Gas Reserves and Other Investments

12 Months Ended

Dec. 31, 2011

Gas Reserves And Other Investments [Abstract]

Gas Reserves And Other Investments [Text Block]

12.Gas Reserves and Other Investments

Our gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits recorded as liabilities on the balance sheet. Other investments include financial investments in life insurance policies, which are accounted for at fair value, and equity investments in certain partnerships and limited liability companies, which are accounted for under the equity or cost methods. The following table summarizes our other investments at December 31:

Thousands			2011		2010
Investments in life insurance policies		$	51,911	$	51,090
Investments in gas pipeline joint ventures			14,340		15,742
Other			2,012		2,262
	Total other investments	$	68,263	$	69,094

Gas Reserves

We entered into an agreement with Encana to develop physical gas reserves that are expected to supply a portion of our utility customers' requirements over the next 30 years. The volume of gas produced and allocated to us under the agreement will increase in the early years as we continue to invest in drilling, with volumes expected to peak at about 13 percent of our utility's gas supply requirement in gas year 2015-2016. Over the first 10 years of the agreement (2011-2020), volumes are expected to average approximately 8 to 10 percent of the annual gas purchase requirements of our utility customers. Under the agreement, we expect to invest approximately $45 million to $55 million per year for five years, and our total investment is expected to be approximately $250 million.

Upon reviewing the transaction, the OPUC determined that our costs under the agreement will be recovered on an ongoing basis through its annual PGA mechanism, including the regulatory deferral and incentive sharing process for the commodity cost of gas. Annually, a forecast will be established for the amounts related to costs and volumes expected, and any variances between forecasted and actual will be subject to the PGA incentive sharing in Oregon, up to a maximum variance of $10 million of which 10 percent (or $1 million maximum) would be recognized in current income. Variances in excess of $10 million, both negative and positive, will be deferred and passed through to customers in future rates at 100 percent. As part of the decision by the OPUC, we agreed to file a general rate case in Oregon no later than December 31, 2011.

Encana began drilling in May 2011 under the agreements referred to above, and we are currently receiving gas from our interests in a section of the gas field. In 2011, volumes from gas reserves were less than one percent of our total gas purchases. Our net investment at December 31, 2011 is $36.3 million, including deferred tax liabilities totaling $15.6 million.

Variable Interest Entity (VIE) Analysis. We concluded that the arrangements with Encana qualify as a VIE, but that we are not the primary beneficiary of these activities as defined by the authoritative guidance related to consolidations due to the fact that our interest represents a minor portion of total extraction activities. We account for our investment in this VIE on the cost basis, and it is included under gas reserves on our balance sheet. Our maximum loss exposure related to this VIE is limited to our investment balance.

Palomar

Palomar, a wholly-owned subsidiary of PGH, is pursuing the development of a new gas transmission pipeline that would provide an interconnection with our utility distribution system.  PGH is owned 50 percent by NWN Energy and 50 percent by TransCanada American Investments Ltd., an indirect wholly-owned subsidiary of TransCanada Corporation. PGH is a development stage variable interest entity.

Variable Interest Entity (VIE) Analysis.As of December 31,2011, we updated our VIE analysis and reconfirmed that we are not the primary beneficiary of PGH's activities as defined by the authoritative guidance related to consolidations due to the fact that we have a 50 percent share and there are no stipulations that allow disproportionate influence over the entity. Therefore, we account for our investment in PGH and the Palomar project under the equity method, which is included in other investments on our balance sheet. Our maximum loss exposure related to PGH is limited to our equity investment balance, less our share of any cash or other assets available to us as a 50 percent owner.

Impairment Analysis.Our investments in nonconsolidated entities accounted for under the equity method are reviewed for impairment at each reporting period, and following updates to our corporate planning assumptions.  When it is determined that a loss in value is other than temporary, a charge is recognized for the difference between the investment's carrying value and its estimated fair value.  Fair value is based on quoted market prices when available, or on the present value of expected future cash flows. Differing assumptions could affect the timing and amount of a charge recorded in any period.

In 2011, our investment in PGH was reviewed for impairment when Palomar withdrew its original application with the FERC for a proposed natural gas pipeline in Oregon.  At the same time, Palomar informed FERC that it intended to re-file an application to reflect changes in the project scope, which was expected to eliminate the western portion of the proposed pipeline and align the revised project with the region's current and future gas infrastructure needs. Palomar is working with customers in the Pacific Northwest to further understand their gas transportation needs and determine the commercial support for a revised pipeline proposal. We expect to file a new FERC certificate application to reflect a revised scope based on regional needs.

The evaluation of assets related to the west portion of the Palomar pipeline determined that these costs were impaired, and as a result we recorded a pre-tax charge of $0.3 million for our share of the project.  An evaluation of the assets related to the east portion was also performed in 2011, and a charge of $1.0 million was recorded. The east segmentcharge was related to costs that would potentially be outdatedand, if so, would need to be redone for the refiled application. Our remaining investment balance in Palomar was $13.5 million at December 31, 2011, which consists of costs related to the east segment. We also determined that our remaining equity investment was not impaired because the fair value of expected cash flows from planned development of the eastern portion of the pipeline project exceeds our equity investment.  However, if we learn later that the project is not viable or will not go forward, then we could be required to recognize a maximum charge of up to approximately $13.2 million based on the current amount of our equity investment net of cash and working capital at Palomar.  We will continue to monitor and update our impairment analysis as required.

Investment in Life Insurance Policies

We have invested in key person life insurance contracts to provide an indirect funding vehicle for certain long-term employee and director benefit plan liabilities.  The amount in the above table is reported as cash surrender value, net of policy loans.