The trend among the top energy marketers appears to be that thebig movers continue getting much bigger while the smaller marketersare struggling to maintain previous sales volumes andprofitability, according to NGI’s marketing survey. The survey alsoindicates volume growth has very little correlation with financialperformance.

Fifteen of the top-20 gas marketers saw their sales volumesincrease or remain flat from the first quarter of 1998 to 1Q99. Andfourteen of the top-20 power marketers reported higher volumescompared to the same quarter in 1998. But a significant number ofmarketing companies also reported declines in profitability.

On average, the gas group grew volumes by 1.2 Bcf/d and sold atotal of 133 Bcf/d, while the top-20 power marketers added 4.3million MWh to their sales, and grew volumes to 402 million MWh.

Enron once again topped both lists with 85 million MWh of powersales and 12.5 Bcf/d of gas sales. And the company reported strong28.5% growth in operating income from its wholesale marketing andservices operations, posting $320 million in the first quartercompared with $249 million in 1Q98.

But the contrast between volume growth, or decline, andfinancial performance showed up significantly in Dynegy’s results.Operating margin from Dynegy’s power marketing and generationjumped to $37.4 million in 1Q99 from only $7.1 million in 1Q98despite a near 50% drop in power marketing volumes to 13.1 millionMWh from 25 million MWh. The company fell to No. 12 in the powerranking from No. 7

Based on pure volume performance, PG&ampE Energy Trading appearsto be improving substantially but the full story won’t be tolduntil the company releases its earnings later this month. PG&ampEEnergy Trading has moved right up on Enron’s heels in gasmarketing, jumping to No. 2 in the first quarter from No. 4 in lastyear’s fourth quarter, riding the strength of a 4.37 Bcf/d increasein volumes.

PG&ampE Energy Trading spokeswoman Debbie Witmer attributed hercompany’s more than 54% growth in gas volume marketed mainly tochanges in the company’s portfolio. PG&ampE Energy Trading isintegrating the fuel supply of non-regulated U.S. Generating aswell as PG&ampE’s Energy Services business. “Some of that increaseis due to the continued integration of the portfolio, which is nowbeing handled by Energy Trading.”

Witmer said PG&ampE Energy is not focused just on volume. “Overtime, say a two- or three-year period, we do expect to see healthygrowth, but these swings up and down are kind of the result oflong-term deals dropping out and new deals coming in. I’d say ourfocus is on profitability, which can come with volumes, but notalways.”

Although Aquila Energy saw an almost 2 Bcf/d rise (21%) in gassales, it fell to fourth place in the ranking. Power marketingvolumes soared 86% to 44 million MWh, pushing Aquila up a notch inthe rankings to second. But Aquila’s first quarter earnings beforeinterest and taxes suffered considerably, dropping 61% to $8.5million from 1998 first quarter EBIT of $21.7 million.

Aquila said earnings from its wholesale power unit improveddramatically from the prior year with good performance in both termorigination and trade operations. But in gas, a warmer-than-normalwinter slowed origination opportunities and reduced margins intrade operations. “The unfavorable gas environment and the costs ofa number of new growth initiatives were only partially offset bythe higher performance in power, resulting in a decline of $3.1million in EBIT compared to the 1998 quarter,” the company said ina statement. Aquila is expecting significant improvement this yearbecause it added several strategic midstream assets that complementits existing portfolio and leverage its capabilities in marketingand trading. It is buying the 20 Bcf gas storage facility at theKaty hub in Texas from Western Gas, beginning development of a500-MW combined cycle power plant in Missouri and obtaining themarketing rights to Oasis Pipe Line’s short-term transportationcapacity.

Engage Volumes Fall, Results Improve

Engage Energy continued to report dwindling volume resultsduring the first quarter, but the company reported a slightimprovement in its financial performance. Engage parent WestcoastEnergy reported that marketing operations incurred a net lossapplicable to common shares of $3 million for the first quarter of1999 compared with a net loss of $7 million in 1998. Westcoast saidthe reduction in the net loss was a result of “focusing onhigher-value services. Engage Energy’s Canadian operations andindividually structured natural gas and electricity tradingarrangements for customers in the United States have beensuccessful and continue to grow.”

After posting a 7% gain in gas volumes from July to September of1998, Engage posted decreased volumes in both the fourth quarter of1998 and first quarter of 1999. With the latest drop of more than12% to 6.38 Bcf/d, Engage fell to ninth place. With power volumesplummeting 65% on the power side to only 1.9 million MWh, Engagehas some significant ground to make up to reach the top-20.

The company biting at Engage’s heels on the gas side, ColumbiaEnergy, has been rising by leaps and bounds since 3Q98. The firstquarter of 1999 marked the second straight 50% rise in gas salesvolumes for the Virginia-based integrated pipeline company.

Columbia Volumes Soar

“I think its just good old-fashioned ‘blocking and tackling,'”said Columbia spokesman Simon Ruebens. “We consider our gasmarketing an important tool that will build our non-regulatedbusinesses, and it has grown commensurate with our success at theretail and large account level.”

Despite strong “blocking and tackling” that led to the soaringvolume growth, however, Columbia’s marketing division continues tostruggle where it counts: near the goal line. It’s marketingsegment, retail and wholesale, reported an operating loss of $21.5million for the quarter, which was $16 million more than the $5.5million loss in 1Q98. Columbia attributed the loss to increasedretail customer acquisition costs, infrastructure investments andadditional staffing, as well as an effort to temporarily scale downwholesale marketing operations until a restructuring of thedivision is complete and a new senior officer is found. Total grossmarketing margins dropped $5.7 million.

“This dramatic growth has placed Columbia Energy Services amongthe nation’s leading marketing companies for retail energycustomers and for [wholesale] gas and power trading,” CEO Oliver G.Richard III said in a statement. “However, the growth has strainedthe company’s marketing infrastructure, highlighting areas thatneed improvement.”

Columbia CFO Michael W. O’Donnell said despite the volume growthColumbia “significantly cut back on the amount of risk activity inthe company,” since trading mistakes contributed to a fourthquarter loss of $39.4 million and a loss for the year of $59million (see NGI Feb. 15). “We’ve moved the management of thebooks, the marking of the prices in the books, from the frontoffice to the mid-office. We think that’s a much better riskmanagement practice than we had before. In addition to that, we’rejust doing a lower level of trading activity generally.” Richardsaid he expects the wholesale operations will make a profit thisyear and retail marketing will break even. Columbia is activelylooking for a senior executive to manage all of its unregulateddivisions, he added.

Another company achieving a 50% increase in gas marketing volumewas Sempra Energy, which added CNG’s energy marketing portfoliolate last year. The rise placed the San Diego-based marketer in12th place, up two spots from its 4Q98 ranking. This is the thirdstraight quarter Sempra has posted a volume increase of 50%.

Sonat Marketing appears to be headed in the opposite directionof Sempra. It posted a decrease in volumes marketed for the thirdstraight quarter. The 1Q99 drop was the most significant, however,as the volumes fell 20% from 1Q98 levels.

“The explanation for our falling physical volumes is that wehave been concentrating on trading financial volumes. That is notto say we don’t think the physical side is important, but we’vefound a strong market for dealing with financial instruments and wehope that will continue,” said Bruce Connery, a Sonat spokesman.

One result of the poor performance was that Atlanta Gas Light(AGL) announced its intention to sell its 35% interest in SonatMarketing. Due to disappointing results from the venture, includinga $3.5 million non-recurring accounting charge last quarter, AGLexercised its option to sell its interest back to Sonat for no lessthan the original investment plus interest. The AGL announcement,however, also allowed Sonat to buy back from AGL a 35% share inSonat Power Marketing last Friday.

Duke’s Gas Sales Jump

Despite a 9% decline in power volumes to 21.8 million MWh, DukeEnergy’s trading and marketing operation, reported EBIT of $33million versus $13 million for the same quarter last year. A 39%increase in the amount of natural gas marketed helped boostmargins. Duke sold 11.4 Bcf/d of gas during 1Q99.

“Our trading and marketing operations continue to grow and turnin solid results,” said CEO Richard Priory. “We have managed togrow the business through very different market conditions – fromlast year’s volatile summer to the more calmer conditions of thisquarter.”

Brad Karp, president of the North Carolina-based company’smarketing and trading division, said all signs are pointing toprolonged positive results.

“We are very encouraged by the power division’s performance. Wearen’t a volume-based company, so the decline isn’t very worrisome.What impresses us is the quality of the sales improved. We boughtmore power directly from generators and sold more power to endusers and to distribution companies. Less of our volumes wereincluded in the daisy chains that are so common in the power marketthese days.”

One company losing major ground in the power ranking wasPacificorp. After knocking on the door of the top-10 in 4Q98 withan 11th place finish, the Oregon-based company plummeted to 17thplace in 1999’s first quarter. Power volumes were down 62% from1Q98 finishing at 7.59 MMWh.

“Our volumes were down as a result of our new focus,” said DaveKvamme, a Pacificorp spokesman. “Last year at this time, we had amajor power marketing office in Ohio, a trading floor in Houstonand an unregulated trading office here in Oregon. Now, the Ohiooffice and the Houston trading floor have been sold, and the Oregonoffice is pursuing other options. We are more focused on ourelectric operations in our core area, as well as Australia.”

Gas Rises, Power Falls for Reliant

Reliant posted a 32% increase in gas volumes. Power volumesdeclined 27%. And the financial performance of wholesale energyoperations improved.

Reliant’s marketing segment reported an increase in operatingincome to $1.2 million for the first quarter of 1999 compared to$0.5 million for the same period of 1998. The company said itimproved operating results from trading and marketing activities,were offset by operating expenses related to investments innon-regulated generating assets whose earnings are seasonal. Thecompany acquired 3,776 MW of non-regulated generating capacity inthe second quarter of 1998.

Avista Corp.’s national energy trading and marketing businessunit, which showed 148% growth in power volumes and 191% growth ingas volumes to 2.4 Bcf/d, suffered a loss of $0.14 per dilutedshare in the first quarter. This compares with $0.03 per dilutedshare positive earnings from national energy trading and marketingin the first quarter of 1998. Prior to this year’s first quarter,Avista Energy had been profitable in every quarter since it beganoperating as a separate entity in July of 1997, said CEO T.M.Matthews, who expressed confidence in Avista’s ability to competeand succeed in the national energy marketplace.

“The national commercial energy business will be dominated bycompanies like ours that understand markets, have strongfundamentals, and are able to cost-effectively move energy andrelated services to customers across the country,” Matthews stated.”With our first quarter acquisition of Vitol Gas &amp Electric, wehave strengthened our experience and our coast-to-coast marketposition, improved our systems trading capability, and furtherdiversified Avista Energy into other fuels markets.”

But the contrast between volume growth and financial struggleduring the first quarter at least reveals that the future is farfrom certain for the wholesale marketing community and significantconsolidation lies ahead.

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