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Storage Remains Drag for NW Natural, But CEO Undaunted

Smarting from losses on a merchant natural gas storage venture, Portland, OR-based NW Natural CEO Gregg Kantor nevertheless on Tuesday held out hope for better times ahead through various growth initiatives and the company's ongoing investment in gas reserves for its utility customer base.

Kantor made the observations as part of a 2Q2014 earnings conference call, reporting consolidated net income of $1.1 million, or 4 cents/share, compared to $2.1 million, or 8 cents/share, for the same period last year. Utility only margin and net income were up ($5 million and $1.5 million, respectively), but the overall results offset that with decreases in both gas storage revenues ($2.7 million) and overall net income ($2.6 million), compared to last year's second quarter results.

In 2Q2014, gas storage recorded a net loss of $1.2 million, compared to profits of $1.5 million for the same period in 2013. Storage revenues were down ($2.7 million), and operating costs were up ($1.4 million) and reflect recontracting storage deals at what CFO Steve Feltz called "historically low prices" at the end of the first quarter.

COO David Anderson, who is overseeing the storage operation, confirmed that seasonal price spreads are narrow, and with abundant gas supplies in California, "it is a buyers' market" for storage. "We also had very large withdrawals, so when you think about a winter spread, it is very low right now and there is not a lot of volatility," Anderson said.

For 2014-2015 spring through winter contracts, the prices are lower, he said, and in 2015-2016 that situation should improve, "but it is still a very low storage market overall." He said not all of the capacity is contracted at today's low prices, but "it's a difficult storage market right now and we're trying to make the best of it."

NW Natural's Gill Ranch Storage facility in Northern California continues to struggle, incurring added power costs related to stepped-up injections in the second quarter and $1 million in repair and maintenance charges. "We are continuing to develop future maintenance plans, and taking a look at capital expenses that may be needed to improve these facilities," Feltz said.

"Despite these challenges, we remain bullish on gas storage for the long term."

NW Natural continues to work with Portland General Electric to see if a proposal to expand gas storage volumes at the Mist, OR, underground facility will pencil out. It expects to decide the project's fate by the end of this year. In addition, it now has an amended gas reserves agreement that it signed with Encana Corp. in 2011 (see Daily GPI, Feb. 28, 2011) since the Canadian company sold its interests in the Jonah Field.

"That was an original investment of $178 million, and that investment will continue to earn a rate of return and provide long-term gas-price protection for our utility customers," said Kantor, noting that while the amended agreement ended its deal with Encana, it also expanded NW Natural's interests in certain sections of the Jonah.

Gas costs and earnings from each well are shared based on NW Natural's interests, he said. Its new partner, Jonah LLC, has proposed additional drilling opportunities, and the company now expects to invest an additional $8-16 million in new wells for this year, bringing the utility holding company's total investment in 2014 to a range of $27-35 million. The added investment still require Oregon regulatory approval, which NW Natural said it will seek later this month.

Later this month, NW Natural expects to file an updated integrated resource plan (IRP) with the Oregon Public Utility Commission (PUC) outlining its plans longer term for holding gas reserves as part of the utility's overall gas supply portfolio.

While the process is still ongoing at the Oregon PUC, Kantor said the imitative for promoting more use of natural gas vehicles (NGV) in the state is moving forward and he expects rules governing the programs later this year for the effort that was kicked off last year by a state law (SB 844) that could boost the utility's role in pushing fueling for NGVs (see Daily GPI, Aug. 8, 2013).

"We [still] think there may be an opportunity under this [broader] greenhouse gas emissions legislation to assist organizations in making the switch to compressed natural gas," he said, noting transportation is only one of the areas NW Natural is examining. It is also considering a push to get customers to switch from residential oil use to natural gas in both urban and rural areas.

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