CNG Leaves Wholesale, Others May Follow
The roster of energy marketers still is in flux as evidenced by last week's announcement by Consolidated Natural Gas (CNG) that it will exit wholesale marketing and trading to focus on retail.
Consultant Ben Schlesinger said he expects others to forsake the wholesale business. Those who stay will be making their money offering multiple commodities, risk management, balancing, rebundled products and other services. "It's still a very attractive business, and I think it's going to remain so. There are still no barriers to entry, and that's one reason we expect to see new marketers come into the fold. But the expertise level is getting challenging."
CNG said thin margins prompted its shift in strategy, which comes on the heels of the March announcement it will take a $20 to $25 million loss in Energy Services to close out electricity positions.
"Wholesale margins across the industry have been driven to virtually zero," said CNG CEO George A. Davidson Jr. "We believe that the time, cost and risk involved in further scaling up a wholesale marketing and trading company at this stage of market maturity are too great to justify, given the potential rewards. We therefore have decided to devote our attention and resources to other opportunities that will better enable us to meet our five-year goals of increasing income by an average of 10% a year and obtaining half our income from exploration and production, international and retail energy marketing operations."
CNG spokespersons last week declined to make officials available for further comment on the company's decision.
CNG said all existing wholesale customer, supplier and partner commitments will be honored, at least some by third parties. The company will close offices in suburban Pittsburgh and in Norwalk, CT. About 125 layoffs are expected. Retail marketing employees will not be affected. The exit from unregulated wholesale marketing will cause a pretax charge of between $55 million and $75 million against first quarter earnings. The company said it will report first-quarter earnings Thursday and will no longer report financial results for energy marketing services as a separate segment.
CNG's unregulated energy marketing services segment had a pretax operating loss of $17.1 million last year versus a loss of $9.1 million in 1996. The higher loss in 1997 resulted mostly from establishment of reserves for pipeline settlements and receivables. Lower gross margins and higher overhead costs also contributed, the company said. Gas sales were 838.7 Bcf last year (2.3 Bcf/d), up from 422.6 Bcf (1.16 Bcf/d) in 1996. A spokesman said the company was averaging 3 Bcf/d in the first quarter of this year. Electricity marketed in 1997 totaled 25.2 million MWh, five times the volume of 1996. "The energy marketing business is not yet profitable, but has established itself as an important competitor in a marketplace that is still growing and changing rapidly," Davidson said in February.
In May 1997, Davidson told shareholders the company was expanding its business in unregulated aspects of the energy industry, including wholesale energy marketing. A year earlier, the company had added offices in Portland and Atlanta ("to serve wholesale and emerging retail markets") to existing offices in Pittsburgh and Houston. In 1996, the company also participated in the first day of electricity futures trading on the New York Mercantile Exchange. Among CNG's wholesale contracts is a three-year deal signed in February with Ormet Corp. for 12 Bcf of annual supply at eight facilities. The deal followed a CNG agreement signed in June 1997 with Ormet to manage $1 billion in electricity over 10 years at two of the company's Ohio facilities.
CNG's abandonment of the wholesale market was applauded by PaineWebber's natural gas group and its analyst Ron Barone. The firm recommended CNG abandon wholesale at the time it pre-announced the $20 to $25 million hit to first quarter earnings. "We are pleased to see that CNG's management has been proactive in promptly resolving this problem and that they will now have substantially more time to focus on growing the unregulated portion of the company's earnings (such as through E&P acquisitions)," PaineWebber said. Barone said there are too many wholesale players and he expects smaller companies to either exit the business or form joint ventures to attain critical mass. As the wholesale market evolves, it will become the province of large players such as Enron, NGC, Engage, and Shell, he said.
Schlesinger, president of Benjamin Schlesinger and Associates, Bethesda, MD, which follows marketers, said he is not surprised to see CNG exit the wholesale business. "CNG's expertise is clearly downstream. They run some fine LDCs. They clearly have strength in the retail market through their LDC functions, and it doesn't surprise me that they are going to focus downstream. That doesn't mean 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, with some dropping out and new faces coming in. Last year's directory lost 40 companies from the year before that either quit operating or merged (CNG's marketing business had hinted at forming an alliance), but there also were 79 new marketers in the directory, Schlesinger said. Data gathered for the 1998 directory shows the same trend of comings and goings. "The retail opportunities are clearly still attracting new entrants. Secondly, the cross-commodity opportunities are attracting new entrants. And third, the increasing liquidity of trading that's enabled by screen trading - more and more spot trades are done on the screen than on the phone - and some traditional commodities traders are coming into the business."
CNG said it will continue to compete in the unregulated retail marketplace. Doing business as Peoples Plus and East Ohio Energy, the company sells gas and electricity and other products and services to homeowners and small businesses in Pennsylvania and Ohio. In December, CNG Energy Services touted that it was providing gas and power to more than 100,000 residential and small business customers, making it the first domestic non-utility marketer to reach the 100,000 milestone. CNG began signing up mass market customers in April 1997. "We intend to quickly become a convenient one-stop shop where homeowners, apartment dwellers and small-business operators can choose from a large menu of products and services in areas such as discount shopping, home and office security, appliance and home repair, and Internet access," said Joseph H. Petrowski, president of CNG Energy Services.
In February, CNG Energy Services announced a marketing agreement with Cendant Corp. The companies will offer the program CompleteHome to more than 1.5 million CNG customers in its Ohio and Pennsylvania markets. CompleteHome offers consumers discounts on name-brand home products and services. Cendant has been in the news recently after announcing accounting irregularities at one of its divisions.
"Within the growing competitive marketplace for energy, we believe the best prospects for profitable growth are occurring on the retail side, and we intend to continue to build on our very strong position in this part of the business," Davidson said. "CNG already is the largest non-utility retail energy marketer in the U.S. We do not see the same opportunities to build shareholder value in wholesale marketing and trading, despite our determined efforts over the last five years."
Joe Fisher, Houston
©Copyright 1998 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.