Poor Results Distributed To LDCs, Too
Producers may be walking around barefoot and hungry after the financial struggle in 1998, but LDCs' wallets are thin as well. The exceptionally warm year cut gas distribution throughput significantly and several local distribution companies ended the year in the red. Average net income declined 10% for 19 gas and combination utilities that reported earnings last week or the week prior.
"It's dismal," said Merrill Lynch LDC analyst Rebecca Followill. "The thing to keep in mind is it's weather, and weather is a short-term phenomenon," she noted. "I think the whole view of the industry right now is everything seems to be going in the wrong direction.. People have pretty much just given up on weather for the winter. Folks that we're talking to are just sitting it out until winter's over. I think people have given up on the stocks until the spring, which I don't necessarily think is the right thing to do."
Some companies Followill watches had decent results. "Two of the LDCs that have reported have come in better than last year. Cascade Natural Gas, and New Jersey Resources." For the year, New Jersey Resources posted a total net income of $43 million, which represents a $2 million increase over 1997 earnings. The majority, however, have little to crow about, except perhaps that a year from now their performance should look great compared with 1998. "I think, generally, most folks are coming in lower than expected," Followill said.
She pointed to Bismarck, ND-based MDU Resources Group, parent of Montana-Dakota Utilities and Williston Basin Interstate, as one shining example. "They were one of the only two stocks in our universe that outperformed the S&P 500 last year, and the other was Enron." To its credit, Followill said, MDU over the last few years has diversified into construction materials. While the company has exploration and production operations, less than 10% of its 1998 earnings were derived from E&P.
Phil Borish, senior financial advisor to the Gas Index Fund, concurred that 1998 was a bad year, but things could be looking up, he said. "[A]s soon as some of the other sectors lose their forward momentum we're going to benefit. The gas fund is down this year. Energy is out of favor. But as soon as you have a hiccup, we're going to come back. I think it's a buying opportunity." Borish noted that as companies become more diversified, it takes a more careful examination to determine what earnings came from gas and what came from other businesses.
One prime example of this is MidAmerican Energy Holdings Co., which posted 1998 earnings that almost matched 1997. For the year, the company posted a net income of $131 million versus $135 million the previous year. Yet while its electric sales increased 2.7% from the previous year to 16,088 MWh, its gas sales plummeted 12.6% to 81,984 MMBtu.
Things should be looking up for MCN Energy Group also. The company largely stanched the flow of red ink from its balance sheet with plans to shed exploration and production operations. Minus E&P, MCN reported a net loss of $6.2 million, compared with earnings of $112.2 million in 1997. Including results from the E&P unit - discontinued in anticipation of sale - MCN reported a net loss for 1998 of $279 million, compared with earnings of $142.3 million in 1997. All figures include special charges.
Including the company's share of joint venture operations, gas transportation volumes were 175.5 Bcf in 1998, compared with 116.0 Bcf in 1997. Gas processing volumes rose to 48.9 Bcf from 42.8 Bcf the previous year. Electricity sales more than doubled to 3.8 million MWh from 1.8 million MWh in 1997. Gas sales and exchange deliveries rose 30% to 465.7 Bcf from 358.8 Bcf in 1997, with significant volume increases in each market region. However, increased volumes were offset by reduced margins and increased gas storage costs.
Joe Fisher, Houston; John Norris
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