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

“Our portfolio of energy marketing contracts, coupled with theevents of the last several weeks, have demonstrated that financialexposures can vary widely and unpredictably over a very shortperiod of time,” said CEO Roger W. Hale. “We entered into many ofthese contracts in 1996 and early 1997 when we, and our outsideadvisors, expected pricing trends in electricity to follow those ofsimilar commodities that have been deregulated.

Of the $232 million loss, $225 million was attributed to powermarketing problems. The remaining portion was a result of one-timecharges related to its utility subsidiary’s merger with KentuckyUtilities. LG&ampE said the majority of its loss ($171 million) wasassociated with a long-term unhedged agreement entered into in1996-97 with Oglethorpe Power. The agreement was based onspeculation that the wholesale price of power was headed down.LG&ampE also underestimated Oglethorpe’s load growth whichexacerbated the problem. The company was increasingly pressured toserve the growing demand with power purchased in a highly volatilemarketplace.

“The power trading market is evolving in a very different way,and the predictability of this business has never been moreuncertain than in the last few weeks,” Hale noted. “These recentmarket events have made it clear that, for now, we lack the sizeand scale necessary to manage the existing portfolio of contracts,and simultaneously grow our energy marketing business in otherareas.”

The company now intends to focus on the less risky business ofmarketing power from its own generating assets. “We have built aportfolio of some of the lowest-cost generation supply in thenation. By optimizing these assets and eliminating merchant energytrading and sales, I am confident in our ability to generate strongearnings growth in the future,” said Hale. “As a result, we do notplan to alter our dividend policy. We will continue our practice ofincreasing dividends each year, consistent with sound financialpractice.”

Duff &amp Phelps Credit Rating Co. said although the one-timecharge will increase leverage by 3%, the company’s business riskprofile will be markedly improved following its exit from themarketing business. The exit from marketing is expected to have apositive impact on earnings margins going forward because thecompany will be focused on achieving higher-margin market-basedsales completely backed by its physical assets, DCR noted.

Rocco Canonica

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