UNITED STATES

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 ~~September 30, 2011~~March 31, 2012

[ ] 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer [ X ]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller reporting company [ ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X ]

At ~~October 31, 2011, 26,702,926~~April 30, 2012, 26,800,474 shares of the registrant’s Common Stock (the only class of Common Stock) were outstanding.

NORTHWEST NATURAL GAS COMPANY

For the Quarterly Period Ended ~~September 30, 2011~~March 31, 2012


	PART I. FINANCIAL INFORMATION
		Page Number
	Forward-Looking Statements	1

Item 1.	Consolidated Financial Statements:

	Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~	2

	Consolidated Balance Sheets at ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ and December 31, ~~2010~~2011	3

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45 41

Item 4.	Controls and Procedures	45 41

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	46 42

Item 1A.	Risk Factors	46 42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46 42

Item 6.	Exhibits	46 42

	Signature	47 43

Table of Contents

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the following:

plans;

·	objectives;

goals;

·	strategies;

·	assumptions and estimates;

·	future events or performance;

trends;

·	cyclicality;

·	earnings and dividends;

growth;

·	customer rates;

·	commodity costs;

·	operational performance and costs;

·	liquidity and financial positions;

·	project development and expansion;

·	competition;

·	storage levels and values;

·	procurement, development and production levels of gas supplies and reserves;

·	estimated expenditures and investments;

·	costs of compliance;

·	credit exposures;

·	potential efficiencies;

·	impacts of laws, rules and regulations;

·	tax liabilities or refunds;

·	outcomes and effects of litigation, regulatory actions, and other administrative matters;

·	projected status and obligations under retirement plans;

·	adequacy of, and shift in mix of, gas supplies;

·	approval and adequacy of regulatory deferrals; and

·	~~costs and recovery related to~~ environmental, regulatory, litigation and ~~insurance.~~insurance costs and recoveries.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our ~~2010~~2011 Annual Report on Form 10-K, Part I, Item 1A. “Risk Factors” and Part II, Item 7. and Item 7A., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk,” and in Part I, Items 2 and 3, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” and Part II, Item 1A, “Risk Factors,” herein.

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

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NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

Consolidated Statements of Income
Consolidated Statements of Comprehensive Income											Consolidated Statements of Comprehensive Income
(Unaudited)	(Unaudited)										(Unaudited)


				Three Months Ended				Nine Months Ended				Three Months Ended
				September 30,				September 30,				March 31,
Thousands, except per share amounts	Thousands, except per share amounts			2011		2010		2011		2010		2012		2011
Operating revenues:	Operating revenues:
	Gross operating revenues		$	93,313	$	95,067	$	577,598	$	543,961
	Less: Cost of sales			43,133		46,359		313,880		281,221
	Revenue taxes			2,397		2,497		14,195		13,410
		Net operating revenues		47,783		46,211		249,523		249,330
Gross operating revenues												$	317,494	$	323,088
Less: Cost of sales													169,771		180,625
Revenue taxes													7,855		7,955
Net operating revenues													139,868		134,508
Operating expenses:	Operating expenses:
	Operations and maintenance			28,372		26,913		89,918		85,985
	General taxes			7,514		6,659		22,338		17,451
	Depreciation and amortization			17,449		16,003		52,304		47,930
		Total operating expenses		53,335		49,575		164,560		151,366
Income (loss) from operations				(5,552)		(3,364)		84,963		97,964
Operations and maintenance													34,416		31,172
General taxes													8,836		8,165
Depreciation and amortization													17,950		17,309
Total operating expenses													61,202		56,646
Income from operations													78,666		77,862
Other income and expense - net	Other income and expense - net			1,781		1,333		4,117		5,969			1,005		1,214
Interest expense - net	Interest expense - net			10,241		10,632		30,956		31,738			11,191		10,449
Income (loss) before income taxes				(14,012)		(12,663)		58,124		72,195
Income tax expense (benefit)				(5,700)		(5,243)		23,470		29,119
Net income (loss)			$	(8,312)	$	(7,420)	$	34,654	$	43,076
Income before income taxes													68,480		68,627
Income tax expense													27,873		27,854
Net income													40,607		40,773
Other comprehensive income:
Amortization of non-qualified employee benefit plan liability, net of taxes of $108 for 2012 and $96 for 2011													166		146
Comprehensive income												$	40,773	$	40,919
Average common shares outstanding:	Average common shares outstanding:
	Basic			26,686		26,606		26,676		26,571
	Diluted			26,686		26,606		26,730		26,641
Earnings (loss) per share of common stock:
	Basic		$	(0.31)	$	(0.28)	$	1.30	$	1.62
	Diluted		$	(0.31)	$	(0.28)	$	1.30	$	1.62
Basic													26,781		26,670
Diluted													26,862		26,724
Earnings per share of common stock:
Basic												$	1.52	$	1.53
Diluted												$	1.51	$	1.53
Dividends declared per share of common stock	Dividends declared per share of common stock		$	0.435	$	0.415	$	1.305	$	1.245		$	0.445	$	0.435

See Notes to Consolidated Financial Statements.	See Notes to Consolidated Financial Statements.										See Notes to Consolidated Financial Statements.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

Consolidated Balance Sheets	Consolidated Balance Sheets										Consolidated Balance Sheets
(Unaudited)	(Unaudited)										(Unaudited)



		September 30,			September 30,			December 31,				March 31,			March 31,			December 31,
Thousands		2011			2010			2010				2012			2011			2011
Assets:
Current assets:
Cash and cash equivalents		$	25,862		$	2,501		$	3,457			$	4,031		$	3,480		$	5,833
Restricted cash			-			924			924				-			924			-
Accounts receivable			25,628			28,503			67,969				90,817			94,521			77,449
Accrued unbilled revenue			14,287			15,399			64,803				44,444			42,342			61,925
Allowance for uncollectible accounts			(1,733	)		(1,736	)		(2,950	)			(3,694	)		(3,821	)		(2,895	)
Regulatory assets			76,734			83,545			52,714				90,490			48,195			94,673
Derivative instruments			3,932			1,864			2,245				1,824			4,861			2,853
Inventories:
Gas			73,572			80,955			70,672
Materials and supplies			10,009			8,668			9,713
Inventories													61,436			53,266			74,363
Gas reserves			2,366			-			-				6,732			-			4,463
Income taxes receivable			5,019			6,762			41,066				1,735			23,645			7,045
Other current assets			14,871			11,282			19,652				13,075			13,292			22,980
Total current assets			250,547			238,667			330,265				310,890			280,705			348,689
Non-current assets:
Property, plant and equipment			2,632,498			2,528,703			2,576,402				2,680,537			2,593,553			2,661,102
Less: Accumulated depreciation			756,592			711,046			722,239				779,683			733,639			767,226
Total property, plant and equipment - net			1,875,906			1,817,657			1,854,163				1,900,854			1,859,914			1,893,876
Gas reserves			28,125			-			-				61,106			-			47,451
Regulatory assets			328,757			339,786			348,897				368,521			345,452			371,392
Derivative instruments			227			518			628				52			1,560			-
Other investments			69,022			68,851			69,094				67,648			69,501			68,263
Restricted cash													4,000			-			4,000
Other non-current assets			15,256			15,898			13,569				14,191			14,421			12,903
Total non-current assets			2,317,293			2,242,710			2,286,351				2,416,372			2,290,848			2,397,885
Total assets		$	2,567,840		$	2,481,377		$	2,616,616			$	2,727,262		$	2,571,553		$	2,746,574

See Notes to Consolidated Financial Statements.	See Notes to Consolidated Financial Statements.										See Notes to Consolidated Financial Statements.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

Consolidated Balance Sheets	Consolidated Balance Sheets										Consolidated Balance Sheets
(Unaudited)	(Unaudited)										(Unaudited)



		September 30,			September 30,			December 31,				March 31,			March 31,			December 31,
Thousands		2011			2010			2010				2012			2011			2011
Capitalization and liabilities:
Capitalization:
Common stock - no par value; authorized 100,000 shares; issued and outstanding 26,703, 26,640, and 26,668 at September 30, 2011 and 2010 and December 31, 2010, respectively		$	346,197		$	342,271		$	342,978
Common stock - no par value; authorized 100,000 shares; issued and outstanding 26,798, 26,673, and 26,756 at March 31, 2012 and 2011 and December 31, 2011, respectively												$	351,005		$	343,787		$	348,383
Retained earnings			356,574			338,725			356,727				402,599			385,899			373,905
Accumulated other comprehensive income (loss)			(6,166	)		(5,675	)		(6,604	)			(7,633	)		(6,458	)		(7,800	)
Total common stock equity			696,605			675,321			693,101				745,971			723,228			714,488
Long-term debt			601,700			591,700			591,700				641,700			551,700			641,700
Total capitalization			1,298,305			1,267,021			1,284,801				1,387,671			1,274,928			1,356,188

Current liabilities:
Short-term debt			181,200			159,875			257,435				113,700			186,435			141,600
Current maturities of long-term debt			40,000			45,000			10,000				-			50,000			40,000
Accounts payable			50,117			79,629			93,243				60,165			71,839			86,300
Taxes accrued			11,117			10,601			10,579				10,509			10,063			10,747
Interest accrued			11,321			12,220			5,182				10,648			11,470			5,857
Regulatory liabilities			28,593			31,502			17,828				50,341			29,016			31,046
Derivative instruments			46,651			59,898			38,437				53,697			25,655			57,317
Other current liabilities			33,609			28,074			35,457				41,503			38,433			41,597
Total current liabilities			402,608			426,799			468,161				340,563			422,911			414,464

Deferred credits and other non-current liabilities:
Deferred tax liabilities			394,217			324,166			373,409				438,486			396,357			413,209
Regulatory liabilities			266,907			252,425			258,031				288,131			263,876			278,382
Pension and other postretirement benefit liabilities			129,669			121,686			144,250				189,003			132,053			201,530
Derivative instruments			7,429			27,211			17,022				3,947			13,914			6,536
Other non-current liabilities			68,705			62,069			70,942				79,461			67,514			76,265
Total deferred credits and other non-current liabilities			866,927			787,557			863,654				999,028			873,714			975,922
Commitments and contingencies (see Note 14)			-			-			-
Commitments and contingencies (see Note 13)
Total capitalization and liabilities		$	2,567,840		$	2,481,377		$	2,616,616			$	2,727,262		$	2,571,553		$	2,746,574

See Notes to Consolidated Financial Statements.	See Notes to Consolidated Financial Statements.										See Notes to Consolidated Financial Statements.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

Consolidated Statements of Cash Flows	Consolidated Statements of Cash Flows							Consolidated Statements of Cash Flows
(Unaudited)	(Unaudited)							(Unaudited)

		Nine Months Ended							Three Months Ended
		September 30,							March 31,
Thousands		2011			2010				2012			2011
Operating activities:
Net income		$	34,654		$	43,076			$	40,607		$	40,773
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization			52,304			47,930				17,950			17,309
Undistributed (earnings) losses from equity investments			354			(576	)
Deferred tax liabilities										27,089			25,048
Undistributed losses from equity investments										1			25
Non-cash expenses related to qualified defined benefit pension plans			5,491			5,758				2,007			1,817
Contributions to qualified defined benefit pension plans			(19,245	)		(10,000	)			(13,800	)		(13,645	)
Deferred environmental expenditures			(7,018	)		(5,153	)
Deferred environmental expenditures, net of recoveries										(827	)		(1,759	)
Other			(969	)		(1,863	)			475			(443	)
Changes in assets and liabilities:
Receivables			92,840			103,377				6,378			(3,122	)
Inventories			(3,196	)		(8,666	)			12,927			27,119
Taxes accrued			36,585			(17,198	)			5,072			16,905
Accounts payable			(33,369	)		(39,985	)			(26,050	)		(14,406	)
Interest accrued			6,139			6,785				4,791			6,288
Deferred gas costs			370			(22,582	)			23,663			196
Deferred tax liabilities			22,908			23,993
Other - net			3,440			(10,372	)			13,771			5,959
Cash provided by operating activities			191,288			114,524				114,054			108,064
Investing activities:
Capital expenditures			(70,036	)		(185,651	)			(20,447	)		(25,403	)
Utility gas reserves			(30,917	)		-				(17,220	)		-
Restricted cash			924			34,619
Other			(192	)		953				(68	)		(121	)
Cash used in investing activities			(100,221	)		(150,079	)			(37,735	)		(25,524	)
Financing activities:
Common stock issued (purchased) - net, including common stock expense			1,320			4,129
Long-term debt issued			50,000			-
Common stock issued - net										1,458			(244	)
Long-term debt retired			(10,000	)		-				(40,000	)		-
Change in short-term debt			(76,235	)		57,875				(27,900	)		(71,000	)
Cash dividend payments on common stock			(34,807	)		(33,063	)			(11,913	)		(11,601	)
Other			1,060			683				234			328
Cash provided by (used in) financing activities			(68,662	)		29,624
Cash used in financing activities										(78,121	)		(82,517	)
Increase (decrease) in cash and cash equivalents			22,405			(5,931	)			(1,802	)		23
Cash and cash equivalents - beginning of period			3,457			8,432				5,833			3,457
Cash and cash equivalents - end of period		$	25,862		$	2,501			$	4,031		$	3,480

Supplemental disclosure of cash flow information:
Interest paid		$	24,817		$	23,796			$	6,148		$	4,162
Income taxes paid		$	1,522		$	21,100			$	101		$	-

See Notes to Consolidated Financial Statements.	See Notes to Consolidated Financial Statements.							See Notes to Consolidated Financial Statements.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

Notes to Consolidated Financial Statements

(Unaudited)

1.	Organization and Principles of Consolidation

The accompanying consolidated financial statements represent the consolidation of Northwest Natural Gas Company (NW ~~Natural)~~Natural or Company) and all companies that we directly or indirectly control, either through majority ownership or otherwise. Our direct and indirect wholly-owned subsidiaries include ~~Gill Ranch Storage, LLC (Gill Ranch),~~ NW Natural Energy, LLC (NWN Energy), NW Natural Gas Storage, LLC (NWN Gas Storage), Gill Ranch Storage, LLC (Gill Ranch) and NNG Financial Corporation (NNG Financial). Investments in corporate joint ventures and partnerships that we do not directly or indirectly control, and for which we are not the primary beneficiary, are accounted for under the equity method or the cost method, which includes NWN Energy’s investment in Palomar Gas Holdings, LLC (PGH). NW Natural and its affiliated companies are collectively referred to herein as “NW Natural.” The consolidated financial statements are presented after elimination of all significant intercompany balances and transactions, except for amounts required to be included under regulatory accounting standards to reflect the effect of such regulation. In this report, the term “utility” is used to describe our regulated gas distribution business, and the term “non-utility” is used to describe our gas storage business and other non-utility investments and business activities. ~~See Note 4.~~

Information presented in these interim consolidated financial statements is unaudited, but includes all material adjustments that management considers necessary for a fair statement of the results for each period reported including normal recurring accruals. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our ~~2010~~2011 Annual Report on Form 10-K ~~(2010~~(2011 Form 10-K). A significant part of our business is of a seasonal nature; therefore, results of operations for interim periods are not necessarily indicative of the results for a full year.

2. Significant Accounting Policies Update

Our significant accounting policies are described in Note 2 of the ~~2010~~2011 Form 10-K. There were no material changes to those accounting policies during the ~~nine~~three months ended ~~September 30, 2011, except for changes in~~March 31, 2012. The following are current updates to certain critical accounting policy estimates and subsequent events of the ~~application of our accounting policies with respect to revenue recognition for the regulatory adjustment of income taxes paid~~Company, and to ~~expense recognition for pension costs under a regulatory deferred accounting order. For further discussion of these changes in significant accounting policies and the impact of new~~ accounting standards ~~see Note 2 below. We do not have any subsequent events to report.~~in general.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

2. ~~Significant~~Regulatory Accounting ~~Policies Update~~

~~Industry Regulation~~

In applying regulatory accounting principles in accordance with ~~U.S. GAAP,~~generally accepted accounting principles in the United States of America (U.S. GAAP), we capitalize or defer certain costs and revenues as regulatory assets and liabilities. At ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ and at December 31, ~~2010,~~2011, the amounts deferred as regulatory assets and liabilities were as follows:

	Regulatory Assets						Regulatory Assets
	September 30,		September 30,		December 31,		March 31,		March 31,		December 31,
Thousands	2011		2010		2010		2012		2011		2011
Current:
Unrealized loss on derivatives(1)	$	46,651	$	59,898	$	38,437	$	53,697	$	25,655	$	57,317
Pension and other postretirement benefit liabilities(2)		10,988		7,502		10,988		15,491		10,988		15,491
Other(3)		19,095		16,145		3,289		21,302		11,552		21,865
Total current	$	76,734	$	83,545	$	52,714	$	90,490	$	48,195	$	94,673
Non-current:
Unrealized loss on derivatives(1)	$	7,429	$	27,211	$	17,022	$	3,947	$	13,914	$	6,536
Income tax asset		70,241		75,515		72,341		63,452		70,241		65,264
Pension and other postretirement benefit liabilities(2)		110,007		104,327		118,248		166,639		115,490		170,512
Environmental costs(4)		122,454		111,931		114,311		112,297		117,544		105,670
Other(3)		18,626		20,802		26,975		22,186		28,263		23,410
Total non-current	$	328,757	$	339,786	$	348,897	$	368,521	$	345,452	$	371,392

	Regulatory Liabilities						Regulatory Liabilities
	September 30,		September 30,		December 31,		March 31,		March 31,		December 31,
Thousands	2011		2010		2010		2012		2011		2011
Current:
Gas costs payable	$	16,991	$	20,487	$	15,583
Gas costs							$	35,584	$	14,144	$	17,994
Unrealized gain on derivatives(1)		3,932		1,864		2,245		1,824		4,861		2,853
Other(3)		7,670		9,151		-		12,933		10,011		10,199
Total current	$	28,593	$	31,502	$	17,828	$	50,341	$	29,016	$	31,046
Non-current:
Gas costs payable	$	1,250	$	900	$	2,297
Gas costs							$	14,462	$	3,932	$	8,420
Unrealized gain on derivatives(1)		227		518		628		52		1,560		-
Accrued asset removal costs		263,123		248,920		252,941		270,837		256,203		267,355
Other(3)		2,307		2,087		2,165		2,780		2,181		2,607
Total non-current	$	266,907	$	252,425	$	258,031	$	288,131	$	263,876	$	278,382

(1)	Unrealized gain orand loss on derivatives does not earn a rate of return or a carrying charge. These amounts are recoverable through utility rates as part of the annual Purchased Gas Adjustment mechanism when realized at settlement.

(2)

Certain pension and other postretirement benefit liabilities of the utility are approved for regulatory deferral, including amounts recorded to the pension cost balancing account to ~~defer~~mitigate the effects of higher and lower pension expenses. Such deferred amounts ~~are recoverable in rates, including an interest component.~~earn a rate of return or carrying charge (see Note 8).

(3)	Other primarily consists of deferrals and amortizations under other approved regulatory mechanisms. The accounts being amortized typically earn a rate of return or carrying charge.

(4)

Environmental costs are related to ~~certain utility~~those sites that are approved for regulatory deferral. In Oregon, we earn ~~the utility’s authorized~~a rate of return ason amounts paid, whereas amounts accrued but not yet paid do not earn a ~~deferred~~rate of return or a carrying charge ~~on deferred account balances.~~until expended. Environmental costs related to Washington ~~are being~~were deferred ~~starting January 26,~~beginning in 2011, with cost recovery and carrying charge to be determined in a future proceeding.

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NORTHWEST NATURAL GAS COMPANY

PART I. FINANCIAL INFORMATION

~~Revenue Recognition~~Subsequent Events

~~Utility and non-utility revenues, which~~There are ~~derived primarily from the sale, transportation or storage of natural gas, are recognized upon the delivery of gas commodity or service~~no subsequent events to customers. Since 2007, utility net operating revenues also included the recognition of a regulatory adjustment for income taxes paid pursuant to a legislative rule (commonly referred to as SB 408) in effect for certain gas and electric utilities in Oregon. Under SB 408, we were required to automatically implement a rate refund, or a rate surcharge, to utility customers on an annual basis. The refund or surcharge amount was based on the difference between income taxes paid and income taxes authorized to be collected in customer rates. We recorded the refund, or surcharge, each quarter from 2007 through 2010 based on the annual amount to be recognized. However, on May 24, 2011, SB 408 was repealed and replaced by Senate Bill 967. SB 967 requires utilities to eliminate amounts accrued under SB 408report for the 2010 and 2011 tax years, thereby denying recovery by NW Natural of the surcharge related to 2010, which resulted in a one-time pre-tax charge of $7.4 million (or 17 cents per share) in the second quarter of 2011. With respect to 2011, there was substantial uncertainty surrounding the continuation of the legal requirements of SB 408 as ofperiod ended March 31, ~~2011, and accordingly, we changed our revenue recognition policy effective January 1, 2011 and did not record an accrual for the regulatory adjustment of income taxes paid pursuant to SB 408.~~

~~Pension Expense~~

Net periodic pension costs consist of service costs, interest costs, the expected returns on plan assets, and the amortization of actuarial gains and losses. Effective January 1, 2011, we began deferring a portion of our net periodic pension costs to a regulatory account on the balance sheet pursuant to Public Utility Commission of Oregon (OPUC) approval to defer certain pension expenses above or below the amount set in rates. As of September 30, 2011, the total amount deferred was $4.0 million. See Note 9 for further information.2012.

New Accounting Standards Update

Adopted Standards

~~Fair Value Disclosures.~~ In January 2010, the Financial Accounting Standards Board (FASB) issued authoritative guidance on new fair value measurements and disclosures. This guidance requires additional disclosures for fair value measurements that use significant assumptions not observable in active markets (i.e. level 3 valuations), including a roll-forward schedule. These changes were effective for periods beginning after December 15, 2010; however, we elected to early adopt these disclosure requirements, as shown in Note 9 in our 2010 Form 10-K. The adoption of this standard did not have a material effect on our financial statement disclosures.

~~Recent Accounting Pronouncements~~

~~Fair Value Measurement.~~ In May 2011, the FASB issued amendments to the authoritative guidance on fair value measurement. The amendments are primarily related to disclosure requirements, which go into effect for periods beginning after December 15, 2011. Early implementation is not allowed and we are currently assessing the impact on our financial statement disclosures.

Comprehensive Income.In June 2011, the FASB issued authoritative guidance on the presentation of comprehensive income within the financial statements. An entity can elect to present items of net income and other comprehensive income in one continuous ~~statement —~~ statement—referred to as the statement of comprehensive ~~income —~~ income—or in two separate, but consecutive, statements. These changes ~~are~~were effective for periods beginning after December 15, 2011. We ~~intend~~elected to present net income and other comprehensive income in one continuous statement, ~~starting January 1, 2012.~~“Consolidated Statements of Comprehensive Income.”

Multiemployer Pension Plans.In September 2011, the FASB issued authoritative guidance regarding multiemployer pension plan disclosures. The revised standard is intended to provide more information about an employer’s financial obligations to a multiemployer pension plan and, therefore, help financial statement users better understand the financial health of all significant plans in which the employer participates. ~~This standard is~~The updated guidance was effective for periods ~~ending~~beginning after December 15, 2011, and we elected to early adopted the guidance in our 2011 Form 10-K. Please see Note 9 in our 2011 Form 10-K for more detail.

Fair Value Measurement. In May 2011, the FASB issued amendments to the authoritative guidance on fair value measurement. The amendments are primarily related to disclosure requirements for Level 3 fair value assets and were effective for periods beginning after December 15, 2011. WeThe adoption of this standard did not have a material effect on our financial statement disclosures.

Recent Accounting Pronouncements

Balance Sheet Offsetting. In December 2011, the FASB issued authoritative guidance regarding the offsetting of assets and liabilities on the balance sheet. The revised standard is intended to provide more comparable guidance between the U.S. GAAP and international accounting standards by requiring entities to disclose both gross and net amounts for assets and liabilities offset on the balance sheet as well as other disclosures concerning their enforceable master netting arrangements. This guidance is effective for annual reporting periods beginning after January 1, 2013, and we are currently assessing the impact on our financial statement disclosures.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

3.	Earnings Per Share

Basic earnings per share are computed using the weighted average number of common shares outstanding ~~during~~for each period presented. Diluted earnings per share are computed using the weighted average number of common shares outstanding plus the potential effects of the assumed exercise of stock options, and payment of estimated stock awards from other stock-based compensation plans that are outstanding, at the end of each period presented. Diluted earnings per share are calculated as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
Thousands, except per share amounts 2011 2010 2011 2010
Net income (loss) $ (8,312 ) $ (7,420 ) $ 34,654 $ 43,076
Average common shares outstanding - basic 26,686 26,606 26,676 26,571
Additional shares for stock-based compensation plans - - 54 70
Average common shares outstanding - diluted 26,686 26,606 26,730 26,641
Earnings (loss) per share of common stock - basic $ (0.31 ) $ (0.28 ) $ 1.30 $ 1.62
Earnings (loss) per share of common stock - diluted $ (0.31 ) $ (0.28 ) $ 1.30 $ 1.62

For the three months ended September 30, 2011 and 2010, 63,263 and 76,088 common share equivalents, respectively, were excluded from the calculation of diluted earnings per share because the effect of these additional shares on the net loss for both periods would have been anti-dilutive. For the nine months ended September 30, 2011 and 2010, ~~3,436 and 427 common share equivalents, respectively, were excluded from the calculation of diluted earnings per share because the effect of these shares would have been anti-dilutive.~~

	Three Months Ended
	March 31,
Thousands, except per share amounts	2012		2011
Net income	$	40,607	$	40,773
Average common shares outstanding - basic		26,781		26,670
Additional shares for stock-based compensation plans(1)		81		54
Average common shares outstanding - diluted		26,862		26,724
Earnings per share of common stock - basic	$	1.52	$	1.53
Earnings per share of common stock - diluted	$	1.51	$	1.53
(1)Additional shares not included in diluted earnings per share calculation
because of antidilutive impact		1,010		2,150

4.	Segment Information

We operate in two primary reportable business segments, ~~local gas distribution~~which we refer to as “utility” and ~~gas~~“gas storage.” We also have other investments and business activities not specifically related to one of these two reporting segments, which we aggregate and report as “other.” We also refer to our ~~local~~ gas ~~distribution business as the “utility,”~~storage and ~~our “gas storage” and “other”~~other business segments as “non-utility.” Our gas storage segment ~~includes~~includes: NWN Gas Storage, which is a wholly-owned subsidiary of NWN ~~Energy,~~Energy; Gill Ranch, which is a wholly-owned subsidiary of NWN Gas ~~Storage,~~Storage; the non-utility portion of our ~~Mist~~ underground storage facility in Oregon (Mist); and revenues from third-party ~~optimization~~asset management services. Our ~~“other”~~other segment includes NNG Financial and our equity investment in PGH, which is pursuing development of the Palomar pipeline project. For the periods presented, intersegment transactions were insignificant. For further discussion of our segments, see Note 4 in our ~~2010~~2011 Form 10-K.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

The following table presents summary financial information about the reportable segments for the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012 and ~~2010. Inter-segment transactions were insignificant.~~2011:

	Three Months Ended September 30,													Three Months Ended March 31,
					Non-Utility											Non-Utility
Thousands		Utility				Gas Storage		Other			Total			Utility		Gas Storage		Other			Total
2011
2012
Net operating revenues		$	41,034			$	6,710	$	39		$	47,783		$	133,150	$	6,679	$	39		$	139,868
Depreciation and amortization			15,875				1,574		-			17,449			16,338		1,612		-			17,950
Income (loss) from operations			(8,029	)			2,458		19			(5,552	)
Net income (loss)			(9,518	)			1,160		46			(8,312	)
2010
Net operating revenues		$	41,258			$	4,906	$	47		$	46,211
Depreciation and amortization			15,668				335		-			16,003
Income (loss) from operations			(6,858	)			3,474		20			(3,364	)
Net income (loss)			(9,123	)			1,782		(79	)		(7,420	)

	Nine Months Ended September 30,
					Non-Utility
Thousands		Utility				Gas Storage		Other			Total
Income from operations															75,964		2,679		23			78,666
Net income															39,791		806		10			40,607
Total assets at March 31, 2012															2,424,583		286,756		15,923			2,727,262
2011
Net operating revenues		$	230,244			$	19,211	$	68		$	249,523		$	129,162	$	5,304	$	42		$	134,508
Depreciation and amortization			47,735				4,569		-			52,304			15,914		1,395		-			17,309
Income from operations			77,762				7,191		10			84,963			76,124		1,716		22			77,862
Net income (loss)			31,702				3,163		(211	)		34,654
Total assets at September 30, 2011			2,291,531				253,478		22,831			2,567,840
2010
Net operating revenues		$	233,670			$	15,523	$	137		$	249,330
Depreciation and amortization			46,925				1,005		-			47,930
Income from operations			85,995				11,910		59			97,964
Net income			36,410				6,405		261			43,076			40,130		688		(45	)		40,773
Total assets at September 30, 2010			2,192,557				266,022		22,798			2,481,377
Total assets at March 31, 2011															2,304,731		244,403		22,419			2,571,553

Total assets at December 31, 2010		$	2,310,388			$	282,945	$	23,283		$	2,616,616
Total assets at December 31, 2011														$	2,435,888	$	294,637	$	16,049		$	2,746,574

5.	Common Stock

We have a share repurchase program for our common stock under which we purchase shares on the open market or through privately negotiated transactions. We currently have Board authorization through May 2012 to repurchase up to an aggregate of 2.8 million shares, but not to exceed $~~100~~$100 million. No shares of common stock were repurchased pursuant to this program during the ~~nine~~three months ended ~~September 30, 2011.~~March 31, 2012. Since the plan’s inception in 2000, a total of 2.1 million shares have been repurchased at a total cost of $83.3 million.

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~~PART I. FINANCIAL INFORMATION~~

6.	Stock-Based Compensation

We have several stock-based compensation plans, including a Long-Term Incentive Plan (LTIP), a Restated Stock Option Plan (Restated SOP) and an Employee Stock Purchase Plan. These plans are designed to promote stock ownership in NW Natural by employees and officers. For additional information on our stock-based compensation plans, see ~~Part II, Item 8.,~~ Note 6, in the ~~2010~~2011 Form 10-K and current updates provided below.

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Long-Term Incentive ~~Plan.~~Plan

Performance-Based Stock Awards. On February ~~23, 2011, 37,950~~22, 2012, 35,340 performance-based shares were granted under the LTIP, which include a market condition, based on target-level awards and a weighted-average grant date fair value of ~~$25.25~~$53.92 per share. Fair value was estimated as of the date of grant using a Monte-Carlo option pricing model based on the following assumptions:

Stock price on valuation date	$	45.74		$	48.00
Performance term (in years)		3.0			3.0
Quarterly dividends paid per share	$	0.435		$	0.445
Expected dividend yield		3.7	%		3.6	%
Dividend discount factor		0.8930			0.9012

~~Restated~~Restricted Stock ~~Option Plan.~~Units. ~~On February 23, 2011, options to purchase 122,700 shares were granted under~~ A new form of restricted stock awards was approved by the Board in 2011. Restricted Stock Units (RSUs) are being used instead of the Restated SOP ~~with an exercise price~~beginning in February of 2012. The current LTIP allows for a variety of awards including RSUs to be granted. RSUs include a performance based threshold and a vesting period of four years from the grant date. An RSU obligates the Company upon vesting to issue the RSU holder one share of common stock plus a cash payment equal to the ~~closing market price~~total amount of ~~$45.74~~dividends paid per share onbetween the grant date and vesting date of ~~grant,~~ ~~vesting over~~the RSU. On February 22, 2012, RSUs totaling 21,720 were granted with a ~~four-year period following the date of grant and a term of 10 years and 7 days. The weighted-average~~ grant date fair value ~~was $6.73~~of $48.00 per share. ~~Fair value was estimated as of the date of grant using the Black-Scholes option pricing model based on the following assumptions:~~

~~Risk-free interest rate~~	~~2.0~~	%
~~Expected life (in years)~~	~~4.5~~
~~Expected market price volatility factor~~	~~24.5~~	%
~~Expected dividend yield~~	~~3.8~~	%
~~Forfeiture rate~~	~~3.1~~	%

Restated Stock Option Plan

As of ~~September 30, 2011,~~March 31, 2012, there was ~~$1.0~~$0.8 million of unrecognized compensation cost ~~related to the unvested portion~~from grants of ~~outstanding Restated SOP awards~~stock options in prior years, which is expected to be recognized over a period extending through 2014. No new stock options were granted in the three months ended March 31, 2012.

7.	Cost and Fair Value Basis of ~~Long-Term~~ Debt

~~New Issuance~~Cost and Fair Value of ~~Long-Term~~Short-Term Debt

~~On September 12, 2011, we issued $50 million~~Our short-term debt consists of ~~secured medium-term notes (MTNs)~~commercial paper and bank loans with an ~~interest rate of 3.176 percent and a~~average maturity date of ~~September 15, 2021.~~May 13, 2012 and an outstanding balance of $113.7 million as of March 31, 2012. The fair value of our commercial paper approximates the amortized cost using Level 2 inputs.

Cost of Long-Term Debt

Our utility’s long-term debt consists of secured ~~MTNs~~Medium Term Notes (MTNs) with maturity dates ranging from ~~2012~~2014 through 2035, interest rates ranging from 3.176 percent to 9.05 percent, and a weighted-average coupon rate of ~~5.93~~5.85 percent. ~~For~~During the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, we redeemed ~~$10~~$40 million of MTNs. ~~For more detail on our outstanding~~

Our gas storage segment’s long-term debt ~~see~~consists of $40 million of fixed and variable senior secured notes with a maturity date of November 30, 2016. The $20 million fixed portion of the debt has an interest rate of 7.75 percent, and the $20 million variable portion currently has an interest rate of 7.00 percent. See Note 7 in our ~~2010~~2011 Form 10-K ~~and new issuance of~~for more detail on long-term ~~debt above.~~debt.

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~~PART I. FINANCIAL INFORMATION~~

Fair Value of Long-Term Debt

As our outstanding debt does not trade in active markets, we used interest rates of other companies’ outstanding debt issuances that actively trade and have similar credit ratings, terms and remaining maturities to estimate the fair value of our long-term debt issuances. These inputs are significant other observable inputs, or Level 2 inputs, in the fair value hierarchy. The following table provides an estimate of the fair value of our long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date. Because our debt outstanding does not trade in active markets, we used interest rates of other companies outstanding debt issues that actively trade and have similar credit ratings, terms and remaining maturities to estimate fair value of our long-term debt issues. These are significant other observable inputs, or level 2 inputs, in the fair value hierarchy.date:

	September 30,				December 31,		March 31,				December 31,
Thousands	2011		2010		2010		2012		2011		2011
Carrying amount	$	641,700	$	636,700	$	601,700	$	641,700	$	601,700	$	681,700
Estimated fair value	$	774,186	$	740,731	$	690,126		742,852		680,436		808,724

8.	~~Comprehensive Income~~

Items excluded from net income and charged directly to stockholders’ equity are included in accumulated other comprehensive income (loss), net of tax. The amount of accumulated other comprehensive loss in stockholders’ equity is $6.2 million and $5.7 million as of September 30, 2011 and 2010, respectively, which is related to employee benefit plan liabilities. The following table provides a reconciliation of net income to total comprehensive income for the nine months ended September 30, 2011 and 2010.

Three Months Ended Nine Months Ended
September 30, September 30,
Thousands 2011 2010 2011 2010
Net income (loss) $ (8,312 ) $ (7,420 ) $ 34,654 $ 43,076
Amortization of employee benefit plan liability, net of tax 146 97 438 293
Total comprehensive income (loss) $ (8,166 ) $ (7,323 ) $ 35,092 $ 43,369

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9.	Pension and Other Postretirement Benefit Costs

The following tables provide the components of net periodic benefit cost for our company-sponsored qualified and non-qualified defined benefit pension plans and other postretirement benefit plans:

	Three Months Ended September 30,														Three Months Ended March 31,
								Other Postretirement													Other Postretirement
		Pension Benefits						Benefits							Pension Benefits						Benefits
Thousands		2011			2010			2011			2010				2012			2011			2012			2011
Service cost		$	1,839		$	1,435		$	168		$	156			$	2,130		$	1,899		$	177		$	168
Interest cost			4,503			4,517			344			343				4,304			4,527			314			344
Expected return on plan assets			(4,455	)		(4,528	)		-			-				(4,638	)		(4,456	)		-			-
Amortization of net actuarial loss			2,683			2,028			68			7				3,843			2,692			103			68
Amortization of prior service costs			88			(270	)		50			50				49			88			49			49
Amortization of transition obligations			-			-			103			103				-			-			103			103
Net periodic benefit cost			4,658			3,182			733			659				5,688			4,750			746			732
Amount allocated to construction			(1,279	)		(897	)		(234	)		(231	)			(1,418	)		(1,235	)		(214	)		(226	)
Amount deferred to regulatory balancing account(1)			(1,330	)		-			-			-				(2,068	)		(1,330	)		-			-
Net amount charged to expense		$	2,049		$	2,285		$	499		$	428			$	2,202		$	2,185		$	532		$	506

	Nine Months Ended September 30,
								Other Postretirement
		Pension Benefits						Benefits
Thousands			2011			2010			2011			2010
Service cost		$	5,638		$	4,981		$	504		$	468
Interest cost			13,556			13,500			1,031			1,028
Expected return on plan assets			(13,367	)		(13,655	)		-			-
Amortization of net actuarial loss			8,067			5,564			204			22
Amortization of prior service costs			264			140			148			148
Amortization of transition obligations			-			-			309			309
Net periodic benefit cost			14,158			10,530			2,196			1,975
Amount allocated to construction			(3,765	)		(2,797	)		(689	)		(646	)
Amount deferred to regulatory balancing account(1)			(3,989	)		-			-			-
Net amount charged to expense		$	6,404		$	7,733		$	1,507		$	1,329

(1) Effective January 1, 2011, the OPUC approved the deferral of certain pension expenses above or below the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which includes the expectation of lower pension expenses in future years. Our recovery of deferred pension expense balances includes accrued interest at the utility’s authorized rate of return.
(1) Effective January 1, 2011, the Oregon Public Utility Commission (OPUC) approved the deferral of certain pension expenses above or below the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which includes the expectation of lower pension expenses in future years. Deferred pension expense balances include accrued interest at the utility’s authorized rate of return.														(1) Effective January 1, 2011, the Oregon Public Utility Commission (OPUC) approved the deferral of certain pension expenses above or below the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which includes the expectation of lower pension expenses in future years. Deferred pension expense balances include accrued interest at the utility’s authorized rate of return.

~~See Part II, Item 8., Note 9, in the 2010 Form 10-K for more information about our pension~~Multiemployer and ~~other postretirement benefit plans.~~Defined Contribution Plans

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In addition to the company-sponsored defined benefit pension plans referred to above, ~~in accordance with our collective bargaining agreement,~~ we contribute to a multiemployer pension plan (EIN 94-6076144) for our utility’s bargaining unit employees, known as the Western States Office and Professional Employees ~~International Union~~ Pension Fund (Western States Plan)., and to defined contribution plans for utility and non-utility employees. The ~~cost~~costs of ~~this plan is~~these plans are in addition to pension expense in the table above. The Western States Plan is managed by a board of trustees that includes equal representation from participating employers and labor unions. Contribution rates are established by collective bargaining agreements, and benefit levels are set by the board of trustees based on the advice of an independent actuary regarding the level of benefits that agreed-uponOur contributions are expected to support. The Western States Plan has reported an accumulated funding deficit for the current plan year and remains in critical status. A plan is considered to be in critical status if its funded status is 65 percent or less. Federal law requires pension plans in critical status to adopt a rehabilitation plan designed to restore the financial health of the plan. Rehabilitation plans may specify benefit reductions, contribution surcharges, or a combination of the two. The Western States Plan trustees adopted a rehabilitation plan that reduced benefit accrual rates and adjustable benefits for active employee participants and increased future employer contribution rates. These changes are expected to improve the funding status of the plan. We made contributions totaling $0.3 million to the Western States Plan amounted to $0.1 million, and our contributions to the defined contribution plans amounted to $0.7 million and $0.8 million, for ~~both~~ the ~~nine~~three months ended ~~September 30,~~March 31, 2012 and 2011, and 2010. This amount includes the 10 percent contribution surcharge. Contribution surcharges above the current 10 percent rate will be assessed to employer participants, but these higher surcharges will not go into effect for NW Natural until its next collective bargaining agreement, which is expected to be no earlier than June 1, 2014.respectively. Under the terms of our current collective bargaining agreement, ~~which became effective in July 2009,~~ we can withdraw from the Western States Plan at any time. However, if we withdraw and the plan is underfunded, we could be assessed a withdrawal liability. ~~In accordance with accounting rules for multiemployer plans,~~Currently, we have made no decisions to withdraw from the plan. Accordingly, we have not currently recognized these potential withdrawal liabilities on the balance ~~sheet. Currently, we have no intent~~sheet pursuant to ~~withdraw from~~accounting rules for multiemployer plans. See Note 9, in the ~~plan, so we have not recorded a withdrawal liability.~~2011 Form 10-K for more information about these plans.

~~Employer Pension Contributions~~

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Employer Contributions to Company-Sponsored Defined Benefit Pension Plans

In the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, we made cash contributions totaling ~~$19.2~~$13.8 million to our qualified defined benefit pension plans. We also expect to make additional contributions of ~~up to $4~~approximately $14 million to these qualified plans over the last ~~three~~nine months of ~~2011,~~2012, plus we expect to make ongoing benefit payments under our unfunded, non-qualified pension plans and other postretirement benefit plans. ~~For more information see Part II, Item 8., Note 9, in the 2010 Form 10-K.~~

~~10.~~9. Income Tax

The effective income tax rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ varied from the combined federal and state statutory tax rates principally due to the following:

	September 30,						March 31,
	2011			2010			2012			2011
Federal statutory tax rate		35.0	%		35.0	%		35.0	%		35.0	%
Increase (decrease):
Current state income tax, net of federal tax benefit		4.5	%		4.8	%		4.6	%		4.6	%
Amortization of investment and energy tax credits		(0.4	) %		(0.4	) %		(0.3	) %		(0.4	) %
Differences required to be flowed-through by regulatory commissions		1.5	%		1.2	%		1.6	%		1.5	%
Gains on company and trust-owned life insurance		(0.9	) %		(0.8	) %		(0.4	) %		(0.2	) %
Other - net		0.7	%		0.5	%		0.2	%		0.1	%
Effective income tax rate		40.4	%		40.3	%		40.7	%		40.6	%

~~The increase in our effective tax rate for the nine months ended September 30, 2011 compared to the same period in 2010 was negligible.~~ See Note 10 in our ~~2010~~2011 Form ~~10-K.~~10-K for more detail on income taxes and effective tax rates.

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~~11.~~10.

Property, Plant and Equipment

The following table sets forth the major classifications of our property, plant and equipment and accumulated depreciation as of ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ and December 31, ~~2010:~~2011:

	September 30,				December 31,		March 31,				December 31,
Thousands	2011		2010		2010		2012		2011		2011
Utility plant in service	$	2,296,788	$	2,222,222	$	2,247,952	$	2,342,681	$	2,264,055	$	2,323,467
Utility construction work in progress		36,459		33,359		29,324		34,903		28,464		36,051
Less: Accumulated depreciation		740,378		700,193		710,214		760,566		720,134		749,603
Utility plant-net		1,592,869		1,555,388		1,567,062		1,617,018		1,572,385		1,609,915
Non-utility plant in service		290,075		66,299		290,038		297,164		292,089		293,205
Non-utility construction work in progress		9,176		206,823		9,088		5,789		8,945		8,379
Less: Accumulated depreciation		16,214		10,853		12,025		19,117		13,505		17,623
Non-utility plant-net	$	283,037	$	262,269	$	287,101	$	283,836	$	287,529	$	283,961

Total property, plant and equipment	$	1,875,906	$	1,817,657	$	1,854,163	$	1,900,854	$	1,859,914	$	1,893,876

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11. Gas Reserves and Other Investments

Our gas reserves are stated at cost, net of volumetric regulatory amortization, with the associated deferred tax benefits recorded as liabilities on the balance sheet. Other investments include financial investments in life insurance policies, which are accounted for at fair value, and equity investments in certain partnerships and limited liability companies, which are accounted for under the equity or cost methods. See ~~Part II, Item 8.,~~ Note 12 in the ~~2010~~2011 Form 10-K for more detail on our investments.

Gas Reserves

We entered into ~~an agreement~~agreements with Encana Oil & Gas (USA) Inc. (Encana) to develop and produce physical gas reserves that are expected to supply a portion of NW Natural’s utility customers’ requirements over ~~the next~~ 30 years. The volume of gas produced and allocated to NW Natural under the agreement will increase in the early years as we continue to invest in drilling, with volumes expected to peak at about 13 percent of our utility’s gas supply requirement in gas year 2015-2016. Over the first 10 years of the agreement (2011-2020), volumes are expected to average approximately 8 to 10 percent of the annual gas purchase requirements of our utility customers. Under the agreement, we expect to invest approximately $45 million to $55 million per year for five years, and our total investment is expected to be about $250 million.

Upon reviewing the transaction, the OPUC determined that our Company’s costs under the agreement will be recovered on an ongoing basis through its annual Purchased Gas Adjustment (PGA) mechanism, including the regulatory deferral and incentive sharing process for the commodity cost of gas. Annually, a forecast will be established for the amounts related to costs and volumes expected, and any variances between forecasted and actual will be subject to the PGA incentive sharing in Oregon, up to a maximum variance of $10 million of which 10 percent (or $1 million maximum) would be recognized in current income. Variances in excess of $10 million, both negative and positive, will be deferred and passed through to customers in future rates at 100 percent. As part of the decision by the OPUC, we agreed to file a general rate case in Oregon no later than December 31, 2011.

Encana began drilling in ~~May~~ 2011 under ~~our~~these agreements, and we are currently receiving gas from our interests in a section of the gas field. Our cost of gas and the carrying cost of the investment are included in our annual Oregon Purchased Gas Adjustment (PGA) filing and recovered through rates in a manner previously approved by the OPUC. This transaction accounted for approximately 2% of our gas supplies for the three month period ending March 31, 2012. The following table outlines our net investment at ~~September 30,~~March 31, 2012 and 2011 ~~is $20.4 million, with deferred taxes totaling $10.1 million.~~and December 31, 2011:

	March 31,				December 31,
Thousands	2012		2011		2011
Gas reserves, current	$	6,732	$	-	$	4,463
Gas reserves, non-current		63,546		-		48,597
Less: Accumulated amortization		2,440		-		1,146
Total gas reserves		67,838		-		51,914

Less: Deferred taxes on gas reserves		22,047		-		15,630

Net investment in gas reserves	$	45,791	$	-	$	36,284

Variable Interest Entity (VIE) Analysis. We concluded that the arrangements with Encana qualify as a VIE, but that we are not the primary beneficiary of these activities as defined by the authoritative guidance related to consolidations. We account for our investment in the VIE on the cost basis and it is included under gas reserves on our balance sheet. Our maximum loss exposure related to the VIE is limited to our investment balance.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

Palomar

PGH is a development stage variable interest entity. Palomar, a wholly-owned subsidiary of PGH, is pursuing the development of a new gas transmission pipeline that would provide an interconnection with our utility distribution system. PGH is owned 50 percent by NWN Energy and 50 percent by TransCanada American Investments Ltd., an indirect wholly-owned subsidiary of TransCanada Corporation.

Variable Interest Entity Analysis. As of ~~September 30, 2011,~~March 31, 2012, we updated our VIE analysis and ~~determined~~reconfirmed that we are not the primary beneficiary of PGH’s activities as defined by the authoritative guidance related to ~~consolidations.~~consolidations due to the fact that we have a 50 percent share and there are no stipulations that allow disproportionate influence over the entity. Therefore, we account for our investment in PGH and the Palomar project under the equity method, which is included in other investments on our balance sheet. Our maximum loss exposure related to PGH is limited to our equity investment balance, less our share of any cash or other assets available to us as a 50 percent owner.

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Impairment Analysis. Our investments in nonconsolidated entities accounted for under the equity method, including Palomar, are reviewed for impairment ~~when circumstances or events indicate a potential loss in value may have occurred,~~at each reporting period, and ~~on an annual basis~~ following updates to our corporate planning assumptions. When it is determined that a loss in value is other than temporary, ~~an impairment~~a charge is recognized for the difference between the investment’s carrying value and its estimated fair value. Fair value is based on quoted market prices when available, or on the present value of expected ~~discounted~~ future cash flows. Differing assumptions could affect the timing and amount of ~~an impairment~~a charge recorded in any period. There have been no significant changes in carrying value or estimated fair value since year end.

~~Earlier~~Our investment balance in ~~2011, our investment in PGH~~Palomar was ~~reviewed for impairment when~~$13.5 million at March 31, 2012, which consists of costs related to the east segment. We are continuing to work on development of commercial support and Palomar ~~withdrew its original application with the~~expects to file a new Federal Energy Regulatory Commission (FERC) for a proposed natural gas pipeline in Oregon. At the same time, Palomar informed FERC that it intended to re-file an application later this year or in 2012 to reflect changes in the project scope, which was expected to eliminate the western portion of the proposed pipeline and align the revised project with the region’s current and future gas infrastructure needs. Palomar is working with customers in the Pacific Northwest to further understand their gas transportation needs and determine the commercial support for a revised pipeline proposal. We expect to file a new FERC certificatecertification application to reflect a revised scope based on regional ~~needs.~~

~~During~~needs for the ~~second quarter of 2011, we re-evaluated our equity investment in Palomar assets related to the western portion~~eastern segment of the proposed Palomar pipeline ~~and determined that these costs were impaired, and as a result we recorded a pre-tax charge of $0.3 million for our share of the~~ project. Our remaining investment balance in Palomar consists of costs related to the east zone, of which the investment balance at September 30, 2011 is $14.4 million. We continue to review the east zone costs for impairment based on the current status of the project, including Palomar’s plans to conduct an open season and re-file a revised application with FERC thereafter. Based on our current review, we determined that our remaining equity investment was not impaired because the fair value of expected cash flows from planned development of the eastern portion of the pipeline project exceeds our equity investment. However, if we learn later that the project is not viable or will not go forward, ~~then~~ we could be required to recognize a maximum ~~impairment~~ charge of up to approximately ~~$14.1~~$13.2 million based on the current amount of our equity investment net of cash and working capital at Palomar. We will continue to monitor and update our impairment analysis as ~~needed.~~required. See Note 12 in our 2011 Form 10-K for more detail on Palomar and our annual impairment analysis.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

~~13.~~12.

Derivative Instruments

We enter into swap, option and combinations of option contracts for the purpose of hedging natural gas. We primarily use these derivative financial instruments to manage commodity prices related to our natural gas purchase requirements. A small portion of our derivative hedging strategy involves foreign currency exchange transactions related to purchases onof natural gas from Canadian suppliers.

In the normal course of business, we enter into indexed-price physical forward natural gas commodity purchase (gas supply) contracts to meet the requirements of core utility customers. We also enter into financial derivatives, up to prescribed limits, to hedge price variability related to these physical gas supply contracts. Derivatives entered into prudently for future gas years prior to our annual PGA filing receive regulatory deferred accounting treatment. Derivative contracts entered into after the annual PGA rate is set for the current gas contract year are subject to our PGA incentive sharing mechanism, which provides for either an 80 or a 90 percent deferral of any gains and losses as regulatory assets or liabilities, with the remaining 10 or 20 percent recognized in current income. All of our commodity hedging for the 2011-12 gas year was completed prior to the start of the gas year, and these hedge prices were included in our PGA filing.

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The following table reflects the income statement presentation for the unrealized gains and losses from our derivative instruments for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 and ~~2010.~~2011. All of our currently outstanding derivative instruments are related to regulated utility operations as illustrated by the derivative gains and losses being deferred to balance sheet accounts in accordance with regulatory accounting standards.

		Three Months Ended								Three Months Ended
		September 30, 2011				September 30, 2010				March 31, 2012							March 31, 2011
Thousands	Thousands		Natural gas commodity(1)		Foreign currency (2)		Natural gas commodity(1)		Foreign currency (2)		Natural gas commodity (1)			Foreign currency (2)				Natural gas commodity (1)			Foreign currency (2)
Cost of sales	Cost of sales	$	(18,987)	$	-	$	(35,744)	$	-		$	(55,894	)	$	-			$	(33,750	)	$	-
Other comprehensive income (loss)			-		(1,221)		-		449
Other comprehensive income												-			126				-			602
Less:	Less:
Amounts deferred to regulatory accounts on balance sheet	Amounts deferred to regulatory accounts on balance sheet		18,987		1,221		35,744		(449)			55,894			(126	)			33,750			(602	)
Total impact on earnings											$	-		$	-			$	-		$	-
	Total impact on earnings	$	-	$	-	$	-	$	-

		Nine Months Ended
		September 30, 2011				September 30, 2010
Thousands			Natural gas commodity(1)		Foreign currency (2)		Natural gas commodity(1)		Foreign currency (2)
Cost of sales		$	(49,106)	$	-	$	(84,837)	$	-
Other comprehensive income (loss)			-		(815)		-		110
Less:
Amounts deferred to regulatory accounts on balance sheet			49,106		815		84,837		(110)
	Total impact on earnings	$	-	$	-	$	-	$	-

(1)	Unrealized gain (loss) from natural gas commodity hedge contracts is recorded in cost of sales and reclassified to regulatory deferral accounts on the balance sheet.
(2)	Unrealized gain (loss) from foreign currency exchange contracts is recorded in other comprehensive income, and reclassified to regulatory deferral accounts on the balance sheet.
(1) Unrealized gain (loss) from natural gas commodity hedge contracts is recorded in cost of sales and reclassified to regulatory deferral accounts on the balance sheet.										(1) Unrealized gain (loss) from natural gas commodity hedge contracts is recorded in cost of sales and reclassified to regulatory deferral accounts on the balance sheet.
(2) Unrealized gain (loss) from foreign currency exchange contracts is recorded in other comprehensive income, and reclassified to regulatory deferral accounts on the balance sheet.										(2) Unrealized gain (loss) from foreign currency exchange contracts is recorded in other comprehensive income, and reclassified to regulatory deferral accounts on the balance sheet.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

No collateral was posted with or by our counterparties as of ~~September 30, 2011~~March 31, 2012 or ~~2010.~~2011. 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 diversification, we have not been subject to collateral calls in ~~2010~~2011 or ~~2011.~~2012. 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 upon current contracts outstanding, which reflect unrealized losses of ~~$49.9~~$55.8 million at ~~September 30, 2011,~~March 31, 2012, we have estimated the level of collateral demands, with and without potential adequate assurance calls, using current gas prices and various downgrade credit rating scenarios for NW Natural as follows:

			Credit Rating Downgrade Scenarios										Credit Rating Downgrade Scenarios
Thousands	(Current Ratings) A+/A3		BBB+/Baa1		BBB/Baa2		BBB-/Baa3		Speculative		(Current Ratings) A+/A3		BBB+/Baa1		BBB/Baa2		BBB-/Baa3		Speculative
With Adequate Assurance Calls	$	-	$	-	$	-	$	5,609	$	37,171	$	-	$	-	$	12,785	$	6,805	$	40,441
Without Adequate Assurance Calls	$	-	$	-	$	-	$	4,581	$	31,143	$	-	$	-	$	-	$	4,292	$	32,928

In the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011, we realized net losses of ~~$6.6~~$29.4 million and ~~$36.2~~$20.9 million, respectively, from the settlement of natural gas hedge contracts at maturity, which were recorded as increases to the cost of ~~gas, compared to net losses of $12.6 million and $33.3 million, respectively, for the three and nine months ended September 30, 2010.~~gas. The exchange rate in all foreign currency forward purchase contracts is included in our purchased cost of gas at settlement; therefore, no gain or loss is recorded from the settlement of those contracts.

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 our natural gas purchases made on behalf of our customers. For more information on our derivative instruments, see Note 13 in our ~~2010~~2011 Form 10-K.

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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. ~~Our~~The inputs in our valuation techniques 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, 2011.~~March 31, 2012. As of ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ and December 31, ~~2010,~~2011, the fair value was ~~$49.9~~a liability of $55.8 million, ~~$84.7~~$33.1 million and $~~52.6~~$61.0 million, respectively, using significant other observable, or ~~level~~Level 2, inputs. We have used no ~~level~~Level 3 inputs in our derivative valuations. We also did not have any transfers between ~~level~~Level 1 or ~~level~~Level 2 during the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 and ~~2010.~~2011.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

~~14.~~13.

Commitments and Contingencies

Environmental Matters

We own, or previously owned, properties that may require environmental remediation or action. We accrue all material loss contingencies relating to these properties that we believe to be probable of assertion and reasonably estimable. We continue to study and evaluate the extent of our potential environmental liabilities, but due to the numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of several site investigations, in some cases, we may not be able to reasonably estimate the high end of the range of possible loss. In those cases we have disclosed the nature of the potential loss and the fact that the high end of the range cannot be reasonably estimated.

We regularly review our environmental liability for each site where we may be exposed to remediation ~~responsibilities. The~~responsibilities, but the costs ~~of environmental remediation~~ are difficult to estimate. A number of steps are involved in each environmental remediation effort, including site investigations, remediation, operations and maintenance, monitoring and site closure. Site investigations and remediation efforts often develop slowly over many years. Each of these steps may, over time, involve a number of alternative actions, each of which can change the course and scope of the ~~effort.~~effort and ultimately also the cost. Many of these steps are dependent upon the approval and direction of federal and state environmental ~~regulators. The~~regulators whose policies, determinations and directions ~~of the regulators~~ may ~~develop and~~ change over time ~~and different regulators may take different positions on the various steps,~~ creating further uncertainty as to the timing and scope of remediation activities. In certain cases ~~in addition to us,~~ there are a number of other potentially responsible parties in addition to us, each of which ~~in proceedings and negotiations with other potentially responsible parties and regulators,~~ may influence the course and scope of the remediation effort. The allocation of liabilities among the potentially responsible parties is ~~often~~ subject to dispute and can be highly uncertain. The events giving rise to environmental liabilities often occurred many decades ago, which complicates the determination of allocating liabilities among potentially responsible parties. Site investigations and remediation efforts often develop slowly over many years. In addition, disputes may arise between potentially responsible parties and regulators asuncertainty at this time with respect to the ~~severity of particular environmental matters and what remediation efforts are appropriate.~~sites noted below. These disputes could lead to adversarial administrative proceedings or litigation, with uncertain outcomes.

We estimate the range of loss for environmental liabilities using current technology, enacted laws and regulations, industry experience gained at similar sites and an assessment of the probable level of involvement and financial condition of other potentially responsible parties. Unless there is an estimate within a range of possible losses that is more likely than other cost estimates within that range, we record the liability at the lower end of this range. It is likely that changes in these estimates and ranges will occur throughout the remediation process for each of these sites due to uncertainty concerning our responsibility, the complexity of environmental laws and regulations and the ~~selection~~determination by regulators of ~~compliance~~remediation alternatives. The status of each of the sites currently under investigation is provided below.

Portland Harbor site. In 1998, the Oregon Department of Environmental Quality (ODEQ) and the Environmental Protection Agency (EPA) completed a study of sediments in a 5.5-mile segment of the Willamette River (Portland Harbor). Since then, EPA has extended the Portland Harbor site to approximately 11 miles of the Willamette River. The Portland Harbor site is adjacent to two upland sites owned by NW Natural that are discussed below as the Gasco upland and Siltronic upland sites. The Portland Harbor was listed by the EPA as a Superfund site in 2000, and we were notified that we are a potentially responsible party. We then joined with other potentially responsible parties (the Lower Willamette Group or LWG) to fund the Portland Harbor Remedial Investigation/Feasibility Study (RI/FS). The LWG submitted the draft Final Portland Harbor Remedial Investigation to EPA in 2011. The LWG submitted the draft Feasibility Study (FS) to EPA in March 2012. The EPA will use the information in the RI/FS to select a cleanup plan for the Portland Harbor Superfund Site. The draft FS provides a range of remedial costs for the entire Portland Harbor Superfund Site, which includes the Gasco/Siltronic Sediment site, discussed below. The range of costs estimated for various remedial alternatives for the entire Portland Harbor, as provided in the draft FS, is $169 million to $1.8 billion. NW Natural's potential liability is a portion of the costs of the remedy EPA ultimately selects for the entire Portland Harbor Superfund site. The costs of that remedy is expected to be allocated among more than 100 potentially responsible parties. NW Natural is participating in a non-binding allocation process in an effort to settle this potential liability.

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Gasco/Siltronic Sediments. In 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with EPA to evaluate and design specific remedies for sediments adjacent to the Gasco upland and Siltronic upland sites, discussed below. The Gasco/Siltronic Sediments is part of the Portland Harbor Superfund site. NW Natural intends to submit a draft Engineering Evaluation/Cost Analysis (EE/CA) to the EPA in May 2012 to provide the estimated cost of potential remedial alternatives for this site. The EE/CA will provide a variety of remedial alternatives for the sediments at this site. The alternatives provided in the EE/CA are based on EPA requirements to develop costs for the various remedies described therein. At this time, the estimated costs for the various sediment remedy alternatives in the draft EE/CA range from $34 million to $350 million. After the EPA determines an appropriate alternative from the EE/CA, a remedial design will be produced. We have recorded a liability of $34.0 million for the sediment clean-up, which reflects the low end of the EE/CA range. We have recorded an additional liability of $12.1 million for the additional studies and design work needed before the clean-up can occur, and for regulatory oversight through the clean-up. At this time, we believe the sediments at this site represent the largest portion of our liability related to the Portland Harbor site, discussed above. We accrued at the low end because no amount within the range is considered to be more likely than another.

Portland Harbor RI/FS and natural resource damage claims. NW Natural incurs costs related to our membership in the Lower Willamette Group which is performing the RI/FS for EPA. NW Natural also incurs costs related to natural resource damages. In 2008, the Portland Harbor Natural Resource Trustee Council advised a number of potentially responsible parties that it intended to pursue natural resource damage claims at the Portland Harbor Superfund Site. The Company and other parties have signed a cooperative agreement with the Natural Resource Trustees to participate in a phased natural resource damage assessment to estimate liabilities to support an early restoration-based settlement of natural resource damage claims. As of March 31, 2012, we have an accrued liability of $4.9 million for these claims, which is at the low end of the range of the potential liability because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated at this time. This liability is not included in the range of costs provided in the draft FS for the Portland Harbor.

Gasco upland site. We own property in Multnomah County, Oregon that is the site of a former gas manufacturing plant that was closed in 1956 (Gasco site). The Gasco upland site is adjacent to the Portland Harbor site described above and has been under investigation by us for environmental contamination under the ~~Oregon Department of Environmental Quality’s (ODEQ)~~ODEQ Voluntary Clean-Up Program. It is not included in the range of remedial costs for the Portland Harbor site. In June 2003, we filed a Feasibility Scoping Plan which outlined a range of remedial alternatives for the most contaminated portion of the Gasco upland site. In December 2004, we submitted an Ecological and Human Health Risk Assessment to ODEQ, and in May 2007 we completed a revised Remedial Investigation Report and submitted it to ODEQ for review. The liability accrued at March 31, 2012 for the Gasco upland site is $9.3 million, which is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated.

In 2007, we also submitted a Focused Feasibility Study (FFS) for the groundwater source control portion of the Gasco site, which ODEQ conditionally approved in March 2008, subject to the submission of additional information. We provided that information to ODEQ and are now working with the agency on the final design for the source control system. Based on the information currently available for groundwater source control at the Gasco site and our current assumptions regarding remediation, we have estimated a range of liability between $11 million and $30 million, for which we have recorded an accrued liability of ~~$11.8~~$11.6 million at ~~September 30, 2011.~~March 31, 2012. The estimated range of liability will be reassessed when ODEQ makes a final source control design decision.

~~In addition to groundwater source control, we signed a joint Order on Consent with the Environmental Protection Agency (EPA), which requires the design~~Table of remedial action for sediments from the Gasco site. This design project is underway. For the sediments project and the other investigation and clean-up work, we have recorded an additional accrued liability of $36.6 million, which reflects the low end of the range of potential liability. We accrued at the low end because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated.Contents

Siltronic upland site. We previously owned property adjacent to the Gasco site that now is the location of a manufacturing plant owned by Siltronic Corporation (the Siltronic upland site). The Siltronic upland site is also adjacent to the Portland Harbor site, but not included in the range of remedial costs for the Portland Harbor site. We are currently conducting an investigation of manufactured gas plant wastes on the uplands at this site for the ODEQ. The liability accrued at ~~September 30, 2011~~March 31, 2012 for the Siltronic site is ~~$0.8~~$1.1 million, which is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

~~Portland Harbor site.~~ In 1998, the ODEQ and the EPA completed a study of sediments in a 5.5-mile segment of the Willamette River (Portland Harbor) that includes an area adjacent to the Gasco and Siltronic sites. The Portland Harbor was listed by the EPA as a Superfund site in 2000 and we were notified that we are a potentially responsible party. We then joined with other potentially responsible parties (Lower Willamette Group), to fund environmental studies in the Portland Harbor. Subsequently, the EPA approved a Programmatic Work Plan, Field Sampling Plan and Quality Assurance Project Plan for the Portland Harbor Remedial Investigation/Feasibility Study (RI/FS) under the plan. The draft FS is scheduled for submittal in 2012. In August 2008, we signed a cooperative agreement to participate in a phased natural resource damage assessment, with the intent to identify what, if any, other information is necessary to estimate additional liabilities to support an early restoration-based settlement of natural resource damage claims. As of September 30, 2011, we have an accrued liability of $7.3 million for this site, which is at the low end of the range of the potential liability because no amount within the range is considered to be more likely than another, and the high end of the range cannot reasonably be estimated.

Central Service Center site. In 2006, we received notice from the ODEQ that our Central Service Center in southeast Portland (Central Service Center site) was assigned a high priority for further environmental investigation. Previously there were three manufactured gas storage tanks on the premises. The ODEQ believes there could be site contamination associated with releases of condensate from stored manufactured gas as a result of historic gas handling practices. In the early 1990s, we excavated waste piles and much of the contaminated surface soils and removed accessible waste from some of the abandoned piping. In early 2008, we received notice that this site was added to the ODEQ’s list of sites ~~where~~in which releases of hazardous substances have been ~~confirmed and~~confirmed. ODEC has also added this site to its list of sites where ~~additional investigation or~~ cleanup is necessary. We are currently performing an environmental investigation of the property under the ODEQ’s Independent Cleanup Pathway. As of ~~September 30, 2011,~~March 31, 2012, we have a liability accrued of ~~$0.5~~$0.4 million for investigation at this site. The estimate is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another and the high end of the range cannot reasonably be estimated.

Front Street site. The Front Street site was the former location of a gas manufacturing plant we operated. It is near but outside the geographic scope of the current Portland Harbor site sediment studies. The EPA directed the Lower Willamette Group to collect a series of surface and subsurface sediment samples off the river bank adjacent to where that facility was located. Based on the results of that sampling, the EPA notified the Lower Willamette Group that additional sampling would be required. As the Front Street site is upstream from the Portland Harbor site, the EPA agreed that it could be managed separately from the Portland Harbor site under ODEQ authority. Work plans for source control investigation and a historical report were submitted to ODEQ and initial studies were completed. In 2010, ODEQ required additional studies which are underway. As of ~~September 30, 2011,~~March 31, 2012, we have an estimated liability accrued of ~~$0.8~~$1.5 million for the study of the sediments and riverbank groundwater and soils at the site. The estimate is at the low end of the range of potential liability because no amount within the range is considered to be more likely than another and the high end of the range cannot reasonably be estimated.

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

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Accrued Liabilities Relating to Environmental Sites. The following table summarizes the accrued liabilities relating to environmental sites at ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ and December 31, ~~2010:~~2011:

	Current Liabilities						Non-Current Liabilities						Current Liabilities						Non-Current Liabilities
	Sept. 30,		Sept. 30,		Dec. 31,		Sept. 30,		Sept. 30,		Dec. 31,		Mar. 31,		Mar. 31,		Dec. 31,		Mar. 31,		Mar. 31,		Dec. 31,
Thousands	2011		2010		2010		2011		2010		2010		2012		2011		2011		2012		2011		2011
Portland Harbor site:
Gasco/Siltronic Sediments													$	2,459	$	1,049	$	1,614	$	43,655	$	29,996	$	35,797
Other Portland Harbor														1,400		2,314		1,893		3,547		5,829		7,066
Gasco site	$	10,389	$	7,738	$	11,366	$	38,051	$	43,597	$	38,921		13,197		12,574		14,092		7,689		6,103		8,900
Siltronic site		721		746		720		114		275		201
Portland Harbor site		2,174		2,712		2,304		5,122		5,594		5,784
Siltronic upland site														478		730		887		588		291		128
Central Service Center site		5		5		5		530		510		510		-		5		-		424		501		495
Front Street site		-		72		1		765		1,039		1,097		1,131		-		1,697		395		947		-
Other sites		-		-		-		129		110		108		-		-		-		116		117		120
Total	$	13,289	$	11,273	$	14,396	$	44,711	$	51,125	$	46,621	$	18,665	$	16,672	$	20,183	$	56,414	$	43,784	$	52,506

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

Regulatory and Insurance Recovery for Environmental Costs. In May 2003, the OPUC approved our request to defer unreimbursed environmental costs associated with certain named sites, including those described above. Beginning in 2006, the OPUC granted us additional authorization to accrue interest on deferred environmental cost balances, subject to an annual demonstration that we have maximized our insurance recovery or made substantial progress in securing insurance recovery for unrecovered environmental expenses. Through a series of extensions, the authorized cost deferral and interest accrual has been extended through January ~~2012.~~2013. In addition, ~~we filed a request with~~beginning in 2011, the Washington Utilities and Transportation Commission (WUTC) ~~in January 2011 to defer~~authorized the deferral of certain environmental costs associated with services provided to Washington customers. ~~We received an order from the WUTC on June 30, 2011 granting that request.~~ Environmental costs related to Washington are being deferred as of January 26, 2011 with cost recovery to be determined in a future proceeding.

On a cumulative basis, we have recognized a total of ~~$107.7~~$129.7 million for environmental costs, including legal, investigation, monitoring and remediation costs, and $4.9 million paid and expensed prior to regulatory deferral order approval. At ~~September 30, 2011,~~March 31, 2012, we had a regulatory asset of ~~$122.5 million, which includes $51.8 million of total paid expenditures to date, $~~58 million for additional environmental costs expected to be paid in the future and accrued interest of $18.1 million, partially offset by $5.4 million of environmental costs expensed in prior years. See table below.$112.3 million.

In December 2010, NW Natural commenced litigation against certain of its historical liability insurers in Multnomah County Circuit Court, State of Oregon Case Number 1012-17532. The defendants include Associated Electric & Gas Insurance Services Limited, Allianz Global Risk US Insurance Company, Certain Underwriters at Lloyd's, London, certain London market insurance companies and other insurance companies. In(see Item 3. Legal Proceedings in the suit, NW Natural alleges that the defendant insurance companies issued third party liability insurance policies to NW Natural and that the defendants have breached the terms of those policies by failing to indemnify NW Natural for liabilities arising from environmental contamination at certain sites caused or alleged to be caused by its historical operations.2011 Form 10-K). NW Natural seeks damages ~~for the~~in excess of $50 million in losses it has incurred to date, as well as declaratory relief for additional losses it expects to incur in the future. In ~~addition to seeking recovery of our environmental costs from our insurers, we believe recovery of~~December 2011, NW Natural reached a settlement with Associated Electric and Gas Insurance Services Limited and dismissed its claims against that insurer in the remainder of our deferred charges, if any, is probable through the regulatory process. Our regulatory asset will be reduced by the amount of any corresponding insurance recoveries. We continue to anticipate that our overall insurance recovery effort could extend over several years, and may include settlements from time to time with one or more of the defendant insurance companies.litigation.

Our regulatory recovery of environmental cost deferrals may be initiated inwhen rates go into effect for the Oregon general rate case; however, ~~we do not expect to have concluded our~~because the rate case proceeding is ongoing, and because the ultimate amounts collected will depend upon future insurance ~~recovery efforts by that point, so~~recoveries and future expenditures, we are not currently able to estimate the amount of recovery expected through the implementation of new rates from the upcoming general rate proceeding. The following table summarizes the non-current regulatory assets relating to environmental sites at September 30, 2011 and 2010 and December 31, 2010:

Non-Current Regulatory Assets
September 30, September 30, December 31,
Thousands 2011 2010 2010
Gasco site $ 79,823 $ 72,531 $ 74,205
Siltronic site 3,535 3,120 3,174
Portland Harbor site 35,889 33,316 33,940
Central Service Center site 610 551 553
Front Street site 2,130 2,000 2,020
Other sites 467 413 420
Total $ 122,454 $ 111,931 $ 114,312
rates.

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~~NORTHWEST NATURAL GAS COMPANY~~

~~PART I. FINANCIAL INFORMATION~~

Legal Proceedings

We are subject to claims and litigation arising in the ordinary course of business. Although the final outcome of any of these legal proceedings cannot be predicted with certainty, including the matter described below, we do not expect that the ultimate disposition of any of these matters will have a material effect on our financial condition, results of operations or cash flows as we would expect to receive insurance recovery or rate recovery.

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

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

The following is management’s assessment of Northwest Natural Gas Company’s (NW Natural) financial condition, including the principal factors that affect results of operations. The disclosures contained in this report refer to our consolidated activities for the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012 and ~~2010.~~2011. Unless otherwise indicated, references below to “Notes” are to the Notes to Consolidated Financial Statements in this report. A significant portion of our business results are seasonal in nature, and as such the results of operations for ~~the~~this three ~~and nine~~ month ~~periods~~period are not necessarily indicative of expected fiscal year results. Therefore, this discussion should be read in conjunction with our ~~2010~~2011 Annual Report on Form 10-K ~~(2010~~(2011 Form 10-K) as well as our Quarterly Reports on Form 10-Q for the first and second quarters of 2011. Unless otherwise indicated, references below to “Notes” are to the Notes to Consolidated Financial Statements in this report..

The consolidated financial statements include the accounts of NW Natural and its direct and indirect wholly-owned subsidiaries which include: ~~Gill Ranch Storage, LLC (Gill Ranch),~~ NW Natural Energy, LLC (NWN Energy), NW Natural Gas Storage, LLC (NWN Gas Storage), Gill Ranch Storage, LLC (Gill Ranch) and NNG Financial Corporation (NNG Financial). These statements also include accounts related to our equity investment in Palomar Gas Holdings, LLC (PGH), which is pursuing the development of a proposed natural gas pipeline through its wholly-owned subsidiary Palomar Gas Transmission LLC (Palomar). These accounts make up our regulated local gas distribution business, our regulated gas storage businesses, and other regulated and non-regulated investments primarily engaged in energy-related businesses. In this report, the term “utility” is used to describe our regulated gas distribution business (local distribution company), and the term “non-utility” is used to describe our regulated gas storage businesses (gas storage) as well as our other regulated and non-regulated investments and business activities (other). For a further ~~discussion of~~information on our business segments, see Note 4.

In addition to presenting results of operations and earnings amounts in total, certain financial measures are expressed in cents per share. These amounts reflect factors that directly impact earnings. We believe this per share information is useful because it enables readers to better understand the impact of these factors on consolidated earnings. All references in this section to earnings per share are on the basis of diluted shares (see Part II, Item 8., Note 3, “Earnings Per Share,” in our ~~2010~~2011 Form 10-K). We use such non-GAAP measures (i.e. ~~non-generally~~measures not based on generally accepted accounting principles) ~~measures~~ in analyzing our financial performance and believe that they provide useful information to our investors and creditors in evaluating our financial condition and results of operations.

Executive Summary

Highlights of consolidated results for the ~~third~~first quarter of ~~2011~~2012 as compared to the same period in ~~2010~~2011 include:

·	Consolidated ~~earnings decreased $0.9 million, from a~~ net ~~loss~~income of ~~$7.4~~$40.6 million or ~~28 cents~~$1.51 per share in the ~~third~~first quarter of ~~2010~~2012, as compared to ~~a net loss of $8.3~~$40.8 million or ~~31 cents per share~~$1.53 in the ~~third~~first quarter of 2011;

·	Net ~~loss~~income from utility operations ~~increased $0.4~~decreased $0.3 million, from ~~$9.1~~$40.1 million in ~~2010~~2011 to ~~$9.5~~$39.8 million in ~~2011;~~2012;

·	Net income from gas storage operations ~~decreased $0.6~~increased $0.1 million, from ~~$1.8 million in 2010 to $1.2~~$0.7 million in 2011 ~~primarily reflecting current market values for contract storage and optimization services;~~to $0.8 million in 2012;

·	Net operating revenues (margin) increased ~~$1.6~~$5.4 million or 34 percent over ~~2010,~~2011, with utility margin ~~down $0.2~~up $4.0 million and gas storage margin up ~~$1.8~~$1.4 million;

·	Operating expenses increased ~~$3.8~~$4.6 million or 8 percent over ~~2010,~~2011, primarily due to ~~increases attributed to Gill Ranch’s first-year expenses for~~higher operations and maintenance ~~depreciation~~expense and ~~amortization;~~higher general tax expense;

·	~~Income tax benefit~~Interest expense increased ~~$0.5~~$0.7 million inor 7 percent over 2011 ~~compared to 2010, primarily~~ due to ~~a higher pre-tax loss;~~senior secured notes issued by Gill Ranch late in 2011;

·	Cash flow from operating activities ~~on a year-to-date basis~~ was ~~$191.3~~$114.1 million, ~~for~~ an increase of ~~$76.8~~$6.0 million or 676 percent over the same ~~year-to-date~~ period in ~~2010;~~2011;

·	Utility customers increased by approximately ~~5,400~~5,300 over the last 12 months, for an annual growth rate of 0.8 percent compared to ~~slightly above 1~~0.9 percent a year ~~ago.~~ago; and

·	NW Natural was ranked as the top gas utility in the West, and second highest in the nation, in the 2012 J.D. Power & Associates Business Customer Satisfaction Survey.

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Issues, Challenges and Performance Measures

Economic ~~Environment.~~environment. Weakness in ~~the~~ local, national and global economies ~~has continued~~continues to impact utility customer growth, ~~the~~business demand for natural gas and ~~the value of natural~~market prices for gas ~~storage services.~~storage. Our utility’s ~~annual~~ customer growth rate ~~was~~remained relatively flat for the third year in a row, with an annual growth rate of 0.8 percent ~~at September 30, 2011, as~~for the period ended March 31, 2012, compared to 0.8 percent ~~at June 30,~~for March 31, 2011 and ~~1.2~~0.7 percent ~~at September 30,~~for March 31, 2010. ~~Total delivered volumes~~The local economy is beginning to ~~utility customers in the third quarter~~show signs of ~~2011 decreased 3 percent,~~a slow recovery, with unemployment rates ~~remaining around 10 percent throughout our service territories~~ in Oregon and southwest Washington declining from over 10 percent during 2011 to under 9 percent early in 2012, and ~~business conditions remaining sluggish as well. Despite these challenges, we~~with industrial usage of natural gas increasing 4 percent in 2012 over 2011. We believe our utility is well positioned to ~~continue adding~~add customers ~~due~~and to serve increasing industrial demand as the economy recovers because of low and stable natural gas prices, ~~an ability to increase~~our relatively low market ~~share in residential~~penetration, our focus on converting homes and ~~commercial sectors, ongoing programs to convert homes~~businesses to natural gas, and the potential for environmental initiatives that could favor natural gas use in our region.

Managing ~~Gas Prices~~gas prices and ~~Supplies.~~supplies. Our gas acquisition and management strategy is ~~regularly updated~~ to secure sufficient supplies of natural gas to meet the needs of our utility customers and to hedge gas prices so that we can effectively manage costs, reduce price volatility for customers, and maintain a competitive advantage. With recent developments in drilling technologies and substantial access to gas supplies from shale ~~gas~~ formations around the U.S. and in Canada, the ~~supply~~current outlook for North American natural gas ~~has increased dramatically, which~~supply is ~~contributing to~~strong and should remain that way well into the future. The abundance of gas suggests continued lower and more stable gas ~~prices.~~prices, subject to a regulatory environment that continues to support hydraulic fracturing and other drilling technologies.

~~The~~Our utility’s Purchased Gas Adjustment (PGA) mechanisms in Oregon and Washington, along with our ~~own~~ gas price hedging strategies which include gas reserves and gas ~~supplies in~~ storage inventories, enable us to reduce earnings ~~risk~~ exposure for the company and secure lower gas costs for ~~our~~ customers. These lower gas prices, coupled with our focus on customer service and cost-effective energy efficiency programs, can help strengthen natural gas’ competitive advantage over other energy sources in key markets. ~~See discussion of Investments in Gas Reserves below under Strategic Opportunities.~~

WeEach year we typically hedge ~~approximately~~about 75 percent of our ~~anticipated year-round~~utility’s annual sales ~~volumes~~requirements based on normal weather. For the ~~2011-12~~current gas contract year (November 1, 2011 – October 31, 2012), we ~~are currently hedged at a level of approximately 75 percent of our forecasted sales volumes, including~~were roughly 51 percent ~~financially~~ hedged with financial swap and option contracts and 24 percent ~~physically~~ hedged with physical gas supplies. The physical supplies consisted of a combination of gas inventories in storage, ~~local~~gas production from the Mist area which we buy at pre-determined prices, and ~~expected~~gas production ~~of gas reserves. The~~from an investment we made in gas reserves ~~are related to a recent transaction whereby we agreed to purchase working interests in producing wells from~~with Encana Oil & Gas (USA) Inc. (Encana). The gas reserves with Encana relate to a new investment we made beginning in 2011, whereby we own working interests in certain leases in Encana’s Jonah gas field located in Rock Springs, Wyoming. For a further discussion of gas reserves, see ~~Investments~~“Investments in Gas ~~Reserves~~Reserves” under ~~Strategic Opportunities~~“Strategic Opportunities” below and “Gas Reserves” under “Rate Mechanisms” below.

~~Additionally,~~Besides the amount hedged for the current gas contract year, we are ~~currently~~also hedged at approximately 3032 percent for the 2012-13 gas year and between 9 and 1314 percent hedged for annual requirements over the following five gas years. Our hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather and economic conditions. ~~Also,~~In addition, our storage inventory levels may increase or decrease based on storage expansion or storage recall by the utility. The Company added approximately 1 Bcf to its off-system storage capacity by entering into a 3-year contract with a third-party for natural gas storage located in Canada. Injections are scheduled to begin April 2012. We expect recovery of our demand charges and other costs through our normal PGA mechanism. As for gas reserves, these levels are estimates of production, which are subject to change based on possible unforeseen events ~~that include~~including the impact from ~~speed~~the pace of drilling activity and the volume of ~~production.~~production from each well.

Although less expensive and more stable gas prices provide opportunities to manage costs for our utility customers, they also present challenges for our gas storage ~~business~~businesses by lowering the ~~value~~price of, and reducing the demand for, storage ~~services, consequently affecting~~services. Consequently, our ability to sign ~~long-term customer~~longer-term storage contracts with customers at favorable ~~prices.~~prices affects our ability to improve financial results, but we remain committed to find opportunities for lowering costs and to develop enhanced services for customers.

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Environmental ~~Costs.~~clean-up costs. We continue to accrue all material ~~environmental~~ loss contingencies related to ~~our properties that require~~ environmental ~~investigation or remediation.~~sites for which we are responsible. Due to numerous uncertainties surrounding the ~~preliminary~~ nature of environmental investigations orand the ~~developing nature~~development of remediation ~~requirements,~~solutions approved by regulatory agencies, actual costs could vary significantly from our loss estimates. As a regulated utility, we ~~are~~have been allowed to defer certain costs pursuant to regulatory decisions. We ~~are authorized by the Public Utility Commission of Oregon (OPUC) and the Washington Utilities and Transportation Commission (WUTC)~~currently have regulatory authority to defer certain environmental costs, and to seek recovery of those ~~amounts~~costs in future ~~rates to customers. The Company is also seeking recovery of these costs under insurance policies. Any amounts collected from insurance~~customer rates. However, we are expected to ~~offset~~pursue recovery from insurance policies first, and to seek recovery from customers only for amounts ~~that may otherwise be collected~~not recovered from ~~customers. Recovery~~insurance. Ultimate recovery of environmental costs, either from regulated utility rates or from insurance, will depend on our ability to effectively manage ~~these~~ costs and demonstrate that ~~they~~costs were prudently incurred. Recovery may vary significantly from amounts currently recorded as regulatory assets, and amounts not recovered would be required to be charged to income in the period they were deemed to be unrecoverable.

See Results of Operations—Regulatory Matters—Rate Mechanisms—Regulatory Recovery for Environmental Costs below, Note 1413 in this report and Note 15 in our ~~2010~~2011 Form 10-K.

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~~Climate Change.~~ ~~See Part II, Item 7., “Executive Summary - Issues, Challenges and~~ Performance ~~Measures—Climate change,” in our 2010 Form 10-K for a discussion of the effect of climate change on our business.~~

~~Performance Measures.~~measures. In order to deal with the challenges affecting our businesses, we annually review and update our strategic plan to map ~~our~~out a course ~~over~~for the next several years. Our plan ~~includes strategies for:~~includes: further improving our utility gas distribution ~~system,~~system; enhancing utility services and operations; optimizing and growing our non-utility gas storage ~~business;~~businesses; investing in natural gas infrastructure projects when necessary to support the energy needs of our region; and maintaining a leadership role within the gas utility industry by addressing long-term energy policies and pursuing business opportunities that support clean energy technologies. We intend to measure our performance and monitor progress on relevant metrics ~~such as:~~including, but not limited to: earnings per share growth; total shareholder return; return on invested capital; utility return on equity; utility customer ~~satisfaction;~~satisfaction ratings; utility margin; utility capital and operations and maintenance expense per customer; and ~~non-utility~~ earnings before interest, taxes, depreciation and amortization ~~(non-utility EBITDA)~~(EBITDA).

Strategic Opportunities

Business ~~Process Improvements.~~process improvements. ~~To address the current economic and competitive challenges, we~~We continue to evaluate, develop and implement business strategies to improve ~~efficiencies. Our goal is~~operational efficiencies and respond to ~~develop, integrate, consolidate~~economic and ~~streamline~~competitive challenges. Over the past several years, we focused our efforts on developing, integrating, consolidating and streamlining operations, ~~and to support~~while supporting our employees with new training and ~~customers with~~ new technology tools.

Since 2006, we reduced staffing levels in response to work load declines related to the low customer growth environment and efficiency improvements, resulting in a reduction of full-time, utility positions from over 1,300 in early 2006 to about 1,050 at the end of 2011. Technology investments, workforce reductions and other initiatives have contributed to a significant increase in efficiency. We also continue to improve the quality and integrity of our buildings and pipeline infrastructure. The number of utility customers served per operating employee increased by 32 percent, from 738 at the end of 2005 to 975 at the end of 2011. We expect these efforts to contribute to long-term operational efficiencies and lower operating and capital costs throughout NW Natural. We remain committed to increasing shareholder value and we continue to look for new ways to improve our business effectiveness as service demands and federal safety requirements increase.

Gas ~~Storage Operations.~~storage development. ~~The Company has developed~~We currently own and operate two underground gas storage ~~facilities~~facilities—the Mist facility in Oregon and ~~California. In California,~~the Gill Ranch ~~began operating during the fourth quarter~~facility in Fresno, California. Our Mist facility currently consists of ~~2010 and offers~~16 Bcf of available storage ~~services~~capacity, with 10 Bcf allocated to the ~~California market at market-based rates.~~utility business and 6 Bcf allocated to the gas storage business. Our wholly-owned subsidiary, Gill Ranch, ~~is subject to California Public Utilities Commission (CPUC) regulation including, but not limited to, service terms and conditions, tariff regulations, and security issuances.~~holds a 75 percent undivided ownership interest in the Gill Ranch ~~currently is designed as a 20 Bcf facility, of which 75~~facility; Pacific Gas and Electric Company (PG&E) owns the other 25 percent ~~is owned by NW Natural, but is expandable to a total estimated capacity of 40~~interest. Currently, we have 15 Bcf of ~~which NW Natural would own 50 percent.~~ available storage capacity for the gas storage business, along with 27 miles of gas transmission pipeline capacity connecting the Gill Ranch facility to an interconnect on PG&E’s transmission system. Future expansion is possible at both the Mist and Gill Ranch storage facilities. For more information, see Note 4 in this report and Part II, Item 7., “2012 Outlook—Strategic Opportunities,” in our 2011 Form 10-K.

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Due to ~~increasing supplies and price stability~~an abundant supply of natural gas and lower, more stable prices in North America, ~~and declining demand for natural gas due to current economic conditions,~~ storage values are expected to remain relatively low in the near term, which will likely affect the prices at which Gill Ranch is able to ~~contract~~contract. Gas prices recently hit a 10-year low, and this has resulted in certain natural gas producers reducing their levels of exploration and production. At the ~~timing of future storage expansions. For more information, see Note 4~~same time, we expect these lower gas prices to increase demand for natural gas as the lower pricing provides a competitive advantage over alternative energy sources including the potential demand for exporting natural gas. Combined, these forces may ultimately result in ~~this report~~upward pressure on gas prices and ~~Part II, Item 7., “2011 Outlook—Strategic Opportunities,” in our 2010 Form 10-K.~~return some price volatility to natural gas markets.

~~In Oregon, we own~~Our storage facilities ~~at Mist~~position us well to capitalize on rising demand for natural gas, increasing gas prices or greater market volatility because storage operations benefit from seasonal swings in commodity prices and market volatility. Additionally, if market demand increases and we are able to obtain regulatory permits and project financing, we have the ability to expand the Gill Ranch facility beyond its current capacity without further expansion of our gas transmission pipeline. We estimate that the current Gill Ranch storage facility could support an aggregate storage capacity of around 40 Bcf with certain infrastructure modifications, of which ~~serve~~we would have the rights to 50 percent of the total.

The Pacific Northwest storage ~~markets. These~~ markets also are ~~negatively~~ impacted by lower gas prices and lack of gas price volatility, ~~but to a lesser extent~~although less than in California ~~and other~~ markets ~~around the country~~primarily because of ~~limited availability~~fewer regional competitors. Nevertheless, we continue to plan for expansion of ~~storage capacity in the Northwest. In 2012, we expect to continue planning for possible expansion at~~ our ~~Mist~~ gas storage facilities at Mist in anticipation of increased natural gas demand for electric generation in the Pacific Northwest. WeCurrently we do not have ~~an established~~a set timeline for ~~the next expansion at Mist,~~development, but we believe the earliest timeframe for completing the next Mist expansion ~~could be as early as 2014.~~is 2016. In the meantime, we ~~will~~expect to continue ~~to monitor the market demand and work~~working on preliminary design and ~~project planning,~~scope of the next expansion, which will ~~ultimately require~~likely include the development of storage wells, ~~potentially~~ a second compression station and additional pipeline gathering facilities that ~~could~~would enable not only the next expansion but future ~~storage expansions.~~expansions as well.

Pipeline ~~Diversification.~~diversification. Currently, our utility operations and ~~Mist~~ gas storage operations at Mist depend on a single bi-directional interstate transmission pipeline to ship ~~gas~~customer supplies. Palomar, a wholly-owned subsidiary of PGH, is pursuing the development of a ~~new~~ gas transmission pipeline that would provide ana new interconnection with our utility distribution system. PGH is owned 50 percent by our NWN Energy subsidiary and 50 percent by TransCanada American Investments Ltd., an indirect wholly-owned subsidiary of TransCanada Corporation. The Palomar pipeline was originally proposed with an east and a west segment, but ~~Palomar~~ currently ~~plans~~Palomar’s plan is to design and develop an east-only pipeline to serve our utility customers as well as ~~the~~ growing natural gas markets in Oregon and other parts of the Pacific Northwest.

Palomar has negotiated a non-binding memorandum of understanding (joint agreement) with The Williams Companies’ Northwest Pipeline (Northwest Pipeline), which contemplates Northwest Pipeline becoming a part owner in the Palomar project. This joint agreement would consolidate the region’s efforts to develop a cross-Cascades pipeline around the use of the Palomar route. Northwest Pipeline is the owner and operator of the single bi-directional interstate transmission pipeline that connects with NW Natural’s utility distribution system.

The proposed Palomar pipeline would be regulated by ~~the~~ Federal Energy Regulatory Commission (FERC).

In March 2011, Palomar withdrew its original application with FERC, ~~for a natural gas pipeline in Oregon,~~ but at the same time informed FERC that it ~~intends~~intended to file a new application ~~later this year or in 2012,~~with a modified scope that excluded the western segment, after it has conducted ana new open season ~~and obtained~~to obtain commercial support for the ~~east segment~~eastern segment. The timing for construction of the Palomar pipeline ~~which~~ is ~~approximately 110 miles long.~~

expected depends on regulatory permits and determining commercial support from shippers.

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~~Investments in~~ Gas ~~Reserves.~~reserves. In addition to hedging gas prices with financial ~~derivative~~swap and option contracts, ~~over the next few years,~~ we ~~recently~~ signed an agreement with Encana in 2011 to ~~develop~~acquire physical gas supplies to ~~supply~~meet a portion of our utility customers’ requirements over ~~a period of about~~ 30 years. During the first 10 years, ~~of the agreement,~~ we forecast the volumes of gas received under the Encana agreement to provide approximately 8 to 10 percent of the average annual requirements of our utility customers. Under the agreement, we expect to invest approximately $45 million to $55 million per year for five years, subject to certain NW Natural rights to terminate the agreement, with our total investment expected to be about $250 million. We pay a fixed portion of drilling costs per well, and Encana ~~will assign~~assigns to us a working ~~interest~~interests in leases to certain sections of the Jonah gas field, located near Rock Springs, Wyoming. These sections include both future and currently producing wells. The working interests entitle us to receive a portion of the gas produced in the assigned sections. Operation of the wells ~~will be~~are governed by a joint operating agreement under which Encana ~~will be~~is the operator, and we ~~will~~ pay our proportionate share of the operating costs.

Upon reviewing the transaction, the OPUC determined that our Company’s costs under the agreement will be recovered on an ongoing basis through our annual PGA mechanism, including the regulatory deferral and incentive sharing process for the commodity cost of gas. See Results of Operations—Regulatory Matters—Rate Mechanisms—~~Purchased~~ Gas ~~Adjustment below. Annually, a forecast will be established for the amounts related to costs~~Reserves below and ~~volumes expected, and any variances between forecasted and actual will be subject to~~Part II, Item 7., “2012 Outlook—Strategic Opportunities,” in our ~~PGA incentive sharing in Oregon, up to a maximum variance~~2011 Form 10-K.

Table of $10 million of which 10 percent (or $1 million maximum) would be recognized in current income. Variances in excess of $10 million, both negative and positive, will be deferred and passed through to customers in future rates at 100 percent. As part of the decision by the OPUC, we agreed to file a general rate case in Oregon no later than December 31, 2011.Contents

Consolidated Earnings and Dividends

~~Three months ended September 30, 2011 compared to September 30, 2010:~~

For the three months ended September 30, 2011, we reported a net loss of $8.3 million, or 31 cents per share, compared to a net loss of $7.4 million, or 28 cents per share, for the same period last year.

The primary factors contributing to the ~~increased third~~decrease in first quarter consolidated net ~~loss~~income were:

·	a ~~$1.5~~$5.4 million increase in net operating revenue (margin) primarily due to an increase from the utility’s residential and commercial customers, an increase from the utility’s incentive sharing related to gas cost savings, and an increase from gas storage at Gill Ranch;

·	a $3.2 million increase in operations and maintenance expense primarily related to ~~first-year expenses~~increases in utility payroll, utility employee benefit costs, utility training costs, and Oregon rate case expenses;

·	a $0.7 million increase in general taxes, primarily related to ~~storage operations~~Gill Ranch property taxes;

·	a $0.7 million increase in depreciation and amortization related to capital asset additions at both the utility and Gill Ranch; and

·	a ~~$1.4~~$0.7 million increase in ~~depreciation and amortization also~~interest expense primarily related to ~~first-year storage operations at Gill Ranch.~~

~~Partially offsetting the above factors were:~~

·	~~a $1.6 million increase in net operating revenues primarily related to storage operations at Gill Ranch.~~

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~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

~~Net income was $34.7 million, or $ 1.30 per share, for the nine months ended September 30, 2011, compared to $43.1 million, or $ 1.62 per share, for the same period last year.~~

~~The primary factors contributing to the $8.4 million decrease in net income were:~~

~~a $12.1 million reduction in utility net operating revenues (margin), representing a $7.4 million write-off taken in 2011 plus $5.0 million of revenues accrued in~~ the first nine months of 2010, related to the repealed Oregon legislative rule on utility income taxes paid. See “Results of Operations - Business Segments - Utility Operations - Regulatory Adjustment for Income Taxes Paid,” below for further explanation;

·	~~a $3.9 million increase in operations and maintenance expense, primarily due to a $4.4 million increase~~new debt issuance at Gill Ranch ~~reflecting first-year operating expenses;~~

·	~~a $4.9 million increase~~ in general taxes, primarily due to a $5.2 million refund of utility property taxes in 2010, partially offset by a $1.1 million decrease in other taxes, and a $0.8 million increase in property and other taxes at Gill Ranch, which reflect first-year operating expenses; and

·	~~a $4.4 million increase in depreciation and amortization expense, due to a $0.8 million increase at the utility and a $3.6 million increase at Gill Ranch.~~

~~Partially offsetting the above factors were:~~

·	~~an $8.1 million increase in utility margin attributable to an increase in residential and commercial customer use, reflecting gains from colder weather and customer growth; and~~

·	~~a $5.6 million decrease in income tax expense related to lower taxable income.~~late 2011.

Dividends paid on our common stock were 44.5 cents per share in the first quarter of 2012, compared to 43.5 cents per share in the ~~third~~first quarter of ~~2011, compared to 41.5 cents per share in the third quarter of 2010.~~2011. The Board of Directors declared a quarterly common stock dividend of 44.5 cents per share, payable on ~~November~~May 15, ~~2011,~~2012, to shareholders of record on ~~October 31, 2011, thereby increasing the~~April 30, 2012. The current indicated annual dividend rate ~~by more than 2 percent from $1.74 to~~is $1.78 per share.

Application of Critical Accounting Policies and Estimates

In preparing our 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 our critical accounting policies to be those which are most important to the representation of our 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 we reported under different conditions or used different assumptions. Our most critical estimates and judgments include accounting for:

·	regulatory cost recovery and amortizations;

·	revenue recognition;

·	derivative instruments and hedging activities;

·	pensions and postretirement benefits;

·	income taxes; and

·	environmental contingencies.

There have been no material changes to the information provided in the ~~2010~~2011 Form 10-K with respect to the application of critical accounting policies and estimates (see Part II, Item 7., “Application of Critical Accounting Policies and Estimates,” in the ~~2010~~2011 Form 10-K)~~, except as indicated below under Revenue Recognition and Pension Expense.~~

~~Table~~. For an update of ~~Contents~~

~~Revenue Recognition~~

Utility and non-utility revenues, which are derived primarily from the sale, transportation or storage of natural gas, are recognized upon the delivery of gas commodity or service to customers. From 2007 through 2010, utility revenues included the recognition of a regulatory adjustment for income taxes paid pursuant to a legislative rule (commonly referred to as SB 408), which applied to certain gas and electric utilities in Oregon. Under SB 408, we were required to automatically implement a rate refund, or a rate surcharge, to utility customers on an annual basis. The refund or surcharge amount was based on the difference between income taxes paid and income taxes authorized to be collected in customer rates. We recorded the refund, or surcharge, each quarter based on the annual amount to be recognized. On May 24, 2011 the Oregon Governor signed Senate Bill 967 (SB 967), which repealed SB 408. The new law requires utilities in Oregon, to reverse amounts accrued for the 2010 and 2011 tax years, which resulted in us recording a one-time pre-tax charge to earnings in the second quarter of 2011 in the amount of $7.4 million ($4.4 million after-tax or 17 cents per share). See “Results of Operations—Business Segments - Utility Operations—Regulatory Adjustment for Income Taxes Paid,” below for a further discussion.

~~Pension Expense~~

Net periodic pension cost consists of service costs, interest costs, the expected returns on plan assets, and the amortization of actuarial gains and losses. Effective January 1, 2011, we began deferring a portion of our net periodic pension cost to a regulatory account on the balance sheet pursuant to OPUC approval of pension expenses above or below the amount set in rates. As of September 30, 2011, the cumulative amount deferred for future pension cost recovery was $4.0 million.

The funded status of our qualified pension plans is likely to be negatively affected by recent changes in market conditions, including a decline in corporate bond interest rates, which increases the value of pension liabilities, and a decline in equity market prices, which decreases the value of pension assets. The combination of these recent market events is likely to result in higher net periodic pension costs and higher pension contributions. For further discussion,environmental disclosures see Note 9.13.

Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit Committee of the Board. Within the context of our critical accounting policies and estimates, management is not aware of any reasonably likely events or circumstances that would result in materially different amounts being ~~reported, except for the items discussed above under Revenue Recognition and Pension Expense.~~reported. For a description of recent accounting pronouncements that could have an impact on our financial condition, results of operations or cash flows, see Note 2.

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Results of Operations

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Regulatory Matters

Regulation and Rates

~~We are~~Utility. Our utility business is subject to regulation with respect to, among other matters, rates and systems of accounts set by the ~~OPUC, WUTC, FERC,~~Oregon Public Utility Commission (OPUC), Washington Utilities and ~~with respect to Gill Ranch, the CPUC.~~Transportation Commission (WUTC), and FERC. The OPUC and WUTC also regulate ~~our issuance of securities and the CPUC regulates~~ the issuance of securities by ~~Gill Ranch.~~our utility. In 2011, approximately 90 percent of our utility gas volumes ~~were delivered to,~~ and ~~utility operating~~ revenues were derived from Oregon customers, ~~and~~with the ~~balance was derived~~remaining 10 percent from Washington customers. Future earnings and cash flows from utility operations will largely be determined ~~largely~~ by ~~the~~rate cases in Oregon and Washington, but will also be affected by the economies in ~~general,~~Oregon and Washington, by the pace of customer growth in the residential and commercial markets, ~~in particular,~~ and by our ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery ~~for~~of our ~~utility gas~~utility-related costs, including operating ~~and maintenance~~ expenses and investment costs ~~made~~ in utility plant and other regulatory assets.

Gas Storage. Our gas storage business is subject to regulation with respect to, among other matters, issuance of securities and systems of accounts set by the OPUC, California Public Utilities Commission (CPUC), and FERC. The OPUC and FERC regulate our Mist gas storage business under a maximum cost-based rate model, whereas the CPUC regulates Gill Ranch under a market-based rate model which allows for the price of storage services to be set by the marketplace. In 2011, approximately 65 percent of our storage revenues were derived from OPUC and FERC approved cost-based rates, and approximately 35 percent were from California approved market-based rates.

See Part II, Item 7., “Results of Operations—Regulatory Matters,” in the ~~2010~~2011 Form 10-K.

Oregon General Rate Case

On December 30, 2011, we filed an application for a general rate increase with the OPUC. In the filing, we requested an increase in authorized annual Oregon jurisdictional revenues of $43.7 million, equivalent to a rate increase of 6.2 percent. The amount and percent of the requested rate increase includes an estimated $15.1 million that represents the cumulative effect of declining use per customer. This amount is currently recovered in customers’ rates through the Company’s conservation tariff mechanism, which has been in place since 2003. Our requested increase also includes costs related to pension contributions and additional utility services. The filing also requests an authorized overall rate of return on capital of 8.28 percent, with a return on common stock equity (ROE) of 10.3 percent and a capital structure of 50 percent common equity. In addition, we have requested the establishment of rate recovery mechanisms for deferred costs related to our environmental liabilities. The filing also requests rate redesign for residential customers with a higher fixed fee, which would effectively combine and incorporate the effects of the weather normalization and decoupling tariffs in the new fixed fee amount. The new rates are requested to be effective by November 1, 2012.

On May 3, 2012, several parties involved in NW Natural’s general rate case filed their testimony, which represents their first filing in the formal administrative proceeding through which the OPUC determines rate cases. These included the Staff of the OPUC, the Citizen’s Utility Board (CUB), and the Northwest Industrial Gas Users (NWIGU). In its testimony, the OPUC Staff recommended a revenue requirement reduction of $10.7 million, or 1.5 percent, compared to our requested $43.7 million increase. Staff’s testimony is based on a 7.56 percent overall cost of capital including a 9.2 percent return on common equity, and reductions to various operation and maintenance (O&M) expenses and capital additions requested. These parties also recommended certain modifications to our proposed environmental cost recovery mechanism, modifications to an existing allocation of revenues to customers from our interstate gas storage operations and denial of our request for recovery of certain costs related to our contributions covering employee pension benefits. The filings made by CUB and NWIGU overlap with Staff’s proposals in some areas while also recommending additional reductions to O&M and capital additions. The Company disagrees with the recommendations made and will be filing testimony rebutting these recommendations in June.

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~~Rate Mechanisms~~Throughout the formal administrative proceeding, NW Natural and the parties have the opportunity to engage in settlement discussions regarding any or all of the issues involved in the proceeding. We have engaged in such discussions during scheduled settlement conferences. We are unable at this time to predict the outcome of this rate proceeding, or to predict which, if any, issues will be presented to the OPUC as part of a contested proceeding or as part of a settlement proposal.

Rate Mechanisms

Purchased Gas Adjustment. Rate changes are established for the utility each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases, including gas prices under spot purchases as well as contract ~~gas purchase prices,~~supplies, gas prices hedged with financial derivatives, ~~or physical~~gas prices from the withdrawal of storage inventories and gas reserves, ~~gas inventory prices,~~ interstate pipeline demand costs, the application of temporary rate adjustments ~~to amortize~~which amortizes balances inof deferred regulatory accounts, and the removal of temporary rate adjustments effective for the previous year.

~~In October~~Effective November 1, 2011, the OPUC and WUTC approved PGA rate changes ~~effective on November 1, 2011. The effect of these rate changes was~~ to decrease the average monthly bills of Oregon and Washington residential customers by ~~about~~ 2 percent. This was our third consecutive year of PGA rate decreases, and cumulatively our average utility residential customer bills declined 20 percent in Oregon and 26 percent in Washington since 2008.

Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby we are required to select each year either an 80 percent or 90 percent deferral of higher or lower actual gas costs compared to estimated PGA prices, such that the impact on current earnings from the incentive sharing is either 20 percent or 10 percent of the difference between actual and estimated gas costs, respectively. Under the Washington PGA mechanism, we defer 100 percent of the higher or lower actual gas costs, and those gas cost differences are normally passed on to customers through the annual PGA rate adjustment. See “Customer Credits for Gas Cost Incentive Sharing” below for a discussion of our utility’s early refund proposal to customers of deferred gas cost savings from November 1, 2011 through March 31, 2012.

In addition to the gas cost incentive sharing mechanism, we are subject to an annual earnings test to determine if the utility is earning above its ~~allowed return on equity (ROE)~~authorized ROE threshold. If utility earnings exceed a specific ROE level, then 33 percent of the amount above that level is required to be deferred for refund to customers. Under this provision, if we select the 80 percent deferral option, then we retain all of our earnings up to 150 basis points above the currently authorized ROE. If we select the 90 percent deferral option, then we retain all of our earnings up to 100 basis points above the currently authorized ROE. We selected the 90 percent deferral option for the 2009-10, the 2010-2011 and the 2011-2012 PGA years. The ROE threshold is subject to adjustment annually based on movements in long-term interest rates. For calendar years ~~2009~~2010 and ~~2010,~~2011, the ROE threshold after adjustment for long-term interest rates was ~~11.5~~11.02 percent and ~~11.02~~10.92 percent, respectively. ~~No amounts were required to be~~We refunded ~~to customers as a result of the 2009 utility earnings test, while we will be refunding~~ $0.2 million to customers in the current PGA for the 2010 utility earnings test. ~~For~~Based on utility results for 2011 we accrued an ~~estimated $0.2 million~~amount for potential refund to customers ~~based on results through September 30.~~

In our Quarterly Report on Form 10-Q for the period ended June 30, 2011, we reported that the OPUC Staff and other parties were disputing our determination of the amount to be refunded to customers for the 2010 earnings test. The dispute was related to property tax expense reductions and whether they should be removed from the earnings test because they related to prior years. The dispute was heard by the Commissioners at the OPUC and, in October, the Commissioners ruled in the ~~Company’s favor on the treatment of property tax expense reductions.~~

There has been no change to the Washington PGA mechanism under which we defer 100 percent of the higher or lower actual gas costs and pass those cost differences on to customers through an adjustment to future ~~rates.~~

~~System Integrity Program.~~ The OPUC has extended the accounting treatment and cost recovery for the system integrity program through the effective date of our next general rate case. For further discussion of the system integrity program, see Part II, Item 7., “Results of Operations—Regulatory Matters—Rate Mechanisms—System Integrity Program” in our 2010 Form 10-K.PGA’s.

~~Regulatory Recovery for~~ Environmental Costs. The OPUC has authorized us to defer environmental costs associated with certain named sites and to accrue ~~interest~~a carrying cost on environmental ~~cost balances,~~costs paid, subject to an annual demonstration that we have maximized our insurance recovery or made substantial progress in securing insurance recovery for unrecovered environmental expenses. Through a series of extensions, the authorized cost deferral and ~~interest~~ accrual ~~has been~~of carrying costs was extended through January ~~2012.~~2013. See Note 1413 for further discussion of our regulatory and insurance recovery of environmental costs.

~~In January 2011, we filed a request with~~The WUTC has also authorized the ~~WUTC to defer~~deferral of environmental costs, if any, that are incurred in connection with services provided to Washington customers. ~~On June 30, 2011, we received an~~The order granting approval of that request ~~with cost deferrals~~was effective January 26, 2011.

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Pension Deferral. Effective January 1, 2011, the OPUC approved our request to defer the annual accounting expense for qualified defined benefit pension ~~expenses~~plans above the ~~current~~ amount set in rates ~~with~~in our last general rate case. The recovery of these deferred ~~amounts~~pension costs will be through the implementation of a balancing account, which includes the expectation of higher and lower pension expenses in future years. Our recovery of these deferred balances includes accrued interest on the account balance at the utility’s authorized rate of return, which is currently 8.62 percent. The ~~estimated~~ reduction to operations and maintenance expense ~~for~~in 2011 ~~is currently estimated to~~ ~~be $5 million, with $4 million being deferred through September 30, 2011.~~was $6.0 million. Future years’ deferrals will depend on changes in plan assets and projected benefit liabilities using a number of key assumptions, as well as ~~our~~being affected by pension ~~contributions.~~contributions by the company. We estimate pension expense deferrals totaling $8 million to $9 million in 2012, with $2.1 million being deferred for the three months ended March 31, 2012.

Customer Credits for Gas Cost Incentive Sharing. For the period between November 1, 2011 and March 31, 2012, our actual gas costs were significantly lower than the gas costs currently embedded in customer rates. As a result, our PGA incentive sharing mechanism recorded 90 percent of gas cost savings during this period, attributed to Oregon customers, and 100 percent of the savings attributed to Washington customers to a regulatory account for credit to customers (see “Purchased Gas Adjustment,” above). Ordinarily, these credits would be included in customer rates starting in November under the next year’s PGA filing, but in April 2012 the company requested regulatory approval to immediately refund $35.1 million and $4.2 million to our Oregon and Washington customers, respectively, through billing credits. If approved, we intend to credit these amounts to customer bills starting in June of 2012.

Customer Credits for Gas Storage Sharing. In April 2012, the company requested regulatory approval to provide its Oregon utility customers with a $9.2 million interstate storage credit from our regulatory incentive sharing mechanism related to interstate gas storage and asset management services. If approved, we intend to credit this amount to customer bills starting in June of 2012.

For a discussion of other rate mechanisms, including but not limited to our system integrity program, see Part II, Item 7., “Results of Operations—Regulatory Matters—Rate Mechanisms” in our ~~2010~~2011 Form 10-K.

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Business Segments - Utility Operations

Our utility margin results are largely affected by customer growth and, to a certain extent, by changes in volume due to weather and customers’ gas usage patterns ~~with~~because a significant portion of our ~~earnings being~~margin revenues are derived from natural gas sales to residential and commercial customers. In Oregon, we have a conservation tariff, ~~that~~which adjusts margin revenues to offset changes resulting from increases or decreases in average use by residential and commercial ~~customers’ gas usage.~~customers. We also have a weather normalization ~~mechanism~~tariff in Oregon, ~~that~~which adjusts customer bills up or down to offset changes in margin resulting from above- or below-average temperatures during the winter heating season. Both mechanisms are designed to reduce the volatility of our ~~utility~~utility’s earnings and customer charges. For more information on our conservation ~~tariff~~ and weather ~~mechanisms,~~normalization tariffs, see discussion under “Results of Operations—Regulatory Matters—Rate ~~Mechanisms~~Mechanisms” in our ~~2010~~2011 Form 10-K.

~~Three~~For the three months ended ~~September 30, 2011~~March 31, 2012, utility operations contributed net income of $39.8 million or $1.48 per share, compared to ~~September 30, 2010:~~

~~Utility operations resulted in a net loss of $9.5~~$40.1 million or ~~35 cents~~$1.50 per share infor the ~~third quarter~~same period of 2011 compared to a net loss of $9.1 million, or 34 cents per share, in the third quarter of 2010. Utility margin during the third quarter of 2011 was fairly flat compared to 2010, with a $0.4 million increase in residential and commercial margin from customer growth, which was more than offset by a $1.0 million decrease from the repeal of SB 408 (see Regulatory Adjustment for Income Taxes Paid below).2011. Total utility volumes sold and delivered for the three months ended March 31, 2012 increased by 2 percent compared to the same period for 2011 primarily due to an increase in ~~the third quarter of this year decreased~~all three customer categories (i.e. residential, commercial and industrial). Total utility margin increased by $4 million, or 3 percent ~~over last year, which consisted of a 3 percent decrease~~primarily due to increases in residential and commercial ~~volumes~~customer margins totaling $1.7 million, including the effects of conservation and ~~a 3 percent decrease~~weather normalization adjustments, and an increase in ~~industrial volumes.~~gas cost incentive sharing gains of $1.6 million.

Our ~~decoupling mechanism adjusted residential and commercial margins down by $0.1 million in the third quarter of 2011, compared to a margin decrease of $1.0 million in 2010.~~

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

In the nine months ended September 30, 2011, utility operations contributed net income of $31.7 million or $1.19 per share, compared to $36.4 million or $1.37 per share in 2010. Total utility volumes sold and delivered in the nine months ended September 30, 2011 increased by 10 percent over last year primarily due to 14 percent colder weather, while total utility margin decreased by $3.4 million, or 1 percent, primarily due to a reduction in margin of $12.1 million related to the repeal of SB 408 discussed earlier, partially offset by an $8.1 million increase in residential and commercial margins, after weather and decoupling mechanism adjustments, related to the benefits of colder weather in the first half months of 2011 and customer growth (see “Residential and Commercial Sales,” below).

~~During the nine months ended September 30, 2011 our~~ weather normalization mechanism adjusted residential and commercial margins down by ~~$10.6~~$3.8 million in the three months ended March 31, 2012 based on temperatures that were ~~14 percent colder than last year and 12~~4 percent colder than average, compared to a margin ~~increase~~decrease of ~~$11.6~~$5.9 million last year when temperatures were 26 percent ~~warmer~~colder than average. Our decoupling mechanism adjusted residential and commercial margins up by ~~$10.8~~$6.7 million in the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, compared to a margin increase of ~~$8.0~~$8.7 million in the ~~nine months ended September 30, 2010, both due to lower average customer usage per degree day.~~comparable period last year.

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The following table summarizes the composition of gas utility volumes, revenues and margin. Certain amounts in prior year balances under the utility margin section of the table have been reclassified to conform with the current year’s presentation. These reclassifications reflect amounts moved from other margin adjustments into residential, commercial and industrial categories where amounts were assignable to a specific customer category. Utility margin in total was not affected by the reclassifications.

		Three Months Ended						Favorable/
		March 31,						(Unfavorable)
Thousands, except degree day and customer data		2012			2011			2012 vs. 2011
Utility volumes - therms:
Residential sales			176,037			174,704			1,333
Commercial sales			100,122			99,177			945
Industrial - firm sales			10,619			10,864			(245	)
Industrial - firm transportation			38,851			36,482			2,369
Industrial - interruptible sales			17,730			17,237			493
Industrial - interruptible transportation			64,800			62,950			1,850
	Total utility volumes sold and delivered		408,159			401,414			6,745
Utility operating revenues - dollars:
Residential sales		$	194,839		$	198,837		$	(3,998	)
Commercial sales			92,175			94,768			(2,593	)
Industrial - firm sales			8,309			8,845			(536	)
Industrial - firm transportation			1,908			1,746			162
Industrial - interruptible sales			10,048			10,327			(279	)
Industrial - interruptible transportation			2,046			2,316			(270	)
Regulatory adjustment for income taxes paid(1)			-			286			(286	)
Other revenues			1,435			602			833
	Total utility operating revenues		310,760			317,727			(6,967	)
Cost of gas sold			169,755			180,610			10,855
Revenue taxes			7,855			7,955			100
	Utility margin	$	133,150		$	129,162		$	3,988
Utility margin:(2)
Residential sales		$	85,608		$	84,252		$	1,356
Commercial sales			32,965			32,558			407
Industrial - sales and transportation			7,636			7,610			26
Miscellaneous revenues			1,595			1,584			11
Gain from gas cost incentive sharing			2,637			1,035			1,602
Other margin adjustments			(133	)		(1,027	)		894
	Margin before regulatory adjustments		130,308			126,012			4,296
Weather normalization adjustment			(3,815	)		(5,861	)		2,046
Decoupling adjustment			6,657			8,725			(2,068	)
Regulatory adjustment for income taxes paid(1)			-			286			(286	)
	Utility margin	$	133,150		$	129,162		$	3,988
Customers - end of period:
Residential customers			617,665			612,738			4,927
Commercial customers			63,210			62,800			410
Industrial customers			919			908			11
	Total number of customers - end of period		681,794			676,446			5,348
Actual degree days			1,954			1,974
Percent colder than average weather(3)			4	%		6	%

(1)	Regulatory adjustment for income taxes paid is described below.
(2)	Amounts reported as margin for each category of customers are net of cost of gas sold and revenue taxes.
(3)	Average weather represents the 25-year average degree days, as determined in our last Oregon general rate case.

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~~The following tables summarize the composition of gas utility volumes, revenues and margin:~~

Three Months Ended Favorable/
September 30, (Unfavorable)
Thousands, except degree day and customer data 2011 2010 2011 vs. 2010
Utility volumes - therms:
Residential sales 28,809 30,031 (1,222 )
Commercial sales 25,450 26,179 (729 )
Industrial - firm sales 7,843 8,079 (236 )
Industrial - firm transportation 28,121 28,942 (821 )
Industrial - interruptible sales 11,815 12,124 (309 )
Industrial - interruptible transportation 55,828 57,268 (1,440 )
Total utility volumes sold and delivered 157,866 162,623 (4,757 )
Utility operating revenues - dollars:
Residential sales $ 42,925 $ 44,255 $ (1,330 )
Commercial sales 26,773 27,609 (836 )
Industrial - firm sales 6,631 6,934 (303 )
Industrial - firm transportation 1,476 1,340 136
Industrial - interruptible sales 7,138 7,709 (571 )
Industrial - interruptible transportation 2,364 2,024 340
Regulatory adjustment for income taxes paid(1)
3 956 (953 )
Other revenues (762 ) (723 ) (39 )
Total utility operating revenues 86,548 90,104 (3,556 )
Cost of gas sold 43,117 46,349 3,232
Revenue taxes 2,397 2,497 100
Utility margin $ 41,034 $ 41,258 $ (224 )
Utility margin:(2)

Residential sales $ 22,837 $ 23,237 $ (400 )
Commercial sales 10,135 10,203 (68 )
Industrial - sales and transportation 6,623 6,608 15
Miscellaneous revenues 867 860 7
Gain (loss) from gas cost incentive sharing 186 415 (229 )
Other margin adjustments 487 (57 ) 544
Margin before regulatory adjustments 41,135 41,266 (131 )
Decoupling adjustment (104 ) (964 ) 860
Regulatory adjustment for income taxes paid(1)
3 956 (953 )
Utility margin $ 41,034 $ 41,258 $ (224 )
Customers - end of period:
Residential customers 609,159 604,327 4,832
Commercial customers 62,204 61,656 548
Industrial customers 915 920 (5 )
Total number of customers - end of period 672,278 666,903 5,375
Actual degree days 50 110
Percent colder (warmer) than average weather(3)
(51 ) % 8 %

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Nine Months Ended Favorable/
September 30, (Unfavorable)
Thousands, except degree day and customer data 2011 2010 2011 vs. 2010
Utility volumes - therms:
Residential sales 282,116 235,985 46,131
Commercial sales 177,025 152,872 24,153
Industrial - firm sales 26,956 26,857 99
Industrial - firm transportation 95,717 92,709 3,008
Industrial - interruptible sales 43,573 42,372 1,201
Industrial - interruptible transportation 176,645 178,618 (1,973 )
Total utility volumes sold and delivered 802,032 729,413 72,619
Utility operating revenues - dollars:
Residential sales $ 328,327 $ 297,866 $ 30,461
Commercial sales 167,262 151,810 15,452
Industrial - firm sales 21,969 22,334 (365 )
Industrial - firm transportation 4,587 4,158 429
Industrial - interruptible sales 25,648 26,286 (638 )
Industrial - interruptible transportation 6,952 5,924 1,028
Regulatory adjustment for income taxes paid(1)
(7,162 ) 4,974 (12,136 )
Other revenues 10,637 14,917 (4,280 )
Total utility operating revenues 558,220 528,269 29,951
Cost of gas sold 313,781 281,189 (32,592 )
Revenue taxes 14,195 13,410 (785 )
Utility margin $ 230,244 $ 233,670 $ (3,426 )
Utility margin:(2)

Residential sales $ 150,855 $ 130,739 $ 20,116
Commercial sales 59,923 52,463 7,460
Industrial - sales and transportation 21,073 20,850 223
Miscellaneous revenues 3,977 3,836 141
Gain from gas cost incentive sharing 1,308 1,110 198
Other margin adjustments 92 29 63
Margin before regulatory adjustments 237,228 209,027 28,201
Weather normalization adjustment (10,612 ) 11,634 (22,246 )
Decoupling adjustment 10,790 8,035 2,755
Regulatory adjustment for income taxes paid(1)
(7,162 ) 4,974 (12,136 )
Utility margin $ 230,244 $ 233,670 $ (3,426 )
Actual degree days 2,968 2,594
Percent colder (warmer) than average weather(3)
12 % (2 ) %

(1) Regulatory adjustment for income taxes paid is described below.
(2) Amounts reported as margin for each category of customers are net of cost of gas sold and revenue taxes.
(3) Average weather represents the 25-year average degree days, as determined in our last Oregon general rate case.

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Residential and Commercial Sales

The primary factors that impact results of operations in the residential and commercial markets are customer growth, seasonal weather patterns, energy prices, competition from other energy sources and economic conditions in our service areas. Typically, 80 percent or more of our utility’s operating revenues on an annual basis 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 is significantly reduced by our weather normalization mechanism in Oregon where about 90 percent of our customers are served. For more information on our weather mechanism, see Regulatory Matters—Rate Mechanisms—Weather Normalization in our 2010 Form 10-K.

~~Three months ended September 30, 2011 compared to September 30, 2010:~~

~~The primary factors contributing to changes in residential and commercial volumes and operating revenues in the third quarter of this year as compared to the same period last year were:~~

·	sales volumes decreased 3 percent based on weather that was 55 percent warmer than 2010; sales volumes to utility customers are not as weather sensitive in the summer months as they are in the winter-heating season;

·	~~utility operating revenues decreased $2.2 million or 3 percent partly due to the lower sales volumes and partly due to customer rate decreases over last year; and~~

·	~~utility margin increased $0.4 million or 1 percent, including decoupling adjustments.~~

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

The primary changes that impacted margin from residential and commercial sales for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 compared to ~~September 30, 2010~~March 31, 2011 were as follows:

·	utility sales volumes ~~increased 18~~were 1 percent higher, primarily reflecting 14residential and commercial customer growth of 0.8 percent ~~colder weather~~ and ~~customer growth;~~increased demand from customers;

utility operating revenues ~~increased $45.9~~decreased $6.6 million or 102 percent primarily ~~reflecting increased volumes from colder weather and~~due to lower customer ~~growth,~~billing rates tied to PGA prices decreases, partially offset by ~~customer rate decreases over last year;~~higher volumes; and

utility margin increased ~~$8.1~~$1.7 million or 41 percent primarily reflecting increased volumes from higher residential and commercial sales volumes due to customer ~~growth and colder weather, which was partially offset by weather normalization adjustments that benefit customer bills when weather is colder than normal.~~growth.

Industrial Sales and Transportation

Operating revenues from industrial customers include the commodity cost component of gas sold under sales service but not under transportation service. Therefore, operating revenues from industrial customers can increase or decrease when customers switch between sales service and transportation service, but generally our margins from these customers are unaffected by these changes because we do not include a profit mark-up for the cost of gas. As such, we believe volumes delivered and margins are better measures of performance for the industrial sector.

~~Three months ended September 30, 2011 compared to September 30, 2010:~~

The primary ~~factors~~changes that impacted ~~third quarter results~~volumes and margins from industrial sales and transportation ~~markets~~services for the three months ended March 31, 2012 compared to March 31, 2011 were as follows:

~~volumes delivered~~gas deliveries to ~~industrial~~industrials were up about 4 percent in the quarter over 2011 results. The volume increase in the period reflects a slight improvement in the economy. Specifically, we’ve added a few new customers ~~decreased by 2.8 million therms, or 3 percent;~~in the forest products segment, and because of the price advantage of natural gas over oil we are beginning to see asphalt plants and other businesses converting to gas that we believe will be coming online in the second and third quarters; and

·	margin ~~was roughly the same as last year.~~

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~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

~~The primary factors that impacted year-to-date results~~ from ~~industrial sales and transportation markets were as follows:~~

~~volumes delivered to~~ industrial customers ~~increased 2.3 million therms, or 1 percent, due~~was flat compared to ~~a slight increase~~last year, with increases in ~~energy demand, with the majority of the increased volumes attributable to~~usage and margins from the manufacturing ~~sector; and~~

·	sector offset by margin ~~increased $0.2 million,~~losses from customers no longer in business or ~~1 percent primarily~~scaled back due to the ~~increase in volumes.~~weak economy.

Regulatory Adjustment for Income Taxes Paid

~~From 2007 through 2010,~~In prior years, Oregon law required ~~certain regulated natural gas and electric utilities~~the company to annually review the amount of income taxes collected in rates from utility operations and compare it to the amount of taxes the utility ~~actually pays to taxing authorities. Under~~paid. In 2011, this law ~~if we paid less in~~was repealed. We did not recognize any income ~~taxes~~or expense related to ~~utility operations than~~this regulatory adjustment for the three months ended March 31, 2012, but we ~~collected from Oregon utility customers, then we were required~~did recognize margin revenues of $0.3 million in the three months ended March 31, 2011 for accrued interest attributed to ~~refund the excess~~regulatory surcharges related to our Oregon utility customers. Conversely, if we paid more in income taxes than we collected from Oregon utility customers, then we were required to collect a surcharge from Oregon utility customers.

~~The Company’s income taxes resulted in a surcharge every year since SB 408 became law in 2006. For~~ the 2009 ~~tax year, the OPUC approved the Company’s recovery of $5.1 million plus interest from customers. For the~~and 2010 tax ~~year, we had originally estimated and accrued the difference between~~years. For more information on regulatory income taxes paid, ~~and the amounts collected~~see Results of Operations – Business Segments – Utility Operations – Regulatory Adjustment for Income Taxes Paid in ~~rates of $7.1 million, excluding interest. However, SB 967 was signed into law in May of~~our 2011 thereby repealing the regulatory adjustment for income taxes paid for the 2010 tax year and all years thereafter. As a result, we recorded a charge of $7.4 million in the second quarter of 2011 to write-off the regulatory asset amount from SB 408, plus interest, related to 2010 tax year. Also, for the corresponding three and nine month periods ended September 30, 2010, we had recognized $1.0 million and $5.0 million, respectively, of pre-tax revenues from SB 408.

SB 967 will require the OPUC to make decisions in future ratemaking proceedings on the amounts of income taxes to be recovered in customer rates. For further discussion, see “Revenue Recognition” above under Application of Critical Accounting Policies and Estimates.Form 10-K.

Other Revenues

Other revenues include miscellaneous fee income ~~as well as revenue adjustments reflecting deferrals to, or amortizations~~and other regulatory adjustments. Other revenues increased from ~~regulatory asset or liability accounts, except~~$0.6 million for ~~gas cost deferrals which flow through~~ the ~~cost of gas sold.~~

~~Three~~three months ended ~~September 30,~~March 31, 2011 ~~compared~~ to ~~September 30, 2010:~~

$1.4 million for the three months ended March 31, 2012. The ~~change in other revenues~~majority of this difference is related to the charge taken related to the earnings test, which was ~~negligible from $0.8~~$1.0 million in the ~~third~~first quarter of 2011 ~~compared to $0.7 million in 2010.~~

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

~~Other revenues were $10.6~~and $0.4 million in the ~~nine months ended September 30, 2011, a decrease~~first quarter of $4.3 million over the same period of 2010, reflecting a $4.7 million decrease in the decoupling amortization and a decrease in other regulatory amortizations of $2.4 million partially offset by a $1.0 million accrual for estimated credits due to utility customers from our regulatory incentive sharing mechanism related to gas storage services at Mist, and an increase in the decoupling deferral of $2.8 million.2012.

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Cost of Gas Sold

Cost of gas sold as reported by the utility includes gas purchases, gas drawn from storage inventory, gains and losses from commodity hedges, pipeline demand costs, seasonal demand cost balancing adjustments, regulatory gas cost deferrals, production from gas reserves, and company gas use. ~~Our regulated utility does not generally earn a profit, or incur a loss, on gas commodity purchases.~~ The OPUC and WUTC generally require natural gas commodity costs to be billed to customers at the same ~~cost~~costs are incurred, or expected to be incurred, by the utility. ~~However, under~~Customer rates are set each year so that if cost estimates were met we would not earn a profit or incur a loss on gas commodity purchases; however, in Oregon we have an incentive sharing mechanism whereby we either increase or decrease margin results based on a percentage of actual gas costs as compared to embedded gas costs in the ~~PGA mechanism in Oregon,~~PGA. Under this provision, our net income can be affected by differences between actual and expected gas costs, which occur primarily because of market fluctuations and volatility affecting unhedged gas purchases (see “Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment,” above). In addition, we recently entered into a regulatory agreement where we receive a rate base return on our investment in gas reserves (see Part II, Item 7., “Regulatory Matters-Rate Mechanisms-Purchased Gas Adjustment and Regulatory Matters-Rate Mechanisms-Gas Reserves in the 2011 Form 10-K). We use natural gas commodity-based hedge contracts (derivatives), primarily fixed-price commodity swaps, consistent with our financial derivatives policies to help manage our exposure to rising gas prices. Gains and losses from these financial hedge contracts are generally included in our PGA prices and normally do not impact net income because the hedged prices are ~~usually 100 percent passed through to customers~~reflected in our annual rate changes, subject to a regulatory prudency review. However, ~~utility~~ hedge contracts entered into after the annual PGA rates are set in Oregon can impact net income because we would be required to share in any gains or losses as compared to the corresponding commodity prices built into rates in the PGA. In Washington, ~~cost of gas sold does not affect our margins or net income because~~ 100 percent of the actual gas costs, including hedge gains and losses allocated to Washington gas sales, are passed through in customer rates (see Part II, Item 7., “Application of Critical Accounting Policies and Estimates—Accounting for Derivative Instruments and Hedging Activities,” and “Results of Operations—Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment,” in the ~~2010~~2011 Form 10-K, and Note 1312 in this report).

~~Three~~ The following summarizes the major factors that contributed to changes in cost of gas sold for the three months ended ~~September 30, 2011 compared to September 30, 2010:~~March 31, 2012:

·	total cost of gas sold decreased ~~$3.2~~$10.9 million, or ~~7 percent, mainly due to a 3 percent decrease in sales volumes;~~

·	~~the average gas cost collected through rates, excluding customer refunds for accumulated gas cost savings from prior quarters remained constant at 61 cents per therm; and~~

·	~~hedge losses totaling $6.6 million were realized and included in cost of gas sold this quarter, compared to $12.6 million of hedge losses in the same period of 2010.~~

The effect on operating results from our gas cost incentive sharing mechanism was a margin gain of $0.2 million in the third quarter of 2011, compared to a margin gain of $0.4 million for the third quarter of 2010.

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

·	~~total cost of gas sold increased $32.6 million, or 12~~6 percent, due to a ~~10 percent increase in total sales volumes offset by a 3~~7 percent decrease in the average cost of gas sold per ~~therm;~~therm offset by a 2 percent increase in sales volumes and;

the average gas cost collected through rates decreased from ~~62 cents per therm in 2010 to~~ 60 cents per therm in the first quarter of 2011 to 56 cents per therm in the first quarter of 2012, primarily reflecting lower gas prices, which were passed on through in PGA rate decreases effective November 1, ~~2009 and 2010;~~2011; and

hedge losses totaling ~~$36.2~~$29.4 million were realized and included in cost of gas sold for the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, compared to ~~$33.3~~$20.9 million of hedge losses in the same period of ~~2010.~~2011. Since the underlying hedge prices were included in our PGA billing rates, these losses did not impact margin or net income.

The amount recorded to pre-tax income from the shareholders’ portion of our gas cost incentive sharing mechanism was a margin contribution of ~~$1.3~~$2.6 million in the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 compared to ~~$1.1~~$1.0 million in ~~2010.~~2011. For a discussion of our gas cost incentive sharing mechanism, see “Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment,” above.

~~Table of Contents~~

Business Segments - Gas Storage

Our gas storage segment primarily consists of the ~~acquisition, development, operation, and management~~non-utility portion of ~~natural gas storage facilities. As of September 30, 2011, we owned and operated non-utility investments at~~ our Mist underground storage facility in Oregon and at our ownership interest in the Gill Ranch underground storage facility in California. Construction of the Gill Ranch storage facility was completed and placed into service during the fourth quarter of 2010. Our gas storage segment also includes asset optimization services using unused gas storage and transportation capacity.

~~Three months ended September 30, 2011 compared to September 30, 2010:~~

For the three months ended ~~September 30, 2011, we~~March 31, 2012, our gas storage segment earned ~~$1.2~~$0.8 million, or 43 cents per share, compared to ~~$1.8~~$0.7 million, or 73 cents per share, for the same period in ~~2010. Even though the gas storage segment margin increased $1.8 million over last year~~2011. The increase in net income was primarily due to ~~revenues from the new Gill Ranch facility,~~improvement in net ~~income decreased $0.6 million over 2010 due to lower firm storage and storage optimization revenues at Mist and a net loss~~operating losses at Gill Ranch, from first year costs, including depreciation, and low storage contract revenues. In addition to currently low storage values, we did not have, as expected, all 15 Bcf of design capacity at Gill Ranch available for contracted revenues during the first year of operations. However, based on our experience with the storage reservoir so far, we anticipate that the full 15 Bcf should be available to contract with customers by the end of 2012.

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

For the nine months ended September 30, 2011, our gas storage segment earned $3.2 million, or 12 cents per share, compared to $6.4 million, or 24 cents per share, for the same period in 2010. This decrease was partly due to a downturn in revenues from firm storage and optimization services at Mist and to a net loss at Gill Ranch from first year costs, including depreciation, and low storage contract revenues. The net loss at Gill Ranch was also affected bywhich had comparatively low storage revenues during the first quarter of 2011 because most of ~~the customer~~its capacity contracts did not ~~go into effect~~begin until April 1, ~~the beginning of the first full year of operations~~2011. The Gill Ranch improvement was partially offset by lower revenues and net income from firm storage and asset management services at ~~Gill Ranch.~~

~~Gas~~Mist. In total, gas storage margin increased ~~$3.7~~$1.4 million to ~~$19.2~~$6.7 million for the ~~nine~~three months ended ~~September 30, 2011, primarily due to Gill Ranch’s revenues of $6.6 million, partially offset by a decrease in firm contract and third-party optimization revenues of $2.9 million at Mist.~~March 31, 2012.

Business Segments - Other

Our other business segment consists primarily of NNG Financial’s investment in KB Pipeline, our equity investment in PGH, which in turn has invested in the Palomar pipeline project, and ~~our~~ other miscellaneous non-utility investments and business activities. NNG Financial had total assets of ~~$0.9~~$1.0 million and $1.1 million as of ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ respectively, primarily reflecting a non-controlling interest in KB ~~Pipeline.~~Pipeline which is contracted to serve our utility. Our net equity investment in PGH as of ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ was ~~$14.4~~$13.5 million and ~~$14.7~~$14.8 million, respectively, with the decrease year-over-year reflecting a ~~$0.3~~$1.3 million write-down ~~of our Palomar investment~~taken in ~~2011 for project costs related to the west pipeline segment.~~2011. In aggregate, earnings from our other business segment for the ~~nine~~three months ended ~~September 30,~~March 31, 2012 and 2011 were net income of $10 thousand and ~~2010 were~~ a net loss of ~~$0.2 million and net income of $0.3 million,~~less than $100 thousand respectively. See Note 4 and Note 12 in the ~~2010~~2011 Form 10-K, and Note 4 and Note 11 in this report, for further details on our other ~~segment.~~

segment and our investment in PGH.

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Consolidated Operations

Operations and Maintenance

~~Three months ended September 30, 2011 compared to September 30, 2010:~~

Consolidated operations and maintenance expense was ~~$28.4~~$34.4 million in 2012, compared to $31.2 million in 2011, ~~compared to $26.9 million in 2010,~~ an increase of ~~$1.5~~$3.2 million or ~~5 percent. The primary factors contributing to the increase were:~~

·	~~a $1.4 million increase for operations and maintenance expenses at Gill Ranch; and~~

·	~~a $0.9 million increase in employee payroll expense at the utility primarily related to a slight increase in the number of employees.~~

~~Partially offsetting the above factors were:~~

·	~~a $0.3 decrease in accrued incentive compensation reflecting lower results against targets compared to last year.~~

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

~~Consolidated operations and maintenance expense was $89.9 million in 2011, compared to $86 million in 2010, a increase of $3.9 million or 5~~10 percent. The following summarizes the major factors that contributed to changes in operations and maintenance expense for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 compared to ~~September 30, 2010:~~March 31, 2011:

·	a ~~$4.4~~$1.1 million increase ~~for operations and maintenance expenses at Gill Ranch;~~in utility payroll primarily related to an increase in field service employees;

·	a $1.3 million increase in employee payroll expense at the utility reflecting additional customer service employees and a temporary shift in the allocation of resources between operations and maintenance work and capital project work during the period;

·	~~a $0.3~~$1.5 million increase in utility ~~bad debt~~non-payroll expense ~~due to~~including higher ~~gross operating revenues (see discussion below); and~~

·	~~a $0.5 million increase in utility health care~~ costs for new employee training, the Oregon general rate case, IT systems maintenance and other ~~employee benefit expense.~~

~~Partially offsetting the above factors were:~~

·	~~a $1.0 million decrease in utility consulting and legal fees reflecting expenses incurred last year related to our successful property tax appeal;~~

·	~~a $1.7 million decrease in accrued incentive compensation at the utility based on lower results against targets compared to last year;~~customer service costs; and

·	a $0.9 million ~~decrease~~increase in utility employee benefit expense, principally related to heath care and pension costs. See below for an additional discussion on pension costs.

Partially offsetting the factors above was:

·	a $0.3 million reduction in operating expense at Gill Ranch due to higher start-up costs for Gill Ranch in the ~~effects~~first quarter of ~~the new regulatory deferral of pension costs authorized by the OPUC (see discussion below).~~2011.

Our bad debt expense as a percent of revenues was ~~0.24~~0.23 percent for the twelve months ended ~~September 30, 2011,~~March 31, 2012, compared to ~~0.15~~0.18 percent for the same period last year. ~~The increase in our~~Our bad debt expense ~~ratio was largely due to lower than normal expense ratio in 2010 that reflected improved collections and recoveries of delinquent account balances. Despite~~results over the ~~modest increase, we~~past few years have been favorable despite challenging economic conditions. We believe ~~bad debt losses are comparable to last year and low compared to industry averages, but~~ credit risks are still elevated due to the continuing weak economy and high unemployment ~~rates.~~rates, but we expect our bad debt expense ratio over the long term to remain below 0.5 percent of revenues.

~~Effective January 1, 2011,~~Our accounting expense for pension costs increased fairly significantly in 2012 largely due to lower interest rates; however, the OPUC approved the deferral of NW Natural’s utility pension costs when ~~NW Natural’s~~its qualified defined benefit pension plans’ operations and maintenance cost exceeds the amount currently recovered in rates. The pension cost deferral iswas recorded to a regulatory ~~asset~~ balancing account, which we expect to result in an estimated $5 million deferral for 2011. So far, we have deferred $4.0 million in the first nine months of 2011, which, when netted with pension expense, resulted in a $0.9 million decrease toreduced operations and maintenance expense ~~compared to~~by $2.1 million for the three months ended March 31, 2012 and $1.3 million for the same period ~~in 2010.~~last year (see Note 8). Therefore, increased pension costs had a minimal effect on operations and maintenance expense, with the increase principally related to the cost allocation to our Washington customers. For further explanation of the pension balancing account, see “Regulatory Matters—Rate Mechanisms—Pension Deferral,” above.

General Taxes

General taxes increased $0.7 million in the first three months of 2012 compared to 2011 primarily due to a $0.5 increase in property taxes at Gill Ranch because of capital investments added to our California tax base in 2011.

Depreciation and Amortization

For the three months ended March 31, 2012, depreciation and amortization expense increased by $0.6 million, or 4 percent compared to the same period in 2011. The increased expense in 2012 was related to higher depreciation at the utility and Gill Ranch because of plant asset additions.

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~~General Taxes~~

~~Three months ended September 30, 2011 compared to September 30, 2010:~~

General taxes, which are principally comprised of property taxes, payroll taxes and regulatory fees, increased $0.9 million, or 13 percent, in the three months ended September 30, 2011 over the same period in 2010, reflecting the timing ~~differences on regulatory fees payable and taxes associated with startup of Gill Ranch earlier this year.~~

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

General taxes increased $4.9 million in the first nine months of 2011 compared to 2010. The major factor that contributed to the change in general taxes was the $5.2 million refund in 2010 for prior years’ property taxes paid pursuant to a favorable ruling from the Oregon Supreme Court. For several years, we had been involved in litigation with the Oregon Department of Revenue over the taxability of certain inventories that were held for sale, including gas inventories. In January 2010, the Oregon Supreme Court unanimously ruled in our favor, stating that these inventories were exempt from property tax. As a result of this ruling, we were refunded $5.2 million, plus accrued interest, for taxes paid on inventories beginning with the 2002-03 tax year. We recognized a net $6.1 million increase in pre-tax income in the first quarter of 2010, which consisted of $5.2 million for the refund of property taxes, $1.9 million for accrued interest income, and $1.0 million in increased operations and maintenance expense for legal and consulting fees.

~~Depreciation and Amortization~~

Depreciation and amortization expense increased by $1.4 million, or 9 percent for the three months ended September 30, 2011, compared to the same period in 2010. For the nine months ended September 30, 2011, depreciation and amortization expense increased by $4.4 million, or 9 percent, as compared to the same period in 2010. The increased expense in the three and nine month periods of 2011 was primarily related to depreciation of Gill Ranch assets, which went into service in the fourth quarter of 2010. A portion of the increase was also related to additional investments in utility plant related to customer growth and system improvements.

Other Income and Expense – Net

The following table provides details on other income and expense – net by primary components:

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
Thousands	2011			2010			2011			2010			2012			2011
Gains from company-owned life insurance	$	286		$	599		$	1,485		$	1,640		$	784		$	505
Interest income		6			8			36			2,006			16			7
Income (loss) from equity investments		(1	)		(152	)		(354	)		576			(1	)		-
Net interest on deferred regulatory accounts		1,548			1,189			4,563			3,163			1,005			1,514
Gain (loss) on sale of investments		-			-			(96	)		223			-			(96	)
Other non-operating		(58	)		(311	)		(1,517	)		(1,639	)		(799	)		(716	)
Total other income and expense - net	$	1,781		$	1,333		$	4,117		$	5,969		$	1,005		$	1,214

Other income and expense – net for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 decreased ~~$1.9~~$0.2 million over ~~2010~~2011, with the decrease primarily due to ~~the 2010 refund of property taxes as discussed above, which included $1.9 million in accrued interest income. Other income and expense also included a $1.4 million increase in~~lower interest from net regulatory asset account balances, ~~largely due to smaller gas costs refund balances, which was~~ partially offset by a ~~$0.9~~$0.3 million ~~decrease~~increase in ~~income~~gains from ~~our equity investments the majority of which was related to PGH.~~life insurance policy proceeds.

Interest Expense – Net

Interest expense – net ~~decreased $0.4~~increased by $0.7 million for the three months ended ~~September 30, 2011 and $0.8 million for the nine months then ended,~~March 31, 2012 compared to the ~~same periods in 2010. The current year decreases were~~first three months of 2011, with the increase primarily due to ~~a $1.2~~interest on Gill Ranch’s new $40 million ~~savings from interest expense on long-term~~ debt ~~as a result of bonds~~balance that ~~were redeemed~~was issued in ~~2010, partially offset by a $0.8 million increase for gas storage related to the Gill Ranch base gas agreement.~~

late 2011.

~~Table of Contents~~

Income Tax Expense

The ~~decrease~~change in income tax expense ~~of $5.6 million or 19 percent~~was not material for the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, compared to the same period in ~~2010, was primarily due to lower pre-tax consolidated earnings of $14.1 million or 19 percent.~~

~~The increase in our effective tax rate for the nine months ended September 30, 2011 compared to the same period in 2010 was negligible.~~2011. For more information on our income taxes, including a reconciliation between the statutory federal and state income tax rates and our effective rates, see Note ~~10.~~9.

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Financial Condition

Capital Structure

One of our long-term goals is to maintain a strong consolidated capital structure, generally consisting of 45 to 50 percent common stock equity and 50 to 55 percent long-term and short-term debt. IfWhen additional capital is required, ~~then~~ debt or equity securities are issued depending upon both the target capital structure and market conditions. These sources of capital are also used to fund long-term debt redemptions and short-term commercial paper maturities (see “Liquidity and Capital Resources,” below, and Note 7). Achieving the target capital structure and maintaining sufficient liquidity to meet operating requirements are necessary to maintain attractive credit ratings and have access to capital markets at reasonable costs. Our consolidated capital structure at ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ and at December 31, ~~2010~~2011 was as follows:

	September 30,						December 31,			March 31,						December 31,
	2011			2010			2010			2012			2011			2011
Common stock equity		45.8	%		45.9	%		44.7	%		49.7	%		47.9	%		46.5	%
Long-term debt		39.6	%		40.2	%		38.1	%		42.7	%		36.5	%		41.7	%
Short-term debt, including current maturities of long-term debt		14.6	%		13.9	%		17.2	%		7.6	%		15.6	%		11.8	%
Total		100	%		100	%		100	%		100	%		100	%		100	%

Liquidity and Capital Resources

At ~~September 30, 2011,~~March 31, 2012, we had ~~$25.9~~$4.0 million of cash and cash equivalents compared to ~~$2.5~~$3.5 million at ~~September 30, 2010.~~March 31, 2011. We also had $4.0 million in restricted cash at Gill Ranch as of March 31, 2012, which is being held as collateral on the long-term debt outstanding. The $0.9 million of restricted cash at Gill Ranch as of March 31, 2011 was held as collateral for equipment purchase contracts, but that amount was released back to Gill Ranch when contract conditions were met. In order to maintain sufficient liquidity during periods ~~of volatile~~when capital markets ~~at times~~are volatile, we ~~will~~may elect to maintain higher cash balances, add short-term borrowing capacity, ~~and issue long-term debt in advance of large~~or pre-fund utility capital ~~projects~~expenditures when ~~interest rates~~long-term fixed rate environments are attractive. As a regulated entity, our issuance of equity securities and ~~market conditions~~most forms of debt securities are ~~attractive~~subject to approval by the OPUC and ~~favorable for customers.~~ WUTC, and our use of proceeds from utility specific issuances are restricted to certain utility purposes. Our use of retained earnings is not subject to those same restrictions.

~~Our~~For the utility segment, our short-term liquidity is supported by cash balances, internal cash flow from operations, proceeds from the sale of commercial paper notes, ~~committed~~borrowings from multi-year ~~bank~~ credit facilities, ~~proceeds~~cash available from ~~cash~~ surrender value ~~loans taken out of~~in company-owned life insurance policies, and proceeds from the sale of long-term debt. We use utility long-term debt proceeds ~~generally~~ to finance utility capital expenditures, to refinance maturing ~~short-term~~debt of the utility and ~~long-term debt and to~~ provide for general corporate ~~purposes. In September 2011, we issued $50 million~~purposes of ~~secured medium-term notes (MTNs) with a coupon rate of 3.176 percent~~the utility.

Capital markets over the past few years, including the commercial paper market, experienced significant volatility and ~~a maturity of 10 years.~~

~~With~~tight credit conditions, but current conditions have improved significantly as reflected by tighter credit spreads and increased access to new financing for investment grade issuers. Based on our current debt ratings (see “Credit Ratings,” below), we have been able to issue commercial paper and ~~MTNs~~first mortgage bonds at attractive rates and have not needed to borrow from our back-up ~~bank~~ credit facilities. In the event that we ~~were~~are not able to issue new debt due to market conditions, we expect that our ~~near-term~~near term liquidity needs ~~could~~can be met by using cash balances or, for the utility segment, drawing upon our committed credit ~~facilities and other liquid assets.~~facilities. We also have a universal shelf registration filed with the ~~Securities and Exchange Commission~~SEC for the issuance of secured and unsecured debt or equity securities, subject to market conditions and certain regulatory approvals. WeAs of March 31, 2012, we have OPUC approval to issue up to $125 million of additional ~~MTNs~~debt under the existing shelf registration ~~which was filed in January 2011.~~for approved purposes.

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In the event that our senior unsecured long-term debt credit ratings are downgraded, or our outstanding derivative position exceeds a certain credit threshold, our counterparties under derivative contracts could require us to post cash, a letter of credit or other form of collateral, which could expose us to additional cash requirements and may trigger significant increases in short-term borrowings. If the credit risk-related contingent features underlying these contracts were triggered on ~~September 30, 2011,~~March 31, 2012, we could have been required to post ~~$37.2~~up to $40.4 million of collateral to our counterparties, but that assumes our long-term debt ratings were atdowngraded to non-investment grade levels, which ~~is several~~would be a very significant change from current rating levels ~~below our current ratings~~for NW Natural (see Note 12 and “Credit Ratings,” below).

Additionally, in July 2010, the U.S. Congress passed and President Obama signed into law the “Wall Street Reform and Consumer Protection Act.” The legislation requires additional government regulation of derivative and over-the-counter transactions, and could expand collateral requirements. While we continue to evaluate the legislation to determine its impact, if any, on our hedging procedures, results of operations, financial position and liquidity, we do not expect to know the full impact of the legislation until final regulations implementing the legislation are issued.

~~Business~~Recent developments that ~~could~~may have a ~~material~~significant impact on our liquidity and capital ~~resource position~~resources include pension ~~contributions, income~~contribution requirements, tax benefits and liabilities, environmental expenditures and insurance ~~recoveries.~~recoveries, and refunds to customers. With respect to pension requirements, we expect to make ~~additional~~significant contributions ~~later this year and in future~~over the next several years ~~so that the plan will be~~until we are fully funded ~~in accordance with~~under the Pension Protection Act rules (see “Pension Cost and Funding Status of Qualified Retirement Plans,” below). With respect to federal income tax liabilities, an extension was granted that ~~allows~~allowed us to take 100 percent bonus depreciation on qualified expenditures during 2011, and allows 50 percent bonus depreciation on a majority of our capital expenditures in 2012, which significantly reduces our tax liability for ~~the 2011 and 2012~~those tax years ~~thereby providing~~and provides cash flow benefits in ~~both years~~2012 and ~~possibly beyond 2012 if these deductions result in a net operating loss carry-forward~~2013 (see “Cash Flows—Operating Activities,” below). With respect to environmental liabilities, we expect to continue using cash resources to fund our environmental liabilities, but we also anticipate recovering amounts ~~from~~through insurance or utility rates over the next several years, although the amount and ~~utility~~timing of these expenditures and recoveries is uncertain (see Note 13).

With respect to customer refunds or credits, our actual gas costs have been significantly lower in recent months than the gas prices embedded in customer rates. As a result, our PGA incentive sharing mechanism deferred 90 percent of these gas cost savings attributed to Oregon, and 100 percent of the savings attributed to Washington, into a regulatory account for refund back to customers (see “Purchased Gas Adjustment,” above). Ordinarily, these refunds would be credited to customer rates ~~based on~~in the next year’s PGA filing, but in April 2012 the company requested regulatory approval to immediately credit an estimated $35 million to Oregon customers and $4 million to Washington customers through billing credits. In addition, in April 2012 the company also requested regulatory approval to provide its Oregon utility customers with an estimated $9 million interstate storage credit from our ~~current assumptions regarding litigation~~regulatory incentive sharing mechanism related to gas storage and ~~regulatory treatment going forward. See Note 14.~~asset management services. If approved, we intend to apply both of these credits to customer bills in June of 2012.

Our storage segment’s short-term liquidity is supported by cash balances, internal cash flow from operations, external financing, and to a certain extent on funding from its parent company. Gill Ranch ~~storage business began commercial~~has a limited operational history, having begun operations in ~~the fourth quarter of~~October 2010. WeAlthough we anticipate operating cash flows ~~at Gill Ranch~~ to ~~increase over time as our share of~~be sufficient for liquidity purposes, the ~~facility ramps up to its full 15 Bcf design capacity, now expected to occur by the end of 2012, and as we contract for such incremental storage capacity. The~~ amount and timing of these cash flows ~~will depend~~are uncertain. In November 2011, Gill Ranch issued $40 million of senior secured notes, with a fixed interest rate on ~~future storage values~~$20 million and ~~our ability~~a variable interest rate on the remaining $20 million. The average combined interest rate on the notes was 7.38 percent per annum through March 31, 2012. These notes are secured by all of the membership interests in Gill Ranch Storage, LLC, and are nonrecourse to ~~optimize unused storage capacity.~~NW Natural and other entities of the consolidated group. The maturity date of these notes is November 30, 2016.

~~In July 2010,~~Under the ~~U.S. Congress passed~~note agreements, Gill Ranch is subject to certain covenants and ~~President Obama signed into law~~restrictions, including but not limited to a financial covenant that requires Gill Ranch to maintain minimum adjusted EBITDA at various levels over the ~~“Wall Street Reform~~term of the notes. The minimum adjusted EBITDA increases incrementally over the first few years, reaching its highest level in the 12-month period beginning April 1, 2015. Under the agreements, Gill Ranch is also subject to a debt service reserve requirement of 10 percent of the outstanding principal amount, initially $4 million, certain prepayment penalties, restrictions on dividends out of Gill Ranch unless certain earnings ratios are met, and ~~Consumer Protection Act,” requiring~~restrictions on incurrence of additional ~~government regulation~~debt.

Table of derivative and over-the-counter transactions and expanded collateral requirements. While we are currently evaluating the new legislation to determine its impact on our cash flows from derivative activities, if any, we will not know the full impact until final regulations implementing the legislation are issued.Contents

Based on several factors, including our current credit ratings, our ~~experience issuing~~ commercial paper ~~our~~program, current cash reserves, ~~our~~ committed credit facilities, ~~and other liquidity resources,~~ and our expected ability to issue long-term debt under ~~the Company’s~~our universal shelf registration, we believe our liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations and investing and financing activities discussed below.

~~Off-Balance Sheet Arrangements~~

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

~~Contractual Obligations~~

At September 30, 2011, our purchase commitments increased approximately $23 million since December 31, 2010, primarily involving long-term contracts entered into in the normal course of business. In addition to these purchase commitments, we entered into an agreement in 2011 with Encana to develop gas reserves for our utility, for which we expect to spend an additional $200 million over the next four calendar years, subject to certain NW Natural rights to terminate the agreement. See “Financial Condition—Contractual Obligations,” in the 2010 Form 10-K.

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Short-Term Debt

Our primary source of utility short-term liquidity is from internal cash flows and the sale of commercial paper. In addition to issuing commercial paper to meet working capital requirements, including seasonal requirements to finance gas inventories and accounts receivable, short-term debt may also be used to temporarily fund utility capital requirements. Commercial paper is periodically refinanced through the sale of long-term debt or equity securities. Our outstanding commercial paper, which is sold through two commercial banks under an issuing and paying agency agreement, is supported by one or more unsecured revolving credit facilities (see “Credit Agreements,” below). Our commercial paper program did not experience any liquidity disruptions as a result of the credit problems that affected issuers of asset-backed commercial paper and certain other commercial paper programs over the last several years. At ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ our utility had commercial paper outstanding of ~~$181.2~~$113.7 million and ~~$159.9~~$186.4 million, respectively. The effective interest rate on the utility’s commercial paper outstanding at ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ was ~~0.3~~0.2 percent and 0.4 percent, respectively.

Credit Agreements

We have a syndicated multi-year credit agreement for unsecured revolving loans totaling $250 ~~million, which may be extended for additional one-year periods subject to lender approval.~~million. The original term of this credit agreement was extended through May 31, 2013. All lenders under our syndicated agreement are major financial institutions with committed balances and investment grade credit ratings as of ~~September 30, 2011~~March 31, 2012 (see table below). ~~We also had three bilateral~~This credit ~~agreements totaling $50 million in effect from November 30, 2010 through March 31, 2011 for seasonal working capital needs.~~facility is scheduled to expire next year, and we plan to negotiate a replacement credit facility later this year.

		Loan Commitment ~~Amounts in Thousands~~ (In Thousands)
		Syndicated
Lender rating, by category		Facility
~~AA/Aa~~AAA/Aaa		$	~~230,000~~-
AA/Aa			165,000
A/A			~~20,000~~85,000
BBB/Baa			-
	Total	$	250,000

Based on credit market conditions, it is possible that one or more lending commitments could be unavailable to us if the lender defaulted due to lack of funds or insolvency. However, based on our current assessment of our lenders’ creditworthiness, including a review of capital ratios, credit default swap spreads and credit ratings, we believe the risk of lender default is minimal.

As discussed above, we extended commitments with all of our lenders under the $250 million syndicated agreement through May 31, 2013. This syndicated agreement ~~also~~ allows us to request increases in the total commitment amount from time to time, up to a maximum amount of $400 ~~million, and to replace any lenders who decline to extend the maturity date of the credit agreement.~~million. This syndicated agreement also permits the issuance of letters of credit in an aggregate amount up to the applicable total borrowing commitment.

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Any principal and unpaid interest amounts owed on borrowings under the credit agreements are due and payable on or before the maturity date. There were no outstanding balances under these credit agreements at ~~September 30, 2011~~March 31, 2012 and ~~2010.~~2011. These agreements require us to maintain a consolidated indebtedness to total capitalization ratio of 70 percent or ~~less.~~less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. We were in compliance with this covenant at ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ with consolidated indebtedness to total capitalization ratios of 5450 percent ~~for each period.~~

and 52 percent, respectively.

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The syndicated agreement also requires that we maintain credit ratings with ~~Standard & Poor’s (S&P)~~S&P and Moody’s ~~Investors Service (Moody’s)~~ and notify the lenders of any change in our senior unsecured debt ratings by such rating agencies. A change in our debt ratings by S&P or by Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. However, a change in our debt rating below BBB- by S&P or Baa3 by Moody’s would require additional approval from the OPUC prior to issuance of utility debt, and interest rates on any loans outstanding under the credit agreements are tied to debt ratings, which would increase or decrease the cost of any loans under the credit agreements when ratings are changed (see “Credit Ratings,” below).

Credit Ratings

Our debt credit ratings are a factor in our liquidity, affecting our access to the capital markets, including the commercial paper market. Our debt credit ratings also have an impact on the cost of funds and the need to post collateral under derivative contracts. A change in our ratings below BBB- by S&P or Baa3 by Moody’s would require additional approval from the OPUC prior to our issuing additional long-term debt.

The following table summarizes our current debt ratings from S&P and Moody’s:

	S&P	Moody’s

Commercial paper (short-term debt)	A-1	P-1
Senior secured (long-term debt)	A+	A1
Senior unsecured (long-term debt)	n/a	A3
Corporate credit rating	A+	n/a
Ratings outlook	Stable	Stable

The above credit ratings are dependent upon a number of factors, both qualitative and quantitative, and are subject to change at any time. The disclosure of these credit ratings is not a recommendation to buy, sell or hold NW Natural securities. Each rating should be evaluated independently of any other rating.

Maturities and Redemptions of Long-Term Debt

For the ~~nine~~three months ended ~~September 30, 2011, $10~~March 31, 2012, $40 million of secured ~~MTNs~~Medium Term Notes (MTNs) with a coupon rate of ~~6.665%~~7.13% were redeemed at maturity. Over the next twelve months, ~~$40 million~~there are no scheduled redemptions of ~~secured MTNs with a coupon rate of 7.13% will be redeemed at maturity in March 2012.~~long-term debt. For long-term debt maturing over the next five years, see ~~Part II, Item 7., "Results of Operations—Financial Condition—Contractual Obligations,"~~“Contractual Obligations” in our ~~2010~~2011 Form 10-K.

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Cash Flows

Operating Activities

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

Year-over-year changes in our operating cash flows are ~~primarily~~ affected by net income, working capital requirements, and other cash and non-cash adjustments to operating results. For the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, cash flows from operating activities totaled ~~$191.3~~$114.1 million, compared to ~~$114.5~~$108.1 million in ~~2010.~~2011. The significant factors contributing to changes in operating cash flows in the first ~~nine months~~quarter of ~~2011~~2012 compared to ~~2010~~2011 are as follows:

~~A decrease~~an increase of ~~$9.2~~$ 23.5 million from deferred gas cost savings, which reflects a higher ~~pension contributions~~level of refunds due utility customers for differences between actual gas prices and the embedded gas prices in amounts billed to ~~a decline in interest rates and asset values, which increased pension funding requirements;~~customers;

·	~~a decrease~~ an increase of ~~$10.5~~$9.5 million from changes in customer receivables primarily due to higher account balances at the end of ~~2009~~2011 compared to 2010 because of colder weather at the end of 2011;

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·	a decrease of $14.2 million from changes in ~~November and December 2009;~~gas inventories primarily due to lower inventory withdrawals during the first quarter of 2012 as compared to 2011 because the utility was able to take advantage of lower spot gas prices to reduce cost of gas;

·	~~an increase~~ a decrease of ~~$53.8~~$11.8 million from changes in income tax account balances primarily related to ~~bonus depreciation which resulted in federal~~prior year income tax refunds received in the first quarter of ~~$36.6 million in 2011~~2011; and ~~other income tax benefits;~~

~~an increase~~

a decrease of $ 23.0 million from changes in the regulatory deferred gas cost account balance, which reflects a lower level of refunds due utility customers for PGA gas cost savings due to differences between actual gas prices and embedded gas prices in the PGA for 2011 compared to 2010; and

·	~~an increase of $6.6~~$11.6 million from changes in gas costs payable primarily due to weather and inventory withdrawal impacts on gas ~~purchase requirements~~purchases between the two periods.

~~In September 2010, Congress passed the “Unemployment~~The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of ~~2010”~~2010 (the Tax Relief Act)~~, and the legislation was signed into law by President Obama. The Act extended for one additional year the~~ allowed 100 percent bonus depreciation rules first enacted in the Economic Stimulus Act of 2008 and subsequently renewed in the American Recovery and Reinvestment Act of 2009. Under the series of bonus depreciation provisions enacted, additional first-year tax deductions were allowed for depreciation equal to 50 percent of the adjusted basis ofon qualified property ~~through September 8, 2010, 100 percent from~~placed in service between September 9, 2010 through December 31, ~~2011, and~~2011. It also extended the 50 percent ~~through December 31, 2012, with the remaining percentages recovered under normal depreciation rules. The 50 percent or 100 percent first year~~bonus depreciation deduction ~~is an acceleration of depreciation deductions that otherwise would be taken~~to qualifying property placed in ~~the later years of an asset’s recovery period.~~service during 2012. As a result of this ~~extension,~~and prior legislation allowing bonus depreciation, we ~~expect~~generated cash flow benefits of $27.0 million and $25.0 million for the three months ended March 31, 2012 and 2011, respectively. These and other tax benefits resulted in a net operating tax loss for 2010, which was carried back to the tax year 2009 and resulted in a federal income tax refund of $22.3 million received in 2011. We also continue to recognize an increase in ~~our~~ cash flows ~~because of lower~~for reduced current tax liabilities ~~for 2011 and 2012. Any tax deductions in excess of 2011 and 2012 taxable income for federal income tax purposes will result in a~~due to net operating loss (NOL)~~, which will be carried forward to the 2013 tax year because of our current tax position (see below).~~ carry-forwards. As of ~~September 30, 2011,~~March 31, 2012, we ~~have a federal and state~~had an income tax receivable balance of $5$1.7 million, ~~the majority of~~ which we expect to realize ~~in cash flows~~ during ~~the fourth quarter of 2011. We received federal refunds totaling $36.6 million during 2011.~~

~~As of December 31, 2010, we reported~~2012, and an NOL carry-forward balance of ~~$20.2~~$57.0 million. We anticipate being able to use the full amount of the current NOL carry-forward balance in future years. The federal NOL from 2010 would expire in 2031 if not used in earlier years.

Also affecting cash flow from operating activities is the amount of cash contributions being made to the utility’s qualified defined benefit pension plans (qualified DB plans). During the first quarter of 2012, we contributed $13.8 million to the qualified DB plans, which ~~will be carried forward to reduce taxable~~was significantly higher than the $2.0 million in non-cash expense recognized on the income statement, and for the first quarter of 2011, ~~tax year.~~we contributed $13.6 million while only $1.8 million in non-cash expense was recognized on the income statement. We ~~anticipate that we~~expect contributions to the qualified DB plans to exceed non-cash expense for the next few years, but amounts and timing of these expenses will ~~be able to utilize all of~~depend on market interest rates and investment returns on the ~~tax loss carry-forward in the current or future years.~~plans’ assets.

Investing Activities

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

Cash used in investing activities for the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 totaled ~~$100.2~~$37.7 million, ~~down~~up from ~~$150.1~~$25.5 million for the same period in ~~2010. Capital~~2011. The increase in investing activities is primarily due to a $17.2 million investment in utility gas reserves during the first quarter of 2012 (see “Executive Summary – Strategic Opportunities – Gas Reserves” above for a discussion of our gas reserve agreement with Encana). Utility capital expenditures were ~~$70~~$18.9 million and gas storage capital spend was $1.5 million in the ~~nine~~three months ended ~~September 30, 2011, down from $185.7~~March 31, 2012, as compared to $16.7 million and $8.7 million, respectively, for the same period in 2010, primarily due to a $121 million decrease in non-utility construction activity, which were largely related to Gill Ranch expenditures in 2010. We also invested $30.9 million in utility gas reserves through2011.

In the ~~third~~first quarter of ~~2011 under our agreement~~2012, we purchased a property in Sherwood, Oregon which, along with ~~Encana.~~anticipated sale of existing properties, will enable us to consolidate certain operations at the new location. This will allow us to consolidate and streamline certain field operations and maintenance groups, plus provide us with expanded scenario-based pipeline training capabilities and a back-up business operations site.

Over the five-year period ~~2011~~2012 through ~~2015,~~2016, total utility capital expenditures are estimated atto be between $400 and $500 million and ~~the~~ utility ~~investment in~~expenditures for gas reserves are estimated ~~at $250~~to be $200 million. The estimated level of utility capital ~~expenditures~~requirements over ~~this five-year period~~the next five years reflects assumptions on customer growth, storage ~~facility improvements,~~development for the utility, technology investments and utility distribution system improvements, including requirements under current pipeline safety ~~rules.~~programs. New federal pipeline safety rules could increase our capital requirement estimates over the next five years. Most of the funds required ~~funding for~~to make these investments over the next five years are expected to be internally generated, ~~except for the funding of long-term gas reserves. The funding of these long-term gas reserves,~~ and any remaining funding ~~that is needed to meet capital requirements of the utility,~~ will be obtained through the issuance of long-term debt or equity securities, with short-term debt providing liquidity and bridge financing.

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In ~~2011,~~2012, we expect to spend less than ~~$15~~$5 million on non-utility ~~development~~capital projects, including ~~Gill Ranch~~the storage businesses and Palomar. ~~Gill Ranch~~Non-utility gas storage capital expenditures in 2012 are expected to be paid ~~through equity~~primarily from working capital, and potentially with additional funds ~~and working capital.~~from the NW Natural consolidated group. Palomar expects to continue working on revised plans for the east pipeline segment, including plans to conduct an open season to re-evaluate regional needs. The initial planning and permitting costs have been financed with equity funds from usNW Natural and our partner, TransCanada American Investments Ltd. For more information on non-utility investment opportunities, see Note 1211 and “Strategic Opportunities—Gas Storage ~~Operations”~~Development” and “—Pipeline Diversification,” above.

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Financing Activities

~~Nine months ended September 30, 2011 compared to September 30, 2010:~~

Cash used in financing activities during the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 totaled ~~$68.7~~$78.1 million, ~~down~~up from cash ~~provided~~used of ~~$29.6~~$82.5 million for the same period in ~~2010.~~2011. The ~~main driver of this decrease~~primary change in financing activity ~~is our short-term debt balances, which decreased $76.2 million during~~in 2012 over 2011 was the ~~nine months ended September 30, 2011, compared~~amount used to ~~an increase of $57.9 million for the same period in 2010. We also redeemed $10~~redeem $40 million of long-term debt in ~~June~~the first quarter of ~~2011. This was offset by a long-term~~2012, which reduced the amount of cash flow used to reduce the short-term debt ~~issuance of $50~~balances outstanding from $71 million in ~~September 2011.~~2011 to $27.9 million in 2012. We continue to use long-term debt proceeds to finance capital expenditures, refinance maturing short-term or long-term debt maturities, and for general corporate purposes. We anticipate issuing long-term debt later on during 2012.

Pension Cost and Funding Status of Qualified Retirement Plans

We make ~~pension~~ contributions to company-sponsored qualified defined benefit pension plans based on actuarial assumptions and estimates, tax regulations and funding requirements under federal law. Our qualified defined benefit pension plans were underfunded by ~~$95.4~~$146.9 million at December 31, ~~2010.~~2011. For the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, we made cash contributions totaling ~~$19.2~~$13.8 million into these qualified pension plans. We anticipate making additional contributions before year end, bringing the total amount to ~~between~~around $28 million in 2012. In 2011 and 2010, we contributed $20 million and ~~$23 million in 2011. In 2010 and 2009, we contributed~~ $10 ~~million and $25~~ million, respectively, into the qualified defined benefit pension plans. The funded status of our qualified pension plans is likely to be negatively affected by recent changes in market conditions, including a decline in corporate bond interest rates, which increases the value of pension liabilities, and a decline in equity market prices, which decreases the value of pension assets. The combination of these recent market events is likely to result in higher net periodic pension costs and higher pension contributions. For more information on the funded status of our qualified retirement plans and other postretirement benefits, see Note 9,8, and Part II, Item 7., “Financial Condition—Pension Cost and Funding Status of Qualified Retirement Plans,” and Part II, Item 8., Note 9, “Pension and Other Postretirement Benefits,” in the ~~2010~~2011 Form 10-K.

We also contribute to a multi-employer union pension plan (Western States Plan) pursuant to our collective bargaining agreement. We made contributions totaling ~~$0.3~~$0.1 million to the Western States Plan in both the ~~nine~~three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ and we expect to contribute a total of $0.4 million during ~~2011.~~2012. See Note 98 for further discussion.

Ratios of Earnings to Fixed Charges

For the ~~nine~~three and twelve months ended ~~September 30, 2011~~March 31, 2012 and the twelve months ended December 31, ~~2010,~~2011, our ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were ~~2.85, 3.51~~6.81, 3.36 and ~~3.73~~3.41 respectively. For this purpose, earnings consist of net income before taxes plus fixed charges, and fixed charges consist of interest on all indebtedness, the amortization of debt expense and discount or premium and the estimated interest portion of rentals charged to income. See Exhibit 12.

Contingent Liabilities

Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies (see Part II, Item 7., “Application of Critical Accounting Policies and Estimates,” in our ~~2010~~2011 Form 10-K). At ~~September 30, 2011,~~March 31, 2012, we had a regulatory asset of ~~$122.5~~$112.3 million for deferred environmental costs, which includes ~~$58~~$75.1 million for additional costs expected to be paid in the future and accrued interest of ~~$18.1~~$20.4 million. If it is determined that both the insurance recovery and future customer rate recovery of such costs are not probable, then the costs will be charged to expense in the period such determination is made. For further discussion of contingent liabilities, see Note ~~14.~~

13.

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ITEM 3.3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various forms of market risk including commodity supply risk, commodity price and storage value risk, interest rate risk, foreign currency risk, credit risk, and weather risk. We monitor and manage these financial exposures as an integral part of our overall risk management program. No material changes have occurred related to our disclosures about market risk for the ~~nine~~three months ended ~~September 30, 2011.~~March 31, 2012. See Part I, Item 1A., “Risk Factors,” and Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” in the ~~2010~~2011 Form 10-K and Part II, Item 1A., “Risk Factors,” in this report for details regarding these risks.

ITEM 4.CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company's management, together with its consolidated subsidiaries, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us and included in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

The Company's management, together with its consolidated subsidiaries, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f).

There have been no changes in our internal control over financial reporting that occurred during the quarter ended ~~September 30, 2011~~March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The statements contained in Exhibit 31.1 and Exhibit 31.2 should be considered in light of, and read together with, the information set forth in this Item 4(b).

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Other than the proceedings disclosed in Note 1413 and those proceedings disclosed and incorporated by reference in Part I, Item 3., “Legal Proceedings,” in our ~~2010~~2011 Form 10-K, we have only routine nonmaterial litigation in the ordinary course of business.

ITEM 1A.1A. RISK FACTORS

There were no material changes from the risk factors discussed in Part I, “Item 1A. Risk Factors,” in our ~~2010~~2011 Form 10-K. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition or results of operations. The risks described in the 2010 Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our financial condition, results of operations or cash flows.

ITEM 2.

~~ITEM 2~~.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases by us during the quarter ended ~~September 30, 2011~~March 31, 2012 of equity securities that are registered pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASE OF EQUITY SECURITIES

					(c)		(d)						(c)		(d)
	(a)		(b)		Total Number of Shares		Maximum Dollar Value of		(a)		(b)		Total Number of Shares		Maximum Dollar Value of
	Total Number		Average		Purchased as Part of		Shares that May Yet Be		Total Number		Average		Purchased as Part of		Shares that May Yet Be
	of Shares		Price Paid		Publicly Announced		Purchased Under the		of Shares		Price Paid		Publicly Announced		Purchased Under the
Period	Purchased(1)		per Share		Plans or Programs(2)		Plans or Programs(2)		Purchased(1)		per Share		Plans or Programs(2)		Plans or Programs(2)
Balance forward						2,124,528	$	16,732,648						2,124,528	$	16,732,648
07/01/11 - 07/31/11		1,276	$	46.01		-		-
08/01/11 - 08/31/11		6,077		43.04		-		-
09/01/11 - 09/30/11		-		-		-		-
01/01/12 - 01/31/12										-	$	-		-		-
02/01/12 - 02/29/12										1,062		47.66		-		-
03/01/12 - 03/31/12										7,888		46.14		-		-
Total		7,353	$	43.55		2,124,528	$	16,732,648		8,950	$	46.32		2,124,528	$	16,732,648

(1)

During the quarter ended ~~September 30, 2011, 1,276~~March 31, 2012, 8,950 shares of our common stock were purchased on the open market or issued by the Company to meet the requirements of our Dividend Reinvestment and Direct Stock Purchase Plan. In addition, 6,077 shares of our common stock were purchased on the open market during the quarter to meet the requirements of our share-based programs. During the quarter ended ~~September 30, 2011,~~March 31, 2012, no shares of our common stock were accepted as payment for stock option exercises pursuant to our Restated Stock Option Plan.

(2)

We have a common stock share repurchase program under which we purchase shares on the open market or through privately negotiated transactions. We currently have Board authorization through May 31, 2012 to repurchase up to an aggregate of 2.8 million shares or up to an aggregate of $100 million. During the quarter ended ~~September 30, 2011,~~March 31, 2012, no shares of our common stock were purchased pursuant to this program. Since the program’s inception in 2000 we have repurchased approximately 2.1 million shares of common stock at a total cost of approximately $83.3 million.

ITEM 6. EXHIBITS ~~EXHIBITS~~

See Exhibit Index attached hereto.

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SIGN~~SIGNATURE~~ATURE

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: ~~November~~May 4, ~~2011~~2012

/s/ Stephen P. Feltz

Stephen P. Feltz

Principal Accounting Officer

Treasurer and Controller

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NORTHWEST NATURAL GAS COMPANY

EXHIBIT INDEX

Quarterly Report on Form 10-Q

For the Quarter Ended

~~September 30, 2011~~March 31, 2012

Exhibit Number Document


~~10.1~~	~~Northwest Natural Gas Company Supplemental Executive Retirement Plan 2011 Restatement~~

12	Statement re computation of ratios of earnings to fixed charges.

31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 *	*The following materials from Northwest Natural Gas Company Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2011,~~March 31, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Income; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Cash Flows; and (iv) Related notes.

* In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act and otherwise is not subject to liability under these sections.

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	Non-Current Regulatory Assets
	September 30,		September 30,		December 31,
Thousands	2011		2010		2010
Gasco site	$	79,823	$	72,531	$	74,205
Siltronic site		3,535		3,120		3,174
Portland Harbor site		35,889		33,316		33,940
Central Service Center site		610		551		553
Front Street site		2,130		2,000		2,020
Other sites		467		413		420
Total	$	122,454	$	111,931	$	114,312