CNG: Aiming to be an 'energy' company, not a gas company

Richard Wheatley
Associate Managing Editor-News

• CNG's reserves, production, marketed gas [48490 bytes]

CNG, a Pittsburgh-based utility holding company, in 1984 began emphasizing E&D activities, as well as taking advantage of forecast growth in gas sales and markets (OGJ, Mar. 12, 1984, p. 42). Unwittingly, the strategy may have been a watershed.

CNG's plan enabled it to build up a head of steam 8 years before Federal Energy Regulatory Commission Order 636 fostered new competition in the interstate natural gas pipeline arena and the National Energy Policy Act widened the opportunity window for traditional gas distribution/transmission companies to seek out new energy markets (OGJ, Oct. 23, 1995, p. 33).

By 1994, CNG had the positioning base it needed to take advantage of gas and electric deregulation.

"Where there have been distinctly different oil, gas, and electric markets in the past, we are moving toward a fluid, integrated energy market in the future," George A. Davidson Jr., CNG chairman and CEO, predicted in an OGJ special report (OGJ, Nov. 7, 1994, p. 54). "In some cases," Davidson said, "energy will be converted from one form to another-physically, financially, or both-before being consumed by the end-user."

Now the metamorphosis in world energy markets is occurring at a rapid pace.

In 1995, CNG began a corporate repositioning to meet mounting competition, switching emphasis from its regulated businesses to the non-regulated side. The goal: To become an energy player, not only in the U.S. but internationally.

Davidson, who joined CNG in 1966 from the Federal Power Commission, FERC's progenitor, predicted: "CNG will be a very different company at the turn of the century."

Ultimately, he said, "We want to be an energy company, not a natural gas company."

CNG's progression

CNG, one of the nation's largest producers, transporters, distributors, and marketers of natural gas, is more than 2 years into its corporate repositioning program and less than 1 year into its current 5-year plan.

CNG's strategy is based on capital allocation, not risk. The numbers are telling: 67% of its 1991-95 $2.2 billion capital spending program was dedicated to regulated businesses; 62% of the 1997-2001 $2.7 billion capital spending program is dedicated to unregulated businesses (see chart, p. 47).

Efforts have resulted in net income of $298 million on $3.8 billion in revenue in 1996 vs. $21 million in net income on $3.3 billion in revenue in 1995.

CNG officials admit not all units are profitable; work remains to arrive at an optimum operating/sales mix and achieve total unit profitability, principally turning around CNG Energy Services.

Unit overview

CNG is placing major reliance on its New Orleans-based exploration and production unit, CNG Producing Co., and, secondarily, on its energy unit, CNG Energy Services Corp., to be profit drivers.

CNG Producing has a lion's share of allocated capital-52% vs. 31% in the prior plan-while CNG Energy Services, on a curve toward profitability, stands to gain a greater share of capital if results improve.

CNG Energy Services, formed in 1994, provides and/or manages gas sales, transportation, storage, and other services, as well as markets electricity and other fuels. It operates the largest underground storage system in the country with 885 bcf of capacity.

CNG's gas marketing volumes fell to 1.2 bcfd in 1996 from 1.5 bcfd the prior year, but first quarter marketed volumes have reversed the decline rate, totaling 2.2 bcfd vs. 1.3 bcfd for the same period in 1996.

Energy Services suffered last year because the number of potential gas transactions was limited by management until internal systems could be upgraded.

"We let our marketing volume get ahead of our ability to handle business processes," noted Davidson. "We scaled that back last year on purpose, so we could regroup."

CNG provides interstate gas transmission and storage services through CNG Transmission Corp., Clarksburg, W.Va.; and local distribution companies (LDCs) East Ohio Gas Co., Cleveland; Peoples Natural Gas Co., Pittsburgh; Virginia Natural Gas Inc., Norfolk, Va.; and Hope Gas Inc., also of Clarksburg.

Gas transmission/distribution op- erations serve customers in Ohio, Pennsylvania, Virginia, West Virginia, New York, and other states in the Northeast and mid-Atlantic region.

CNG's LDC system, serving more than 1.8 million customers directly, is the fifth largest in the U.S.

Peoples Natural Gas, CNG's Pennsylvania LDC, is pressing a program of customer choice through its Energy Choice program. And through its new, nonregulated, third-party entity Peoples Energy, more than 35,000 residential customers have signed up for unbundled retail gas service, making Peoples Energy the state's largest non-utility residential energy supplier.

In western Pennsylvania, 100% of the retail market is unbundled, and Peoples Natural Gas is actively lobbying for legislative changes to provide unbundled services for all gas customers; it also is seeking open access in Ohio.

CNG is among eight companies that have qualified to sell electricity in a Pennsylvania pilot program. Electricity unbundling is moving ahead there, but some utilities' plans have been rejected by the public utility commission and will need modification.

CNG is actively trading electricity, and it owns interests in seven independent power plants in California, New Jersey, New York, and Pennsylvania.

CNG sold 5 million MW-hr of electricity in 1996 vs. 1.9 million MW-hr in 1995. In first quarter 1997 alone, sales totaled 2.6 million MW-hr vs. 800,000 MW-hr for the same period in 1996.

Internationally, CNG International Corp., Reston, Va., and Sydney, Australia, owns and operates natural gas and electric generation, transmission, and distribution businesses.

CNG Producing

CNG Producing explores for and produces gas and oil in the Gulf of Mexico and onshore in the U.S. and Canada.

During each of the last 3 years, it has added more than 200 bcf of gas equivalent reserves and replaced an average of 175% of its production.

In mid-1995, the goal of the E&P unit was established, calling for it to generate $100 million in pre-tax operating income by 1999. Despite management concerns as to whether or not that could be accomplished, CNG Producing in 1996 generated $133 million.

Before the ink was dry on the 1996 income statement, management upped the unit's ante to $200 million in pre-tax operating income by 1999 or sooner.

"It's a bit of a stretch," said Davidson, adding: "This is not all pricing. If you look at 1995 vs. 1996, prices were better, but we increased production over 43%.

"The key is increased production in double-digit rates; if we can do that- and if we can handle our pricing and our hedging and our other activities appropriately-we've got a good shot at it."

Strong start

CNG Producing is starting out strong.

On a first quarter comparison basis, it produced 36.3 bcf of gas in 1997 vs. 31.7 bcf for the same period in 1996 and 24.3 bcf in 1995.

Oil production in first quarter 1997 was about 1.24 million bbl compared with slightly more than 1 million bbl in first quarter 1996 and 735,000 bbl in first quarter 1995.

Pat Riley, CNG Producing's president, expects hefty increases in output this year. In 1997, he sees gas production at about 150-160 bcf and 7 million bbl of oil: "That's approaching being double what it was at this time in 1995." But, added Riley, "We're not depending on price increases to make us look good. We're depending on increasing production and reducing our costs."

CNG's principal focus areas have been the U.S. Outer Continental Shelf of the Gulf of Mexico, onshore in the Appalachian region, the Southwest, West, and Canada. It's not a significant international player, but it plans to be at some point.

Most recently, it expanded its onshore program to include South Texas and other Gulf Coast areas, and at the beginning of 1997 established an onshore business unit in Houston.

In gulf OCS waters, CNG plans to drill about 20 wells this year, half development and half exploration.

CNG is a 50-50 partner with operator Oryx Energy Co. in the deepwater Neptune spar, which was placed on production in March 1997 to develop four blocks encompassing the Viosca Knoll 856 Unit, about 80 miles south of Mobile, Ala.

CNG is an interest owner in the Shell Deepwater Production Inc.-operated Popeye Unit, CNG's first deepwater venture in the Gulf of Mexico.

"We paid out our $66 million investment in that project in less than a year," Riley noted.

Growing exploration program

CNG is stepping back slightly from deepwater development, for now shifting more toward exploration.

Recently, an exploratory well on Green Canyon Block 37-part of a six-block project known as Navarro, consisting of blocks 37, 38, 39, 81, 82, and 83-discovered about 150 ft of potentially productive sands; however, oil was considerably less than commercial at 8° API gravity.

CNG's partners are operator British-Borneo Exploration Inc., Houston, and Kerr-McGee Corp., Oklahoma City. The group is now recalibrating its efforts, with more Navarro project drilling likely.

Onshore, CNG is drilling two wells in southern Oklahoma, and in South Texas, where it has a significant mineral fee ownership position, it will pursue Wilcox, Vicksburg, and Frio targets.

"Our basic thrust there is to use the same tools in the onshore environment that have been successful and made us a lot of money offshore," said Riley, "including application of 3D seismic technology and use of a multi-discipline team approach to improve chances for drilling success.

"We're committed to making a go of it onshore in basins where, number one, we can apply the technology that we know and trust and have good experience with; and, number two, where there are good chances of success because others have been there."

Energy Services

Analysts give CNG high marks overall, but some say the jury is out on Energy Services.

Others maintain the unit will be strengthened and should be profitable soon because of the greater corporate emphasis placed on the unit-and because of the Apr. 1 hiring of Joe Petrowski as Energy Services' president.

"They've stumbled a little bit," said Mike Heim of A.G. Edwards & Sons Inc., St. Louis. Heim says CNG may have to be willing to sustain some more unprofitable years for the unit before Energy Services achieves the scale and power necessary to turn itself around in this highly competitive environment.

But Ron Barone, managing director, Paine Webber Inc., New York, cautions too much emphasis can be placed on Energy Services' current situation, and he sees Petrowski's hiring as a key step toward future profitability: "It's not going to turn overnight, but I think over the next couple of quarters they can reduce those losses and turn it around," Barone said.

"The real driving force is exploration and production; they've turned the E&P company around, and I think they can do it to Energy Services as well."

Petrowski's plans

Petrowski, acknowledging the hurdles, sees opportunities in each of Energy Services' five distinct businesses:

• Wholesale trading and marketing. According to Petrowski, Energy Services' market concentration has been the East, mideastern states, and the mid-Atlantic region. But he says these areas should be expandable because wholesale trading and marketing is a national business and one of scale. CNG has revamped its gas management logistics system, completed an in-house project to develop a risk-analysis system called "Monte," and it has a proprietary in-house system, called "E-Bolt," which handles both positions and price analysis across all North American Electric Reliability Council regions.

• Large industrial marketing. This effort is principally centered on the East Coast, punctuated by thin profit margins and high sales volumes. But Petrowski sees opportunities spinning off CNG's expanding wholesale trading capabilities.

• Retail. Petrowski maintains CNG is well-positioned to capture a growing share of this market, which is driven by one's "ability to service the customer...a question of being very efficient in your billing and invoicing, as well as having scale." CNG is developing a new, in-house billing system called "CAMP," which Petrowski says should make CNG more competitive in invoicing and handling all the customer information flows necessary for that segment.

• Commercial and industrial (C&I) mid-markets. This segment is one of the most complicated segments for most energy companies, says Petrowski, because customers generally are big enough to want a significant amount of individual attention, "but small enough that the energy provider has to worry about his cost structure in providing that individual attention and handling the customer. Our mid-market concentration will follow both our retail and our wholesale industrial base, so that we'll get scale in certain areas; we're not going to serve the C&I market nationwide on a one-customer-behind-one-LDC basis. We'll try to get scale behind one so we can get a lower cost structure."

• Energy services/large structured deals. This segment involves use of strategic initiatives benefiting smaller LDCs, electric utilities, municipalities, and electric cooperatives; customer requirements range from full fuel services to complete energy outsourcing to management of the customer's generation assets to long term capacity/ storage contracts. Nationwide, Pe- trowski plans to expand Energy Services in "value corridors" across the country, including the Southeast area of the Carolinas and Florida, the Midwest/Chicago area, and the San Juan/Permian basin regions.

CNG tomorrow

"We're moving into an era where we're going to be very disciplined on the capital that we allocate to the regulated businesses, both the LDC business and the transmission business," said Davidson, "and focus on allocating available capital based upon success to the E&P business and also to the growing international business."

The effort includes leveraging exploration and production success, advancing a program based on customer choice in electricity/energy, adding more retail products and services, implementing steps to make Energy Services profitable, and seeking to improve operational efficiency and the quality of CNG's regulated businesses.

Last December, CNG International embarked on an Australian investment with El Paso Energy Corp. unit El Paso Energy International Co. Called Epic Energy Pty. Ltd., the partnership has interests in one-third of the pipeline capacity in Australia formerly owned by Tenneco Energy.

Interests are El Paso Energy International 30%, CNG International 30%, and Australia's AMP Investment Australia Ltd., Axiom Funds Management, Hastings Fund Management, and Allgas Energy Ltd., 10% each.

Epic has been selected to construct, own, and operate a pipeline and compressor expansion project to deliver gas from the North West Shelf to Geraldton, Western Australia. Project value is about $300 million (Australian).

The increased capacity will be used to supply gas to the planned $1.5 billion (Australian) An Feng Kingstream Mid West Iron & Steel plant planned at Oakajee, W.A.

The pipeline project will expand the existing AlintaGas-operated Dampier-Bunbury pipeline (OGJ, Nov. 13, 1995, p. 46).

Looping and added compression will involve about 400 km of 30-in. pipeline, about 13,400 hp of additional compression at three existing stations, as well as a 55-m lateral to the Oakajee plant site.

Also, the project will provide fuel for the independent gas-fired power station that will provide electricity for the steel plant.

Initial deliveries are expected late in 1999, with full deliveries expected to reach about 161 MMcfd soon after.

"We see that (the Epic venture) as a stepping-stone for further activities and further capital requirements on the international side," Davidson said.

CNG plans to spend about $40 million/year for international activities and sees most opportunities in Latin America and the Pacific-Rim region.

"As we get into the turn of the century," he said, "we'll have a growing business on that (international) side, and we'll have investment alternatives on the capital side to regulate pipeline investments and other investments here in the U.S."

This is the first installment of a new feature Oil & Gas Journal will run occasionally. Each OGJ Spotlight will focus on a single company's operations, business plans, and management strategies.