15. SUBSEQUENT EVENTS

Regulatory Settlements

On July 11, 2013, NW Natural filed stipulated settlement agreements in two dockets that resulted from certain decisions deferred by the OPUC from our 2012 general rate case. One settlement addresses implementation issues related to the new environmental recovery mechanism (SRRM), and the second settlement relates to the recovery of carrying costs on working gas inventory. The settlement agreements are subject to Commission review and approval. The Company anticipates Commission review during the third quarter.

Environmental Cost (SRRM) Settlement

If approved, the settlement addresses SRRM implementation issues including a review of the prudence of past deferred expenses, as well as the creation and application of an earnings test to determine the amount of environmental costs that would be collected from customers based on the Company's past and future earnings.

Under the settlement agreement, approximately $97.6 million of environmental remediation expenses and associated carrying costs incurred by NW Natural through December 31, 2012 were deemed prudently incurred. The parties also agreed that insurance settlements finalized through 2012 (approximately $40.7 million) were prudently executed, with these recoveries applied against deferred expenses to reduce amounts to be amortized under the SRRM. As part of the settlement, NW Natural has agreed not to seek recovery of $7.0 million of its $97.6 million in deferred expenses and associated carrying costs incurred through December 31, 2012. Upon Commission approval, this disallowance and other related adjustments will result in a one-time, net after-tax charge of $3.4 million.

The settlement also provides that environmental remediation expenditures deferred on or after January 1, 2013 will be reviewed annually for prudency, and an earnings test will be applied annually as follows:


•	If NW Natural's Oregon utility results of operations (ROO) for a given year show that NW Natural's earnings were more than 75 basis points below its authorized return on equity in that year (Authorized ROE), NW Natural will be allowed to collect all of the prudently incurred environmental remediation expenses deferred in that year.

•

If NW Natural's ROO for a given year shows that its earnings are between 75 basis points below Authorized ROE and Authorized ROE (or at Authorized ROE), NW Natural will reduce the balance of the SRRM account up to the net amount deferred for the current year, including offsetting insurance proceeds and other third-party recoveries allocated to that year (Net Amount Deferred), by 10% of its earnings between 75 basis points below Authorized ROE and Authorized ROE.

•

If NW Natural's ROO for a given year shows that its earnings are above Authorized ROE but less than or equal to 50 basis points above Authorized ROE, NW Natural will reduce the balance of the SRRM account, up to the Net Amount Deferred for the current year, including offsetting insurance proceeds and other third-party recoveries allocated to that year, by: (1) 80% of NW Natural's earnings between Authorized ROE and 50 basis points above Authorized ROE; and (2) 10% of its earnings between 75 basis points below Authorized ROE and Authorized ROE.

•

If NW Natural's ROO for a given year shows that its earnings are more than 50 basis points above Authorized ROE, NW Natural will reduce the balance of the SRRM account, up to the Net Amount Deferred for the current year, including offsetting insurance proceeds and other third-party recoveries allocated to that year, by: (1) 95% of its earnings above 50 basis points above Authorized ROE; (2) 80% of its earnings between Authorized ROE and 50 basis points above Authorized ROE; and (3) 10% of its earnings between 75 basis points below Authorized ROE and Authorized ROE.

Any insurance proceeds recovered after December 31, 2012 will be applied against expenses approved for amortization in the SRRM in equal amounts over the 10-year period following receipt of the funds.

The settlement also provides for recovery of the Company's costs associated with the construction of a water treatment station at NW Natural's Gasco site in Portland, Oregon. The station is currently under construction and is expected to be completed in the third quarter of 2013 with a cost estimate between $20 million and $25 million. Under the settlement agreement, NW Natural can file for rate recovery upon completion and after a prudency review. After these steps, the approved capital costs will be rolled into customer rates as part of rate base at the time of the subsequent PGA.

Working Gas Inventory Settlement

The working gas inventory carrying costs settlement, if approved, would allow the Company to collect $4.5 million, before interest, for deferred carrying costs on working gas inventory balances for the period of November 1, 2012 through October 31, 2013. Upon approval, this amount will be included in the 2013-2014 PGA rates. Prior to the settlement, the Company had been accruing $4.0 million annually for these carrying costs.

In addition, beginning November 1, 2013, approximately $39.5 million in working gas inventory will be included in rate base at NW Natural's authorized utility rate of return. This equates to an annual revenue requirement increase of approximately $4.5 million.