CNG Leaves Wholesale, Others May Follow
The roster of energy marketers still is in flux as evidenced by
last week's announcement by Consolidated Natural Gas (CNG) that it
will exit wholesale marketing and trading to focus on retail.
Consultant Ben Schlesinger said he expects others to forsake the
wholesale business. Those who stay will be making their money
offering multiple commodities, risk management, balancing,
rebundled products and other services. "It's still a very
attractive business, and I think it's going to remain so. There are
still no barriers to entry, and that's one reason we expect to see
new marketers come into the fold. But the expertise level is
CNG said thin margins prompted its shift in strategy, which
comes on the heels of the March announcement it will take a $20 to
$25 million loss in Energy Services to close out electricity
"Wholesale margins across the industry have been driven to
virtually zero," said CNG CEO George A. Davidson Jr. "We believe
that the time, cost and risk involved in further scaling up a
wholesale marketing and trading company at this stage of market
maturity are too great to justify, given the potential rewards. We
therefore have decided to devote our attention and resources to
other opportunities that will better enable us to meet our
five-year goals of increasing income by an average of 10% a year
and obtaining half our income from exploration and production,
international and retail energy marketing operations."
CNG spokespersons last week declined to make officials available
for further comment on the company's decision.
CNG said all existing wholesale customer, supplier and partner
commitments will be honored, at least some by third parties. The
company will close offices in suburban Pittsburgh and in Norwalk,
CT. About 125 layoffs are expected. Retail marketing employees will
not be affected. The exit from unregulated wholesale marketing will
cause a pretax charge of between $55 million and $75 million
against first quarter earnings. The company said it will report
first-quarter earnings Thursday and will no longer report financial
results for energy marketing services as a separate segment.
CNG's unregulated energy marketing services segment had a pretax
operating loss of $17.1 million last year versus a loss of $9.1
million in 1996. The higher loss in 1997 resulted mostly from
establishment of reserves for pipeline settlements and receivables.
Lower gross margins and higher overhead costs also contributed, the
company said. Gas sales were 838.7 Bcf last year (2.3 Bcf/d), up
from 422.6 Bcf (1.16 Bcf/d) in 1996. A spokesman said the company
was averaging 3 Bcf/d in the first quarter of this year.
Electricity marketed in 1997 totaled 25.2 million MWh, five times
the volume of 1996. "The energy marketing business is not yet
profitable, but has established itself as an important competitor
in a marketplace that is still growing and changing rapidly,"
Davidson said in February.
In May 1997, Davidson told shareholders the company was
expanding its business in unregulated aspects of the energy
industry, including wholesale energy marketing. A year earlier, the
company had added offices in Portland and Atlanta ("to serve
wholesale and emerging retail markets") to existing offices in
Pittsburgh and Houston. In 1996, the company also participated in
the first day of electricity futures trading on the New York
Mercantile Exchange. Among CNG's wholesale contracts is a
three-year deal signed in February with Ormet Corp. for 12 Bcf of
annual supply at eight facilities. The deal followed a CNG
agreement signed in June 1997 with Ormet to manage $1 billion in
electricity over 10 years at two of the company's Ohio facilities.
CNG's abandonment of the wholesale market was applauded by
PaineWebber's natural gas group and its analyst Ron Barone. The
firm recommended CNG abandon wholesale at the time it pre-announced
the $20 to $25 million hit to first quarter earnings. "We are
pleased to see that CNG's management has been proactive in promptly
resolving this problem and that they will now have substantially
more time to focus on growing the unregulated portion of the
company's earnings (such as through E&P acquisitions),"
PaineWebber said. Barone said there are too many wholesale players
and he expects smaller companies to either exit the business or
form joint ventures to attain critical mass. As the wholesale
market evolves, it will become the province of large players such
as Enron, NGC, Engage, and Shell, he said.
Schlesinger, president of Benjamin Schlesinger and Associates,
Bethesda, MD, which follows marketers, said he is not surprised to
see CNG exit the wholesale business. "CNG's expertise is clearly
downstream. They run some fine LDCs. They clearly have strength in
the retail market through their LDC functions, and it doesn't
surprise me that they are going to focus downstream. That doesn't
mean that there are no margins upstream."
Marketers Directory Grows
Schlesinger's firm publishes an annual directory of marketers,
which every year sees a good bit of churn among the players, with
some dropping out and new faces coming in. Last year's directory
lost 40 companies from the year before that either quit operating
or merged (CNG's marketing business had hinted at forming an
alliance), but there also were 79 new marketers in the directory,
Schlesinger said. Data gathered for the 1998 directory shows the
same trend of comings and goings. "The retail opportunities are
clearly still attracting new entrants. Secondly, the
cross-commodity opportunities are attracting new entrants. And
third, the increasing liquidity of trading that's enabled by screen
trading - more and more spot trades are done on the screen than on
the phone - and some traditional commodities traders are coming
into the business."
CNG said it will continue to compete in the unregulated retail
marketplace. Doing business as Peoples Plus and East Ohio Energy,
the company sells gas and electricity and other products and
services to homeowners and small businesses in Pennsylvania and
Ohio. In December, CNG Energy Services touted that it was providing
gas and power to more than 100,000 residential and small business
customers, making it the first domestic non-utility marketer to
reach the 100,000 milestone. CNG began signing up mass market
customers in April 1997. "We intend to quickly become a convenient
one-stop shop where homeowners, apartment dwellers and
small-business operators can choose from a large menu of products
and services in areas such as discount shopping, home and office
security, appliance and home repair, and Internet access," said
Joseph H. Petrowski, president of CNG Energy Services.
In February, CNG Energy Services announced a marketing agreement
with Cendant Corp. The companies will offer the program
CompleteHome to more than 1.5 million CNG customers in its Ohio and
Pennsylvania markets. CompleteHome offers consumers discounts on
name-brand home products and services. Cendant has been in the news
recently after announcing accounting irregularities at one of its
"Within the growing competitive marketplace for energy, we
believe the best prospects for profitable growth are occurring on
the retail side, and we intend to continue to build on our very
strong position in this part of the business," Davidson said. "CNG
already is the largest non-utility retail energy marketer in the
U.S. We do not see the same opportunities to build shareholder
value in wholesale marketing and trading, despite our determined
efforts over the last five years."
Joe Fisher, Houston