We have several stock-based compensation plans, including the Long-Term Incentive Plan (LTIP), the Restated SOP and the ESPP. These plans are designed to promote stock ownership in NW Natural by employees and officers.

The LTIP is intended to provide a flexible, competitive compensation program for eligible officers and key employees. An aggregate of 600,000 shares of common stock was authorized for grants under the LTIP as stock bonus, restricted stock or performance-based stock awards. Shares awarded under the LTIP may be purchased on the open market or issued as new shares.

At December 31, 2011, 337,788 shares of common stock were available for award under the LTIP, assuming that performance based grants currently outstanding are awarded at the target level. The LTIP stock awards are compensatory awards for which compensation expense is based on the fair value of stock awards, with expense being recognized over the performance and vesting period for the outstanding awards.

Performance-based Stock Awards. Since the LTIP's inception in 2001, performance-based stock awards have been granted annually based on three-year performance periods. At December 31, 2011, certain performance-based stock award measures had been achieved for the 2009-11 award period. Accordingly, participants are estimated to receive 8,428 shares of common stock and a dividend equivalent cash payment equal to the number of shares of common stock received on the award payout multiplied by the aggregate cash dividends paid per share during the performance period. At December 31, 2010 and 2009, we awarded 8,007 and 15,900 shares of common stock, respectively, for the 2008-10 and 2007-09 award periods, plus a dividend equivalent cash payment equal to the number of shares of common stock received on the award payout multiplied by the aggregate cash dividends paid per share during the performance period. In 2010 and 2009, we expensed $0.2 million and $0.5 million respectively for both the 2008-10 and 2007-09 performance-based stock award periods, and on a cumulative basis we accrued a total of $0.7 million and $1.5 million, respectively, related to the 2008-10 and 2007-09 performance periods.

At December 31, 2011, the aggregate number of performance-based shares granted and outstanding at the threshold, target and maximum levels were as follows:

Performance	Performance Share Awards Outstanding			2011		Cumulative Expense
Period	Threshold	Target	Maximum	Expense		At Dec. 31, 2011
2009-11	7,410	39,000	78,000	$	353	$	763
2010-12	n/a⁽¹⁾	41,500	83,000		430		718
2011-13	n/a⁽¹⁾	37,950	75,900		276	$	276
Total		118,450	236,900	$	1,059

⁽¹⁾The threshold requirement was modified and is no longer applicable beginning in the 2010-12 performance period.

The threshold level estimates future payout assuming the minimum award payable is achieved for each component of the formula in the LTIP. For each of these performance periods, awards will be based on total shareholder return relative to a peer group of gas distribution companies over the three-year performance period and on performance results achieved relative to specific core and non-core strategies. Compensation expense is recognized in accordance with the accounting standard for stock compensation based on performance levels achieved and an estimated fair value using a Black-Scholes or binomial model. The weighted-average grant date fair value of unvested shares at December 31, 2011 and 2010 was $25.06 and $23.10 per share, respectively. The weighted-average grant date fair value of shares vested during the year was $22.35 per share and granted during the year was $19.38 per share.

Restricted Stock Units. A new form of restricted stock awards was approved by the Board in 2011. Restricted Stock Units (RSUs) are expected to be used instead of the Restated SOP starting in February of 2012. The LTIP plan was amended to allow RSUs to be granted under the plan. RSUs are expected to include a performance based threshold and a vesting period of four years from the grant date. An RSU obligates the Company upon vesting to issue the RSU holder one share of common stock plus a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of the RSU.

A total of 2,400,000 shares of common stock were reserved for issuance under the Restated SOP with 580,650 available for grant as of December 31, 2011. Options under the Restated SOP may be granted only to officers and key employees designated by a committee of our Board of Directors. All options are granted at an option price equal to the closing market price on the date of grant and may be exercised for a period up to 10 years and 7 days from the date of grant. Option holders may exchange shares they have owned for at least six months, at the current market price, to purchase shares at the option price.

The fair value of each stock option is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions and outcomes:

		2011		2010		2009
Risk-free interest rate		2.0%		2.3%		2.0%
Expected life (in years)		4.5		4.7		4.7
Expected market price volatility factor		24.5%		23.2%		22.5%
Expected dividend yield		3.8%		3.8%		3.8%
Forfeiture rate		3.1%		3.2%		3.7%
Weighted average grant date fair value	$	6.73	$	6.36	$	5.46

The expected life of our grants was calculated based on our actual experience with previously exercised option grants. The risk-free interest rate was based on the implied yield currently available on U.S. Treasury zero-coupon issues with a life equal to the expected life of the options. Historical data was used to estimate the volatility factor, measured on a daily basis, for a period equal to the duration of the expected life of the option awards. The dividend yield was based on management's current estimate for future dividend payouts at the time of grant. We expense the total cost of stock option awards granted to retirement eligible employees at the date of grant in accordance with stock option accounting guidance and the retirement vesting provisions of our option agreements.

Information regarding the Restated SOP activity for the three years ended December 31, 2011 is summarized as follows:

			Weighted -		Intrinsic
	Option		Average		Value
	Shares		Price Per Share		(In millions)
Balance outstanding, Dec. 31, 2008	396,410	$	38.62	$	2.3
Granted	111,750		41.15		n/a
Exercised	(23,225)		30.92		0.3
Balance outstanding, Dec. 31, 2009	484,935		39.57		2.7
Granted	119,750		44.25		n/a
Exercised	(111,525)		39.01		0.9
Forfeited	(2,700)		43.00		n/a
Balance outstanding, Dec. 31, 2010	490,460		40.82		2.8
Granted	122,700		45.74		n/a
Exercised	(24,185)		33.88		0.3
Forfeited	(9,750)		44.38		n/a
Balance outstanding, Dec. 31, 2011	579,225	$	42.09	$	3.4

Exercisable, Dec. 31, 2011	311,951	$	40.20	$	2.4

In the year ended December 31, 2011, cash of $0.8 million was received for option shares exercised and a $26,000 thousand related tax benefit was realized. For the 12 months ended December 31, 2011, 2010 and 2009, the total fair value of options that vested was $0.6 million, $0.5 million and $0.4 million, respectively. The weighted average remaining life of options exercisable and outstanding at December 31, 2011 was 5.5 years and 6.8 years, respectively

Thousands			2011		2010		2009

Operations and maintenance expense, for stock-based compensation		$	1,477	$	1,032	$	1,434
Income tax benefit			(597)		(418)		(559)
	Net stock-based compensation effect on net income	$	880	$	614	$	875
Amounts capitalized for stock-based compensation		$	261	$	182	$	229