Columbia Energy Group sent Enron home with leftovers last weekin the form of a wholesale marketing and trading operation thatColumbia has been attempting to unload since August.

Despite the difficulties it has faced over the past few years,the unregulated operations will provide an immediate volumeincrease to Enron’s already plump wholesale division. It also willfit neatly into Enron’s longstanding strategic plan of building itsunregulated assets and shying away from regulated operations. Enronsold its regulated electric utility, Portland General Electric, for$2.1 billion to Sierra Pacific earlier this month.

Columbia subsidiary Columbia Energy Services said the dealincludes a package of gas already in storage and most of thedivision’s contracts for gas, power, storage, transportation, andasset management. In addition, Enron will become the primarywholesale provider to CES’s retail operations and the primary buyerof Columbia Natural Resources’ Appalachian production into early2001.

With Columbia’s 4.3 Bcf/d of gas sales and 14.4 million MWh ofpower (for 1998), Enron’s wholesale gas sales volumes will rise tomore than 16 Bcf/d and its power sales will move above 410 millionMWh/year.

“This transaction fits perfectly with our core business ofproviding energy and risk management solutions to wholesalecustomers and expands the scale and scope of our operations,” saidCliff Baxter, chairman and CEO of Enron North America. “In additionto the existing business, we are excited about the opportunity toexpand our relationship with Columbia Energy Group companiesthrough our supply agreement with Columbia Energy Services.”

Although Columbia won’t be rolling in the dough after this one— it reported receiving a lot less than expected —it will berelieved of a business that has been a headache for years.

“To me the financial implications are secondary to the fact thatColumbia is now finally done with it and Enron now has a deepermarket presence in a market where they weren’t dominant before” —the Mid-Atlantic, said Curt Launer, veteran energy analyst forDonaldon Lufkin & Jenrette. Launer wouldn’t delve into thefinances of the deal other than to note that it was a “very smalltransaction.”

Although the purchase price was not disclosed, Columbia alreadyhas said it received significantly less for the operations thanexpected. It originally counted the sale as break-even but bids forthe division came in lower than anticipated. As a result, itrevised third quarter 1999 results related to discontinuedoperations as a loss on the disposal of the assets of $13 million,or 16 cents per share. Its revised total third quarter earningsshow a $22.7 million net loss ($0.28/share). It previously hadreported only a $9.7 million net loss ($0.12/share).

But the divestiture apparently was well worth the struggle. Theoperations showed a $25 million loss for the first nine months ofthe year. It’s fair to say Columbia has struggled in the wholesalearena. Its wholesale and retail operations combined reported a $59million operating loss for 1998 and an operating loss of $13.2million in 1997 due to costs of investment in marketinginfrastructure and customer acquisitions and partly because oftrading mishaps.

During the fourth quarter of last year the company found that anindividual trader misstated prices in its forward books resultingin a loss, which when combined with all other gas tradingpositions, caused a net loss of $6.5 million. The trader was fired,but the incident essentially got the snowball rolling toward thissale. A thorough review was undertaken in February, leading tochanges in wholesale operating methods and personnel. Then in JuneColumbia brought in Brian Watt, who holds a doctorate of sciencesdegree from MIT, to straighten CES out.

“The decision to sell the CES wholesale and trading operationswas announced in August 1999 as part of a move to focus itsstrategy upon retail energy marketing operations in areas whereColumbia’s existing geographic footprint provides a competitiveadvantage,” Watt, president and CEO of CES, said yesterday. Henoted Columbia’s principal operations are in the East, in keystates expected to provide the best development opportunities asderegulation of gas and electrical power markets proceeds. The saleto Enron is expected to be completed by year-end.

Rocco Canonica

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