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Public Service of NM Exits Gas Marketing

August 31, 1998
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Public Service of NM Exits Gas Marketing

Public Service Co. of New Mexico is the latest to exit the unregulated gas marketing business, joining Consolidated Natural Gas (CNG) and LG&ampE Energy. "On August 4, 1998, the company decided to phase out the non-utility gas trading operations of its Energy Services Business Unit by the end of 1998. Based on preliminary estimates, discontinuance of gas trading activities will not have a material impact on the company's financial condition or results of operations." Unlike CNG and LG&ampE, Public Service Co. has no plans to exit power marketing.

Public Service entered the gas marketing business in the third quarter of 1996, targeting end-use customers in California and hoping to create a springboard to power marketing in California. "It was kind of a way to get our foot in the door in the energy market in California," said spokesman Bob Hagan. Instead, the company got its foot caught in the door as the California power market didn't develop as expected and gas marketing created a drag on Energy Services results. "Considering the market's slow start, we changed our strategy to provide value-added services, engaging in commodity arbitrage, scheduling services and storage and pipeline services.

"We didn't do as well as we had hoped in the trading business. We got on the wrong side of some contracts is the most blunt way to put it. It was not generating the revenues and profits we had hoped it would." Hagan said the company is "still very active in the bulk power market in the West. We are not in the retail power market in any area except in our own service territory. Offsystem we are strictly in the bulk power business, and the bulk power business has been extremely valuable. It makes up a large proportion of our total power sales now." Public Service has not written off the possibility of reentering gas marketing, he said.

"In its first full year of operation, our gas marketing business, which serves retail and wholesale customers in California, Texas and Arizona, generated $114.7 million in revenues in 1997. However, uncertainties surrounding the potential impact of El Nino and other factors contributed to unusual volatility in the natural gas markets during the last half of the year, resulting in losses of approximately $8 million or 12 cents per share," the company said in its fourth quarter 1997 earnings release. "While these results were disappointing, we continue to view gas marketing, like our other energy services initiatives, as a necessary investment in PNM's competitive future. Our strategic plan does not envision these business lines contributing significantly to earnings in the near term."

The company recognized additional losses in connection with gas marketing that reduced margin by $5.2 million or 7 cents per share from the previous year's quarter, Public Service said in it its first quarter 1998 earnings release.

Hagan said the business' largest gas contracts were fulfilled as of June. Remaining obligations will either be met by the company or sold to others, he said. At its peak, the gas marketing operation had about a dozen employees. Some of them will be retained and moved over to bulk power marketing while others will lose their jobs.

In April, Consolidated Natural Gas (CNG) blamed thin margins for its exit from wholesale marketing and trading to focus on retail (See NGI April 27, 1998). The shift in strategy followed the March announcement CNG would take a $20 to $25 million loss in Energy Services to close out electricity positions.

LG&ampE Energy Corp. said in July it was discontinuing its gas and power marketing operations and would take a $231.8 million after-tax loss in the second quarter mainly because it was forced to cover fixed-priced power marketing agreements when Midwest power prices went through the roof in June, reaching $7,000/MW compared to $30/MW just days prior (See NGI Aug. 3, 1998).

Joe Fisher, Houston

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