KN Energy said it will take a fourth quarter charge as 1998earnings will fall short of market expectations due to record warmweather during November and most of December, plus a decline innatural gas processing marginsto about 1 cent, and lowertransportation revenues.

Operating income in 1998 may be about 90% of the 1997 pro formacombined results of $385.2 million for KN and MidCon Corp., whichKN acquired in January of this year. KN said a variety of factorsare negatively impacting the company’s revenues in the fourthquarter – which is typically KN’s strongest quarter – and willaffect profits in all segments.

Weather during the first three weeks of December was extremelywarm. At the halfway point in the month, it was more than 30%warmer than normal, following a November that ended 9% abovenormal, according to Cambridge Energy Research Associates. Areaswith the warmest weather relative to normal include the Midwest,the principal market for both the KNI and MidCon pipelines.

Natural gas in storage as of yesterday, both for KN and theindustry as a whole, is above 95% of capacity and about 16% abovelevels a year ago, due in part to excess supplies remaining fromlast year’s mild winter. This combined with the record warmth hassignificantly lowered transportation revenues for the fourthquarter.

Natural gas liquids inventories are at historically high levels,and crude oil prices have broken through 20-year lows. As highinventories and low demand for liquids combine with low crudeprices, the revenue margin for liquids production compresses. Theoutlook for December’s margin is lower than any level seen thisyear, and the average margin for 1998 will be the lowest in 15years. Lakewood, CO-based KN said in light of these factors itanticipates taking a pretax charge not expected to exceed $30million in the fourth quarter. Earnings per share for 1998 beforeany such charge could be about 20% to 30% below KN’s $2.45 result ayear ago.

KN said it is taking a number of steps to counter the difficultenvironment, including finding and implementing further expensereductions at every level of operations, reducing commodityvolatility risk in upstream operations, managing the integration ofthe assets of MidCon and the Thermo Cos., which KN acquired in1998.

KN also is developing growth opportunities through investmentsin the TransColorado Pipeline – which will go into service inFebruary – and through new market development along its pipelinenetwork, including gas gathering projects and natural gas-firedpower generation.

It wasn’t warm weather but another bugaboo – low commodityprices – that prompted Northwest Natural Gas Co. of Portland, OR,to announce losses. Northwest Natural said 66%-owned Canadiansubsidiary Canor Energy Ltd. is expected to record impairmentcharges and property write-downs equivalent to about 6 cents ashare for NW Natural in the quarter ending Dec. 31. The Companyalso expects Canor to record losses from continuing operations forthe quarter equivalent to about 2 cents a share. Canor’s resultshave been depressed during 1998 by low oil prices, lower thanexpected gas and oil production and unsuccessful drilling efforts.

“The impairment charges and write-downs in the fourth quarter of1998, to the extent we are required to recognize them, will nothave a material effect on next year’s earnings,” said Bruce R.DeBolt, senior vice president and chief financial officer.

However, PaineWebber lowered its 1999 earnings estimate forNorthwest Natural to $1.50 per share from $1.96 per share due tocontinued low oil prices and uncertainty due to a pending ratecase. PaineWebber also lowered its 1998 earnings estimate forNorthwest Natural to $1.45 per share from $1.50 per share.

DeBolt explained that Northwest Natural’s outlook for 1999 isprimarily dependent on three factors: weather conditions in thecompany’s service territory; oil prices as they affect margins inan oil price-sensitive industrial tariff; and results in thecompany’s general rate case in Oregon. “Assuming average weatherand a continuation of the low oil prices we have seen this year,but without factoring in any results from the rate case we wouldexpect earnings for 1999 to be around $1.50 a share.”

Northwest Natural filed the general rate case, its first inOregon since 1989, in October. The increase is designed to coverthe costs of the company’s new customer information system,installed in Nov. 1997, and expanded gas storage capacity in itsMist Storage Field that went into service in November.

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