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1Q99 Marketing Results Show Increased Volumes

1Q99 Marketing Results Show Increased Volumes

The demonstrative trend among the top energy marketers appears to be that the big movers continue getting much bigger while the smaller marketers are struggling to maintain previous sales volumes and profitability, according to NGI's marketing survey. The survey also indicates volume growth has very little correlation with financial performance.

Only five of the top-20 gas marketers saw their sales volumes decline from the first quarter of 1998 to 1Q99: Engage, El Paso, Williams, Texaco and Sonat. And six of the top-20 power marketers reported lower volumes compared to the same quarter in 1998: Duke, Entergy, Dynegy, Reliant, Statoil and PacifiCorp. But a significant number reported declines in profitability.

On average the gas group grew volumes by 1.2 Bcf/d, while the top-20 power marketers added 4.6 million MWh to their sales. The gas group sold a total of 133 Bcf/d of gas and the power group sold 409 million MWh.

Enron once again topped both lists with 85 million MWh of power sales and 12.5 Bcf/d of gas sales. And the company reported a strong 28.5% growth in operating income from its wholesale marketing and services operations, posting $320 million in the first quarter compared with $249 million in 1Q98.

But the contrast between volume growth, or decline, and financial performance showed up significantly in Dynegy's results. Operating margin from Dynegy's power marketing and generation jumped to $37.4 million in 1Q99 from only $7.1 million in 1Q98 despite a near 50% drop in power marketing volumes to 13.1 million MWh from 25 million MWh. The company fell to No. 12 in the power ranking from No. 7

Based on pure volume performance, PG&E Energy Trading appears to be improving substantially but the full story won't be told until the company releases its earnings later this month. PG&E Energy Trading has moved right up on Enron's heels in gas marketing, jumping to No. 2 in the first quarter from No. 4 in last year's fourth quarter, riding a 4.37 Bcf/d increase in volumes.

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

Aquila said earnings from its wholesale power unit improved dramatically from the prior year with good performance in both term origination and trade operations. But in gas, a warmer-than-normal winter slowed origination opportunities and reduced margins in trade operations.

Engage Energy continued to report dwindling volume results during the first quarter but the company reported a slight improvement in its financial performance. Engage parent Westcoast Energy reported that marketing operations incurred a net loss applicable to common shares of $3 million for the first quarter of 1999 compared with a net loss of $7 million in 1998. Westcoast said the reduction in the net loss was a result of "focusing on higher-value services. Engage Energy's Canadian operations and individually structured natural gas and electricity trading arrangements for customers in the United States have been successful and continue to grow."

After posting a 7% gain in gas volumes from July to September of 1998, Engage posted decreased volumes in both the fourth quarter of 1998 and first quarter of 1999. With the latest drop of more than 12% to 6.38 Bcf/d, Engage fell to ninth place. With power volumes plummeting 65% on the power side to only 1.9 million MWh, Engage has some significant ground to make up to reach the top-20.

The company biting at Engage's heels on the gas side, Columbia Energy, has been rising by leaps and bounds since 3Q98. The first quarter 1999 marked the second straight 50% rise in gas sales volumes for the Virginia-based integrated pipeline company.

But Columbia's marketing division reported an operating loss of $21.5 million for the quarter, which was $16 million more than the $5.5 million loss in 1Q98. Columbia attributed the loss to increased retail customer acquisition costs, infrastructure investments and additional staffing, as well as an effort to temporarily scale down wholesale marketing operations until a restructuring of the division is complete and a new senior officer is found. Total gross marketing margins dropped $5.7 million.

Columbia CFO Michael W. O'Donnell said despite the volume growth Columbia "significantly cut back on the amount of risk activity in the company," since trading snafus contributed to a fourth quarter loss of $39.4 million and a loss for the year of $59 million. "We've moved the management of the books, the marking of the prices in the books, from the front office to the mid-office. We think that's a much better risk management practice than we had before. In addition to that, we're just doing a lower level of trading activity generally."

Another company achieving a 50% increase in gas marketing volume was Sempra Energy, which added CNG's energy marketing portfolio late last year. The rise placed the San Diego-based marketer in 12th place, up two spots from its 4Q98 ranking. This is the third straight quarter Sempra has posted a volume increase of 50%.

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

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

Duke's Gas Sales Jump, Power Falls

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

Brad Karp, president of the North Carolina-based company's marketing and trading division said all signs are pointing to prolonged positive results.

"We are very encouraged by the power division's performance. We aren't a volume-based company, so the decline isn't very worrisome. What impresses us is the quality of the sales improved. We bought more power directly from generators and sold more power to end users and to distribution companies. Less of our volumes were included in the daisy chains that are so common in the power market these days."

One company losing major ground in the power ranking was Pacificorp. After knocking on the door of the top-10 in 4Q98 with an 11th place finish, the Oregon-based company plummeted to 17th place in 1999's first quarter. Power volumes were down 62% from 1Q98 finishing at 7.59 MMWh.

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

Reliant's posted a 32% increase in gas volumes but power volumes declined 27%. The company's wholesale energy segment reported an increase in operating income to $1.2 million for the first quarter of 1999 compared to $0.5 million for the same period of 1998. The company said it showed improved operating results from trading and marketing activities, but those were offset by operating expenses related to investments in non-regulated generating assets whose earnings are seasonal. Reliant acquired 3,776 MW of non-regulated generating capacity in the second quarter of 1998.

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

"The national commercial energy business will be dominated by companies like ours that understand markets, have strong fundamentals, and are able to cost-effectively move energy and related services to customers across the country," Matthews stated.

But the contrast between volume growth and financial struggle during the first quarter at least reveals that the future is far from certain for the wholesale marketing community and significant consolidation lies ahead.

Enron Withdraws EOG Proposal

Enron announced it has notified the independent committee of the board of directors of Enron Oil & Gas Company that the Enron Corp. has withdrawn the previously announced proposal made by a third party relating to the sale of Enron's 53.5% interest in EOG. In light of the withdrawal, Enron has filed an amendment to its Schedule 13D with the Securities and Exchange Commission.

"Our principal motivation in evaluating offers for our interest in EOG has always been, and will continue to be, maximizing the value of that investment to Enron's shareholders," said Kenneth L. Lay, Enron chairman and CEO. "We will continue to explore opportunities to maximize the value of our investment in EOG."

Enron notified the SEC last December the third party would acquire Enron's shares in EOG and make an offer for all the outstanding shares. At the time EOG's stock price had sunk to around $13 a share. It has moved up since then and closed Friday above $18 a share.

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