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NW Natural Considering ‘All Options’ for Gill Ranch Gas Storage

Portland, OR-based NW Natural may withdraw from the merchant natural gas storage business in California following poor results at Gill Ranch Storage LLC in recent years.

CEO David Anderson said during a conference call Friday that the company plans to diversify by entering the water utility space in the Pacific Northwest, a move that would not initially be financially material.

However, poor results at Gill Ranch in Northern California may result in NW Natural selling its 75% interest in the facility that it operates, which began operations in 2010 as a joint venture with 25% partner Pacific Gas and Electric Co.

Following a strategic evaluation near the end of last year, management concluded that Gill Ranch is "no longer core to our business or part of our long-term strategy," said Anderson, emphasizing that NW Natural today is focused on regulated or regulated-like businesses.

He attributed the recent poor results at Gill Ranch to the impacts from the U.S. unconventional gas boom that blossomed about the same time the 20 Bcf capacity facility opened.

"At the point we began construction, the fundamentals of independent, nonutility gas storage were very favorable," Anderson said. "Gas prices were much higher and price volatility and seasonal spreads more attractive."

He noted that the facility began with a number of multi-year service agreements in place, but shortly thereafter the shale revolution was in full force.

"Natural gas production dramatically increased in shale basins across America," he said, noting that the full market implications at first were difficult to predict. "Ultimately, the gas production resulted in substantial reductions in prices, volatility and seasonal spreads, all of which negatively impacted the value of storage in California."

After the initial favorable contracts expired, the subsequent ones have been at much lower prices, Anderson noted. "As we move forward, we will pursue all options on Gill Ranch, including divestiture."

In late December, the gas-only utility acquired two small, privately owned water utilities, Oregon-based Salmon Valley Water Co. and Idaho-based Falls Water Co., which Anderson called "an excellent strategic fit" for NW Natural. The transactions need Oregon and Idaho regulatory commission approvals and are expected to close this year.

Combined, the two water providers serve about 6,500 customers in Welches, OR, and Idaho Falls, ID.

"It could translate into strong, organic growth opportunities," Anderson said. "Although the transactions are small, this is an exciting opportunity for the long-term."

Anderson and Justin Palfreyman, vice president for strategy and business development, emphasized that there are hundreds of small water utilities sprinkled throughout the Northwest region, and they are generally under-capitalized.

"The water industry is highly fragmented, and in many cases these utilities have not been able to adequately invest in new infrastructure," Palfreyman said. NW Natural can bring a source of capital for future growth to the sector.

On a macro basis, future water sector infrastructure investment could total up to $400 billion during the next 20 years, said Anderson, citing an estimate from the American Society of Civil Engineers. "There are thousands of individual water utilities in the Pacific Northwest and across the region that are in need of capital." NW Natural's move to water would be "disciplined and measured.”

In response to an analyst's question, Anderson did not specify how much it plans to invest in the water sector, but Palfreyman said NW Natural is "starting small and being very disciplined in our approach; we see this an a definite growth opportunity long-term."

Including a $192.5 million impairment for Gill Ranch, NW Natural reported 4Q2017 and full-year losses. In the fourth quarter the loss was $90.1 million (minus $3.14/share), compared with net income of $28.2 million ($1.00) in 4Q2016. For 2017, the loss was $55.6 million (minus $1.94/share), versus 2016 net income of $58.8 million ($2.12).

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