and $12.5 million of proceeds from the sale of discontinued operations in 2020, partially offset by a $37.0 million decrease in cash paid for acquisitions.

NW Natural capital expenditures for 2023 are expected to be in the range of $310 million to $350 million and for the five-year period from 2023 to 2027 are expected to range from $1.3 billion to $1.5 billion. NW Natural Water is expected to invest approximately $25 million in 2023 related to maintenance capital expenditures for water and wastewater utilities owned as of December 31, 2022, and for the five-year period from 2023 to 2027 capital expenditures are expected to invest approximately $90 million to $110 million.

The timing and amount of the core capital expenditures and projects for 2023 and the next five years could change based on regulation, growth, and cost estimates. Additional investments in our infrastructure during and after 2023 that are not incorporated in the estimates provided above will depend largely on additional regulations, growth, and expansion opportunities. Required funds for the investments are expected to be internally generated or financed with long-term debt or equity, as appropriate.

Financing Activities

NW Natural cash provided by financing activities $ 178.9 $ 139.3 $ 122.4

NW Holdings cash provided by financing activities $ 301.6 $ 131.4 $ 171.8

2022 COMPARED TO 2021. Cash provided by financing activities increased $39.6 million at NW Natural primarily driven by $63.4 million in capital contributions by NW Holdings, partially offset by changes in debt.

Cash provided by financing activities increased $170.2 million at NW Holdings primarily due to cash proceeds of $191.1 million from the issuance of common stock and the ATM equity program, partially offset by changes in debt.

2021 COMPARED TO 2020. Cash provided by financing activities increased $16.9 million at NW Natural primarily driven by higher short-term debt borrowings of $297.6 million and $116.0 million in capital contributions by NW Holdings, partially offset by $390.1 million of lower proceeds from and repayments of commercial paper with maturities greater than 90 days.

Cash provided by financing activities decreased $40.4 million at NW Holdings primarily due to $390.1 million of lower proceeds from and repayments of commercial paper with maturities greater than 90 days, partially offset by higher other short-term debt borrowings of $319.6 million and cash proceeds of $17.5 million from the ATM equity program.

Pension Cost and Funding Status of Qualified Retirement Plans

NW Natural's pension costs are determined in accordance with accounting standards for compensation and retirement benefits. See “Application of Critical Accounting Policies and Estimates – Pensions and Postretirement Benefits” below. Pension expense for NW Natural's qualified defined benefit plan, which is allocated between operations and maintenance expenses and capital expenditures totaled $5.4 million in 2022, a decrease of $11.2 million from 2021. The fair market value of pension assets in this plan decreased to $280.3 million at December 31, 2022 from $399.2 million at December 31, 2021. The decrease was due to a loss on plan assets of $93.7 million and benefit payments of $25.2 million.

Contributions made to NW Natural's company-sponsored qualified defined benefit pension plan are based on actuarial assumptions and estimates, tax regulations, and funding requirements under federal law. The qualified defined benefit pension plan was underfunded by $101.3 million at December 31, 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. The amount and timing of future contributions will depend on market interest rates and investment returns on the plan's assets. See Note 10 for information regarding employer contributions and estimated future benefit payments and other pension disclosures.

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Contingent Liabilities

Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies. See “Application of Critical Accounting Policies and Estimates—Environmental Contingencies” below. At December 31, 2022, NW Natural's total estimated liability related to environmental sites was $118.8 million. See Note 17 and "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Cost Deferral and Recovery" above.

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.

New Accounting Pronouncements

For a description of recent accounting pronouncements that may have an impact on our financial condition, results of operations, or cash flows, see Note 2.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing financial statements in accordance with U.S. GAAP, management exercises judgment to assess the potential outcomes and related accounting impacts in the selection and application of accounting principles, including making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and related disclosures in the financial statements. Management considers critical accounting policies to be those which are most important to the representation of financial condition and results of operations and which require management’s most difficult and subjective or complex judgments, including accounting estimates that could result in materially different amounts if reported under different conditions or used different assumptions. Our most critical estimates and judgments for both NW Holdings and NW Natural include accounting for:

•regulatory accounting;

•revenue recognition;

•derivative instruments and hedging activities;

•pensions and postretirement benefits;

•income taxes;

•environmental contingencies; and

•impairment of long-lived assets and goodwill.

Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit Committees of the Boards of NW Holdings and NW Natural. Within the context of critical accounting policies and estimates, management is not aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Regulatory Accounting

The NGD segment is regulated by the OPUC and WUTC, which establish the rates designed to recover specific costs of providing regulatory services, and, to a certain extent, set forth special accounting treatment for certain regulatory transactions for which NW Natural records regulatory assets and liabilities. In general, the same accounting principles as non-regulated companies reporting under U.S. GAAP are used. However, authoritative guidance for regulated operations (regulatory accounting) requires different accounting treatment for regulated companies to show the effects of such regulation. For example, NW Natural accounts for the cost of gas using a PGA deferral and cost recovery mechanism, which is submitted for approval annually to the OPUC and WUTC. See "Results of Operations—Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment" above. There are other expenses and revenues that the OPUC or WUTC may require NW Natural to defer for recovery or refund in future periods. Regulatory accounting requires NW Natural to account for these types of 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, NW Natural 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 conditions that must be satisfied to adopt the accounting policies and practices of regulatory accounting include:

•an independent regulator sets rates;

•the regulator sets the rates to cover specific costs of delivering service; and

•the service territory lacks competitive pressures to reduce rates below the rates set by the regulator.

Because NW Natural's NGD operations satisfy all three conditions, NW Natural continues to apply regulatory accounting to NGD operations. Future accounting changes, regulatory changes, or changes in the competitive environment could require NW Natural to discontinue the application of regulatory accounting for some or all of our regulated businesses. This would require the write-off of those regulatory assets and liabilities that would no longer be probable of recovery from or refund to customers.

Based on current accounting and regulatory competitive conditions, NW Natural believes it is reasonable to expect continued application of regulatory accounting for NGD activities. Further, it is reasonable to expect the recovery or refund of NW Natural's regulatory assets and liabilities at December 31, 2022 through future customer rates. If it is determined that all or a portion of

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these regulatory assets or liabilities no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances against earnings in the period such determination is made. The net balance in regulatory asset and liability accounts was a net liability of $479.3 millionand a net liability of $382.7 million as ofDecember 31, 2022 and 2021, respectively. See Note 2 for more detail on regulatory balances.

Revenue Recognition

Revenues, which are derived primarily from the sale, transportation, and storage of natural gas, are recognized upon the delivery of gas commodity or services rendered to customers.

Accrued Unbilled Revenue

For a description of the policy regarding accrued unbilled revenue, most of which relates to the NGD business at NW Natural, see Note 2. The following table presents changes in key metrics if the estimated percentage of unbilled volume at December 31 was adjusted up or down by 1%:

In millions Up 1% Down 1%

Unbilled revenue increase (decrease)(1) $ 1.6 $ (1.6)

Margin increase (decrease)(1) 0.2 (0.2)

Net income before tax increase (decrease)(1) 0.2 (0.2)

(1) Includes impact of regulatory mechanisms including decoupling mechanism and excludes the impact of unbilled revenue from water services.

Derivative Instruments and Hedging Activities

NW Holdings and NW Natural have financial derivative policies that set forth guidelines for using financial derivative instruments to support prudent risk management strategies. These policies specifically prohibit the use of derivatives for trading or speculative purposes. Financial derivative contracts are utilized to hedge a portion of natural gas sale requirements. These contracts include swaps, options, and combinations of option contracts. NW Natural primarily uses these derivative financial instruments to manage commodity price variability. A small portion of NW Natural's derivative hedging strategy involves foreign currency exchange contracts.