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Moody's : Troubling Trends in Pipeline Industry

Moody's : Troubling Trends in Pipeline Industry

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In a recent report on the outlook for gas transmission companies, Moody's Investor Services said transmission pipeline companies are vulnerable because of high leverage, commodity price instability and mergers. The report marks the second consecutive year the pipeline industry has earned a negative outlook.

A dangerous combination exists between transmission companies' need to expand into other areas and a lack of cash due to low prices to accomplish that task, the report states. "As everybody knows, returns on regulated transmission is not the stuff that attracts a lot of attention," said William Christman, a Moody's gas analyst. "These companies have to diversify, but they also have had to issue debt because of property write-downs." He stressed that this report's intent is not to sound an alarm, but rather to point out potentially negative aspects within the industry.

The Moody's report also pointed to transmission price instability as another reason for its negative outlook for the industry. With FERC contemplating a switch from fixed rates to variable rates (and tying earnings to the volume of gas delivered in the process), the whole transmission pricing structure is unstable, Christman said.

On the bright side, Christman said one positive factor for these companies is the value of natural gas as a fuel source. "It is becoming a prime fuel. Thirty Tcf may or may not happen, but everybody will agree that usage will definitely rise. That's good for these regulated pipeline companies, and, with highs and lows, [it is] good for their unregulated services."

Sonat Inc., one of the companies included in the Moody's study, reported a net income, excluding extra charges, of $33.6 million compared to $45.8 million in 2Q98 with Sonat's Southern Natural Gas pipeline accounting for much of the poor performance Southern Natural posted a $49 million net income before interest and taxes (EBIT) compared to $63 million in 2Q98. Last year's second quarter out-performed 1999's second quarter because the company benefited from various reserve adjustments and asset sales while equity in earnings at 50%-owned Citrus Corp. benefited from the recognition of credits from a gas supply agreement in 2Q98.

While Sonat struggled through the second quarter, its potential merger partner, El Paso Energy, did somewhat better. The Houston-based diversified pipeline company reported diluted earnings per share of $0.74 before merger charges, compared to second quarter 1998 diluted earnings per share of $0.45. However, $126 million in merger charges incurred during the quarter knocked the end product down to $0.04 per share.

El Paso's Tennessee Gas Pipeline unit had the most success. It reported second quarter EBIT of $113 million compared to $72 million a year ago. The results included the resolution of certain regulatory matters accomplished during the quarter.

El Paso Natural Gas reported second quarter EBIT of $54 million compared to $57 million in 1998. El Paso's second quarter 1999 throughput averaged 3,939 BBtu/d, up 2% from the year-ago quarter due primarily to increased gas demand for electric generation in California.

El Paso Energy Marketing and El Paso Power Services together reported EBIT of $6 million for the second quarter of 1999 compared to reported break-even results in 1998. Marketed gas volumes in the quarter averaged 3,322 BBtu/d, consistent with year-ago levels, while average marketed power volumes rose 52% to 18 million MWh.

John Norris

©Copyright 1999 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

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