Atlanta Gas Light was one of the biggest losers among a group of37 LDCs reporting first quarter earnings. AGL’s net income was offa whopping 46% from the first quarter of 1998. PaineWebber notedthe significant drop was due mainly to a change in rate design thattook effect in July 1998 when the company unbundled.

Also affecting AGL was the exodus of gas supply customersfollowing the company’s unbundling. More customers than expectedswitched to gas marketers, which made for increased operations andmaintenance expenses. Since deregulation in July of last year, morethan 50% of AGL’s utility customers have switched to marketers.

On the marketing front, AGL was hit by continued losses from itsgas marketing joint venture with Sonat Inc. “While deregulationcreates new opportunities, it also increases competition,particularly on the retail marketing front,” PaineWebber wrote in aresearch note. “In the short- to intermediate-term, smallermarketers, like AGL, will be able to serve local markets and nichesprofitably, but longer-term margins may be squeezed due to theentry of larger mega-type marketing firms.”

AGL was not alone in posting poor results. MidAmerican Energyposted net income of $8 million, down a full 70% from first quarter1998 net income of $27 million, and Scana was off 42% to $37million from $64 million. All was not lost in the LDC arena,however, as a number of companies posted respectable gains in netincome. KeySpan was up 24%; Peoples Energy gained 40%; LG&E wasup 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 andelectric-service operations. The gas-distribution businesscontributed $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 benefitsof our synergy-savings efforts.”

Rebecca Followill, a Houston-based Merrill Lynch analyst,observed LDC results are generally better than what had beenexpected. “I think there was some nice colder weather in March thatkind of saved a few people.” She also said losses fromnon-regulated businesses seem to be tapering off, noting about ayear ago many LDCs were just getting into non-regulatedenterprises, such as marketing.

“For most of these companies, weather was still warmer thannormal, which leaves some room for [improvement] next year, whichis always nice to have.”

An improvement in LDC performance that bolsters stock priceswould be nice to have indeed in Phil Borish’s view. Borish is thesenior financial analyst for Rushmore Services’ American Gas IndexFund. “We had an awful quarter. The worst in our history. Thecompanies that did the best in the last quarter in our fund, well,frankly, they’re not the LDCs.” The fund has stock holdings acrossthe gas industry, including pipelines and marketers. The LDCs amongthe fund’s top-10 performers were all involved in some kind oftakeover action, Borish said, noting Southwest Gas and PublicService of North Carolina.

Overall, Borish is bullish for LDC stock prices and earnings.”It’s the throughput that will increase their profits, theirshareholder values. And the only thing that hammered against thatis 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 forthe quarter, and that impacted LDCs because the LDCs interruptiblecustomers generally switched to oil.” Look for weather hedges tobecome more popular among LDCs, Wagner advised. “The LDCs, theywant to be able to post results that are reflective of theirefforts. If you can hedge away the impact of weather, the numbersyou’re posting are a much more accurate reflection of managementefforts.”

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