Columbia Energy Group subsidiary Columbia Energy Services (CES)yesterday said it would sell its Houston-based wholesale andtrading operations. The move follows a review of CES’ overallenergy marketing businesses begun in February after the unitreported a $59 million operating loss for 1998.

“We have concluded that CES would do better to concentrate onbecoming a significant player in the retail end of the business,where Columbia’s existing geographic footprint gives us anadvantage,” said Brian Watt, CEO of CES. “Columbia’s principaloperations are in the East, amidst a dozen key states expected toprovide the best retail opportunities as deregulation of gas andelectrical power markets proceeds. Therefore, we intend toconcentrate our resources on developing these opportunities. Therecently announced consolidation of our retail businesses inHerndon, VA, and refocusing of our retail operations both are aimedat this objective.

“We have built and grown a wholesale gas and electric tradingoperation in Houston, but with our strategic shift, CES will nolonger pursue a strategy aimed at being a top-tier wholesalemarketer.”

During the first six months of 1999, the Houston operation solda daily average of 5 Bcf of gas and more than 17 million megawatthours of electricity. The CES trading team has managed volumes for65 pipelines and 77 local distribution companies, also tradingpower in six North American Electric Reliability Council regions inthe Eastern Interconnect. The unit ranks among the top-15 for gassales and has made the top-20 in electric power sales in terms ofvolume.

Columbia’s marketing segment reported an operating loss of $59million for 1998, versus an operating loss of $13.2 million in 1997(see Daily GPI Feb. 12, 1999). Columbia said the 1998 loss stemmedfrom costs of investment in infrastructure, a significantinvestment 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 tradingpositions, caused a net loss of $6.5 million and reduced the grossmargin to $42.7 million, Columbia said. The company has taken”corrective action designed to prevent similar incidents fromrecurring.”

A spokesman at the time said Columbia Energy Servicesexperienced an incident where an individual trader “misstated theprices in the forward book. Columbia Energy Services has takenaction to address the situation. The trader has been terminated,”the spokesman said. “The size of permitted trading positions hasbeen reduced, and a more aggressive audit program has been[implemented].”

In addition, however, Columbia said its marketing segment “hasbeen analyzing certain financial records with amounts that do notappear to have adequate third party documentation, primarilyresulting from the ongoing implementation of new accounting systemsand the strain on the infrastructure caused by rapid growth.” As aresult of this ongoing analysis, a $16.3 million pre-tax reductionin income was recorded in the 1998 fourth quarter. The marketingsegment reported an operating loss of $39.4 million for 4Q98 dueprimarily to the trading losses and the $16.3 million charge.

Watt, an MIT graduate and industry consultant, was brought in aspresident of the marketing operation in late June as the divisionposted 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 about150 employees.

“We intend to sell the wholesale and trading operation as agoing concern and are not interested in ‘selling the book’ andliquidating the business,” said Watt. “The new owner may see valuewith continuing to provide certain resources to Columbia EnergyGroup businesses, and therefore Columbia will entertain thepossibility of contracting with the purchaser to provide Columbiawith these services.”

Companies with an interest in acquiring the business shouldcontact Dennis Pick, Columbia Energy Group Service Corp., at(703)561-6797.

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