AWG Fuels Market Fire

Arkansas Western Gas
• Click here to view the chart of infrastructure improvements. Click here to view a chart of revenue trends versus fuel prices. (Charts require Adobe Acrobat viewer. Click here for a free copy.)

Arkansas Western Gas Co. has tapped into an expanding reservoir. Only instead of natural gas, the Fayetteville firm is hauling in new customers by marketing itself to Northwest Arkansas’ gush of new subdivisions.

Even though its publicly traded parent, Southwestern Energy Co., moved from Fayetteville to Houston in 2001, AWG has during the last five years invested even more on local infrastructure in a climate of higher gas prices, fluctuating demand and ever-decreasing operating income.

Energy providers have to stay a little ahead of the curve, but since 1999 AWG’s area infrastructure investment is up 14.5 percent from $6.9 million in 1999 to an expected $7.9 million by 2004’s end. During the same span, the firm’s customer base has increased only 8.5 percent from 132,540 to an estimated 143,800 (see chart).

AWG, which operates 13 offices throughout north Arkansas, has retained 10 percent of the natural gas market in “The Natural State,” based on delivered volumes in 2003. And Alan Stewart, AWG’s executive vice president, said more than 90 percent of new customer growth is coming from Benton and Washington counties.

The University of Arkansas Center for Business and Economic Research estimates the population of the Fayetteville-Springdale-Rogers metropolitan statistical area will soar to more than 400,000 by 2010 and to more than 600,000 by 2025.

“We put in 100 miles of pipeline to serve new customer additions of about 3,000 customers [this year],” Stewart said.

The investment is roughly $2,000 per new customer for all infrastructure required.

Four construction coordinators and three residential marketing representatives cover AWG’s territory in Northwest Arkansas. The market reps monitor an average of 80 subdivisions each, and the construction coordinators oversee major cities and their outlying development.

AWG runs a model to estimate the cost to install gas in new subdivisions. The model includes the number of houses built per year and the typical consumption of each household. If AWG already has adequate gas lines in the area, the investment will usually provide a decent rate of return, Moody said.

“Our authorized return on equity by the Arkansas Public Service Commission is 9.9 percent,” Stewart said.

If calculated demand is high enough, Stewart said, AWG will not charge the developer to compensate for the cost of piping the subdivision.

AWG’s market reps are also assigned to specific builders and developers in a database. Stewart said the personalized service is designed to foster good relationships and to make sure the firm is presenting industrial, commercial and residential developers “the gas option in an appropriate way.”

AWG tried to make a map of all of the subdivisions in NWA, but the ever-changing document proved too cumbersome.

“The map is great for visual and planning, but our database is where we are going now,” Stewart said.

AWG has about 200 residential subdivisions and 15,000 homes in its online database, plus about 550 commercial and industrial projects.

“We stay in touch,” said Sonny Hudson, AWG’s regional marketing representative for Northwest Arkansas.

“Instead of [developers] coming to us, we go to them, and they are asking us questions.”

“We have three major responsibilities,” Stewart said. “One is to our customers, second is to our community, and third is to our shareholders. We are obligated to provide a fair return to our shareholders, so that they’ll keep investing in the company, so we’ll have access to capital to invest $8 [million] to $10 million in infrastructure.”

Even though its customer base has grown, its employee base has shrunk by 20 in the last four years.

“Due to efficiencies, we’ve been able to downsize our workload,” Stewart said.

Reducing overhead costs with a new accounting program was one component, he said.

“We are constantly looking at process improvements to generate efficiencies so we don’t have to add staff,” Stewart said. “Even with implementing these improvements, we eventually have to add staff to keep up with the growing customer service requirements.”

Demand Sans Price

Stewart said gas usage in the residential, commercial and industrial sectors is actually flat or decreasing, because of price. Most of the increase in demand, he said, is driven by the need for electric generation.

“We have a very tight market right now,” Stewart said. “Ninety percent of the electric generation development planned in the United States is going to utilize natural gas fuel.”

With 2003 annual revenue of $137.3 million, AWG sold 16.3 billion cubic feet (Bcf) of natural gas to customers at an average rate of $7.93 per thousand cubic feet (Mcf). Revenue includes the cost of gas and delivery to customers. That was a 2.5 percent decrease in distribution from 2002 when revenue chilled at $115.8 million and the average rate per Mcf was 18.2 percent lower.

Annual revenue totaled $147.2 million in 2001, and the average gas rate was $8.26 per Mcf.

“Revenue is tied to what the cost of gas is that we pass on to our customers and also to the weather,” Stewart said. “Actually, 2001, was a warmer year yet we had more revenues because the cost of gas was higher.”

AWG sold 17 Bcf in 2001. Warmer than average weather cooled 2003 sales, and 2002 sales were down as some industrial customers opted to buy their own gas, but pay AWG to distribute it. The BYOG customers account for about 8 Bcf of the 25 Bcf distributed annually, Stewart said.

Stewart emphasized that AWG does not see profit in the cost of gas and that the company has to earn a profit on delivering gas.

“We’re seeing a decrease in operating income because of the high cost of gas and conservation,” Stewart said. “Also operating costs are going up so we are seeing operating income dropping.”

Operating income decreased 34 percent from $10.3 million in 2001 to $6.7 million in 2003.

On Oct. 1, AWG filed with the Arkansas Public Service Commission a notice of intent to file for a modification of its rates and charges. The actual rate modification will be filed for APSC review by the end of 2004, and the rates, if approved would go into effect in November 2005, Stewart said.

Consumption

Winter gas bills are expected to climb by 50 percent this year, or to an average rate of 0.864 per cubic feet from 0.577 per cubic feet, Stewart said. That means a customer who uses 100 cubic feet of gas per month would have a monthly bill of about $114, which includes customer and delivery charges plus state and local taxes.

The Energy Information Administration reported that 211 Bcf of gas was delivered to the state in 2003. Annual gas consumption was up 6 percent from 228 Bcf in 2001 to 242 Bcf in 2002 but down more than 3 percent from consumption estimates in 1999 and 2000.

AWG delivers about 25 Bcf of natural gas per year. The company has 821 miles of transmission pipe and 3,373 miles of distribution pipe. It buys gas on the open market to distribute to its customers.