Warm Weather Cooled Some LDC 1Q Earnings
Atlanta Gas Light was one of the biggest losers among a group of
37 LDCs reporting first quarter earnings. AGL's net income was off
a whopping 46% from the first quarter of 1998. PaineWebber noted
the significant drop was due mainly to a change in rate design that
took effect in July 1998 when the company unbundled.
Also affecting AGL was the exodus of gas supply customers
following the company's unbundling. More customers than expected
switched to gas marketers, which made for increased operations and
maintenance expenses. Since deregulation in July of last year, more
than 50% of AGL's utility customers have switched to marketers.
On the marketing front, AGL was hit by continued losses from its
gas marketing joint venture with Sonat Inc. "While deregulation
creates new opportunities, it also increases competition,
particularly on the retail marketing front," PaineWebber wrote in a
research note. "In the short- to intermediate-term, smaller
marketers, like AGL, will be able to serve local markets and niches
profitably, but longer-term margins may be squeezed due to the
entry of larger mega-type marketing firms."
AGL was not alone in posting poor results. MidAmerican Energy
posted net income of $8 million, down a full 70% from first quarter
1998 net income of $27 million, and Scana was off 42% to $37
million from $64 million. All was not lost in the LDC arena,
however, as a number of companies posted respectable gains in net
income. KeySpan was up 24%; Peoples Energy gained 40%; LG&E was
up 60%, and CILCORP gained a whopping 64%.
"Our earnings met our expectations," said KeySpan CEO Robert B.
Catell. "We had solid performances from our gas-distribution and
electric-service operations. The gas-distribution business
contributed $0.84 per share, clearly reflecting sales growth of 4%
on a weather-normalized basis. Our electric-service business earned
$0.12 per share. Both businesses have realized the initial benefits
of our synergy-savings efforts."
Rebecca Followill, a Houston-based Merrill Lynch analyst,
observed LDC results are generally better than what had been
expected. "I think there was some nice colder weather in March that
kind of saved a few people." She also said losses from
non-regulated businesses seem to be tapering off, noting about a
year ago many LDCs were just getting into non-regulated
enterprises, such as marketing.
"For most of these companies, weather was still warmer than
normal, which leaves some room for [improvement] next year, which
is always nice to have."
An improvement in LDC performance that bolsters stock prices
would be nice to have indeed in Phil Borish's view. Borish is the
senior financial analyst for Rushmore Services' American Gas Index
Fund. "We had an awful quarter. The worst in our history. The
companies that did the best in the last quarter in our fund, well,
frankly, they're not the LDCs." The fund has stock holdings across
the gas industry, including pipelines and marketers. The LDCs among
the fund's top-10 performers were all involved in some kind of
takeover action, Borish said, noting Southwest Gas and Public
Service of North Carolina.
Overall, Borish is bullish for LDC stock prices and earnings.
"It's the throughput that will increase their profits, their
shareholder values. And the only thing that hammered against that
is two years of warm weather. The chances of having a third year,
as one analyst said, I think are pretty slim."
Another influence on LDC earnings last quarter was oil prices,
noted Edward Jones analyst Zach Wagner. "Oil prices were low for
the quarter, and that impacted LDCs because the LDCs interruptible
customers generally switched to oil." Look for weather hedges to
become more popular among LDCs, Wagner advised. "The LDCs, they
want to be able to post results that are reflective of their
efforts. If you can hedge away the impact of weather, the numbers
you're posting are a much more accurate reflection of management