The following paper examines the economic impact of recent take-or-pay settlements on the stock prices of Panhandle Eastern Corporation (Panhandle) and Columbia Gas System, Inc. (Columbia). The analysis indicates that each company's stock price was positively affected by settlement of its take-or-pay positively affected by settlement of its take-or-pay claims. Each company outperformed both the market and a comparison panel of its industry peers during trading periods surrounding the announcement date of each settlement. The data suggest that by eliminating these financial claims, both companies positively altered their competitive position in the gas transmission industry.
During the 1980's, the settlement of take-or-pay disputes with suppliers has become critically important to gas transmission companies. Due to their inability to sell natural gas in today's unfavorable market environment, many companies have accrued substantial take-or-pay obligations with producers totalling millions—or even billions—of dollars.
How did this situation arise? Take-or-pay provisions have been a standard feature of natural gas provisions have been a standard feature of natural gas purchase contracts for many years. Under these purchase contracts for many years. Under these provisions, gas transmission companies typically commit provisions, gas transmission companies typically commit themselves to paying for certain quantities of natural gas whether or not the gas is actually used. In the early 1980's, based on the belief that gas would continue to be in short supply, transmission companies increased sharply the amount of gas they had under take-or-pay contracts. These companies committed to paying for large quantities of gas at prices which paying for large quantities of gas at prices which were not only above market, but were also unresponsive to changing market conditions.
Shortly after gas transmission companies entered into these highly restrictive contracts, market conditions became unfavorable for gas sales. The demand for gas decreased as a result of conservation measures by consumers, fuel switching by industrial users, and economic stagnation in the manufacturing sector. The supply of gas increased due to price incentives contained in the Natural Gas Policy Act of 1978. Lower demand together with increased supply meant that gas transmission companies were left with unmarketable quantities of gas at unmarketable prices.
Beginning in 1983, many gas transmission companies responded to unfavorable market conditions by reducing the amount of gas they were willing to buy— and the price they were willing to pay—unilaterally. Faced with the prospect of mounting financial obligations, these companies began to renegotiate high take and high price contracts with producers and attempted to settle take-or-pay claims.
Given the critical importance of the take-or-pay issue, this paper analyzes the economic impact of take-or-pay settlements on gas transmission companies.
Two significant settlements were made public in 1984. On October 24, Panhandle announced that it had eliminated $1.9 billion of take-or-pay claims—or 70 percent of its total obligations from 1982 to 1984—by percent of its total obligations from 1982 to 1984—by agreeing to pay producers $188 million. On November 13, Columbia announced the settlement of $650 million of claims—or 45 percent of its 1983 and 1984 take-or-pay obligations—by paying suppliers $99 million. As part of the settlement, both companies also succeeded in reducing future take obligations and prices under existing contracts.
P. 91
