NGI The Weekly Gas Market Report
A strong performance by Columbia Energy Group’s transmission,distribution, and exploration and production operations last yearin spite of 17% warmer than normal weather and lower commodityprices was significantly tainted by several major blunders in itsenergy marketing operations.
A 78% surge in marketing volumes evidently left the company’smarketing executives with their heads spinning. Records becamemismatched. And to make matters worse, a trader misquoted forwardprices for several transactions, triggering a nightmarish wave oflosses 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 $3.23per share, for the year compared to $273.3 million, or $3.29 pershare, 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 CEOOliver G. Richard III. “Despite innovative regulatory settlements,cost reductions and business expansion, our net income fell shortof 1997’s record level, and was restricted by the impact of recordwarm weather on gas demand and throughput, as well as bysubstantial costs related to our marketing operations.” Theweather, which was 19% warmer than in 1997, cost Columbia anestimated $80 million on a pre-tax basis.
“[M]arketing operations expanded dramatically during 1998 andcontinue to offer a promising challenge for Columbia,” saidRichard, noting the nearly 80% increase in volumes to 4.3 Bcf/d ingas sales. “This growth has strained the infrastructure of themarketing segment. The marketing segment has established a year-endreserve that reduced pre-tax income by $16.3 million, whichincluded an increase in the allowance for uncollectible accountsstemming from our continuing review of the segment’s financialrecords.”
Columbia said its marketing segment analyzed certain financialrecords and found “amounts that do not appear to have adequatethird party documentation, primarily resulting from the ongoingimplementation of new accounting systems and the strain on theinfrastructure caused by rapid growth.” As a result, the marketingsegment reported an operating loss of $39.4 million for the fourthquarter and $59 million for the year compared to 13.2 million in1997.
The loss included a $6.5 million charge related to “certainunusual trading activity.” A spokesman said Columbia EnergyServices experienced an incident in which an individual trader”misstated the prices in the forward book.” Columbia EnergyServices has taken action to address the situation and the traderhas been terminated, the spokesman said. “The size of permittedtrading positions has been reduced, and a more aggressive auditprogram has been [implemented].”
Energy analyst Ronald J. Barone of PaineWebber said he’sconvinced the problems in Columbia’s marketing operations “arecontained, and that overall this is a very well-run company with ahighly attractive asset base, highly diverse portfolio of growthprojects and very innovative and respected management team.”
Barone pointed to the many positives in Columbia’s year-endfinancial report. Despite an 8% drop in transmission throughput, a2% decline in distribution volume sold and transported, andtemperatures 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 grew26%, including a 48% jump in the fourth quarter compared to 4Q97.For distribution, it grew 0.7% for the year and 23% in the fourthquarter. For E&P, it jumped 20% for the year and 7% in thefourth quarter. Total operating income was $540 million, a $30.6million improvement over 1997. Columbia’s total revenues grew $1.5billion last year to nearly $6.6 billion.
Reviewing other changes that took place during the year, Richardnoted that Columbia’s transmission and storage segment had morethan 3 Bcf/d of expansion projects underway or planned at the endof 1998. Columbia’s distribution segment is 86% unbundled, and onthe nonregulated side, more than 1,500 MW of new power projects arein various stages of development.
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