SCHEDULE 14A (RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of thePROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE

Securities Exchange Act ofSECURITIES EXCHANGE ACT OF 1934

Filed by the Registrantx

Filed by a Party other than the Registrant¨

Check the appropriate box:

Northwest Natural Gas CompanyNORTHWEST NATURAL GAS COMPANY

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

   PORTLAND, OR 97209

April 16, 200415, 2005

To the Shareholders of Northwest Natural Gas Company:

We cordially invite you to attend the 20042005 Annual Meeting of Shareholders of Northwest Natural Gas Company (the Company), which will be held in the Lloyd Center BallroomColonel Lindbergh Room of the DoubleTreeEmbassy Suites Hotel, Portland-Lloyd Center, 1000 N.E. Multnomah319 SW Pine Street, Portland, Oregon, on Thursday, May 27, 2004,26, 2005, commencing at 2:00 p.m., Pacific Daylight Time. We look forward to greeting as many of our shareholders as are able to join us.

At the meeting you will be asked to consider and vote upon the election of threefive directors. Your Board of Directors unanimously recommends that you voteFORthe directors nominated in Proposal 1.

In connection with the meeting, we enclose a notice of the meeting, a proxy statement and a proxy card. Detailed information relating to the Company’s activities and operating performance is contained in our 20032004 Annual Report, which is also enclosed.

It is important that your shares are represented and voted at the meeting. Whether or not you plan to attend, please vote your shares in one of three ways: via Internet, telephone or mail. Instructions regarding Internet and telephone voting are included on the proxy card. If you elect to vote by mail, please sign, date and return the proxy card in the enclosed postage-paid envelope. Your proxy may be revoked at any time before it is exercised in the manner set forth in the proxy statement.

Sincerely,
Richard L. Woolworth				Mark S. Dodson
Richard G. Reiten Chairman of the Board				Mark S. Dodson President and Chief Executive Officer

NORTHWEST NATURAL GAS COMPANY

ONE PACIFIC SQUARE

220 N.W. SECOND AVENUE

PORTLAND, OREGON 97209

(503) 226-4211

NOTICE OF 20042005 ANNUAL MEETING OF SHAREHOLDERS

Portland, Oregon, April 16, 200415, 2005

To the Shareholders:

The 20042005 Annual Meeting of Shareholders of Northwest Natural Gas Company will be held in the Lloyd Center BallroomColonel Lindbergh Room of the DoubleTreeEmbassy Suites Hotel, Portland-Lloyd Center, 1000 N.E. Multnomah319 SW Pine Street, Portland, Oregon, on Thursday, May 27, 2004,26, 2005, at 2:00 p.m., Pacific Daylight Time, for the following purposes:

Holders of record at the close of business on April 8, 20047, 2005 are entitled to vote upon all matters properly submitted to shareholder vote at the meeting.

The Board of Directors of the Company is soliciting the proxies of all holders of the Common Stock who may be unable to attend the meeting in person. These proxies also will instruct the relevant fiduciary under the Company’s Dividend Reinvestment and Stock Purchase Plan or Retirement K Savings Plan to vote any shares held for shareholders’ benefit under those Plans, as indicated on the proxies. A proxy and a stamped return envelope are enclosed herewith for your use. No postage is needed if mailed in the United States. Instructions regarding Internet and telephone voting also are included on the enclosed proxy card.

Your vote is very important to us.

We urge you to vote by promptly marking, signing, dating and returning the enclosed proxy card, or by granting a proxy by telephone or the Internet in accordance with the instructions on the enclosed proxy card, as soon as possible. Your prompt vote will save the Company the additional expense of further requests to ensure the presence of a quorum. You may vote in person at the meeting whether or not you previously have returned your proxy.

By Order of the Board of Directors,

C. J. Rue

Secretary

NORTHWEST NATURAL GAS COMPANY

ONE PACIFIC SQUARE

220 N.W. SECOND AVENUE

PORTLAND, OREGON 97209

(503) 226-4211

20042005 ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD MAY 27, 200426, 2005

PROXY STATEMENT

The Board of Directors of Northwest Natural Gas Company is soliciting the proxies of all holders of the Common Stock who may be unable to attend in person the Annual Meeting of Shareholders to be held in the Lloyd Center BallroomColonel Lindbergh Room of the DoubleTreeEmbassy Suites Hotel, Portland-Lloyd Center, 1000 N.E. Multnomah319 SW Pine Street, Portland, Oregon, on Thursday, May 27, 2004,26, 2005, at 2:00 p.m., Pacific Daylight Time. The Company requests that you sign and return the enclosed proxy promptly. Alternatively, you may grant your proxy by telephone or the Internet.

The Company’s Annual Report for the fiscal year ended December 31, 2003,2004, including audited financial statements, is being mailed to all shareholders, together with this proxy statement and the accompanying proxy card, commencing April 16, 2004.15, 2005.

The close of business on April 8, 20047, 2005 has been fixed as the record date for the determination of shareholders entitled to notice of and to vote at the meeting.

VOTING BY PROXY AND HOW TO REVOKE YOUR PROXY

You may vote your shares either in person or by duly authorized proxy. You may use the proxy card accompanying this proxy statement if you are unable to attend the meeting in person or you wish to have your shares voted by proxy even if you do attend the meeting. If you are a registered shareholder, you may vote by telephone, Internet or mail, or you may vote your shares in person at the meeting. To vote:

By telephone (do not return your proxy card)

By Internet (do not return your proxy card)

By mail

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You may revoke your proxy at any time before the proxy is exercised (1) by delivering a written notice of revocation, (2) by filing with the corporate secretary a subsequently dated, properly executed proxy, (3) by voting after the date of the proxy by telephone or Internet, or (4) by attending the meeting and voting in person. Your attendance at the meeting, by itself, will not constitute a revocation of a proxy. You should address any written notices of proxy revocation to:

Northwest Natural Gas Company

220 NW Second Ave.

Portland, OR 97209

Attention: Corporate Secretary

If your shares are held in nominee or street name by a bank or broker, you should follow the directions on the instruction form you receive from your bank or broker as to how to vote, change your vote, or revoke your proxy.

If an adjournment of the meeting occurs, it will have no effect on the ability of shareholders of record as of the record date to exercise their voting rights or to revoke any previously delivered proxies.

VOTING SECURITIES OF THE COMPANY

The 26,002,24127,630,996 shares of Common Stock outstanding on March 15, 200418, 2005 were held by 9,5959,250 shareholders residing in 50 states, the District of Columbia and a number of foreign countries.

Each holder of Common Stock of record at the close of business on April 8, 20047, 2005 will be entitled to one vote for each share of Common Stock so held on all matters properly submitted at the meeting. Such holder will be entitled to cumulative voting for directors; that is, to cast as many votes for one candidate as shall equal the number of shares held of record multiplied by the number of directors to be elected, or to distribute such number of votes among any number of the candidates.

A majority of the shares of Common Stock outstanding at the close of business on April 8, 20047, 2005 must be represented at the meeting, in person or by proxy, to constitute a quorum for the transaction of business.

It is important that your shares be represented at the meeting. You are urged, regardless of the number of shares held, to sign and return your proxy. Alternatively, you may grant your proxy by telephone or the Internet as described above.

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PROPOSAL 1 - ELECTION OF DIRECTORS

The Company’s Restated Articles of Incorporation provide that the Board of Directors be comprised of not less than nine nor more than 13 directors, with the exact number of directors to be determined by the Board. The Board has fixed the number of directors at 11. AtOn February 24, 2005, the openingBoard of Directors elected Kenneth Thrasher as a director for a term expiring at this year’s Annual Meeting Mr. Robert L. Ridgley will retire as he has reachedto fill a vacant position resulting from the mandatory retirement age for Board service. Mr. Ridgley hasuntimely death of Melody C. Teppola on December 6, 2004. Ms. Teppola had been a director since 19841987 and served on a variety of board committees, most recently as Presidentchair of the Public Affairs and Chief Executive OfficerEnvironmental Policy Committee and a member of the Governance and Audit Committees. Her friendship and effective, valued service for the benefit of the Company from 1985 until 1996 when he retired. Mr. Ridgley served as Chairman of the Board from March 1997 through February 1999. The Board of Directors thanks Mr. Ridgley for his extensive and valued service to the Company forits shareholders over 20 years.a 17-year period will be long remembered and treasured.

The Restated Articles provide that the Board of Directors be divided into three classes and that the number of directors in each class be as nearly equal in number as possible. Members of each class are elected to serve a three-year term with the terms of office of each class ending in successive years. The term of Class IIIII directors expires with this year’s Annual Meeting. Messrs. HamachekJohn D. Carter, C. Scott Gibson and TromleyRichard G. Reiten and Ms. TeppolaMartha L. “Stormy” Byorum are nominees for election to the Board as Class IIIII directors to serve until the 20072008 Annual Meeting or until their successors have been duly elected and qualified. Each of Messrs. Hamachek and Tromley and Ms. TeppolaMr. Reiten was elected by the shareholders at the 20012002 Annual Meeting. Each of Messrs. Carter and Gibson was elected by the shareholders at the 2003 Annual Meeting. Ms. Byorum was elected by the Board of Directors to fill a vacancy in 2004. In addition, Kenneth Thrasher was elected by the Board of Directors to fill a vacancy on February 24, 2005. Mr. Thrasher is nominated for election to the Board as a Class II director to serve until the 2007 Annual Meeting or until his successor has been duly elected and qualified. Mr. Thrasher was recommended to the Governance Committee by the Retired Chairman of the Board. In case any of the nominees should become unavailable for election for any reason, the persons named in the proxy will have discretionary authority to vote for a substitute. Management knows of no reason why any of the nominees would be unable to serve if elected.

Vote Required

Under Oregon law, if a quorum of shareholders is present at the Annual Meeting, the threefive nominees who receive the greatest number of votes cast at the meeting shall be elected directors. Abstentions and broker non-votes are counted for purposes of determining whether a quorum exists at the Annual Meeting but are not counted and have no effect on the results of the vote for directors.

The Board of Directors recommends the election of the nominees listed below.

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INFORMATION CONCERNING NOMINEES

AND CONTINUING DIRECTORS

NOMINEES FOR ELECTION TO BOARD OF DIRECTORS

Class IIIII

(For a three-year term ending 2007)in 2008)

		Tod R. HamachekMartha L. “Stormy” Byorum Chairman and Chief Executive Officer, Penwest Pharmaceuticals Company Danbury, ConnecticutSenior Managing Director of Stephens Cori Capital Advisors, New York, New York Age: 5856 Director since: 19862004 Board Committees: Governance, Audit, Strategic Planning (Chair)Committee: Finance

Mr. Hamachek hasIn January 2005, Ms. Byorum became Senior Managing Director of Stephens Cori Capital Advisors, a division of Stephens, Inc., a private investment banking firm founded in 1933. From 2003 to 2004, Ms. Byorum served as Chairman and Chief Executive Officer of Penwest Pharmaceuticals Company since October 1997. Penwest,Cori Investment Advisors, LLC, which was spun off from Penford CorporationVioly, Byorum & Partners (VB&P) in 1998, is engaged2003. VB&P was the leading independent strategic advisory and investment banking firm specializing in the research, development and commercialization of novel drug delivery products and technologies. From 1985 until 1998, Mr. HamachekLatin America. Prior to co-founding VB&P in 1996, Byorum had a 24-year career at Citibank, where, among other things, she served as PresidentChief of Staff and Chief ExecutiveFinancial Officer for Citibank’s Latin American Banking Group from 1986-1990, overseeing $15 billion of Penford Corporation,loans and coordinating activities in 22 countries. She later was appointed the head of Citibank’s U.S. Corporate Banking Business and a diversified producermember of specialty paper, food starchesthe bank’s Operating Committee and pharmaceutical ingredients. HeCustomer Group with global responsibilities. A graduate of Southern Methodist University and the Wharton School at the University of Pennsylvania, she is a directorLife Trustee of Penwest, The Seattle Times Company and The Blethen Corporation (the majority owner of The Seattle Times Company). Mr. Hamachek is alsoAmherst College, a trusteeTrustee Emeritus of the Aldrich MuseumFolger Shakespeare Library and a board member of Contemporary Art in Ridgefield, Connecticut. He isAeterna-Zentaris Laboratories, Inc., a graduate of Williams College and Harvard Business School.biopharmaceutical company.

		Melody C. TeppolaJohn D. Carter Managing Partner, National Builders Hardware Company,
		Principal of Imeson & Carter, Portland, Oregon
		Age: 61 59
		Director since: 1987 2002
		Board Committees: Public Affairs and Environmental PolicyAudit, Finance, Governance (Chair), Governance, Audit

Ms. Teppola has been associated with National Builders Hardware Company,In 2002, Mr. Carter joined the strategic planning and public affairs consulting firm of Imeson & Carter as a regionalprincipal. Prior to January 1, 2002, he was an executive vice president of Bechtel Group, Inc. where, from December 1998 to December 2000, he provided senior executive oversight of Bechtel’s telecommunications, industrial, civil, information systems and national distributortechnology businesses. From September 1997 to December 1998, he served as president of builders hardware, woodworking machineryBechtel’s Europe, Africa, Middle East, Southwest Asia region. From 1992 to 1997 he served as president of Bechtel’s North American region and decorative plumbing, since 1965,government companies, and a managing partner since 1975. Her community activities have focused on art, education and advocacy for women and children. She iswas president of Bechtel Enterprises, Inc., as well as a director of U.S. Generating Company and other Bechtel Group and Bechtel Enterprises ventures. Mr. Carter retired as a director of Bechtel Group, Inc. and several Bechtel subsidiaries, including Bechtel Enterprises, Inc., in 2002. He continues to serve as a director of London & Continental Railways Ltd. in the Portland Business AllianceUnited Kingdom, and until recently served on an advisory board to the government of the Netherlands on privatization. Mr. Carter is a member of the Marquam Hill Steering CommitteeBoard of Oregon Health Science University Foundation. She also serves as a directorDirectors of the Oregon Community Foundation and the Bonnie Bronson Fund. Ms. TeppolaFlir Systems, Inc. He is a graduate of Mills College.Stanford University and Harvard Law School.

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		Russell F. TromleyC. Scott Gibson
		President, Gibson Enterprises, Portland, Oregon
		Age: 52
		Director since: 2002
		Board Committees: Public Affairs and Environmental Policy (Chair), Organization and Executive Compensation, Strategic Planning

Mr. Gibson has been President of Gibson Enterprises, a venture capital firm, since its formation in 1992. In 1983, Mr. Gibson co-founded Sequent Computer Systems and served as its President from 1988 until March 1992. Before his tenure at Sequent, Mr. Gibson served as General Manager for the Memory Components Division of Intel Corporation. Mr. Gibson serves as Chairman of the Board of Radisys Corporation, and as a director of TriQuint Semiconductor, Pixelworks and Electroglas, Inc. He also serves as a member of the Board of Trustees of the Oregon Community Foundation, the OHSU Foundation and is Vice Chair of the Oregon Health and Science University governing board. Mr. Gibson earned a Bachelor of Science degree in electrical engineering and a Masters in Business degree from the University of Illinois.

		Richard G. Reiten
		Retired Chairman and CEO of the Company, Portland, Oregon
		Age: 65
		Director since: 1996
		Board Committees: Public Affairs and Environmental Policy, Finance, Strategic Planning

Mr. Reiten served as Chief Executive Officer of the Company from January 1, 1997 until December 31, 2002. He joined the Company as President and Chief Operating Officer and was elected to the Board effective March 1, 1996. He was appointed to the additional position of Chairman of the Board in September 2000, a position he held until February 28, 2005. Prior to joining the Company, from 1992 through 1995, Mr. Reiten served as President and Chief Operating Officer of Portland General Electric Company (PGE) after serving as President of PGE’s parent company, Portland General Corporation (PGC), from 1989 through 1992. He also served as a director of PGC from 1983 to 1987 and from 1990 to 1995 when he retired from PGE. He is a director of U.S. Bancorp, Building Materials Holding Corporation, The Regence Group, Idacorp and National Fuel Gas Company. He is a past chairman of the board of the American Gas Association and currently serves on the board of Associated Electric and Gas Insurance Services Ltd., as Vice Chairman of The Nature Conservancy of Oregon and on the Board of the Oregon Community Foundation. He is a past General Chairman of the United Way campaign for Portland and a past Chairman of both the Portland Metropolitan Chamber of Commerce and the Association for Portland Progress. Mr. Reiten is a graduate of the University of Washington and the Executive and Board of Directors Programs at Stanford Business School.

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Class II

(For a term ending in 2007)

President

		Kenneth Thrasher
		Chairman and Chief Executive Officer, Tromley Industrial Holdings, Inc., Tualatin,Compli Corporation, Portland, Oregon
		Age: 64 55
		Director since: 1994 2005
		Board Committees: Audit, Governance, Organization and Executive Compensation (Chair) None

Since 2002, Mr. TromleyThrasher has served as Chairman and Chief Executive Officer of Compli Corporation, a software solution provider for management of compliance in employment practices and corporate governance. Prior to joining Compli, Mr. Thrasher served 19 years in executive positions with Fred Meyer, Inc., including serving as President and Chief Executive Officer of Tromley Industrial Holdings, Inc., since its formation in 1990. Tromley Industrial Holdings is involved in nonferrous metals alloyingfrom 1999 to 2001 and distribution, the manufactureas Executive Vice President and sale of equipment for the foundry and steel industry, industrial equipment leasing and industrial and retail business property investments.Chief Administrative Officer from 1997 to 1999. Mr. Tromley is a past President of the Casting Industry Suppliers Association and of the Arlington Club, and is a non-lawyer arbitrator for, and a member of the House of Delegates of, the Oregon State Bar Association. He was a founding director of The Bank of the Northwest, and alsoThrasher serves on the advisory board of Pacific Northwest Bankdirectors of Oregon and as a director emeritusFriends of the Evans Scholars FoundationChildren, the Oregon Mentoring Initiative, the Portland Art Museum, the Leaders Roundtable and the Western Golf Association.Oregon Coast Aquarium. In 2001, he was appointed by the Oregon Governor as Chairperson of the Quality Education Commission, a position he continues to hold. He is also a co-chair of Portland State University’s capital endowment campaign. Mr. Tromley attended the UniversityThrasher earned a Bachelor of Washington and HarvardScience degree in Business School.Administration from Oregon State University.

MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE

Class I

(Term ending in 2006)

		Timothy P. Boyle
		President and Chief Executive Officer of Columbia Sportswear Company, Portland, Oregon
		Age: 54 55
		Director since: 2003
		Board Committees: Finance, Organization and Executive Compensation, Strategic Planning

Since 1989, Mr. Boyle has served as President and Chief Executive Officer of Columbia Sportswear Company, an active outdoor apparel and footwear company headquartered in Portland, Oregon. He began working with Columbia Sportswear Company in 1970. Mr. Boyle is a member of the Boards of Directors of Widmer Brothers Brewing, the University of Oregon Foundation and Oregon Trout and is a trustee of Reed College and a past member of the Young Presidents’ Organization. He earned a Bachelor of Science degree in Journalism from the University of Oregon.

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		Mark S. Dodson
		President and Chief Executive Officer of the Company, Portland, Oregon
		Age: 59 60
		Director since: 2003
		Board Committees: None

Mr. Dodson became Chief Executive Officer of the Company on January 1, 2003, where he previously served as President, Chief Operating Officer and General Counsel since 2001. He joined the Company in 1997 as Senior Vice President of Public Affairs and General Counsel, following a 17-year career with the Portland law firm Ater Wynne Hewitt Dodson & Skerritt. Mr. Dodson serves on the executive committeescommittee of the Portland Business Alliance and Associated Oregon Industries and is a member of the Board of Directors of the Oregon Business Council. He also has worked on affordable housing issues as a board member and chairman of the Neighborhood Partnership Fund. Mr. Dodson has provided adviceis currently the Chair of the Portland Business Alliance and counsel to government and elected officials, including service onwas formerly Chairman of the transition committeesOregon State Board of several Oregon governors.Higher Education. He currently serves as a Trustee of Linfield College and as a member of the Board of Directors of Waseda University USA, and recently headed the Oregon Governor’s Task Force on Scholarship and Student Aid. He earned an undergraduate degree from Harvard University and a law degree from Boalt College of Law at the University of California, Berkeley.

		Randall C. Papé
		President and Chief Executive Officer, The Papé Group, Inc., Eugene, Oregon
		Age: 53 54
		Director since: 1996
		Board Committees: Governance, Finance (Chair), Public Affairs and Environmental Policy

Since 1981, Mr. Papé has served as President, Chief Executive Officer and a director of The Papé Group, Inc., a holding company for Papé Machinery, Inc., Papé Bros., Inc., Flightcraft, Inc., Hyster Sales Company,Papé Material Handling, Ditch Witch Northwest, Industrial Finance Co. and Papé Properties, Inc. He also is President, CEO and a director of Liberty Financial Group, a holding company for LibertyBank, and its subsidiary, Commercial Equipment Lease Corporation. He is an owner and director of Sanipac, Inc. and its subsidiary, Eco Sort LLC, and a partner in Papé Investment Company. Since 1996, Mr. Papé has served as a director of Obie Media Corporation and is a former director and past presidentPresident of Mt. Bachelor, Inc. He serves as a Commissioner to the Oregon Department of Transportation and is a trustee and past presidentPresident of the University of Oregon Foundation. Mr. Papé also serves as chair of the Oregon Business Council. He earned a Bachelor of Science degree in Finance from the University of Oregon.

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		Richard L. Woolworth
		Chairman of the Board of the Company and Retired Chairman and Chief Executive Officer, The Regence Group, Portland, Oregon
		Age: 62 63
		Director since: 2000
		Board Committees: Governance, Audit (Chair), Organization and Executive Compensation

Mr. Woolworth became Chairman of the Board of the Company on March 1, 2005. From 1995 through 2003, Mr. Woolworth served as Chairman and CEO of The Regence Group, the largest affiliation of Blue CrossBlueCross and/or Blue ShieldBlueShield companies in the western United States. He also served as board chairmanBoard Chairman of Regence BlueCross BlueShield of Oregon and Regence HMO Oregon. He also serves as a director of the Columbia Mutual Funds. He is past chair of the National Blue Crossnational BlueCross and Blue ShieldBlueShield Association, the Portland Chamber of Commerce, the Oregon Business Council and United Way and has chaired fundraising drives for both United Way and the Juvenile Diabetes Foundation. Mr. Woolworth is a former certified public accountant and a graduate of Lewis and Clark College in Portland.

Class IIIII

(Term ending in 2005)2007)

		John D. CarterTod R. Hamachek Principal of Goldschmidt, Imeson, Carter, Portland, Oregon
		Former Chairman and Chief Executive Officer, Penwest Pharmaceuticals Company, Danbury, Connecticut
		Age: 58 59
		Director since: 2002 1986
		Board Committees: Governance, Audit, Finance, GovernanceStrategic Planning (Chair)

In 2002, Mr. Carter joined the strategic planningHamachek served as Chairman and public affairs consulting firmChief Executive Officer of Goldschmidt, Imeson, Carter as a principal. Prior to January 1, 2002, he was an executive vice president of Bechtel Group, Inc. From December 1998 to December 2000, Mr. Carter provided senior executive oversight of Bechtel’s telecommunications, industrial, civil, information systems and technology businesses. From SeptemberPenwest Pharmaceuticals Company from October 1997 to DecemberFebruary 2005. Penwest, which was spun off from Penford Corporation in 1998, heis engaged in the research, development and commercialization of novel drug delivery products and technologies. From 1985 until 1998, Mr. Hamachek served as presidentPresident and Chief Executive Officer of Bechtel’s Europe, Africa, Middle East, Southwest Asia (EAMS) region. Previously hePenford Corporation, a diversified producer of specialty paper, food starches and pharmaceutical ingredients. He is a director of The Seattle Times Company and The Blethen Corporation (the majority owner of The Seattle Times Company). Mr. Hamachek is also a trustee of the Aldrich Museum of Contemporary Art in Ridgefield, Connecticut. He is a graduate of Williams College and Harvard Business School.

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		Russell F. Tromley
		President and Chief Executive Officer, Tromley Industrial Holdings, Inc., Tualatin, Oregon
		Age: 65
		Director since: 1994
		Board Committees: Audit, Governance, Organization and Executive Compensation (Chair)

Mr. Tromley has served as presidentPresident and Chief Executive Officer of Bechtel’s North American regionTromley Industrial Holdings, Inc., since its formation in 1990. Tromley Industrial Holdings is involved in nonferrous metals alloying and government companies,distribution, the manufacture and sale of equipment for the foundry and steel industry, industrial equipment leasing and industrial and retail business property investments. Mr. Tromley is a past President of the Casting Industry Suppliers Association and of the Arlington Club, and is a non-lawyer arbitrator for, and a member of the House of Delegates of, the Oregon State Bar Association. He was presidenta founding director of Bechtel Enterprises, Inc. from 1992-1997, as wellThe Bank of the Northwest, and served on the advisory board of Pacific Northwest Bank of Oregon and as a director of U.S. Generating Company and other Bechtel Group and Bechtel Enterprises ventures. Mr. Carter retired as a director of Bechtel Group, Inc. and several Bechtel subsidiaries, including Bechtel Enterprises, Inc., in 2002. He served on the boards of InterGen (formerly International Generating Company) and International Water Ltd. He continues to serve as a director of London & Continental Railways Ltd. in the United Kingdom, and until recently served on an advisory board to the governmentemeritus of the Netherlands on privatization.Evans Scholars Foundation and the Western Golf Association. Mr. Carter also chaired the Bechtel 401(K) retirement plan and Bechtel Foundation. Mr. CarterTromley is a member of the Board of Directors of Flir Systems, Inc. He is a graduate of Stanford University andthe Harvard Law School.

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		C. Scott Gibson President, Gibson Enterprises, Portland, Oregon Age: 51 Director since: 2002 Board Committees: Public Affairs and Environmental Policy, Organization and Executive Compensation, Strategic Planning

Business School Alumni Association. Mr. Gibson has been President of Gibson Enterprises, a venture capital firm, since its formation in 1992. In 1983, Mr. Gibson co-founded Sequent Computer Systems and served as its President from 1988 until March 1992. Before his tenure at Sequent, Mr. Gibson served as General Manager for the Memory Components Division of Intel Corporation. Mr. Gibson serves as Chairman of the Board of Radisys Corporation, and as a director of TriQuint Semiconductor, Pixelworks, Electroglas, Inc., Livebridge and Thetus. He also serves as a member of the Board of Trustees of the Oregon Community Foundation, the OHSU Foundation and the Oregon Health and Science University governing board. Mr. Gibson earned a Bachelor of Science degree in electrical engineering and a Masters in Business degree from the University of Illinois.

		Richard G. Reiten Chairman of the Board of the Company, Portland, Oregon Age: 64 Director since: 1996 Board Committees: Public Affairs and Environmental Policy, Finance, Strategic Planning

Mr. Reiten served as Chief Executive Officer of the Company until December 31, 2002. He joined the Company as President and Chief Operating Officer and was elected to the Board effective March 1, 1996. He was elected President and Chief Executive Officer effective January 1, 1997, was appointed to the additional position of Chairman of the Board in September 2000 and relinquished the position of President in May 2001. Prior to joining the Company, from 1992 through 1995, Mr. Reiten served as President and Chief Operating Officer of Portland General Electric Company (PGE) after serving as President of PGE’s parent company, Portland General Corporation (PGC), from 1989 through 1992. He also served as a director of PGC from 1983 to 1987 and from 1990 to 1995 when he retired from PGE. He is a director of U.S. Bancorp, Building Materials Holding Corporation, The Regence Group, ESCO Corporation and Idacorp. He is immediate past chairman of the board of the American Gas Association and currently serves on the board of Associated Electric and Gas Insurance Services Ltd., as vice chairman of The Nature Conservancy of Oregon and on the board of trustees of the Portland Art Museum. He is a past General Chairman of the United Way campaign for Portland and a past Chairman of both the Portland Metropolitan Chamber of Commerce and the Association for Portland Progress. Mr. Reiten is a graduate ofTromley attended the University of Washington and the executive and board of directors programs at StanfordHarvard Business School.

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INFORMATION CONCERNING THE

BOARD OF DIRECTORS AND ITS COMMITTEES

Annual Meeting Attendance

The Board of Directors conducts its annual organization meeting immediately followingon the same date as the Annual Meeting of Shareholders, which all of the directors are encouraged to attend. In 2003,2004, all of the Company’s directors attended the Annual Meeting of Shareholders.

Independence

On July 24, 2003, theThe Board of Directors has adopted Director Independence Standards and amended the Standards on February 26, 2004 to comply with final New York Stock Exchange rules. The Director Independence Standards, amended as of December 16, 2004, are set forth in Appendix A to this proxy statement and also are available on the Company’s website atwww.nwnatural.com.No director is deemed independent unless the Board affirmatively determines that the director has no material relationship with the Company either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company. The Board applies its adopted standards as well as additional qualifications prescribed under the listing standards of the New York Stock Exchange and applicable state and federal statutes. Annually the Board determines whether each director meets the criteria of independence. In 2004,2005, the Board determined that eightnine of the ten continuingeleven directors met the independence criteria. They are directors Boyle, Byorum, Carter, Gibson, Hamachek, Papé, Teppola,Thrasher, Tromley and Woolworth.

Committees

There are six standing committees of the Board: the Audit, Governance, Organization and Executive Compensation, Finance, Public Affairs and Environmental Policy and Strategic Planning Committees. Each of the committees operates according to a formal written charter, all of which are reviewed annually and are available on the Company’s website atwww.nwnatural.com.www.nwnatural.com. Copies of the charters are also available upon request. The performance of each committee is reviewed annually. Each committee may obtain advice and assistance from internal or external legal, accounting or other advisors, when appropriate.

Audit Committee

The Audit Committee is comprised of directors Carter, Hamachek, Teppola, Tromley and Woolworth, each of whom is an independent director as defined under current New York Stock Exchange listing standards and the Company’s Director Independence Standards. Based on its review of relevant information, the Board has determined that Mr. Woolworth, the chair of the committee,Committee, is an “audit committee financial expert” and “independent” as that term isthose terms are defined under applicable Securities and Exchange Commission rules.

The Audit Committee is responsible for overseeing matters relating to accounting, financial reporting, internal control and auditing. The Committee is also responsible for the appointment, compensation, oversight and review of the independent auditor,registered public accounting firm, and reviews the corporate audit and other internal accounting control matters with the independent auditor. A more detailed description of the Audit Committee’s responsibilities is included in the “Report of the Audit Committee,” below. During 2003, the Board amended the Committee’s charter to be consistent with final New York Stock Exchange listing standards. See Appendix B.which is included herein on page 31. The Committee reports regularly to the Board. The Committee held eightnine meetings during 2003.2004. The Chair of the Committee, Mr. Woolworth, presides at all executive sessions of the Committee.

Governance Committee

The Governance Committee is empowered, during intervals between Board meetings, to exercise all of the authority of the Board in the management of the Company, except as

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otherwise may be provided by law. The Committee, which serves as the nominating committee, makes recommendations to the Board regarding nominees for election to the Board, criteria for Board and committee membership and

9

policies that govern the Board’s activities, including the Corporate Governance Standards discussed below, and evaluates Board and individual director performance. It also considers any questions of possible conflicts of interest of Board members and senior executives and jointly reviews annually the performance of the CEO with the Organization and Executive Compensation Committee. This Committee is comprised of directors Carter, Hamachek, Papé, Teppola, Tromley and Woolworth, each of whom is an independent director as defined under current New York Stock Exchange listing standards and the Company’s Director Independence Standards. The Committee held fivesix meetings in 2003.2004. The Chair of the Committee, Mr. Carter, presides at all executive sessions of the Committee and executive sessions of the non-management directors of the Board.

Organization and Executive Compensation Committee

The Organization and Executive Compensation Committee is comprised of directors Boyle, Gibson, Tromley and Woolworth, each of whom is an independent director as defined under current New York Stock Exchange listing standards and the Company’s Director Independence Standards. Each member of this Committee also meets the criteria as a “non-employee director” under applicable rules of the Securities and Exchange Commission and the criteria for “outside directors” under Section 162(m) of the Internal Revenue Code of 1986, as amended. Mr. Tromley chairs the Committee. The Committee reviews the performance of the CEO and other executive officers, considers executive compensation survey data in making recommendations to the Board relating to the Company’s executive compensation program and benefit plans, and administers the Restated Stock Option Plan, the Long-Term Incentive Plan, the Executive Deferred Compensation Plan and the Executive Annual Incentive Plan. This Committee also makes recommendations to the Board regarding board compensation and organization and executive succession matters. FourSix meetings of this Committee were held during 2003.2004.

The Report of the Organization and Executive Compensation Committee is included herein on page 26.

Public Affairs and Environmental Policy Committee

The Public Affairs Committee and the Environmental Policy Committee were combined in 2003 to form the Public Affairs and Environmental Policy Committee. The Committee reviews the Company’s policies and practices relating to significant public and political issues that may have an impact on the Company’s business operations, financial performance or public image. It oversees the Company’s programs and policies relating to civic, charitable and community affairs, safety and equal employment opportunity. The Committee also develops and recommends to the Board appropriate environmental policies and advises the Board concerning the status of the Company’s compliance with environmental regulations. The Committee makes recommendations to the Board to ensure that the Company fulfills its objectives in a manner consistent with the responsibilities of good corporate citizenship. The Committee is comprised of directors Gibson, Papé, Reiten, Ridgley and Teppola.Reiten. Ms. Teppola chairschaired the Committee until her death in December 2004. Mr. Gibson has been appointed to the position of Chair of the Committee. The newly combined Committee held two meetings in 2003 and one joint meeting of the Environmental Policy and Public Affairs Committees was held prior to combining the Committees.2004.

Finance Committee

The Finance Committee is responsible for reviewing strategies and making recommendations to the Board with respect to the Company’s financing programs, financial policy matters and material regulatory issues. The Committee consists of directors Boyle, Byorum, Carter, Papé, Reiten and Ridgley.Reiten. Mr. Papé chairs the Committee. The Committee held threefive meetings in 2003.2004.

11

Strategic Planning Committee

The Strategic Planning Committee a Committee formed in 2003, is responsible for reviewing and making recommendations to management and the Board of Directors with respect to the long-term strategic goals, objectives and plans of the Company for the purpose of creating and maintaining long-term shareholder value. The Committee is comprised of directors Boyle, Gibson, Hamachek Reiten and Ridgley.Reiten. Mr. Hamachek chairs the Committee, which met three times in 2003.2004.

10

Board Nominations

The Board is responsible for selecting candidates for Board membership and the Governance Committee has been assigned the responsibility of recommending to the Board of Directors nominees for election as directors. The Governance Committee has not used a third party to assist in finding candidates. The Governance Committee, with recommendations and input from the Chairman of the Board, the Chief Executive Officer and other directors, evaluates the qualifications of each director candidate in accordance with the Director Selection Criteria established by the Board. The Director Selection Criteria includes three guiding principles: independence, absence of conflicts and diversity. Specific mandatory criteria include, among other things:

In addition, preferred criteria include, among other things, prior experience as a director of a public company, substantive knowledge of the utility industry and the ability to understand, analyze and apply financial information and accounting rules.

Shareholders’ recommendations for director-nominees may be submitted to the Secretary of the Company for consideration by the Governance Committee. In evaluating shareholder recommendations for director-nominees, the Governance Committee applies the same Director Selection Criteria discussed above. The Company’s Restated Articles of Incorporation provide that no person, except those nominated by the Board, shall be eligible for election as a director at any annual or special meeting of shareholders unless a written request that his or her name be placed in nomination, together with the written consent of the nominee, shall be received from a shareholder of record entitled to vote at such election by the Secretary of the Company on or before the later of (a) the thirtieth day prior to the date fixed for the meeting, or (b) the tenth day after the mailing of the notice of that meeting.

DIRECTOR COMPENSATION

Fees and Arrangements

In 2004, Directors who arewere not employees of the Company receivereceived an annual cash retainer of $10,000, an annual retainer of $20,000 which may be paidwas payable in cash or applied to the purchase of Company stockCommon Stock in the open market (see “Non-Employee Directors Stock Compensation Plan,” below), a fee of $1,000 for each Board meeting attended and a fee of $800 for each Committee meeting attended. In addition, a $3,000 annual retainer iswas paid to each Committee chair. Effective March 1, 2004, the annual retainer to be paid for service as chair of the Audit Committee was increased to $6,000.

Following the Organization and Executive Compensation Committee’s review of the existing terms of compensation for non-employee directors and a review of a survey by the

12

Committee’s independent consultant of compensation paid to non-employee directors of companies of comparable size, the Board of Directors approved modifications to the terms of compensation to be paid to non-employee directors, effective January 1, 2005. The compensation terms for non-employee members of the Board of Directors are described below:

Assuming 14 meetings per year (7 Board and 7 Committee), for a Board member who chairs one Committee, the expected total annual compensation would be $77,500.

The Company’s Non-Employee Directors Stock Compensation Plan was amended such that the plan terminated as to new awards on January 1, 2005 (see below). All existing grants under the plan will vest according to the terms of the plan. Accordingly, current Board members who have, as of the end of 2004, stock left to vest, continue to vest such stock at approximately $20,000 worth of stock per year through December 31, 2008. During 2003,that time, their annual cash retainer would be $35,000 instead of $55,000. Any person first elected as a director after December 31, 2004 will be paid the full amount of the retainer in cash.

Also effective January 1, 2005, the per diem fee for each day or significant portion of a day spent in the conduct of Company business on a day other than a day on which a meeting of the Board or a Board Committee is held was increased to $1,500.

During 2004, there were sixseven meetings of the Company’s Board, each of which included an executive session of non-management directors. No continuing director attended fewer than 75 percent of the total meetings of the Company’s Board or committeesCommittees on which he or she served.

In 2002, the Board approved an arrangement for Mr. Reiten whereby he willagreed to serve as non-employee Chairman of the Board through February 2005. According to the terms of the arrangement, Mr. Reiten was paid a monthly fee of $5,000 per month through February 2004 and will bewas paid a reduced monthly fee of $2,500 per month through February 2005. In addition, he is entitled to standard Board-approved cash and stock retainers and meeting fees, as well as office space, secretarial support and annual club dues and a Company vehicle or vehicle allowance.dues.

11

Non-Employee Directors Stock Compensation Plan

Non-employeeBefore January 1, 2005, non-employee directors of the Company arewere awarded approximately $100,000 worth of the Company’s Common Stock upon joining the Board pursuant to the Company’s Non-Employee Directors Stock Compensation Plan. These initial awards vestvested in monthly installments over the five calendar years following the award. On January 1 of each year thereafter, non-employee directors arewere awarded an additional $20,000 of Common Stock, which vestsvested in monthly installments in the fifth year following the award (after the previous award hashad fully vested). The shares awarded were purchased in the open market by the Company at the time of award. Non-employee directors maycould elect to receive awards in the form of deferred cash credits into the directors’ cash accounts under the Directors Deferred Compensation Plan, rather than in the form of Common Stock.

All awards vest immediately upon a change in control of the Company. Unvested shares and unvested cash credits are forfeited if the recipient ceases to be a director. The shares awarded are purchased in the open market by the Company at the time of award. Directors maycould elect to defer unvested shares into their stock accounts under the Directors Deferred Compensation Plan. Certificates representing a director’s vested shares are not delivered to the director until after the director leaves the Board.

13

On September 23, 2004, the Board of Directors amended the Non-Employee Directors Stock Compensation Plan to provide that no new awards will be granted on or after January 1, 2005. Previous awards will continue to vest in monthly installments according to the original vesting schedule.

Deferred Compensation Plans

Directors Deferred Compensation Plan

Directors mayPrior to January 1, 2005, directors could elect to defer the receipt of all or a part of their directors’ fees under the Company’s Directors Deferred Compensation Plan.Plan (DDCP). At the director’s election, deferred amounts may bewere credited to either a “cash account” or a Company “stock account.” If deferred amounts arewere credited to stock accounts, such accounts arewere credited with a number of shares based on the purchase price of the Common Stock on the next purchase date under the Company’s Dividend Reinvestment and Stock Purchase Plan, and such accounts arewere credited with additional shares based on the deemed reinvestment of dividends. Cash accounts arewere credited quarterly with interest at a rate equal to Moody’s Average Corporate Bond Yield plus two percentage points. The crediting rate iswas subject to a six percent minimum rate. The rate iswas adjusted quarterly. At the election of the participant, deferred balances in the stock and/or cash accounts arewere payable after termination of Board service in a lump sum, in installments over a period not to exceed 10 years, or in a combination of lump sum and installments.

The Company’s obligations under the PlanDDCP are unfunded and benefits will be paid either from the general funds of the Company or from the Umbrella Trust for Directors which has been established for this Plan.the DDCP. With respect to the cash accounts, the Company has purchased life insurance policies on the lives of the participants, the proceeds from which will be used to reimburse the Company for the payment of cash benefits from the Plan.DDCP. The cost of any one individual participant cannot be properly allocated or determined because of overall Plan assumptions. In addition, the Company has contributed cash and Common Stock to the trustee of the Umbrella Trust such that the Umbrella Trust holds the number of shares of Common Stock equal to the number of shares credited to all directors’ stock accounts. Shares so held will be used to fund the Company’s obligation to pay out the stock accounts.

The Company may from time to time transfer other assets to the trustee of the Umbrella Trust to hold in trust for the benefit of PlanDDCP participants. The Company’s obligations under the PlanDDCP are not limited to trust assets, and PlanDDCP participants will have a claim against the Company for any payments not made by the trustee. The Company instructs the trustee as to the investment of the trust’s assets and the trustee’s fees and expenses are paid by the Company.

Upon the occurrence of certain events, such as a change in control of the Company, termination of the PlanDDCP or the failure by the Company to provide the trust with adequate funds to pay current benefits, the Company may be required under the terms of the trust to contribute to the trust annually the amount by which the present value of all benefits payable under the PlanDDCP exceeds the value of the trust’s assets.

12In September 2004, the Board approved an amendment to the DDCP partially terminating the plan so that no deferrals will be made to the plan subsequent to December 31, 2004. All other provisions of the DDCP remain in effect.

2005 Deferred Compensation Plan for Directors and Executives

On November 17, 2004, the Board of Directors approved the Northwest Natural Gas Company Deferred Compensation Plan for Directors and Executives (DCP). The effective date of the DCP is January 1, 2005.

14

The DCP is intended to replace the existing Executive Deferred Compensation Plan (EDCP) and the DDCP as the vehicle for nonqualified deferral of compensation by executives and directors. The DCP includes a number of technical changes from the EDCP and DDCP in provisions relating to the timing of deferral elections and the timing of payout elections as necessary to comply with new deferred compensation requirements of the American Jobs Creation Act of 2004. However, the DCP continues the basic provisions of the EDCP and DDCP under which deferred amounts are credited to either a “cash account” or a Company “stock account.” Stock accounts represent a right to receive shares of Company Common Stock on a deferred basis, and such accounts are credited with additional shares based on the deemed reinvestment of dividends. Cash accounts are credited quarterly with interest at a rate equal to Moody’s Average Corporate Bond Yield plus two percentage points. The crediting rate is subject to a six percent minimum rate. The Company’s obligation to pay deferred compensation in accordance with the terms of the DCP will generally become due on retirement, death, or other termination of service, and will be paid in a lump sum or in installments of five or ten years as elected by the participant in accordance with the terms of the DCP. The right of each participant in the DCP is that of a general, unsecured creditor of the Company.

Directors Retirement Benefit

On January 1, 1998, in connection with the termination of a prior retirement benefit for directors and in lieu of that benefit, the Company credited a number of shares of Company Common Stock to a stock account under the Directors Deferred Compensation PlanDDCP for each then current director. If such a director retires from the Board at age 70 or older with 10 or more years of service as a director or if the director earlier dies or becomes disabled or if there is an earlier change in control of the Company, the Company is obligated to deliver to the director (or to his or her beneficiary) the number of shares credited to the account, plus an additional number of shares based on reinvested dividends credited to the account over time. Concurrently with the creation of the stock accounts, the Company contributed to the Umbrella Trust for Directors a number of shares of the Company’s Common Stock equal to the number of shares credited to directors’ accounts. Such stock is held in the Umbrella Trust and will be used to fund the Company’s obligation to pay out the stock accounts. The number of shares of Common Stock in the retirement benefit stock account of each such director at December 31, 20032004 was: Tod R. Hamachek, 793;827; Randall C. Papé, 598;624; Richard G. Reiten, 1,313; Robert L. Ridgley, 1,913; Melody C. Teppola, 982;1,370; and Russell F. Tromley, 1,221.1,273.

CORPORATE GOVERNANCE STANDARDS

The Board of Directors adopted Corporate Governance Standards that are intended to provide the Company and its Board of Directors with policies and proceduresguidelines designed to ensure that business is conducted to serve stakeholders with the highest level of integrity. These Corporate Governance Standards are reviewed annually by the Governance Committee to determine if changes should be recommended to the Board of Directors. The Corporate Governance Standards, as amended as of December 16, 2004, are available on the Company’s website atwww.nwnatural.com and are available in print to any shareholder who requests a copy. Among other matters, the Corporate Governance Standards include the following:

1315

In addition, the Board of Directors has adopted procedures for the receipt, retention and treatment of concerns from Company employees and others regarding accounting, internal controls, auditing or other matters. Employees may submit concerns anonymously pursuant to

16

the Code of Ethics’ hotline, located on the Company’s internal Web site. Shareholders may submit concerns in writing to the non-management directors of the Company, c/o the Corporate Secretary, 220 NW Second Avenue, Portland OR 97209, or by calling 1-800-541-9967 or sending an e-mail todirectors@nwnatural.com.directors@nwnatural.com. Concerns relating to accounting, internal accounting controls or auditing matters will be referred by the Corporate Secretary to the chair of the Audit Committee and the chair of the Governance Committee. Other concerns will be referred by the Corporate Secretary to the chair of the Governance Committee.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers to file reports of ownership and changes in ownership of Company Common Stock with the Securities and Exchange Commission. The Company is required to disclose in this proxy statement any late or missed filings of those reports made by its directors and executive officers during 2003.2004. Based solely upon a review of the copies of such reports furnished to it and written representations that no other such reports were required, the Company believes that during 20032004 all directors and executive officers timely filed all such required reports.

14

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In January 2003,From time to time, the Company contributed $125,000 to establish the Richard G. Reiten Leadership Fundconducts business with the Oregon Community Foundation in honoraffiliates of retiringThe Papé Group, Inc., of which director Randall C. Papé is President, Chief Executive Officer Richard G. Reiten. and a major shareholder.

The fund isCompany entered into a lease through May 31, 2007 with an affiliate of The Papé Group and paid $73,300 in connection with the lease in 2004. From time to time, the Company also purchases equipment from and employs the services of certain affiliates of The Papé Group. In 2004, the Company paid $128,010 for general charitable purposessuch equipment and Mr. Reitenservices. Based upon representations from The Papé Group’s independent auditor and his family members will advisea review of the Oregon Community Foundation on the fund’s use. Mr. Gibson, a director, is a member oftransactions, the Board of TrusteesDirectors has affirmatively determined that these transactions were arm’s length transactions entered into in the ordinary course of the Oregon Community Foundationbusiness and serves on the Company’s Public Affairs and Environmental Policy, Strategic Planning and Organization and Executive Compensation Committees. In addition, Ms. Teppola is a member of the Board of Trustees of the Oregon Community Foundation and serves on the Company’s Public Affairs and Environmental Policy, Audit and Governance Committees. The Board approved this transaction in December 2002.not material.

SECURITY OWNERSHIP OF COMMON STOCK

OF CERTAIN BENEFICIAL OWNERS

The following table shows ownership of Common Stock of the Company on February 27, 200428, 2005 by each person who, to the knowledge of the Company, owned beneficially more than 5% of the Common Stock of the Company:

1517

BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS

AND EXECUTIVE OFFICERS

Set forth below is certain information with respect to beneficial ownership of the Company’s Common Stock as of February 27, 200428, 2005 by all directors and nominees, each of the executive officers and the key employee named in the Summary Compensation Table on page 1720 and all directors and executive officers as a group.

18

1619

EXECUTIVE COMPENSATION

Shown below is information concerning the annual and other compensation for services in all capacities to the Company for the years ended December 31, 2004, 2003, 2002, and 2001,2002, of those persons who were, during 20032004 and at December 31, 20032004 (i) the chief executive officer, (ii) the four most highly compensated executive officers, and (iii) a retired highly compensated executive officer and (iv) one key employee of the Company (the Named Executive Officers):

SUMMARY COMPENSATION TABLE

20

17

OPTION GRANTS IN LAST FISCAL YEAR

NoThe following table provides information on stock options were grantedawarded to the Named Executive Officers listed in the Summary Compensation Table during 2003.in 2004:

		Individual Grants
Name		Number of Securities Underlying Options Granted1		Percent of Total Options Granted to Employees in Fiscal Year2			Exercise or Base Price ($/Sh)			Expiration Date		Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term3
												5 Percent			10 Percent
Mark S. Dodson		30,000		14.8	%		$	31.34		March 4, 2014		$	591,300		$	1,498,600
Michael S. McCoy		12,000		5.9	%		$	31.34		March 4, 2014			236,520			599,400
Bruce R. DeBolt		8,000		3.9	%		$	31.34		March 4, 2014			157,680			399,600
Beth A. Ugoretz4		8,000		3.9	%		$	31.34		March 4, 2014			157,680			399,600
Gregg S. Kantor		6,000		3.0	%		$	31.34		March 4, 2014			118,260			299,700
Lea Anne Doolittle		5,000		2.5	%		$	31.34		March 4, 2014			98,550			249,750
David A. Weber		5,000		2.5	%		$	31.34		March 4, 2014			98,550			249,750

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1	Approximately one-third of the options became exercisable on February 25, 2005, one-third will become exercisable on January 1, 2006 and the remainder on January 1, 2007.

2	The indicated percentages represent the options to purchase the Company’s Common Stock granted to each Named Executive Officer expressed as a percentage of the aggregate number of options to purchase the Company’s Common Stock granted to employees of the Company in 2004.

3

The 5 and 10 percent growth rates for the period ending March 4, 2014, which were determined in accordance with the rules of the Securities and Exchange Commission, illustrate that the potential future value of the granted options is linked to future increases in growth of the price of the Company’s Common Stock. Because the exercise price for options equals the market price of the Company’s Common Stock on the date of grant, no gain to the Named Executive Officers is possible without an increase in the stock price. The 5 and 10 percent growth rates are intended for illustration only and are not intended to be predictive of future growth; the actual value, if any, that may be realized by any Named Executive Officer will depend on the market price of the Company’s Common Stock on the date of exercise.

4	Award lapsed upon resignation on January 3, 2005.

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LONG-TERM INCENTIVE PLAN – AWARDS IN 20032004

 

The following table provides information on performance-based Long-Term Incentive Plan awards granted to the Named Executive Officers listed in the Summary Compensation Table in 2003.2004.

 

				Long-Term Incentive Plan1
		Performance Period		Number of Shares								Long-Term Incentive Plan1
Name			Award		Threshold		Target		Maximum		Performance Period		Number of Shares
Name														Award		Threshold		Target		Maximum
		2003-2005		8,000		1,600		8,000		16,000		2004-2006		10,000		2,500		10,000		20,000
Michael S. McCoy		2003-2005		4,000		800		4,000		8,000		2004-2006		4,000		1,000		4,000		8,000
Bruce R. DeBolt		2003-2005		4,000		800		4,000		8,000
Beth A. Ugoretz		2003-2005		3,000		600		3,000		6,000
Bruce R. DeBolt2												2004-2006		4,000		1,000		4,000		8,000
Beth A. Ugoretz3												2004-2006		4,000		1,000		4,000		8,000
Gregg S. Kantor		2003-2005		3,000		600		3,000		6,000		2004-2006		3,000		750		3,000		6,000
Lea Anne Doolittle												2004-2006		3,000		750		3,000		6,000
David A. Weber		2003-2005		2,000		400		2,000		4,000		2004-2006		2,000		500		2,000		4,000

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1

Each Named Executive Officer received an award based on a three-year performance period (2003-2005)(2004-2006). The Organization and Executive Compensation Committee established a series ofCompany performance targetsmeasures based on total shareholder return relative to a peer group, with a minimum return of 6% per year for a cycle (75% of award) and performance milestones relative to the Company’s average annual return on equity (ROE) forcore and non-core strategic plans (25% of award). At the performance period corresponding to award opportunities ranging from 0% to 200%end of the target awards. No awards are payable unlesscycle, the threshold annual average ROE level of 10 1/4 % is achieved duringCommittee will determine the award period. The maximum awards are payable only uponCompany’s ability to achieve the achievement of an average annual ROE of 12 1/4%established criteria and assign a factor to each component ranging between 0% and 200%. As a general guideline, if the Company achieves the targets as stated, the component factor would be 100%. A participant generally must be employed by the Company at the end of the performance period to receive an award payout, although pro-rated awards will be paid if employment terminates earlier on account of death, disability or retirement, or for other reasons within six months of the end of the performance period. Awards will be paid in Common Stock as soon as practicable after the end of the performance period. Participants will also receive dividend equivalent cash payments equal to the number of shares of Common Stock received on the award payout multiplied by the aggregate cash dividends paid per share by the Company during the performance period. Upon a change in control of the Company (as defined in the plan), all outstanding awards will be paid at the target award level.

2	Award lapsed upon retirement on October 1, 2004.

3	Award lapsed upon resignation on January 3, 2005.

 

AGGREGATED OPTION EXERCISES IN 2003

2004 AND YEAR-END OPTION VALUES

 

Shown below is information with respect to options to purchase shares of the Company’s Common Stock exercised in 20032004 and unexercised options granted under the Restated Stock Option Plan to the Named Executive Officers and held by them at December 31, 2003.2004.

 

		No. of Shares Acquired on Exercise		Value Realized			No. of Securities Underlying Unexercised Options at December 31, 2003				Value of Unexercised Options at December 31, 2003						No. of Shares Acquired on Exercise		Value Realized			No. of Securities Underlying Unexercised Options at December 31, 2004				Value of Unexercised Options at December 31, 2004
Name						Exercisable		Unexercisable1		Exercisable2			Unexercisable1, 2					Exercisable				Unexercisable1		Exercisable2			Unexercisable1,2
Mark S. Dodson		1,000		$	4,540		14,573		8,300		$	89,482		$	36,935		5,244		$	56,609		13,529		34,100		$	93,561		$	102,504
Michael S. McCoy		15,000			142,693		9,400		8,600			33,955			38,270		0			0		13,700		16,300			94,053			60,792
Bruce R. DeBolt		3,170			26,066		20,021		5,300			152,530			23,583		16,480			150,632		16,841		0			90,065			38,544
Beth A. Ugoretz		0			0		1,700		3,300			5,355			10,935
Beth A. Ugoretz3																	1,700			10,599		0		11,300			0			39,462
Gregg S. Kantor		0			0		9,700		3,300			68,690			14,685		2,500			32,862		8,900		7,600			76,616			26,304
Lea Anne Doolittle																	5,000			35,625		3,400		6,600			25,296			23,904
David A. Weber		0			0		4,200		3,300			30,378			14,685		0			0		5,900		6,600			55,584			23,904

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1

Unexercisable options are those options that have not vested. Of the options shown, a portion became exercisable on January 1, 20042005 and the remainder will become exercisable over the period from January 1, 20052006 to January 1, 2006.2007. Restrictions on exercise lapsed with respect to options granted to Mr. DeBolt upon his retirement on October 1, 2004.

2	Represents the difference between the option exercise prices and the closing price of $30.75$33.74 for the Company’s Common Stock as quoted on the New York Stock Exchange on December 31, 20032004 times the number of options.

3	Of the 11,300 options outstanding at December 31, 2004, options on 9,600 shares lapsed upon resignation on January 3, 2005 and 1,700 shares became exercisable on January 1, 2005, which shares will lapse unless exercised before April 3, 2005.

 

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PENSION PLANS

 

The following table shows the estimated annual retirement benefit payable upon retirement at age 65 as a straight life annuity (netwith 10 years of guaranteed payments, net of Social Security offset)offset, to the Company’s executive officers under the Company’s defined benefit plans:plans effective as of December 31, 2004: the qualified Retirement Plan for Non-Bargaining Unit Employees (NBU Plan), the non-qualified Executive Deferred Compensation Plan supplemental benefit (EDC Plan) and the non-qualified Executive Supplemental Retirement Income Plan (ESRIP). Optional forms of payment, including joint and survivor forms, are available, subject to an actuarial adjustment in the amount of payment.

 

PENSION PLAN TABLE

 

Compensation		Years of Service														Years of Service
		10			15			20			25 or more
																10		15		20		25 or more
$150,000		$	43,500		$	76,100		$	79,800		$	83,600				$  42,500		$  75,000		$  78,800		$  82,500
200,000			65,200			108,600			113,600			118,600				64,100		107,500		112,500		117,500
250,000			86,800			141,100			147,300			153,600				85,800		140,000		146,300		152,500
300,000			108,500			173,600			181,100			188,600				107,400		172,500		180,000		187,500
350,000			130,100			206,100			214,800			223,600				129,100		205,000		213,800		222,500
400,000			151,800			238,600			248,600			258,600				150,700		237,500		247,500		257,500
450,000			173,400			271,100			282,300			293,600				172,400		270,000		281,300		292,500
500,000			195,100			303,600			316,100			328,600				194,000		302,500		315,000		327,500
550,000			216,700			336,100			349,800			363,600				215,700		335,000		348,800		362,500
600,000			238,400			368,600			383,600			398,600				237,300		367,500		382,500		397,500
650,000			260,000			401,100			417,300			433,600				259,000		400,000		416,300		432,500
700,000			281,700			433,600			451,100			468,600				280,600		432,500		450,000		467,500
750,000																302,300		465,000		483,800		502,500
800,000																323,900		497,500		517,500		537,500
850,000																345,600		530,000		551,300		572,500

 

For purposes of the ESRIP,total pension benefits described above, “compensation” consists of the average of the annual salary and Executive Annual Incentive Plan bonus awarded to a plan participant by the Company for the highest three compensation years in the last 10 years prior to retirement.

 

The credited years of service under the ESRIPpension plans for Messrs. Dodson, McCoy and DeBolt, Ms. Ugoretz, Mr. Kantor, Ms. Doolittle and Mr. KantorWeber are 6 years, 34 years, 24 years, 1 year and 7 years, 35 years, 25 years, 2 years, 8 years, 4 years and 5 years, respectively. The service requirements for Mr. Dodson’s ESRIP benefit were modified by the terms of his employment agreement. See “Employment Agreements,” below. A participant who becomes entitled to severance benefits under his or her executive severance agreement in connection with a change in control of the Company will receive three additional years of service credit for ESRIP purposes. See “Executive Severance Agreements,” below.

Mr. Weber is not a participant in the ESRIP, but is a participant in the Retirement Plan for Non-Bargaining Unit Employees with four years of service.NBU Plan. As such, he will be entitled to a benefit equal to 1.8% of his average compensation at retirement for the same benefits upon retirement as other non-bargaining unit employees based on his age,first 10 years of service, and finalplus the annuity equivalent of 7.5 percent of his average compensation at retirement.retirement for each year of service in excess of 10 years. Mr. Weber’s estimated annual benefit payable upon retirement at the NBU Plan’s normal retirement age, age 62, is $52,004, assuming no future changes in compensation levels, interest rates or IRS limits on recognizable compensation.

 

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The ESRIP portion of the total pension plan benefits areis 50% vested after five years of service and becomebecomes vested for an additional 10% for each additional year of service until fully vested after 10 years of service. A participant who becomes entitled to severance benefits under his or her executive severance agreement in connection with a change in control of the Company will be fully vested in the ESRIP portion of the benefit regardless of years of service. The benefit under the NBU Plan is fully vested after five years of service.

 

Executive Severance Agreements

On May 7, 2004, the Company announced that its Senior Vice President and Chief Financial Officer, Bruce R. DeBolt, informed the Board of Directors of his decision to retire on October 1, 2004. In connection with his retirement, on May 27, 2004, the Organization and Executive Compensation Committee of the Board of Directors approved a retirement agreement between the Company and Mr. DeBolt dated June 25, 2004, as amended (the Retirement Agreement).

The Retirement Agreement was entered into in the interest of facilitating an orderly transition of the chief financial officer position of the Company. In consideration for his future services to the Company, Mr. DeBolt was entitled to (i) an enhanced supplemental retirement benefit calculated so that the present value of the benefit was $280,000 as of October 1, 2004, assuming a 6.25% discount rate and the UPB 84(+1) mortality table, (ii) $100,000 payable in equal monthly installments of $1,666.67 commencing January 2005 and continuing for a period of sixty months and (iii) $86,000 on January 15, 2005 and $81,000 on July 31, 2005, subject to the satisfactory transfer of his duties in all material respects.

 

The Board of Directors has approved the Company’s entry into severance agreements with each executive officer of the Company, including all of the Named Executive Officers. These agreements generally provide for the payment, upon the termination of the employee’s employment by the Company without cause or by the employee for “good reason” (as defined in the severance agreement) within two years following a change in control of the Company, of an amount equal to

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one, two or three times the sum of the employee’s annual salary and average bonus for the last three years, and also provide up to three-years’ continuation of life and health insurance benefits. In addition, if any payments to the Named Executive Officers other than Mr. Weber are subject to the excise tax on “parachute payments,” the Company will make an additional payment to the employee such that the employee will receive net benefits as if no excise tax were payable. If such additional payments are required, the Company will not be able to deduct such additional payments for federal income tax purposes and also will be denied such a deduction for some or all of the other payments made pursuant to the agreement and its other plans and policies. Each employee is obligated under the severance agreement to remain in the employ of the Company for a period of 270 days following a “potential change in control” (as defined in the severance agreements).

 

Executive Deferred Compensation Arrangements

As discussed above, the Company’s existing EDCP was replaced by the DCP, effective January 1, 2005. With respect to executives, the DCP provides that the Company’s obligation to pay deferred compensation in accordance with the terms of the DCP will generally become due on retirement, death, other termination of employment or service, or an earlier date selected by the participant at the time of the deferral election, and will be paid in a lump sum or in installments of five, ten or fifteen years as elected by the participant in accordance with the terms of the DCP. See “Directors Compensation—Deferred Compensation—2005 Deferred Compensation Plan for Directors and Executives,” above.

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Employment Agreements

 

On July 2, 1997, the Company entered into an employment agreement with Mr. Dodson for a term extending until December 31, 2002, with an option for Mr. Dodson to renew for an additional term through December 31, 2007. Effective January 1, 2003, the agreement was extended to December 31, 2007 and modified to reflect his appointment as President and Chief Executive Officer. Under this agreement, the Company modified the service requirements applicable to Mr. Dodson for purposes of the ESRIP. Accordingly, Mr. Dodson became vested and eligible under the ESRIP for supplemental retirement benefits at 32.5% of final annual compensation upon retirement on or after December 31, 2002, and will be vested and eligible under the ESRIP for supplemental benefits at 65% of final annual compensation upon retirement on or after December 31, 2007. The agreement also provides that Mr. Dodson will be vested and eligible under the ESRIP for supplemental retirement benefits at 65% of final annual compensation with no reduction in benefits based on early retirement if he (a) becomes disabled, (b) dies after December 31, 2002, (c) is terminated other than for cause, or (d) becomes entitled to severance benefits under his executive severance agreement in connection with a change in control of the Company.

 

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REPORT OF THE ORGANIZATION AND EXECUTIVE COMPENSATION

COMMITTEE ON EXECUTIVE MANAGEMENT COMPENSATION

 

Executive Compensation Principles

The Company’s executive compensation program is administered by the Organization and Executive Compensation Committee of the Board of Directors (the Committee) whichdetermines the compensation of NW Natural’s executive officers and oversees the administration of executive compensation programs. The Committee is comprised of directors Boyle, Gibson, Tromley and Woolworth, each of whom is an independent director under applicable New York Stock Exchange listing standards. The program isstandards and the Company’s Director Independence Standards. Each member of this Committee also meets the criteria as a “non-employee director” under applicable rules of the Securities and Exchange Commission and the criteria for “outside directors” under Section 162(m) of the Internal Revenue Code of 1986, as amended. NW Natural’s executive compensation programs are designed to attract, motivate and retain talented executives critical to the achievement of the Company’s long-term business strategy, its annual goals and objectives, the enhancement of shareholder value, and the implementation of corporate values. The program seeks to do this by:

 

Tying a portion of each executive’s total compensation opportunity to the achievement of previously-established annual and long-term performance goals.

Aligning

Ÿ

tying a portion of each executive’s total compensation opportunity to the achievement of previously-established annual and long-term performance goals;

Ÿ

aligning executives’ long-term interests with those of the Company’s shareholders by encouraging ownership of the Company’s Common Stock by officers; and

Ÿ

providing total compensation, including base salary and incentive compensation, which is competitive with that of other energy service and industrial companies of comparable size and circumstances.

Each year, the Committee reviews the relationship between the Company’s executive compensation policies and the creation of shareholder value, as well as the competitiveness of the programs. The Committee submits recommendations regarding salary actions and annual bonuses to the Board for approval. The Committee approves long-term incentive awards for officers, and also recommends to the Board appropriate changes in the compensation programs of the Company.

The Committee engages an independent compensation consultant to assist it in evaluating the competitiveness of the Company’s shareholders by encouraging ownershipexecutive compensation programs and to provide overall guidance to the Committee as it relates to the design and operation of executive and director compensation programs. During 2004, the Committee issued a request for proposal to several compensation consulting firms and, following a review of the Company’s Common Stock.

Providing total compensation, including base salaryresponses received and incentive compensation, which is competitiveinterviews with thateach of other energy service and industrial companies of comparable size and circumstances.

these firms, selected one to serve as the Committee’s consultant. The Committee intends to repeat the request for proposal process periodically.

 

The Board took action in 2002, 2003 and 20032004 to revise the Committee charter and self-assessment form to ensure compliance with the Sarbanes-Oxley Act of 2002 and New York Stock Exchange requirements.

 

Executive Compensation Components

The Company’s executive compensation program consists of three primary components: annual base salary, annual incentive cash bonuses and long-term stock incentives.

 

Base Salaries

Base salaries paid to executives are established by the Board of Directors upon the recommendation of the Committee based, in part, on a review of market salary analyses prepared by the Company’s independent compensation consultant.consultant who reports to the Committee Chair. These analyses include salary data for comparable executive positions of

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energy service and industrial companies of approximately the same size in terms of total revenues located throughout the United States. The energy services portion of the analysis includesCommittee also reviews data from the American Gas Association executive compensation survey, which includes gas distribution companies comparable to the Company.

 

The Committee uses this information as a guide to establish base salaries that are competitive with those paid to executives in similar positions in comparable companies. Generally, it is the Committee’s policy to target executives’ base salaries at a level equivalent to the 50th percentile for base salaries for comparable positions included in the consultant’s analyses. Each executive’s targeted salary level may be adjusted, at the discretion of the Committee, on the basis of such executive’s performance and potential, as well as changes in duties and responsibilities. The Committee reviews executives’ salaries annually.

During 2003, the independent compensation consultant conducted a complete review of the total remuneration paid or provided to Company executives. This review included salary, annual incentives, the expected value of long-term incentives and health, welfare and other benefits, paid or provided to Company executives in comparison to the total remuneration paid or provided to executives in similar positions with a group of comparable energy and gas utility companies and general industry companies. Based on this review, the consultant concluded that generally the total remuneration paid to Company executives was in line with the median total remuneration

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for similar executive positions within the energy and gas utility group and was somewhat below median when compared to the general industry group.

 

Executive Annual Incentive Plan

The Company’s Executive Annual Incentive Plan is intended to advance the interests of the Company and its shareholders by means of an incentive cash bonus program which will motivate key executives to achieve previously-established annual performance goals. The amounts to be paid if these goals should be achieved or exceeded, when added to base salaries, are intended to place the Company’s executives’ compensation at between the 50th percentileand 75th percentiles of total cash compensation for comparable positions included in the consultant’s analyses. Should the Company exceed these incentive goals, total cash compensation may be between the 50th and 75th percentiles.

 

Participation in the Executive Annual Incentive Plan currently is limited to 13 participants selected by the Committee, including eight executive officers. The payment of awards under this Plan is contingent upon meeting predetermined individual and Company performance goals. At the beginning of each year, weighted performance goals are established. At year-end, performance is measured against these goals. The results are considered by the Committee in determining the amounts to be awarded, if any.

 

The amounts of the awards are based on a formula which reflects an allocation between Company and individual performance criteria. The allocation depends upon each executive’s ability to influence corporate performance. Depending upon position, performance and the other factors considered by the Committee, an executive can earn from 20%25% to 50% of base salary if the prescribed Company and individual performance goals are met, or up to 30%37.5% to 75% of base salary if these goals are exceeded.

 

Performance goals established for 20032004 focused on strengthening the Company’s financial position. These goals included the achievement of: (1) net income in an amount which the Committee determined would demonstrate above average performance; and (2) several operating goals related to return on new residential customers, customer satisfaction improvement, market share, capital cost management and productivity in serving customers. In combination, these goals measured the Company’s performance in terms of its overall profitability, return on new residential customers, customer satisfaction, market share, the reduction of costs and the achievement of greater efficiency. In determining the awards, the Committee accorded 50% of the weight to net income and 50% to the combined group of operating goals. The grant of any award for 20032004 was conditioned upon the Company’s 20032004 net income exceeding a percentage of the target designated in advance by the Committee and being sufficient to cover the payment of all dividends.

 

Long-Term Incentives

The long-term portion of the Company’s executive compensation program consists of two components: stock options and performance shares. Stock options provide incentives to executives to increase the Company’s Common Stock price performance, thereby aligning their interests with those of the other common shareholders.

 

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The Company typically makes stock option grants under the Restated Stock Option Plan every two years, rather than annually. NoThe options that were granted to the Named Executive Officers in 2004 are shown in the Summary Compensation Table (page 17) in 2003. When grants are made, the20). The number of options granted is based upon a combination of several factors, including the stock option component of the independent compensation consultant’s competitive market analysis of long-term incentives, including the stock option component, and the Committee’s judgment as to how many options will provide meaningful incentives to executives. In determining the number of options to be granted, the Committee takes into consideration the number of shares available for grant under the Plan, the number of options previously granted and the number of shares then owned by each Named

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Executive Officer in relation to targeted objectives for stock ownership by executives. Those objectives, contained in the Company’s Corporate Governance Standards, provide the following ownership guidelines for executive officers, expressed as a multiple of each officer’s base salary: (i) two times salary for the Chief Executive Officer, (ii) one and one-half times salary for the Executive Vice President and Senior Vice Presidents, and (iii) one times salary for all other executive officers. These ownership objectives generally are to be attained within five years of being appointed an officer.

 

The second component of long-term compensation is provided through a performance share program pursuant to the Company’s Long-Term Incentive Plan. This program consists of annual awards payable in Company stock, based on the Company’s financial performance over three-year performance cycles. Awards granted by the Committee in 20012002 were based on a three-year performance cycle covering the period 2001-2003.2002-2004. The performance measure used to determine incentive awards for this cycle was the Company’s average return on equity during the period covered by the award in relation to pre-established targeted objectives. The return on equity targets in the plan were well above the approved regulated return on equity during this performance award cycle, which concluded on December 31, 2003,2004, and no awards were paid.

 

In February 2004, the Committee established new performance criteria for the 2004-2006 performance period. For this performance period, performance shares will be determined considering two primary factors. The first of these factors is Total Shareholder Return (TSR) performance relative to a peer group of 10 gas utility companies. The Company must achieve an average of 6% TSR over the three-year period before any awards can be earned. Further, the Company must outperform the middle of the ranked peer companies to earn target awards. This factor determines 75% of the award. The second factor, that makes up 25% of the award, is subjectively determined by the Committee considering milestone performance relative to the goals set forth in the Company’s strategic plan.

Total Remuneration

In addition to an annual review of the cash components discussed above, every two years, at the Committee’s request, the independent compensation consultant conducts a complete review of the total remuneration paid or provided to Company executives in comparison to the total remuneration paid or provided to executives in similar positions with a group of comparable energy and gas utility companies. This review includes salary, annual incentives, equity and long-term incentive compensation, health, welfare and other benefits, and the dollar value and cost to the Company of all perquisites and benefits under the Company’s non-qualified deferred compensation and supplemental retirement plans. Based upon this review, the Committee has found the total remuneration for the executive officers, including the CEO, to be reasonable and aligned with the Executive Compensation Principles outlined above. Further, the Committee actively reviews the compensation of the CEO relative to other executive officers, management, and the average employee and has concluded that relative differences are appropriate. The Committee will continue to actively monitor each component of total remuneration and make changes to remuneration programs to maintain this position, as necessary.

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CEO Compensation

Compensation paid to Mark S. Dodson for the year 2003,2004, as President and Chief Executive Officer, consisted of his base salary and an annual incentive bonus. Mr. Dodson’s 20032004 compensation reflects his base salary of $390,000,$435,000, effective as of JanuaryMarch 1, 2003, concurrent with his appointment as Chief Executive Officer.2004. This base salary was deemed by the Committee and the Board to be appropriate to reflect the additional responsibilities assumed by Mr. Dodson upon his appointment as CEO and to maintain the competitiveness of his base salary. His compensation also reflects a cash bonus of $250,000$260,000 under the Executive Annual Incentive Plan. The 20032004 incentive award, which is equal to 56%60% of Mr. Dodson’s 20032004 base salary, was based, in part, upon the achievement of the corporate performance goals as described above under the “Executive Annual Incentive Plan” and upon the Committee’s evaluation of Mr. Dodson’s performance in relation to the achievement of pre-established individual performance goals. For 2003,2004, the Company reported earnings of $1.76$1.86 a diluted share and net income applicable to common stock of $45.7$50.6 million. These 20032004 results substantially met or exceeded performance goals, including the targeted net income goal. The Committee determined that the achievements made with respect to these corporate performance goals, together with Mr. Dodson’s overall accomplishments for the year, warranted the bonus awarded to Mr. Dodson for 2003.2004. Considering the competitive market analysis of long-term incentive opportunities, in early 2002, prior to Mr. Dodson’s appointment as CEO,2004 the Committee granted Mr. Dodson 12,50030,000 non-statutory stock options and in early 2003, awarded him 8,00010,000 performance shares for the three-year cycle beginning January 1, 2003.2004. See “Option Grants in Last Fiscal Year,” on page 21 and “Long-Term Incentive Plan – Awards In 2003,2004,” on page 18.22.

 

Deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code), generally limits to $1 million per person the amount that the Company may deduct for compensation paid in any year to any individual who, on the last day of the taxable year, is its chief executive officer or is among its four highest compensated officers (other than the chief executive officer). Certain exceptions to this limitation apply to so-called “performance-based compensation.” The Company does not expect the sum of the base salary, annual cash incentive bonus and other relevant compensation paid to any executive officer to exceed $1 million in any year. In the event that in the future the Company determines that an executive’s annual compensation may approach or exceed this limitation, it will consider the use of this exception to the limitation under Code Section 162(m) as it has in the case of stock options and the non-discretionary portion of long-term incentive awards as described below.

 

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It is the Company’s policy generally to grant options that meet the requirements of the Code and the regulations thereunder so that any such compensation recognized by an optionee will be fully deductible performance-based compensation. The shareholders have previously approved the Restated Stock Option Plan to comply with the performance-based compensation requirements of Code Section 162(m) so that compensation received on the exercise of options granted under this Plan would not be subject to the $1 million limitation. In 1996, the Committee determined that option grants would henceforth generally be Non-Statutory Stock Options for which the Company will receive a tax deduction upon exercise.

 

The non-discretionary portion of performance share long-term incentive awards granted by the Company are also generally intended to meet the “performance-based compensation” requirements of the Code and regulations so that any compensation paid under those awards will be fully deductible. However, the long-term incentive awards granted in 2002 for the 2002-2004 performance cycle did not meet the “performance-based compensation” requirements because those awards were approved by the Committee more than 90 days after the commencement of the cycle. The awards in 2002 were delayed pending resolution of matters related to the attempted acquisition of Portland General Electric Company.

 

Respectfully submitted on February 26, 200423, 2005 by the Organization and Executive Compensation Committee of the Board of Directors:

 

		Russell F. Tromley, Chair		Timothy P. Boyle
		C. Scott Gibson		Richard L. Woolworth

 

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SHAREHOLDER RETURN PERFORMANCE PRESENTATION

 

Set forth below is a line graph comparing the annual percentage change in the cumulative total shareholder return, assuming reinvestment of dividends at the end of the month during which they were paid, on the Company’s Common Stock against the cumulative total return of the Standard & Poor’s (S&P) SmallCap 600 Index and the S&P Utilities Index for the period of five years commencing December 31, 19981999 and ended December 31, 2003.2004. The S&P Utilities Index encompasses companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.

 

Comparison of Five-Year Cumulative Total Return

Based on $100 invested on 12/31/98

 

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REPORT OF AUDIT COMMITTEE

 

The Audit Committee of the Board of Directors (the Committee) is responsible for providing independent, objective oversight of the Company’s accounting functions, financial reporting and internal controls. The Committee is solely responsible for the engagement of the independent registered public accounting firm on behalf of the Company, and the independent auditor reports to the Committee. The Committee acts under a written charter, first adopted and approved by the Board on May 25, 2000, and amended as of September 25, 2003,July 22, 2004, to ensure compliance with applicable laws and regulations. The charter is reviewed annually by the Committee and is available on the Company’s website atwww.nwnatural.com.See Appendix B. Each of the members of the Committee is independent as defined by current New York Stock Exchange listing standards.standards and the Company’s Director Independence Standards.

 

The Committee, in accordance with its written charter, oversees the quality and integrity of the Company’s accounting, auditing and financial reporting practices. During fiscal 2003,2004, the Committee discussed the interim financial information in each of the Company’s quarterly reports to the Securities and Exchange Commission (SEC) in special meetings with the Chief Executive Officer, the Chief Financial Officer, the Controller and PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, as auditor, prior to filing them with the SEC. In addition, the Chair of the Committee and available Committee members review the Company’s quarterly earnings press release before its dissemination.

 

During 2003,2004, the Committee reviewed disclosure controls and procedures designed to ensure the continuing integrity of the Company’s financial reports and the Company’s compliance with new corporate governance mandates, including Committee oversight of the Company’s assessment of its internal controls over financial reporting.reporting in compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

 

In fulfilling its responsibilities, the Committee has reviewed and discussed the audited financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 20032004 with the Company’s management and the independent auditor. As part of its review, the Committee discussed the Company’s critical accounting policies and matters of judgment and estimates used in the preparation of the financial statements included in the Company’s 20032004 Annual Report on Form 10-K. In addition, the Committee discussed with the independent auditor those matters required to be discussed by Statement on Auditing Standards No. 61, as amended,Communications with Audit Committees.Committees,and Public Company Accounting Oversight Board Auditing Standard No. 2,An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements.Management is responsible for the financial statements and the reporting process, including a report on the system ofCompany’s internal controls.controls over financial reporting. The independent auditor is responsible for expressing an opinion as to whether the financial statements are presented fairly, in all material respects, in conformity with accounting principles generally accepted in the United States.States, as well as expressing an opinion on (i) management’s assessment of the effectiveness of Company’s internal controls over financial reporting and (ii) the effectiveness of internal controls over financial reporting.

 

In discharging its oversight responsibility as to the audit process, the Committee obtained from the independent auditor a formal written statement describing all relationships and non-audit services between the independent auditor and the Company that might bear on the auditor’s independence consistent with Independence Standards Board Standard No. 1, as amended,Independence Discussions with Audit Committees. Committees. In this regard, the Committee considered whether or not the provision of non-audit services by the independent auditor for the year 20032004 is compatible with maintaining the independence of the firm.

 

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In February 2003,2004, the Committee pre-approved certain non-audit services performed by the Company’s independent auditor and affirmed its procedure for the pre-approval of any future non-audit services performed by its independent auditor during the 20032004 audit. On February 26, 2004,24, 2005, the Committee pre-approved specific services to be performed by the independent auditor in 2004,2005, including audit, audit-related and tax services, and established its procedure for pre-approval of all other services to be performed by the independent auditor in 2004.2005. The Committee determined that:

 

For proposed non-audit services, Company management will submit to the Committee the list of non-audit services that it recommends the Committee engage the independent auditor to provide;

Ÿ

For proposed non-audit services, Company management will submit to the Committee the list of non-audit services that it recommends the Committee engage the independent auditor to provide;

 

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The Committee will review and consider for approval the list of permissible non-audit services and the budget for such services;

Ÿ

The Committee will review and consider for approval the list of permissible non-audit services and the budget for such services;

 

The Committee will be informed routinely by management as to the non-audit services actually provided by the independent auditor pursuant to this pre-approval process; and

Ÿ

The Committee will be informed routinely by management as to the non-audit services actually provided by the independent auditor pursuant to this pre-approval process; and

 

The Director of Internal Auditing will be responsible for reporting at least annually to the Committee all independent auditor fees against the pre-approved budget for such services.

Ÿ

The Director of Internal Auditing will be responsible for reporting at least annually to the Committee all independent auditor fees against the pre-approved budget for such services.

 

The chair of the Committee is authorized to pre-approve non-audit services between meetings of the Committee and must report such approvals at the next Committee meeting.

 

The Committee also discussed with the independent auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditor’s independence.independence. The Committee also completed its annual assessment of the independent auditor’s and internal auditor’s performance. The Committee discussed with management, the internal auditors and the independent auditor the quality, adequacy and adequacyeffectiveness of the Company’s internal controls over financial reporting, and the organization, responsibilities, budget and staffing of the internal audit function. The Committee reviewed with both the independent auditor and the internal auditors their respective audit plans, audit scopes and identification of audit risks.

 

The Committee, in reliance on the reviews and discussions referred to above, recommended to the Board of Directors (and the Board has approved and directed) that the audited financial statements be included in Northwest Natural Gas Company’s Annual Report on Form 10-K for the year ended December 31, 2003,2004, for filing with the Securities and Exchange Commission.

 

Respectfully submitted on February 26, 200424, 2005 by the Audit Committee of the Board of Directors:

 

		Richard L. Woolworth, Chair		John D. Carter
		Tod R. Hamachek		Melody C. Teppola
Russell F. Tromley

 

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SELECTION OF INDEPENDENT AUDITORSREGISTERED

PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP, independent certified public accountants, as independent auditorsregistered public accounting firm of the Company for the year 2004.2005. A representative of PricewaterhouseCoopers LLP will be present at the Annual Meeting of Shareholders and will be provided with an opportunity to make a statement and to respond to appropriate questions. For 2004,2005, the Audit Committee approved remunerationservices for audit, audit-related and tax services, as well as guidance relatedincluding audit services relating to compliance with Section 404 of the Sarbanes-Oxley Act. As of February 26, 2004,24, 2005, there were no other services pre-approved by the Audit Committee. The chair of the Audit Committee is authorized to pre-approve non-audit services between meetings of the Audit Committee and must report such approvals at the next Audit Committee meeting. See “Report of Audit Committee,” above.

 

The following table shows the fees that the Company paid or accrued for the audit and other services provided by PricewaterhouseCoopers LLP for the fiscal years 20032004 and 2002:2003:

 

		2003			2002			2004			2003
Audit Fees		$	209,300		$	180,210		$	961,049		$	209,300
Audit Related Fees			49,500			96,701
Audit-Related Fees									33,750			49,500
Tax Fees			16,222			15,281			17,358			16,222
All Other Fees			10,750			67,390			3,600			10,750
Total		$	285,772		$	359,582		$	1,015,757		$	285,772

 

Audit Fees

 

This category includes fees for services rendered for the audit of the annual financial statements included in the Form 10-K and the review of the quarterly financial statements included in the Forms 10-Q. In 2004, the amount includes $731,800 for the review of the Company’s internal controls over financial reporting in compliance with the Sarbanes-Oxley Act of 2002. In addition, amounts include fees for statutory filings and audits, issuance of consents and comfort letters relating to the registration of Company securities and assistance with the review of documents filed with the Securities and Exchange Commission.

 

Audit-Related Fees

 

These fees and expenses include required audits of the Company’s Retirement Plans and its Retirement K Savings Plan and, in 2003, the required audit of its Cafeteria Plan and services in connection with preparation for compliance with internal controls requirements mandated by the Sarbanes-Oxley Act of 2002.

 

Tax Fees

 

This category includes fees for tax compliance, tax planning and tax advice. In 2002, the fee included $4,838 for tax services related to the Company’s proposed acquisition of Portland General Electric Company.

 

All Other Fees

 

The category relates to services other than those described above. In 2002, these fees2004, this amount relates to a letter required for the installation of a combined heat and expenses were comprisedpower project and the license of amounts paid for merger integration and advisory services related to the proposed acquisition of Portland General Electric Company.an accounting research tool. In 2003, the amount relates to a required audit of the Company’s internal transfer agent and registrar functions which wasfunctions. All fees in this category were pre-approved by the Audit Committee in February 2003.Committee. See “Report of Audit Committee,” above.

 

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OTHER MATTERS

 

Management does not know of any other matters to be presented at the Annual Meeting. If other matters should be properly presented at the meeting, the persons named in the accompanying proxy will vote the shares represented by such proxy with respect to such matters in accordance with their best judgment.

 

2005Consolidation Services Provided

The consolidation of an individual’s multiple proxy cards into one envelope is a service the Company provides based on Social Security Number or Tax ID Number match.

If you received a consolidated mailing this year and you would like to receive a separate annual report or proxy statement for each account with the same Social Security Number, please submit your request to Shareholder Services, 220 NW Second Avenue, Portland, OR 97209-3991 or call (800) 422-4012, ext. 3412. The Company will promptly send additional copies of the annual report and/or proxy statement upon receipt of such request. You may also contact the Company if you received multiple copies of the annual meeting materials and would prefer to receive a single copy in the future.

2006 ANNUAL MEETING OF SHAREHOLDERS

 

The 20052006 Annual Meeting of Shareholders is scheduled to be held in Portland, Oregon on Thursday, May 26, 2005.25, 2006. Securities and Exchange Commission proxy rules require that any shareholder proposal to be considered for inclusion in the Company’s proxy statement for the 20052006 Annual Meeting of Shareholders must be received at the Company’s principal executive office no later than December 17, 2004.19, 2005.

 

The Company’s bylaws require shareholders to give the Company advance notice of any proposal to be submitted at any meeting of shareholders. The bylaws prescribe the information to be contained in any such notice, and a copy of the relevant provisions of the bylaws will be provided to any shareholder upon written request to the Secretary of the Company. For any shareholder proposal to be considered at the 20052006 Annual Meeting of Shareholders, the shareholder’s notice must be received by the Company’s Secretary no later than February 20, 2005.26, 2006. The Securities and Exchange Commission’s proxy rules allow the Company to use discretionary voting authority to vote on a matter coming before an annual meeting of shareholders which is not included in the Company’s proxy statement, if the Company does not have notice of the matter before the deadline established in its bylaws. In addition, discretionary voting authority may generally also be used if the Company receives timely notice of such matter (as described above) and if, in the proxy statement, the Company describes the nature of such matter and how the Company intends to exercise its discretion to vote on such matter.

 

COMPANY INFORMATION

 

The Company makes available on its website(www.nwnatural.com), among other things:

 

Corporate Governance Standards;

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Corporate Governance Standards;

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Director Independence Standards;

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Charters of the Governance, Audit, Organization and Executive Compensation, Finance, Public Affairs and Environmental Policy and Strategic Planning Committees;

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Code of Ethics;

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Standards of Conduct; and

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Financial Code of Ethics.

 

Director Independence Standards;

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Committee charters;

Code

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You may request a copy of Ethics; and

these documents, at no cost to you, by writing or calling Shareholder Services, Northwest Natural Gas Company, One Pacific Square, 220 N.W. Second Avenue, Portland, Oregon 97209, telephone 503-226-4211.

Financial Code of Ethics.

 

Shareholders may communicate with the Chairman of the Board or the non-management directors of the Board by:

 

calling 1-800-541-9967;

mailing correspondence to 220 NW Second Avenue, Portland, OR 97209, Attn: Corporate Secretary; or

sending an e-mail todirectors@nwnatural.com.

Ÿ

calling 1-800-541-9967;

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mailing correspondence to 220 NW Second Avenue, Portland, OR 97209, Attn: Corporate Secretary; or

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sending an e-mail todirectors@nwnatural.com.

 

Correspondence or other communications received by the Corporate Secretary are forwarded to the chair of the Governance Committee or to the chair of the Audit Committee, as appropriate.

 

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SOLICITATION OF PROXIES

 

Proxies may be solicited on behalf of the Board of Directors by regular employees in person or by mail, telephone, the Internet or facsimile transmission. The Company will reimburse brokers or other persons holding stock in their names or in the names of their nominees for their reasonable expenses incurred in forwarding proxies and proxy materials to the beneficial owners of such shares. All solicitation costs will be borne by the Company. The Company has retained Georgeson Shareholder Inc. to assist in the solicitation of proxies from banks, brokers and nominees at a fee of $2,500 plus reasonable out-of-pocket expenses. Shareholders may assist the Company in avoiding expenses in this connection by returningvoting their proxies promptly.

 

If you are unable to be present at the Annual Meeting in person, please mark, date, sign and mail the enclosed proxy, or, alternatively, grant your proxy by telephone or the Internet, so that the business of the meeting can be transacted.

 

								By Order of the Board of Directors,
Portland, Oregon						C. J. Rue
April 16, 200415, 2005						Secretary

 

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Appendix A

 

Northwest Natural Gas Company

(the “Corporation”)

 

Statement of Policy

Director Independence Standards

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I.

Policy

 

It is the sense of this Board that the expertise and perspective of independent directors is of great value and benefit to the Corporation and its stockholders. Accordingly, and in keeping with the other high standards of corporate governance which this Board has established for itself, the listing standards of the New York Stock Exchange, and laws and regulations applicable to the Corporation, this Board establishes the following guidelines on director independence and for determining whether its members are independent.

 

II.

Director Independence – General

 

The Board believes that a substantial majority of its members should satisfy these standards for independence.

 

No director may be deemed independent unless the Board affirmatively determines, after due deliberation, that the director has no material relationship with the Corporation either directly or as a partner, shareholder or officer of an organization that has a relationship with the Corporation. In each case, the Board shall broadly consider all the relevant facts and circumstances from the standpoint of the director as well as from that of persons or organizations with which the director has an affiliation and shall apply these standards. Trivial orde minimisaffiliations or connections to the Corporation by a director or his or her immediate family will not generally be cause for the Board to determine that the director is not independent. In addition:addition, a director is not independent if:

 

1)(1)

AThe director who is, or has been within the last three years, an employee of the Corporation, or whosean immediate family member is, or has been within the last three years, an executive officer, of the Corporation is not independent until three years after the termination of such employment relationship.Corporation. Employment as an interim Chairman of the Board or Chief Executive Officer or other executive officer shall not disqualify a director from being considered independent following that employment.

 

2)(2)

AThe director who receives,has received, or whosehas an immediate family member receives,who has received, during any twelve-month period within the last three years, more than $100,000 per year in direct compensation from the Corporation, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), is not independent until three years after he or she ceases to receive more than $100,000 per year in such compensation.. Compensation received by a director for former service as an interim Chairman or Chief Executive Officer or other executive officer shall not be considered in determining independence under this test. Compensation received by an immediate family member for service as a non-executivean employee of the Corporation (other than an executive officer) need not be considered.

 

A-1

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3)(3)

A(A) The director who is affiliated with or employed by, or whosean immediate family member is affiliated with or employed in a professional capacity by,current partner of a present or formerfirm that is the Corporation’s internal or external auditor or law firm; (B) the director is a current employee of such a firm; (C) the Corporationdirector has an immediate family member who is a current employee of such a firm and who participates in the firm’s legal engagement, audit, assurance or tax compliance (but not independent untiltax planning) practice; or (D) the director or an immediate family member was within the last three years after(but is no longer) a partner or employee of such a firm and personally worked on the termination of the affiliationCorporation’s engagement or the employment or auditing relationship.audit within that time.

 

4)(4)

AThe director who is employed, or whosean immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Corporation’s present executives serveexecutive officers at the same time serves or served on that company’s compensation committee is not independent until three years after the termination of such service or employment relationship.committee.

 

5)(5)

AThe director who is an executive officera current employee, or an employee, or whose immediate family member is ana current executive officer, of a company that makeshas made payments to, or receivesreceived payments from, the Corporation for property or services in an amount which, in any singleof the last three fiscal year,years, exceeds the greater of $1,000,000$1 million, or 2% of such other company’s consolidated gross revenues, is not independent until three years after the contribution to consolidated gross revenues falls below that threshold.revenues. Relationships involving a director’s affiliation with another company that account for lesser amounts than those specified will not be considered to be material relationships that would impair the director’s independence, provided that the related payments for goods or services or in connection with other contractual arrangements are made in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable transactions with non-affiliated parties.

 

6)(6)

The following not-for-profit relationships will not be considered to be material relationships that would impair a director’s independence: if a director (or an immediate family member of the director) serves as an officer, director or trustee of a not-for-profit organization, and (i) the Corporation’s discretionary charitable contributions to the organization are less than 1% of that organization’s consolidated gross revenues during its preceding fiscal year or $25,000, whichever is greater, and (ii) the Corporation’s discretionary charitable contributions to the organization are less than 5% of the Corporation’s annual budget for such contributions for the year in question. The Corporation’s automatic matching of employee charitable contributions will not be included in the amount of the Corporation’s charitable contributions for this purpose. In addition, the Corporation’s contributions to nonprofit umbrella organizations that themselves support or administer funds for a number of separate, unrelated charities shall be considered outside the scope of this paragraph.

7)

A director who receives compensation for services as (or who is affiliated with an organization that is) a significant advisor, counsel or consultant to the Corporation is not independent.Corporation.

 

8)

The ownership of stock of the Corporation by directors is encouraged and substantial stock ownership will not affect the status of a director as either independent or non-independent.

The following relationships with tax exempt organizations will not be considered to be material relationships that would impair a director’s independence: if a director (or an immediate family member of the director) serves as an officer, director or trustee of a tax exempt organization, and (i) the Corporation’s discretionary charitable contributions to the organization are less than 1% of that organization’s consolidated gross revenues during its preceding fiscal year or $25,000, whichever is greater, and (ii) the Corporation’s discretionary charitable contributions to the organization are less than 5% of the Corporation’s annual budget for such contributions for the year in question. The Corporation’s automatic matching of employee charitable contributions will not be included in the amount of the Corporation’s charitable contributions for this purpose. In addition, the Corporation’s contributions to nonprofit umbrella organizations that themselves support or administer funds for a number of separate, unrelated charities shall be considered outside the scope of this paragraph.

The ownership of stock of the Corporation by directors is encouraged and substantial stock ownership will not affect the status of a director as either independent or non-independent.

 

The Board will annually review the commercial, industrial, banking, consulting, legal, accounting and charitable relationships between the Corporation’s directors and the organizations with which they and the members of their immediate families have material interests. For relationships that are either not covered by or do not satisfy these guidelines, the determination of whether the relationship is material or not, and therefore whether the director would be independent or not, shall be made by the directors satisfying the independence guidelines.

 

A-2

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III.

Director Independence – Audit Committee Members

 

No director who is a member of the Audit Committee of the Board may accept any consulting, advisory or compensatory fee from the Corporation, or from any of its subsidiary companies, other than in that director’s capacity as a member of the Board or any of the Board’s several committees.

 

In addition, no director who is a member of the Audit Committee may be an affiliated person of the Corporation or any of its subsidiary companies apart from affiliation occasioned by the director’s service as a member of the Board or any of the Board’s several committees. A director would be deemed an affiliated person of the Corporation if that director directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with the Corporation.

 

IV.

Independence of Certain Committee Members

 

No director may serve on the Governance Committee, Audit Committee or Organization and Executive Compensation Committee of the Board unless such director is independent in accordance with these Standards.

 

V.

Approval and Adoption

 

This Statement of Policy of the Board of Directors of Northwest Natural Gas Company was approved and adopted by resolution of the Board of Directors of the Corporation at a meeting thereof held the 24th24^th day of July, 2003. Amended February 26,December 16, 2004.

 

A-3

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Appendix B

 

NORTHWEST NATURAL GAS COMPANY

Audit Committee

Purpose

The Audit Committee (Committee) of Northwest Natural Gas Company (Company) shall, through regular or special meetings with management, the Director of Internal Auditing, and the Company’s independent auditor: (i) provide oversight to ensure the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications, performance and independence, and the performance of the Company’s internal audit function; and (ii) prepare the report required by law to be included in the Company’s annual proxy statement.

Membership and Organization

The Committee shall be comprised of three or more directors, each of whom shall be independent directors in accordance with applicable law and the listing standards of the New York Stock Exchange. The Board of Directors shall designate one member of the Committee as Chair. Each member of the Committee shall be financially literate or must become financially literate within a reasonable period of time after his or her appointment to the Committee. At least one member of the Committee must have accounting or related financial management expertise, as the Board, in its business judgment, interprets the foregoing qualifications in accordance with applicable law.

The Committee shall meet at least four times per year. The Committee will also meet on other occasions on an as needed basis as determined by the Committee Chair or by a majority of the Committee members. The Committee shall meet privately (without members of management present) and separately with the Director of Internal Auditing and the independent auditor periodically and, when deemed appropriate, with the Company’s General Counsel.

Responsibilities of the Committee

Independent Auditor

The Committee shall:

have the direct and sole authority and responsibility to select, evaluate and terminate the firm of independent certified public accountants to serve as the Company’s independent auditor, which firm shall report directly to the Committee;

establish audit engagement fees payable to the independent auditor and other terms of the engagement;

establish policies and procedures for the Committee’s pre-approval of permitted non-audit services to be provided by the independent auditor;

ensure that the independent auditor provides annually to the Committee a formal written statement delineating: (i) its internal quality control procedures; (ii) any material issues raised by the most recent internal quality-control review, peer review or any inquiry or investigation by governmental or professional authorities within the preceding five years

B-1

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with respect to one or more independent audits carried out by the firm and any steps taken to address such issues; and (iii) all relationships between the independent auditor and the Company;

review annual audit plans of the independent auditor;

review with the independent auditor any audit problems or difficulties and management’s response;

actively engage in a dialogue with the independent auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditor and take appropriate action deemed necessary in response to the independent auditor’s report to satisfy itself of the independent auditor’s independence;

review the performance, qualifications and independence of the independent auditor on an annual basis, including communicating to the independent auditor that it is ultimately accountable to the Committee;

review the appointment and replacement not less frequently than every five years of the lead audit engagement partner of the independent auditor;

establish hiring policies for employees or former employees of the independent auditor; and

review any allegations of fraudulently influencing, coercing, manipulating or misleading the independent auditor for the purpose of rendering the financial statements materially misleading.

Internal Audit

The Committee shall:

approve the appointment and evaluation, in consultation with executive management, of the Director of Internal Auditing;

review the organization, staffing, scope, results, and effectiveness of the Company’s internal audit function; and

review annual audit plans of the Director of Internal Auditing.

Financial Reporting

The Committee shall:

assist the Board with establishing procedures to ensure the integrity of the Company’s financial statements;

review the results of the internal auditor’s and the independent auditor’s activities, including major conclusions, findings and recommendations, and related management responses;

review the adequacy and effectiveness of the Company’s internal controls, including computerized information system controls and security;

review the adequacy of the Company’s disclosure controls and procedures;

review the Company’s accounting and financial reporting practices, policies and procedures, including its critical accounting policies;

review accounting, legal, tax and other developments of major significance to the Company, including any alternative treatment of information within Generally Accepted Accounting Principles;

B-2

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review the Company’s annual audited financial statements and quarterly financial statements, including disclosures under “Management’s Discussion and Analysis of Results of Operations and Financial Condition” to be included in the Company’s annual and quarterly reports on Forms 10-K and 10-Q, and discuss with management and the independent auditor prior to filing the report matters required to be discussed by relevant auditing standards, including the quality, not just the acceptability, of the accounting principles and underlying estimates used in the financial statements;

discuss generally earnings press releases and other financial information and earnings guidance provided to analysts and rating agencies, including the types of information to be disclosed and the types of presentations to be made; and

establish and maintain procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters and the confidential, anonymous submissions by employees of concerns regarding questionable auditing or accounting practices.

Annual Assessments

Annually, the Committee shall:

conduct a performance evaluation of the Committee;

review the continued adequacy of this Audit Committee Charter.

Other Responsibilities

The Committee shall review, pursuant to a schedule developed by the Committee Chair in consultation with management:

material litigation involving the Company and litigation involving officers and directors;

an internal audit report regarding the total annual compensation of each executive officer of the Company for consistency with Board approved compensation levels and applicable law;

transactions with related parties;

the Company’s policies with respect to risk assessment and risk management of major financial risk exposures and the steps management has taken to monitor and control such exposures;

periodic reports from management, the General Counsel, the Director of Internal Auditing, and the independent auditor on matters relating to accounting, financial reporting, internal control, auditing, litigation and compliance with legal and regulatory requirements;

progress or results relating to major capital projects or contingency issues, as the Committee considers appropriate; and

the Company’s policies relating to delegation of management authority.

The Committee shall also undertake such additional activities as required by law or as the Committee or the Board of Directors may from time to time determine.

Reporting

The Committee shall have separate direct lines of communication between itself and the independent auditor, the Director of Internal Auditing, management and, with regard to litigation and legal and regulatory compliance, the General Counsel. The Committee Chair shall make regular reports to the Board on the Committee’s activities. In addition, the Committee shall:

report to the Board, based on its reviews and discussions, whether it recommends to the Board that the most recent year’s audited financial statements be included in the Company’s Form 10-K to be filed with the SEC; and

B-3

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prepare and approve the Audit Committee report to be included in the Company’s proxy statement as required by the relevant regulations which shall state (i) whether it has reviewed and discussed the audited financial statements with management; (ii) whether it has discussed with the Company’s independent auditor the matters required to be discussed under relevant auditing standards; (iii) whether it has received the written disclosures and the letter from the Company’s independent auditor with respect to the auditor’s independence; and (iv) whether it has discussed the independent auditor’s independence with the auditor.

Independent Advisors

The Committee may cause an investigation to be made into any matter within the scope of its responsibility. The Committee shall have the authority to retain its own independent counsel and other advisors and determine and ensure provision for appropriate funding to compensate the independent auditors, counsel and advisors.

Effective Dates

As approved by the Board of Directors on May 25, 2000.

As Amended:		May 23, 2002
		February 27, 2003
		September 25, 2003

B-4

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ANNUAL MEETING OF SHAREHOLDERS OF

May 26, 2005

May 27, 2004

Please date, sign and mail

your proxy card in the

envelope provided as soon

as possible.

êPlease detach along perforated line and mail in the envelope provided.ê

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THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF DIRECTORS.REVOCABLE PROXY

PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HEREx

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1.		Vote on Directors as Class II Nominees:						This proxy when properly executed will be voted in the manner directed herein by the shareholder whose signature appears below. If no direction is made, the proxy will be voted FOR Proposal 1.
				NOMINEES:
¨		FOR ALL NOMINEES		Tod R. Hamachek Melody C. Teppola Russell F. Tromley
¨		WITHHOLD AUTHORITY FOR ALL NOMINEES
¨		FOR ALL EXCEPT (See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark“FOR ALL EXCEPT” and write the nominee name(s) below:
_____________________________________
_____________________________________
								Please mark this box if you plan¨ to attend the Annual Meeting.
To change the address on your account, please check the box at right and indicate your new address in the address space above. Please note that changes to the registered name(s) on the account may not be submitted via this method.						¨

Signature of Shareholder

Date:

Signature of Shareholder

Date:

Note:

Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

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		REVOCABLE PROXY

NORTHWEST NATURAL GAS COMPANY

PROXY FOR 20042005 ANNUAL MEETING OF SHAREHOLDERS

This Proxy is Solicited on Behalf of the Board of Directors

The undersigned hereby appoints John D. Carter, Randall C. Papé and Richard L. Woolworth and each or any of them, the proxy or proxies, with power of substitution and with authorization to vote all of the common shares of the undersigned at the annual meeting of shareholders of Northwest Natural Gas Company to be held on Thursday, May 27, 2004,26, 2005, and at all adjournments thereof, (i) as designated on the reverse of this card and, (ii) at their discretion, upon any and all other matters which properly may be brought before such meeting or any adjournment thereof.

If shares of the Company’s Common Stock are held for the account of the undersigned under the Company’s Dividend Reinvestment and Stock Purchase Plan or its Retirement K Savings Plan, then the undersigned hereby directs the respective fiduciary of each applicable plan to vote all shares of Northwest Natural Gas Company Common Stock in the undersigned’s name and/or account under such plan in accordance with the instructions given herein, at the 20042005 Annual Meeting and at any adjournments or postponements thereof, on all matters properly brought before such meeting or any adjournment thereof, including but not limited to the matters set forth on the reverse side.

The Company will provide reasonable accommodation for a disability. If you need an accommodation, please contact the Company at (503) 226-4211 ext. 3412 at least 72 hours before the meeting.

Please date and sign this proxy on the reverse side and mail without delay in the enclosed envelope.

Address Changes/Comments:

(If you noted any Address Changes/Comments above, please mark corresponding box on the reverse side.)

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ANNUAL MEETING OF SHAREHOLDERS OF

 

220 NORTHWEST SECOND AVENUE

PORTLAND, OR 97209

VOTE BY INTERNET - www.proxyvote.com

Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time May 27, 200425, 2005. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.

ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER

PROXY VOTING INSTRUCTIONSCOMMUNICATIONS

MAIL - Date, sign and mail your proxy card in the postage paid envelope provided as soon as possible.
- OR -
TELEPHONE - Call toll-free1-800-PROXIES (1-800-776-9437) from any touch-tone telephone and follow the instructions. Have your proxy card available when you call.		COMPANY NUMBER
- OR -
INTERNET - Accesswww.voteproxy.com and follow the on-screen instructions. Have your proxy card available when you access the web page.

If you would like to reduce the costs incurred by Northwest Natural Gas Company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years.

Vote 24 hours a day, 7 days a week!VOTE BY PHONE - 1-800-690-6903

Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time May 25, 2005. Have your proxy card in hand when you call and then follow the instructions.

Your telephone or Internet vote must be received by 4:00 p.m. eastern daylight timeVOTE BY MAIL

on May 26, 2004 to be countedMark, sign and date your proxy card and return it in the final tabulation.postage-paid envelope we have provided or return it to Northwest Natural Gas Company, c/o ADP, 51 Mercedes Way, Edgewood, NY 11717.

TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:

ê Please detach along perforated line and mail in the envelope providedIF you are not voting via telephone or the Internet.êNWNGC1

KEEP THIS PORTION FOR YOUR RECORDS

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DETACH AND RETURN THIS PORTION ONLY

THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.

NORTHWEST NATURAL GAS COMPANY

THE BOARD OF DIRECTORS RECOMMENDS A

VOTE “FOR” THE ELECTION OF DIRECTORS.

1. Vote on Directors Proposal

Class II Nominee:

Class III Nominees:

Kenneth Thrasher

Martha L. “Stormy” Byorum

John D. Carter

C. Scott Gibson

Richard G. Reiten

For

All

Withhold

All

For All

Except

To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and write the nominee name(s) on the line below:

This proxy when properly executed will be voted in the manner directed herein by the shareholder whose signature appears below. If no direction is made, the proxy will be voted FOR Proposal 1.

PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HEREx

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For address changes and/or comments, please check this box and write them on the back where indicated.

1.		Vote on Directors as Class II Nominees:						This proxy when properly executed will be voted in the manner directed herein by the shareholder whose signature appears below. If no direction is made, the proxy will be voted FOR Proposal 1.
				NOMINEES:
¨		FOR ALL NOMINEES		Tod R. Hamachek Melody C. Teppola Russell F. Tromley
¨		WITHHOLD AUTHORITY FOR ALL NOMINEES
¨		FOR ALL EXCEPT (See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT” and write the nominee name(s) below:
_____________________________________
_____________________________________
								Please mark this box if you plan¨ to attend the Annual Meeting.
To change the address on your account, please check the box at right and indicate your new address in the address space above. Please note that changes to the registered name(s) on the account may not be submitted via this method.						¨

Please indicate if you plan to attend the Annual Meeting.

Signature of Shareholder

Date:

Signature of Shareholder

Date:

HOUSEHOLDING ELECTION - Please indicate if you consent to receive certain future investor communications in a single package per household.

Note:

Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

Date Signature [PLEASE SIGN WITHIN BOX]

Note: Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

(Joint Owners)