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Marketing Revenue Growth, Margin Shrinkage Remain the Norm

August 24, 1998
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Marketing Revenue Growth, Margin Shrinkage Remain the Norm

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High revenues and low margins will continue to be the plight in the energy marketing industry as consolidation continues over the next five years, a new study, North American Wholesale Energy Marketers, by the California consulting firm Frost and Sullivan concludes.

"Yes I do think margins will continue to shrink if at all possible. There's not much more room for them to go down much further. But I don't think they'll be going up anytime soon," said energy analyst Susan Hutchinson, the author of the report. "In the next five years, I see the industry consolidating a lot. There's going to be five, six or seven really huge marketers, probably Enron, Dynegy, Duke and several other top companies. They'll be buying up the smaller operations or merging with other operations.

"Once the industry consolidates a little more, some will say 'it's too rich for my blood' and will exit the market, like LG&ampE and CNG have done, or they'll merge with other companies. So the selling at a loss will end in the next few years but I think margins will stay very low. And marketing volumes will continue to rise with the energy going through multiple marketers before actually reaching distribution."

A ranking of energy marketers by operating margin puts many of the largest marketers near their volume ranking but also shows which marketers potentially might be the next takeover targets. The study notes, "In 1997, many marketers mistakenly believed that if the volume they traded was increased, their company would be more profitable. However, it seems that the opposite was true. Marketers saw margins fall an average of 50% in 1997. Many companies who saw their volumes skyrocket did not see an increase in earnings, while some companies with a more conservative approach kept earnings steady despite narrowing margins." For example, Duke was ranked third in overall Btu volume. Its revenues rose 96% last year to $7,489 million. Despite the record sales, however, its operating margin dropped 60%. Sonat, which had a more conservative volume growth rate at 44%, experienced only a 25% decrease in operating margin.

"This phenomenon may be indicative of a lack of economies of scale in the energy marketing industry. It is more likely, though, that marketers are attempting to gain market share by selling gas and power at or below cost."

The report shows the natural gas market grew 22.4% in 1997, mainly because marketers sell the same volume two or three times among themselves, Hutchinson noted. The Frost &Sullivan study predicts the revenue growth rate in the gas and power markets will decline over the next few years and then flatten in 2003 and 2002, respectively. The firm predicts the revenue growth rate in gas will be 18% this year, 14% in 1999, 12% in 2000, 10% in 2001 and 8% from 2002 through 2004, with $201.17 billion in revenue in 2004. In the power market, the revenue growth rate is expected to be 115% this year, 60% in 1999, 35% in 2000, 25% in 2001, 15% the following year and 10% in 2003 and 2004 with total revenues of $204.85 billion in 2004.

Most of the top gas marketers also are the top power marketers, which shows the one-stop shopping approach has gained in popularity as a way of holding onto a large customer base.

Marketer profiles are the meat of the report, providing a detailed look at marketing contracts, strategies, financial snapshots, software utilized and risk management activities. The study also provides a look at what criteria endusers use in selecting marketers. Not surprisingly, price was identified as the top determining factor when choosing from which marketer to purchase energy.

"Once they're on the list then it comes down to price," one utility told the survey. "The basic qualifier is that we expect whoever is supplying the gas is going to meet nomination deadlines, make sure the gas shows up...once they're there, then it's price."

Other determining factors in selecting a marketer were: open communication, service quality, prior relationship and a successful risk management operation.

Frost &Sullivan is an international marketing consulting firm based in Mountain View, CA, that monitors the energy industry for market trends, measurements and strategies and reports results in a variety of studies. For a copy of the Wholesale Energy Marketers study contact Frost &Sullivan at (650) 237-4385. The study costs $2,950.

Rocco Canonica

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