Moody's : Troubling Trends in Pipeline Industry
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
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.