In an announcement that stunned its customers and investors, one of Maryland's most important suppliers of natural gas announced yesterday that plummeting gas prices may drive it into bankruptcy.
Unless banks and gas suppliers agree to give Wilmington, Del.-based Columbia Gas System Inc. more credit and lower-priced contracts, the company will have to file for court-protected reorganization, Columbia Gas officials said yesterday.
The announcement dismayed investors, who drove Columbia's stock price down nearly 40 percent in heavy trading yesterday. But local utility executives said the move might actually benefit Marylanders who heat or cool with gas.
If Columbia is able to renegotiate its contracts, local gas prices could decline slightly, said Stephen Jones, a gas supply planner for Baltimore Gas and Electric Co.
And even if the company is forced into bankruptcy, gas probably won't stop flowing into Maryland, Mr. Jones said. Bankruptcy probably wouldn't stop customers from using the pipeline, he said. And though Columbia was once the only company that supplied natural gas to Maryland, two other companies have built pipelines into the state in the last couple of years, and they could take up any slack, he said.
Columbia officials said yesterday that the current glut of natural gas, combined with the warmer-than-usual winter, has pushed spot-market gas prices far below the price the company agreed to pay its suppliers.
If, as expected, gas prices remain low, Columbia will lose $1 billion over the next 10 years, the company warned.
Though natural gas is selling today at $1.30 to $1.40 per thousand cubic feet, Columbia has hundreds of supply contracts with guaranteed minimum prices ranging as high as $6.70. On average, the company said it is paying $2.75 per thousand cubic feet.
As a result, the company yesterday eliminated its dividend and began negotiating with its banks for an extension of its credit line.
If its banks, led by Morgan Guaranty Trust Co. of New York, the lead bank in a $750 million revolving credit agreement, do not agree to ease the company's credit crunch by Oct. 1, Columbia Gas System will file for reorganization, the company said.
If the banks agree, but suppliers do not lower their contract prices, the Columbia subsidiary that buys the gas will file for bankruptcy protection, said James Holland, president of the subsidiary, called the Columbia Gas Transmission Corp.
Columbia is proposing to pay its suppliers, which include big oil companies, $600 million in securities of its subsidiary to induce them to break the high-price contracts that are expected to result in the $1 billion loss.
Mr. Holland said that Columbia would take a large charge against earnings in its second quarter to prepare for the negotiations.
Though Columbia has slashed its capital spending by $100 million in recent months, company officials said that they didn't think the move would affect plans to restart its Cove Point liquefied natural gas import terminal in Calvert County.
In addition, they said that while the company was not hiring, they did not expect any layoffs of workers.
Columbia's stock, the most active on the New York Stock Exchange, fell $13.75, to $20.75.
Natural gas prices
The average spot U.S. natural gas price per million British thermal units, roughly equal to a thousand cubic feet of gas.
1990 ... ... ... ... ... Price
January ... ... .. .. .. $2.22
February ... ... ... ... 1.85
March ... ... ... ... .. 1.42
April ... ... ... ... .. 1.40
May ... ... ... .. .. .. 1.38
June ... ... ... ... ... 1.40
July ... ... ... ... ... 1.35
August ... ... ... .. .. 1.30
September ... ... ... .. 1.33
October ... ... .. .. .. 1.52
November ... ... ... ... 1.93
December ... ... ... ... 2.06
January ... ... .. .. .. 1.74
February ... ... ... ... 1.30
March ... ... ... ... .. 1.26
April ... ... ... ... .. 1.26
May ... ... ... .. .. .. 1.25
Source: Natural Gas Clearing House
Columbia Gas System's profits and losses, in millions of dollars.
Source: Value Line Investment Survey