8. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS

We maintain qualified non-contributory defined benefit pension plans covering a majority of our utility employees with more than one year of service, a few non-qualified supplemental pension plans for eligible executive officers and other key employees, and other postretirement employee benefit plans. We also have qualified defined contribution plans (Retirement K Savings Plan) for all eligible employees. Only the qualified defined benefit pension plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund retirement benefits. Effective December 31, 2012, the defined benefit pension plans for non-union and union employees were merged. We will begin to refer to these plans as one plan in future filings. The qualified defined benefit retirement plan for non-union and union employees was closed to new participants effective January 1, 2007. The postretirement benefits plan for non-union employees was closed to new participants effective January 1, 2010. These plans were not available to employees of our non-utility 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.

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, 2012 and 2011, and a summary of the funded status and amounts recognized in the consolidated balance sheets using measurement dates as of December 31, 2012 and 2011:



	Postretirement Benefit Plans
	Pension Benefits						Other Benefits
In thousands	2012			2011			2012			2011
Reconciliation of change in benefit obligation:
Obligation at January 1	$	391,127		$	339,338		$	30,049		$	27,676
Service cost	8,047			7,122			592			614
Interest cost	17,295			18,134			1,267			1,404
Net actuarial (gain) or loss	37,615			44,802			3,182			2,225
Benefits paid	(18,195		)	(18,269		)	(1,971		)	(1,870		)
Obligation at December 31	$	435,889		$	391,127		$	33,119		$	30,049

Reconciliation of change in plan assets:
Fair value of plan assets at January 1	$	215,970		$	219,014		$	—		$	—
Actual return on plan assets	26,683			(6,684		)	—			—
Employer contributions	25,145			21,909			1,971			1,870
Benefits paid	(18,195		)	(18,269		)	(1,971		)	(1,870		)
Fair value of plan assets at December 31	$	249,603		$	215,970		$	—		$	—
Funded status at December 31	$	(186,286	)	$	(175,157	)	$	(33,119	)	$	(30,049	)

Our qualified defined benefit pension plan has an aggregate benefit obligation of $404.0 million and $362.9 million at December 31, 2012 and 2011, respectively, and fair values of plan assets of $249.6 million and $216.0 million, respectively.

The following table presents amounts recognized in regulatory assets or in the statement of comprehensive income for the years ended December 31, 2012, 2011 and 2010:



	Regulatory Assets																		Other Comprehensive Income
	Pension Benefits									Other Postretirement Benefits									Pension Benefits
In thousands	2012			2011			2010			2012			2011			2010			2012			2011			2010
Net actuarial loss	$	26,504		$	66,404		$	17,115		$	3,182		$	2,225		$	2,387		$	3,511		$	2,948		$	1,716
Amortization of:
Transition obligation	—			—			—			(411		)	(411		)	(411		)	—			—			—
Prior service cost	(230		)	(230		)	(230		)	(197		)	(197		)	(197		)	35			(122		)	43
Actuarial loss	(14,482		)	(10,731		)	(6,740		)	(435		)	(289		)	(131		)	(1,150		)	(854		)	(707		)
Total	$	11,792		$	55,443		$	10,145		$	2,139		$	1,328		$	1,648		$	2,396		$	1,972		$	1,052

The following table presents amounts recognized in regulatory assets and accumulated other comprehensive income (AOCI) at December 31, 2012 and 2011:



	Regulatory Assets								AOCI
	Pension Benefits				Other Postretirement Benefits				Pension Benefits
In thousands	2012		2011		2012		2011		2012			2011
Net transition obligation	$	—	$	—	$	—	$	411	$	—		$	—
Prior service cost	1,097		1,328		882		1,079		(12		)	(48		)
Net actuarial loss	188,278		176,255		9,681		6,934		15,327			12,966
Total	$	189,375	$	177,583	$	10,563	$	8,424	$	15,315		$	12,918

In 2013, an estimated $17.2 million will be amortized from regulatory assets to net periodic benefit costs, consisting of $16.8 million of actuarial losses, and $0.4 million of prior service costs. A total of $1.3 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), which uses high quality corporate bonds rated AA- or higher by S&P or Aa3 or higher by Moody’s. The discount rate curve was applied to match the estimated cash flows in each of the Company's plans to reflect the timing and amount of expected future benefit payments for these plans.

Our assumed expected long-term rate of return on plan assets was developed using a weighted average of the expected returns 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 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 outside 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, portfolio risk, and return expectation. 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, 2012:



Asset Category	Target Allocation
U.S. large cap equity	13.0	%
U.S. small/mid cap equity	8.5	%
Non-U.S. equity	13.0	%
Emerging markets equity	3.5	%
Long government/credit	30.0	%
High yield	5.0	%
Emerging market debt	5.0	%
Real estate funds	6.0	%
Absolute return strategy	11.0	%
Real return strategy	5.0	%

Our non-qualified supplemental defined benefit plan obligations were $31.9 million and $28.2 million at December 31, 2012 and 2011, 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 actuarial gains and losses, prior service costs and transition assets or obligations for these plans were recognized as a regulatory asset.

Net periodic benefit costs consist 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, of which the differences 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 Company's pension and other postretirement benefit plans for the years ended December 31, 2012, 2011, and 2010 and the assumptions used in measuring these costs and benefit obligations:



	Pension Benefits									Other Postretirement Benefits
In thousands	2012			2011			2010			2012			2011			2010
Service cost	$	8,047		$	7,122		$	6,688		$	592		$	614		$	588
Interest cost	17,295			18,134			18,029			1,267			1,404			1,436
Expected return on plan assets	(19,082		)	(17,867		)	(18,207		)	—			—			—
Amortization of transition obligations	—			—			—			411			411			411
Amortization of prior service costs	195			352			187			197			197			197
Amortization of net actuarial loss	15,631			11,584			7,447			435			289			131
Net periodic benefit cost	22,086			19,325			14,144			2,902			2,915			2,763
Amount allocated to construction	(5,820		)	(4,905		)	(3,729		)	(882		)	(878		)	(904		)
Amount deferred to regulatory balancing account⁽¹⁾	(7,876		)	(6,008		)	—			—			—			—
Net amount charged to expense	$	8,390		$	8,412		$	10,415		$	2,020		$	2,037		$	1,859

⁽¹⁾ Effective January 1, 2011, the OPUC approved the deferral of certain pension expenses above or below the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which includes the expectation of lower net periodic benefit costs in future years. Deferred pension expense balances include accrued interest at the utility’s authorized rate of return. See Note 2.

Net periodic benefit costs above are reduced by amounts capitalized to utility plant based on approximately 30% to 40% payroll overhead charge to construction work orders. In addition, a certain amount of net periodic benefit costs are recorded to the regulatory balancing account for pensions, with the remaining net amount charged to expense and recognized in current earnings.



	Pension Benefits						Other Postretirement Benefits
	2012		2011		2010		2012		2011		2010
Assumptions for net periodic benefit cost:
Weighted-average discount rate	4.51	%	5.49	%	6.01	%	4.33	%	5.16	%	5.78	%
Rate of increase in compensation	3.25-5.0%		3.25-5.0%		3.25-5.0%		n/a		n/a		n/a
Expected long-term rate of return	8.00	%	8.25	%	8.25	%	n/a		n/a		n/a
Assumptions for year-end funded status:
Weighted-average discount rate	3.85	%	4.51	%	5.49	%	3.56	%	4.33	%	5.16	%
Rate of increase in compensation	3.25-5.0%		3.25-5.0%		3.25-5.0%		n/a		n/a		n/a
Expected long-term rate of return	7.50	%	8.00	%	8.25	%	n/a		n/a		n/a

The assumed annual increase in health care cost trend rates used in measuring other postretirement benefits as of December 31, 2012 were 8.5% for medical and 10.5% for prescription drugs. Medical costs and prescription drugs are assumed to decrease gradually each year to a rate of 5.0% by 2023.

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:



In thousands	1% Increase		1% Decrease
Effect on net periodic postretirement health care benefit cost	$	65	$	(58	)
Effect on the accumulated postretirement benefit obligation	943		(841		)

The impact of a change in retirement benefit costs on operating results would be less than the amounts shown above because 30% to 40% of these amounts would be capitalized to utility plant as payroll overhead charges to construction work orders, and a certain amount of increases or decreases would 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, 2012 and 2011, and estimated future contributions and payments:



In thousands	Pension Benefits		Other Benefits
Employer Contributions:
2011	$	22,325	$	1,870
2012	25,559		1,971
2013 (estimated)	13,803		2,004
Benefit Payments:
2010	18,645		1,476
2011	18,269		1,870
2012	18,195		1,971
Estimated Future Benefit Payments:
2013	19,732		2,004
2014	20,244		2,080
2015	20,788		2,108
2016	21,490		2,169
2017	22,245		2,213
2018-2022	128,609		11,514

Employer Contributions to Company-Sponsored Defined Benefit Pension Plans

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% funding target over seven years for plan years beginning after December 31, 2008. In addition, in July 2012 the Moving Ahead for Progress in the 21st Century Act (MAP-21). This legislation changes several provisions affecting pension plans, including temporary funding relief and Pension Benefit Guaranty Corporation (PBGC) premium increases, which reduces the level of minimum required contributions in the near-term but generally increases contributions in the long-run as well as increasing the operational costs of running a pension plan. Our qualified defined benefit pension plans are currently underfunded by $154.4 million at December 31, 2012. Including the impacts of MAP-21, we expect to make contributions during 2013 of up to $15 million.

Multiemployer Pension Plan

In addition to the Company-sponsored defined benefit plans referred to above, we contribute to a multiemployer pension plan for our utility's union 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, and corresponding future liabilities, are in addition to pension amounts in the tables 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 below 65%. 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 2012, 2011, and 2010 which is approximately 5% of the total contributions to the plan by all employer participants.

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 the plan is underfunded at the time we withdraw, we would be assessed a withdrawal liability. In accordance with accounting rules for multiemployer plans, we have not 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.

Defined Contribution Plan

The Retirement K Savings Plan provided to our employees is a qualified defined contribution plan under Internal Revenue Code Section 401(k). Employer contributions to this plan totaled $2.2 million in 2012, $2.4 million in 2011, and $2.1 million in 2010. The Retirement K Savings Plan includes an Employee Stock Ownership Plan.

Deferred Compensation Plans

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.

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 and U.S. SMALL/MID CAP EQUITY. These are level 1 and 2 assets. The level 1 assets consist of directly held stocks, and mutual funds with a published net asset value (NAV). The level 2 assets consist of a mutual fund where NAV is not publicly published but the investment can be readily disposed of at NAV or market value. Directly held stocks are valued at the closing price reported in the active market on which the individual security is traded, and mutual funds are valued at NAV. This asset class includes investments primarily in U.S. common stocks.

NON-U.S. EQUITY. These are level 1 and 2 assets. The level 1 assets consist of directly held stocks, and the level 2 assets consist of an open-end mutual fund and a commingled trust where the NAV/unit price is not publicly published but the investment can be readily disposed of at the NAV/unit price. Directly held stocks are valued at the closing price reported in the active market on which the individual security is traded, and the mutual fund is valued at NAV, while the commingled trust is valued at the unit price of the trust. This asset class includes investments primarily in foreign equity common stocks.

EMERGING MARKET EQUITY. These are level 1 assets representing mutual funds with published NAV's. These mutual funds are valued at NAV. This asset class includes investments primarily in common stocks in emerging markets.

FIXED INCOME. This is a level 2 asset consisting of a mutual fund, valued at NAV, where NAV is not publicly published. This asset class includes investments primarily in investment grade debt and fixed income securities.

LONG GOVERNMENT/CREDIT. These are level 1 and 2 assets. The level 1 assets consist of a fixed-income mutual fund with a published NAV. This mutual fund is valued at NAV. The level 2 assets consist of directly held fixed-income securities whose values are determined by closing prices if available and by matrix prices 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.

HIGH YIELD BONDS. These are level 2 assets consisting of a limited partnership where valuation is not publicly published but the investment can be readily disposed of at market value. This asset class includes investments primarily in high yield bonds.

EMERGING MARKET DEBT. These are level 1 assets consisting of a mutual fund with a published NAV. This mutual fund is valued at NAV. This asset class includes investments primarily in emerging market debt.

REAL ESTATE FUNDS. These are level 1 assets consisting of a mutual fund with a published NAV. This mutual fund is valued at NAV. This asset class includes investments primarily in real estate investment trust (REIT) securities.

ABSOLUTE RETURN STRATEGY. These are level 2 assets consisting of a hedge fund of funds where valuation is not publicly published but the investment can be readily disposed of at unit price. The hedge fund of funds is valued at the weighted average value of investments in various hedge funds which in turn are valued at the closing price of the underlying securities. This asset class includes investments primarily in common stocks and fixed income securities.

REAL RETURN STRATEGY. These are level 1 assets representing a mutual fund with a published NAV. This mutual fund is valued at NAV. 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 representing mutual funds without published NAV's but the investment can be readily disposed of at NAV. The mutual funds are valued at the net asset value of the shares held by the plan at the valuation date. This asset class primarily includes money market mutual funds.

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, 2012 and 2011:



In thousands	December 31, 2012
Investments	Level 1		Level 2		Level 3		Total
U.S. large cap equity	$	29,047	$	1,891	$	—	$	30,938
U.S. small/mid cap equity	21,624		1,312		—		22,936
Non-U.S. equity	13,931		15,812		—		29,743
Emerging markets equity	8,004		—		—		8,004
Fixed income	—		8,824		—		8,824
Long government/credit	30,098		29,249		—		59,347
High yield bonds	—		12,017				12,017
Emerging market debt	11,421		—				11,421
Real estate funds	15,992		—		—		15,992
Absolute return strategy	—		32,078		—		32,078
Real return strategy	12,932		—		—		12,932
Cash and cash equivalents	—		1,459		—		1,459
Total investments	$	143,049	$	102,642	$	—	$	245,691

	December 31, 2011
Investments	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,
Receivables					2012		2011
Accrued interest and dividend income					$	388	$	414
Due from broker for securities sold					4,459		321
Total receivables					$	4,847	$	735
Liabilities
Due to broker for securities purchased					$	935	$	839
Total investment in retirement trust					$	249,603	$	215,970

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, 2012:



	Level 3 Assets
In thousands	Real Estate Funds
January 1, 2012 balance	$	15,317
Sales	(15,317		)
December 31, 2012 balance	$	—