Oregonian: NW Natural's calm shareholders meeting doesn't reflect shareholder happiness

The Oregonian
By Ted Sickinger

Northwest Natural Gas Co.'s annual shareholder meeting Thursday was considerably calmer than in years past -- no noisy demonstrators outside the Oregon Convention Center complaining about pipelines and liquefied natural gas terminals; no outbursts inside from sympathizers who snuck past security.

This year, it was a typical shareholder gathering of a monopoly utility: quick, orderly, with a graying crowd of stockholders ready for the coffee and cookies to follow.

That was the good news for executives.

But the quiet also reflected a less comfortable reality for shareholders. After a string of strong financial performances, the slumping economy and burgeoning supplies of cheap gas have taken the financial wind out of NW Natural's sails, derailing projects that were supposed to drive the company's growth (and that protesters found so objectionable).

NW Natural chief executive Gregg Kantor acknowledged as much when fielding written questions from shareholders: "We have stagnated for a number of reasons on our performance."

Like most utilities, NW Natural has been plagued by lingering effects of the recession, high unemployment and the slow housing market, which undercut residential, commercial and industrial demand. Gas demand was down 6 percent overall last year, and NW Natural's earnings reflect the slump -- down 4 percent in 2010 with another slide projected this year.

The company's growth strategy -- expanding in the more lucrative and less-regulated pipeline and gas storage businesses -- is also predicated on volatile prices and increasing demand for natural gas. That looked prescient a few years ago with analysts warning of looming gas shortages and skyrocketing prices in the United States and Canada.

Yet the gas supply picture has flipped 180 degrees in the last few years as producers use new drilling techniques to tap gas trapped in shale formations. Industry forecasts now see surpluses lasting years, if not decades, with prices remaining low.

Kantor said results from the company's new Gill Ranch gas storage project near Fresno, Calif., were not meeting expectations. NW Natural has invested more than $200 million in the storage project, of which it owns 75 percent. Kantor said storage prices had likely bottomed out and that price volatility would return when the economy recovered, pushing up demand.

The changing supply picture, coupled with regulatory delays, also undermined plans to build a liquefied natural gas terminal on the Columbia River at Bradwood Landing, along with NW Natural's plan to be the pipeline supplier to that project.

Kantor said Tuesday that he thought all efforts to build LNG terminals in Oregon were dead, whether it was for import or export.

"I don't see any hope of LNG being resurrected," he said. "Politically it's not going to happen in Oregon."

The company's fallback plan, to build a scaled-down, cross-Cascades lateral pipeline from Maupin to Molalla, has also been delayed because NW Natural can't support the shipping volumes on its own or find sufficient interest from other utility customers to make the numbers pencil out. While it has pulled its permit application for the project, NW Natural hasn't changed its tune on the need for the project.

The existing pipeline that carries 90 percent of NW Natural's gas supply is running near full capacity during periods of peak demand, the company says, and demand for natural gas is bound to increase as electric utilities get closer to their scheduled shutdown of coal-fired power plants in Boardman and Centralia starting in 2020.

"There's no question another pipeline will be built, the question is when," Kantor said. The answer depends on the economy and how much electric utilities rely on natural gas to replace coal-fired generation. Meanwhile, Kantor said, the company has changed its pipeline route to reduce its footprint in the Mt. Hood National Forest, and joined forces with the backer of a competing pipeline proposal.

Financial analysts remain somewhat skeptical.

"The probability of it being built in the next five years is less than 50 percent," said Mike Bates, an analyst with D.A. Davidson & Co. of Lake Oswego who has a neutral rating on the company's stock.

Opponents of the projects also say they'll swing right back into action when NW Natural relaunches the effort.

"We don't see the changed route as any benefit to Mt. Hood," said Olivia Schmidt, an organizer with Bark, an environmental advocacy group on Mt. Hood issues. "We stopped them once, and we'll do it again."