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Wholesale Energy Marketing Powers Up 2nd Quarter Earnings

Wholesale Energy Marketing Powers Up 2nd Quarter Earnings

Finding superlatives to match the second-quarter earnings reports for energy companies across the United States in the past few weeks has been difficult at best. With earnings doubled, tripled, and for some even quadrupled, there was little bad news to report. High natural gas and crude prices, coupled with high demand, have guaranteed magnificent returns across the board.

Even with the high prices and increased energy demands, earnings reports for the second quarter showed the most growth overall in wholesale marketing and trading operations. For those companies that market energy, every day lately has been a great day, especially if they market in the explosive growth area of the central and western part of the United States, where natural gas volumes tripled in some cases.

Andrew Levi, a utilities analyst with Credit Suisse First Boston in New York, said the market was changing fundamentally, which was especially helpful to smaller companies and created the huge earnings increases for both small and large marketers alike. Higher natural gas and power prices are becoming the "norm instead of the exception," and that has contributed to higher earnings across the board, he said.

For instance, Reliant Energy, which reported its second-quarter earnings last Thursday (see related story this issue), said its wholesale energy segment, which includes trading and marketing activities in the United States and Canada, showed a dramatic increase in operating income: $184 million this quarter, compared with $9 million in 1999. Revenue for the quarter rose 79% from 1999's second quarter, and gross margins increased by $219 million over margins last year.

The increases, according to the Houston-based company, came from strong commercial and operations performance in an "increasingly diverse multi-regional business portfolio." A lot of the improvement came from improved trading and marketing performance in the Western markets.

"We added 4,500 MW to our growing power generation portfolio this quarter," said Reliant CEO Steve Letbetter. "We are now the third-largest unregulated power generator in the United States with over 9,000 MW of capacity, and we have the necessary commercial skills to maximize the value of these assets."

For maximizing the sales side of wholesale energy operations, one has to look no farther than industry leader and trendsetter Enron Corp., another Houston-based operation. Enron's recurring second-quarter earnings from wholesale energy alone increased 23% overall from a year ago, to $437 million from $356 million in 1999. Specifically, Enron's commodity sales and services earnings exploded --- up to $442 million from $81 million for the same period of 1999.

Sped by the still-new EnronOnline, which only debuted last fall, Enron's second quarter total physical volumes rose 39%, to 46,730 Btu/d from 33,708 Btu/d in 1999.

Individually, Enron's U.S. physical natural gas volumes jumped nearly 97%, to 26,031 Btu/d from 13,736 Butte/d. The Canadian increase was 47% (6,587 Btu/d from 4,475 Btue/d), and Europe was up 300%. Enron used a business-to-business strategy long before the broader market, and that early work has paid off, say analysts.

Ron Barone, an energy analyst with PaineWebber in New York, said that Enron's inclusion of "asset harvesting activities" and the influences from Enron management's actions resulted in the division's results being "lumpy." But, "this is an enormous earnings vehicle, which can often be called upon when and if market conditions require," he said.

Enron management said that the Internet has made its trading work efficient, which also allows it to enter new markets and become a dominant player quickly.

For San Diego-based Sempra, earnings were also tied to its Energy Trading unit, whose net income grew to $40 million in the second quarter, up from $3 million a year earlier. The dramatic increase, said management, keyed on oil and natural gas trading the United States and Europe in volatile international commodity markets.

"We're pleased with these results," understated Sempra CEO Stephen L. Baum. "Clearly, Sempra Energy Trading has demonstrated its value as a key element in our strategic direction. We also are aware that energy trading is more volatile than the traditional utility business," and he noted that the results will vary "from quarter to quarter."

Sempra's physical trading volumes of natural gas increased 91% from a year ago, to 8.4 Bcf/d, compared with 4.4 Bcf/d. Trading volumes of crude oil and products increased 4% to 2.4 MMbtu/d, compared with 2.3 MMBtu/d in second quarter 1999.

As part of its growth, Sempra Energy Trading entered the Asian trading market, opening an office in Singapore. It also was chosen as the "preferred" wholesale natural gas supplier for Utility.com, an Internet utility company serving consumers in California and Pennsylvania.

San Francisco-based PG&E Corp.'s strong second-quarter performance also was led by its National Energy Group (NEG), which handles PG&E's electric and natural gas trading operations. The NEG earned $.10 per diluted share from operations this quarter, a 233% increase from the same period last year.

"With its performance in the first two quarters of 2000, our NEG is on track to meet its target of delivering 30% of the corporation's earnings by 2002," said CEO Robert D. Glynn Jr. In the second quarter, PG&E also continued to achieve "important milestones" in its strategy to grow its business in wholesale power generation and natural gas transmission markets.

Not resting on its laurels, wholesale trading is expected to grow even more at PG&E under a new business initiative. Earlier this year, PG&E announced that it has made an equity investment in True Quote r, an online wholesale energy trading system, which also holds strategic partnerships with APB Energy, an energy brokerage company, and EnronOnline.

Without its higher energy trading volumes, Columbus, OH-based American Electric Power Co. (AEP) might not have had as good a second quarter as it reported.

It said on July 26 that because of special items, which totaled $164 million, or 51 cents a share, it recorded a loss for the quarter of $9 million, or 3 cents a share, compared with net income of $190 million, or 59 cents a share in 1999. However, management did have good news, and all of it was tied to its energy trading area.

AEP reported that it is having solid growth in its energy trading operations: net revenue from energy trading was up a whopping 242% to $83 million. AEP was the second-largest U.S. power marketer behind Enron in 1999 and 1998 , according to NGI rankings. (See intelligencepress.com/features/rankings )

When Houston's Dynegy Inc. reported July 18 that its second-quarter earnings had more than tripled, management pinned much of its gains on its wholesale marketing division also, which buys and sells gas and electricity and manages price volatility for customers across North America and the United Kingdom.

Dynegy CEO Chuck Watson said that the second quarter was fueled by "the continuing trend toward competitive wholesale markets" that fostered "greater business opportunities in energy convergence." That was an understatement: by itself, the marketing and trade unit of Dynegy had recurring net income was $71.5 million, which represented 79% of Dynegy's second-quarter consolidated net income.

Houston's Williams, which has partnered as a stakeholder with Dynegy this year in eSpeed Inc., an interactive commodity-specific marketplace, saw its second-quarter earnings gains directly related to how well its wholesale trading unit did. And, like all the other players, wholesale trading was very, very good to Williams this quarter.

Williams' Energy Services unit, which includes its wholesale marketing business, reported second-quarter segment profit of $411.6 million, up from $105.9 million a year ago --- a 300% increase. In energy trading and marketing alone, Williams reported a $256 million increase, resulting primarily from higher electric power services margins from increased contract origination revenues, changes in forward power market prices and increased power trading volumes. The unit also benefited from a 63% hike in natural gas liquids average prices from last year and from higher processing and refining volumes.

Carolyn Davis, Houston

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