Derivative Instruments

6 Months Ended

Jun. 30, 2011

Disclosure Derivative Instruments [Abstract]

Derivative Instruments Text Block

13.Derivative Instruments

We enter into swap, option and variousoption combinationsfor the purpose of hedging natural gas. We primarily use these derivative financial instruments to manage commodity prices related to our natural gas purchase requirements. A small portion of the derivatives are also related to foreign currency exchange transactions.

In the normal course of business, we enter into indexed-price physical forward natural gas commodity purchase (gas supply) contracts to meet the requirements of core utility customers.  We also enter into financial derivatives, up to prescribed limits, to hedge price variability related to the physical gas supply contracts.  Derivatives entered into prudently for future gas years prior to our annual PGA filing receive regulatory deferred accounting treatment.  Derivative contracts entered into after the annual PGA rate was set on November 1, 2010 that are for the current gas contract year are subject to our PGA incentive sharing mechanism, which, during the current PGA year, provides for a 90 percent deferral of any gains and losses as regulatory assets or liabilities, with the remaining 10 percent recognized on the income statement. Most of our commodity hedging for the upcoming gas year is completed prior to the start of each gas year, and these hedge prices are included in our annual PGA filing.  

The following table discloses the income statement presentation for the unrealized gains and losses from our derivative instruments for the six months ended June 30, 2011 and 2010. All of our currently outstanding derivative instruments are related to regulated utility operations as illustrated by the derivative gains and losses being deferred to the balance sheet accounts in accordance with regulatory accounting.

		Three Months Ended
		June 30, 2011								June 30, 2010
Thousands			Natural gas commodity	(1)		Foreign currency	(2)		Natural gas commodity	(1)		Foreign currency(2)
Cost of sales		$	3,631		$	-		$	8,471		$	-
Other comprehensive income (loss)			-			(196)			-			(356)
Less:
Amounts deferred to regulatory accounts on balance sheet			(3,631)			196			(8,471)			356
	Total impact on earnings	$	-		$	-		$	-		$	-
		Six Months Ended
		June 30, 2011								June 30, 2010
Thousands			Natural gas commodity	(1)		Foreign currency	(2)		Natural gas commodity	(1)		Foreign currency(2)
Cost of sales		$	(30,119)		$	-		$	(49,093)		$	-
Other comprehensive income (loss)			-			406			-			(339)
Less:
Amounts deferred to regulatory accounts on balance sheet			30,119			(406)			49,093			339
	Total impact on earnings	$	-		$	-		$	-		$	-
(1)	Unrealized gain (loss) from natural gas commodity hedge contracts is recorded in cost of sales and reclassified to regulatory deferral accounts on the balance sheet.
(2)	Unrealized gain (loss) from foreign currency exchange contracts is recorded in other comprehensive income, and reclassified to regulatory deferral accounts on the balance sheet.

We had no collateral posted with our counterparties as of June 30,2011or 2010.  We attempt to minimize the potential exposure to collateral calls by our counterparties to manage our liquidity risk.  Based on our current credit ratings, most counterparties allow us credit limits ranging from $25 million to $50 million before collateral postings are required.  Our collateral call exposure is set forth under credit support agreements, which generally contain credit limits. We also could be subject to collateral call exposure where we have agreed to provide adequate assurance, which is not specific as to the amount of credit limit allowed, but could potentially require additional collateral in the event of a material adverse change.  Based upon current contracts outstanding, which reflect unrealized losses of $29.7 million at June 30,2011, we have estimated the level of collateral demands, with and without potential adequate assurance calls, using current gas prices and various downgrade credit rating scenarios for NW Natural as follows:

				Credit Rating Downgrade Scenarios
Thousands		(Current Ratings) A+/A3		BBB+/Baa1		BBB/Baa2		BBB-/Baa3		Speculative
With Adequate Assurance Calls	$	-	$	-	$	-	$	1,966	$	16,900
Without Adequate Assurance Calls	$	-	$	-	$	-	$	1,966	$	13,892

In the three and six months ended June 30,2011, we realized net losses of $8.7 million and $29.6million,respectively, from the settlement of natural gas hedge contracts at maturity, which were recorded as increases to the cost of gas, compared to net losses of $14.6 million and $20.8 million, respectively, for the three and six months ended June 30,2010. The exchange rate in all foreign currency forward purchase contracts is included in our purchased cost of gas at settlement; therefore, no gain or loss is recorded from the settlement of those contracts.

We are exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps to hedge the risk of price increases for our natural gas purchases made on behalf of our customers. For more information on our derivative instruments, see Note 13 in our 2010 Form 10-K.

Fair Value

In accordance with fair value accounting, we include nonperformance risk in calculating fair value adjustments.  This includes a credit risk adjustment based on the credit spreads of our counterparties when we are in an unrealized gain position, or on our own credit spread when we are in an unrealized loss position.  Our assessment of non-performance risk is generally derived from the credit default swap market and from bond market credit spreads. The impact of the credit risk adjustments for all outstanding derivatives was immaterial to the fair value calculation at June 30,2011.As of June 30,2011and 2010and December 31,2010, the fair value was $29.7 million,$49.4 million and $52.6 million, respectively, using significant other observable, or level 2, inputs. We have used no level 3 inputs in our derivative valuations. We also did not have any transfers between level 1 or level 2 during the six months ended June 30,2011and 2010.