SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from              to             

Commission File No. 1-15973

NORTHWEST NATURAL GAS COMPANY

(Exact name of registrant as specified in its charter)

Oregon	93-0256722
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

220 N.W. Second Avenue, Portland, Oregon 97209

(Address of principal executive offices) (Zip Code)

Registrant’s Telephone Number, including area code: (503) 226-4211

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

At July 30, 2004, 27,343,860 shares of the registrant’s Common Stock, $3 ¹/6 par value (the only class of Common Stock) were outstanding.

NORTHWEST NATURAL GAS COMPANY

For the Quarterly Period Ended June 30, 2004

		Page Number
	PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2004 and 2003	3
	Consolidated Statements of Earnings Invested in the Business and Comprehensive Income for the six-month periods ended June 30, 2004 and 2003	4
	Consolidated Balance Sheets at June 30, 2004 and 2003 and Dec. 31, 2003	5
	Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2004 and 2003	7
	Consolidated Statements of Capitalization at June 30, 2004 and 2003 and Dec. 31, 2003	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	32
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits and Reports on Form 8-K	34
	Signature	34

2

NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Consolidated Statements of Income

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
Thousands, except per share amounts	2004			2003		2004		2003
Operating revenues:
Gross operating revenues	$	109,659		$	117,489	$	364,109	$	324,028
Cost of sales		57,030			58,940		199,446		166,891
Net operating revenues		52,629			58,549		164,663		157,137
Operating expenses:
Operations and maintenance		24,307			23,331		49,817		47,402
Taxes other than income taxes		7,531			7,350		19,984		18,167
Depreciation and amortization		13,913			13,338		27,819		26,504
Total operating expenses		45,751			44,019		97,620		92,073
Income from operations		6,878			14,530		67,043		65,064
Other income		442			1,348		465		764
Interest charges - net of amounts capitalized		8,764			9,126		17,708		18,072
Income (loss) before income taxes		(1,444	)		6,752		49,800		47,756
Income tax expense (benefit)		(728	)		2,290		17,904		16,890
Net income (loss)		(716	)		4,462		31,896		30,866
Redeemable preferred stock dividend requirements		—			147		—		294
Earnings (loss) applicable to common stock	$	(716	)	$	4,315	$	31,896	$	30,572
Average common shares outstanding:
Basic		27,257			25,682		26,615		25,649
Diluted		27,582			26,041		26,947		26,002
Earnings (loss) per share of common stock:
Basic	$	(0.03	)	$	0.17	$	1.20	$	1.19
Diluted	$	(0.03	)	$	0.17	$	1.19	$	1.18

See Notes to Consolidated Financial Statements

3

NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Consolidated Statements of Earnings Invested in the Business and

Comprehensive Income

(Unaudited)

	Six Months Ended June 30,
Thousands	2004					2003
Earnings invested in the business:
Balance at beginning of period	$	170,053				$	157,136
Net income		31,896		$	31,896		30,866		$	30,866
Cash dividends paid:
Redeemable preferred stock		—					(299	)
Common stock		(17,306	)				(16,144	)
Common stock expense		(1,453	)				—
Balance at end of period	$	183,190				$	171,559
Accumulated other comprehensive income (loss):
Balance at beginning of period	$	(1,016	)			$	(3,084	)
Comprehensive income				$	31,896				$	30,866
Balance at end of period	$	(1,016	)			$	(3,084	)

See Notes to Consolidated Financial Statements

4

NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Consolidated Balance Sheets

Thousands	June 30, 2004 (Unaudited)			June 30, 2003 (Unaudited)			Dec. 31, 2003
Assets:
Plant and property:
Utility plant	$	1,717,296		$	1,592,613		$	1,659,089
Less accumulated depreciation		491,340			454,261			471,716
Utility plant - net		1,225,956			1,138,352			1,187,373
Non-utility property		26,807			23,008			23,395
Less accumulated depreciation and amortization		5,083			4,631			4,855
Non-utility property - net		21,724			18,377			18,540
Total plant and property		1,247,680			1,156,729			1,205,913
Other investments		15,083			12,833			12,635
Current assets:
Cash and cash equivalents		7,528			24,059			4,706
Accounts receivable		44,755			34,137			53,976
Allowance for uncollectible accounts		(1,886	)		(2,315	)		(1,763	)
Accrued unbilled revenue		11,970			14,579			59,109
Inventories of gas, materials and supplies		48,960			35,405			50,859
Prepayments and other current assets		17,209			21,729			32,661
Total current assets		128,536			127,594			199,548
Regulatory assets:
Income tax asset		64,475			47,975			63,449
Deferred gas costs receivable		9,513			—			—
Unamortized costs on debt redemptions		7,568			6,277			7,803
Other		5,377			6,661			6,020
Total regulatory assets		86,933			60,913			77,272
Other assets:
Investment in life insurance		60,000			57,660			59,710
Fair value of non-trading derivatives		28,285			22,842			23,885
Other		13,915			16,841			12,369
Total other assets		102,200			97,343			95,964
Total assets	$	1,580,432		$	1,455,412		$	1,591,332

See Notes to Consolidated Financial Statements

5

NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Consolidated Balance Sheets

Thousands	June 30, 2004 (Unaudited)			June 30, 2003 (Unaudited)			Dec. 31, 2003
Capitalization and liabilities:
Capitalization:
Common stock	$	86,563		$	81,467		$	82,137
Premium on common stock		295,159			251,129			255,871
Earnings invested in the business		183,190			171,559			170,053
Unearned stock compensation		(892	)		(830	)		(729	)
Accumulated other comprehensive income (loss)		(1,016	)		(3,084	)		(1,016	)
Total common stock equity		563,004			500,241			506,316
Redeemable preferred stock		—			7,500			—
Long-term debt		500,073			450,858			500,319
Total capitalization		1,063,077			958,599			1,006,635
Current liabilities:
Notes payable		4,901			16,600			85,200
Accounts payable		78,679			55,284			86,029
Long-term debt due within one year		—			35,000			—
Taxes accrued		5,837			5,238			8,605
Interest accrued		2,929			2,950			2,998
Other current and accrued liabilities		30,708			29,716			31,589
Total current liabilities		123,054			144,788			214,421
Regulatory liabilities:
Accrued asset removal costs		140,847			130,375			135,638
Customer advances		1,584			1,770			1,564
Deferred gas costs payable		—			13,510			5,627
Unrealized gain on non-trading derivatives		28,285			22,842			23,885
Total regulatory liabilities		170,716			168,497			166,714
Other liabilities:
Deferred income taxes		189,514			144,769			171,797
Deferred investment tax credits		6,341			7,255			6,945
Other		27,730			31,504			24,820
Total other liabilities		223,585			183,528			203,562
Commitments and Contingencies (see Note 7)		—			—			—
Total capitalization and liabilities	$	1,580,432		$	1,455,412		$	1,591,332

See Notes to Consolidated Financial Statements

6

NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
Thousands	2004			2003
Operating activities:
Net income	$	31,896		$	30,866
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization		27,819			26,504
Deferred income taxes and investment tax credits		17,113			2,468
Undistributed losses (earnings) from equity investments		49			(245	)
Allowance for funds used during construction		(581	)		(608	)
Deferred gas costs - net		(15,140	)		2,875
Other		946			(550	)
Cash from operations before working capital changes		62,102			61,310
Changes in operating assets and liabilities:
Accounts receivable - net of allowance for uncollectible accounts		9,344			15,114
Accrued unbilled revenue		47,139			29,490
Inventories of gas, materials and supplies		1,899			22,625
Accounts payable		(7,349	)		(19,152	)
Accrued interest and taxes		1,534			4,145
Prepayments and other current assets		10,918			8,405
Other current and accrued liabilities		(881	)		(329	)
Cash provided by operating activities		124,706			121,608
Investing activities:
Acquisition and construction of utility plant assets		(62,789	)		(55,839	)
Investment in non-utility property		(3,412	)		(816	)
Other investments		(92	)		(1,285	)
Cash used in investing activities		(66,293	)		(57,940	)
Financing activities:
Common stock issued		43,468			3,458
Redeemable preferred stock retired		—			(750	)
Long-term debt issued		—			40,000
Long-term debt retired		—			(20,000	)
Change in short-term debt		(80,300	)		(53,202	)
Cash dividend payments:
Redeemable preferred stock		—			(299	)
Common stock		(17,306	)		(16,144	)
Common stock expense		(1,453	)		—
Cash used in financing activities		(55,591	)		(46,937	)
Increase in cash and cash equivalents		2,822			16,731
Cash and cash equivalents - beginning of period		4,706			7,328
Cash and cash equivalents - end of period	$	7,528		$	24,059
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	17,788		$	18,009
Income taxes	$	2,500		$	9,200
Supplemental disclosure of non-cash financing activities:
Conversion to common stock:
7 1/4 % Series of Convertible Debentures	$	246		$	87

See Notes to Consolidated Financial Statements

7

NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Consolidated Statements of Capitalization

Thousands, except share amounts	June 30, 2004 (Unaudited)					June 30, 2003 (Unaudited)					Dec. 31, 2003
Common stock equity:
Common stock - par value $3 1/6 per share	$	86,563				$	81,467				$	82,137
Premium on common stock		295,159					251,129					255,871
Earnings invested in the business		183,190					171,559					170,053
Unearned stock compensation		(892	)				(830	)				(729	)
Accumulated other comprehensive income (loss)		(1,016	)				(3,084	)				(1,016	)
Total common stock equity		563,004		53	%		500,241		52	%		506,316		50	%
Redeemable preferred stock:
$7.125 Series, stated value $100 per share		—		0	%		7,500		1	%		—		0	%
Long-term debt:
Medium-Term Notes
First Mortgage Bonds:
6.340% Series B due 2005		5,000					5,000					5,000
6.380% Series B due 2005		5,000					5,000					5,000
6.450% Series B due 2005		5,000					5,000					5,000
6.050% Series B due 2006		8,000					8,000					8,000
6.310% Series B due 2007		20,000					20,000					20,000
6.800% Series B due 2007		9,500					9,500					9,500
6.500% Series B due 2008		5,000					5,000					5,000
4.110% Series B due 2010		10,000					—					10,000
7.450% Series B due 2010		25,000					25,000					25,000
6.665% Series B due 2011		10,000					10,000					10,000
7.130% Series B due 2012		40,000					40,000					40,000
8.260% Series B due 2014		10,000					10,000					10,000
7.000% Series B due 2017		40,000					40,000					40,000
6.600% Series B due 2018		22,000					22,000					22,000
8.310% Series B due 2019		10,000					10,000					10,000
7.630% Series B due 2019		20,000					20,000					20,000
9.050% Series A due 2021		10,000					10,000					10,000
5.620% Series B due 2023		40,000					—					40,000
7.250% Series B due 2023		—					20,000					—
7.500% Series B due 2023		—					4,000					—
7.520% Series B due 2023		—					11,000					—
7.720% Series B due 2025		20,000					20,000					20,000
6.520% Series B due 2025		10,000					10,000					10,000
7.050% Series B due 2026		20,000					20,000					20,000
7.000% Series B due 2027		20,000					20,000					20,000
6.650% Series B due 2027		20,000					20,000					20,000
6.650% Series B due 2028		10,000					10,000					10,000
7.740% Series B due 2030		20,000					20,000					20,000
7.850% Series B due 2030		10,000					10,000					10,000
5.820% Series B due 2032		30,000					30,000					30,000
5.660% Series B due 2033		40,000					40,000					40,000
Convertible Debentures
7 1/4% Series due 2012		5,573					6,358					5,819
		500,073					485,858					500,319
Less long-term debt due within one year		—					35,000					—
Total long-term debt		500,073		47	%		450,858		47	%		500,319		50	%
Total capitalization	$	1,063,077		100	%	$	958,599		100	%	$	1,006,635		100	%

See Notes to Consolidated Financial Statements

8

NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Financial Statements

The consolidated financial statements include the accounts of Northwest Natural Gas Company (NW Natural), a regulated utility, and its non-regulated wholly-owned subsidiary businesses, NNG Financial Corporation (Financial Corporation) and Northwest Energy Corporation (Northwest Energy). Together these businesses are referred to as the “Company.”

The information presented in the consolidated financial statements is unaudited, but includes all material adjustments, including normal recurring accruals, that the management of the Company considers necessary for a fair presentation of the results for each period reported. These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2003 Annual Report on Form 10-K (2003 Form 10-K). A significant part of the business of the Company is of a seasonal nature; therefore, results of operations for interim periods are not necessarily indicative of the results for a full year.

Certain amounts from prior periods have been reclassified to conform, for comparison purposes, with the current financial statement presentation. These reclassifications had no impact on prior period consolidated results of operations.

2. New Accounting Standards

Adopted Standards

In December 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132 (revised) requires expanded disclosures about pension plans and other postretirement benefit plans in the Company’s consolidated financial statements for annual and interim periods ending on and after Dec. 15, 2003. The Company adopted the annual disclosure requirements with the 2003 Form 10-K (see Part II, Item 8., Note 7 in the 2003 Form 10-K). SFAS No. 132 (revised) does not change the measurement of liabilities or the recognition of expense for pension and other postretirement benefit plans as determined in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The adoption of this new standard did not have an effect on the Company’s consolidated financial statements.

In December 2003, the FASB revised FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities” (FIN 46R), to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46R provides additional guidance for identification and consolidation of variable interest entities (VIEs), and for financial reporting by enterprises involved with VIEs. The Company adopted the original provisions of FIN 46 during 2003, stating that it did not have significant variable interests in any VIEs. The Company has certain equity investments that are variable interests and some of these entities are potentially VIEs. However, because the Company is not the primary beneficiary of these entities, it is not required to consolidate the VIEs. The Company’s variable interests primarily consist of limited liability interests with investments in alternative energy projects, low income housing and other real estate, which were entered into between the years 1988 and 2000 and have been accounted for under the equity method or cost method (see Part II, Item 8., Note 9, in the 2003 Form 10-K). The Company’s maximum

9

exposure to loss from these investments is $6.8 million at June 30, 2004, an amount that represents the Company’s investment balance or net realizable value. The Company’s investment risk is limited to the investment balance or net realizable value because all such investments are non-recourse to the Company. The adoption of FIN 46R had no material impact on the Company’s financial condition or results of operations.

Recent Accounting Pronouncements

In May 2004, the FASB issued Staff Position (FSP) No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP No. FAS 106-2 provides accounting guidance for the effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) for employers that sponsor postretirement health care plans that provide prescription drug benefits. FSP No. FAS 106-2 also requires certain disclosures regarding the effect of a federal subsidy provided by the Act.

The Act, signed into law on Dec. 8, 2003, introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is actuarially at least equivalent to Medicare Part D.

FSP No. FAS 106-2 superseded FSP No. FAS 106-1, issued in January 2004, which had permitted a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act.

The Company sponsors a postretirement health care benefit plan that provides prescription drug coverage. The Company made an election in the quarter ended March 31, 2004 to defer accounting for the effects of the Act, pursuant to FSP No. FAS 106-1. The Company and its actuary have not determined whether the benefits provided by the plan are actuarially at least equivalent to Medicare Part D under the Act, or estimated the impact of the Act on the Company’s cash flows, accumulated postretirement benefit obligation (APBO) or net periodic postretirement benefit cost. The Company expects to adopt FSP No. FAS 106-2 as of July 1, 2004, and it will continue to work with the actuary during the third quarter of 2004 to determine the effects, if any, the adoption of FSP No. FAS 106-2 will have.

In June 2004, the Emerging Issues Task Force (EITF) issued EITF No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF No. 03-1).” Application guidance in EITF No. 03-1 should be used to determine when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of such impairment. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures in annual financial statements about unrealized losses that have not been recognized as other-than-temporary impairments. The recognition and measurement guidance of EITF No. 03-1 should be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The adoption of EITF No. 03-1 is not anticipated to have a material impact on the Company’s financial condition or results of operations.

3. Stock-Based Compensation

NW Natural has stock-based compensation plans including the Long-Term Incentive Plan (LTIP), the Restated Stock Option Plan (Restated SOP), the Employee Stock Purchase Plan (ESPP) and the Non-Employee Directors Stock Compensation Plan (NEDSCP). For a more detailed description of these plans, and accounting for stock-based compensation, see Part II, Item 8., Note 4, in the 2003 Form 10-K. These plans are designed to promote stock ownership in NW Natural by employees and officers, and, in the case of the NEDSCP, non-employee directors.

In February 2004, NW Natural granted LTIP awards covering a new three-year performance period (2004-06). The aggregate target award and maximum award were 35,000 and 70,000 shares, respectively. Following the end of the performance period, actual awards are distributed based on the

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attainment of certain total shareholder return goals in comparison to a peer group of companies, and other performance goals. During the performance period, the Company will recognize compensation expense and liability for the LTIP awards based on performance levels achieved or expected to be achieved and the estimated market value of the common stock as of the distribution date. At June 30, 2004, no compensation expense or liability was accrued for the new LTIP grant because the amount estimated as earned since the grant date was negligible.

Under the Restated SOP, options on 1,244,700 shares were available for grant and options to purchase 491,944 shares were outstanding as of June 30, 2004. Options granted generally have 10-year terms and vest ratably over a three-year period following the date of grant. During the first six months of 2004, the Company granted 184,800 options to purchase shares at an exercise price of $31.34, equal to the market price of the common stock on the date of grant.

The Company adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123,” but has continued to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” for its stock-based employee compensation. In accordance with APB No. 25, no compensation expense is recognized for options granted under the Restated SOP or shares issued under the ESPP. If compensation expense for awards under these two plans had been determined based on fair value at the grant dates, net income and earnings per share for the three- and six-month periods ended June 30, 2004 and 2003 would have been reduced to the pro forma amounts shown below:

Pro Forma Effect of Stock-Based Options and ESPP:	Three Months Ended June 30,						Six Months Ended June 30,
Thousands, except per share amounts	2004			2003			2004			2003
Net income (loss) as reported	$	(716	)	$	4,462		$	31,896		$	30,866
Pro forma stock-based compensation expense determined under the fair value based method - net of tax		(106	)		(78	)		(206	)		(139	)
Redeemable preferred stock dividends		—			(147	)		—			(294	)
Pro forma earnings (loss) applicable to common stock - basic		(822	)		4,237			31,690			30,433
Debenture interest less taxes		61			70			123			141
Pro forma earnings (loss) applicable to common stock - diluted	$	(761	)	$	4,307		$	31,813		$	30,574
Basic earnings (loss) per share
As reported	$	(0.03	)	$	0.17		$	1.20		$	1.19
Pro forma	$	(0.03	)	$	0.17		$	1.19		$	1.19
Diluted earnings (loss) per share
As reported	$	(0.03	)	$	0.17		$	1.19		$	1.18
Pro forma	$	(0.03	)	$	0.17		$	1.18		$	1.18

For purposes of the pro forma disclosures above, the estimated value of stock options is amortized to expense over the vesting period.

4. Use of Financial Derivatives

NW Natural utilizes derivative instruments to manage commodity prices related to natural gas purchases, foreign currency prices related to gas purchase commitments from Canada and interest rate risks related to long-term debt maturing in less than five years or expected to be issued in future periods. Use of derivatives is permitted only after the commodity price, exchange rate and interest rate exposures have been identified, are determined to exceed acceptable tolerance levels and are considered to be unavoidable because they are necessary to support normal business activities. NW Natural does not enter into derivative instruments for trading purposes and believes that any increase in market risk created by holding derivatives should be offset by the exposures they modify. See Part II, Item 8., Notes 1 and 11, in the 2003 Form 10-K.

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At June 30, 2004, NW Natural had the following derivatives outstanding covering its exposures to commodity and foreign currency prices: a series of 21 natural gas price swap contracts, one natural gas call option contract, and 60 foreign currency forward contracts. Each of these contracts was designated as a cash flow hedge. The estimated fair values and the notional amounts of derivative instruments (unrealized gains and losses) outstanding were as follows:

	June 30, 2004					Dec. 31, 2003
Thousands	Fair Value Gain (Loss)			Notional Amount		Fair Value Gain		Notional Amount
Fixed-price natural gas commodity swap contracts	$	28,629		$	306,014	$	23,285	$	284,317
Fixed-price natural gas call option contracts		(369	)		11,000		366		19,761
Foreign currency forward purchase contracts		25			6,214		234		6,417
Total	$	28,285		$	323,228	$	23,885	$	310,495

5. Segment Information

The Company principally operates in a segment of business, “Utility,” consisting of the distribution of natural gas. Another segment, “Gas Storage,” represents natural gas storage services provided to interstate customers and asset optimization services under a contract with an independent energy trading company. The remaining segment, “Other,” primarily consists of non-utility operating activities, non-regulated investments in alternative energy projects in California and a Boeing 737-300 aircraft leased to Continental Airlines.

The following table presents information about the reportable segments for the three- and six- month periods ended June 30, 2004 and 2003. Inter-segment transactions are insignificant.

	Three Months Ended June 30,											Six Months Ended June 30,
Thousands	Utility			Gas Storage		Other			Total			Utility		Gas Storage		Other			Total
2004
Net operating revenues	$	50,995		$	1,591	$	43		$	52,629		$	161,193	$	3,387	$	83		$	164,663
Depreciation and amortization		13,799			114		—			13,913			27,591		228		—			27,819
Other operating expenses		31,602			163		73			31,838			69,348		368		85			69,801
Income (loss) from operations		5,594			1,314		(30	)		6,878			64,254		2,791		(2	)		67,043
Income (loss) from financial investments		607			—		332			939			1,425		—		(49	)		1,376
Net income (loss)		(1,761	)		705		340			(716	)		30,119		1,495		282			31,896
Total assets at June 30, 2004		1,544,120			21,647		14,665			1,580,432			1,544,120		21,647		14,665			1,580,432
2003
Net operating revenues	$	56,112		$	2,387	$	50		$	58,549		$	152,117	$	4,931	$	89		$	157,137
Depreciation and amortization		13,225			113		—			13,338			26,277		227		—			26,504
Other operating expenses		30,489			162		30			30,681			65,172		345		52			65,569
Income from operations		12,398			2,112		20			14,530			60,668		4,359		37			65,064
Income from financial investments		1,064			—		505			1,569			1,509		—		245			1,754
Net income		2,869			1,177		416			4,462			28,028		2,452		386			30,866
Total assets at June 30, 2003		1,416,804			20,495		18,113			1,455,412			1,416,804		20,495		18,113			1,455,412

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6. Pension and Other Postretirement Benefits

Net Periodic Benefit Cost

The following tables provide the components of net periodic benefit cost for the Company’s defined benefit pension and other postretirement benefit plans for the three- and six-month periods ended June 30, 2004 and 2003. See Part II, Item 8., Note 7, in the 2003 Form 10-K for the assumptions used in measuring these benefit costs.

Thousands	Pension Benefits						Other Postretirement Benefits
	Three Months Ended June 30,
	2004			2003			2004		2003
Service cost	$	1,409		$	1,215		$	132	$	114
Interest cost		3,199			3,040			364		334
Expected return on plan assets		(3,309	)		(3,062	)		—		—
Amortization of transition obligation		—			—			103		103
Amortization of prior service cost		274			283			—		—
Recognized actuarial loss		436			188			118		100
Net periodic benefit cost	$	2,009		$	1,664		$	717	$	651
Thousands	Pension Benefits						Other Postretirement Benefits
	Six Months Ended June 30,
	2004			2003			2004		2003
Service cost	$	2,819		$	2,431		$	264	$	288
Interest cost		6,399			6,080			729		668
Expected return on plan assets		(6,619	)		(6,124	)		—		—
Amortization of transition obligation		—			—			206		206
Amortization of prior service cost		547			566			—		—
Recognized actuarial loss		872			376			237		200
Net periodic benefit cost	$	4,018		$	3,329		$	1,436	$	1,362

Employer Contributions

The Company is required to make future cash contributions and benefit payments for its pension and other postretirement benefit plans (see Part II, Item 8., Note 7, in the 2003 Form 10-K).

7. Commitments and Contingencies

Environmental Matters

NW Natural owns or previously owned properties currently being investigated that may require environmental response. See Part II, Item 8., Note 12, in the 2003 Form 10-K. NW Natural has accrued all material loss contingencies relating to environmental matters that it believes to be probable of assertion and reasonably estimable.

NW Natural previously owned property adjacent to the Gasco site that now is the location of a manufacturing plant owned by Wacker Siltronic Corporation (the Wacker site). See Part II, Item 8., Note 12, in the 2003 Form 10-K. Pursuant to an order from the Oregon Department of Environmental Quality (ODEQ), consultant studies have been conducted to determine the nature and extent of releases of hazardous substances from the Wacker site. Recently the studies indicated some benzene is present in the soil at the Wacker site,

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and the ODEQ has requested that NW Natural conduct further tests of groundwater and indoor air quality. NW Natural has not determined to what extent additional testing will be required. At June 30, 2004, NW Natural’s estimated liabilities were less than $0.1 million for its costs of further investigation on the Wacker site.

The U.S. Environmental Protection Agency (EPA) has approved the Programmatic Work Plan, Field Sampling Plan and Quality Assurance Project Plan for the Portland Harbor Remedial Investigation/Feasibility Study. NW Natural’s share of the estimated budget to complete the first phase of the work is $1.0 million. The analysis of the data gathered in this phase will determine if more field work is necessary. In addition, on March 1, 2004 the Company received a letter from the EPA requesting that it enter into an Administrative Order on Consent (AOC) providing for early action removal of a body of tar in the river sediments adjacent to the Gasco site. The Company negotiated the form of the AOC with the EPA and it was executed on April 23, 2004. On July 20, 2004, the EPA indicated that it was approving an initial work plan for the early action removal. The Company has estimated the removal cost to be in the range of $1.0 million to $4.6 million, and currently has accrued $1.1 million as its reasonable and probable liability. The Company has also agreed to do additional work on the Gasco site for the ODEQ in conjunction with the EPA early action, and an additional $0.3 million was reserved to complete this study.

NW Natural accrued an additional loss contingency totaling $2.3 million in the first six months of 2004 for the revised estimate of the above-described work and the new estimate of environmental remediation costs. This additional amount results in a reserve balance of $2.1 million for the Portland Harbor site and $1.7 million for the Gasco site at June 30, 2004, representing the estimated amounts required to complete the feasibility study and work plan and the early action removal of the body of tar.

In May 2003, the Public Utility Commission of Oregon (OPUC) approved NW Natural’s request for deferral of environmental costs associated with specific sites, including the Gasco, Wacker, Portland Harbor and Portland Gas sites (see Part II, Item 8., Note 12, in the 2003 Form 10-K). The authorization, which has been extended through April 2005, allows NW Natural to defer and seek recovery of unreimbursed environmental costs in a future general rate case. On a cumulative basis through June 30, 2004, the Company paid out a total of $1.8 million relating to the sites since the effective date of the deferral authorization, which would be proposed for regulatory recovery if it is not recovered from insurance.

Due to the preliminary nature of these environmental investigations, the range of any additional possible loss contingency cannot be currently estimated. NW Natural will first seek to recover the costs of investigation and remediation for which it may be responsible with respect to the Gasco, Wacker, Portland Harbor and Portland Gas sites, if any, from insurance. If these costs are not recovered from insurance, then NW Natural will seek recovery through future rates subject to approval by the OPUC. At June 30, 2004, NW Natural had a $6.1 million receivable representing an estimate of the environmental costs it expects to incur and recover from insurance, consisting of $2.9 million for costs relating to the Gasco site and $3.2 million for costs relating to the Portland Harbor site.

Corps of Engineers Notice of Noncompliance

On July 2, 2004, the U.S. Army Corps of Engineers (Corps) issued to the Company a Notice of Noncompliance for discharges of drilling mud into two streams during drilling operations on the Company’s South Mist Pipeline Extension project. The Corps’ Notice claims that the discharges violated the scope of work in permits for the drilling. The Corps has yet to determine the most appropriate enforcement action to address the alleged violation. Among the enforcement options available are fines, injunctions requiring work cessation and/or restoration, and suspension or modification of permits. The Company has been cooperating with the Corps in its investigation and is working closely with the Corps and other state and federal agencies to minimize impacts from these occurrences. The Company does not expect the final disposition of this matter to have a material impact on its results of operations or financial condition.

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Legal Proceedings

On May 28, 2004, a lawsuit was filed against the Company (Kerry Law, Arnold Zuehlke and Kenneth Cooper, on behalf of themselves and all others similarly situated v. Northwest Natural Gas Company U.S. Dist. Ct. D. Or., Case No. CV-04-728-AS), by three individuals alleging violation of the Fair Labor Standards Act for failure to pay overtime. The suit was subsequently amended to include state wage and hour claims. The plaintiffs are or have been independent backhoe operators who performed services for the Company under contract. In the lawsuit, the plaintiffs claim that they, and others similarly situated, should have been considered “employees” of the Company instead of independent contractors. The plaintiffs seek overtime and interest to be proven, liquidated damages equal to the overtime award, civil penalties and attorneys fees and costs. The plaintiffs seek to certify a class in this matter. Although no other claims have been filed, the Company has received a letter from plaintiffs’ counsel indicating that additional claims seeking employee benefits allegedly due to plaintiffs will be filed. The Company intends to vigorously contest the claims.

The Company is subject to other 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, the Company does not expect that the ultimate disposition of these matters will have a materially adverse effect on the Company’s financial condition or results of operations.

8. Capital Stock

Common Stock

In April 2004, the Company issued and sold 1,290,000 shares of its common stock in an underwritten public offering and used the net proceeds of $38.5 million from the offering primarily to reduce short-term indebtedness by about $29 million and to fund, in part, NW Natural’s utility construction program.

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NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following is management’s assessment of Northwest Natural Gas Company’s financial condition including the principal factors that affect results of operations. The discussion refers to the consolidated activities of the Company for the three and six months ended June 30, 2004 and 2003. Unless otherwise indicated, references in the discussion to Notes are to the notes to the consolidated financial statements in the Company’s 2003 Annual Report on Form 10-K (2003 Form 10-K).

The consolidated financial statements include:

Regulated utility:

Northwest Natural Gas Company (NW Natural)

Non-regulated wholly-owned subsidiaries of NW Natural:

NNG Financial Corporation (Financial Corporation), and its wholly-owned subsidiaries

Northwest Energy Corporation (Northwest Energy), and its wholly-owned subsidiary

Together these businesses are referred to as the Company (see “Results of Operations—Non-utility Operations,” below, and Note 2 in the 2003 Form 10-K).

In addition to presenting results of operations and earnings amounts in total, certain measures are expressed in cents per share. These amounts reflect factors that directly impact the Company’s earnings. The Company believes this per share information is useful because it enables readers to better understand the impact of these factors on the Company’s earnings. All references in this report to earnings per share are on the basis of diluted shares (see Note 1, “Earnings Per Share,” in the 2003 Form 10-K).

Application of Critical Accounting Policies and Estimates

In preparing the Company’s financial statements using generally accepted accounting principles in the United States of America (GAAP), management exercises judgment in the selection and application of accounting principles, including making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures in the financial statements.

Management considers its critical accounting policies to be those which are most important to the representation of the Company’s financial condition and results of operations and which require management’s most difficult and subjective or complex judgments, including accounting estimates that could result in materially different amounts if the Company reported under different conditions or using different assumptions. The Company’s most critical estimates or judgments involve regulatory cost recovery, unbilled revenues, derivative instruments, pension assumptions and environmental contingencies (see Part II, Item 7., “Application of Critical Accounting Policies and Estimates,” in the 2003 Form 10-K). Management has discussed the estimates and judgments used in the application of critical accounting policies with the Audit Committee of the Board. Because of the uncertainty inherent in these matters, actual results could differ materially from the estimates developed from applying these critical accounting policies.

Within the context of the Company’s critical accounting policies and estimates, management is not currently aware of any reasonably likely events or circumstances other than as previously disclosed in the 2003 Form 10-K and the Form 10-Q for the quarterly period ended March 31, 2004 that would result in materially different amounts being reported.

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Earnings and Dividends

The Company incurred a loss applicable to common stock of $0.7 million in the quarter ended June 30, 2004, compared to earnings of $4.3 million in the quarter ended June 30, 2003. The loss for the second quarter of 2004 was equivalent to 3 cents a share, compared to earnings of 17 cents a share for the second quarter of 2003.

NW Natural lost $1.8 million or 6 cents a share from gas utility operations in the second quarter of 2004, compared to earnings of $2.9 million or 11 cents a share in the second quarter of 2003. Gas deliveries and utility net operating revenues (margin) were lower in the current quarter in the Company’s temperature-sensitive residential and commercial markets due to significantly warmer weather than last year. See “Results of Operations,” below. The Company earned $0.7 million or 3 cents a share from its non-utility gas storage operations in the second quarter of 2004, compared to earnings of $1.2 million or 5 cents a share in the same period of 2003. The Company’s earnings from its subsidiary and other non-utility operations in the second quarter of 2004 were $0.3 million, less than 1 cent a share, compared to earnings of $0.4 million or 1 cent a share in the second quarter of 2003. See “Non-utility Operations,” below.

For the six months ended June 30, 2004, NW Natural’s earnings applicable to common stock were $31.9 million, or $1.19 a share, compared to earnings of $30.6 million, or $1.18 a share, in the first six months of 2003.

NW Natural earned $30.1 million or $1.12 a share from gas utility operations in the first six months of 2004, compared to $28.0 million or $1.08 a share in the first six months of 2003. Weather conditions in NW Natural’s service territory in the first half of the year were 10 percent warmer than average and 6 percent warmer than last year. The Company earned $1.5 million or 6 cents a share from its non-utility gas storage operations in the first six months of 2004, compared to earnings of $2.5 million or 10 cents a share in the first six months of 2003. The Company also earned $0.3 million or about 1 cent a share from its subsidiary and other non-utility operations in the first six months of 2004, compared to earnings of $0.4 million or about 1 cent a share in the first six months of 2003.

Average diluted shares of common stock outstanding were 6 percent and 4 percent higher in the three-month and six-month periods ended June 30, 2004, respectively, than in the equivalent periods a year earlier, due to the Company’s sale of 1.3 million shares of common stock in a public offering in early April 2004.

Dividends paid on common stock were 32.5 cents and 31.5 cents a share in the three-month periods ended June 30, 2004 and 2003, respectively. In July 2004, the Company’s Board of Directors declared a quarterly dividend of 32.5 cents a share on the common stock, payable August 13, 2004, to shareholders of record on July 30, 2004. The current indicated annual dividend rate is $1.30 a share.

Results of Operations

Regulatory Developments

General Rate Cases

On June 24, 2004, the Washington Utilities and Transportation Commission (WUTC) approved a settlement agreement entered into by the parties to NW Natural’s Washington general rate case filed in November 2003 (see Part II, Item 7., “Results of Operations—Regulatory Matters—General Rate Cases,” in the 2003 Form 10-K). By approving the settlement, the WUTC authorized an initial revenue increase of $3.5 million per year effective July 1, 2004. The initial rate increase does not include costs for a new service center in Vancouver, Washington, the construction of which has been postponed. The initial rate increase also does not include the cost of service relating to NW Natural’s South Mist Pipeline Extension (SMPE) project, which expands the Company’s Mist gas storage system. The settlement does authorize NW

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Natural to include the SMPE costs in rates, however, subject to audit, through the annual Washington Purchased Gas Adjustment (PGA) filing to be effective in the fourth quarter of 2004 as long as the SMPE is completed and placed in service by Dec. 1, 2004. NW Natural expects the inclusion of the SMPE costs in Washington rates to result in an additional revenue increase of approximately $0.8 million per year.

In August 2003, the Public Utility Commission of Oregon (OPUC) entered an order covering all of the issues in NW Natural’s general rate case filed in November 2002 (see Part II, Item 7., “Results of Operations—Regulatory Matters—General Rate Cases,” in the 2003 Form 10-K). Pursuant to the order, on Sept. 1, 2003, NW Natural applied rate increases designed to increase margin by approximately $6.2 million per year. Also pursuant to the order, in November 2003, NW Natural commenced deferred revenue treatment for an additional $2.8 million per year when the first 11.7-mile segment of the SMPE went into service. The rate increases and the deferred revenue from the SMPE contributed about $2.5 million of margin in the second quarter of 2004 and $7.2 million of margin in the first six months of 2004, equivalent to 5 cents and 16 cents a share of earnings, respectively. NW Natural expects to raise rates or to implement further deferred revenue treatment reflecting the cost of service associated with the remaining 50 miles of the SMPE when all or portions of that segment are completed and go into service which is expected to occur in the fourth quarter of 2004.

OPUC Investigation

On July 13, 2004, NW Natural filed for approval by the OPUC a stipulation among NW Natural, the OPUC staff and two parties in NW Natural’s 2003 Oregon general rate case. The stipulation provides for the settlement of issues in an investigation initiated by the OPUC in 2003 relating to NW Natural’s transactions or interests in certain properties in the vicinity of the Company’s headquarters building in downtown Portland, and the use of some of these properties for employee parking. The stipulation has the primary effect of reversing cost recovery as of Sept. 1, 2003, for certain properties that should not have been included in rate base in NW Natural’s 2003 Oregon general rate case, and for certain employee parking costs. The OPUC is expected to act on the stipulation in August 2004.

If the stipulation is approved, NW Natural will pay refunds in the amount of $1.3 million to Oregon customers commencing Oct. 1, 2004, in connection with the annual PGA filing to be effective on that date. Approximately $0.3 million of that amount was charged to a reserve in respect of these issues in 2003 and the first quarter of 2004; approximately $0.9 million was recognized as a reduction in other revenues in the second quarter of 2004; and the balance of $0.1 million will be recognized as a reduction in other revenues in the third quarter of 2004. Effective Oct. 1, 2004, NW Natural also will reduce its Oregon revenues by about $0.5 million per year to eliminate these costs from rates on an ongoing basis. NW Natural agreed in the stipulation to undergo an audit in 2005, which is currently expected to focus on ratemaking issues relating to the inclusion of assets in rate base and NW Natural’s relationships with any affiliated interests.

Rate Mechanisms

In July 2004, the OPUC approved applications by NW Natural relating to the accounting treatment and revenue recovery for the Company’s costs of its pipeline integrity management program (IMP) as mandated by the Pipeline Safety Improvement Act of 2002 and rules adopted by the U.S. Department of Transportation’s (DOT) Office of Pipeline Safety (see Part II, Item 7., “Financial Condition—Cash Flows—Investing Activities,” in the 2003 Form 10-K). Under the applications as approved, NW Natural will classify its IMP costs as capital expenditures, accumulate the costs over each 12-month period ending June 30, and recover the costs, subject to audit, through rate changes effective on Oct. 1 of each year commencing Oct. 1, 2004. The accounting and rate treatment for these costs extends through Sept. 30, 2008, and it may be reviewed for potential extension after that date.

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On June 14, 2004, the DOT Research and Special Programs Administration (RSPA) issued a final pipeline safety rule that includes a revised definition of natural gas transmission pipelines for use in development of IMPs. The revised definition could have a material impact on the scope and cost of the Company’s IMP. The Company and industry groups have filed comments challenging the RSPA’s authority to change the definition without the opportunity for public comment.

Comparison of Gas Operations

The following tables summarize the composition of gas utility volumes and revenues for the three and six months ended June 30, 2004 and 2003:

	Three Months Ended June 30,
(Thousands, except customers and degree days)	2004					2003
Utility gas sales and transportation volumes - therms:
Residential and commercial sales		103,415					130,051
Unbilled volumes		(20,454	)				(19,593	)
Weather-sensitive volumes		82,961		38	%		110,458		48	%
Industrial firm sales		14,157		6	%		11,967		5	%
Industrial interruptible sales		22,980		11	%		8,303		4	%
Total gas sales		120,098		55	%		130,728		57	%
Transportation deliveries		98,609		45	%		98,916		43	%
Total volumes sold and delivered		218,707		100	%		229,644		100	%
Utility operating revenues - dollars:
Residential and commercial sales	$	101,597				$	110,964
Unbilled revenues		(19,948	)				(16,280	)
Weather-sensitive revenues		81,649		76	%		94,684		82	%
Industrial firm sales		9,259		8	%		7,019		6	%
Industrial interruptible sales		11,061		10	%		4,099		4	%
Total gas sales		101,969		94	%		105,802		92	%
Transportation revenues		3,156		3	%		5,048		4	%
Other revenues		2,886		3	%		4,196		4	%
Total utility operating revenues	$	108,011		100	%	$	115,046		100	%
Cost of gas sold	$	57,016				$	58,934
Utility net operating revenues (margin)	$	50,995				$	56,112
Total number of customers (end of period)		582,270					566,955
Actual degree-days		469					730
25-year average degree-days		676					679

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	Six Months Ended June 30,
(Thousands, except customers and degree days)	2004					2003
Utility gas sales and transportation volumes - therms:
Residential and commercial sales		377,779					366,374
Unbilled volumes		(52,342	)				(36,155	)
Weather-sensitive volumes		325,437		54	%		330,219		57	%
Industrial firm sales		32,667		5	%		26,521		5	%
Industrial interruptible sales		47,356		8	%		11,988		2	%
Total gas sales		405,460		67	%		368,728		64	%
Transportation deliveries		201,567		33	%		208,076		36	%
Total volumes sold and delivered		607,027		100	%		576,804		100	%
Utility operating revenues - dollars:
Residential and commercial sales	$	354,121				$	311,477
Unbilled revenues		(47,482	)				(30,220	)
Weather-sensitive revenues		306,639		85	%		281,257		88	%
Industrial firm sales		21,553		6	%		15,685		5	%
Industrial interruptible sales		23,035		6	%		5,943		2	%
Total gas sales		351,227		97	%		302,885		95	%
Transportation revenues		6,451		2	%		10,853		3	%
Other revenues		2,931		1	%		5,247		2	%
Total utility operating revenues	$	360,609		100	%	$	318,985		100	%
Cost of gas sold	$	199,416				$	166,868
Utility net operating revenues (margin)	$	161,193				$	152,117
Actual degree-days		2,276					2,413
25-year average degree-days		2,528					2,536

Residential and Commercial Sales

NW Natural added 15,315 customers since June 30, 2003, for an annual growth rate of 2.7 percent. In the three years ended Dec. 31, 2003, more than 54,000 customers were added to the system, representing an average annual growth rate of 3.5 percent.

Volumes of gas sold to residential and commercial customers in the second quarter of 2004 were 27.5 million therms, or 25 percent, lower than in the second quarter of 2003, reflecting significantly warmer-than-average weather. Related revenues decreased $13.0 million, or 14 percent, due to the lower volumes, partially offset by adjustments due to NW Natural’s weather normalizing mechanism in Oregon (see Part II, Item 7., “Results of Operations—Regulatory Matters—General Rate Cases—Rate Mechanisms,” in the 2003 Form 10-K). The Company’s weather normalizing mechanism contributed $3.4 million of margin in the second quarter of 2004, helping to offset the loss due to the warm weather. This mechanism was not in effect in the second quarter of 2003. The rate increases approved in NW Natural’s Oregon general rate case in late 2003 were applied predominantly to the temperature-sensitive residential and commercial markets whose consumption patterns are seasonal. The resulting revenue increases in these markets will occur to a greater extent in the first and fourth calendar quarters of each year than in the second and third quarters.

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Gas sales to residential and commercial customers in the first six months of 2004 were 4.8 million therms, or 1 percent, lower while related revenues increased $25.4 million, or 9 percent, in the first six months of 2004 compared to 2003. The effects on revenues of rate increases during 2003 and continuing customer growth more than offset the effects of decreased volumes due to warmer weather. In addition, the Company’s weather normalizing mechanism contributed $6.1 million of margin in the first six months of 2004. This mechanism was not in effect during the first six months of 2003.

Typically, 80 percent or more of NW Natural’s annual operating revenues are derived from gas sales to weather-sensitive residential and commercial customers. Although variations in temperatures between periods will affect volumes of gas sold to these customers, the effect on margin and net income has been significantly reduced with the implementation of the weather normalizing mechanism in Oregon in November 2003. The mechanism applies to meter readings of participating Oregon customers taken between Nov. 15 and May 15. Approximately 8 percent of NW Natural’s residential and commercial customers are in Washington, where the mechanism is not in effect, and about 8 percent of the eligible Oregon customers elected not to be covered by the mechanism in its first year, so the mechanism does not fully insulate the Company from earnings volatility due to weather. The mechanism covered about half of the Company’s total weather variability in the second quarter. Nevertheless, as discussed above, the mechanism contributed $3.4 million and $6.1 million of margin, equivalent to 7 cents and 14 cents a share of earnings, in the three- and six-month periods ended June 30, 2004, respectively, making up a significant portion of the margin that otherwise would have been lost from the warmer-than-average weather.

Weather conditions, rate changes and customer billing dates from one period to the next affect the balance of unbilled revenues at the end of each period. For the six-month period ended June 30, 2004, the decrease in unbilled revenues was $17.3 million higher than in the same period last year. The amount reported as unbilled revenues primarily reflects changes in the balance of accrued unbilled revenues between June 30 and the prior year-end. The larger decrease in this year’s unbilled revenues was primarily due to higher balances of accrued unbilled revenues at Dec. 31, 2003 ($59.1 million) compared to Dec. 31, 2002 ($44.1 million) and the impact of warmer weather affecting unbilled revenues at June 30, 2004 compared to June 30, 2003.

Industrial Sales and Transportation Revenues

The following table summarizes the delivered volumes and margin in the industrial and electric generation markets for the three- and six-month periods ended June 30, 2004 and 2003:

	Three Months Ended June 30,				Six Months Ended June 30,
(Thousands)	2004		2003		2004		2003
Delivered volumes - therms:
Industrial sales and transportation		135,746		119,186		281,590		244,918
Electric generation		—		—		—		1,667
Total volumes		135,746		119,186		281,590		246,585
Margin - dollars:
Industrial sales and transportation	$	9,514	$	9,131	$	20,435	$	18,877
Electric generation		—		—		—		6
Total margin	$	9,514	$	9,131	$	20,435	$	18,883

Total volumes delivered to industrial customers were 17 million therms, or 14 percent, higher in the second quarter of 2004 than in the same period of 2003. Margin from these customers was $0.4 million, or 4 percent, higher in the second quarter of 2004 compared to the same period of 2003.

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In the six months ended June 30, 2004, volumes delivered to industrial and electric generation customers were 35 million therms, or 14 percent, higher than in the same period in 2003. Combined margins from these customers were up $1.6 million, or about 8 percent, in the first six months of 2004.

The higher volumes and margin in the industrial market reflect the addition of a large customer, an improving economy, and rate design changes approved in the Oregon general rate case. NW Natural re-designed its industrial rates in Oregon as part of its general rate case in 2003, transferring $4.8 million of annual revenue requirement from industrial rates to residential and commercial rates in order to better reflect relative costs of service and to become more competitive in the industrial market.

Other Revenues

Other revenues include miscellaneous fee income as well as revenue adjustments reflecting deferrals to, or amortizations from, regulatory asset or liability accounts other than deferrals relating to gas costs and non-utility gas storage (see Part II, Item 7., “Application of Critical Accounting Policies and Estimates—Regulatory Accounting,” in the 2003 Form 10-K). Other revenues contributed $2.9 million to utility operating revenues in the second quarter of 2004, compared to $4.2 million in the second quarter of 2003. The $1.3 million decrease in the first quarter of 2004 was primarily due to a change ($2.1 million) in the direction of revenue deferrals (from recovery to refund) under NW Natural’s decoupling mechanism in Oregon (see Part II, Item 7., “Results of Operations—Regulatory Matters—Rate Mechanisms,” in the 2003 Form 10-K). Revenue deferrals for the recovery of costs relating to the first segment of the SMPE (see “Regulatory Developments—General Rate Cases,” above) and higher amortizations of interstate gas storage credits were partially offset by amortizations from the decoupling mechanism and by higher amounts of amortizations relating to conservation programs and Year 2000 technology costs.

Other revenues contributed $2.9 million to utility operating revenues in the first six months of 2004, compared to $5.3 million in the first six months of 2003. The $2.4 million decrease was primarily related to amortizations from the decoupling mechanism and by higher amounts of amortizations relating to conservation programs and Year 2000 technology costs.

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The following table summarizes other revenues by primary category for the three and six months ended June 30, 2004 and 2003:

	Three Months Ended June 30,						Six Months Ended June 30,
(Thousands)	2004			2003			2004			2003
Revenue adjustments:
Current deferrals:
Decoupling	$	(1,208	)	$	894		$	(203	)	$	1,428
SMPE		179			—			1,280			—
OPUC investigation		(840	)		—			(958	)		—
Other		—			(191	)		—			(114	)
Current amortizations:
Interstate gas storage credits		5,324			3,057			5,324			3,057
Decoupling		(581	)		—			(2,135	)		—
Conservation programs		(563	)		(515	)		(1,953	)		(1,421	)
Year 2000 technology costs		(302	)		(277	)		(874	)		(473	)
Other		75			141			267			396
Net revenue adjustments		2,084			3,109			748			2,873
Miscellaneous revenues:
Customer fees		694			987			1,908			2,085
Other		108			100			275			289
Total miscellaneous revenues		802			1,087			2,183			2,374
Total other revenues	$	2,886		$	4,196		$	2,931		$	5,247

Cost of Gas Sold

Natural gas commodity prices have fluctuated dramatically in recent years (see Part II, Item 7., “Results of Operations—Comparison of Gas Operations—Cost of Gas Sold,” in the 2003 Form 10-K). During the second quarter and first six months of 2004, the cost per therm of gas sold was 5 percent and 9 percent, higher, respectively, than in the comparable 2003 periods, primarily due to higher natural gas commodity prices. The cost per therm of gas sold includes current gas purchases, gas withdrawn from storage inventory, gains or losses from commodity hedges, margin from off-system gas sales, demand cost balancing adjustments (demand equalization), regulatory deferrals and company use.

NW Natural uses a natural gas commodity-price hedge program under the terms of its Derivatives Policy to help manage its variable price gas commodity contracts (see Part II, Item 7., “Application of Critical Accounting Policies and Estimates—Accounting for Derivative Instruments and Hedging Activities,” in the 2003 Form 10-K). NW Natural recorded net hedging gains of $9 million and $18 million from this program during the three- and six-month periods ended June 30, 2004, respectively, compared to net hedging gains of $8 million and $31 million in the same periods of 2003. Hedging gains and losses relating to gas commodity purchases are included in cost of gas and factored into NW Natural’s annual PGA rate changes, and therefore have no material impact on net income.

Under NW Natural’s PGA tariff in Oregon, net income from Oregon operations is affected within defined limits by changes in purchased gas costs (see Part II, Item 7., “Results of Operations—Comparison of Gas Operations,” in the 2003 Form 10-K). NW Natural’s gas costs in the second quarter of 2004 were slightly lower than the costs embedded in rates, with the effect that NW Natural’s share of the lower costs increased margin by $0.2 million, equivalent to earnings of less than 1 cent a share. For the second quarter of 2003, NW Natural’s gas costs were slightly higher than the gas costs embedded in rates, with the effect that NW Natural’s share of the higher costs decreased margin by $0.3 million, equivalent to a loss of about 1 cent a share. In the first six months of 2004, NW Natural’s gas costs were slightly lower than the gas costs embedded in rates, despite rising gas prices in the spot market. NW Natural’s share of these savings contributed $0.4 million of margin, equivalent to 1 cent a share of earnings. The equivalent result in the first half of 2003 was net savings of $0.3 million, also equivalent to 1 cent a share of earnings.

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NW Natural is able to use gas supplies that are under contract but are not required for delivery to core market (residential, commercial and industrial firm) customers to make off-system sales. Under the PGA tariff in Oregon, NW Natural retains 33 percent of the margins realized from its off-system gas sales and records the remaining 67 percent as a deferred regulatory asset or liability for recovery from or refund to customers in future rates. NW Natural’s share of margin from off-system gas sales in the second quarter of 2004 was $0.2 million, equivalent to earnings of less than 1 cent a share, compared to $0.6 million, or 2 cents a share of earnings, for the same period in 2003. In the first six months of 2004, NW Natural’s share of margin from off-system gas sales contributed $0.2 million of margin, equivalent to earnings of less than 1 cent a share, compared to $4.6 million, or 10 cents a share of earnings, for the same period in 2003.

Non-utility Operations

At June 30, 2004 and 2003, the Company’s non-utility operations consisted primarily of gas storage operations and two wholly-owned subsidiaries, Financial Corporation and Northwest Energy. Northwest Energy was inactive during the first six months of 2003 and 2004.

Gas Storage

NW Natural realized net income from its non-utility gas storage business segment (see Part II, Item 7., “Results of Operations—Non-utility Operations—Gas Storage,” in the 2003 Form 10-K), after regulatory sharing and income taxes, of $0.7 million or 3 cents a share in the three months ended June 30, 2004, compared to $1.2 million or 5 cents a share in the three months ended June 30, 2003. For the first six months of 2004, operating results were net income of $1.5 million or 6 cents a share compared to net income of $2.5 million or 10 cents a share for the comparable period in 2003. Earnings from this business segment were lower in the three- and six-month periods of 2004 than in comparable periods of 2003, primarily due to a lower contribution from a contract with an independent trading company that optimizes the use of NW Natural’s assets by trading temporarily unused portions of its upstream pipeline transportation capacity and gas storage capacity. The lower contribution was primarily due to a change in market conditions where gas price differentials were less volatile in 2004 compared to 2003.

Financial Corporation

Financial Corporation’s results for the three months ended June 30, 2004 were net earnings of about $0.3 million, compared to net earnings of about $0.4 million for the same period in 2003. For the first six months of 2004, results were net earnings of about $0.1 million, compared to net earnings of about $0.4 million for the same period in 2003. The net earnings in both the three- and six-month periods were equivalent to less than 1 cent a share. The lower net income in the current three- and six-month month periods was primarily due to lower income from investments in limited partnerships in wind and solar electric generation projects in California. These investments generate the majority of their operating revenues during the third quarter; therefore, results for the first six months of the year are not necessarily indicative of the results for a full year. The Company’s investment balances in Financial Corporation at June 30, 2004 and 2003 were $5.7 million and $9.4 million, respectively. The reduced investment in Financial Corporation at June 30, 2004 was primarily due to a $4.2 million cash dividend that Financial Corporation paid to NW Natural in the fourth quarter of 2003.

Operating Expenses

Operations and Maintenance

Operations and maintenance expenses in the second quarter of 2004 were $24.3 million, 4

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percent higher than in the second quarter of 2003. The $1.0 million increase was primarily due to higher payroll and payroll-related expenses resulting from employee additions, pay increases and higher benefit costs ($0.7 million), an increase in uncollectible accounts expense ($0.3 million), and higher administrative expenses associated with compliance activities relating to the Sarbanes-Oxley Act of 2002 ($0.3 million).

Operations and maintenance expenses in the first six months of 2004 were $49.8 million, 5 percent higher than in the first six months of 2003. The $2.4 million increase was primarily due to higher payroll and payroll-related expenses resulting from employee additions, pay increases and higher benefit costs ($1.4 million), an increase in uncollectible accounts expense ($0.4 million), higher costs for gas technology research ($0.4 million), and higher administrative expenses associated with compliance activities relating to the Sarbanes-Oxley Act of 2002 ($0.5 million).

Taxes Other than Income Taxes

Taxes other than income taxes, which are principally comprised of franchise, property and payroll taxes, increased $0.2 million, or 2 percent, and $1.8 million, or 10 percent, in the three- and six-month periods ended June 30, 2004, respectively, compared to the same periods in 2003. For the three- and six-month periods ended June 30, 2004, property taxes increased $0.2 million and $0.5 million, respectively, due to utility plant additions. Payroll taxes increased $0.2 million and $0.3 million, respectively, due to wage and salary increases. For the three-month period ended June 30, 2004, franchise taxes, which are based on gross revenues, decreased $0.2 million, reflecting lower gross revenues primarily due to warmer weather. For the six-month period ended June 30, 2004, franchise taxes increased $1.0 million, or 13 percent, reflecting higher gross revenues primarily due to higher rates.

Depreciation and Amortization

The Company’s depreciation and amortization expense increased $0.6 million, or 4 percent, and $1.3 million, or 5 percent, in the three- and six-month periods ended June 30, 2004, respectively, compared to the same periods in 2003. The increased expense reflects additional investments in utility plant that were made to meet continuing customer growth, including the Company’s investment in the portion of the SMPE that was put into service in November 2003 (see “Results of Operations—Regulatory Developments—General Rate Cases,” above and, “Financial Condition—Cash Flows—Investing Activities,” below).

Other Income

The following table summarizes other income by primary components for the three and six months ended June 30, 2004 and 2003:

	Three Months Ended June 30,						Six Months Ended June 30,
(Thousands)	2004			2003			2004			2003
Other income (expense):
Gains from Company-owned life insurance	$	607		$	1,064		$	1,425		$	1,509
Allowance for funds used during construction - equity		122			208			189			250
Interest income		104			455			117			508
Other non-operating expense		(571	)		(510	)		(934	)		(958	)
Interest charges on deferred regulatory account balances		(152	)		(374	)		(283	)		(790	)
Earnings (loss) from equity investments of Financial Corporation		332			505			(49	)		245
Total other income	$	442		$	1,348		$	465		$	764

Other income decreased $0.9 million, or 67 percent, and $0.3 million, or 39 percent, in the three- and six-month periods ended June 30, 2004, respectively, compared to the same periods in 2003. The decrease in the three-month period ended June 30, 2004 was primarily due to lower gains from Company-

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owned life insurance ($0.5 million) due to decreases during the quarter in the market value of equity-based life insurance investments and lower interest income on short-term investments ($0.4 million). The decrease in the six-month period ended June 30, 2004 was primarily due to lower interest income on short-term investments ($0.4 million) and lower earnings from equity investments of Financial Corporation ($0.3 million), partially offset by lower interest charges on deferred regulatory account balances ($0.5 million) reflecting lower credit balances in these accounts.

Interest Charges – net of amounts capitalized

The Company’s net interest expense decreased by $0.4 million, or 4 percent, and $0.4 million, or 2 percent, in the three- and six-month periods ended June 30, 2004, respectively, compared to the same periods in 2003. The effect of the increase in the average balance of debt outstanding in 2004 was more than offset by lower weighted average interest costs on such borrowings and slightly higher interest credits from the debt component of the allowance for funds used during construction (see Part II, Item 7., “Results of Operations—Interest Charges—Net,” in the 2003 Form 10-K).

Income Taxes

The effective corporate income tax rate was 35.9 percent for the six-month period ended June 30, 2004, compared to 35.4 percent for the six-month period ended June 30, 2003.

Financial Condition

Capital Structure

The Company’s goal is to maintain a capital structure comprised of 45 to 50 percent common stock equity, up to 5 percent preferred stock and 45 to 50 percent short-term and long-term debt. When additional capital is required, debt or equity securities are issued depending upon both the target capital structure and market conditions. These sources also are used to meet long-term debt redemption requirements and to pay down outstanding commercial paper notes payable (see “Liquidity and Capital Resources” and “Cash Flows—Financing Activities,” below, and Notes 3, 5 and 6 in the 2003 Form 10-K).

Liquidity and Capital Resources

At June 30, 2004, the Company had $7.5 million in cash and cash equivalents, compared to $24.1 million at June 30, 2003 and $4.7 million at Dec. 31, 2003. Cash and cash equivalents at June 30, 2003 was higher due to the Company’s remaining balance of proceeds from the sale of $40 million in long-term debt in the first quarter of 2003. Short-term liquidity is generally provided by cash from operations and from the sale of commercial paper notes, which are supported by commercial bank lines of credit. The Company has available through Sept. 30, 2005, committed lines of credit with four commercial banks (see “Lines of Credit,” below, and Note 6 in the 2003 Form 10-K).

Accounts receivable at June 30, 2004 were $44.8 million, up $10.6 million or 31 percent from June 30, 2003, due to a combination of higher rates and a higher amount of residential account balances representing customers on time payment plans. The allowance for uncollectible accounts at June 30, 2004 was $1.9 million, $0.4 million or 19 percent lower than a year earlier, primarily due to lower reserve requirements for industrial accounts. A high percentage of the residential customers on time payment plans were current in their payments on those plans as of June 30, 2004, so NW Natural believes the amounts accrued for these customers in the allowance for uncollectible accounts is reasonable.

NW Natural’s capital expenditures are primarily related to utility construction resulting from customer growth and system improvements (see “Cash Flows—Investing Activities,” below). In addition, NW Natural has certain contractual commitments under capital leases, operating leases, gas supply purchase contracts and other contracts that require an adequate source of funding. These capital and contractual expenditures are financed through cash from operations and from the issuance of short-term debt, which is periodically refinanced through the sale of long-term debt or equity securities.

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In December 2003, the DOT’s Office of Pipeline Safety issued a final rule that specifies the detailed requirements for transmission pipeline IMPs as mandated by the Pipeline Safety Improvement Act of 2002 (Pipeline Safety Act). NW Natural estimates that its IMP will cost up to $5 million in 2004, and $5 million to $15 million per year beginning in 2005, totaling $50 million to $100 million over the first 10 years of the program ending Dec. 17, 2012. On June 14, 2004, the DOT’s RSPA issued a final pipeline safety rule that includes a revised definition of natural gas transmission pipelines for use in development of IMPs. The revised definition could potentially materially impact the scope and cost of the Company’s IMP. The Company and industry groups have filed comments challenging the RSPA’s authority to change the definition without opportunity for public comment.

Off-Balance Sheet Arrangements

Except for certain lease and purchase commitments (see “Contractual Obligations,” below), the Company has no material off-balance sheet financing arrangements.

Contractual Obligations

During the six-month period ended June 30, 2004, the Company entered into additional contracts with the primary contractor for the construction of the SMPE, which incorporated any remaining obligations to this contractor under contracts previously entered into for the project. As of June 30, 2004, there were $20.3 million of open contract commitments to this contractor. Other than contracts entered into in the ordinary course of business, there were no other material changes to the Company’s contractual obligations during the period. The Company’s contractual obligations are more fully described in Part II, Item 7., “Financial Condition—Liquidity and Capital Resources—Contractual Obligations,” and Note 7 in the 2003 Form 10-K.

Commercial Paper

The Company’s primary source of short-term funds is from the sale of commercial paper notes payable. Both NW Natural and Financial Corporation have the ability to sell commercial paper under agency agreements with a commercial bank. NW Natural’s commercial paper outstanding is supported by its committed bank lines of credit (see “Lines of Credit,” below), while Financial Corporation’s commercial paper is supported by committed bank lines of credit and the guaranty of NW Natural (see Note 6 in the 2003 Form 10-K). NW Natural had $4.9 million in commercial paper notes outstanding at June 30, 2004, compared to $16.6 million outstanding at June 30, 2003 and $85.2 million outstanding at Dec. 31, 2003. Financial Corporation had no commercial paper notes outstanding at June 30, 2004 or 2003 or at Dec. 31, 2003.

Lines of Credit

NW Natural has lines of credit with four commercial banks totaling $150 million. Half of the credit facility with each bank, totaling $75 million, is committed and available through Sept. 30, 2004, and the other $75 million is committed and available through Sept. 30, 2005. NW Natural has the authority required from the OPUC and the WUTC to draw upon the two-year portions of the credit lines, if needed.

In addition, Financial Corporation has available through Sept. 30, 2004, committed lines of credit with two commercial banks totaling $10 million. Financial Corporation’s lines are supported by the guaranty of NW Natural.

Under the terms of these lines of credit (see Note 6 in the 2003 Form 10-K), NW Natural and Financial Corporation pay commitment fees but are not required to maintain compensating bank balances. The interest rates on borrowings under these lines of credit, if any, are based on current market rates. There were no outstanding balances on either the NW Natural or Financial Corporation lines of credit at June 30, 2004 or 2003, or at Dec. 31, 2003.

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NW Natural’s lines of credit require the Company to maintain an indebtedness to total capitalization ratio of 65 percent or less and to maintain a consolidated net worth at least equal to 80 percent of its net worth at Sept. 30, 2003, plus 50 percent of the Company’s net income for each subsequent fiscal quarter. Failure to comply with either of these covenants would entitle the banks to terminate their lending commitments and to accelerate the maturity of all amounts outstanding. NW Natural was in compliance with both of these covenants at June 30, 2004 and at Dec. 31, 2003, and with the equivalent covenants in the prior year’s lines of credit at June 30, 2003.

Cash Flows

Operating Activities

Cash provided by operating activities was $124.7 million in the six months ended June 30, 2004, compared to $121.6 million in the first six months of 2003. The $3.1 million, or 3 percent, increase was due to increased cash flow from working capital sources ($2.3 million), combined with an increase in cash from operations before working capital changes ($0.8 million).

The primary factors contributing to the overall increase in cash flow from operations included:

• a larger decrease in accrued unbilled revenue ($17.6 million), primarily due to a higher starting balance of unbilled revenue at Dec. 31, 2003 caused by colder weather during December 2003;

• a larger increase in deferred income taxes and investment tax credits ($14.6 million), due in part to higher tax deductions pursuant to legislation in 2002 and 2003 providing for additional depreciation deductions for property acquired (see Part II, Item 7., “Financial Condition—Cash Flows—Operating Activities,” in the 2003 Form 10-K);

• a smaller increase in accounts payable ($11.8 million); and

• higher net income ($1.0 million);

partially offset by:

• a smaller decrease in inventories of gas, materials and supplies ($20.7 million); and

• an increase in deferred gas costs receivable in the first six months of 2004, compared to an increase in deferred gas costs payable in 2003 ($18.0 million), reflecting different patterns of activity between the two periods with respect to purchased gas cost savings and off-system gas sales under NW Natural’s PGA tariff (see “Results of Operations—Comparison of Gas Operations—Cost of Gas Sold,” above).

The Company has lease and purchase commitments relating to its operating activities that are financed with cash flows from operations (see “Liquidity and Capital Resources,” above, and Note 12 in the 2003 Form 10-K).

Investing Activities

Cash requirements for investing activities in the first six months of 2004 totaled $66.3 million, up from $57.9 million in the same period of 2003. Cash requirements for utility construction totaled $62.8 million, up $7.0 million from the first six months of 2003. The increase in cash requirements for utility construction in the first six months of 2004 was primarily the result of higher capital expenditures relating to NW Natural’s SMPE project to extend the pipeline from its Mist gas storage field ($8.9 million), partially offset by a decrease in capital expenditures for special projects to serve new customer load or new service areas ($3.4 million).

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Investments in non-utility property during the first six months of 2004 totaled $3.4 million, up from $0.8 million during the first six months of 2003. The higher investments in 2004 were primarily for certain improvements to the Company’s gas pipeline system that were related to interstate gas storage services.

The SMPE project is expected to be completed in the fourth quarter of 2004, assuming work on the pipeline continues without interruption (see Item 2. “Results of Operations—Regulatory Developments—Corps of Engineers Notice of Noncompliance,” above). NW Natural obtained easements and rights-of-way for the construction of the pipeline and has used condemnation proceedings, some of which remain pending as to valuation, to secure some of them.

Financing Activities

Cash used in financing activities in the first six months of 2004 totaled $55.6 million, compared to $46.9 million in the same period of 2003. Factors contributing to the $8.7 million difference were a larger reduction in short-term debt in the first six months of 2004 ($80.3 million), as compared to the first six months of 2003 ($53.2 million), and $20 million in long-term debt retired in the first six months of 2003, partially offset by the Company’s sale of $40 million in long-term debt in the first quarter of 2003.

In April 2004, the Company issued and sold 1,290,000 shares of its common stock in an underwritten public offering, and used the net proceeds of $38.5 million from the offering to reduce short-term indebtedness by about $29 million and to fund, in part, NW Natural’s utility construction program. The offering of common stock was pursuant to the Company’s universal shelf registration statement for the registration of $200 million of securities, which was effective in February 2004 (see Part II, Item 7., “Financial Condition—Liquidity and Capital Resources,” in the 2003 Form 10-K). After the common stock offering, there was a balance of approximately $160 million remaining under the shelf registration statement for the Company to issue additional securities, which may include First Mortgage Bonds, unsecured debt, preferred stock or common stock.

Ratios of Earnings to Fixed Charges

For the six months and 12 months ended June 30, 2004 and the 12 months ended Dec. 31, 2003, the Company’s ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 3.50, 2.86 and 2.84, respectively. A significant part of the business of the Company is of a seasonal nature; therefore, the ratio of earnings to fixed charges for the interim period is not necessarily indicative of the results for a full year.

For the purpose of calculating these ratios, earnings consist of net income before taxes plus fixed charges, and fixed charges consist of interest on all indebtedness, dividends on all preferred and preference stock, the amortization of debt expense and discount or premium and the estimated interest portion of rentals charged to income. For the 12 months ended Dec. 31, 2003 and June 30, 2004, other interest includes dividends on redeemable preferred stock, which have been reclassified as interest expense beginning July 1, 2003 upon adoption of SFAS No. 150. Calculated on the same basis, the ratios of earnings to fixed charges for the years ended Dec. 31, 1999, 2000, 2001, 2002 and 2003, and for the 12 months ended March 31, 2004, were 3.12, 3.14, 3.14, 2.85, 2.84 and 3.12.

Contingent Liabilities

Environmental Matters

The Company is subject to federal, state and local laws and regulations related to environmental matters. These evolving laws and regulations may require expenditures over a long timeframe to control environmental impacts. The Company believes that appropriate investigation or remediation is being undertaken at all the relevant sites. Based on existing knowledge, the Company does not expect that the

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ultimate resolution of these matters will have a material adverse effect on its financial condition, results of operations or cash flows. See Note 7 to the accompanying Consolidated Financial Statements and Note 12 in the 2003 Form 10-K.

Legal Proceedings

The Company’s current legal proceedings are described in Part I, Item 1., Note 7, “Commitments and Contingencies—Legal Proceedings,” above.

Forward-Looking Statements

This report and other presentations made by the Company from time to time may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and other statements that are other than statements of historical facts. The Company’s expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis. However, each such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the following important factors, among others, that could cause the actual results of the Company to differ materially from those projected in such forward-looking statements: (i) prevailing state and federal governmental policies and regulatory actions, including those of the OPUC, the WUTC and the U.S. Department of Transportation’s Office of Pipeline Safety, with respect to allowed rates of return, industry and rate structure, purchased gas and investment recovery, acquisitions and dispositions of assets and facilities, operation and construction of plant facilities, the maintenance of pipeline integrity, present or prospective wholesale and retail competition, changes in tax laws and policies and changes in and compliance with environmental and safety laws, regulations and policies; (ii) weather conditions and other natural phenomena; (iii) unanticipated population growth or decline, and changes in market demand caused by changes in demographic or customer consumption patterns; (iv) competition for retail and wholesale customers; (v) pricing of natural gas relative to other energy sources; (vi) risks relating to dependence on a single pipeline transportation provider for natural gas supply; (vii) risks resulting from uninsured property damage to Company property, intentional or otherwise; (viii) unanticipated changes in interest or foreign currency exchange rates or in rates of inflation; (ix) economic factors that could cause a severe downturn in certain key industries, thus affecting demand for natural gas; (x) unanticipated changes in operating expenses and capital expenditures; (xi) unanticipated changes in future liabilities relating to employee benefit plans; (xii) capital market conditions, including their effect on pension costs; (xiii) competition for new energy development opportunities; (xiv) potential inability to obtain permits, rights of way, easements, leases or other interests or other necessary authority to construct pipelines, develop storage or complete other system expansions; and (xv) legal and administrative proceedings and settlements. All subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, also are expressly qualified by these cautionary statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for the Company to predict all such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposures associated with activities involving derivative financial instruments and other financial instruments are natural gas commodity price risk, foreign currency exchange risk and interest rate risk (see Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk,” in the 2003 Form 10-K).

With respect to natural gas commodity price risk, NW Natural uses commodity swap and call option contracts to convert certain natural gas purchase contracts from floating prices to fixed prices, following guidelines set forth in its Derivatives Policy (see Note 1 and Note 11 in the 2003 Form 10-K). In the second quarter of 2004, NW Natural entered into natural gas commodity swap contracts extending for up to three years through October 2007, within constraints that limit the portion of estimated gas purchases in the second and third years that can be hedged this far in advance. The two-year and three-year price swaps are expected to have the effect of reducing NW Natural’s cost for the quantity of gas covered by these swap contracts for the first year of the contracts, compared to prices that otherwise would have applied, but they carry the risk that the cost for this quantity of gas in the second or third years of the swap contracts might be higher than otherwise would have applied. NW Natural expects its costs of gas, including its cost net of hedging gains or losses from gas purchases covered by multi-year commodity swap contracts, to continue being included in cost of gas and factored into NW Natural’s annual PGA rate adjustments (see Part II, Item 7., “Results of Operations—Comparison of Gas Operations—Cost of Gas Sold,” in the 2003 Form 10-K).

There have been no other material changes to the information relating to market risk provided in the 2003 Form 10-K.

Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of June 30, 2004, the principal executive officer and principal financial officer of the Company have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon that evaluation, the principal executive officer and principal financial officer of the Company have concluded that such disclosure controls and procedures are effective in timely alerting them to any material information relating to the Company and its consolidated subsidiaries required to be included in the Company’s reports filed with or furnished to the Securities and Exchange Commission under the Exchange Act.

(b) Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Litigation

The Company’s current legal proceedings are described in Part I, Item 1., Note 7, “Commitments and Contingencies—Legal Proceedings,” above.

Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(e) The following table provides information about purchases by the Company during the quarter ended June 30, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

	(a)	(b)		(c)	(d)
Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
Balance forward					$	26,800,000
04/01/04-04/30/04	—		—	—		—
05/01/04-05/31/04	—		—	—		—
06/01/04-06/30/04	3,140	$	29.19	—		—
Total	3,140	$	29.19	—	$	26,800,000

(1) During the three months ended June 30, 2004, the Company repurchased an aggregate of 3,140 shares of its common stock pursuant to its Non-Employee Directors Stock Compensation Plan (NEDSCP), as amended Feb. 26, 2004. The Company purchases shares awarded pursuant to the NEDSCP in the open market at the time of award.

(2) On May 25, 2000, the Company announced a program to repurchase up to 2 million shares, or up to $35 million in value, of NW Natural’s common stock pursuant to a repurchase program that has been extended annually. The purchases are made in the open market or through privately negotiated transactions. Since the program’s inception, the Company has repurchased 355,400 shares of common stock at a total cost of $8.2 million. On April 22, 2004, NW Natural’s Board of Directors extended the program through May 31, 2005.

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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NW Natural’s Annual Meeting of Shareholders was held in Portland, Oregon on May 27, 2004. At the meeting, three director-nominees were elected, as follows:

Director	Class	Term Expiring	Votes For	Votes Withheld
Tod R. Hamachek	II	2007	23,174,520	564,944
Melody C. Teppola	II	2007	22,912,827	826,637
Russell F. Tromley	II	2007	23,186,844	552,620

The other seven directors whose terms of office as directors continued after the Annual Meeting are: Timothy P. Boyle, John D. Carter, Mark S. Dodson, C. Scott Gibson, Randall C. Papé, Richard G. Reiten and Richard L. Woolworth. In accordance with the Company’s Bylaws, Robert L. Ridgley retired as a director at the conclusion of the meeting. There were no broker non-votes on the election of directors.

No other matters were voted upon at the meeting.

Item 5. OTHER INFORMATION

Officer Retirement

On May 7, 2004, the Company announced that its senior vice president and chief financial officer, Bruce R. DeBolt, intends to retire from NW Natural on Oct. 1, 2004 after 24 years of service with the Company. The Company expects that Mr. DeBolt will resign his officer positions effective Aug. 10, 2004.

Director Election

Effective May 27, 2004, the Board of Directors elected Martha (Stormy) Byorum as a Class III director to serve until the 2005 Annual Meeting of Shareholders, at which time her name will be submitted to shareholders for election. The Board appointed Ms. Byorum to serve on the Board’s Finance Committee. Ms. Byorum, 55, is the Chief Executive Officer of Cori Investment Advisors, LLC, a private equity advisory and investment banking firm. She is a former senior executive with Citibank, where she was the bank’s senior energy and oil analyst among other roles during her 24 years with the bank. The Board has determined that Ms. Byorum meets the independence criteria of NW Natural’s Director Independence Standards and is an independent director under current New York Stock Exchange listing standards.

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Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

See Exhibit Index attached hereto.

(b) Reports on Form 8-K

(1) On April 2, 2004 the Company filed its Current Report on Form 8-K, filing as an exhibit the Underwriting Agreement, dated March 30, 2004, between the Company and A.G. Edwards & Sons, Inc., Edward D. Jones & Co., L.P., Janney Montgomery Scott LLC, Stifel, Nicolaus & Company, Incorporated and Wells Fargo Securities, LLC, relating to the issuance and sale of 1,290,000 shares of the Company’s Common Stock;

(2) On April 23, 2004, the Company furnished its Current Report on Form 8-K relating to earnings for the quarter ended March 31, 2004 (unaudited);

(3) On July 14, 2004, the Company filed its Current Report on Form 8-K relating to certain regulatory developments and the election of Martha (Stormy) Byorum as a director; and

(4) On July 23, 2004, the Company furnished its Current Report on Form 8-K relating to earnings for the quarter ended June 30, 2004 (unaudited).

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NORTHWEST NATURAL GAS COMPANY
	(Registrant)
Dated: August 5, 2004	/s/ Stephen P. Feltz
	Stephen P. Feltz
	Principal Accounting Officer
	Treasurer and Controller

34

NORTHWEST NATURAL GAS COMPANY

EXHIBIT INDEX

To

Quarterly Report on Form 10-Q

For Quarter Ended

June 30, 2004

Document	Exhibit Number
Bylaws as amended July 22, 2004	(3)
Retirement Agreement and Mutual Release of All Claims dated June 25, 2004 entered into between the Company and Bruce R. DeBolt, Senior Vice President and CFO of the Company	(10)
Statement re: Computation of Per Share Earnings	(11)
Computation of Ratio of Earnings to Fixed Charges	(12)
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002	(31.1)
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002	(31.2)
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(32.1)