The roster of energy marketers still is in flux as evidenced bylast week’s announcement by Consolidated Natural Gas (CNG) that itwill exit wholesale marketing and trading to focus on retail.

Consultant Ben Schlesinger said he expects others to forsake thewholesale business. Those who stay will be making their moneyoffering multiple commodities, risk management, balancing,rebundled products and other services. “It’s still a veryattractive business, and I think it’s going to remain so. There arestill no barriers to entry, and that’s one reason we expect to seenew marketers come into the fold. But the expertise level isgetting challenging.”

CNG said thin margins prompted its shift in strategy, whichcomes on the heels of the March announcement it will take a $20 to$25 million loss in Energy Services to close out electricitypositions.

“Wholesale margins across the industry have been driven tovirtually zero,” said CNG CEO George A. Davidson Jr. “We believethat the time, cost and risk involved in further scaling up awholesale marketing and trading company at this stage of marketmaturity are too great to justify, given the potential rewards. Wetherefore have decided to devote our attention and resources toother opportunities that will better enable us to meet ourfive-year goals of increasing income by an average of 10% a yearand obtaining half our income from exploration and production,international and retail energy marketing operations.”

CNG spokespersons last week declined to make officials availablefor further comment on the company’s decision.

CNG said all existing wholesale customer, supplier and partnercommitments will be honored, at least some by third parties. Thecompany will close offices in suburban Pittsburgh and in Norwalk,CT. About 125 layoffs are expected. Retail marketing employees willnot be affected. The exit from unregulated wholesale marketing willcause a pretax charge of between $55 million and $75 millionagainst first quarter earnings. The company said it will reportfirst-quarter earnings Thursday and will no longer report financialresults for energy marketing services as a separate segment.

CNG’s unregulated energy marketing services segment had a pretaxoperating loss of $17.1 million last year versus a loss of $9.1million in 1996. The higher loss in 1997 resulted mostly fromestablishment of reserves for pipeline settlements and receivables.Lower gross margins and higher overhead costs also contributed, thecompany said. Gas sales were 838.7 Bcf last year (2.3 Bcf/d), upfrom 422.6 Bcf (1.16 Bcf/d) in 1996. A spokesman said the companywas averaging 3 Bcf/d in the first quarter of this year.Electricity marketed in 1997 totaled 25.2 million MWh, five timesthe volume of 1996. “The energy marketing business is not yetprofitable, but has established itself as an important competitorin a marketplace that is still growing and changing rapidly,”Davidson said in February.

In May 1997, Davidson told shareholders the company wasexpanding its business in unregulated aspects of the energyindustry, including wholesale energy marketing. A year earlier, thecompany had added offices in Portland and Atlanta (“to servewholesale and emerging retail markets”) to existing offices inPittsburgh and Houston. In 1996, the company also participated inthe first day of electricity futures trading on the New YorkMercantile Exchange. Among CNG’s wholesale contracts is athree-year deal signed in February with Ormet Corp. for 12 Bcf ofannual supply at eight facilities. The deal followed a CNGagreement signed in June 1997 with Ormet to manage $1 billion inelectricity over 10 years at two of the company’s Ohio facilities.

CNG’s abandonment of the wholesale market was applauded byPaineWebber’s natural gas group and its analyst Ron Barone. Thefirm recommended CNG abandon wholesale at the time it pre-announcedthe $20 to $25 million hit to first quarter earnings. “We arepleased to see that CNG’s management has been proactive in promptlyresolving this problem and that they will now have substantiallymore time to focus on growing the unregulated portion of thecompany’s earnings (such as through E&ampP acquisitions),”PaineWebber said. Barone said there are too many wholesale playersand he expects smaller companies to either exit the business orform joint ventures to attain critical mass. As the wholesalemarket evolves, it will become the province of large players suchas Enron, NGC, Engage, and Shell, he said.

Schlesinger, president of Benjamin Schlesinger and Associates,Bethesda, MD, which follows marketers, said he is not surprised tosee CNG exit the wholesale business. “CNG’s expertise is clearlydownstream. They run some fine LDCs. They clearly have strength inthe retail market through their LDC functions, and it doesn’tsurprise me that they are going to focus downstream. That doesn’tmean 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, withsome dropping out and new faces coming in. Last year’s directorylost 40 companies from the year before that either quit operatingor merged (CNG’s marketing business had hinted at forming analliance), but there also were 79 new marketers in the directory,Schlesinger said. Data gathered for the 1998 directory shows thesame trend of comings and goings. “The retail opportunities areclearly still attracting new entrants. Secondly, thecross-commodity opportunities are attracting new entrants. Andthird, the increasing liquidity of trading that’s enabled by screentrading – more and more spot trades are done on the screen than onthe phone – and some traditional commodities traders are cominginto the business.”

CNG said it will continue to compete in the unregulated retailmarketplace. Doing business as Peoples Plus and East Ohio Energy,the company sells gas and electricity and other products andservices to homeowners and small businesses in Pennsylvania andOhio. In December, CNG Energy Services touted that it was providinggas and power to more than 100,000 residential and small businesscustomers, making it the first domestic non-utility marketer toreach the 100,000 milestone. CNG began signing up mass marketcustomers in April 1997. “We intend to quickly become a convenientone-stop shop where homeowners, apartment dwellers andsmall-business operators can choose from a large menu of productsand services in areas such as discount shopping, home and officesecurity, appliance and home repair, and Internet access,” saidJoseph H. Petrowski, president of CNG Energy Services.

In February, CNG Energy Services announced a marketing agreementwith Cendant Corp. The companies will offer the programCompleteHome to more than 1.5 million CNG customers in its Ohio andPennsylvania markets. CompleteHome offers consumers discounts onname-brand home products and services. Cendant has been in the newsrecently after announcing accounting irregularities at one of itsdivisions.

“Within the growing competitive marketplace for energy, webelieve the best prospects for profitable growth are occurring onthe retail side, and we intend to continue to build on our verystrong position in this part of the business,” Davidson said. “CNGalready is the largest non-utility retail energy marketer in theU.S. We do not see the same opportunities to build shareholdervalue in wholesale marketing and trading, despite our determinedefforts over the last five years.”

Joe Fisher, Houston

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