Staff Audit Report of - Oregon Public Utility Commission NWN Final 3-7...OPUC Staff Audit Report...

OPUC Staff Audit Report Audit 2017-001 NW Natural March 2016 – January 2017 March 7, 2017

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Staff Audit Report of Northwest Natural Audit Number: 17-001

Audit team: Marianne Gardner (Lead Auditor) Scott Gibbens Lisa Gorsuch Judy Johnson Mitch Moore Matthew Muldoon Prepared by: Marianne Gardner


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Staff Audit Report of Northwest Natural

Table of Contents

Executive Summary ............................................................................................ 4 Audit Objectives and Scope .............................................................................. 4 Audit Areas ........................................................................................................ 4 Audit Results ..................................................................................................... 5 Other Comments ............................................................................................... 5

Summary of Recommendations ........................................................................ 6 Company Background and Organization ....................................................... 14 Affiliated Interest and Cost Allocations .......................................................... 14

Affiliated Interests ............................................................................................ 14 Affiliate Transactions ....................................................................................... 16

Capital Projects ................................................................................................. 18 Oregon Situs Utility Plant ................................................................................ 18 System Integrity Programs .............................................................................. 21 Storage ............................................................................................................ 21

Schedule 90 Conditions of Approval ............................................................ 22 WARM & Decoupling ....................................................................................... 24 Pipeline Capital Costs ..................................................................................... 25 Accounting ...................................................................................................... 25 Competitive Bidding ........................................................................................ 26 Information Technology Capital Projects ......................................................... 26

I-Series Recovery Project ............................................................................ 26 Technology Refresh-Desktops/Laptops and Peripherals ............................. 27 Technology Refresh-Large Servers/SANs ................................................... 27 GMAC Upgrade ........................................................................................... 28 Customer Order Management ..................................................................... 29 Enterprise Content Management ................................................................. 30 PCAD Upgrade ............................................................................................ 31 SAP Upgrade – Phase II .............................................................................. 31 J5 Implementation ....................................................................................... 32 Voice Radio Operations Improvement (VROI) – Phase II ............................ 32 Sherwood Microwave Tower........................................................................ 33 Eagle Wireless ............................................................................................. 34 Unified Communications – Phase 2 ............................................................. 35 ICS Network Segmentation – Cybersecurity Program ................................. 36 RLMAN Replacement .................................................................................. 36

Allowance for Funds Used During Construction (AFUDC) .............................. 37 Actual Financial Performance.......................................................................... 37

Actual Returns ................................................................................................. 37 Budget Versus Actual ...................................................................................... 39


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Comparison to Other Natural Gas Utilities in Oregon ...................................... 40 Administrative and General (A&G) Expenses ................................................ 42

Cost Comparisons ........................................................................................... 42 Advertising ...................................................................................................... 43 Uncollectible Expenses ................................................................................... 43 Insurance Services, Injuries, and Damages .................................................... 45 Other Administrative & General Expense Adjustments ................................... 46 Legal Fees ...................................................................................................... 46

Labor Costs ....................................................................................................... 46 Staffing ............................................................................................................ 46 Severance Costs ............................................................................................. 48 Incentive Costs ................................................................................................ 48 Labor Loadings................................................................................................ 49 Benefits ........................................................................................................... 50 Medical/Dental/Vision Benefits ........................................................................ 51 Pension and Postretirement Costs .................................................................. 53

Operations and Maintenance Expenses ......................................................... 55 Taxes .................................................................................................................. 56

Income Taxes .................................................................................................. 56 Other Taxes..................................................................................................... 57 Deferred Taxes ................................................................................................ 58 Tax Credits ...................................................................................................... 58

Financial Records ............................................................................................. 58 Internal Audits ................................................................................................. 58 FAS 133 Mark-to-Market Accounting .............................................................. 59 Property Sales ................................................................................................. 59

Cost of Capital................................................................................................... 59 Securities Issuance ......................................................................................... 59 Long-Term Debt .............................................................................................. 60 Snapshot ......................................................................................................... 61

Cash Flows .................................................................................................. 61 Credit Facilities ............................................................................................ 62 Dividends ..................................................................................................... 62

Advice by Investment Banks to Northwest Natural .......................................... 63 Customer Service ............................................................................................. 63

Customer Count, Complaints, and Service Levels ....................................... 63


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Executive Summary Audit Staff (Staff) conducted an Operational Audit of Northwest Natural (NW Natural, NWN, or Company) during the March 2016 through January 2017 timeframe. As part of the audit, Staff submitted 257 data requests to NW Natural. Although Staff focused on operations from fiscal years 2012 through 2015, Staff examined additional data for consistency and that can be reviewed as historical information in a future regulatory proceeding. In addition to NW Natural's responses to Staff's data requests, Staff relied on the following resources: 1. NW Natural Reports Results for the Quarter Ending March 31, 2016,

Company Release May 3, 2016; 2. NW Natural Form 8-K Current Reports filed with the U.S. Securities and

Exchange Commission (SEC); 3. Thompson Reuters Street-Events Edited Transcript of NWN – Q1 2016

Earnings Call of May 3, 2016; 4. NW Natural Form 10-Q filed with the SEC for the quarterly period ended

March 31, 2016; 5. “Lead, Innovate, Grow,” NW Natural Investor Presentation of June 2016 and

updated for September 2016; 6. NW Natural's Fiscal Year 2015 Results of Operations Report; 7. NW Natural's Fiscal Year 2015 Affiliated Interest Annual Report; 8. NW Natural’s calendar year 2015 FORM 10-K Annual Report filed with the

SEC; 9. NW Natural's 2015 FERC Form 2 report; 10. An analysis of NW Natural’s historic and outstanding debt securities utilizing

Bloomberg and SNL Financial, LLC; and 11. NW Natural 2016 annual shareholder meeting presentation, “Building with

foresight.”

Audit Objectives and Scope 1. Review and provide information that will assist Staff in the next NW

Natural rate case. 2. Provide an information base for future regulatory proceedings and other

inquiries into the operations of NW Natural.

3. Develop suggestions for further investigation during a rate case.

Audit Areas Staff audited the following areas and topics:


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1. Company Background 2. Affiliated Interest 3. Capital Projects 4. Information Technology (IT) Capital Projects 5. Allowance for Funds Used During Construction (AFUDC) 6. Actual Financial Performance 7. Administrative and General Costs 8. Labor Costs 9. Operations and Maintenance (O&M) 10. Taxes 11. Financial Records 12. Securities Issuances 13. Customer Service

Audit Results Staff’s audit led to several recommendations to staff assigned to NW Natural’s next general rate case (rate case staff) regarding topics for examination and to a few recommendations that are pertinent to staff’s review of other types of filings.1 It is important to note that the audit was performed on a sample basis. Staff involved in the Company’s next rate case may discover issues and concerns that were not encountered during the audit process or may not align with the Audit Staff's findings. Additionally, these recommendations should not be construed as final rate case adjustments, as each subject area will undergo further review by staff during NW Natural's rate case.

Other Comments Staff appreciates NW Natural's responsiveness and cooperation during the audit process.

1 The latter issues are identified as “general issues” in the Audit Report.


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Summary of Recommendations

NW Natural

No. Area Topic Comments Page 1. Affiliated

Interest and Cost

Allocations

Affiliated Interests

NW Natural should include the Master Service Agreement (MSA) as an appendix to its annual affiliated interest report filed with the Commission and ensure that the language in the body of the MSA and any addendums or appendices are current as of the end of the year addressed in the report. (General Issue)

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2. Affiliated Interest and

Cost Allocations

Affiliate Transactions

Rate case staff should review the Cost Allocation Manual as part of the rate case review of allocations.

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3. Capital Projects

Oregon Situs Utility Plant

Rate case staff should examine capital projects included in rate base to ensure that awards, gifts and other costs like performance incentives normally excluded in full or in part are excluded from rate base.

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4. Capital Projects

Oregon Situs Utility Plant

Rate case staff should review ROI or cost-benefit analysis (CBA) performed by the Company for existing plant as well as plant forecasted to be used and useful by the date rates are expected to be in effect.

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5. Capital Projects

Storage Rate case staff should review the capital cost of all new storage additions by the Company since the last general rate case, as well as the level of storage capacity for core demand included in its regulated rate base.

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6. Capital Projects

Storage Rate case staff should review the appropriateness of the level and 21


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No. Area Topic Comments Page types of operational and maintenance costs for Company-owned storage included in rates. Rate case staff should specifically review the costs associated with the repair or replacement of the large dehydrator at Mist’s Miller Station.

7. Capital Projects

Storage Rate case staff should review and confirm that the Schedule 90 Conditions of Approval as listed under the report heading, “Schedule 90 Conditions,” are being met per Commission approval of Advice No. 14-7, which are detailed in Attachment A of Staff’s memorandum.

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8. Capital Projects

WARM & Decoupling

Rate case staff should confirm that the temperature data lag does not conflict with data used to calculate the WARM coefficients.

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9. Capital Projects

WARM & Decoupling

Rate case staff should confirm that temperature coefficients used in WARM are consistent with the forecasting methodology used to generate billing determinants in any general rate case.

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10. Capital Projects

WARM & Decoupling

Rate case staff should evaluate the current decoupling mechanism, including addressing the following: • How well the Company’s

incentives aligned with respect to energy efficiency goals.

• How these mechanisms assisted the Company towards earning its authorized rate of return.

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11. Capital WARM & Rate case staff should update 25


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No. Area Topic Comments Page Projects Decoupling the calculation of the baseline

margin used for comparison to arrive at the decoupling adjustment.


WARM & Decoupling

Rate case staff should review the normal weather assumptions used for the test year normalization.

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WARM & Decoupling

Rate case staff should evaluate all trackers adopted since UG 152, as well as the shifting of risk associated with volatility in sales volumes from NW Natural to its customers.

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WARM & Decoupling

Rate case staff should evaluate the decoupling status of comparison firms in any cost of capital study.

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Pipeline Capital Costs

Rate case staff should review all construction and capital costs for current and past proposed pipeline distribution projects.

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Pipeline Capital Costs

Rate case staff should review all construction and capital costs for current and past proposed low and high pressure pipeline transportation projects.

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Accounting Rate case staff should audit and review entries made to FERC account 380.

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Accounting Rate case staff should verify the mapping of SAP accounting entries to ensure they are correct and appropriate.

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Competitive Bidding

Rate case staff should verify that all pipeline and mains project costs are reasonable, and where competitive bidding processes are used, that the results of bidding are appropriate.

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No. Area Topic Comments Page 20. Capital

Projects Competitive

Bidding Rate case staff should verify all documentation of the conduct and results of each bidding process for pipeline and mains projects.

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Information Technology

Capital Projects

Rate case staff should ensure that Technology Refresh-Large Servers assets are allocated, as appropriate, to non-utility operations in accordance with NW Natural’s allocation methodology.

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Capital Projects

Rate case staff should ensure that the Disaster Recovery Phase II project; the SCADA Network Security; the GMS SunGard Aligne; and the GMS PCM-Gasco projects are used and useful prior to placing into plant.

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Capital Projects

Rate case staff should review all ROI or cost-benefit analysis (CBA) performed by the Company for all major IT capital projects.

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24. Actual Financial

Performance

Budget Versus Actual

Rate case staff should examine test year operating expenses against the historical performance.

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25. Admin. and

General

Environmental Costs

Rate case staff should review FERC Account 925 to ensure no disallowed costs are included.

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26. Admin. and

General Expenses

Advertising Rate case staff should review all advertising and promotional concessions expense for consistency with applicable rules and Commission policy.

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27. Admin. and General

Expenses

Uncollectible Expenses

Rate case staff should review uncollectible expenses during the rate case to determine a reasonable ongoing level of expense.

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No. Area Topic Comments Page 28. Admin. and

General Expenses

Insurance Services,

Injuries, and Damages

Rate case staff should review individual insurance policies to determine an appropriate level of insurance expense that should be borne by customers.

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29. Admin. and General

Expenses

Other A&G Expenses

Rate case staff should review in detail other administrative and general expense to identify non-utility office expenses, meals/travel/entertainment expenses, spousal expenses, political contributions, gifts, catering, etc. that should be removed as rate case adjustments.

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30. Labor Costs Staffing Rate case staff should review wages and salaries and compare the historical trend in base rates, incentives, and FTE to the test year amounts and determine causal drivers that appear to influence changes in the year over year trend.

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31. Labor Costs Staffing Rate case staff should review salary studies or labor benchmarking conducted internally by NWN or outside consultants.

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32. Labor Costs Incentive Costs Rate case staff should review and determine whether NWN’s salaries used in the salary studies included bonuses, key goal incentives, overtime or any other wage components, and, if so, whether the components are comparable with the surveys provided in the salary studies.

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33. Labor Costs Labor Loadings Rate case staff should examine the labor loading percentages and confirm with NWN if there has been a change in methodology.

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No. Area Topic Comments Page 34. Labor Costs Labor Loadings Rate case staff should examine

labor loading percentages and compare them to industry standards if available.

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35. Labor Costs Benefits Rate case staff should review all optional non-wage compensation provided to employees as part of a total compensation package and compare to any available surveys.

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36. Labor Costs Medical/Dental/ Vision Benefits

Rate case staff should review the health plans offered to employees, the associated premiums, and any cost sharing between NWN and its employees and compare Company’s cost sharing against the KKF health benefits survey.

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37. Labor Costs Medical/Dental/ Vision Benefits

Rate case Staff should review any savings options, such as a Heath Reimbursement Arrangement (HRA) or a Heath Savings Account (HSA), the Company contributes to on behalf of employees and compare to the KKF surveys.

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38. Pension and

Post- retirement

Costs

Pension and

Post- retirement

Costs

Rate case staff should examine GRC test year trend and third party assessments in its review of pension and other post-retirement costs.

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39. Operations and

Maintenance Expenses

Operations and Maintenance

Expenses

Rate case staff should review O&M expenses during the rate case to determine a reasonable ongoing level of expense.

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40. Taxes ADIT Rate case staff should verify whether the Company has properly included the tax effects of any special tax treatments such as the bonus depreciation deduction or the maintenance and repairs deduction in ADIT.

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No. Area Topic Comments Page 41. Taxes Tax Credits Rate case staff should verify that

any tax credit that is linked to Oregon operations is reflected in rates.

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42. Cost of Capital

Securities Issuance

Rate case staff should examine non-regulatory assets and goodwill and associated equity.

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43. Cost of Capital

Securities Issuance

Rate case staff should examine the Company’s control of legal expenses surrounding securities’ issuance. This examination should look at the assignment of legal costs across multiple related issuances and confirm whether costs for like legal work reflect downward price pressures over time.

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44. Cost of Capital

Securities Issuance

Staff in subsequent securities issuance dockets should require that the Company capture and document legal expenses to reflect the purposes of the legal services rendered, the skill level of attorney or paralegal performing the work, and the billed cost to accomplish specific component tasks. (Rate case and Securities Issuance dockets)

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45. Cost of Capital

Long-Term Debt

Rate case staff should remove short-term debt, contracts and obligations with debt like properties, and imputed debt from calculation of long-term debt.

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46. Cost of Capital

Long-Term Debt

Rate case staff should examine early redemption opportunities for effectiveness against term maturities. This analysis will include sensitivities around Federal Reserve interest rate increases.

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No. Area Topic Comments Page 47. Cost of

Capital Long-Term

Debt Rate case staff should examine early redemption opportunities for effectiveness against term maturities. This analysis will include sensitivities around Federal Reserve interest rate increases.

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48. Cost of Capital

Snapshot - Dividends

Rate case staff should examine the relative cost of unsecured letters of credit (LC) vs. secured LC and bond alternatives to ensure that lower cost guarantees adequate to satisfy counterparties were not overlooked.

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49. Cost of Capital

Investment Banking Advice

Rate case staff will review the following three programs against governance examined in the audit.

a. Dividend Reinvestment Plan (DRIP),

b. Employee Stock Purchase Plan (ESPP), and

c. Restated Stock Option Plan (SOP).

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50. Cost of Capital

Investment Banking Advice

Rate case staff should examine financial hedges to verify that the Company performed its own analysis or retained its own quantitative analysis experts as opposed to sole reliance on indicative data from facilitators and counterparties. Rate case staff should determine if the Company identified which parties could gain or lose and to what extent if assumptions and expected correlations did not hold true.

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Company Background and Organization Founded in 1859, Northwest Natural Gas Company, dba NW Natural, is a local gas distribution company based in Oregon and Washington. NW Natural is headquartered in Portland, Oregon. At year-end 2015, NW Natural had approximately 714,000 utility customers in Oregon and southwest Washington, including the Portland-Vancouver metropolitan area, the Willamette Valley, the Oregon coast, and the Columbia River Gorge. NW Natural serves a wide array of industries including but not limited to, pulp, paper, and other forest products processors; food processors; agriculture; government and educational institutions; and electric generation. NW Natural meets the expected needs of its core utility customers through natural gas purchases from a variety of suppliers in the western United States and Canada. The Company also operates an underground storage facility and contracts for additional gas storage outside its service territory. NW Natural operates two liquefied natural gas plants in its service area. The Company also provides gas storage services to other energy companies in the Northwest interstate market. In addition, NW Natural has contracts with an electric generator and two industrial customers that provide recallable capacity transportation.

Affiliated Interest and Cost Allocations

Affiliated Interests The following is a brief description of NW Natural’s affiliated entities based on the Company’s 2015 Annual Affiliated Interests Report filed with the Commission. These entities are affiliated interests of the Company, as defined by ORS 757.015, because each has two or more officers or directors in common with the Company, or they meet the ownership requirements of 5 percent direct or indirect ownership. NNG Financial Corporation (NNGFC) is a wholly owned subsidiary of NW Natural created in 1984. NNGFC owns 100 percent of the stock of KB Pipeline Company. NNGFC is also a limited partner in a low-income housing project located in Portland, Oregon. NNGFC’s ownership interest in this project is 49.5 percent. KB Pipeline Company (KBPC) is a wholly owned subsidiary of NNGFC created in 1991. KBPC owns a 10 percent interest in, and is the former operator of, an interstate natural gas pipeline known as the Kelso-Beaver Pipeline. KBPC has


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no separate employees of its own; it uses employees shared with Northwest Natural, as approved by FERC in July 2004. Northwest Energy Corporation (NWEC) is a wholly owned subsidiary of NW Natural created in 2001. It was formed to serve as the holding company for Northwest Natural and PGE in the event NWN’s proposed acquisition of PGE had been completed. NWN terminated the acquisition process in May 2002 and the corporation remained dormant until 2013. Since 2013, NW Energy Corp has served as the holding company for NWN Gas Reserves LLC. Northwest Energy Sub Corporation (NWESC) is a wholly owned subsidiary of NWEC created in 2001. It was formed to effect the corporate reorganization of the proposed acquisition mentioned in the preceding paragraph. The corporation has remained dormant since its foundation. There were no affiliated transactions between NW Natural and NWESC in 2015. NWN Gas Reserves LLC (NWN Gas Reserves) is a wholly owned subsidiary of Northwest Energy Corporation formed in December 2012. In March 2013, NWN's transferred its working interest in the Jonah Field to this entity.

The agreements related to the working interest were amended in 2014 to facilitate Encana Oil & Gas (USA) Inc.'s sale of its interest in the Jonah Field to an affiliate of TPG Capital. The agreements related to the working interest were again amended in 2016 to further clarify the terms related to additional well development and capital expenditures. Northwest Biogas, LLC (NWB) is partly owned by NWN. NWN owns a 50 percent membership interest in NW Biogas and serves as the Managing Member. The other 50 percent membership interest is owned by BEF Renewable Incorporated. NW Biogas developed and operates a demonstration biodigester located at Three Mile Canyon Farms in Boardman, Oregon. NW Natural Gas Storage, LLC (NWN Gas Storage) is a wholly owned subsidiary of NW Natural formed in 2009. NWN Gas Storage owns and manages non-utility gas storage interests. BL Credit Holdings, LLC (BLCH) is a wholly owned subsidiary of TWP. There were no affiliated transactions between the Company and BLCH in 2015. Gill Ranch Storage, LLC (GRS) is a wholly owned subsidiary of NW Natural created in 2007. Effective March 7, 2007, the Company assigned all of its membership interest in GRS to NW Natural Energy, LLC. NW Natural Energy,


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LLC, subsequently assigned all of its membership interest in GRS to NW Natural Gas Storage, LLC. GRS entered into a Joint Project Agreement with Pacific Gas & Electric Company (PG&E) in 2007 for the co-development of an underground natural gas storage facility near Fresno, California. GRS has a 75 percent undivided ownership interest in the project and is the project operator. NW Natural Energy, LLC (NWNE) is a wholly owned subsidiary of Northwest Natural Gas Company created in 2009. It was formed to own NW Natural Gas Storage, LLC, and other non-utility businesses. Trail West Holdings, LLC (TWH) is owned by NW Natural Energy, LLC ("NWN Energy") and TransCanada American Investment Ltd. ("TAIL"), with each owning a 50 percent membership interest. TWH wholly owns Trail West Pipeline, LLC (TWP), which is developing the cross-Cascades natural gas pipeline. See below for description of TWP. Trail West Pipeline (TWP) is a wholly owned subsidiary of TWH, and has been pursuing the development of a proposed FERC-regulated cross-Cascades natural gas pipeline.

Affiliate Transactions Staff reviewed the Company’s 2015 Annual Affiliated Interest Report and comments on the following: Money Pooling The Company does not maintain a cash management (money pooling) arrangement with subsidiaries and affiliates. Master Services Agreement NW Natural’s most recent Affiliated Master Services Agreement (MSA) was approved on February 6, 2009, in OPUC Order No. 09-051. At this time, however, the MSA does not accurately reflect NW Natural’s current affiliates. Staff noted the same in the prior audit and recommended the Company file an addendum to update the list of current affiliates in its MSA within 120 days of this report. During the course of this audit, Staff asked the Company whether it had updated the MSA since February 6, 2009. The Company replied that the MSA remains unchanged since that date.

Staff Recommendation 1. NW Natural should include the MSA as an appendix to its Annual Affiliated

Interest report filed with the Commission and ensure that the language in the body of the MSA and any addendums or appendices are current as of the end of the year addressed in the Report. (General Issue)


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Transactions NW Natural made payments to KB Pipeline Company in 2015 for pipeline demand charges of $224,258 and $12,359 on a total Company and total Oregon basis, respectively. These payments are pursuant to certain FERC regulations and do not require an affiliated interest filing pursuant to OAR 860-027-0040(3)(b)(A). Services rendered by NNG Financial Corporation (NNGFC) Affiliate services payments to the utility in 2015 for insurance, overhead, property taxes, and other administrative expenses totaled $1,289,367. Services provided by NW Natural employees to affiliates or non-utility are direct charged and based on individual time cards with an administrative overhead allocation of 27.5 percent of the direct labor in addition to vacation and holiday overhead and benefits overhead. An administrative overhead charge is likewise added to labor charges from an affiliate to the parent. Affiliates or non-public utility activities are charged directly for materials, supplies, and services purchased by NW Natural on behalf of the affiliate. Intercompany balances between NW Natural and its affiliates are generally paid on a monthly basis. Staff did not note any issues concerning the services payments. Other Payments Tax benefits (Oregon) used by NW Natural from NNG Financial Corporation in 2015 equaled ($16,327). Tax benefits (Oregon) paid by NW Natural to GRS in 2015 equaled $11,291,482. Tax benefits (Oregon) paid by NW Natural to NWN Gas Storage in 2015 equaled $405,792. Tax benefits (Oregon) paid by NW Natural to NWN Energy in 2010 equaled $264,656. Salaries and overhead paid by NW Natural to NWN Gas Storage equaled $180,526. NW Natural files both federal and state income taxes on a consolidated basis and allocates income tax expense or benefit to each affiliate or activity based on the taxable income or loss of the affiliate or activity. Staff did not note any issues concerning the other payments. Cost Allocation Manual The Cost Allocation Manual attached to the 2015 Affiliated Interest Report notes that nine percent of total assets and three percent of gross operating revenues were attributable to non-regulated/non-utility activities. A section-by-section comparison to the Cost Allocation Manual template indicates compliance with the Commission’s requirements concerning the Cost Allocation Manual. Staff also performed a cursory review of the Cost Allocation Manuals included with the 2013 and 2014 Affiliated Interest Reports and noted no extraordinary or unexpected items.


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Staff Recommendation

2. Rate case staff should review the Cost Allocation Manual as part of the rate case review of allocations.

Capital Projects

Oregon Allocated and Situs Utility Plant The following table presents the depreciated changes in asset accounts 301 through 399 from 2012 through 2015. Table 1 – Oregon Allocated and Situs Utility Plant Note: Year-to-year account differences over 10 percent are highlighted and are explained below. See notes A, B, and C.


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FERC Acct # FERC Description 2013 2014 2015

Percent Change 2013-

2015301 ORGANIZATION 852 852 852 0%302 FRANCHISES & CONSENTS 83,496 83,496 83,496 0%

303.1 COMPUTER SOFTWARE 64,579,309 A 53,335,387 B 56,947,460 -12%303.2 CUSTOMER INFORMATION SYSTEM 30,488,305 30,488,305 30,488,305 0%303.3 INDUSTRIAL & COMMERCIAL BIL 4,146,951 4,146,951 4,146,951 0%303.4 CRMS 2,049,451 A 682,893 B 682,893 -67%304.1 LAND 24,998 24,998 24,998 0%305.5 P P O G STRU & IMPR-OTHER Y 13,156 13,156 13,156 0%318.3 P P O G LIGHT OIL REFINING 144,896 144,896 144,896 0%318.5 P P O G TAR PROCESSING 243,551 243,551 243,551 0%

305.11 GAS PRODUCTION - COTTAGE G 8,320 8,320 8,320 0%305.17 STRUCTURES MIXING STATION 46,587 46,587 46,587 0%311.7 LIQUIFIED GAS EQUIPMENT COO 4,033 4,033 4,033 0%311.8 LIQUIFIED GAS EQUIPMENT LIN 4,209 4,209 4,209 0%319 GAS MIXING EQUIPMENT GASCO 185,448 185,448 185,448 0%

350.1 LAND 106,549 106,549 106,549 0%350.2 RIGHTS-OF-WAY 109,625 109,625 109,625 0%351 STRUCTURES AND IMPROVEMENTS 6,715,064 7,139,428 7,208,245 7%352 WELLS 20,047,076 20,047,076 20,047,076 0%

352.1 STORAGE LEASEHOLD & RIGHTS 3,538,491 3,938,491 A 3,938,491 11%352.2 RESERVOIRS 5,844,618 5,844,618 7,272,553 24%352.3 NON-RECOVERABLE NATURAL GAS 6,440,890 6,440,890 6,440,890 0%353 LINES 6,552,220 6,552,220 6,552,220 0%354 COMPRESSOR STATION EQUIPMENT 29,528,531 29,528,531 31,351,812 6%355 MEASURING / REGULATING EQUIPM 6,700,892 6,700,892 7,159,406 7%356 PURIFICATION EQUIPMENT 297,363 297,363 297,363 0%357 OTHER EQUIPMENT 1,331,924 1,331,924 1,332,029 0%

360.11 LAND - LNG LINNTON 83,598 83,598 83,598 0%360.12 LAND - LNG NEWPORT 536,675 536,675 536,675 0%360.2 LAND - OTHER 106,557 B 106,557 106,557 0%

361.11 STRUCTURES & IMPROVEMENTS 4,540,966 4,540,966 4,594,791 1%361.12 STRUCTURES & IMPROVEMENTS 4,603,395 4,659,407 4,656,739 1%361.2 STRUCTURES & IMPROVEMENTS - 26,757 26,757 26,757 0%

362.11 GAS HOLDERS - LNG LINNTON 2,690,579 2,690,579 2,744,404 2%362.12 GAS HOLDERS - LNG NEWPORT 5,791,956 5,791,956 5,791,956 0%362.2 GAS HOLDERS - LNG OTHER 1,600 1,600 1,600 0%

363.11 LIQUEFACTION EQUIP. - LINN 2,921,964 2,921,686 2,975,510 2%363.12 LIQUEFACTION EQUIP - NEWPO 7,308,111 7,308,111 7,308,111 0%363.21 VAPORIZING EQUIP - LINNTON 2,629,836 2,629,836 2,683,660 2%363.22 VAPORIZING EQUIP - NEWPORT 3,594,015 3,594,015 3,664,362 2%363.31 COMPRESSOR EQUIP - LINNTON 180,903 180,903 180,903 0%363.32 COMPRESSOR EQUIPMENT - NE 300,951 1,390,926 A 1,390,926 362%363.41 MEASURING & REGULATING EQU 737,149 1,091,077 A 1,247,665 69%363.42 MEASURING & REGULATING EQU 113,414 113,414 113,414 0%363.5 CNG REFUELING FACILITIES 1,787,828 3,051,295 A 3,051,295 71%363.6 LNG REFUELING FACILITIES 739,473 739,473 739,473 0%365.1 LAND 89,772 89,772 89,772 0%365.2 LAND RIGHTS 6,455,177 6,455,177 6,455,177 0%


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FERC Acct # FERC Description 2013 2014 2015

Percent Change 2013-2015

366.3 STRUCTURES & IMPROVEMENTS - 1,041,984 1,041,984 1,041,984 0%367 MAINS 121,002,232 A 140,349,960 A 145,322,300 20%

367.21 NORTH MIST TRANSMISSION LI 1,994,582 1,994,582 1,994,582 0%367.22 SOUTH MIST TRANSMISSION LI 14,949,264 14,949,264 14,949,264 0%367.23 SOUTH MIST TRANSMISSION LI 34,881,341 34,881,341 34,881,341 0%367.24 11.7M S MIST TRANS LINE 17,466,182 17,466,182 17,466,182 0%367.25 12M NORTH S MIST TRANS 18,613,651 18,613,651 18,613,651 0%367.26 38M NORTH S MIST TRANS 68,232,676 68,232,676 68,232,676 0%

369 MEASURING & REGULATE STATION 3,969,550 3,969,549 3,969,549 0%374.1 LAND 76,386 76,386 76,386 0%374.2 LAND RIGHTS 1,848,733 1,856,083 1,856,083 0%375 STRUCTURES & IMPROVEMENTS 49,372 49,372 49,372 0%

376.11 MAINS < 4" 454,424,224 464,906,167 479,292,086 5%376.12 MAINS 4" & > 411,920,247 420,957,204 436,010,519 6%

377 COMPRESSOR STATION EQUIPMENT 969,942 A 969,942 818,380 -16%378 MEASURING & REG EQUIP - GENER 27,549,313 A 28,997,225 29,834,731 8%379 MEASURING & REG EQUIP - GATE 3,289,321 A 4,073,081 A 4,938,535 50%380 SERVICES 600,566,888 624,298,119 647,488,241 8%381 METERS 69,296,722 71,083,083 73,650,011 6%

381.1 METERS (ELECTRONIC) 1,915,609 1,464,473 B 1,541,675 -20%381.2 ERT (ENCODER RECEIVER TRANS 30,278,200 32,458,063 33,908,087 12%382 METER INSTALLATIONS 55,788,114 54,749,773 53,843,505 -3%

382.1 METER INSTALLATIONS (ELECTR 999,397 A 481,020 B 481,020 -52%382.2 ERT INSTALLATION (ENCODER 8,725,108 8,632,976 8,527,489 -2%383 HOUSE REGULATORS 1,079,350 A 1,243,208 A 1,448,901 34%

387.1 CATHODIC PROTECTION TESTING 173,859 A 173,859 173,859 0%387.2 CALORIMETERS @ GATE STATIONS 69,794 69,794 69,794 0%387.3 METER TESTING EQUIPMENT 72,671 72,671 72,671 0%389 LAND 9,609,274 9,609,258 9,609,258 0%390 STRUCTURES & IMPROVEMENTS 45,318,207 A 54,853,432 A 57,230,523 26%

390.1 SOURCE CONTROL PLANT 20,942,177 D 17,923,231 B 17,923,231 -14%391.1 OFFICE FURNITURE & EQUIPMEN 12,190,243 9,856,553 B 10,411,367 -15%391.2 COMPUTERS 20,373,475 22,897,389 A 16,175,109 -21%391.3 ON SITE BILLING 938,788 - C - -100%391.4 CUSTOMER INFORMATION SYSTEM 1,308,391 - C - -100%392 TRANSPORTATION EQUIPMENT 27,945,343 28,886,714 33,652,526 20%393 STORES EQUIPMENT 119,406 119,406 119,406 0%394 TOOLS - SHOP & GARAGE EQUIPUI 15,862,925 16,220,907 16,645,174 5%395 LABORATORY EQUIPMENT 68,293 68,293 68,293 0%396 POWER OPERATED EQUIPMENT 8,291,382 A 8,356,164 8,931,718 8%397 GEN PLANT-COMMUNICATION EQU 98,549 88,322 B 88,322 -10%

397.1 MOBILE 1,295,887 475,621 B 475,621 -63%397.2 OTHER THAN MOBILE & TELEMET 1,769,868 1,690,854 1,690,854 -4%397.3 TELEMETERING - OTHER 4,337,251 4,617,676 4,588,470 6%397.4 TELEMETERING - MICROWAVE 2,233,771 1,522,718 B 1,646,795 -26%397.5 TELEPHONE EQUIPMENT 2,211,091 394,587 B 490,742 -78%398.1 PRINT SHOP 83,249 83,249 83,249 0%398.2 KITCHEN EQUIPMENT 12,812 12,812 12,812 0%398.3 JANITORIAL EQUIPMENT 61,420 14,873 B 14,873 -76%398.4 INSTALLED IN LEASED BUILDINGS 5,393 5,393 5,393 0%398.5 OTHER MISCELLANEOUS EQUIPMENT 66,739 66,739 66,739 0%

Total Utility Plant 2,360,868,143 2,421,332,364 2,493,770,123 6%


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Notes: A Plant additions to FERC Account B Plant retirements in FERC Account C Assets in FERC Account were fully retired As noted from the table above, plant in service has increased at an average rate of three percent a year over the past two years. Staff reviewed the Company’s Capital Asset Policy and did not have any concerns on how the Company capitalizes assets.

Staff Recommendation: 3. Rate case Staff should examine capital projects included in rate base to

ensure entertainment, awards, and other costs such as performance incentives normally disallowed in full or in part are excluded from rate base.

4. Rate case staff should review ROI or cost-benefit analyses (CBA) performed

by the Company for existing plant as well as plant forecasted to be used and useful by the date rates are expected to be in effect.

System Integrity Programs NW Natural’s System Integrity Program (SIP) Investments last appeared in the 2014 PGA. There were no SIP investments in the 2015 PGA. Staff, NW Natural, the Citizens’ Utility Board of Oregon (CUB), and Northwest Industrial Gas Users (NWIGU) participated in Docket No. UM 1722, which investigated gas utility safety programs and how to fund them. A Stipulation resolving issues raised in Docket No. UM 1722 has been submitted to the Commission and is under advisement.

Storage Staff reviewed NW Natural’s storage. NWN utilizes four different storage facilities in its current resource stack including, Mist (underground storage), Jackson Prairie (underground storage), Gasco (Liquefied natural gas (LNG) storage), and Newport (LNG storage). Mist underground storage is the Company’s largest storage resource, and it is located on the Company’s system. Staff’s recommendations are as follows.

Staff Recommendations: 5. Rate case staff should review the capital cost of all new storage additions by

the Company since the last general rate case, as well as the level of storage capacity for core demand included in its regulated rate base.

6. Rate case staff should review the appropriateness of the level and types of operational and maintenance costs for Company-owned storage included in


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rates. Rate case staff should specifically review the costs associated with the repair or replacement of the large dehydrator at Mist’s Miller Station.

7. Rate case staff should review whether the following Schedule 90 Conditions of Approval are being met per Commission approval of Advice No. 14-7, which are detailed in Attachment A of Staff’s memorandum and included below for reference.

Schedule 90 Conditions of Approval Cost Recovery 1. As an overarching principle, NWN is committed that all direct

and indirect costs incurred by the Company to provide Schedule 90 service will be allocated to and recovered from Schedule 90 customers. NWN agrees to work collaboratively with the parties and to be subject to future processes for Staff and stakeholder review of accounting entries and supporting documentation to ensure an appropriate cost allocation.

2. The costs of any utility personnel that work on the planning and

construction of the non-Core Mist Storage for the provision of RS 90 service will be charged to the RS 90 customers as provided in the customer’s agreement. (With respect to PGE, NWN and PGE have agreed to implement this commitment through allocating such costs to PGE as capital. NWN agrees that there will be a credit provided to core customers to offset the costs that would otherwise be in rates, but which are allocated to PGE. NWN will seek to pass that credit through to customers as a one-time credit when the project goes into service, subject to gaining any necessary approvals of the Commission required to affect the credit).

3. In the event that NWN and the applicable Schedule 90 customer

determine that, after Schedule 90 service is initiated, utility resources will be used in any way to provide ongoing service to that Schedule 90 customer, NWN will develop a shared services-type agreement that allocates utility costs to the Schedule 90 customer. NWN commits to providing an opportunity for stakeholders to review and comment on such agreement and raise any concerns to the Commission prior to effectiveness of such services-type agreement.


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4. NWN will further clarify the costs that will be recoverable from Schedule 90 customers under the general rate formula contained in the service agreement. Specifically, NWN confirms that operation and maintenance activities such as accounting, financial reporting, customer service, communications and monitoring, control room services and general management are included. NWN is currently working with PGE on an amendment to the service agreement that would capture these elements, and NWN will add them to the generic service agreement filed with the Commission as part of its original filing on Schedule 90.

Core Customer Interests in Assets Used to Provide Schedule 90 Service 5. NWN will make appropriate provisions to compensate non-

Schedule 90 customers for any use of assets for which they have paid in providing Schedule 90 service. (With respect to PGE’s Schedule 90 service, which will be provided through a development of the Adams Pool at North Mist, NWN has confirmed that all costs associated with the Adams Pool have remained in “Construction Work in Progress,” and have not affected rates, with one exception. The one exception is that recoverable gas costs associated with the pool have been included in inventories for general customers, included in rate base, and expensed over time at a calendar Weighted Average Cost of Gas or other average-cost rate as used by customers. NWN proposes to negotiate with PGE for PGE’s purchase of any remaining recoverable gas at market prices taking into account the quality and location of the gas, and credit general customers as though it was a sale of a rate base item).

6. NWN will continue, through its IRP process, to refine cost estimates, timing, and least-cost planning related to any future expansion of North Mist reservoirs, other than the Adams reservoir, for non-Schedule 90 customers. NWN recognizes that the Staff and stakeholders retain all of their rights to participate in that process and determine their positions on the issues surrounding future expansion of North Mist for non-Schedule 90 customers, and NWN commits to work collaboratively on those issues.

7. NWN commits that in any future proceeding regarding the review for prudence of any expansion or proposed expansion of Mist for non-Schedule 90 customers, it will provide access to


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information that is required to perform an analysis of the costs that would have been associated with developing the Adams Pool for non-Schedule 90 customers versus the costs of any other pool that is ultimately developed for non-Schedule 90 customers.

NWN’s determinations related to the use of the Adams Pool may be raised by any party as an issue during the future prudence review related to any expansion or proposed expansion of Mist for non-Schedule 90 customers. All parties would reserve their rights to take any position in that future proceeding with respect to any such issues raised, including the relevance of the other parties’ arguments.

WARM & Decoupling During and after the 2014-2015 heating season, the OPUC experienced elevated customer complaints regarding NW Natural’s Weather Adjusted Rate Mechanism (WARM) Program. As a result, at the September 8, 2015 Public Meeting, the Commission opened an investigation into WARM, docketed as UM 1750. Parties to the docket entered into a stipulation to implement several modifications to the WARM Program that would reduce adverse customer impacts in the future. The WARM investigation was concluded on June 20, 2016, with Commission Order No. 16-223 adopting the parties’ stipulation with agreed-to WARM Program modifications. NW Natural filed an updated tariff in compliance with Order 16-223. NW Natural has also asked to defer certain WARM-related expenses as contemplated in Order No. 16-223. This request for deferral was filed on September 19, 2016, and is being addressed in Docket No. UM 1798. During the investigation into the WARM Program mentioned above, Staff noted that NW Natural’s billing system incorporates a one-day time lag when recording temperatures. Temperature data is used to estimate the heat response coefficients used in the WARM tariff and in the actual WARM adjustments made to customer bills. Staff includes recommendations in this audit report for staff to review, in the next general rate proceeding, the effect of this lag as well as other aspects of the WARM Program.

Staff Recommendations:

8. Rate case staff should confirm that the temperature data lag does not conflict with data used to calculate the WARM coefficients.


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9. Rate case staff should confirm that temperature coefficients used in WARM are consistent with the forecasting methodology used to generate billing determinants in any general rate case.

10. Rate case staff should evaluate the current decoupling mechanism, including

addressing the following:

• How well the Company’s incentives are aligned to energy efficiency goals.

• How these mechanisms assisted the Company with respect to earning its authorized rate of return.

11. Rate case staff should update the calculation of the baseline margin used for

comparison to arrive at the decoupling adjustment.

12. Rate case staff should review the normal weather assumptions used for the test year normalization.

13. Rate case staff should evaluate all trackers adopted since UG 152, as well as the shifting of risk associated with volatility in sales volumes from NW Natural to its customers.

14. Rate case Staff should evaluate the decoupling status of comparison firms in

any cost of capital study.

Pipeline Capital Costs Staff Recommendations:

15. Rate case staff should review all construction and capital costs for current and past proposed pipeline distribution projects.

16. Rate case staff should review all construction and capital costs for current and past proposed low and high pressure transmission pipeline projects.

Accounting Staff Recommendations:

17. Rate case staff should audit and review entries made in FERC account 380.

18. Rate case staff should verify the mapping of SAP accounting entries to ensure they are correct and appropriate.


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Competitive Bidding Staff Recommendations:

19. Rate case staff should verify all major pipeline and mains project costs are reasonable, and where competitive bidding processes are used, that the results of the bidding are appropriate.

20. Rate case staff should verify all documentation of the conduct and results of each bidding process for pipeline and mains projects.

Information Technology Capital Projects The following fifteen Information Technology capital projects (expected total project cost greater than $500,000) are currently being implemented by the Company. The information below was provided by NW Natural in response to Staff Information Request No. 168. In part e. of IR No. 168, Staff requested a summary of the return on investment (ROI) studies performed. The Company responded that no (ROI) studies were performed for any of the listed projects. Instead the Company provided a short explanation justifying each project.

I-Series Recovery Project a. Purpose: Purchase of a new production hardware system for CIS at

headquarters, and equivalent for our backup site in Sherwood. NWN will use its previous production system as a hot standby unit at headquarters. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed because of a need for a disaster and business continuity environment that could handle the full load of restored business operations in the event of a critical outage of the production systems.

b. Capability Gained: Increased failover capabilities and reduction of downtime.

c. System Replaced: The Power 6 system in Sherwood, which was beyond the end of life.

d. Anticipated Operational Savings: Reduced equipment maintenance expense.

e. Project required to enhance business operations resiliency and recovery capabilities.

f. Project Budget: $1,105,710.

g. Primary Customers: All users of CIS and CRMS.


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Technology Refresh-Desktops/Laptops and Peripherals a. Purpose: Complete Desktop/Laptop replacements per lease schedules.

Desktops are leased for 4 years and laptops for 3 years (industry standard estimated useful life).

b. Capability Gained: “Technology Refresh” means replacing existing technology assets according to a planned schedule based upon the estimated useful life of the asset and as required to support existing and new business systems. Additional areas of return include:

• Reduction in risk resulting from inability to access critical information due to failure of aging hardware

• Increased user efficiency by providing faster access to essential business information (faster processors, disk, additional bandwidth, etc.)

• Increased quality of service by implementing technologies that enable and enhance collaboration (access to and exchange of electronic information) among employees, customers, and business partners

• Reduction in capital cost and time to implement new business processes by having in place the technologies required to support the new applications

c. System Replaced: 2016 Lease Schedules include replacement of 289 desktops and 89 laptops. The project budget includes funding for refresh of other capital peripherals (monitors and/or printers) only as needed.

d. Anticipated Operational Savings: Reduced equipment maintenance expense.

e. Tech refresh required to reduce maintenance.

f. Project Budget: $696,310.

g. Primary Customers: All Company business systems users.

Technology Refresh-Large Servers/SANs a. Purpose: Acquire and implement hardware/software to expand the

Company’s virtual server farm and storage environment to accommodate the continued growth in data storage requirements of existing systems. Estimated useful life of servers is 5 years (industry standard). Typical use is 3 years as production servers and then they are repurposed as development/test servers. IT strategy continues to be virtualizing all servers when possible.

b. Capability Gained: “Tech Refresh” means replacing existing technology assets according to a planned schedule based upon the estimated useful


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life of the asset and as required to support existing and new business systems. It is key to meeting the Company’s Infrastructure Strategic Objectives:

• Infrastructure is resistant to intrusion as defined by passing penetration tests.

• Processing capacity is available when needed with very few unscheduled outages.

• Critical systems are recoverable within committed business recovery windows.

• 1st Quartile infrastructure support costs – Cost effective and sustainable.

• Infrastructure is responsive to application and company process changes without significant implementation efforts, timeframes or costs.

c. System Replaced: Disk storage equipment in headquarters and our backup site in Sherwood. Also upgraded blade servers used for virtual hosts.

d. Anticipated Operational Savings: Reduced equipment maintenance expense

e. Tech refresh required to reduce maintenance.


g. Primary Customers: All Company Business Systems Users.

GMAC Upgrade a. Purpose: Implement new infrastructure and upgraded applications

environment for Gas Control inclusive of the upgraded version of primary SCADA control and monitoring application, upgraded associated software, communication drivers, upgraded database environments, enhanced security, and optimized architecture. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed because of the fact that our present system was approaching its end of supportability and the application ecosystem also needed cybersecurity enhancements to secure the validity of data being consumed and monitored by our gas control function.

b. Capability Gained: The current version of SCADA system runs on the operating systems that are end of support in 2015. Upgrading to the current version of system will ensure continued support from the vendor and allow NW Natural to incorporate product improvements and new capabilities. Moving to current versions of operating systems, applications, and databases will facilitate NW Natural’s SCADA security


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initiatives including patching. The project will also provide greater SCADA system resilience with local high availability and significant improvements to our disaster recovery.

c. System replaced: None (product/system lifecycle upgrade).

d. Anticipated Operations Savings: Not applicable (product/system lifecycle upgrade).

e. This project is required as product/system lifecycle upgrade.


g. Primary Customers: NW Natural Gas Control and Operations.

Customer Order Management a. Purpose: Implement a comprehensive system that will provide end to end

functionality for customer relationship management (CRM), configuring / pricing / quoting (CPQ) and order management (OM). This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed because of the fact that it will reduce reliance on manual processing and provide system flexibility to support customer delivery process improvements

b. Capability Gained: The benefits of the project include greater effectiveness and the ability to redirect staff time to higher value work. The increases in efficiency and productivity are of prime importance given growing capacity constraints of current staff. As the market rebounds and the market demands shift to a more complex work mix, current staffing levels are not sufficient to address manual, time-intensive processes caused by system work- arounds and lack of functionality and flexibility. NWN cannot adapt fast enough to changing customer demands to effectively serve the market (e.g. multifamily, multiple segments and channels in the commercial market, and permitting and moratorium issues). Streamlining processes, adding financial analysis capabilities, automated tracking, interactivity and on-demand reporting for our work streams that involve customers, trade allies, municipalities and prospects will be necessary to achieving our goals efficiently.

c. System replaced: Existing CRMS and Prospector applications and interfaces.

d. Anticipated Operations Savings: While we have not identified specific operational savings, we anticipate efficiencies will be gained through automation of certain current manual processes.

e. Alternatives analysis was performed. Two alternatives were evaluated: 1) Do nothing alternative was evaluated but not pursued. Current


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CRMS/price and quote systems are homegrown systems with many layers from continuous add-ons and updates. Do nothing alternative increases risk when changes are required and limits ability to improve and redesign existing processes without significant changes to the application. 2) Replacement of existing systems with a custom built CRMS and price/quote system was evaluated but not pursued as being more expensive than vendor provided solution.

f. Project Budget: $1,837,178 (preliminary and subject to change).

g. Primary Customers: NW Natural Customer Acquisitions, Industrial Customer Group, Government Relations, NW Natural customers, trade allies.

Enterprise Content Management a. Purpose: The Enterprise Content Management (ECM) Program will

establish the governance framework, business processes and technology platform to effectively manage NW Natural business information throughout its lifecycle in order to protect this asset, reduce the company’s risk and improve employee productivity. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed because it replaces unsupported technology and improves compliance with legal requirements related to company records.

b. Capability Gained: This project is driven by four needs: 1) To improve compliance with legal requirements related to company records including the need to access and deliver records timely to regulatory authorities; 2) To manage the protection and optimization of company assets – i.e., information in a record; 3) To replace/upgrade the company’s legacy records management application – TRIM; 4) To manage a large and growing number of records in various systems.

c. System replaced: TRIM.

d. Anticipated Operations Savings: While we have not identified specific operational savings, NWN anticipate efficiencies will be gained through automation of certain current manual processes.

e. Alternatives analysis was performed. Two alternatives were evaluated: 1) Do nothing alternative was evaluated but not pursued as viable. Current system is not supported or upgradable by the vendor. 2) Replace TRIM only alternative was evaluated but not pursued as TRIM only manages a subset of company records.

f. Project Budget: $2,250,087 (preliminary and subject to change).


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g. Primary Customers: All NW Natural employees.

PCAD Upgrade a. Purpose: Upgrade NW Natural work management system to the new

version includes upgrades of operating system and database. The project also includes extensive training of all field employees on the new application. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed because of the fact that our present system has not been upgraded since it went live in 2008 and the new version provides significant supportability and business benefits.

b. Capability Gained: The upgrade will ensure that the application as well as its operating system and database remain supported by the vendors to allow for break fixes and enhancements. The upgrade will provide more flexibility for IT department to make application changes in response to business needs. New version of the application includes functionality that will create a platform to support our business needs for many years in the future. Examples of this functionality include: simplified/more initiative user interface; graphical dispatch; improvements in work levelling algorithms; and many more.

c. System replaced: None (product/system lifecycle upgrade).

d. Anticipated Operations Savings: Not applicable (product/system lifecycle upgrade).

e. This project is product/system lifecycle upgrade.


g. Primary Customers: NW Natural Resource Management Center and Operations.

SAP Upgrade – Phase II a. Purpose: Upgrade all applications in the SAP environment. This project

was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed as a product/system lifecycle upgrade.

b. Capability Gained: An SAP upgrade is needed to obtain additional functionality and keep our existing system up-to-date in terms of security and patches. We are currently three enhancement packs behind in our SAP environment and GRC and Solution manager are no longer supported by SAP. The upgrade is also a prerequisite to certain projects that NW Natural is considering for 2017 and beyond such as asset management and risk and land application replacement.


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c. System replaced: None (product / system lifecycle upgrade).

d. Anticipated Operations Savings: Not applicable (product / system lifecycle upgrade).

e. This project is required as product/system lifecycle upgrade.


g. Primary Customers: All NW Natural employees.

J5 Implementation a. Purpose: This project is the first phase of the Control Room Management

(CRM) Integration program and addresses logbook functionality, shift change process, and change management workflows for Gas Control. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed because of the fact that supports our regulatory compliance need.

b. Capability Gained: This project will greatly enhance Gas Control situational awareness and change management capabilities which will improve NW Natural CRM compliance with CRM regulations (49 CFR 192.631). Capabilities gained include:

1) Enhance situational awareness for Gas Control Operators.

2) Improve Controller’s ability to electronically record information and events.

3) Enhanced reporting on operational information involving all aspects of management of change.

4) Improved shift change process.

5) Improved work tracking and work management.

c. System replaced: None.

d. Anticipated Operations Savings: Not applicable.

e. This project supports regulatory compliance need.

f. Project Budget: $560,000 (preliminary and subject to change).

g. Primary Customers: NW Natural Gas Control and Operations.

Voice Radio Operations Improvement (VROI) – Phase II a. Purpose: Voice Radio Operations Improvement (VROI) project phase two

integrates a radio console and radio network technical refresh with business operational radio standard operating procedures (SOPs). This


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phase combines system modifications with improved operational protocols for business continuity, emergency operations, incident response and routine business communications. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed to improve radio communication functionality and operations.

b. Capability gained or enhanced: Upgraded business voice radio consoles and DR radio capability supporting emergency operations and business continuity. NW Natural’s voice radio network is highly One Pacific Square (“OPS”) centric. If the connection with OPS is lost, communications to trucks, (or dispatch to field) would significantly impair radio communications. The voice radio project Phase I included design and acquisition of software to support converting our traditional single point radio console into a networked topology. In the event of a local DR (OPS is lost), implementation of Voice Radio Phase 2 will provide voice radio console (dispatch) capability at our DR facility, from key NWN business continuity sites, and mobile operation vehicles. Additional benefit of the upgrade is improved connectivity, flexible patching of frequencies, and improved normal business operational use of the voice radio system.

c. System replaced, if applicable: Radio Console technology; Radio infrastructure components.

d. Anticipated operational savings: Not applicable. This project supports a strategic business need for operational resiliency in the event of a disruption in our primary access to system networks.

e. This project replaces end-of-life radio technology to support a business need.

f. Project Budget: $898,148.00.

g. Primary customers, internal or external: All Company employees dispatched for customer support, construction, locates, and services. All Company employees responding in the event of a disaster; external customers able to continue business with Company in the event of a disaster.

Sherwood Microwave Tower a. Purpose: The two Sherwood microwave links will provide communications

resiliency between OPS and the data center and business continuity spaces at the Sherwood site. Additionally, these links will allow NWN to meet the demand for increased bandwidth requirements between OPS and Sherwood on a day-to-day basis. The Tualatin resource center move to the new Sherwood location necessitated the move of the Tualatin to


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Healy Heights microwave link. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed to provide voice, data, and radio communications links with the Sherwood DR facility.

b. Capability gained or enhanced: The Sherwood to Mt Scott microwave link provides redundancy and resiliency for the Sherwood data center and business continuity spaces and supports the requirement for increased bandwidth.

c. System replaced, if applicable: The Sherwood to Healy Heights microwave link replaces the Tualatin to Healy Heights link.

d. Anticipated operational savings: Not applicable.

e. This project supports a strategic business need.


g. Primary customers, internal or external: All company employees utilizing applications supported by the Sherwood data center; external customers able to continue business with Company in the event of a disaster.

Eagle Wireless a. Purpose: The Eagle Wireless Upgrade project will convert current Eagle

Advance Automated Meter Reading (AAMR) devices from analog lines to wireless technology (cellular or satellite). The upgrade is necessary due to a recent FCC ruling (FCC ruling 15-14, Feb 2, 2015), allowing telecom providers to move from legacy copper services to IP based networks and services. As telecom providers begin the transition, the Eagle AAMR devices will no longer function appropriately as they are currently utilizing copper legacy phone lines. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed to continue metering service as legacy technology is phased out.

b. Capability gained or enhanced: Moving to a cellular or satellite connection will not only allow NW Natural to maintain connectivity with our customers to receive billing data required by tariff, the advanced technology will increase efficiencies and can reduce outages. Cellular technology is also more scalable, which provides NW Natural more opportunities to meet future technological demands quicker and more effectively. In the event of a local disaster, cellular technology can provide our customers with more flexibility as cellular technology is mobile and is not hardwired.

c. System replaced, if applicable: Analog Eagle AAMR devices.



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e. This project replaces end-of-life technology.

f. Project Budget: $2.3M.

g. Primary customers, internal or external: External, Large Commercial Customers.

Unified Communications – Phase 2 a. Purpose: Technical Refresh of 20 year old Company telecommunications

system and call center technology. The NorTel telephone system was past end-of-life support by the vendor. The Unified Communications and Collaboration (UCC) – Phase 2 project completed the migration of NW Natural’s telephony to a UCC platform and was a continuation of the work completed in Phase 1. This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed to continue telecommunications services as legacy technology is phased out.

b. Capability gained or enhanced: The upgrade ensured that the telephony platform and customer contact center applications as well as operating system and databases remain supported by the vendors to allow for break fixes and enhancements. The new DR architecture and applications included new business functionality coupled with resiliency and redundancy for business and customer service emergency call services. The telephony infrastructure at OPS, NW Natural’s 14 Resource Centers and the 3 storage facilities migrated to the Avaya Voice over Internet Protocol (VoIP) platform and the NorTel switch was removed. Core infrastructure hardware was added at OPS, resource centers, Salem call center, and Sherwood data center. Additionally, the project included the implementation of an Interactive Voice Response (IVR) application development/testing environment to enable enhancements to the customer services provided by the IVR.

c. System replaced, if applicable: Tech refresh of end-of-life NorTel phone switch, over 1000 telephones, and ancillary equipment supporting call technology.


e. This project replaced end-of-life technology.

f. Project Budget: $1,150,855.00.

g. Primary customers, internal or external: All NW Natural customers and all NW Natural employees.


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ICS Network Segmentation – Cybersecurity Program a. Purpose: This project improves the security of our industrial control

systems.

b. Capability Gained: Improve security by segmenting the industrial control network. This is a recommendation based on NIST standards.

c. System Replaced: SCADA Network at NW Natural headquarters and Sherwood

d. Anticipated Operational Savings: Not applicable.

e. This project is a critical need for the cybersecurity protection of our critical SCADA networks.


g. Primary Customers, Internal or External: NW Natural Gas Control and Operations.

RLMAN Replacement a. Purpose: Implement SAP real estate module to manage NW Natural

contracts (easements, leases, franchises, licenses, permits, railroad permits). This project was presented before the NWN Project Prioritization Steering Committee for approval and was approved to proceed because of the fact that it improves NW Natural processes for managing real estate contracts and payments.

b. Capability Gained: Consolidate risk and land department many separate data management tools into a single system integrated with NW Natural accounting system. Standardize and automate many manual departmental processes associated with tracking and managing NW Natural risk and land contracts and payments.

c. System replaced: A portion of the custom built application (RLMAN) and many spreadsheets.

d. Anticipated Operations Savings: Specific operational savings not identified yet.

e. Anticipate efficiencies will be gained through automation of current manual processes.


g. Primary Customers: Risk and Land group, Accounting, Legal departments.


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Non-utility use of assets acquired by the Technology Refresh-Large Servers project is reviewed annually in September and will be directly charged.

Staff Recommendations: 21. Rate case staff should ensure that Technology Refresh-Large Servers

assets are allocated, as appropriate, to non-utility operations in accordance with NW Natural’s allocation methodology.

22. Rate case staff should ensure that the Disaster Recovery – Phase II project; the SCADA Network Security; the GMS SunGard Aligne; and the GMS PCM-Gasco projects are used and useful prior to placing into plant.

23. Rate case staff should review all ROI or cost-benefit analysis (CBA)

performed by the Company for all major IT capital projects. In the review, staff should select IT projects that are completed as of the base year and those that are in progress and anticipated to be used and useful when rates go into effect. A robust CBA analysis should quantify the benefits of a project and its associated costs. Commonly included in an ROI are an internal hurdle rate, cost savings, cash outflows, net present value analysis, as well as a narrative justification. An effective CBA demonstrates the economic and social advantages or drawbacks of projects, it aids in the prioritization of projects, and it allows for a more transparent decision making process against which final outcomes can be measured over time.

Allowance for Funds Used During Construction (AFUDC) NW Natural’s procedures regarding AFUDC generally follow FERC and standard accounting guidelines. Staff verified this utilizing the Company’s responses to Staff IR Nos. A53 and A54. These IRs were issued as follow-up to Staff’s site visit. The Company’s responses to Staff IR Nos. A55 through A63 provide a reference against which to identify gaps or divergence from trend in the Company’s next general rate case. No flags were raised in the current audit. In the next GRC Staff should drill down selectively to reinforce Staff’s review in this audit that there are no discrepancies from standard procedures

Actual Financial Performance

Actual Returns Staff reviewed NW Natural’s actual Oregon returns for fiscal years 2013 through 2015. The following table compares total rate base, income, and returns for that time period. Information was provided by the Company in response to Staff Information Request (IR) No. A253.


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Table 2 – Actual Oregon Returns ($000s) 2013 2014 2015 Utility Plant in Service $2,349,248 $2,531,367 $2,594,5332 2013 2014 2015 Accumulated Depreciation

$1,005,403 $1,062,416 $1,107,066

Net Utility Plant $1,343,845 $1,468,951 $1,487,467 Customer Advances -$3,214 -$3,103 -$2,983 Gas Inventory $61,292 $62,222 $74,309 Materials & Supplies $8,112 $8,285 $8,954 Leasehold Improvements $1,120 $964 $740 Accumulated Deferred Income Taxes

-$336,756 -$353,433 -$381,891

Total Rate Base $1,068,408 $1,178,063 $1,180,958 Operating Revenue $80,626 $88,475 $88,306 Overall Return on Rate Base 7.55% 7.51% 7.48% Return on Equity 9.27% 9.17% 8.88%

NW Natural’s actual rate of return and return on equity for 2013, 2014, and 2015 does not exceed its authorized rate of return of 7.78 percent and return on equity of 9.50 percent. However, the returns for actual and authorized are within 70 [or 62] bps through 2015. The Company presents profitability ratios as shown in the following table: Table 3 – Profitability Ratios

2013 2014 2015 Return on Average Equity3 8.2% 7.7% 6.9%

2 The utility plant in Table 1 is based on NW Natural’s FERC Form 2, which displays assets on a “situs” basis, so all assets located in Oregon are presented as Oregon assets. The amount in Table 5 above provides amounts that are “state allocated,” which is done for ratemaking purposes and reflects the assignment of a portion of costs that are in Oregon to Washington operations. The most significant category of assets that is allocated is for the storage facility at Mist. The difference is not related to SIP or AMR, both of which are directly assigned for state allocation purposes to the states in which they are located. 3Return on Average Equity is an adjusted version of the return on equity (ROE) measure of company profitability, in which the denominator, shareholders' equity, is changed to average shareholders' equity. Typically, return on average equity refers to a company's performance over


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Additionally, NW Natural discusses its earnings in several Company press releases including:

• September 2, 2016 – Storage income increased $1.5 million year over year. However, this was offset by a 7% decrease in natural gas volumes, which was caused by 22% warmer temperatures year over year.

• October 6, 2016 - The Board of Directors of NW Natural Gas Company

(NYSE: NWN), dba NW Natural, has declared a quarterly dividend of 47 cents a share on the company's common stock. The dividends will be paid November 15, 2016, to shareholders of record on October 31, 2016. The company's indicated annual dividend rate is $1.88 per share.

Budget Versus Actual The following information was provided by NW Natural concerning budgeted versus actual performance. The tables below reflect total system actual compared to total system budgeted and does not reflect Oregon-Situs. Table 4 – Budgeted Versus Actual Performance – 2013

2013 Budget 2013 Actual %

Difference Total System Total System Revenue $714,184,054 $727,182,089 1.82%

Natural Gas Commodity Costs $364,350,261

2.45% $373,297,588

Operating Expenses $224,695,756 $225,817,684 0.50%

Utility Operating Income $125,138,007

2.34% $128,066,818

Interest and Other $71,621,538 $73,675,093 2.87% Net Income $53,516,469 $54,391,725 1.64%

a fiscal year, so the average-equity denominator is usually computed as the sum of the equity value at the beginning and end of the year, divided by two. www.investopedia.com

http://www.investopedia.com/


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Table 5 – Budgeted Versus Actual Performance – 2014

2014 Budget 2014 Actual %

Difference Total System Total System Revenue $743,305,,185 $731,578,062 -1.58% Natural Gas Commodity Costs $376,224,734

-2.85% $365,490,497

Operating Expenses $232,682,729 $227,168,486 -2.37% Utility Operating Income $134,397,722

3.36% $138,919,079

Interest and Other $75,839,673 $80,842,644 6.60% Net Income $58,558,050 $58,076,435 -0.82%

Table 6 – Budgeted Versus Actual Performance – 2015

2015 Budget 2015 Actual Total System

% Difference Total System

Revenue $784,272,836 $702,210,148 -10.46% Natural Gas Commodity Costs $412,075,438

-20.57% $327,305,170

Operating Expenses $256,946,120 $255,635,486 -0.51%

Utility Operating Income $115,251,278

3.49% $119,269,492

Interest and Other $65,022,283 $67,229,859 3.40% Net Income $50,248,995 $52,039,633 3.56%

As the tables above indicate, NW Natural’s budgets are fairly close to its actual performance in most cases.

Staff Recommendation: 24. Rate case staff should closely examine test year operating expenses against

historical performance.

Comparison to Other Natural Gas Utilities in Oregon For comparison purposes, Staff examined NW Natural’s basic residential service rates to those of Avista and Cascade, the other two natural gas utilities operating in Oregon. The rates of these three utilities include a myriad of variables including cost of gas and other operating expenses incurred by each natural gas company. The following table highlights the comparison.


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Table 7 – Comparison of Residential Service Rates of Oregon Natural Gas Utilities4

Company Base Per Therm Average Bill 5 Avista $9.00 $1.05307 $61.65 Cascade $3.00 $.73249 $39.62 NW Natural $8.00 $.90723 $53.36 National Avg.6 $51.90

In comparison to the other two utilities, NWN’s residential rate is in the middle. The rate is approximately fifteen percent lower than Avista, and thirty percent higher than Cascade, and is the closest to the national average price. Prices have trended downward in the past three years, including the 2016 PGA. All three utilities saw a decrease in the cost of gas. NWN’s average bill decreased by 2.5% due to the most recent PGA. The table and graph below show how NWN’s rates have changed over recent years. 4 To perform the comparison, Staff used Cascade General Residential Service Rate, Schedule No. 101; Avista Corporation General Natural Gas Service – Oregon, Schedule 410; and NW Natural Gas Company Rate Schedule 2, Residential Sales Service in their current tariff as of 11/22/16. 55 Assumes average customer use of 50 therms per month. 6 Estimate based on EIA average residential price for 2015, requires assumptions regarding heat content of natural gas.

$0

$10

$20

$30

$40

$50

$60

$70

Avg. Rate

Cascade

Avista

NWN

National Avg.


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Table 8 – 2012-2016 Average Monthly Bill Comparison Year Avg. Residential Bill (50 Therms) 2012 $53.36 2013 $54.76 2014 $58.67 2015 $57.66 2016 $56.80

Administrative and General (A&G) Expenses

Cost Comparisons Rather than budgeting by FERC account, NW Natural budgets by cost center and GL Account. The following table highlights changes in NWN A&G costs from fiscal year 2013 to fiscal year 2015: Table 9 – Northwest Natural Administrative and General Costs

2013 2014 2015

Percent Change

2013-2015 Payroll $56,052,307 $51,378,536 $57,307,603 2% Non-Payroll $19,234,997 $23,931,848 $38,375,585 100% Total A&G $75,287,304 $75,310,384 $95,683,188 27%

$35.00

$40.00

$45.00

$50.00

$55.00

$60.00

$65.00

$70.00

2012 2013 2014 2015 2016

Avg. Residential Bill Over Time

Cascade

Avista

NWN

National Avg.


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As Table 9 indicates, NW Natural experienced a significant increase in overall A&G costs from 2013 to 2015 of approximately 27 percent. The majority of this increase is the result of an increase to Non-Payroll costs, which have roughly doubled in the past two years. Staff examined the following accounts due to significant changes in expenses from 2013 to 2015: 921 – Administrative Office Supplies and Expenses decreased by $2.78 million between 2013 and 2014. It then increased by a total of $5.9 million from 2014 to 2015. The main driver in the decrease from 2013-2014 is a decrease in Payroll expenses. Bonus pay decreased by approximately $3.5 million in addition to a decrease in Payroll overhead of $1.2 million. Conversely, an increase in Bonus pay and overhead of a combined $3.9 million, along with an increase of approximately $1.2 million in professional services were found to be the drivers of the increase from 2014-2015. 925 – Injuries and Damages increased by roughly $15 million between the years 2014 and 2015. This is almost entirely due to a regulatory disallowance associated with OPUC Commission Order No. 15-049 on the recovery of past environmental cost deferrals.

Staff Recommendation: 25. Rate case staff should review FERC account 925 and to ensure that no

disallowed costs are included.

Advertising Staff requested comprehensive information regarding NW Natural’s advertising in Staff Audit Information Request Nos. A41 – A50. Staff reviewed the responses provided by the Company. The Company’s effort to assemble the advertising materials and compile the financial details, in the specific format requested by Staff, was greatly appreciated.

Staff Recommendation: 26. Rate case staff should review all advertising and promotional concessions

expense for consistency with applicable administrative rules and Commission policy.

Uncollectible Expenses Staff reviewed NW Natural’s level of uncollectible expense for fiscal years 2012 through 2015. When uncollectible accounts are turned over to a collection agency, NW Natural credits the accounts receivable (general ledger Account 142) and debits


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provisions for bad debts (general ledger Account 144). Any recovery is then credited to the provisions for bad debts (offset in cash-general ledger) and collection agency fees are charged to the O&M expense. The Company recently developed a reporting tool that was used in the formation of the data in the table below. Due to the newness, the Company states: “the data is still being refined but it is considered materially accurate and fairly represents the historical performance for the years requested”. Table 10 – Assignment and Collections

Year 2012 2013 2014 2015 Assigned to Collection Agencies

$2,401,346 $1,965,517 $1,926,117 $1,566,206

Amounts Collected for Utility Service

$421,153 $390,401 $368,406 $316,320

Amounts not collected as result of Bankruptcy, other

$206,428 $244,634 $272,334 $129,020

Collection $616,763 $584,427 $556,704 $594,991 Net (Still Open) $1,157,002 $746,055 $728,673 $525,875 Collection Fees Paid to Agencies

$154,118 $145,793 $138,039 $147,121

The overall health of the economy, a decrease in the Purchased Gas Adjustment mechanism, and weather all play a role in the amount of charge-offs a utility needs to make. Gas prices have largely trended downward in recent years and the amount assigned to collection agencies has followed the downward trend. The percentage of collection has increased from 25 percent to 37 percent from 2012 to 2015. The average collection rate of 30 percent is eight percent higher than the average during the period from 2008 to 2010. When a customer reactivates service, the debt is paid but not listed in collection dollars as there was no commission paid to the collection agency. When considering this, along with amounts not collected as result of bankruptcy, death, or some other circumstance beyond the utility’s control, the total collection rate increases to 66 percent in 2015; 15 percentage points higher than it was in 2012.


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In addition to examining the amount of collections and write offs, Staff also reviewed NW Natural’s process for turning an account over to a collection agency. Staff finds the process to be sufficient and reasonable in minimizing the impact to customers.

Staff Recommendation 27. Rate case staff should review uncollectible expenses during the rate case

to determine a reasonable ongoing level of expense.

Insurance Services, Injuries, and Damages Total premium costs have increased by approximately 14 percent ($416,368) from 2012 to 2015. The table below highlights NWN’s insurance costs: Table 11 – Northwest Natural Insurance Premium Costs Cost 2012 2013 2014 2015 Excess Property Insurance Premiums

$449,470 $469,660 $517,311 $454,586

Excess Liability Insurance Premium

$1,556,623 $1,772,228 $1,936,325 $2,012,250

Terrorism Premium $81,029 $128,448 $122,311 $117,581

Excess D&O Liability Premium $607,313 $655,281 $652,662 $497,050

Excess Workers' Compensation Premiums

$247,351 $235,309 $270,413 $276,687

Total Premium Costs $2,941,786 $3,260,926 $3,499,022 $3,358,154 The majority of the overall increase in premium costs was due to a roughly 30 percent ($455,627) increase in excess liability premiums. In percentage terms, terrorism premiums increased by 45 percent from 2012 to 2015. This was offset somewhat by an approximately 20 percent decrease in D&O insurance premiums. According to the Company, NW Natural carries D&O limits in accordance with the associated risk to directors and officers for service to the Company. NW Natural believes that in order to attract and retain qualified directors and officers, NW Natural must provide adequate insurance coverage. Company insurance limits are based on input from industry peers, the Company’s broker and claim review.


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Staff Recommendation 28. Rate case staff should review individual insurance policies to determine the

appropriate level of insurance expense that should be borne by customers.

Other Administrative & General Expense Adjustments Staff did not review individual line item detail for other administrative and general expense.

Staff Recommendation 29. Rate case staff should review in detail other administrative and general

expense to identify non-utility office expenses, meals/travel/entertainment expenses, spousal expenses, political contributions, gifts, catering, etc. that should be removed as rate case adjustments.

Legal Fees Staff requested that NW Natural provide a breakdown of legal costs for accounts 921 (Office Supplies and Expenses), 923 (Outside Services Employed), and 928 (Regulatory Commission Expense) for each year 2014 and 2015. Staff also requested that NW Natural explain if services were provided for both utility and non-utility activities, and to provide details on how expenses were allocated. According to the Company, all NW Natural legal costs are included in FERC account 921. All costs included in this account were for utility matters. Table 12 – Legal Expenses 2008 and 2009 FERC Account 921

FERC Account 2014 2015 Percent Change

from 2014 to 2015

921 $1,948,017 $1,108,419 -43.1% According to the breakout provided by NW Natural, the majority of their legal costs are associated with state and federal regulation, general legal, reporting, and human resources/labor matters.

Labor Costs

Staffing The following table shows a breakdown of Northwest Natural full-time and part-time employees. This is a snap-shot of the year-end employee headcount.


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Table 13 – Northwest Natural Staffing – Headcount

Chg.%

Chg.

Division 2012 2015Acquire Customers 56 57 1 1.79%Business Development & Energy 13 15 2 15.38%Corporate Communications 8 4 -4 -50.00%Deliver Gas 363 366 3 0.83%Executives 11 17 6 54.55%Finance 77 73 -4 -5.19%General Counsel 39 34 -5 -12.82%Human Resources & Admin. 46 46 0 0.00%Information Technology 93 89 -4 -4.30%Resource Management 79 69 -10 -12.66%Serve the Customer 307 291 -16 -5.21%Total 1,092 1,061 -31 -2.84%

Full-Time/Part-Time Employee Headcount

12/31/2015

Table 14 - Northwest Natural Staffing – Full-Time Equivalent (FTE

Chg. Chg.

Division 2012 2015Acquire Customers 57.15 57.54 0.39 0.68%Business Development & Energy 12.3 14.77 2.47 20.08%Corporate Communications 7.47 4.04 -3.43 -45.92%Deliver Gas 371.47 381.06 9.59 2.58%Executives 11 16.88 5.88 53.45%Finance 76.74 69.98 -6.76 -8.81%General Counsel 38.15 34.93 -3.22 -8.44%Human Resources & Admin. 44.12 46.14 2.02 4.58%Information Technology 90.29 90.78 0.49 0.54%Resource Management 74.36 68.75 -5.61 -7.54%Serve the Customer 288.64 293.8 5.16 1.79%Total 1,071.69 1,078.67 6.98 0.65%

FTE Employees for 2015


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Staff reviewed the time period between 2012 and 2015. Employee count based on headcount and FTE have remained relatively flat for this period; specifically, FTE changed less than one percent between 2015 and 2012. Staff reviewed salary studies submitted by NW Natural in response to Staff information requests. Overall, it appears that NW Natural does perform salary studies to establish that its employees are at or below market levels. Due to timing of the salary studies, Staff was unable to view salary studies performed that would affect the 2017 wage and salary levels.

Staff Recommendation 30. Rate case staff should review wages and salaries and compare the historical

trend in base rates, incentives, and FTE to the test year amounts and determine causal drivers that appear to influence changes in the year over year trend.

31. Rate case staff should review salary studies or labor benchmarking

conducted internally by NW Natural or outside consultants.

Severance Costs The following table highlights NW Natural’s severance costs within the Company’s regulated operations. Table 15 – NW Natural’s Severance Costs

2012 2013 2014 2015Executives $ - $ - $ - $ - NBU-Exempt $ 90,870 $354,552 $471,875 $235,000 NBU Non-Exempt $ - $ 44,579 $ - $ - Bargaining $ 70,500 $ 80,000 $ - $ - Total $161,370 $479,131 $471,875 $235,000 Incentive Costs The table below reflects incentive payments7 on a total Company basis.

7 According to NW Natural, annual incentive payments include Key Goal Bonuses, NBU Goals Incentive Plan Bonuses, Executive Bonuses, and the Long Term Incentive Plan payments. The payments are reported in the year paid and are not split into Operating & Maintenance and Capital expense categories; for these two reasons, they will not match the incentive expense included in the income statement.


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Table 16 – NW Natural’s Incentive Payments2012 2013 2014 2015

Officers $1,167,000 $1,056,062 $ 1,944,000 $1,890,023 Exempt $4,129,497 $3,157,810 $ 6,874,044 $4,730,869

Nonexempt $ 120,957 $ 80,023 $ 137,335 $ 98,200 Union $1,720,586 $1,257,621 $ 2,318,145 $ 3,500

Total $7,138,040 $5,551,516 $11,273,525 $6,722,592

Staff Recommendation: 32. Rate case staff should review and determine whether NW Natural’s salaries

used in the salary studies include bonuses, key goal incentives, overtime, or any other wage components and, if so, whether these components are comparable with those in salaries survey in the salary studies.

Labor Loadings The Company states that in January of 2011 it made the following two changes to its labor loading methodology: 1. “The Company began applying our loading rates to all base wages. Between February 2009 and December 2010, the loading rate was only applied to regular wages, excluding paid leave time. After this change, the loading rate was applied to all base wages, including paid leave time (sick leave, vacation, holiday, etc.).” 2. “The Company began applying a loading rate to overtime. This was done to better recognize only the costs that apply when working overtime. This rate, which is lower than the base wage rate, includes costs such as 401k match, payroll taxes, bonus accrual, etc.” According to the Company, “The methodology was changed in order to smooth out the fluctuation in loading costs attributed to the seasonality of vacation usage and overtime. This resulted in a lower loading rate due to costs being spread over a larger wage base.” Staff also inquired regarding the item named “Western States” that was included in the benefits loading. The Company responded that, although the Company withdrew from its participation in the Western States Pension Office and Professional Employees Pension Fund in December 22, 2013, it is required to contribute $582,000 to the Plan annually for twenty years. On December 23, 2013, the Company filed an application with the Commission for an accounting order authorizing the Company to classify the withdrawal liability as a regulatory asset. The request was granted in Docket No. UM 1680, Order 14-041. Staff’s analysis in the related public meeting memo notes that the regulatory asset


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would not collect interest and would be reduced incrementally over 20 years. Recording the annual expense would commence at the time of withdrawal and recording of the regulatory asset, not at the time of the next general rate case. Staff did request from the Company any benchmark studies for labor loadings whether generated internally or purchased. The Company replied that the overall payroll overhead rate is not compared against any benchmarks. This rate is a function of all overhead expenses and actual payroll costs. Table 17 – NW Natural Labor Loadings 2012 – 2015

Benefits* VSH** Benefits* VSH** Benefits* VSH** Benefits* VSH**

Executive - Base Wages 101.45% 13.04% 92.24% 13.04% 81.77% 13.04% 99.61% 13.41%

Non-executive - Base Wages 76.09% 12.98% 75.84% 13.04% 66.49% 13.04% 85.30% 13.41%

Non-executive - Overtime 17.52% 16.86% 17.71% 14.85%

** VSH includes vacation-sick-holiday time.

* Benefits include health benefits, pensions, post-retirement medical, Western States, Workers Comp., Deferred Comp. Match, Payroll taxes, and Incentives/Bonuses.

Overhead Rate2012 2013 2014 2015

Staff Recommendation:

33. Rate case staff should examine the labor loading percentages and confirm with NW Natural if there has been a change in methodology.

34. Rate case staff should examine labor loading percentages and compare them

to industry standards if available.

Benefits Staff did not review NW Natural’s benefit costs in detail, but did note that the Company’s benefits, as listed in the table below, increased by $608,230 or 3.22% between 2014 and 2015. Medical/Dental/Vision benefits, for which 68 percent of the total dollar increase is attributable, went up by 2.91 percent. The


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Defined Contribution Pension, which increased $165,618, was responsible for 27 percent of the total dollar increase. Table 18 – Northwest Natural Benefit Costs

Benefit Description 2012 2013 2014 2015Medical/Dental/Vision 14,192,460$ 13,630,611$ 14,187,311$ 14,599,827$ Defined Contribution Pension 638,462$ 835,972$ 1,103,050$ 1,268,669$ Life Insurance 79,220$ 83,920$ 87,042$ 106,344$ 401(k) Employer Match 2,150,452$ 2,201,108$ 2,450,981$ 2,456,537$ Short-Term Disability 36,034$ 37,458$ 57,215$ 57,240$ Long-Term Disability 189,455$ 238,467$ 357,991$ 371,916$ Employee Assistance Program 28,479$ 27,729$ 28,647$ 29,749$ Tuition Assistance Plan 60,452$ 101,168$ 109,308$ 91,875$ Wellness - Health Miles 153,201$ 142,451$ 129,537$ 151,135$ Wellness - Flu Shots/Health Risk Assessment 32,090$ 52,290$ 69,760$ 68,735$ Transit Passes 149,317$ 150,591$ 129,087$ 136,706$ FSA Administration 20,362$ 14,409$ 16,449$ 17,713$ ESPP Discount 127,099$ 108,830$ 152,614$ 130,779$

Total 17,857,084$ 17,625,003$ 18,878,994$ 19,487,224$

Medical/Dental/Vision Benefits To evaluate the 2.91 percent increase in NWN’s health benefit costs between 2014 and 2015, Staff reviewed the Kaiser Family Foundation’s (KKF) “2016 Employer Health Benefits Survey”8 and compared the increase in NWN’s cost to the increase in the average annual health premiums for single and family coverage. Between 2014 and 2015, average premiums increased by 3.75 percent and 4.22 percent for single and family coverage, respectively.

8 Kaiser FamilyFoundation, 2016 Employer Health Benefits Survey, http://kff.org/report-section/ehbs-2016-section-six-worker-and-employer-contributions-for-premiums/, accessed 10/10/2016.

http://kff.org/report-section/ehbs-2016-section-six-worker-and-employer-contributions-for-premiums/

http://kff.org/report-section/ehbs-2016-section-six-worker-and-employer-contributions-for-premiums/


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Table 19 - Kaiser Family Foundation Single and Family Premiums

2012 2013 2014 2015 2016Single 5,615$ 5,884$ 6,025$ 6,251$ 6,435$ Family 15,745$ 16,351$ 16,834$ 17,545$ 18,142$ * All plan types (includes HMO, PPO, POS, HDHP/SO)

2013 2014 2015 2016Single 4.79% 2.40% 3.75% 2.94%Family 3.85% 2.95% 4.22% 3.40%

Average Annual Premiums for Single and Family Coverage*

Average Annual Premium for Single and Family CoverageYear over Year Percentage Change

According to NW Natural’s response to Staff’s information request, NW Natural reviews surveys of energy and utility companies’ healthcare benefits and cost sharing to ensure that the Company’s benefit plans and cost sharing target the market median and are market competitive. For 2015, NW Natural benchmarked their benefits against the 2015 Willis Towers Watson Benchmark Survey and the American Gas Association. NW Natural’s 2015 premium sharing was 80/20 for medical coverage, 80/20 sharing for dental coverage, and 80/20 sharing for vision coverage. Premiums for high deductible health plans (HDHP) offered to non-represented employees were shared 85/15. NW Natural explained it picked up a higher percentage for the HDHP because it is the most cost effective plan offered. Represented employees were offered 85/15 sharing if they opted to participate in biometric screenings and health risk assessments. According to the KKF 2016 survey, for the last five years, premium growth has stayed low at 3 to 4 percentage points per year, and the employee premium sharing for single and family coverage has been steady at 18 percent and 30 percent, respectively. However, other forms of employee cost sharing in terms of deductibles, co-pays, co-insurance has increased. The survey attributes the increase in deductibles in part to rising enrollments in HDHP. To offset workers’ costs, the survey found that a growing number of large employers are offering HDHP with a savings option and contributing to the savings option to assist employees with higher out-of-pocket costs. The most common savings options are heath reimbursement arrangements (HRAs) and heath savings accounts (HSAs).

Staff Recommendation 35. Rate case staff should review all optional non-wage compensation provided

to employees as part of a total compensation package and compare to any available surveys.


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36. Rate case staff should review the health plans offered to employees, the associated premiums, and any cost sharing between NWN and its employees and compare the Company’s cost sharing against the KKF health benefits survey.

37. Rate case Staff should review any savings options, such as a Heath Reimbursement Arrangement (HRA) or a Heath Savings Account (HSA), the Company contributes to on behalf of employees and compare to the KKF surveys.

Pension and Postretirement Costs Northwest Natural indicates that there have been no material changes to the Company’s methodologies and information systems since 2008 that impact the reported values in Table 22 below. In the next general rate case, Staff will continue to examine trends of lower investment returns and higher health and life-insurance premiums found herein and in the two prior audits. The following tables clearly illustrate these recurring trend lines. (See Appendix A for years 2008-2015.)


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Table 20 - NW Natural Pension and Post Retirement Costs ($000's)2012 2013 2014 2015

Obligation at prior year-end measurement date 421 469 420 519 Fair Value of Plan Assets 249,603 267,062 279,164 249,338 Actual Return on Assets 26,683 22,872 19,957 (9,599) Funded Status (219,405) (152,781) (240,186) (227,339) Accumulated Benefit Obligation 469,008 419,843 519,350 476,677 Service Cost 8,639 9,354 7,696 8,794 Interest Cost 18,562 17,557 19,450 19,539 Expected Return on Assets (19,082) (18,721) (19,496) (20,676) Amortization of Transition Asset/Obligation 411 - - - Amortization of Prior Service Cost 392 420 420 428 Recognized (Gain) Loss 16,066 19,028 11,135 19,163 Net Periodic Pension Cost (Income) 24,988 27,638 19,205 27,248 *NW Natural Contribution to Plan 27,530 15,802 13,948 17,714

Discount Rate 4.51%/4.33%

3.84%/3.56%

4.71%/4.45%

3.82%/3.74%

Long-Term Rate of Return on Assets

8.00% 7.50% 7.50% 7.50%

Actual Rate of Return on Assets

11.46% 8.85% 7.31% -3.63%**

Return on Consolidated Common Equity

8.20% 8.20% 7.70% 6.90%

* These amounts include the costs allocated to construction and deferred to the pension balancing account.**Amount is calculated as the actual return on plan assets divided by the average fair value of the plan assets.

The actual rate of return on assets is a one-year rate. The long-term rate of return on assets is the anticipated return on plan assets measured at market value based on long-term expected rate of return over multiple years. Over an extended time, actual and estimated rates of return should be comparable. Staff will look at volatility and market trends in the next rate case to more closely examine drivers of diminished returns, including the role of an extended period of low interest rates. The Company’s responses to IR Nos. A242 and A243 will form the foundation of that next analysis.


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Northwest Natural’s response to IR No. A9 will be the beginning of common size trending for other looks at pension and related defined contribution in the next general rate case. The following table highlights net pension benefit costs and net postretirement costs for the years 2012 through 2015:

Table 21 - NW Natural Pension Costs ($000's)2012 2013 2014 2015

FAS 87 Pension 22,086 24,894 17,052 24,791 FAS 106 Postretirement 2,902 2,744 2,153 2,457

Total 24,988 27,638 19,205 27,248

NW Natural also records Executive Deferral plan costs/payments in account 926. The table below summarizes expense for the Executive Supplemental Retirement Income Plan (ESRIP) and Supplemental Executive Retirement Plan (SERP). Table 22 - NW Natural Postretirement Costs ($000's)

2012 2013 2014 2015SERP 470 546 509 616 ESRIP 2,472 2,834 2,357 3,403 Total 2,942 3,380 2,866 4,019

Staff Recommendation 38. Rate case staff should examine GRC test year trend and third party

assessments in its review of pension and other post-retirement costs.

Operations and Maintenance Expenses Staff examined NW Natural’s O&M accounts for the years 2012 through 2015. The following table highlights NWN’s O&M costs. Table 23 – NW Natural’s O&M costs (FERC 816-894)

Year 2012 2013 2014 2015 Costs $48,932,886 $53,617,239 $52,050,505 $53,840,285 Percent Change 2012-2015

10%

CPI Change 2012-2015

4.7%

As the Table 25 indicates, NW Natural’s increase in O&M costs has been higher than the CPI-U increase for the same period.


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Although the cost increases are higher than the CPI-U, the Company states that there were no changes, adjustments, one-time charges, or out-of-period changes that are reasonably viewed as distorting a comparison of annual O&M expenses for each fiscal year through 2012 and 2015. Due to the relatively small difference between O&M percent change and overall price increase, Staff accepts NWN’s costs as reasonable but notes that special care should be taken during the next rate case to ensure costs are not continuing to increase without merit.

Staff recommendation 39. Rate case staff should review O&M expenses during the rate case to

determine a reasonable ongoing level of expense.

Taxes

Income Taxes NW Natural provided the following tax information for 2012 through 2015. Total Operating Revenues for Oregon decreased approximately 0.270 percent in 2015 from 2012. The following table highlights the income taxes for 2012 through 2015. Table 24 – NW Natural Income Tax 2012 – 2015

2012 2013 2014 2015Operating Revenue 718,292,421 746,183,842 750,415,902 720,229,847 Other Deductions 589,438,163 618,117,025 611,494,793 600,960,355 Interest (AFUDC) 127,180 171,108 117,417 159,970 Interest (exp/inc net) 32,914,233 35,740,881 37,709,465 29,608,733 Schedule "M" Additions 22,250,062 13,841,214 106,723,420 31,596,521 Schedule "M" Deductions 170,585,485 153,524,476 106,491,871 48,284,365 Income Before Taxes (52,268,218) (47,186,218) 101,560,610 73,132,885 State Income Taxes - (10,751) 1,868,240 2,131,850 Taxable Income (52,268,218) (47,175,467) 99,692,370 71,001,035 Federal Income Tax 32,658 8,883 21,124,969 15,166,220 Schedule “M” deductions increased in 2012 and 2013. According to the Company, the primary driver of the increase for both years was accelerated cost recovery deductions from gas reserves investments. For 2014 and 2015, fluctuating gas commodity pricing and the resulting weighted average cost of gas (WACOG) balance resulted in a timing difference for income tax reporting. Schedule “M” additions increased in 2014 because the Company received over $100 million in taxable insurance proceeds. These were environmental insurance proceeds received as a result of settlements with historical insurance


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carriers. As part of Docket No. UM 1732, these proceeds were reviewed by Staff and allocation of the insurance proceeds is discussed in Order No. 15-049. NWN stated that taxable income is apportioned to Oregon using a percentage that is primarily derived by dividing Oregon revenue by total revenue (ORS 314.650). Staff reviewed ORS 314.650. This statute concerns the Oregon Department of Revenue and specifically refers to the apportionment of taxable income on a company’s Oregon excise tax return. In estimating the level of income taxes for ratemaking purposes, Staff is guided by ORS 757.269 (1) that states, “[s]ubject to subsections (2) and (3) of this section, amounts for income taxes included in rates are fair, just and reasonable if the rates include current and deferred income taxes and other related tax items that are based on estimated revenues derived from the regulated operation of the utility.”

Other Taxes Staff requested Northwest Natural provide the following information regarding taxes other than income and explain any year to year change greater than 10 percent: Table 25 – Taxes Other than Income

2012 2013 2014 2015

Property Tax 20,256,428$ 20,137,669$ 20,729,293$ 20,790,917$

Franchise Fees 18,429,746 19,001,753 18,837,840 18,034,193

Payroll Tax 5,228,793 5,453,509 4,621,709 5,187,688

Other 52,113 41,755 76,466 324,689 Regulatory Fees 2,014,052 1,760,703 1,828,415 1,840,206

Total 45,981,132$ 46,395,389$ 46,093,723$ 46,177,693$ NW Natural explained payroll tax in 2014 decreased 15 percent from 2013 due primarily to three factors; 1) The 2014 bonus accrual for bargaining unit employees was eliminated due to a renegotiation of their contract; The offsetting compensation increase did not occur until December 2014; 2) A higher percentage of labor was capitalized. Consequently, more payroll tax was charged to capital; and, 3) Unemployment tax, a component of payroll tax, was


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reduced, decreasing overall payroll tax. The “other” category changed due to annual fee assessments by the Oregon Department of Energy. Staff did not review in detail the regulatory fees. These primarily would be fees assessed by the OPUC for OPUC operations.

Deferred Taxes The table below shows NWN’s accumulated deferred income taxes for years 2012 through 2015. Table 26 – Accumulated Deferred Income Taxes (ADIT) 2012 2013 2014 2015 ADIT ($349,456,520) ($389,238,081) ($402,317,785) ($427,030,498) Staff requested the Company explain any year over year change greater than 10 percent. According to the Company, the 11 percent increase in ADIT between years 2012 through 2013 is primarily attributed to accelerated cost recovery of capital assets for income tax purposes. This includes income tax deductions for bonus tax depreciation, regular tax depreciation, and repair deductions.

Tax Credits NW Natural received various Federal and State Income tax credits, the details of which are confidential.

Staff Recommendation 40. Rate case staff should verify whether the Company has properly included the

tax effects of any special tax treatments such as the bonus depreciation deduction or the maintenance and repairs deduction in ADIT.

41. Rate case staff should verify that any tax credit that is linked to Oregon

operations is reflected in rates.

Financial Records

Internal Audits Staff reviewed the Company’s internal audit program. The Company’s Board of Directors has an Audit Committee consisting of five members as of April 7, 2016. Each of these directors is independent as defined under current NYSE listing standards and the Company’s Director Independence Standards. The chair of the committee has been deemed a financial expert as defined under applicable Securities and Exchange Commission (SEC) rules.9

9 See Company’s response to Staff Information Request No. 217.


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The Company’s Internal Audit Department completed six internal audits in 2012, three internal audits in 2013, five internal audits in 2014, and six audits in 2015. Multiple reviews have been conducted during the same timeframe.10 Staff reviewed four Audit Reports and two Review Memos and was favorably impressed with their robustness and quality.11

FAS 133 Mark-to-Market Accounting According to the Company, in the ordinary course of business, NW Natural enters into a number of contracts to mitigate or control financial risks. Many of these contracts are considered to be financial derivative contracts (also referred to as ISDA contracts) and are accounted for under FAS 133. The most common use of FAS 133 contracts by the Company is related to natural gas purchase contracts in which it actively manages the gas price risk. However, NW Natural also uses foreign currency forward purchase contracts and interest rate hedge contracts. The Company has used foreign currency hedge contracts for a number of years to manage the financial risk associated with paying pipeline demand charges and buying commodity supplies from Canada.

Property Sales There have been two sales of real property by the Company between 2012 and 2015. The South Center and Tualatin Center properties, both located in Tualatin, Oregon were sold. South Center sold on August 30, 2012 for $1.8 million. Tualatin Center was sold on May 30, 2013, for $6.8 million. OPUC Order No. 12-299 and OPUC Order No. 13-196 discuss the specifics of the property transactions. Summarily, both properties were sold because of the need to have a more capable centralized hub. The South Center property was sold at a net loss of approximately $22,000. Tualatin Center resulted in a gain of $2.8 million. This gain was refunded to customers through the Company’s PGA mechanism.

Cost of Capital

Securities Issuance Staff will not introduce sensitive, forward-looking information here, but will use understandings derived from this audit, as the foundation for inquiry in the next general rate case. Access to Capital

10 Id. 11 The reports reviewed by Staff were provided by the Company in response to Staff Information Request No. 228 and included the following topics: 2012 Affiliated Interests Audit, 2012 Loy Clark Vendor Audit, 2014 Healthcare Benefits Administration Audit, 2014 Gift and Entertainment Policy Compliance Review, 2014 Pension Withdrawal Liability Review, and 2015 Integrated Resource Plan (IRP) Audit.


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Market conditions are now attractive and supportive of the Company achieving its target long-term capital structure. Investor Presentations Staff reviewed the correlation of presentation and other materials with quarterly and annual filings with the SEC provided by the Company. Staff found no material differences in NWN’s presentation materials delivered to investors, analysts or credit rating agencies and those delivered to either the SEC or the Commission.

Staff Recommendations: 42. Rate case staff should examine non-regulatory assets and goodwill and

associated equity.

43. Rate case staff should examine the Company’s control of legal expenses surrounding securities’ issuance. This examination should look at the assignment of legal costs across multiple related issuances and confirm whether costs for like legal work reflect downward price pressures over time.

44. Staff, in subsequent securities issuance dockets and rate cases, should

require that the Company capture and document legal expenses to reflect the purposes of the legal services or rendered, the skill level of attorney or paralegal performing the work, and the billed cost to accomplish specific component tasks. (Rate case and Securities Issuance dockets)

Long-Term Debt End of 2016 Q1 long term debt outstanding was $569,745,000, a drop of $43,672 from the $613,417,000 of a year earlier. Short-term debt rose over the same period by $26,635. Staff will start the next general rate case informed by the Company’s confidential responses to A164 for capital structure, A76 for debt, A91 for credit facilities and A107 for credit reports. At that time, Staff will bring additional current data into Oregon specific analytical frameworks to update earlier projections. Note: The Financial Accounting Standards Board (FASB) issued Accounting

Standard Update (ASU) 2016-01 on January 5, 2016, titled: “Financial Instruments – Overall Recognition and Measurement of Financial Assets and Financial Liabilities” effective January 1, 2018. At this time Oregon identifies long-term debt as that having maturities over one year. In the next general rate case, Staff will be careful to exclude imputed debt, contracts with debt like properties and short-term debt from its calculations of cost of capital. To the extent that accounting practices at the Company change, Staff and NW Natural will need to back out debt components that would not be material in an Oregon general rate case from the Company’s reporting,


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Also at the time NW Natural files its next general rate case, Staff will back out non-regulatory assets of divisions listed in the Organizational Chart provided in response to IR A1 and then estimate capital structure for a three year period including the test year to understand trend and spot relationships.

Staff Recommendations: 45. Rate case staff should remove short-term debt, contracts and obligations with

debt like properties and imputed debt from calculation of long-term debt.

46. Rate case staff should examine early redemption opportunities for effectiveness against term maturities. This analysis will include sensitivities around Federal Reserve interest rate increases.

47. Rate case staff should examine early redemption opportunities for

effectiveness against term maturities. This analysis will include sensitivities around Federal Reserve interest rate increases.

Snapshot

Cash Flows: Cash provided by operations (unaudited) was $146.1 million for 2016 first quarter (Q1), compared to $118.2 million for the same period in the prior year. But only $8.2 million of the $27.9 million difference was from an increase in net income. Net deferred tax liabilities from the enactment of bonus depreciation accounted for $17.4 million, while $5.0 million came from collections under an environmental recovery mechanism.12

12 NW Natural Reports Results for the Quarter Ending March 31, 2016, Company Release May 3, 2016.


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Table 27 - Credit Ratings have been stable since September, 2011:

Moody’s13 S&P14

Secured Debt A1 AA-

LT Local Currency Issue A3 A+

Commercial Paper P-2 A-1

Outlook Stable Stable

Credit rating agencies generally find the forward looking test year in Oregon general rate cases and various regulatory mechanisms that help facilitate prompt cost recovery credit supportive including: decoupling, WARM, Purchased Gas Adjustment (PGA), Environmental Cost Deferral and Pension Balancing.

Credit Facilities: NW Natural’s $300 million credit facility provides liquidity through 2019.

Dividends: NW Natural’s Board of Directors (BOD) declared a 2016 Q1 dividend of 46.75 cents per common share, equating to an annual dividend rate of $1.87. Cost of dividends issued for End of 2016 Q1 increased by $135,000 from $12,688,000 to $12,823,000.15 NWN notes that it has a stable 60-year history of increasing dividends paid annually.16 As of December 31, 2015, the dividend yield for the Company’s common shares was 3.7 percent. The 10-year compound average dividend growth rate (CAGR) at that time was 2.7 percent. NW Natural states that this

13 Moody’s refers collectively to: Moody’s Corporation (NYSE: MCO) and its affiliates Moody’s

Investors Service, Inc. and Moody’s Analytics, Inc. Ratings other than for unsecured long-term debt are captured from page 23 of NW Natural investor presentation, “Lead, Innovate, Grow” of June, 2016. Unsecured long-term debt ratings were retrieved on August 25, 2016 from Moody’s Website at: https://www.moodys.com/page/search.aspx?tb=1&luar=northwest+natural+gas

14 S&P refers collectively to S&P Global (NYSE: SPGI), a limited liability company and its affiliate Standard & Poor’s Financial Services, LLC. Ratings other than for unsecured long-term debt are captured from page 23 of NW Natural investor presentation, “Lead, Innovate, Grow” of June, 2016. Unsecured long-term debt ratings were retrieved on August 25, 2016, from S&P’s website at: http://www.standardandpoors.com/en_US/web/guest/ratings/entity/-/org-details/sectorCode/UTIL/entityId/101709

15 NW Natural Form 8-K Current Report filed with the U.S. Securities and Exchange Commission (SEC) on May 3, 2016.

16 Please see page 5 of the NW Natural investor presentation, “Lead, Innovate, Grow” of June, 2016.

https://www.moodys.com/page/search.aspx?tb=1&luar=northwest+natural+gas

http://www.standardandpoors.com/en_US/web/guest/ratings/entity/-/org-details/sectorCode/UTIL/entityId/101709

http://www.standardandpoors.com/en_US/web/guest/ratings/entity/-/org-details/sectorCode/UTIL/entityId/101709


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makes its dividend profile one of the three strongest on the New York Stock Exchange (NYSE).17

Staff Recommendations: 48. Rate case staff should examine the relative cost of unsecured letters of credit

(LC) vs. secured LC and bond alternatives to ensure that lower cost guarantees adequate to satisfy counterparties were not overlooked.

Advice by Investment Banks to Northwest Natural Staff notes that investment banks both advised and offered to sell financial services to the Company since the last audit. This is a matter of course in financial markets. However, the Company should be performing its own benefit, cost, risk analysis or directly retaining third party quantitative experts to make sure that Northwest Natural has assessed risks based on best available actual data. Such assessment prevents overreliance on created illustrative data and marketing materials from investment banks that omit troublesome inputs and low-frequency, high-cost and risk events. In the next general rate case Staff will review financial hedges to look for this due diligence.

Staff Recommendations: 49. Rate case staff should review three programs against governance examined

in the audit. a. Dividend Reinvestment Plan (DRIP), b. Employee Stock Purchase Plan (ESPP), and c. Restated Stock Option Plan (SOP).

50. Rate case staff should examine financial hedges to verify that the Company

performed its own analysis or retained its own quantitative analysis experts as opposed to sole reliance on indicative data from facilitators and counterparties. Rate case staff should determine if the Company identified which parties could gain or lose and to what extent if assumptions and expected correlations did not hold true.

Customer Service

Customer Count, Complaints and Service Levels The Company has initiated several investments in the customer experience in the last four years. A majority of these were aimed at improving the call response time for customers.

17 Pages 19 and 26 of the NW Natural investor presentation, “Lead, Innovate, Grow” of June, 2016.


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• NW Natural replaced its phone system with an upgraded voice over Internet Protocol (VoIP) system between 2012 and 2014. This change was intended to increase response flexibility and call reliability.

• Interactive Voice Response (IVR) software upgrades were made in late 2012 and October 2015. This has increased IVR response percentages as evidenced in Table 36 below.

The Company also utilizes regular follow-up surveys and national studies performed by third party companies to evaluate customer satisfaction and identify areas of improvement. In a recent JD Power study, NW Natural received lower than desired ratings on the Company’s self-service options. This has led to the Company reviewing options to improve the customer’s ability to manage their account on their own. Specifically:

• A Website Upgrade o Tentatively Planned for 2017.

• Proactive Outreach and Digital Engagement Tools o Currently doing product demos with vendors; software to offer self-

service and account management options to customers via digital channels; offer customer-requested alerts.

Table 28 - Average Customer Counts by Class (Sales)

Residential Commercial Industrial Interruptible Total 2012 621,399 63,580 569 138 685,686 2013 628,634 65,272 563 148 694,617 2014 637,411 66,204 571 142 704,328 2015 646,841 66,421 636 141 714,039 Growth 2012-2015

4.09% 4.47% 11.78% 2.17% 4.13%

NWN has shown a steady increase in customer counts for all classes between the years 2012 and 2015. The only class that may be showing signs of leveling out is the Interruptible Industrial class. With the number of customers, specifically residential customers, increasing, it is becoming even more important to leverage self-service technology to maintain normalized costs and customer satisfaction.


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Table 29 – Customer Inquiries and At-Fault Complaints by Class 2012 2013 2014 2015 Inq. At-

Fault Inq. At-

Fault Inq. At-

Fault Inq. At-

Fault Billing 6 4 6 2 7 0 14 0 Customer Acquisition 4 0 3 1 3 0 3 0

Service - Field 6 0 14 0 6 0 9 0

Service – Office 53 5 59 3 29 5 27 7

Rates/WARM 2 0 2 0 1 0 59 0 Misc 6 1 6 0 7 0 7 0 Total 77 10 90 6 53 5 119 7

Total customer complaints have stayed relatively level over the past four years. A large jump occurred in inquiries during the summer of 2015 due to a warmer than average winter the previous year, which resulted in more WARM adjustments and subsequent calls. Although a decreasing trend in customer complaints would signify an improvement in customer satisfaction, the current level of around one at-fault complaint per 100,000 customers seems reasonable. Staff reviewed the customer call totals by month and annually for the period 2012 through 2015. The data exhibited signs of increased utilization of the IVR application among customers especially in 2013. As Table 30 below illustrates, since 2012, the number of customer calls has increased. The increase however, has been entirely handled by technological means. Agent answered calls have actually decreased by 1.3 percent. Further, NWN states that due to a recent improvement in voice recognition capabilities for the IVR, automated responses are currently between 35-37 percent. Table 30 – Customers Calls Answered by Agents and Technology

Agent Percent of Total Technology

Percent of Total Combined

2012 696,204 69.9% 299,796 30.1% 996,000 2013 700,396 66.2% 357,604 33.8% 1,058,000 2014 698,728 66.8% 347,272 33.2% 1,046,000 2015 686,868 66.3% 349,132 33.7% 1,036,000 2012/2015 Change -9,336 -1.3% 49,336 16.5% 40,000


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Conclusion Staff appreciates the cooperation received from NW Natural during the audit process and the site visit. The Company’s thorough responses to Staff’s informational requests and the in-depth presentation addressing a wide range of Staff’s audit topics allowed Staff to gain additional insight into NW Natural's operations. NW Natural’s professionalism and willingness to engage with Staff was critical to the completeness of this report. Copy to: Marc Hellman Jason Eisdorfer Judy Johnson Michael Dougherty

Lori Koho Bob Jenks, CUB Ed Finklea, NWIGU

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