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Local natural gas distribution companies (LDCs) have become self-reliant in response to federal and state regulatory efforts to create an efficient LDC marketplace and competitive trade practices. LDCs have also begun to market beyond their home areas and change the nature of their industry, and this is having an impact on earnings and profit margins. Investors need to select the highest quality stocks in the natural gas distribution industry.

Gas utilities have been reshaping their corporate profiles in order to garner wider shares of nonregulated markets, with both state and federal regulators setting competition guidelines within the industry. Utilities have changed practices in order to recover natural gas sale and distribution costs, and profit margins have become razor thin. Investors need to evaluate these stocks on a yield basis in order to achieve reliable income.

Unbundling has become important to natural gas industry since the Federal Energy Regulatory Commission began to encourage industry competition in the early 1980s. The local distribution companies have gained more self-reliance and offered non-regulater services as a rseult, but greater competition has also meant meager industry profits. Investors seeking income will find several of these stocks, especially local distribution companies, appealing.

The Federal Energy Regulatory Commission has encouraged competition among gas companies since the 1980s with the aim of increasing supplies at low cost. Deregulation has led local distribution companies to form business alliances and seek mergers, and are assuming the role of sellers of natural gas as a commodity. The primary appeal of stocks in the gas distribution industry is income, and few have any price appreciation role for investors.

Natural gas utilities' bottom lines will continue to be determined by state regulatory commissions even as these local distribution companies (LDC) seek to expand their presence as nonregulated gas marketers. These LDCs found that being a broker/dealer of natural gas offered a way to boost profits without having to distribute all their earnings to shareholders. The LDCs are able to garner profit because they are establishing subsidiaries that are shielded from state regulatory oversight.

Gas utilities continue to be regulated by the state, but are expanding their market by doing business as non-regulated brokers selling alternative gas-supply services. Competition amongst utilities establishes the profit levels for these auxiliary activities, which has resulted in strategic alliances aimed at encouraging mergers among utilities. These activities make gas stocks a greater risk than usual, but some income portfolios may still be interested in gas utilities.

The structure of the natural gas distribution industry has changed from the mid-1980s to the late-1990s. Pipelines have become common carriers from whom all customers may buy directly, instead of traditional gas-supply dealers, under new rules from the Federal Energy Regulatory Commission. Prices and profits are no longer regulated, and marketing ventures may now cross state lines. High-quality, defensive stocks are the industry's best investments.

Investment in gas transmission industry stocks is still something of an enigma as deregulation, the rise of many new local distribution companies, mergers and acquisitions by large gas utilities, limited profits, and the replacement of long-term interstate contracts with utilities by 2-3 year local contracts create questions. Conservative investors should retain stocks in some of the better gas transmission companies, especially those involved in mergers, as they will have steady, if not spectacular, earnings and little price volatility.

The rules for natural gas utilities have changed since the mid-1980s. The industry is still often regarded as a natural monopoly, but the idea of an exclusive franchise has shifted. Competition among pipelines was felt to be the best way to create supply/demand balance and a more efficient market and many firms are moving into new regions to free themselves from state price regulation. Investors should select high quality stocks in this industry.

New regulatory policies, along with competition from pipelines and alternate energy sources, are forcing gas distributors to adopt new business methods. In 1996, local gas distributors may market gas beyond their natural markets, and free market competition controls prices and profits. The better gas distribution stocks are defensive in nature, with slow dividend growth from unsure earnings, and they face the risk of rising interest rates.

Gas companies market fuel to a nearly captive commercial and residential market for space heating and cooking. The long-haul and local systems are becoming more competitive, however, due to deregulation. The off-system market is becoming more active for local distributors, and customers will be able to select suppliers eventually, as well. There are several high-quality stocks in this industry for investor selection.

Gas delivery volume increased 3% for local distributors in 1995, largely due to demand from electric utilities and manufacturers. Earnings for the 4th qtr of 1995 will also improve with frigid weather in the colder US areas. A larger customer base will offset a lower allowable rate of return in the 11%-11.5% range, and gas marketing methods are changing. These stocks are defensive and investors should seek quality for dividend growth.

There is greater competition for natural gas distributors with a changed regulatory environment at the federal and state levels over the last 10 years. The Federal Energy Regulatory Commission is transforming pipe lines from resellers to common carriers, and local distribution companies must obtain supplies under new conditions. Investors must choose between higher yields or lower risk when selecting stocks in this industry.

Gas company dividends were sharply raised in the 1980s and in 1995 are 80% of earnings at some companies. The allowed return on equity was also reduced by state regulatory commissions during the same period, and gas utilities have relied on debt financing as a consequence. Rate planning is changing to advance profits and safeguard dividends. Income investment is difficult in this industry and investors must look for quality.

Increased competition and more lenient regulation are two factors affecting gas companies and distributors in the 1990s. Pipe lines are changing from gas resellers to transporters, due to Federal Energy Regulatory Commission policies encouraging more efficient gas delivery, and gas companies are planning off-system markets. Stocks with dividend payouts of less than 80% are the best investments for the 1990s.