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Pension and Other Postretirement Benefits
 12 Months Ended
Dec. 31, 2011
Disclosure Pension And Other Postretirement Benefits [Abstract]  
Pension and Other Postretirement Benefits Text Block
    Impact on 2011 Impact on Retirement
  Change in Retirement  Benefit Obligations
Thousands, except percentAssumption Benefit Costs at Dec. 31, 2011
Discount rate:(0.25%)    
 Qualified defined benefit plans  $ 1,162 $ 11,796
 Non-qualified plans  8 53
 Other postretirement benefits  54 754
Expected long-term return on plan assets:(0.25%)    
 Qualified defined benefit plans  580 N/A

9.       Pension and Other Postretirement Benefits

 

We maintain two qualified non-contributory defined benefit pension plans covering a majority of our regular NW Natural employees with more than one year of service, several non-qualified supplemental pension plans for eligible executive officers and certain key employees and other postretirement employee benefit plans.  We also have a qualified defined contribution plan (Retirement K Savings Plan) for all eligible employees. Only the two qualified defined benefit pension plans and Retirement K Savings Plan have plan assets, which are held in a qualified trust to fund retirement benefits.  Effective January 1, 2007 and 2010, the qualified defined benefit retirement plans and postretirement benefits for non-union employees and for union employees, respectively, were closed to new participants. These plans were not available to employees of our NW Natural subsidiaries.  Non-union and union employees hired or re-hired after December 31, 2006 and 2009, respectively, and employees of NW Natural subsidiaries are provided an enhanced Retirement K Savings Plan benefit. Also, effective January 1, 2007, the postretirement Welfare Benefit Plan for Non-Bargaining Unit Employees was closed to new participants after December 31, 2006.

 

The following table provides a reconciliation of the changes in benefit obligations and fair value of plan assets, as applicable, for the pension and other postretirement benefit plans, excluding the Retirement K Savings Plan, for the years ended December 31, 2011, 2010, and 2009, and a summary of the funded status and amounts recognized in the consolidated balance sheets using measurement dates as of December 31, 2011, 2010 and 2009:

   Postretirement Benefit Plans
   Pension Benefits  Other Benefits
Thousands 2011 2010 2009  2011 2010 2009
Reconciliation of change in benefit obligation:             
 Obligation at January 1$ 339,338$ 307,991$ 281,127 $ 27,676$ 24,741$ 23,863
 Service cost  7,122  6,688  6,402   614  588  522
 Interest cost  18,134  18,029  17,948   1,404  1,436  1,568
 Net actuarial (gain) or loss  44,802  25,275  23,584   2,225  2,387  216
 Benefits paid  (18,269)  (18,645)  (17,149)   (1,870)  (1,476)  (1,428)
 Plan amendments  -  -  (3,921)   -  -  -
 Obligation at December 31$ 391,127$ 339,338$ 307,991 $ 30,049$ 27,676$ 24,741
               
Reconciliation of change in plan assets:             
 Fair value of plan assets at January 1$ 219,014$ 201,312$ 163,115 $ -$ -$ -
 Actual return on plan assets  (6,684)  24,651  28,641   -  -  -
 Employer contributions  21,909  11,696  26,705   1,870  1,476  1,428
 Benefits paid  (18,269)  (18,645)  (17,149)   (1,870)  (1,476)  (1,428)
 Fair value of plan assets at December 31$ 215,970$ 219,014$ 201,312 $ -$ -$ -
               
Funded status at December 31$ (175,157)$ (120,324)$ (106,679) $ (30,049)$ (27,676)$ (24,741)

Our qualified defined benefit pension plans had an aggregate projected benefit obligation of $362.9 million, $314.5 million and $285.2 million at December 31, 2011, 2010, and 2009, respectively, and the fair value of plan assets was $216.0 million, $219.0 million and $201.3 million, respectively.  Changes in certain pension assumptions impact our projected benefit obligations. Benefit obligations at December 31, 2011 increased $40.3 million due to decreases in our discount rate assumptions and increased by $0.9 million due to changes in other assumptions. The projected benefit obligations at December 31, 2010 increased $17.9 million over the prior year due to decreases in our discount rate assumptions and increased by $6.5 million due to changes in other assumptions.  

  

The following table provides amounts amortized from accumulated other comprehensive income (AOCI) or regulatory assets to net periodic benefit cost during 2011, 2010, and 2009:

   Regulatory Asset Amortization  AOCI Amortization
   Pension Benefits Other Postretirement Benefits  Pension Benefits
Thousands 2011 2010 2009  2011 2010 2009  2011 2010 2009
Net periodic benefit costs:                    
 Actuarial loss$ 10,731$ 6,740$ 6,189 $ 289$ 131$ 17 $ 854$ 707$ 449
 Prior service cost  230  230  1,260   197  197  197   122  (43)  (37)
 Transition obligation  -  -  -   411  411  411   -  -  -
Total $ 10,961$ 6,970$ 7,449 $ 897$ 739$ 625 $ 976$ 664$ 412

In 2012, an estimated $15.5 million will be amortized from regulatory assets to net periodic benefit costs, consisting of $14.7 million of actuarial losses, $0.4 million of prior service costs and $0.4 million of transition obligations, and $1.0 million will be amortized from AOCI to earnings related to actuarial losses.

Our assumed discount rate was determined independently for each pension plan and other postretirement benefit plan based on the Citigroup Above Median Curve (discount rate curve) using high quality bonds (i.e. rated AA- or higher by S&P or Aa3 or higher by Moody's).  The discount rate curve was then applied to match the estimated cash flows in each plan to reflect the timing and amount of expected future benefit payments for these plans.

The assumption for expected long-term rate of return on plan assets was developed as a weighted average of the expected earnings for the target asset portfolio.  In developing the expected long-term rate of return assumption, consideration was given to the historical performance of each asset class in which the plans' assets are invested and the target asset allocation for plan assets.

Our investment strategy and policies for the qualified pension plan assets held in the Retirement Trust Fund were approved by our retirement committee, which is composed of senior management employees with the assistance of an investment consultant.  The policies set forth the guidelines and objectives governing the investment of plan assets.  Plan assets are invested for total return with appropriate consideration for liquidity and portfolio risk.  All investments are expected to satisfy the requirements of the rule of prudent investments as set forth under the Employee Retirement Income Security Act of 1974.  The approved asset classes include cash and short-term investments, fixed income, common stock and convertible securities, absolute and real return strategies, real estate and investments in our common stock.  Plan assets may be invested in separately managed accounts or in commingled or mutual funds.  Investment re-balancing takes place periodically as needed, or when significant cash flows occur, in order to maintain the allocation of assets within the stated target ranges.  Our expected long-term rate of return is based upon historical index returns by asset class, adjusted by a factor based on our historical return experience, diversified asset allocation and active portfolio management by professional investment managers.  The Retirement Trust Fund is not currently invested in any NW Natural securities.

 

The following is our pension plan asset target allocation at December 31, 2011:

  Target
Asset CategoryAllocation
U.S. large cap equity15.0%
U.S. small/mid cap equity10.0%
Non-U.S. equity14.5%
Emerging markets equity3.5%
Long government/credit24.0%
High yield5.0%
Emerging market debt5.0%
Real estate funds5.8%
Absolute return strategy12.0%
Real return strategy5.2%

Our non-qualified supplemental defined benefit pension benefit obligations were $28.2 million, $24.9 million and $22.8 million at December 31, 2011, 2010 and 2009, respectively.  These plans are not subject to regulatory deferral and the changes in actuarial gains and losses, prior service costs and transition assets or obligations are recognized in AOCI under common stock equity, net of tax, until they are amortized as a component of net periodic benefit cost.  Although these are unfunded plans with no plan assets due to their nature as non-qualified plans, we indirectly fund a portion of our obligations with company- and trust-owned life insurance.

Our plans for providing postretirement benefits other than pensions also are unfunded plans, but are subject to regulatory deferral.  The gains and losses, prior service costs and transition assets or obligations for these plans were recognized as a regulatory asset. 

Net periodic benefit cost consists of service costs, interest costs, the amortization of actuarial gains and losses, the expected returns on plan assets and, in part, on a market-related valuation of assets.  The market-related valuation reflects differences between expected returns and actual investment returns, which are recognized over a three-year period or less from the year in which they occur, thereby reducing year-to-year net periodic benefit cost volatility.

 

The following tables provide the components of net periodic benefit cost for the qualified and non-qualified pension and other postretirement benefit plans for the years ended December 31, 2011, 2010 and 2009 and the assumptions used in measuring these costs and benefit obligations:

     Pension Benefits  Other Postretirement Benefits
Thousands  2011  2010  2009  2011  2010  2009
 Service cost $ 7,122 $ 6,688 $ 6,402 $ 614 $ 588 $ 522
 Interest cost   18,134   18,029   17,948   1,404   1,436   1,568
 Expected return on plan assets   (17,867)   (18,207)   (15,696)   -   -   -
 Amortization of transition                   
  obligations   -   -   -   411   411   411
 Amortization of prior service costs   352   187   1,223   197   197   197
 Amortization of net actuarial loss   11,584   7,447   6,810   289   131   -
   Net periodic benefit cost   19,325   14,144   16,687   2,915   2,763   2,698
 Amount allocated to construction   (4,905)   (3,729)   (4,636)   (878)   (904)   (858)
 Amount deferred to regulatory                  
  balancing account   (6,008)   -   -   -   -   -
   Net amount charged to expense $ 8,412 $ 10,415 $ 12,051 $ 2,037 $ 1,859 $ 1,840

The assumed annual increase in health care cost trend rates used in measuring other postretirement benefits as of December 31, 2011 were 8.0 percent for medical and 10.0 percent for prescription drugs.  Medical costs and prescription drugs are assumed to decrease gradually each year to a rate of 5.0 percent by 2021.

 

Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans.  A one percentage point change in assumed health care cost trend rates would have the following effects:

 

Thousands 1% Increase  1% Decrease
Effect on net periodic postretirement health care benefit cost $ 67 $ (60)
Effect on the accumulated postretirement benefit obligation $ 678 $ (613)

The impact of a change in retirement benefit costs on operating results would be less than the amounts shown above because 30 to 40 percent of these amounts would be capitalized to construction accounts as payroll overhead and included in utility plant, and a certain amount of increases or decreases could be recorded to the regulatory balancing account for pensions, with the remaining amount recognized in current earnings.

 

The following table provides information regarding employer contributions and benefit payments for the two qualified pension plans, non-qualified pension plans and other postretirement benefit plans for the years ended December 31, 2011 and 2010, and estimated future contributions and payments:

Thousands     
 Employer Contributions Pension Benefits  Other Benefits
  2010$ 12,088 $ 1,476
  2011  22,325   1,870
  2012 (estimated)  30,109   2,056
 Benefit Payments     
  2009  17,149   1,428
  2010  18,645   1,476
  2011  18,269   1,870
 Estimated Future Payments     
  2012  19,374   2,056
  2013  19,620   2,083
  2014  20,107   2,138
  2015  20,640   2,149
  2016  21,284   2,198
  2017-2021  122,680   11,298

We make contributions to our qualified defined benefit pension plans based on actuarial assumptions and estimates, tax regulations and funding requirements under federal law. The Pension Protection Act of 2006 (the Act) established new funding requirements for defined benefit plans.  The Act establishes a 100 percent funding target over seven years for plan years beginning after December 31, 2008.  Our qualified defined benefit pension plans are currently underfunded by $146.9 million at December 31, 2011, and we expect to make contributions during 2012 of approximately $28 million.

The Retirement K Savings Plan provided to our employees is a qualified defined contribution plan under Internal Revenue Code Section 401(k).  Our contributions to this plan totaled $2.4 million 2011 and $2.1 million in 2010 and 2009.  The Retirement K Savings Plan includes an Employee Stock Ownership Plan. 

 

The supplemental deferred compensation plans for eligible officers and senior managers are non-qualified plans.  These plans are designed to enhance the retirement savings of employees and to assist them in strengthening their financial security by providing an incentive to save and invest regularly.  

 

In addition to the company-sponsored defined benefit plans referred to above, we contribute to a multiemployer pension plan for our bargaining unit employees known as the Western States Office and Professional Employees International Union Pension Fund (Western States Plan) in accordance with our collective bargaining agreement. The employer identification number of the plan is 94-6076144. The cost of this plan is in addition to pension expense in the table above. The Western States Plan is managed by a board of trustees that includes equal representation from participating employers and labor unions. Contribution rates are established by collective bargaining agreements, and benefit levels are set by the board of trustees based on the advice of an independent actuary regarding the level of benefits that agreed-upon contributions are expected to support. The Western States Plan has reported an accumulated funding deficit for the current plan year and remains in critical status. A plan is considered to be in critical status if its funded status is 65 percent or less. Federal law requires pension plans in critical status to adopt a rehabilitation plan designed to restore the financial health of the plan. Rehabilitation plans may specify benefit reductions, contribution surcharges, or a combination of the two. The Western States Plan trustees adopted a rehabilitation plan that reduced benefit accrual rates and adjustable benefits for active employee participants and increased future employer contribution rates. These changes are expected to improve the funded status of the plan.  Our contributions to the Western States Plan amounted to $0.4 million in 2011, 2010 and 2009 which is greater than 5 percent of the total contributions to the plan by all participants.  This amount includes the 10 percent contribution surcharge. Contribution surcharges above the current 10 percent rate will be assessed to employer participants, but these higher surcharges will not go into effect for NW Natural until its next collective bargaining agreement, which is expected to be no earlier than June 1, 2014. Under the terms of our current collective bargaining agreement, which became effective in July 2009, we can withdraw from the Western States Plan at any time. However, if we withdraw and the plan is underfunded, we could be assessed a withdrawal liability. In accordance with accounting rules for multiemployer plans, we have not currently recognized these potential withdrawal liabilities on the balance sheet. Currently, we have no intent to withdraw from the plan, so we have not recorded a withdrawal liability.

 

Fair Value

 

Following is a description of the valuation methodologies used for assets measured at fair value. In cases where the pension plan is invested through a collective trust fund or mutual fund, our custodian uses the fund's market value.  The custodian also provides the market values for investments directly owned.

U.S. large cap equity:  These are level 1 assets valued at the closing price reported on the active market on which the individual security is traded.  This asset class includes investments primarily in U.S. common stocks.

U.S. small/mid cap equity:  These are level 2 assets valued based on information provided by the plan's investment custodians. The financial statements of the commingled fund are audited annually by independent accountants. Values for such funds are stated at estimated fair values, which have been determined based on the unit values of the funds. Unit values are determined by the bank sponsoring such funds by dividing the fund's net assets at fair value by its units outstanding at the valuation date.  This asset class includes investments primarily in U.S. common stocks.

 

 Non-U.S. equity:  These are level 1 and 2 assets. Level 1 assets are valued at the closing price reported on the active market on which the individual security is traded.  Level 2 assets are valued based on information provided by the plan's investment custodians. The financial statements of the commingled fund are audited annually by independent accountants. Values for such funds are stated at estimated fair values, which have been determined based on the unit values of the funds. Unit values are determined by the bank sponsoring such funds by dividing the fund's net assets at fair value by its units outstanding at the valuation date.  This asset class includes investments primarily in foreign equity common stocks.

Emerging market equity:  These are level 1 assets valued at the net asset value of the shares held by the plan at the valuation date.  This asset class includes investments primarily in common stocks in emerging markets.

Fixed income:  These are level 1 assets valued at the net asset value of the shares held by the plan at the valuation date.  This asset class includes investments primarily in investment grade debt and fixed income securities. 

Long Government/Credit: These are level 2 assets whose values are determined by closing values if available and by matrix pricing for illiquid securities. This asset class includes long duration fixed income investments primarily in U.S. treasuries, U.S. government agencies, municipal securities, mortgage-backed securities, asset-backed securities, as well as U.S. and international investment-grade corporate bonds.

 

Real estate funds: These are level 3 assets valued based on the interest held by the plan, for which fair values of the underlying investments are subject to appraisal as directed by the funds' management.  This asset class includes a real estate fund that invests directly in real estate.  The underlying properties held in the funds are appraised utilizing the following approaches: the cost approach (the current cost of replacing the real estate less deterioration and functional and economic obsolescence); the income approach (the ability of the underlying properties to generate net rental income); and the comparable sales approach (recent sales of comparable real estate in the same market). The plan's ability to redeem these investments is subject to certain restrictions and cash availability.

Absolute return strategy: These are level 2 assets valued based on information provided by the plan's investment custodians. The financial statements of the partnerships are audited annually by independent accountants, with the value of the underlying investments based on the estimated fair value of the various holdings in the portfolio as reported in the financial statements at net asset value.  This asset class includes a hedge fund.  Our investment normally provides for a quarterly distribution subject to 95 days advance notice of withdrawal.  Currently there are no restrictions on withdrawal requests, and as of December 31, 2011 we have not submitted a withdrawal request.

Real return strategy:  These are level 1 assets valued at the net asset value of the shares held by the plan at the valuation date.  This asset class includes an investment in a broad range of assets and strategies primarily including fixed income and equity securities, along with commodities.

Cash and cash equivalents:  These are level 2 assets valued at the net asset value of the shares held by the plan at the valuation date.  This asset class primarily includes a money market mutual fund.

The preceding valuation methods may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Although we believe these valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Investment securities are exposed to various financial risks including interest rate, market and credit risks.  Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of our investment securities will occur in the near term and that such changes could materially affect our investment account balances and the amounts reported as plan assets available for benefits payments.

 

The following table presents the fair value of plan assets, including outstanding receivables and liabilities, of the Retirement Trust Fund as of December 31, 2011 and 2010:

  December 31, 2011
Investments, in thousands  Level 1  Level 2  Level 3  Total
U.S. large cap equity $ 36,236 $ - $ - $ 36,236
U.S. small/mid cap equity   -   27,310   -   27,310
Non-U.S. equity   22,158   11,587   -   33,745
Emerging markets equity   10,208   -   -   10,208
Fixed income   19,121   -   -   19,121
Long government/credit   -   18,897   -   18,897
Real estate funds   -   -   15,317   15,317
Absolute return strategy   -   30,475   -   30,475
Real return strategy   15,475   -   -   15,475
Cash and cash equivalents   -   9,290   -   9,290
 Total investments $ 103,198 $ 97,559 $ 15,317 $ 216,074
              
  December 31, 2010
Investments, in thousands  Level 1  Level 2  Level 3  Total
U.S. large cap equity $ 37,231 $ - $ - $ 37,231
U.S. small/mid cap equity   -   27,864   -   27,864
Non-U.S. equity   24,630   14,549   -   39,179
Emerging markets equity   11,476   -   -   11,476
Fixed income   36,429   -   -   36,429
Real estate funds   -   -   14,721   14,721
Absolute return strategy   -   32,378   -   32,378
Real return strategy   15,452   -   -   15,452
Cash and cash equivalents   -   3,629   -   3,629
 Total investments $ 125,218 $ 78,420 $ 14,721 $ 218,359
              
         December 31,
Receivables        2011  2010
Accrued interest and dividend income       $ 414 $ 249
Due from broker for securities sold         321   448
 Total receivables       $ 735 $ 697
              
Liabilities            
Due to broker for securities purchased       $ 839 $ 42
 Total investment in retirement trust       $ 215,970 $ 219,014

Level 3 Investments

 

The following table presents the beginning balance, activity and ending balance of Level 3 investments that have their fair values established using significant unobservable inputs as of December 31, 2011: 

    Level 3 Assets
Thousands Real estate Funds
January 1, 2011 balance$ 14,721
 Total gains or (losses):  
  Included in earnings (or changes in net assets)  596
December 31, 2011 balance$ 15,317