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Columbia Results Improve, But E&P, Marketing Struggle

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 presence."

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.

Rocco Canonica

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