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Columbia Selling Houston Wholesale Trading

Columbia Selling Houston Wholesale Trading

Columbia Energy Group subsidiary Columbia Energy Services' (CES) decision to sell its wholesale and trading operation may be a harbinger of a white knight deal to save Columbia from a hostile takeover by NiSource. Then again, it may simply represent the acknowledgement by the Virginia-based company that its strength lies in its regional roots.

"We know [Columbia Energy CEO Rick] Richard is under the gun, that NiSource is trying to buy them. This may be indicative of Richard making a deal with a white knight and the white knight saying, 'I don't need your marketing group. I have my own. Let's get rid of it now before we get into the real deal,'" said Jofree Corp analyst Carol Freedenthal.

"This question is coming up everywhere," said PaineWebber analyst James Yannello of the speculation about a white knight. He said Columbia management has been watching the wholesale division and he's not surprised by the move to sell. "Though you can't rule it out, I believe management would have sold its wholesale division if it continued to under-perform, regardless of a hostile offer or any plans to potentially merge with another company."

Freedenthal said he thought Richard would have done more to make the wholesale and trading operation a success "before giving up the ghost." However, Columbia is not alone in exiting the volatile business segment. "LG&E did it. SCANA has done it. There have been a couple of others that realized it's been the wrong business for them."

The move by Columbia follows a review of CES' overall energy marketing businesses begun in February after the unit reported a $59 million operating loss for 1998, versus an operating loss of $13.2 million in 1997 (see NGI Feb. 15, 1999). Columbia said the 1998 loss stemmed from costs of investment in infrastructure, a significant investment for customer acquisition and certain trading losses. During the fourth quarter, "certain unusual trading activity" resulted in a loss, which when combined with all other gas trading positions, caused a net loss of $6.5 million and reduced the gross margin to $42.7 million, Columbia said. The company has taken "corrective action designed to prevent similar incidents from recurring."

A spokesman at the time said Columbia Energy Services experienced an incident where an individual trader "misstated the prices in the forward book. Columbia Energy Services has taken action to address the situation. The trader has been terminated," the spokesman said. "The size of permitted trading positions has been reduced, and a more aggressive audit program has been [implemented]."

In addition, however, Columbia said its marketing segment "has been analyzing certain financial records with amounts that do not appear to have adequate third party documentation, primarily resulting from the ongoing implementation of new accounting systems and the strain on the infrastructure caused by rapid growth." As a result of this ongoing analysis, a $16.3 million pre-tax reduction in income was recorded in the 1998 fourth quarter. The marketing segment reported an operating loss of $39.4 million for 4Q98 due primarily to the trading losses and the $16.3 million charge.

NiSource, which has state and federal lawsuits in progress against Columbia, offered to acquire Columbia for $5.7 billion, or $68 per share in cash, an amount several analysts have said falls short of Columbia's actual value. Columbia has repeatedly rejected the offer. In the meantime, a number of U.S. and foreign electric companies have emerged as potential third-party suitors for Columbia (see NGI July 19, 1999). U.S. companies reputed to be eyeing Columbia are ComEd of Chicago parent Unicom Corp; Ohio-based Cinergy Corp., which has the 12th largest investor-owned utility system in the nation; and FirstEnergy Corp., whose utilities serve Ohio, Indiana and Kentucky. Also, KeySpan Energy, parent of Brooklyn Union Gas of New York, was said to be "very interested" in the company.

"As we have stated from day one, we continue to view the $68/share NiSource offer as inadequate and continue to believe that at the end of the day, Columbia will work to generate higher near-term shareholder value while likely finding a more suitable/lucrative/friendly offer from another entity down the road," Yannello's PaineWebber research note released last week said.

As for CES, the company will focus on the retail market where its geographic footprint gives it an advantage, said CES CEO Brian Watt. "Columbia's principal operations are in the East, amidst a dozen key states expected to provide the best retail opportunities as deregulation of gas and electrical power markets proceeds. Therefore, we intend to concentrate our resources on developing these opportunities. The recently announced consolidation of our retail businesses in Herndon, VA, and refocusing of our retail operations both are aimed at this objective.

"We have built and grown a wholesale gas and electric trading operation in Houston, but with our strategic shift, CES will no longer pursue a strategy aimed at being a top-tier wholesale marketer."

During the first six months of 1999, the Houston operation sold a daily average of 5 Bcf of gas and more than 17 million megawatt hours of electricity. The CES trading team has managed volumes for 65 pipelines and 77 local distribution companies, also trading power in six North American Electric Reliability Council regions in the Eastern Interconnect. The unit ranks among the top-15 for gas sales and has made the top-20 in electric power sales in terms of volume.

"We had been skeptical of Columbia's ability to earn adequate returns in the highly competitive wholesale natural gas/electricity markets where size, scope and scale truly separate the winners from the losers," the PaineWebber research note said.

Watt, an MIT graduate and industry consultant, was brought in as president of the marketing operation in late June as the division posted an operating loss of $10.5 million for the second quarter, 1999.

The sale will not require staff reductions in the Houston unit, pending the sale of the business. The Houston operation has about 150 employees.

"We intend to sell the wholesale and trading operation as a going concern and are not interested in 'selling the book' and liquidating the business," said Watt. "The new owner may see value with continuing to provide certain resources to Columbia Energy Group businesses, and therefore Columbia will entertain the possibility of contracting with the purchaser to provide Columbia with these services."

A Columbia spokesman turned down NGI's request for an interview with company officials. Companies with an interest in acquiring the business should contact Dennis Pick, Columbia Energy Group Service Corp., at (703)561-6797.

Joe Fisher, Houston

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