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Policy
 12 Months Ended
Dec. 31, 2011
Accounting Policies Abstract  
Consolidation, Policy [Policy Text Block]

1.       Organization and Principles of Consolidation

 

The accompanying consolidated financial statements represent the consolidation of Northwest Natural Gas Company (NW Natural) and all companies that we directly or indirectly control, either through majority ownership or otherwise. Our direct and indirect wholly-owned subsidiaries include Gill Ranch Storage, LLC (Gill Ranch), NW Natural Energy, LLC (NWN Energy), NW Natural Gas Storage, LLC (NWN Gas Storage), and NNG Financial Corporation (NNG Financial). Investments in corporate joint ventures and partnerships that we do not directly or indirectly control, and for which we are not the primary beneficiary, are accounted for under the equity method or the cost method, which includes NWN Energy's investment in Palomar Gas Holdings, LLC (PGH). NW Natural and its affiliated companies are collectively referred to herein as “NW Natural.” The consolidated financial statements are presented after elimination of all significant intercompany balances and transactions, except for amounts required to be included under regulatory accounting standards to reflect the effect of such regulation. In this report, the term “utility” is used to describe our regulated gas distribution business, and the term “non-utility” is used to describe our gas storage business and other non-utility investments and business activities.

 

Certain prior year balances in our consolidated financial statements have been combined to conform with the current presentation. These changes had no impact on our prior year's consolidated results of operations, financial condition or cash flows.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect reported amounts in the consolidated financial statements and accompanying notes.  Actual amounts could differ from those estimates, and changes would most likely be reported in future periods.  Management believes that the estimates and assumptions used are reasonable.

 
Public Utilities, Policy [Policy Text Block]

Industry Regulation

Our principal businesses are the distribution of natural gas, which is regulated by the Public Utility Commission of Oregon (OPUC) and Washington Utilities and Transportation Commission (WUTC), and natural gas storage services, which are regulated by either the Federal Energy Regulatory Commission (FERC) or the California Public Utilities Commission (CPUC), and to a certain extent by the OPUC.  Accounting records and practices of our regulated businesses conform to the requirements and uniform system of accounts prescribed by these regulatory authorities in accordance with U.S. GAAP.  Our businesses regulated by the OPUC, WUTC and FERC earn a reasonable return on invested capital from approved cost-based rates, while our business regulated by the CPUC earns a return to the extent we are able to charge competitive prices above our costs (i.e. market-based rates).

In applying regulatory accounting principles, we capitalize or defer certain costs and revenues as regulatory assets and liabilities pursuant to orders of the OPUC or WUTC, which provides for the recovery of revenues or expenses from, or refunds to, utility customers in future periods, including a return or a carrying charge in most cases.

 
Property, Plant and Equipment, Policy [Policy Text Block]

Plant, Property and Accrued Asset Removal Costs

Plant and property are stated at cost, including capitalized labor, materials and overhead (see Note 11).  In accordance with regulatory accounting standards, the cost of acquiring and constructing long-lived plant and property generally includes an allowance for funds used during construction (AFUDC) or capitalized interest.  AFUDC represents the regulatory financing cost incurred when debt and equity funds are used for construction (see “Allowance for Funds Used During Construction,” below).  When constructed assets are subject to market-based rates rather than cost-based rates, then the financing cost incurred during construction are included in capitalized interest in accordance with U.S. GAAP, not regulatory financing cost under AFUDC.

Our provision for depreciation of utility plant and property is computed under the straight-line method in accordance with engineering studies approved by regulatory authorities. The weighted average depreciation rate for utility assets in service was approximately 2.8 percent in 2011 and 2010, and 2.9 percent in 2009 reflecting the approximate average economic life of the property. This includes 2011 weighted average depreciation rates for the following asset categories: 2.7 percent for transmission and distribution plant, 2.2 percent for gas storage facilities, 4.6 percent for general plant, and 5.1 percent for intangible and other fixed assets.

 
Asset Retirement Obligations, Policy [Policy Text Block]

In accordance with long-standing regulatory treatment, our depreciation rates are comprised of three components: one based on the average service life of the asset, a second based on the estimated salvage value of the asset, and a third based on the asset's cost of removal. We collect, through rates, the estimated cost of removal on certain regulated properties through depreciation expense, with a corresponding offset to accumulated depreciation.  These removal costs are non-legal obligations as defined by regulatory accounting guidance. Therefore, we have included these costs in non-current regulatory liabilities on our consolidated balance sheets. In the rate setting process, the liability for the removal costs is treated as a reduction to the net rate base upon which the regulated utility has the opportunity to earn its allowed rate of return.
Allowance for Funds Used During Construction, Policy [Policy Text Block]

Allowance for Funds Used During Construction

Certain additions to utility plant include AFUDC, which represents the net cost of debt and equity funds used during construction. AFUDC is calculated using actual interest rates for debt and authorized rates for return on equity, if applicable. If short-term debt balances are less than the total balance of construction work in progress, then a composite AFUDC rate is used to represent interest on all debt funds, shown as a reduction to interest charges, and a return on equity funds, shown as other income. While cash is not immediately recognized from recording AFUDC, it is realized in future years through rate recovery resulting from the higher utility cost of service. Our composite AFUDC rates were 0.5 percent in 2011, 0.6 percent in 2010 and 1.0 percent in 2009.

 
Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand plus highly liquid investment accounts with maturity dates of three months or less. At December 31, 2011, outstanding checks of approximately $3.9 million were included in accounts payable.

 
Revenue Recognition Policy Text Block

Revenue Recognition and Accrued Unbilled Revenues

Utility revenues, derived primarily from the sale and transportation of natural gas, are recognized upon delivery of gas commodity or service to customers.  Revenues include accruals for gas delivered but not yet billed to customers based on estimates of deliveries from meter reading dates to month end (accrued unbilled revenues). Accrued unbilled revenues are dependent upon a number of factors that require management's judgment, including total gas receipts and deliveries, customer use by billing cycle and weather factors.  Accrued unbilled revenues are reversed the following month when actual billings occur. Our accrued unbilled revenues at December 31, 2011 and 2010 were $61.9 million and $64.8 million, respectively.

From 2007 through 2010, utility net operating revenues also included the recognition of a regulatory adjustment for income taxes paid pursuant to a legislative rule (commonly referred to as SB 408) in effect for certain gas and electric utilities in Oregon. Under SB 408, we were required to automatically implement a rate refund, or a rate surcharge, to utility customers on an annual basis. The refund or surcharge amount was based on the difference between income taxes paid and income taxes authorized to be collected in customer rates. We recorded the refund, or surcharge, each quarter based on estimates of the annual amount to be recognized. On May 24, 2011, SB 408 was repealed and replaced by Senate Bill 967. SB 967 required utilities to eliminate amounts accrued under SB 408 for the 2010 and 2011 tax years, thereby denying recovery by NW Natural of the surcharge accrued for 2010, which resulted in a one-time pre-tax charge of $7.4 million in the second quarter of 2011. Pursuant to SB 967, we changed our revenue recognition policy effective January 1, 2011 and no longer recognize a regulatory adjustment for income taxes for SB 408.

 

Non-utility revenues are derived primarily from the gas storage business segment. At Mist, revenues are recognized upon delivery of services to customers.  Revenues from our asset management partner are recognized over the life of the asset management contract for guaranteed amounts, if any, and are recognized as earned for amounts above the guaranteed amount. At Gill Ranch, firm storage services resulting from short-term and long-term contracts are typically recognized in revenue ratably over the term of the contract regardless of the actual storage capacity utilized. Asset management revenue is recognized using a straight-line, pro rata methodology over the term of each contract and provides us with 80 percent of the pre-tax income from our independent energy marketing company. See Note 4.

 
Receivables, Policy [Policy Text Block]

Accounts Receivable and Allowance for Uncollectible Accounts

Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to core utility customers, plus amounts due for gas storage services.  With respect to these trade receivables, including accrued unbilled revenues, we establish an allowance for uncollectible accounts (allowance) based on the aging of receivables, collection experience of past due account balances including payment plans, and historical trends of write-offs as a percent of revenues.  With respect to large individual customer receivables, a specific allowance is established and added to the general allowance when amounts are identified as unlikely to be partially or fully recovered.  Inactive accounts are written-off against the allowance after they are 120 days past due or when deemed to be uncollectible.  Differences between our estimated allowance and actual write-offs will occur based on a number of factors, including changes in economic conditions, customer credit worthiness and the level of natural gas prices.  Each quarter the allowance for uncollectible accounts is adjusted, as necessary, based on information currently available.

 
Inventory, Policy [Policy Text Block]

Inventories

Utility gas inventories, which consist of natural gas in storage for the utility, are generally stated at the lower of average cost or net realizable value. The regulatory treatment of utility gas inventories provides for cost recovery in customer rates.  Utility gas inventories that are injected into storage are priced into inventory based on actual purchase costs. Utility gas inventories that are withdrawn from storage are charged to cost of gas during the current period at the weighted average inventory cost.

 

Gas Storage inventories, which primarily represent inventories at Gill Ranch, exclude cushion gas and consist of natural gas that we received as fuel-in-kind from storage customers. Gas Storage inventories are valued at the lower of average cost or net realizable value. Cushion gas is recorded at original cost and classified as long-term assets.

 

Material and supplies inventories, which consist of both utility and non-utility inventories, are stated at the lower of average cost or net realizable value.

 

Our utility and gas storage inventories totaled $65.6 million and $70.7 million at December 31, 2011 and 2010, respectively, and our materials and supplies inventories totaled $8.8 million and $9.7 million

Gas Reserves Policy [Text Block]

 

Our gas reserves are stated at cost, adjusted for regulatory amortization, with the associated deferred tax benefits recorded as liabilities on the balance sheet. Transactional costs to enter into the agreement (see Note 12) and payments by NW Natural to Encana Oil & Gas (USA) Inc. (Encana) are recognized as gas reserves on the balance sheet.  The current portion is calculated based on expected gas deliveries within the next fiscal year.  We recognize regulatory amortization of this asset on a volumetric basis and calculate using the proven reserves and the therms extracted and sold each month.  The amortization of gas reserves is recorded as an adjustment to the cost of gas.
Derivatives Policy Text Block

Derivatives

In accordance with accounting for derivatives and hedges, we measure derivatives at fair value and recognize them as either assets or liabilities on the balance sheet.  Accounting for derivatives requires that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met.  Accounting for derivatives and hedges provides an exception for contracts intended for normal purchases and normal sales for which physical delivery is probable.  In addition, certain derivative contracts are approved by regulatory authorities for recovery or refund through customer rates.  Accordingly, the changes in fair value of these approved contracts are deferred as regulatory assets or liabilities pursuant to regulatory accounting principles.  Derivative contracts entered into for core utility customer requirements after the annual purchased gas adjustment (PGA) rate has been set are subject to the PGA incentive sharing mechanism. Effective November 1, 2008, Oregon approved a PGA sharing mechanism under which we are required to select either an 80 percent deferral or 90 percent deferral of higher or lower gas costs such that the impact on current earnings from the gas cost sharing is either 20 percent or 10 percent of gas cost differences compared to PGA prices, respectively. For the PGA years in Oregon beginning November 1, 2011, 2010 and 2009, we selected a 90 percent deferral of gas cost differences.  In Washington, 100 percent of our gas cost differences are deferred.  See Note 13.

Our financial derivatives policy sets forth the guidelines for using selected derivative products to support prudent risk management strategies within designated parameters.  Our objective for using derivatives is to decrease the volatility of gas prices, earnings and cash flows and to prevent speculative risk. The use of derivatives is permitted only after the risk exposures have been identified, are determined to exceed acceptable tolerance levels and are necessary to support normal business activities.  We do not enter into derivative instruments for trading purposes and we believe that any increase in market risk created by holding derivatives should be offset by the exposures they modify.
Fair Value Of Financial Instruments Policy

Fair Value

In accordance with fair value accounting, we use the following fair value hierarchy for determining inputs for our debt, pension plan assets and our derivative fair value measurements:

  • Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets;
  • Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market; and
  • Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in valuing the asset or liability.

 

When developing fair value measurements, it is our policy to use quoted market prices whenever available, or to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. Fair values are primarily developed using industry-standard models that consider various inputs including: (a) quoted future prices for commodities; (b) forward currency prices; (c) time value; (d) volatility factors; (e) current market and contractual prices for underlying instruments; (f) market interest rates and yield curves; (g) credit spreads; (h) and other relevant economic measures.
Revenue Tax Policy [Text Block]

Revenue Taxes

We account for revenue-based taxes as a separate cost item collected from customers.  Therefore, revenue taxes are accounted for as a cost of sale and presented separately on the income statement.

 
Income Tax Policy [Text Block]

Income Tax Expense

NW Natural and its wholly-owned subsidiaries file consolidated federal and state income tax returns. Current income taxes are allocated based on each entity's respective taxable income or loss and tax credits as if each entity filed a separate return. We account for income taxes in accordance with accounting standards for income taxes. Accounting for income taxes requires recognition of deferred tax liabilities and assets for the future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (see Note 10).

Accounting for income taxes also requires recognition of deferred income tax assets and liabilities for temporary differences where regulators prohibit deferred income tax treatment for ratemaking purposes.  We have recorded a deferred tax liability equivalent of $68.5 million and $72.3 million at December 31, 2011 and 2010, respectively, to recognize future taxes payable resulting from transactions that have previously been reflected in the financial statements for these temporary differences.  Regulatory assets or liabilities corresponding to such additional deferred income tax assets or liabilities may be recorded to the extent we believe they will be recoverable from or payable to customers through the ratemaking process.  Pursuant to regulatory accounting principles, a corresponding regulatory asset has been recorded which represents the probable future revenue that will result from inclusion in rates charged to customers of taxes which will be paid in the future.  The probable future revenue to be recorded takes into consideration the additional future taxes which will be generated by that revenue.  Amounts applicable to income taxes due from customers primarily represent differences between the book and tax basis of net utility plant in service and actual removal costs incurred.

Deferred investment tax credits on utility plant additions, which reduce income taxes payable, are deferred for financial statement purposes and amortized over the life of the related plant or lease.