NGI The Weekly Gas Market Report
Columbia Energy Group subsidiary Columbia Energy Services’ (CES)decision to sell its wholesale and trading operation may be aharbinger of a white knight deal to save Columbia from a hostiletakeover by NiSource. Then again, it may simply represent theacknowledgement by the Virginia-based company that its strengthlies in its regional roots.
“We know [Columbia Energy CEO Rick] Richard is under the gun,that NiSource is trying to buy them. This may be indicative ofRichard making a deal with a white knight and the white knightsaying, ‘I don’t need your marketing group. I have my own. Let’sget rid of it now before we get into the real deal,'” said JofreeCorp analyst Carol Freedenthal.
“This question is coming up everywhere,” said PaineWebberanalyst James Yannello of the speculation about a white knight. Hesaid Columbia management has been watching the wholesale divisionand he’s not surprised by the move to sell. “Though you can’t ruleit out, I believe management would have sold its wholesale divisionif it continued to under-perform, regardless of a hostile offer orany plans to potentially merge with another company.”
Freedenthal said he thought Richard would have done more to makethe wholesale and trading operation a success “before giving up theghost.” However, Columbia is not alone in exiting the volatilebusiness segment. “LG&E did it. SCANA has done it. There havebeen a couple of others that realized it’s been the wrong businessfor them.”
The move by Columbia follows a review of CES’ overall energymarketing businesses begun in February after the unit reported a$59 million operating loss for 1998, versus an operating loss of$13.2 million in 1997 (see NGI Feb. 15, 1999). Columbia said the1998 loss stemmed from costs of investment in infrastructure, asignificant investment for customer acquisition and certain tradinglosses. During the fourth quarter, “certain unusual tradingactivity” resulted in a loss, which when combined with all othergas trading positions, caused a net loss of $6.5 million andreduced the gross margin to $42.7 million, Columbia said. Thecompany has taken “corrective action designed to prevent similarincidents from recurring.”
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.
NiSource, which has state and federal lawsuits in progressagainst Columbia, offered to acquire Columbia for $5.7 billion, or$68 per share in cash, an amount several analysts have said fallsshort of Columbia’s actual value. Columbia has repeatedly rejectedthe offer. In the meantime, a number of U.S. and foreign electriccompanies have emerged as potential third-party suitors forColumbia (see NGI July 19, 1999). U.S. companies reputed to beeyeing Columbia are ComEd of Chicago parent Unicom Corp; Ohio-basedCinergy Corp., which has the 12th largest investor-owned utilitysystem in the nation; and FirstEnergy Corp., whose utilities serveOhio, Indiana and Kentucky. Also, KeySpan Energy, parent ofBrooklyn Union Gas of New York, was said to be “very interested” inthe company.
“As we have stated from day one, we continue to view the$68/share NiSource offer as inadequate and continue to believe thatat the end of the day, Columbia will work to generate highernear-term shareholder value while likely finding a moresuitable/lucrative/friendly offer from another entity down theroad,” Yannello’s PaineWebber research note released last weeksaid.
As for CES, the company will focus on the retail market whereits geographic footprint gives it an advantage, said CES CEO BrianWatt. “Columbia’s principal operations are in the East, amidst adozen key states expected to provide the best retail opportunitiesas deregulation of gas and electrical power markets proceeds.Therefore, we intend to concentrate our resources on developingthese opportunities. The recently announced consolidation of ourretail businesses in Herndon, VA, and refocusing of our retailoperations both are aimed at 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.
“We had been skeptical of Columbia’s ability to earn adequatereturns in the highly competitive wholesale natural gas/electricitymarkets where size, scope and scale truly separate the winners fromthe losers,” the PaineWebber research note said.
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.”
A Columbia spokesman turned down NGI’s request for an interviewwith company officials. Companies with an interest in acquiring thebusiness should contact Dennis Pick, Columbia Energy Group ServiceCorp., at (703)561-6797.
Joe Fisher, Houston
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