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S&P: California Storage Project Risky for Northwest Natural

Portland, OR-based Northwest Natural Gas Co.'s proposed independent underground gas storage project in Northern California in conjunction with local utility Pacific Gas and Electric Co. (PG&E) as a minority (25%) partner carries increased risk for the utility, according to Standard & Poor's Ratings Services (S&P), which on Friday changed Northwest's outlook to "negative" from a previous "stable" designation.

S&P said the Pacific Northwest gas-only distribution utility's financial profile could deteriorate during the next three years with the development of the Gill Ranch storage project. "The projected decline in metrics likely will be well below our expectations for the 'AA-' rating [carried by Northwest Natural]," S&P said.

In July, Northwest and PG&E made a filing to the California Public Utilities Commission (CPUC) for development of the $150 million project by units of their respective utilities. They asked the CPUC for approval to build and operate the 20 Bcf facility by 2010 at a site near Fresno, CA (see NGI, Aug. 4).

"We believe that gas storage facilities have above-average construction execution risks given the experiences of peers in the sector, and have the potential to raise cost estimates that could further pressure Northwest's consolidated credit profile," S&P said. "Gill Ranch presents incremental risks as the nonregulated investment is outside of Northwest Natural's existing service territory and is located in an area with several other proposed storage projects."

The ratings agency acknowledged that the Oregon utility was partnering with PG&E to develop the storage field and a related 25-mile gas pipeline to interconnect with the San Francisco-based utility's pipeline system, but S&P said the cost estimates already have increased to the $160-180 million range since the CPUC filing.

S&P said there has been an increase in the project's construction budget of $10-20 million due to higher equipment and development costs.

"Gas storage projects have been identified as a high-risk investments given recent projects that have experienced substantial cost overruns," said S&P. The ratings agency acknowledged that the risks in the case of Gill Ranch were "somewhat mitigated" because it is a depleted gas reservoir that has "lower geologic risks than salt dome storage."

In addition, S&P said Northwest Natural is likely to "fix a significant portion of the construction costs by the end of 2009," which will reduce the project's exposure to material cost overruns.

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