11. GAS RESERVES

Our gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits recorded as liabilities on the balance sheet.

We entered into agreements with Encana Oil & Gas (USA) Inc. (Encana) in 2011 to develop and produce physical gas reserves and provide long-term gas price protection for utility customers. Encana began drilling in 2011 under these agreements. Gas produced from working interests in these gas fields is sold at prevailing market prices, with revenues from such sales, less associated production costs, credited to the utility's cost of gas. The cost of gas, including a carrying cost for the rate base investment, is part of NW Natural's annual Oregon PGA filing, which allows us to recover our costs through customer rates. Our net investment under the original agreement earns a rate of return and provides long-term price protection for our utility customers.

On March 28, 2014, we amended the original gas reserve agreement in order to facilitate Encana's proposed sale of its interest in the Jonah field to Jonah Energy LLC. Under the amendment, we ended the drilling program with Encana, but increased our assigned ownership interests in certain sections of the Jonah field and retained the right to invest in additional wells with the new owner.

Since the amendment, we have been notified by Jonah Energy LLC of investment opportunities in the sections of the Jonah field where we have ownership interests. The amended agreement allows us to invest in additional wells on a well-by-well basis with drilling costs and resulting gas volumes shared at our amended proportionate ownership interest for each well in which we invest. We elected to participate in some of the additional wells drilled in 2014, and we may have the opportunity to participate in more wells in the future. We filed an application requesting regulatory deferral in Oregon for these additional investments. We have also signed a memorandum of understanding with all parties agreeing that individual wells drilled in any year will be reviewed for prudence annually going forward. Subsequently, we filed in 2015 seeking cost recovery for the additional wells drilled in 2014. A decision on the prudence of the wells drilled in 2014 will occur when the parties and Commission review our filing seeking cost recovery. Our cumulative investment of approximately $10 million in these additional wells has been accounted for as a utility investment. If regulatory approval is not received, our investment in these additional wells would follow oil and gas accounting.

Gas reserves acted to hedge the cost of gas

for approximately 10% and 6% of our utility's gas supplies for the years ended December 31, 2014 and 2013, respectively.

The following table outlines our net gas reserves investment at December 31:



In thousands	2014		2013
Gas reserves, current	$	20,020	$	20,646
Gas reserves, non-current	167,190		140,573
Less: Accumulated amortization	37,910		18,575
Total gas reserves⁽¹⁾	149,300		142,644
Less: Deferred taxes on gas reserves	18,551		42,117
Net investment in gas reserves⁽¹⁾	$	130,749	$	100,527


⁽¹⁾	Total gas reserves includes our investment in additional wells, subject to regulatory deferral approvals, with total gas reserves of $9.2 million and net investment of $8.4 million at December 31, 2014 and no net investment or total gas reserves from additional wells in 2013.

Variable Interest Entity (VIE) Analysis

We concluded that the arrangement with Encana qualifies as a variable interest (VI) as our interest represents a minor portion of total extraction activities. Our investment is included on our balance sheet under gas reserves with our maximum loss exposure limited to our current investment balance.