7. DEBT

Short-Term Debt

Our primary source of short-term funds is from the sale of commercial paper and bank loans. In addition to issuing commercial paper or bank loans to meet seasonal working capital requirements, short-term debt is used temporarily to fund capital requirements. Commercial paper and bank loans are periodically refinanced through the sale of long-term debt or equity securities. Our commercial paper program is supported by one or more committed credit

facilities. At December 31, 2013 and 2012, the amounts of commercial paper debt outstanding were $188.2 million and $190.3 million, respectively, and the average interest rate was 0.3% at year-end for both periods. The carrying cost of our commercial paper approximates fair value using Level 2 inputs, due to the short-term nature of the notes. See Note 2 for a description of the fair value hierarchy. At December 31, 2013, our commercial paper had a maximum maturity of 136 days and an average maturity of 66 days. There were no bank loans outstanding at December 31, 2013 or 2012.

On December 20, 2012, NW Natural entered into a five-year $300 million credit agreement, pursuant to which we may extend commitments for two additional one-year periods subject to lender approval. In December 2013, we extended our commitment for an additional year with an updated maturity date of December 20, 2018. The credit agreement allows us to request increases in the total commitment amount up to a maximum amount of $450 million and permits letters of credit in an aggregate amount of up to $200 million. Any principal and unpaid interest owed on borrowings under the agreement are due and payable on or before the expiration date. There were no outstanding balances under the agreement and no letters of credit issued or outstanding at December 31, 2013 and 2012.

The credit agreement requires that we maintain credit ratings with Standard & Poor’s (S&P) and Moody’s Investors Service, Inc. (Moody’s) and notify the lenders of any change in our senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in our debt ratings is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit facility. However, interest rates on any loans outstanding under the credit facility are tied to debt ratings, which would increase or decrease the cost of any loans under the credit facility when ratings are changed.

The credit agreement also requires us to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. We were in compliance with this covenant at December 31, 2013 and 2012.

Long-Term Debt

The issuance of first mortgage bonds (FMBs), which includes our medium-term notes, under the Mortgage and Deed of Trust (Mortgage) is limited by eligible property, adjusted net earnings and other provisions of the Mortgage. The Mortgage constitutes a first mortgage lien on substantially all of our utility property. In addition, our Gill Ranch subsidiary senior secured debt is secured by all of the membership interests in Gill Ranch as well as Gill Ranch’s debt service reserve account.

Retirement of long-term debt for each of the 12-month periods through December 31, 2018 are as follows:



In thousands
Year
2014	$	60,000
2015	40,000
2016	65,000
2017	40,000
2018	22,000

The following table presents our debt outstanding as of December 31:



In thousands	2013		2012
First Mortgage Bonds
8.26 % Series B due 2014	$	10,000	$	10,000
3.95 % Series B due 2014	50,000		50,000
4.70 % Series B due 2015	40,000		40,000
5.15 % Series B due 2016	25,000		25,000
7.00 % Series B due 2017	40,000		40,000
6.60 % Series B due 2018	22,000		22,000
8.31 % Series B due 2019	10,000		10,000
7.63 % Series B due 2019	20,000		20,000
5.37 % Series B due 2020	75,000		75,000
9.05 % Series A due 2021	10,000		10,000
3.176 % Series B due 2021	50,000		50,000
3.542% Series B due 2023	50,000		—
5.62 % Series B due 2023	40,000		40,000
7.72 % Series B due 2025	20,000		20,000
6.52 % Series B due 2025	10,000		10,000
7.05 % Series B due 2026	20,000		20,000
7.00 % Series B due 2027	20,000		20,000
6.65 % Series B due 2027	19,700		19,700
6.65 % Series B due 2028	10,000		10,000
7.74 % Series B due 2030	20,000		20,000
7.85 % Series B due 2030	10,000		10,000
5.82 % Series B due 2032	30,000		30,000
5.66 % Series B due 2033	40,000		40,000
5.25 % Series B due 2035	10,000		10,000
4.00 % Series due 2042	50,000		50,000
	701,700		651,700
Subsidiary Senior Secured Debt
Gill Ranch debt due 2016	40,000		40,000
	741,700		691,700
Less: Current maturities of long-term debt	60,000		—
Total long-term debt	$	681,700	$	691,700

First Mortgage Bonds

NW Natural issued $50 million of FMBs on August 19, 2013 with a coupon rate of 3.542% and a 10-year maturity. In October 2012, the utility issued $50 million of FMBs with a coupon rate of 4.00% and a maturity date of October 31, 2042.

Subsidiary Senior Secured Debt

In November 2011, Gill Ranch issued $40 million of senior secured debt, which consists of $20 million of fixed rate debt with an interest rate of 7.75% and $20 million of variable interest rate debt with an interest rate of LIBOR plus 5.50%, or 7.00%, whichever is higher. At December 31, 2013, the variable interest rate was 7.00%. This debt is secured by all of the membership interests in Gill Ranch and is nonrecourse to NW Natural. The maturity date of this debt is November 30, 2016.

Under the debt agreements, Gill Ranch is subject to certain covenants and restrictions including, but not limited to, a financial covenant that requires Gill Ranch to maintain minimum adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) at various levels over the term of the debt. The minimum adjusted EBITDA increases incrementally over the first few years, reaching its highest level in the 12-month period beginning April 1, 2015. Under the debt agreements, Gill Ranch is also subject to a debt service reserve requirement of 10% of the outstanding principal amount, certain prepayment penalties, restrictions on dividends out of Gill Ranch unless certain earnings ratios are met, and restrictions on incurrence of additional debt. Gill Ranch was in compliance with all existing debt provisions and covenants for the year ended December 31, 2013.

Fair Value of Long-Term Debt

As our outstanding debt does not trade in active markets, we estimated the fair value of our outstanding long-term debt using outstanding debt issuances that actively trade in public markets and companies that have similar credit ratings, terms and remaining maturities to our debt. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2.

The following table provides an estimate of the fair value of our long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:



	December 31,
In thousands	2013		2012
Carrying amount	$	741,700	$	691,700
Estimated fair value	806,359		834,664