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Gas Company Results ‘Do Not Disappoint’
With the first week of financial reports for the natural gasindustry in hand, analysts are expecting overall results to be verygood, driven by an extremely cold start to the winter, robustdemand growth, low storage levels and tight supply.
“We expected strong earnings across the natural gas complex,”said Merrill Lynch analysts yesterday in a weekly research note.”Results to date do not disappoint, so far up an average of 39%versus last year. Moreover, our expectation for upside earningssurprises to be more the norm this season than not is also playingout well. In fact, of the seven companies reporting so far,[earnings per share] on average beat consensus each time but twice(and did so on average by nearly 10%) with reported actuals for allseven coming in 3.9% greater than expectations.”
Despite a soft start to 2001 with stocks off an average of 10.4%year to date for Merrill Lynch’s group of companies, the upsidesurprises should continue to drive bullish investor sentiment inthe gas group, Merrill Lynch analysts said.
Cascade Natural Gas, Dynegy, Enron, Kinder Morgan EnergyPartners, Kinder Morgan Inc., NUI Corp. and TEPPCo Partners allbeat consensus earnings expectations by an average of 3.9%.
“So far, so good,” said Carl Kirst, energy analyst with MerrillLynch. “Earnings for some of our companies are up as high as 50%related to last year. Our entire spectrum of gas companies iscoming in well, including the integrated E&P operations, thelarge energy merchants and the LDCs.” Atmos, AGL and Energen, whichalso reported earnings this week, did well, he noted.
AGL reported a 37% increase in earnings per share to 41cents/share from 30 cents/share for its first fiscal quarter of theyear yesterday. The strong showing was based on colder weather,continued cost cutting and the integration of its Virginia NaturalGas acquisition.
Atmos posted net income of $23 million, or 70 cents per dilutedshare for the quarter, compared to net income of $14.3 million or46 cents per diluted share last year. Analysts expected the companyto post a profit of 66 cents per share, according to research firmFirst Call/Thomson Financial. Operating revenues for the firstquarter were $442.8 million compared to $224.5 million in 2000.
Nicor reported net income of $136.4 million for the twelvemonths ended Dec. 31, excluding a third quarter mercury-relatedcharge, compared with net income of $124.4 million in 1999. Dilutedearnings per share were $2.94, compared to $2.62 in 1999.
Despite the excellent performance last year and during the mostrecent quarter, there are several things to watch with concern in2001, said Kirst, including the growing alarm among consumers overhigh commodity prices, the fallout from California’s energy debacleand the slowing economy.
“The higher gas prices shouldn’t impact the utilities much goingforward because as you know it’s a pure pass-through,” said Kirst.”But on a realistic level there are some issues that we are takinga guard against. Some of the utility companies like Atmos Energyare increasing their bad debt reserves. They are taking a littleextra prudency reserves because of the higher bills that are outthere.
“I do get a little concerned when I see what happened withVectren in Indiana. The regulators there made them eat $3.9 millionin gas costs because the commission alleged they should have beenbetter prognosticators of what was going to happen to the gasmarket. They did that even though these guys have bought gas thesame way over the last five years and ratepayers have benefitedfrom significantly warmer than normal weather throughout the 90s.”
Illinois is undertaking a gas investigation right now as isOhio. “But what these utilities have done has in fact beenprudent,” Kirst said. “It’s just that customers have gotten stickershock because they’ve literally gone from the warmest winter onrecord last year to the second coldest start to winter in Novemberand December in 50 years.
“The companies have to be proactive in educating their consumersand being sensitive to what they are going through. A lot of gasutilities are doing that. If they continue to do that, the issue inIndiana is going to be the exception and not the norm.”
Regarding stock prices, Kirst sees the potential for thecompanies to build on last year’s results despite the 10% set backyear-to-date in 2001. Gas utility stock prices were up 15-20% in2000. Most of the surge last year started in September. “They hadsunk to such a low depth on a price/earnings evaluation basisrelative to their historic norms because of all the warm winters ina row. They’ve come up, but I think they still have a long way togo. First quarter we expect to continue to see strong earningscomparisons,” said Kirst.
“As of last Friday they were looking at an average P/E ofroughly the 13.5 range, which is up from the 11 times this timelast year but still well below the five-year trailing average ofabout 16 times P/E. As long as earnings growth continues to bedelivered, people will get more confidence in the true power ofthese companies. I think there’s still upside in terms ofvaluation.”
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