Derivative Instruments

6 Months Ended

Jun. 30, 2013

Derivative Instrument Detail [Abstract]

Derivative Instruments [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 utility customers. We also enter into financial derivatives, up to prescribed limits, to hedge price variability related to these physical gas supply contracts as well as to hedge spot purchases of natural gas. The following table presents the absolute notional amounts related to open positions on financial derivative instruments:

	June 30,				December 31,
Dollars in thousands	2013		2012		2012
Open position absolute notional amount:
Natural gas (millions of therms)	35.9		35.1		39.5
Foreign exchange	$	17,171	$	13,725	$	13,231

Derivatives entered into by the utility for the procurement or hedging of natural gas for future gas years and 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 90% deferral of any gains and losses as regulatory assets or liabilities, with the remaining 10% or 20% recognized in current income. All of our commodity hedging for the 2012-13 gas year was completed prior to the start of the gas year, and these hedge prices were included in the Company's PGA filing.

The following table reflects the income statement presentation for the unrealized gains and losses from our derivative instruments. Outstanding derivative instruments related to regulated utility operations are deferred in accordance with regulatory accounting standards. We also enter into exchange contracts related to the optimization of our gas portfolio, which are derivatives but do not qualify for hedge accounting or regulatory deferral, and are subject to our regulatory sharing agreement.

	Three Months Ended
	June 30, 2013						June 30, 2012
In thousands	Natural gas commodity			Foreign currency			Natural gas commodity			Foreign currency
Cost of sales increase (decrease)	$	(16,139	)	$	—		$	27,780		$	—
Other comprehensive loss	—			(274		)	—			(237		)
Less:
Amounts deferred to regulatory accounts	16,069			274			(27,780		)	237
Total loss in pre-tax earnings	$	(70	)	$	—		$	—		$	—

	Six Months Ended
	June 30, 2013						June 30, 2012
In thousands	Natural gas commodity			Foreign currency			Natural gas commodity			Foreign currency
Cost of sales increase (decrease)	$	(8,956	)	$	—		$	(28,114	)	$	—
Other comprehensive loss	—			(513		)	—			(111		)
Less:
Amounts deferred to regulatory accounts	9,032			513			28,114			111
Total gain in pre-tax earnings	$	76		$	—		$	—		$	—

No collateral was posted with or by our counterparties as of June 30, 2013 or 2012. 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 2012 or 2013. 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 financial derivative contracts outstanding, which reflect unrealized losses of $8.8 million at June 30, 2013, 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
In thousands	(Current Ratings) A+/A3		BBB+/Baa1		BBB/Baa2		BBB-/Baa3		Speculative
With Adequate Assurance Calls	$	—	$	—	$	—	$	—	$	6,337
Without Adequate Assurance Calls	—		—		—		—		6,180

Our derivative financial instruments are subject to master netting arrangements; however, they are presented on a gross basis on the face of our statement of financial position. The Company and its counterparties have the ability to set-off their obligations to each other under specified circumstances. Generally set-off of any early termination amount payable to one party by the other party, in circumstances where there is a defaulting party or where there is one affected party in the case where either a credit event upon merger has occurred, the occurrence of an event of default or any other termination event, will, at the option of the non-defaulting party be reduced by or set-off against any other amounts payable. If netted by counterparty, our derivative position would result in an asset of $0.2 million and $0.9 million and a liability of $9.7 million and $29.1 million as of June 30, 2013 and June 30, 2012, respectively.

In the three and six months ended June 30, 2013, we realized a net gain of $1.4 million and a net loss of $4.0 million, respectively, from the settlement of natural gas hedge contracts at maturity, which were recorded as decreases and increases to the cost of gas, compared to net losses of $21.3 million and $50.7 million, respectively, for the three and six months endedJune 30, 2012. The currency 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 customers. See Note 13 in our 2012 Form 10-K for more information on our derivative instruments.

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 June 30, 2013. As of June 30, 2013 and 2012 and December 31, 2012, the fair value was a liability of $9.5 million, $28.2 million, and $5.8 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 six months ended June 30, 2013 and 2012.