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Northwest Natural CEO: Oregon LNG Project Has 50-50 Chance

The chances of an Oregon liquefied natural gas (LNG) facility being constructed remain about 50-50, with the crucial indicator coming early next year, said Portland, OR-based Northwest Natural Gas Co. CEO Gregg Kantor.

Not much has changed on LNG developments in recent months, Kantor said during a conference call to discuss second quarter earnings in which he also divulged the gas distribution utility faces additional job cuts of 50-100, but major storage and pipeline projects continue on schedule.

Northwest Natural has a joint venture with TransCanada to build the 220-mile, 36-inch diameter Palomar Pipeline out of Western Canada, which potentially can interconnect with a LNG terminal along the Columbia River where several projects are proposed. As growth in its core utility business slowed in recent years, Northwest Natural has made no secret of the fact it is looking for related nonutility projects to supplement earnings.

NorthernStar Natural Gas Corp.'s Bradwood Landing LNG project along the Columbia holds a heavily conditioned approval from the Federal Energy Regulatory Commission (FERC) and is awaiting final state and local approvals. (Two other Oregon LNG projects are seeking FERC's OK.).

"I continue to rate it as a 50-50 proposition, and I probably won't change from that for awhile," Kantor told financial analysts. "The real milestone that everyone ought to look toward is whether Bradwood Landing gets any of the state permits."

Based on recent discussions he has had with NorthernStar executives, Kantor said the project developers "are hoping to see something early next year, and I think that's when we will be able to adjust that 50-50."

Northwest Natural is "executing well" on all of its new business projects, said Kantor, and like related natural gas storage projects, the pipeline is on track, paralleling the separate LNG project developments.

Northwest Natural announced essentially flat second quarter earnings and a 9% increase in six-month results, compared with the first half of last year. Net income in the second quarter was $3.1 million (12 cents/share) compared to $3.3 million (12 cents) for the same quarter in 2008. Six-month net income this year was $50.4 million ($1.90/share) compared with $46.5 million ($1.75) for the first half of last year.

Even though it had already eliminated about 175 positions in past two years in a companywide effort to improve the utility's efficiency, Kantor said during the "next several months" Northwest Natural will be "rolling out a plan to make sure we match staffing levels to our current work volumes. The work we did to redesign our operations over the past few years provided a much more efficient structure, but now we have to make sure the structure reflects today's economic realities."

The utility is getting employee ideas for streamlining operations, and Kantor said it will identify by September what position reductions will be needed, and complete the bulk of the downsizing by the end of this year. The focus of the effort is to allow the utility to remain what Kantor called "sustainable," meaning it can "adapt" to a new economic environment.

In response to questions from financial analysts during an earnings conference call, Kantor said Northwest Natural's joint venture 20 Bcf underground gas storage project in Northern California, Gill Ranch, is progressing on schedule and should be operational by August next year. And at its existing Mist storage facility in Oregon, preliminary studies and plans continue for a 3 Bcf capacity addition.

Permitting processes on the $160 million Gill Ranch project, a joint venture with San Francisco-based Pacific Gas and Electric Co.(PG&E), are expected to be completed by the end of this year, Kantor said. Northwest and PG&E applied a year ago to the California Public Utilities Commission. "It should be starting operations about this time in 2010," Kantor said.

In another joint venture, this one with TransCanada, the Palomar West natural gas transmission pipeline should have a draft environmental review released by the Federal Energy Regulatory Commission in September. Kantor called this upcoming move "a critical step," and "we continue to work through routing and permitting issues with landowners, environmental groups and state agencies."

In response to other questions on Gill Ranch, Kantor said Northwest has signed up at least two customers for the storage facility and is negotiating with a number of others and expects to sign more purchase agreements by the end of this year. "We've been holding off in signing some deals until we get further along in the process," he said. "We'll have more to tell you after the third quarter."

Real earnings impact from the storage operation won't come until 2011 because that will be the first full calendar year of the storage field's operations, Kantor said. The compressors have been ordered, and the company is now beginning to order pipe.

Gill Ranch's state regulatory filing outlined a facility that would include 12-15 injection/withdrawal wells located on four drilling pads; a central compressor station located on 10 acres in the Gill Ranch Storage Field; and electric compression to minimize impacts on the San Joaquin Valley's air quality.

New connecting infrastructure will include a 27-mile, 30-inch diameter gas transmission pipeline connecting to PG&E's Line 401 north of Panoche, CA, and a new nine-mile electric power line constructed on wood poles, co-located with an existing PG&E power distribution line.

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