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The ground rules for the natural gas pipe line and gas utility industries have been revised by state and federal regulators with the purpose of greater competition through deregulation. The financial returns from deregulation have been modest so far in 1998, but the dynamics of the natural gas (distribution) industry has been altered and wider margins are forecast for the future. Prices for these stocks remain stable and should be sought mainly by income investors.

The natural gas distribution industry represents a risky venture for investors, mainly due to the new rules laid down by the Federal Energy Regulatory Commission regarding interstate operations of local distribution companies. While some companies are faring well under the new rules, other are still trying to implement them in a changing business environment that may yet have unforeseen risks and pitfalls.

Rising interest rates have caused natural gas distribution industry stock prices to decrease and dividend yields to increase. Stock prices in 1994 have decreased to 15%-25% less than the highest prices of 1993. Dividends may also increase slowly, approximately 1.5%-2.5% each year. High quality stocks will continue to retain their value and those of lesser quality may have dividend reductions.

Natural gas distribution companies' main concern centers around their high dividend levels. These local distribution companies, which have been operating in an increasingly deregulated market, are not expected to increase dividends more than 2% through the 1997-1999 period. Investors in this industry should concentrate their holdings in the higher rated gas stocks to hedge against interest rate risks.

Potential investors in natural gas distribution are advised to select high-quality stocks because they are likely to continue to yield high dividends even amid rising interest rates. Many distributors have high payout ratios, which could cause yearly dividend appreciation of only around 2%. The industry will have to confront possible challenges such as weak fuel-oil prices, rising supply costs for utilities and higher tariffs for captive customers.

Natural gas distributors' stock is unlikely to provide exciting returns for investors in 1994. It is possible that the companies will grow at a rate better than inflation, depending on the weather, but increasing regulation and the capital outlays required for actual growth will prohibit major growth. If interest rates rise, it is likely that the stocks will suffer a downturn, and investors should be warned that the industry is an extremely untimely one.