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Warm Weather Cooled Some LDC 1Q Earnings

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 efforts."

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