Columbia Results Improve, But E&P, Marketing Struggle
Columbia Energy Group barely overcame warmer than normal
temperatures, weak gas prices and higher marketing costs during the
first quarter to post a 2% increase in earnings. The company
reported first quarter 1999 earnings of $150.4 million, or $1.81
per share, up from $147.5 million or $1.77 per share in 1Q98.
The performance failed to meet analysts' expectations of
$1.78/share, triggering a lower estimate for the year to about
$3.40/share from $3.60 (versus Street consensus of $3.67) by
PaineWebber. PaineWebber's Ronald J. Barone said, however, he is
maintaining an attractive rating on the company because "Columbia
Energy's overall fundamentals remain fairly solid and its stock
price remains undervalued."
During a conference call with analysts last week, Columbia CEO
Oliver G. Richard said the company is maintaining its target of
achieving 10-12% earnings growth and having its unregulated
operations contribute 30% of its year end 2001 operating income.
Strong performances by Columbia's regulated transmission,
storage and distribution operations, as well as its unregulated
propane, power generation and LNG activities during the first
quarter were offset by continued difficulties in unregulated
marketing and exploration and production.
The marketing segment reported an operating loss of $21.5
million, which was $16 million more than the $5.5 million loss in
1Q98. The 1Q99 loss was attributed to increased retail customer
acquisition costs, infrastructure investments and additional
staffing, as well as an effort to temporarily scale down wholesale
marketing operating until a restructuring of the division is
complete and a new senior officer is found.
Total gross marketing margins dropped $5.7 million due primarily
to the warmer than normal weather, Columbia said. While 1999's
first quarter weather was 20% colder than the record warmth of the
1998 quarter, it still was 6% warmer than normal. However,
Columbia's gas sales of 554 Bcf (6.16 Bcf/d) were up 52% over last
year and power trading was at 7.85 million MWh compared to 305 GWh
in 1Q98. Columbia Energy Services now provides energy service to
nearly half a million retail customers in 10 states, more than
twice the level of retail customers of a year ago.
"This dramatic growth has placed Columbia Energy Services among
the nation's leading marketing companies for retail energy
customers and for gas and power trading," said Richard. "However,
the growth has strained the company's marketing infrastructure,
highlighting areas that need improvement. While continuing to work
to improve its infrastructure, over the near term, we are focusing
the marketing segment's efforts where Columbia has an established
On the wholesale side, CFO Michael W. O'Donnell said Columbia
had "significantly cut back on the amount of risk activity in the
company," since the trading snafus that contributed to a fourth
quarter loss of $39.4 million and a loss for the year of $59
million (see NGI Feb. 15, 1999). "We've moved the management of the
books, the marking of the prices in the books, from the front
office to the mid-office. We think that's a much better risk
management practice than we had before. In addition to that, we're
just doing a lower level of trading activity generally." Richard
said he expects the wholesale operations will make a profit this
year and retail marketing will break even. Columbia is actively
looking for a senior executive to manage all of its unregulated
divisions, he added.
Columbia's total revenues for the first quarter were up more
than $700 million from the same period last year. Operating income
of $272.6 million set a new record high for a quarter, an increase
of $18.4 million over 1998. Transmission and storage's operating
income was up $26.4 million due primarily to recording the
settlement of the last remaining producer issue stemming from
Columbia's bankruptcy proceedings that concluded in 1995. The
settlement resulted in a one-time improvement of $20.6 million.
Richard also noted Columbia Gas Transmission's market expansion
program is expected to be completed later this year.
Distribution operating income increased $10.1 million. Richard
said more than 1.6 million retail customers in Columbia's
distribution service areas can choose their natural gas supplier.
In Ohio, Columbia's choice program has resulted in nearly $30
million in customer savings since its inception.
Its propane, power generation and LNG operating income improved
$1.6 million over 1Q98. Exploration and production's operating
income fell $8.8 million, however, due to sharply lower prices that
only partially offset a 7% increase in production. Prices averaged
$2.44/Mcf compared to $3.38/Mcf last year, while 1999 production of
10.6 Bcf, was up almost 1 Bcf.
"Since the end of the quarter, we have announced definitive
agreements for three acquisitions on the nonregulated side-two in
propane and one in exploration and production," Richard noted. The
company is buying National Propane Partners for $80 million,
propane and other assets from Carlos R. Leffler for about $60
million, and about 42.7 Bcfe of proved reserves and a gathering
system in the Appalachian region from The Wiser Oil Co. for about
$28 million. "Once completed, these transactions would broaden our
geographic footprint in propane, nearly triple the number of
propane customers served and expand Columbia Propane's market area
from eight to 35 states, making it one of the largest propane
companies in America. Also, Columbia Energy Resources would be able
to extend its leadership position in the Appalachian Basin, with
about 3 Bcf of additional annual production and over 40 Bcf of
proved reserves." The Wiser deal will grow CNR's reserve base to
about 844 Bcfe.