Derivative Instruments

9 Months Ended

Sep. 30, 2015

Derivative Instrument Detail [Abstract]

Derivative Instruments [Text Block]

12. DERIVATIVE INSTRUMENTS

We enter into financial derivative contracts to hedge a portion of the utility’s natural gas sales requirements. These contracts include swaps, options, and combinations of option contracts. We primarily use these derivative financial instruments to manage commodity price variability. A small portion of our derivative hedging strategy involves foreign currency exchange contracts.

We enter into these financial derivatives, up to prescribed limits, primarily to hedge price variability related to our 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, we enter into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of utility customers. These contracts qualify for regulatory deferral accounting treatment.

We also enter into exchange contracts related to the third-party asset management of our gas portfolio, some of which are derivatives that do not qualify for hedge accounting or regulatory deferral, but are subject to our regulatory sharing agreement. These derivatives are recognized in operating revenues in our gas storage segment, net of amounts shared with utility customers.

Notional Amounts

The following table presents the absolute notional amounts related to open positions on our derivative instruments:

	September 30,				December 31,
In thousands	2015		2014		2014
Natural gas (in therms):
Financial	416,075		368,425		287,475
Physical	521,350		620,550		420,980
Foreign exchange	$	8,023	$	10,296	$	12,230

Purchased Gas Adjustment (PGA)

Derivatives entered into by the utility for the procurement or hedging of natural gas for future gas years generally receive regulatory deferral accounting treatment. Derivative contracts entered into after the start of the PGA period are subject to our PGA incentive sharing mechanism in Oregon, which provides for either an 80% or 90% deferral of any gains and losses as regulatory assets or liabilities, with the remaining 20% or 10%, respectively, recognized in current income. For the 2014-15 and 2015-16 gas years, we selected the 90% and 80% deferral option, respectively. In general, our commodity hedging for the current gas year is completed prior to the start of the upcoming gas year, and hedge prices are reflected in our weighted-average cost of gas in the PGA filing. As of November 1, 2014, we reached our target hedge percentage of approximately 75% for the 2014-15 gas year. These hedge prices were included in the PGA filings and qualified for regulatory deferral.

Unrealized Gain/Loss

The following table reflects the income statement presentation for the unrealized gains and losses from our derivative instruments:

	Three Months Ended September 30,
	2015						2014
In thousands	Natural gas commodity			Foreign currency			Natural gas commodity			Foreign currency
Expense to cost of gas	$	(8,415	)	$	(150	)	$	(10,173	)	$	(421	)
Operating revenues	33			—			—			—
Less:
Amounts deferred to regulatory accounts on the balance sheet	8,391			150			10,559			421
Total gain in pre-tax earnings	$	9		$	—		$	386		$	—

	Nine Months Ended September 30,
	2015						2014
In thousands	Natural gas commodity			Foreign currency			Natural gas commodity			Foreign currency
(Expense) benefit to cost of gas	$	(21,876	)	$	(413	)	$	360		$	(242	)
Operating revenues	55			—			—			—
Less:
Amounts deferred to regulatory accounts on the balance sheet	21,838			413			(93		)	242
Total gain in pre-tax earnings	$	17		$	—		$	267		$	—

Outstanding derivative instruments related to regulated utility operations are deferred in accordance with regulatory accounting standards. The cost of foreign currency forward contracts and natural gas derivative contracts are recognized immediately in 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

We realized a net loss of $2.3 million and $24.3 million for the three and nine months endedSeptember 30, 2015 and a net gain of $0.5 million and $13.3 million for the three and nine months endedSeptember 30,2014, respectively, from the settlement of natural gas financial derivative contracts. Realized gains and losses are recorded in cost of gas, deferred through our regulatory accounts and amortized through customer rates in the following year.

Credit Risk Management of Financial Derivative Instruments

No collateral was posted with, or by, our counterparties as of September 30, 2015 or 2014. We attempt to minimize the potential exposure to collateral calls by counterparties to manage our liquidity risk. Counterparties generally allow a certain credit limit threshold before requiring us to post collateral against loss positions. Given our counterparty credit limits and portfolio diversification, we have not been subject to collateral calls in 2014 or 2015. Our collateral call exposure is set forth under credit support agreements, which generally contain credit limits. We could also be subject to collateral call exposure where we have 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. Based on current financial swap and option contracts outstanding, which reflect net unrealized losses of $23.8 million at September 30, 2015, we have estimated the level of collateral demands, with and without potential adequate assurance calls, using current gas prices and various credit downgrade rating scenarios for NW Natural as follows:

			Credit Rating Downgrade Scenarios
In thousands	(Current Ratings)  A+/A3		BBB+/Baa1		BBB/Baa2		BBB-/Baa3		Speculative
With Adequate Assurance Calls	$	—	$	—	$	—	$	—	$	22,066
Without Adequate Assurance Calls	—		—		—		—		15,937

Our financial derivative instruments are subject to master netting arrangements; however, they are presented on a gross basis in our statement of financial position. We and our counterparties have the ability to set-off our 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.

If netted by each counterparty, our net derivative position would result in an asset of $3.1 million and a liability of $25.3 million as of September 30, 2015. As of September 30, 2014, our derivative position would have resulted in an asset of $4.0 million and a liability of $3.9 million, and as of December 31, 2014, our derivative position would have resulted in an asset of $0.2 million and a liability of $33.4 million.

We are exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps to hedge the risk of price increases for natural gas purchases made on behalf of customers. See Note 13 in the 2014 Form 10-K for additional information.

Fair Value

In accordance with fair value accounting, we include nonperformance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of our counterparties when we are in an unrealized gain position, or on our own credit spread when we are in an unrealized loss position. The inputs in our valuation models include natural gas futures, volatility, credit default swap spreads, and interest rates. Additionally, our 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 September 30, 2015. As of September 30, 2015 and 2014 and December 31, 2014, the net fair value was a liability of $22.2 million, an asset of $0.1 million, and a liability of $33.2 million, respectively, using significant other observable, or Level 2, inputs. No Level 3 inputs were used in our derivative valuations, and there were no transfers between Level 1 or Level 2 during the nine months ended September 30, 2015 and 2014.