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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 year.
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 for 1999.
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 invoice.
"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."
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