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Heavy Losses Force LG&E Out Of Gas, Power Marketing

August 3, 1998
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Heavy Losses Force LG&E Out Of Gas, Power Marketing

LG&ampE Energy Corp. said it is discontinuing its gas and power marketing operations and will take a $231.8 million after-tax loss in the second quarter mainly because it was forced to cover fixed-priced power marketing agreements when Midwest power prices went through the roof last month, reaching $7,000/MW compared to $30/MW just days prior. The company was among the top 10 largest power marketers and top-20 largest gas marketers (by volume sold) in North America, selling more than 53 million MWh and 2.6 Bcf/d of gas in 1997.

"Our portfolio of energy marketing contracts, coupled with the events of the last several weeks, have demonstrated that financial exposures can vary widely and unpredictably over a very short period of time," said CEO Roger W. Hale. "We entered into many of these contracts in 1996 and early 1997 when we, and our outside advisors, expected pricing trends in electricity to follow those of similar commodities that have been deregulated.

Of the $232 million loss, $225 million was attributed to power marketing problems. The remaining portion was a result of one-time charges related to its utility subsidiary's merger with Kentucky Utilities. LG&ampE said the majority of its loss ($171 million) was associated with a long-term unhedged agreement entered into in 1996-97 with Oglethorpe Power. The agreement was based on speculation that the wholesale price of power was headed down. LG&ampE also underestimated Oglethorpe's load growth which exacerbated the problem. The company was increasingly pressured to serve the growing demand with power purchased in a highly volatile marketplace.

"The power trading market is evolving in a very different way, and the predictability of this business has never been more uncertain than in the last few weeks," Hale noted. "These recent market events have made it clear that, for now, we lack the size and scale necessary to manage the existing portfolio of contracts, and simultaneously grow our energy marketing business in other areas."

The company now intends to focus on the less risky business of marketing power from its own generating assets. "We have built a portfolio of some of the lowest-cost generation supply in the nation. By optimizing these assets and eliminating merchant energy trading and sales, I am confident in our ability to generate strong earnings growth in the future," said Hale. "As a result, we do not plan to alter our dividend policy. We will continue our practice of increasing dividends each year, consistent with sound financial practice."

Duff &amp Phelps Credit Rating Co. said although the one-time charge will increase leverage by 3%, the company's business risk profile will be markedly improved following its exit from the marketing business. The exit from marketing is expected to have a positive impact on earnings margins going forward because the company will be focused on achieving higher-margin market-based sales completely backed by its physical assets, DCR noted.

Rocco Canonica

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