How Arkla keeps gas rates low and makes money

This is a tough time to be in the energy business. A slumping economy has combined with consumers' conservation efforts to dampen demand and produce excess supply. The result has been depressed prices and agitated executives.

Life is especially difficult for the many gas companies that are locked into contracts forcing them to pay suppliers for gas even if they do not want it.

''Some companies have had take-or-pay problems,'' admits a spokesman for the American Gas Association.

But the experience of Arkla Inc. of Louisiana illustrates how careful strategic planning and well-timed execution can combine to help insulate a company from temporary economic conditions. The Shreveport-based gas-producing and distribution firm recently got federal approval for an arrangement allowing it to sell excess gas to a local electric company at rates above what existing customers are paying.

The arrangement with Central Louisana Electric Company (CLECO) ''is relatively unique in that it covers big volumes, and Arkla has the gas supplies to do it,'' said Ronald J. Barone, an analyst with Kidder, Peabody & Co.

''It gives us much flexibility to buy gas for the future since we know we will have a market for it today,'' explained E. Sheffield Nelson, Arkla chairman. The arrangement obliges CLECO to take up to 135 million cubic feet of gas per day from Arkla. Gas sales to CLECO can be interrupted if demand from other Arkla customers is higher than expected.

Arkla's latest deal, which will add an estimated 11 percent to the firm's revenues, is just part of a corporate strategy that has made Arkla one of best managed gas companies in the United States. Since the youthful Mr. Nelson assumed control of the company in 1973 profits have climbed at a 15.8 percent compound rate to $87.5 million. Meanwhile, return on stockholders' equity has climbed more than one-third to a robust 21.1 percent.

''Sheffield Nelson has stayed a step ahead of the game,'' says Richard M. Lilly, an analyst with Raymond, James & Associates, a St. Petersburg, Fla., brokerage house.

Mr. Nelson's game is aggressive accumulation of gas reserves, successfull politicking with local regulators to get reasonable rates, and tight management of day-to-day operations.

While Arkla's results have attracted Wall Street's attention, they have not triggered significant protests from regulators in Arkla's five-state service area of Arkansas, Louisana, Oklahoma, Kansas, and Missouri. The reason is that aggressive management has not only boosted corporate profits but has held down costs for consumers.

For example, in Arkansas, which accounts for 63 percent of Arkla's gas revenues, ''the company is providing the lowest cost energy by a considerable sum,'' analyst Lilly notes. Arkla is delivering gas ''at the equivalent of oil at $18 per barrel. Saudi Arabian light crude is currently quoted at $34 per barrel.

Arkla's ability to offer relatively low-price gas was a key element in the gas company's deal with CLECO. The electric company will pay $3.67 per MCF (thouand cubic feet) of gas, a price ''some 50 cents per MCF cheaper than intrastate alternatives,'' says Salomon Brothers analyst Howard J. Erlichman.

The competitive price does not crimp Arkla's margins, however. In 1982 the gas Arkla purchases is expected to cost about $2.50 per thousand cubic feet, ''more than $1 per (thousand cubic feet) below that of most competitors,'' Mr. Erlichman says.

Shrewd bargaining is one way Arkla has lined up gas at a lower cost than many competitors. In the past Arkla had signed a number of long-term, fixed-price contracts to buy gas. The company has been able to get suppliers to promise it more gas in return for offering some upward adjustment in price. ''It is a good, viable way'' to boost reserves, Mr. Nelson notes. In fact, the company now has enough gas to last 14.1 years at current usage rates vs. about a 10-year supply for the rest of the industry. In each of the past six years the firm has replaced more gas than it used.

Almost 90 percent of Arkla's gas is purchased from outside suppliers. However , the company has been stepping up efforts to find gas for itself. In 1981 Arkla acquired 502 billion cubic feet of proven gas reserves of which 70 billion cubic feet came from the company's exploration program.

Arkla intends to use its strong gas reserves position to expand into new geographical areas. ''If the Federal Energy Regulatory Commission is willing, we plan to expand our market,'' Mr. Nelson says. ''We can do an expansion through transportation agreements or exchanges.'' One sign of the company's plans to move beyond its current five-state base is the 33 percent interest it has in a gas exploration program in Williston Basin, N.D.

While corporate planning is focusing on the gas business, Arkla also operates subsidiaries producing chemicals, cement, and gas grills. Together these operations account for about 7.5 percent of pretax corporate profits. Company managers say the businesses are worth keeping since they require little capital or management time.

''They realize pretty good returns without requiring too much in terms of management effort,'' concludes E. F. Hutton & Co. analyst Ronald F. Cassinari.

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