Marketing Losses, Warm Temps Trouble Columbia
A strong performance by Columbia Energy Group's transmission,
distribution, and exploration and production operations last year
in spite of 17% warmer than normal weather and lower commodity
prices was significantly tainted by several major blunders in its
energy marketing operations.
A 78% surge in marketing volumes evidently left the company's
marketing executives with their heads spinning. Records became
mismatched. And to make matters worse, a trader misquoted forward
prices for several transactions, triggering a nightmarish wave of
losses across the company's books.
Columbia still managed to prevent a major decline in net income,
however. The company posted $269.2 million in net income, or $3.23
per share, for the year compared to $273.3 million, or $3.29 per
share, for 1997. In fact, its performance topped many of its peers,
most of whom averaged 10% declines in net income last year.
"Columbia's earnings did not meet our expectations," said CEO
Oliver G. Richard III. "Despite innovative regulatory settlements,
cost reductions and business expansion, our net income fell short
of 1997's record level, and was restricted by the impact of record
warm weather on gas demand and throughput, as well as by
substantial costs related to our marketing operations." The
weather, which was 19% warmer than in 1997, cost Columbia an
estimated $80 million on a pre-tax basis.
"[M]arketing operations expanded dramatically during 1998 and
continue to offer a promising challenge for Columbia," said
Richard, noting the nearly 80% increase in volumes to 4.3 Bcf/d in
gas sales. "This growth has strained the infrastructure of the
marketing segment. The marketing segment has established a year-end
reserve that reduced pre-tax income by $16.3 million, which
included an increase in the allowance for uncollectible accounts
stemming from our continuing review of the segment's financial
Columbia said its marketing segment analyzed certain financial
records and found "amounts that do not appear to have adequate
third party documentation, primarily resulting from the ongoing
implementation of new accounting systems and the strain on the
infrastructure caused by rapid growth." As a result, the marketing
segment reported an operating loss of $39.4 million for the fourth
quarter and $59 million for the year compared to 13.2 million in
The loss included a $6.5 million charge related to "certain
unusual trading activity." A spokesman said Columbia Energy
Services experienced an incident in which an individual trader
"misstated the prices in the forward book." Columbia Energy
Services has taken action to address the situation and the trader
has been terminated, the spokesman said. "The size of permitted
trading positions has been reduced, and a more aggressive audit
program has been [implemented]."
Energy analyst Ronald J. Barone of PaineWebber said he's
convinced the problems in Columbia's marketing operations "are
contained, and that overall this is a very well-run company with a
highly attractive asset base, highly diverse portfolio of growth
projects and very innovative and respected management team."
Barone pointed to the many positives in Columbia's year-end
financial report. Despite an 8% drop in transmission throughput, a
2% decline in distribution volume sold and transported, and
temperatures well below normal and nearly 20% below the prior year,
operating income for Columbia's major divisions, except marketing,
was on the rise. Operating income for transmission and storage grew
26%, including a 48% jump in the fourth quarter compared to 4Q97.
For distribution, it grew 0.7% for the year and 23% in the fourth
quarter. For E&P, it jumped 20% for the year and 7% in the
fourth quarter. Total operating income was $540 million, a $30.6
million improvement over 1997. Columbia's total revenues grew $1.5
billion last year to nearly $6.6 billion.
Reviewing other changes that took place during the year, Richard
noted that Columbia's transmission and storage segment had more
than 3 Bcf/d of expansion projects underway or planned at the end
of 1998. Columbia's distribution segment is 86% unbundled, and on
the nonregulated side, more than 1,500 MW of new power projects are
in various stages of development.