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Columbia Results Improve, But E&P, Marketing Struggle
Columbia Energy Group barely overcame warmer than normaltemperatures, weak gas prices and higher marketing costs during thefirst quarter to post a 2% increase in earnings. The companyreported first quarter 1999 earnings of $150.4 million, or $1.81per 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) byPaineWebber. PaineWebber’s Ronald J. Barone said, however, he ismaintaining an attractive rating on the company because “ColumbiaEnergy’s overall fundamentals remain fairly solid and its stockprice remains undervalued.”
During a conference call with analysts last week, Columbia CEOOliver G. Richard said the company is maintaining its target ofachieving 10-12% earnings growth and having its unregulatedoperations contribute 30% of its year end 2001 operating income.
Strong performances by Columbia’s regulated transmission,storage and distribution operations, as well as its unregulatedpropane, power generation and LNG activities during the firstquarter were offset by continued difficulties in unregulatedmarketing and exploration and production.
The marketing segment reported an operating loss of $21.5million, which was $16 million more than the $5.5 million loss in1Q98. The 1Q99 loss was attributed to increased retail customeracquisition costs, infrastructure investments and additionalstaffing, as well as an effort to temporarily scale down wholesalemarketing operating until a restructuring of the division iscomplete and a new senior officer is found.
Total gross marketing margins dropped $5.7 million due primarilyto the warmer than normal weather, Columbia said. While 1999’sfirst quarter weather was 20% colder than the record warmth of the1998 quarter, it still was 6% warmer than normal. However,Columbia’s gas sales of 554 Bcf (6.16 Bcf/d) were up 52% over lastyear and power trading was at 7.85 million MWh compared to 305 GWhin 1Q98. Columbia Energy Services now provides energy service tonearly half a million retail customers in 10 states, more thantwice the level of retail customers of a year ago.
“This dramatic growth has placed Columbia Energy Services amongthe nation’s leading marketing companies for retail energycustomers 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 workto improve its infrastructure, over the near term, we are focusingthe marketing segment’s efforts where Columbia has an establishedpresence.”
On the wholesale side, CFO Michael W. O’Donnell said Columbiahad “significantly cut back on the amount of risk activity in thecompany,” since the trading snafus that contributed to a fourthquarter loss of $39.4 million and a loss for the year of $59million (see NGI Feb. 15, 1999). “We’ve moved the management of thebooks, the marking of the prices in the books, from the frontoffice to the mid-office. We think that’s a much better riskmanagement practice than we had before. In addition to that, we’rejust doing a lower level of trading activity generally.” Richardsaid he expects the wholesale operations will make a profit thisyear and retail marketing will break even. Columbia is activelylooking for a senior executive to manage all of its unregulateddivisions, he added.
Columbia’s total revenues for the first quarter were up morethan $700 million from the same period last year. Operating incomeof $272.6 million set a new record high for a quarter, an increaseof $18.4 million over 1998. Transmission and storage’s operatingincome was up $26.4 million due primarily to recording thesettlement of the last remaining producer issue stemming fromColumbia’s bankruptcy proceedings that concluded in 1995. Thesettlement resulted in a one-time improvement of $20.6 million.Richard also noted Columbia Gas Transmission’s market expansionprogram is expected to be completed later this year.
Distribution operating income increased $10.1 million. Richardsaid more than 1.6 million retail customers in Columbia’sdistribution service areas can choose their natural gas supplier.In Ohio, Columbia’s choice program has resulted in nearly $30million in customer savings since its inception.
Its propane, power generation and LNG operating income improved$1.6 million over 1Q98. Exploration and production’s operatingincome fell $8.8 million, however, due to sharply lower prices thatonly partially offset a 7% increase in production. Prices averaged$2.44/Mcf compared to $3.38/Mcf last year, while 1999 production of10.6 Bcf, was up almost 1 Bcf.
“Since the end of the quarter, we have announced definitiveagreements for three acquisitions on the nonregulated side-two inpropane and one in exploration and production,” Richard noted. Thecompany is buying National Propane Partners for $80 million,propane and other assets from Carlos R. Leffler for about $60million, and about 42.7 Bcfe of proved reserves and a gatheringsystem in the Appalachian region from The Wiser Oil Co. for about$28 million. “Once completed, these transactions would broaden ourgeographic footprint in propane, nearly triple the number ofpropane customers served and expand Columbia Propane’s market areafrom eight to 35 states, making it one of the largest propanecompanies in America. Also, Columbia Energy Resources would be ableto extend its leadership position in the Appalachian Basin, withabout 3 Bcf of additional annual production and over 40 Bcf ofproved reserves.” The Wiser deal will grow CNR’s reserve base toabout 844 Bcfe.
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