Other Retailers Keep Rolling Over as Enron Gets Even Stronger
By agreeing last week to sell the stock of its retail marketing
arm to Enron Energy Services Operations Inc. for $85 million,
PG&E National Energy Group not only trimmed non-profitable
assets from its portfolio, but perpetuated an industry-wide trend
of major companies exiting the retail arena.
PG&E painted the move as another step in its refocusing
effort. "This transaction frees up additional resources that we
will redirect to support our plans to aggressively expand and grow
the competitive wholesale generation, energy commodities trading,
and natural gas services businesses of the National Energy Group,"
said Thomas G. Boren, CEO of the PG&E National Energy Group.
Renee Parnell, a PG&E National Energy Group spokeswoman,
said PG&E Energy Services provides energy to "hundreds of
business and institutional customers, as well as 2,500 small
business and residential customers across the country." She did not
disclose the gas or electricity volumes.
The agreement does not represent a sale of the entire unit.
"Essentially, we sold the supply contracts to EES," said Parnell.
The company is currently reviewing offers from parties interested
in acquiring the rest of the retail unit including value-added
services and certain infrastructure assets.
The sale is subject to FERC and other regulatory reviews. It is
expected to be completed by the close of the second quarter this
PG&E said it received offers from several parties interested
in acquiring all or a portion of the retail energy services unit.
The transaction was done expeditiously, Boren said. "The
announcement of this transaction, which comes about four months
following our decision to exit the retail energy services business,
demonstrates the speed and intensity with which we are implementing
our strategy to grow financial performance and shareholder value."
Since Boren arrived from Southern Co. last August, PG&E's
National Energy Group has aggressively sought ways to unload the
assets that weren't meeting its financial targets. In January, the
group gave up on the Texas liquids and gathering business it
purchased from Valero Energy and Teco in 1997 for more than $1
billion and sold them to El Paso Energy Services for $840 million
(see NGI, Feb. 7).
The retail arm and the Texas assets were the two largest drags
on PG&E's earnings for 1999. The company posted an overall loss
of 20 cents/share ($71 million) despite growing revenues from its
utility, generation, commodity trading and gas pipeline businesses.
The Texas asset sale caused a $2.42/share charge and the energy
services unit caused a 16 cent/share charge on the total earnings
Over the past few months, more and more companies have left the
retail marketing arena. Speaking at GasMart/Power 2000 last week in
Denver, Brian Watt, the CEO of Columbia Energy Services, forecast a
major shake-out of retail marketers over the next five years.
According to Watt, the industry could mirror the path of the
telecommunications industry after it deregulated, where market
participants dwindled from 400 to less than 10.
CES was an active participant in retail markets, signing more
than 300,000 customers all over the country. However, Watt said CES
is re-evaluating its approach to marketing altogether. Earlier this
year, CES sold its wholesale marketing operations to Enron for
$38.3 million (see NGI, Nov. 29, 1999).
For CES, the optimism regarding retail markets is gone. "We
started off with the perception of a national mass market. We
envisioned something like the Sprint or AT&T model. Go out. Get
a whole bunch of customers, then spread the fixed costs over large
amounts of people and live happily ever after. Well guess what?
It's a local market, not a national one.. The regulatory process is
local. So that vision of taking a $340 billion business and getting
a market share of it may look great, but getting there is a lot
tougher," Watt said.
And there are others. Earlier this year both DTE Energy and
Cinergy entirely pulled out of the retail marketing arena, saying
the markets are not developed enough to turn serious profits.
Sierra Pacific has gone to court against the Public Utilities
Commission of Nevada recently to halt that state's electric
deregulation efforts, saying the process would be detrimental to
its customers and shareholders.
While Watt talked about the difficulties around the retail
business, he said he still thinks deregulation is the right path
for the industry to take. "I've lived in the United Kingdom and
other places abroad. I've seen what too much regulation can do.
Deregulated retail markets will happen I think, but it will take
longer than many people originally thought.
For Enron, however, the PG&E Energy Services deal increases
the powerful reach of its energy services arm. The PG&E
transaction was just one of three major deals the company signed
last week, including a six-year, $210 million energy management and
supply contract with Sonoco and similar 10-year, $610 million deal
with International Business Machines Corp. (IBM).
The Sonoco pact is designed to ensure electricity savings at
more than 150 Sonoco manufacturing plants and facilities
nationwide. Enron will provide or manage the electricity supply to
Sonoco's facilities, as well as provide related energy management
services, including analysis and consolidation of energy
expenditures and assumption of energy price risk.
"Although Sonoco's energy management capability is extensive,
Enron's expertise at managing large, nationwide energy portfolios
has uncovered significant energy commodity savings," said Enron
Energy Services CEO Lou Pai. Charles Coker, vice president of
Procurement and Logistics for Sonoco, said the agreement enables
Sonoco to manage energy costs and enhance productivity.
Sonoco, founded in 1899, is a $2.5 billion global manufacturer
of industrial and consumer packaging products and provider of
packaging services with 285 operations in 33 countries serving
customers in 85 nations.
The IBM deal calls for Enron to supply or procure electricity
for several IBM facilities across the United States, reducing IBM's
exposure to price volatility and providing it with a single monthly
"This agreement marks the beginning of a relationship that will
allow IBM to use Enron's expertise as a nationwide leader in the
energy industry to control the energy costs inherent in all lines
of their business," said Lou Pai, CEO of Enron Energy Services. IBM
is the world's largest information technology company. With
headquarters in Armonk, New York, IBM has nearly 300,000 employees
in more than 160 countries.
While other marketers struggle, EES has turned into one of
Enron's most profitable businesses. The unit nearly doubled its
revenue from $370 million of revenues and a $31 million loss 1Q99
to $642 million of revenues and an income before interest and taxes
of $16 million in the first quarter of 2000.
"PG&E is so locked in to its refocusing strategy and
jettisoning everything else that they are putting some good
bargains on the market," said Merrill Lynch analyst Donato Eassey.
"The old Valero and Teco sale was good for El Paso and I wouldn't
be surprised if this turns out well for Enron too."