Subject to the economy and some legal factors, the need for added natural gas pipeline and storage capacity in the Pacific Northwest is a no-brainer; it is just a matter of when, not if, according to senior executives at Northwest Natural Gas Co., speaking on a second quarter earnings conference call Wednesday. Earnings increased quarter over quarter for the most recent period and were flat for the first half of this year compared to the same period in 2009.
Northwest Natural reported net income of $6.9 million, or 26 cent/share, for the second quarter, compared with $3.1 million, or 12 cents/share, for the same period last year. For the first six months in 2010, net income was $50.5 million, or $1.90/share, compared to $50.4 million, or $1.90/share, in the first half of 2009.
Noting that natural gas prices should stay flat or slightly lower, CEO Gregg Kantor said he is bullish about the prospects for the Portland, OR-based utility's joint pipeline project with TransCanada, Palomar Pipeline, although it is confined to the so-called eastern zone now that NorthernStar Natural Gas has abandoned its proposed Bradwood Landing liquefied natural gas (LNG) project along the Columbia River in Oregon and filed for Chapter 7 bankruptcy. Kantor reiterated that Palomar remains complementary to the El Paso Natural Gas Corp.'s proposed Ruby Pipeline from the Rockies to the Oregon-California border (see Daily GPI, Aug. 3).
While continuing to monitor the bankruptcy in which a decision on the NorthernStar agreement with Palomar has been delayed another three months by the trustee in the case, Kantor said work on the east zone portion of Palomar is moving forward. "While the bankruptcy will likely cause us to modify the project, we believe there remains a critical need for Palomar-East," he said.
"With existing interstate pipelines at maximum use, it is a question of when -- not if -- additional pipeline infrastructure is needed to serve the Williamette Valley and the rest of the Pacific Northwest." Kantor cited "a growing dependency on natural gas" in the region to transition from coal and back up growing use of renewable-based electric generation as making added natural gas infrastructure "absolutely essential."
And he said the advent of the Ruby Pipeline to the south puts the proposed Palomar Pipeline in a good position to bring in additional supplies from the Rockies. Palomar now is anticipating amending its application at the Federal Energy Regulatory Commission to reflect the NorthernStar Gas situation and whatever comes out of the bankruptcy case, Kantor said.
There are financial issues related to Palomar and its ties to the Bradwood Landing LNG project with it western portion that now is not seen as viable. CFO David Anderson summarized some of the outstanding financial exposure, noting that Northwest Natural has an investment to date in the project of nearly $45 million ($25.9 million for the east zone and $18.9 million for the west part). As part of a prior agreement, the gas utility has received $15.8 million of its investment in the west section from NorthernStar.
With $3.1 million still at risk in the west section part of the pipeline project, Anderson said it is not likely that the bankruptcy court will accept the existing agreement with NorthernStar, and thus for the west part of the project to move forward there would have to be a new agreement. If needed, Northwest Natural eventually would have to take a $3.1 million impairment charge against its earnings for this part of the pipeline project, he said.
For both the pipeline and Northwest's joint venture 20 Bcf Gill Ranch underground storage project in Northern California (see Daily GPI, Jan. 13), Kantor views the push away from coal-fired generation and the growing reliance on wind-generated power in the Northwest as solidifying the ultimate need for added pipeline and storage capacity. He used questions on the conference call related to the storage projects to underscore this point.
There is another 20 Bcf storage potential in the Gill Ranch project that is under construction, and Northwest Natural has call on 5 Bcf of that addition, said Kantor, who eventually thinks that the project will expand when the economy turns around and the market indicates the added storage is needed. He acknowledged that nationally gas storage values are depressed currently.
"We [along with partner Pacific Gas and Electric Co.] have sized both the pipeline and the compressor station to be able to serve that additional capacity," Kantor said. "We're as anxious as anyone to get that added capacity on, and I think the marketplace will dictate that. The incentive for both us and PG&E would be to bring that on as soon as the market says it is valuable."
Kantor said the Mist storage facility in Oregon will be increasingly in demand, too, although there are no current plans to expand that facility. Its use and marketing will change, however, he said.
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