Counterparty risk rising with gas prices

Counterparty risk is rising along with high natural gas prices. MCN Energy Group Inc., Detroit, blamed a $9 million charge or 11�/share in the second quarter 2000 on potentially uncollectible account receivables in its energy marketing group. And with gas trading at more than $4/mcf for most of the summer, some industry experts expect a coming shakeout among smaller and weaker players.


Kate Thomas
OGJ Online

Counterparty risk is rising along with high natural gas prices. MCN Energy Group Inc., Detroit, blamed a $9 million charge or 11�/share in the second quarter 2000 on potentially uncollectible account receivables in its energy marketing group.

Several marketers with which MCN did business "were short in this market," says spokesman Stewart Lawrence. When gas prices rose, some marketers were not able to deliver promised gas. And with gas trading at more than $4/mcf for most of the summer, some industry experts expect a coming shakeout among smaller and weaker players. The biggest players appear to be doing all right with a strategy of trading huge volumes at very thin margins, Lawrence says.

High natural gas prices have turned the market on its ear and forced companies such as MCN to adopt a different operational strategy in the second quarter. MCN traditionally relied on a hedging strategy and delivered physical gas from storage. But dramatic changes in natural gas pricing, including the narrowing or reversal of summer-to-winter price differentials, forced the Detroit-based integrated energy company to change its approach to the market.

The futures market is basically valuing natural gas for September delivery at a higher price than natural gas prices delivered in winter. Gas for September delivery is trading at a 10-13� premium to February gas. With such a negative spread, "who would be willing to pay to inject gas now," says Lawrence.

Experts say high prices could account for why natural gas storage numbers are low compared to last year. According to the futures market, the risk is greater to buy natural gas and inject it into storage now rather than wait and buy it in winter or spring. It's also possible some buyers in the Northeast and Midwest are relying on the availability of new pipeline capacity to deliver gas this spring rather than injecting it into storage.

MCN began trading gas for the first time in the second quarter to take advantage of arbitrage opportunities, which also required a change to mark-to-market accounting. In the past, the company expected to deliver gas. Now, it may close a position without ever delivering the physical product.

Responding to the changes in the marketplace, MCN sought to maximize earnings from storage assets through financial rather than physical transactions, while attempting to keep its exposure to commodity price changes as minimal levels in the nonregulated natural gas operations, said MCN Chairman Alfred R. Glancey III.

Despite changing market conditions, DTE Chairman Anthony F. Earley Jr. said he expected the proposed merger with MCN to go forward.

"Our continuing work on integration planning has identified several areas where we believe we can achieve additional cost synergies following the close," he said in a statement.

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