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Derivative Instruments
 6 Months Ended
Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments DERIVATIVE INSTRUMENTS
NW Natural enters into financial derivative contracts to hedge a portion of the NGD segment's natural gas sales requirements. These contracts include swaps, options, and combinations of option contracts. These derivative financial instruments are primarily used to manage commodity price variability. A small portion of NW Natural's derivative hedging strategy involves foreign currency exchange contracts.

NW Natural enters into these financial derivatives, up to prescribed limits, primarily to hedge price variability related to physical gas supply contracts as well as to hedge spot purchases of natural gas. The foreign currency forward contracts are used to hedge the fluctuation in foreign currency exchange rates for pipeline demand charges paid in Canadian dollars.

In the normal course of business, NW Natural also enters into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of NGD customers. These contracts qualify for regulatory deferral accounting treatment.

NW Natural also enters into exchange contracts related to the third-party asset management of its gas portfolio, some of which are derivatives that do not qualify for hedge accounting or regulatory deferral, but are subject to NW Natural's regulatory sharing agreement. These derivatives are recognized in operating revenues, net of amounts shared with NGD customers.

Notional Amounts
The following table presents the absolute notional amounts related to open positions on NW Natural derivative instruments:
June 30,December 31,
In thousands202120202020
Natural gas (in therms):
Financial680,335 654,145 784,400 
Physical419,148 570,600 457,593 
Foreign exchange$6,477 $7,176 $5,896 

Purchased Gas Adjustment (PGA)
Derivatives entered into by NW Natural for the procurement or hedging of natural gas for future gas years generally receive regulatory deferral accounting treatment. In general, commodity hedging for the current gas year is completed prior to the start of the gas year, and hedge prices are reflected in the weighted-average cost of gas in the PGA filing. Rates and hedging approaches may vary between states due to different rate structures and mechanisms. Hedge contracts entered into after the start of the PGA period are subject to the PGA incentive sharing mechanism in Oregon. NW Natural entered the 2020-21 and 2019-20 gas years with forecasted sales volumes hedged at 53% and 52% in financial swap and option contracts, and 17% and 19% in physical gas supplies, respectively. Hedge contracts entered into prior to the PGA filing in September 2020 were included in the PGA for the 2020-21 gas year. Hedge contracts entered into after the PGA filing, and related to subsequent gas years, may be included in future PGA filings and qualify for regulatory deferral.
Unrealized and Realized Gain/Loss
The following table reflects the income statement presentation for the unrealized gains and losses from NW Natural's derivative instruments, which also represents all derivative instruments at NW Holdings:
Three Months Ended June 30,
20212020
In thousandsNatural gas commodityForeign exchangeNatural gas commodityForeign exchange
Benefit (expense) to cost of gas$16,323 $(45)$5,492 $459 
Operating revenues (expense)— — 754 — 
Amounts deferred to regulatory accounts on balance sheet
(16,323)45 (6,119)(459)
Total gain (loss) in pre-tax earnings$— $— $127 $— 

Six Months Ended June 30,
20212020
In thousandsNatural gas commodityForeign exchangeNatural gas commodityForeign exchange
Benefit (expense) to cost of gas$36,805 $32 $149 $(7)
Operating revenues (expense)(27)— (1,679)— 
Amounts deferred to regulatory accounts on balance sheet
(36,782)(32)1,286 7 
Total gain (loss) in pre-tax earnings$(4)$— $(244)$— 

Unrealized Gain/Loss
Outstanding derivative instruments related to regulated NGD operations are deferred in accordance with regulatory accounting standards. The cost of foreign currency forward and natural gas derivative contracts are recognized immediately in the cost of gas; however, costs above or below the amount embedded in the current year PGA are subject to a regulatory deferral tariff and therefore, are recorded as a regulatory asset or liability.

Realized Gain/Loss
NW Natural realized net gains of $4.2 million and $9.3 million for the three and six months ended June 30, 2021 from the settlement of natural gas financial derivative contracts, whereas, net losses of $1.1 million and $3.2 million were realized for the three and six months ended June 30, 2020. Realized gains and losses offset the higher or lower cost of gas purchased, resulting in no incremental amounts to collect or refund to customers.

Credit Risk Management of Financial Derivatives Instruments
No collateral was posted with or by NW Natural counterparties as of June 30, 2021 or 2020. NW Natural attempts to minimize the potential exposure to collateral calls by diversifying counterparties to manage liquidity risk. Counterparties generally allow a certain credit limit threshold before requiring NW Natural to post collateral against loss positions. Given NW Natural's counterparty credit limits and portfolio diversification, it was not subject to collateral calls in 2021 or 2020. The collateral call exposure is set forth under credit support agreements, which generally contain credit limits. 

NW Natural could also be subject to collateral call exposure where it has agreed to provide adequate assurance, which is not specific as to the amount of credit limit allowed, but could potentially require additional collateral in the event of a material adverse change. If credit-risk related contingent features within these contracts were triggered as of June 30, 2021, assuming current gas prices and a credit rating downgrade to a speculative level, we would not be required to post collateral calls, including estimates for adequate assurance.

NW Natural's financial derivative instruments are subject to master netting arrangements; however, they are presented on a gross basis in the consolidated balance sheets. NW Natural and its counterparties have the ability to set-off obligations to each other under specified circumstances. Such circumstances may include a defaulting party, a credit change due to a merger affecting either party, or any other termination event.

NW Natural’s current commodity financial swap and option contracts outstanding reflect unrealized gains of $54.3 million and $5.3 million at June 30, 2021 and June 30, 2020, respectively. If netted by counterparty, NW Natural's physical and financial derivative position would result in an asset of $51.8 million and a liability of $1.6 million as of June 30, 2021, an asset of $6.7 million and a liability of $1.5 million as of June 30, 2020, and an asset of $14.1 million and a liability of $1.3 million as of December 31, 2020.
NW Natural is exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps with financial counterparties. NW Natural utilizes master netting arrangements through International Swaps and Derivatives Association contracts to minimize this risk along with collateral support agreements with counterparties based on their credit ratings. In certain cases, NW Natural requires guarantees or letters of credit from counterparties to meet its minimum credit requirement standards. See Note 16 in the 2020 Form 10-K for additional information.

Fair Value
In accordance with fair value accounting, NW Natural includes non-performance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of NW Natural counterparties when in an unrealized gain position, or on NW Natural's own credit spread when in an unrealized loss position. The inputs in our valuation models include natural gas futures, volatility, credit default swap spreads and interest rates. Additionally, the assessment of non-performance risk is generally derived from the credit default swap market and from bond market credit spreads. The impact of the credit risk adjustments for all outstanding derivatives was immaterial to the fair value calculation at June 30, 2021. Using significant other observable or Level 2 inputs, the net fair value was an asset of $50.2 million, an asset of $5.2 million, and an asset of $12.8 million as of June 30, 2021 and 2020, and December 31, 2020, respectively. No Level 3 inputs were used in our derivative valuations during the six months ended June 30, 2021 and 2020. See Note 2 in the 2020 Form 10-K.