13. ENVIRONMENTAL MATTERS

We own, or previously owned, properties that may require environmental remediation or action. We estimate the range of loss for environmental liabilities based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites and an assessment of the probable level of involvement and financial condition of other potentially responsible parties. Due to the numerous uncertainties surrounding the course of environmental remediation and the ongoing nature of several site investigations, we may not be able to reasonably estimate the high end of the range of possible loss. In those cases, we have disclosed the nature of the possible loss and the fact that the high end of the range cannot be reasonably estimated. Unless there is an estimate within a range of possible losses that is more likely than other cost estimates within that range, we record the liability at the low end of this range. It is likely that changes in these estimates and ranges will occur throughout the remediation process for each of these sites due to our continued evaluation and clarification concerning our responsibility, the complexity of environmental laws and regulations, and the determination by regulators of remediation alternatives.

In Oregon, we have a Site Remediation and Recovery Mechanism (SRRM) through which we track and have the ability to recover past deferred and future environmental remediation costs, subject to an earnings test. An Order from the OPUC in February 2015 deemed certain environmental remediation expenses and associated carrying costs deferred through March 31, 2014 prudent. Our settlement with insurance carriers resulting in insurance proceeds received was also deemed prudent in the Order. Under the Order, we were required to forgo the collection of $15 million out of approximately $95 million of environmental remediation expenses and associated carrying costs we had deferred through 2012 under the Order. The OPUC disallowed this amount from rate recovery based on its determination of how an earnings test should apply to amounts deferred from 2003 to 2012, with adjustments for other factors the OPUC deemed relevant. See Note 2 for information regarding the regulatory disallowance of past deferred costs under the Order received from the OPUC in February 2015.

We received total environmental insurance proceeds of approximately $150 million as a result of settlements from our litigation that was dismissed in July 2014. Under the OPUC Order, one-third of the Oregon allocated proceeds were applied to costs deferred through 2012, and the remaining two-thirds will be applied to costs over the next 20 years.

Under the SRRM, we will recover the first $5 million of annual expense through an amount that will be collected from Oregon customers through a tariff rider. We will apply $5 million of insurance (plus interest) to the next portion of environmental expenses each year. Any expenses and interest on expenses in excess of the annual $10 million (plus interest from insurance) are fully recoverable through the SRRM, to the extent the utility earns at or below our authorized Return On Equity (ROE). To the extent the utility earns more than its authorized ROE in a year, the utility is required to cover environmental expenses and interest on expenses greater than the $10 million (plus interest from insurance proceeds) with those earnings that exceed its authorized ROE.

We submitted the required compliance filing demonstrating the proposed implementation of the Order and SRRM in March 2015. In September 2015, as a result of discussions with the parties, we withdrew our original compliance filing and submitted a revised filing noting the parties could potentially raise two issues with our proposed implementation of the Order. First, we believe the February 2015 Order reflected the Commission’s determination of the total disallowance to be borne by NW Natural for prior periods; however, we anticipate the parties will question whether interest on the $15 million charge should be separately disallowed. This interest would total approximately $3 million. Second, we anticipate discussions concerning how state allocation rates from the Order are applied to our environmental remediation sites. However, we believe the effect on current regulatory deferrals related to the state allocation issue would be insignificant.

We are engaged in the Commission’s process with the parties to resolve issues they have raised regarding the compliance filing and expect resolution of these matters in the first half of 2016. The revised compliance filing is subject to final review and approval by the OPUC and as a consequence thereof, additional or different implementation procedures could be required, which may, among other things, result in additional impacts on earnings.

In addition, we requested clarification from the OPUC regarding the amount of Oregon-allocated insurance proceeds to be held in a secured account. In September 2015, the OPUC resolved the issue by adopting an all-party settlement, which provided that we did not need to obtain a secured account. Instead, under the order insurance proceeds used to offset future environmental expenses will accrue interest at a rate equal to the five-year treasury rate plus 100 basis points. Currently, Oregon-allocated insurance proceeds total approximately $96 million on a pre-tax basis.

In Washington, cost recovery and carrying charges on amounts deferred for costs associated with services provided to Washington customers will be determined in a future proceeding. Annually, we review all regulatory assets for recoverability or more often if circumstances warrant. If we should determine all or a portion of these regulatory assets no longer meet the criteria for continued application of regulatory accounting, then we would be required to write off the net unrecoverable balances against earnings in the period such a determination is made.

Environmental Sites

The following table summarizes information regarding the environmental site liabilities, which are recorded in other current liabilities and other non-current liabilities on the balance sheet:



	Current Liabilities						Non-Current Liabilities
	September 30,				December 31,		September 30,				December 31,
In thousands	2015		2014		2014		2015		2014		2014
Portland Harbor site:
Gasco/Siltronic Sediments	$	1,236	$	686	$	1,767	$	38,533	$	38,593	$	38,019
Other Portland Harbor	1,243		1,060		1,934		4,563		3,198		4,338
Gasco site	4,510		7,399		9,535		36,795		37,748		37,117
Siltronic Uplands site	538		634		957		489		577		348
Central Service Center site	177		70		171		—		173		—
Front Street site	420		804		1,020		215		99		122
Oregon Steel Mills	—		—		—		179		179		179
Total	$	8,124	$	10,653	$	15,384	$	80,774	$	80,567	$	80,123

The following table presents information regarding the total amount of cash paid for environmental sites and the total regulatory asset deferred:



	September 30,				December 31,
In thousands	2015		2014		2014
Cumulative cash paid	$	121,819	$	111,367	$	113,740
Total regulatory asset deferral⁽¹⁾	49,807		51,861		58,859


⁽¹⁾	Includes cash paid, remaining liability, and interest, net of insurance reimbursement and amounts reclassified to utility plant for the water treatment station.

PORTLAND HARBOR SITE. The Portland Harbor is an Environmental Protection Agency (EPA) listed Superfund site that is approximately 10 miles long on the Willamette River and is adjacent to our Gasco uplands and Siltronic uplands sites. We are a potentially responsible party (PRP) to the Superfund site and have joined with some of the other PRPs (the Lower Willamette Group or LWG) to develop a Portland Harbor Remedial Investigation/Feasibility Study (RI/FS). In August 2015, the EPA issued its own Draft Feasibility Study (Draft FS) for comment. The EPA Draft FS provides a new range of remedial costs for the entire Portland Harbor Superfund Site, which includes the Gasco/Siltronic Sediment site, discussed below. The range of present value costs estimated by the EPA for various remedial alternatives for the entire Portland Harbor, as provided in the EPA’s Draft FS, is $791 million to $2.45 billion. The range provided in the EPA’s Draft FS is based on cost alternatives the EPA estimates to have an accuracy between -30% and +50% of actual costs, depending on the scope of work. While the EPA’s Draft FS provides a higher range of costs than the LWG's submission, our potential liability is still a portion of the costs of the remedy the EPA will select for the entire Portland Harbor Superfund site. The cost of the remedy is expected to be allocated among more than 100 PRPs. We are participating in a non-binding allocation process in an effort to settle this potential liability. The new EPA Draft FS does not provide any additional clarification around allocation of costs. We manage our liability related to the Superfund site as two distinct remediation projects, the Gasco/Siltronic Sediments and Other Portland Harbor projects.

GASCO/SILTRONIC SEDIMENTS. In 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with the EPA to evaluate and design specific remedies for sediments adjacent to the Gasco uplands and Siltronic uplands sites. We submitted a draft Engineering Evaluation/Cost Analysis (EE/CA) to the EPA in May 2012 to provide the estimated cost of potential remedial alternatives for this site. At this time, the estimated costs for the various sediment remedy alternatives in the draft EE/CA, as well as the estimated costs for the additional studies and design work needed before the clean-up can occur, and for regulatory oversight throughout the clean-up, range from $39.8 million to $350 million. We have recorded a liability of $39.8 million for the sediment clean-up, which reflects the low end of the range. At this time, we believe sediments at this site represent the largest portion of our liability related to the Portland Harbor site, discussed above.

OTHER PORTLAND HARBOR. We incur costs related to our membership in the LWG, who is performing the RI/FS for the EPA, and also incur costs related to natural resource damages from these sites. NW Natural and other parties have signed a cooperative agreement with the Portland Harbor Natural Resource Trustee council to participate in a phased natural resource damage assessment to estimate liabilities to support an early restoration-based settlement of natural resource damage claims. Natural resource damage claims may arise only after a remedy for clean-up has been settled. We have accrued a liability for these claims at the low end of the range of the potential liability; the high end of the range cannot be reasonably estimated at this time. This liability is not included in the range of costs provided in the EPA Draft FS for the Portland Harbor noted above.

GASCO SITE. We own a former gas manufacturing plant that was closed in 1958 (Gasco site) and is adjacent to the Portland Harbor site described above. The Gasco site has been under investigation by NW Natural for environmental contamination under the Oregon Department of Environmental Quality (ODEQ) Voluntary Clean-Up Program. It is not included in the range of remedial costs for the Portland Harbor site noted above. We manage the Gasco site in two parts, the uplands portion and the groundwater source control action.

Uplands. In May 2007, we completed a revised Remedial Investigation Report for the uplands portion and it was approved by the ODEQ in March 2010. In 2015, ODEQ approved a risk assessment for the Uplands site, and we are currently working on a feasibility study. We have recognized a liability for the remediation of the uplands portion of the site at the low end of the range of potential liability; the high end of the range cannot be reasonably estimated at this time.

Groundwater Source Control. In September 2013, we completed construction of a groundwater source control system, including a water treatment station, at the Gasco site. We are working with ODEQ on monitoring the effectiveness of the system and at this time it is unclear what, if any, additional actions ODEQ may require subsequent to the performance testing of the system or as part of the final remedy for the uplands portion of the Gasco site. We have estimated the cost associated with the ongoing operation of the system and have recognized a liability at the low end of the range of potential cost. We cannot estimate the high end of the range at this time due to the uncertainty associated with the duration of running the water treatment station, which will be highly dependent upon the remedy determined for both the upland portion as well as the final remedy for our Gasco sediment exposure.

Beginning November 1, 2013, capital asset costs of $19 million for the Gasco water treatment station were placed into rates with OPUC approval. The OPUC deemed these costs prudent. Beginning November 1, 2014, the OPUC approved the application of $2.5 million from insurance proceeds plus interest to reduce the total amount of Gasco capital costs to be recovered through rate base.

OTHER SITES. In addition to those sites above, we have environmental exposures at four other sites: Siltronic, Central Service Center, Front Street, and Oregon Steel Mills. Due to the uncertainty of the design of remediation, regulation, timing of the liabilities, and in the case of the Oregon Steel Mills site, pending litigation, liabilities for each of these sites have been recognized at their respective low end of the range of potential liability; the high end of the range could not be reasonably estimated at this time.

Siltronic Upland site. A portion of the Siltronic property was formerly part of the Gasco site. We are currently conducting an investigation of manufactured gas plant wastes on the uplands portion of this site for the ODEQ.

Central Service Center site. We are currently performing an environmental investigation of the property under the ODEQ's Independent Cleanup Pathway. This site is on ODEQ's list of sites with confirmed releases of hazardous substances requiring cleanup.

Front Street site. The Front Street site was the former location of a gas manufacturing plant we operated. At ODEQs request, we conducted a sediment and source control investigation and provided findings to ODEQ. A Feasibility Study is currently underway.

Oregon Steel Mills site. See “Legal Proceedings,” below.

Legal Proceedings

We are subject to claims and litigation arising in the ordinary course of business. Although the final outcome of any of these legal proceedings cannot be predicted with certainty, including the matter described below, we do not expect the ultimate disposition of any of these matters will have a material effect on our financial condition, results of operations, or cash flows. See also Part II, Item 1, “Legal Proceedings.”

OREGON STEEL MILLS SITE. In 2004, we were served with a third-party complaint by the Port of Portland (the Port) in a Multnomah County Circuit Court case, Oregon Steel Mills, Inc. v. The Port of Portland. The Port alleges that in the 1940s and 1950s petroleum wastes generated by our predecessor, Portland Gas & Coke Company, and 10 other third-party defendants, were disposed of in a waste oil disposal facility operated by the United States or Shaver Transportation Company on property then owned by the Port and now owned by Oregon Steel Mills. The complaint seeks contribution for unspecified past remedial action costs incurred by the Port regarding the former waste oil disposal facility as well as a declaratory judgment allocating liability for future remedial action costs. No date has been set for trial. Although the final outcome of this proceeding cannot be predicted with certainty, we do not expect the ultimate disposition of this matter will have a material effect on our financial condition, results of operations, or cash flows.

For additional information regarding other commitments and contingencies, see Note 14 in the 2014 Form 10-K.