Derivative Instruments

9 Months Ended

Sep. 30, 2012

Disclosure Derivative Instruments [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

12. Derivative Instruments

We enter into swap, option and combinations of option contracts for the purpose of hedging natural gas.  We primarily use these derivative financial instruments to manage commodity price variability related to our natural gas purchase requirements.  A small portion of our derivative hedging strategy involves foreign currency exchange transactions related to purchases of natural gas from Canadian suppliers.

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 these 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 is set for the current gas contract year are subject to our PGA incentive sharing mechanism, which provides for either an 80 or a 90 percent deferral of any gains and losses as regulatory assets or liabilities, with the remaining 10 or 20 percent recognized in current income.  All of our commodity hedging for the 2011-12 gas year was completed prior to the start of the gas year, and these hedge prices were included in our PGA filing.  

The following table reflects the income statement presentation for the unrealized gains and losses from our derivative instruments for the three and nine months ended September 30, 2012 and 2011.  All of our currently outstanding derivative instruments are related to regulated utility operations as illustrated by the derivative gains and losses being deferred to balance sheet accounts in accordance with regulatory accounting standards.

	Three Months Ended
	September 30, 2012						September 30, 2011
Thousands	Natural gas commodity(1)			Foreign currency (2)			Natural gas commodity(1)			Foreign currency (2)
Cost of sales	$	22,558		$	—		$	(18,987	)	$	—
Other comprehensive income (loss)	—			273			—			(1,221		)
Less:
Amounts deferred to regulatory accounts on balance sheet	(22,558		)	(273		)	18,987			1,221
Total impact on earnings	$	—		$	—		$	—		$	—

	Nine Months Ended
	September 30, 2012						September 30, 2011
Thousands	Natural gas commodity(1)			Foreign currency (2)			Natural gas commodity(1)			Foreign currency (2)
Cost of sales	$	(5,556	)	$	—		$	(49,106	)	$	—
Other comprehensive income (loss)	—			162			—			(815		)
Less:
Amounts deferred to regulatory accounts on balance sheet	5,556			(162		)	49,106			815
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.

No collateral was posted with or by our counterparties as of September 30, 2012 or 2011.  We attempt to minimize the potential exposure to collateral calls by counterparties to manage our liquidity risk.  Counterparties generally allow a certain credit limit threshold before requiring us to post collateral against loss positions. Given our counterparty credit limits and portfolio diversification, we have not been subject to collateral calls in 2011 or 2012.  Our collateral call exposure is set forth under credit support agreements, which generally contain credit limits. We could also 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 $5.4 million at September 30, 2012, we have estimated the level of collateral demands, with and without potential adequate assurance calls, using current gas prices and various credit downgrade 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	$	—	$	—	$	—	$	—	$	585
Without Adequate Assurance Calls	$	—	$	—	$	—	$	—	$	522

In the three and nine months ended September 30, 2012, we realized net losses of $12.7 million and $63.3 million, 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 $6.6 million and $36.2 million, respectively, for the three and nine months endedSeptember 30, 2011.  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 2011 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.  The inputs in our valuation techniques include natural gas futures, volatility, credit default swap spreads and interest rates.  Additionally, 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 September 30, 2012.  As of September 30, 2012 and 2011 and December 31, 2011, the fair value was $5.4 million, $49.9 million and $61.0 million, respectively, using significant other observable, or Level 2, inputs.  We have used no Level 3 inputs in our derivative valuations.  We did not have any transfers between Level 1 or Level 2 during the nine months ended September 30, 2012 and 2011.