By agreeing last week to sell the stock of its retail marketingarm to Enron Energy Services Operations Inc. for $85 million,PG&E National Energy Group not only trimmed non-profitableassets from its portfolio, but perpetuated an industry-wide trendof major companies exiting the retail arena.

PG&E painted the move as another step in its refocusingeffort. “This transaction frees up additional resources that wewill redirect to support our plans to aggressively expand and growthe competitive wholesale generation, energy commodities trading,and natural gas services businesses of the National Energy Group,”said Thomas G. Boren, CEO of the PG&E National Energy Group.

Renee Parnell, a PG&E National Energy Group spokeswoman,said PG&E Energy Services provides energy to “hundreds ofbusiness and institutional customers, as well as 2,500 smallbusiness and residential customers across the country.” She did notdisclose the gas or electricity volumes.

The agreement does not represent a sale of the entire unit.”Essentially, we sold the supply contracts to EES,” said Parnell.The company is currently reviewing offers from parties interestedin acquiring the rest of the retail unit including value-addedservices and certain infrastructure assets.

The sale is subject to FERC and other regulatory reviews. It isexpected to be completed by the close of the second quarter thisyear.

PG&E said it received offers from several parties interestedin acquiring all or a portion of the retail energy services unit.The transaction was done expeditiously, Boren said. “Theannouncement of this transaction, which comes about four monthsfollowing our decision to exit the retail energy services business,demonstrates the speed and intensity with which we are implementingour strategy to grow financial performance and shareholder value.”

Since Boren arrived from Southern Co. last August, PG&E’sNational Energy Group has aggressively sought ways to unload theassets that weren’t meeting its financial targets. In January, thegroup gave up on the Texas liquids and gathering business itpurchased from Valero Energy and Teco in 1997 for more than $1billion and sold them to El Paso Energy Services for $840 million(see NGI, Feb. 7).

The retail arm and the Texas assets were the two largest dragson PG&E’s earnings for 1999. The company posted an overall lossof 20 cents/share ($71 million) despite growing revenues from itsutility, generation, commodity trading and gas pipeline businesses.The Texas asset sale caused a $2.42/share charge and the energyservices unit caused a 16 cent/share charge on the total earningsfor 1999.

Over the past few months, more and more companies have left theretail marketing arena. Speaking at GasMart/Power 2000 last week inDenver, Brian Watt, the CEO of Columbia Energy Services, forecast amajor shake-out of retail marketers over the next five years.According to Watt, the industry could mirror the path of thetelecommunications industry after it deregulated, where marketparticipants dwindled from 400 to less than 10.

CES was an active participant in retail markets, signing morethan 300,000 customers all over the country. However, Watt said CESis re-evaluating its approach to marketing altogether. Earlier thisyear, CES sold its wholesale marketing operations to Enron for$38.3 million (see NGI, Nov. 29, 1999).

For CES, the optimism regarding retail markets is gone. “Westarted off with the perception of a national mass market. Weenvisioned something like the Sprint or AT&T model. Go out. Geta whole bunch of customers, then spread the fixed costs over largeamounts of people and live happily ever after. Well guess what?It’s a local market, not a national one.. The regulatory process islocal. So that vision of taking a $340 billion business and gettinga market share of it may look great, but getting there is a lottougher,” Watt said.

And there are others. Earlier this year both DTE Energy andCinergy entirely pulled out of the retail marketing arena, sayingthe markets are not developed enough to turn serious profits.Sierra Pacific has gone to court against the Public UtilitiesCommission of Nevada recently to halt that state’s electricderegulation efforts, saying the process would be detrimental toits customers and shareholders.

While Watt talked about the difficulties around the retailbusiness, he said he still thinks deregulation is the right pathfor the industry to take. “I’ve lived in the United Kingdom andother places abroad. I’ve seen what too much regulation can do.Deregulated retail markets will happen I think, but it will takelonger than many people originally thought.

For Enron, however, the PG&E Energy Services deal increasesthe powerful reach of its energy services arm. The PG&Etransaction was just one of three major deals the company signedlast week, including a six-year, $210 million energy management andsupply contract with Sonoco and similar 10-year, $610 million dealwith International Business Machines Corp. (IBM).

The Sonoco pact is designed to ensure electricity savings atmore than 150 Sonoco manufacturing plants and facilitiesnationwide. Enron will provide or manage the electricity supply toSonoco’s facilities, as well as provide related energy managementservices, including analysis and consolidation of energyexpenditures and assumption of energy price risk.

“Although Sonoco’s energy management capability is extensive,Enron’s expertise at managing large, nationwide energy portfolioshas uncovered significant energy commodity savings,” said EnronEnergy Services CEO Lou Pai. Charles Coker, vice president ofProcurement and Logistics for Sonoco, said the agreement enablesSonoco to manage energy costs and enhance productivity.

Sonoco, founded in 1899, is a $2.5 billion global manufacturerof industrial and consumer packaging products and provider ofpackaging services with 285 operations in 33 countries servingcustomers in 85 nations.

The IBM deal calls for Enron to supply or procure electricityfor several IBM facilities across the United States, reducing IBM’sexposure to price volatility and providing it with a single monthlyinvoice.

“This agreement marks the beginning of a relationship that willallow IBM to use Enron’s expertise as a nationwide leader in theenergy industry to control the energy costs inherent in all linesof their business,” said Lou Pai, CEO of Enron Energy Services. IBMis the world’s largest information technology company. Withheadquarters in Armonk, New York, IBM has nearly 300,000 employeesin more than 160 countries.

While other marketers struggle, EES has turned into one ofEnron’s most profitable businesses. The unit nearly doubled itsrevenue from $370 million of revenues and a $31 million loss 1Q99to $642 million of revenues and an income before interest and taxesof $16 million in the first quarter of 2000.

“PG&E is so locked in to its refocusing strategy andjettisoning everything else that they are putting some goodbargains on the market,” said Merrill Lynch analyst Donato Eassey.”The old Valero and Teco sale was good for El Paso and I wouldn’tbe surprised if this turns out well for Enron too.”

John Norris

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