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Enron Dines on Columbia's Wholesale Marketing Division

Enron Dines on Columbia's Wholesale Marketing Division

Columbia Energy Group sent Enron home with leftovers last week in the form of a wholesale marketing and trading operation that Columbia 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 volume increase to Enron's already plump wholesale division. It also will fit neatly into Enron's longstanding strategic plan of building its unregulated assets and shying away from regulated operations. Enron sold its regulated electric utility, Portland General Electric, for $2.1 billion to Sierra Pacific earlier this month.

Columbia subsidiary Columbia Energy Services said the deal includes a package of gas already in storage and most of the division's contracts for gas, power, storage, transportation, and asset management. In addition, Enron will become the primary wholesale provider to CES's retail operations and the primary buyer of Columbia Natural Resources' Appalachian production into early 2001.

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

"This transaction fits perfectly with our core business of providing energy and risk management solutions to wholesale customers and expands the scale and scope of our operations," said Cliff Baxter, chairman and CEO of Enron North America. "In addition to the existing business, we are excited about the opportunity to expand our relationship with Columbia Energy Group companies through 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 be relieved of a business that has been a headache for years.

"To me the financial implications are secondary to the fact that Columbia is now finally done with it and Enron now has a deeper market presence in a market where they weren't dominant before" --- the Mid-Atlantic, said Curt Launer, veteran energy analyst for Donaldon Lufkin & Jenrette. Launer wouldn't delve into the finances of the deal other than to note that it was a "very small transaction."

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

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

During the fourth quarter of last year the company found that an individual trader misstated prices in its forward books resulting in a loss, which when combined with all other gas trading positions, caused a net loss of $6.5 million. The trader was fired, but the incident essentially got the snowball rolling toward this sale. A thorough review was undertaken in February, leading to changes in wholesale operating methods and personnel. Then in June Columbia brought in Brian Watt, who holds a doctorate of sciences degree from MIT, to straighten CES out.

"The decision to sell the CES wholesale and trading operations was announced in August 1999 as part of a move to focus its strategy upon retail energy marketing operations in areas where Columbia's existing geographic footprint provides a competitive advantage," Watt, president and CEO of CES, said yesterday. He noted Columbia's principal operations are in the East, in key states expected to provide the best development opportunities as deregulation of gas and electrical power markets proceeds. The sale to Enron is expected to be completed by year-end.

Rocco Canonica

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