SoCalGas eludes 'take-or-pay' headaches.

SoCalGas eludes |take-or-pay' headaches

No, Los Angeles-based Southern California Gas Co. and its parent, Pacific Enterprises, will not be hit by the much-heralded "take-or-pay" woes afflicting Columbia Gas System Inc., a SoCalGas executive asserted last week.

Columbia suspended its common dividend and defaulted on two loan payments - $15 million and $10 million - late last month, and was scrambling to renegotiate contracts with gas producers and lenders to avoid bankruptcy. Unlike Columbia, which is an interstate pipeline company, SoCalGas distributes natural gas to residential, commercial and industrial customers in L.A. and adjoining counties, Benjamin F. Jones carefully noted.

SoCalGas, continued the company's manager of gas acquisition, began in the late 1980s to head off the problems that became latent after the Federal Energy Regulatory Commission changed its rules in the middle of the decade.

FERC eliminated the minimum bill that could be charged customers, Jones said, and that was the "first crack," which allowed customers to transport their own natural gas. Eventually, he said, pipelines became simply "transporters" rather than "merchants" of gas.

A result of the change, Jones said: Pipelines were left with long-term gas supply contracts at prices that proved too high after spot prices tumbled when the worldwide oil glut hit. The glut has continued to plague the petroleum industry by depressing prices of both crude oil and natural gas.

To ease the problem, he said, FERC allowed pipelines to buy down or buy out their high-priced take-or-pay contracts that required the pipelines to pay regardless of whether they took delivery of the high-priced gas. Pipelines opting to do this, Jones said, were required by FERC to swallow 25 percent of the price of any buy-down/buy-out arrangement and to pass on the other 75 percent to customers, such as SoCalGas.

Its two principal interstate gas suppliers, El Paso Natural Gas Co. and Transwestern Pipeline Co. opted to do just that, swallow the 25 percent and pass on the other 75 percent, he said. SoCalGas, of course, sought relief from the California Public Utilities Commission to pass on this extra cost ($525 million from El Paso and $150 million from Transwestern) in the form of higher gas prices to customers.

CPUC approved but made SoCalGas amortize the cost in the form of higher rates over a period years, Jones indicated. One-third of the extra cost payable to Transwestern already is paid, and payment of the other two-thirds will be completed in March 1992, he said, while the extra cost payable to El Paso will be completed by March 1993.

Meanwhile, instead of contracting to buy gas from El Paso and Transwestern, he said, SoCalGas generally has contracted for its own supplies directly from producers and other sellers for residential and commercial customers. The company then pays El Paso and Transwestern fees, which include the extra surcharges, to transport the natural gas to SoCalGas.

Most (65 percent) of the supply contracts SoCalGas has with producers and other sellers, Jones said, are for less than a year - 30 to 365 days - while most of the remaining 35 percent are for one to two years. The relative shortness of the contracts have enabled SoCalGas and its customers to benefit from prices depressed by surplus supplies, he indicated.

Acknowledging SoCalGas has "done a good job" and does not have the problems of Columbia Gas, David N. Fleischer quickly added that Pacific Enterprises (SoCalGas' parent) has plenty of other problems. The New York-based natural gas analyst and first vice president of Prudential Securities Inc. identified Pacific Enterprise's principal problem areas as: 1) retailing and 2) petroleum exploration and production.

Before Pacific Enterprises changed its name from Pacific Lighting Corp. and set out on a diversification program, SoCalGas was providing the holding company with earnings of $5 a share, Fleischer said. Last year, though, Pacific Enterprises' earnings withered to $3.07 a share, he said and projected a steeper drop to $2 this year, with perhaps a turnaround to $2.65 next year.

Things began to go wrong, Fleischer suggested, when Pacific's chief executive officer then, Paul Miller, had the company buy L.A.-based Thrifty Corp. and its Thrifty Drug Stores Co. chain. Thrifty's CEO then, Leonard Straus, negotiated a "good price" for his shareholders, Fleischer said: 28 times earnings in exchange for Pacific shares then selling at a price/earnings ratio of 10.

Pacific expected to make up for the dilution with Thrifty's growth, he said, and with acquisitions of sporting goods stores - the Big Five chain locally. Unfortunately, Fleischer observed, retailing lost its profitability, and Pacific hired new management to turn around retailing.

"But there's been no turnaround." Instead, he snapped, there's been a "total wipeout," with the quarterly dividend halved to 44 cents this year from the former 87-cent rate.

Moreover, Fleischer lamented, Pacific's other major diversification move - into petroleum exploration and production - has suffered "high finding" costs.

Given such adverse developments, Pacific's share price by last week had plunged to $26.125, a new 52-week low and down a sickening 40 percent from the 52-week high of $43.875.