Consolidated Natural Gas (CNG) blamed thin margins for its exitfrom wholesale marketing and trading to focus on retail. The shiftin strategy comes on the heels of the March announcement CNG willtake a $20 to $25 million loss in Energy Services to close outelectricity positions. The move could herald the beginning of amarketer shakeout, noted one analyst.

“Wholesale margins across the industry have been driven tovirtually zero,” said CNG CEO George A. Davidson Jr. “We believethat the time, cost and risk involved in further scaling up awholesale marketing and trading company at this stage of marketmaturity are too great to justify, given the potential rewards. Wetherefore have decided to devote our attention and resources toother opportunities that will better enable us to meet ourfive-year goals of increasing income by an average of 10% a yearand obtaining half our income from exploration and production,international and retail energy marketing operations.”

CNG said all existing wholesale customer, supplier and partnercommitments will be honored, at least some by third parties. Thecompany will close offices in suburban Pittsburgh and in Norwalk,CT. About 125 layoffs are expected. Retail marketing employees willnot be affected. The exit from unregulated wholesale marketing willcause a pretax charge of between $55 million and $75 millionagainst first quarter earnings. The company will reportfirst-quarter earnings April 30 and will no longer report financialresults for energy marketing services as a separate segment.

CNG’s unregulated energy marketing services segment had a pretaxoperating loss of $17.1 million last year versus a pretax operatingloss of $9.1 million in 1996. The higher loss in 1997 resultedmostly from establishment of reserves for pipeline settlements andreceivables. Lower gross margins and higher overhead costs alsocontributed, the company said. Gas volumes were 856.4 Bcf lastyear, an increase of 429.3 Bcf from 1996. Electricity marketed in1997 totaled 25.2 million MWh, five times the volume of 1996.

CNG’s abandonment of the wholesale market was applauded byPaineWebber’s natural gas group and its analyst Ron Barone whoobserved “they will now have substantially more time to focus ongrowing the unregulated portion of the company’s earnings (such asthrough E&P acquisitions).” Barone said there are too manywholesale players and he expects smaller companies to either exitthe business or form joint ventures to attain critical mass. As thewholesale market evolves, it will become the province of largeplayers such as Enron, NGC, Engage, and Shell, he said.

CNG said it will continue to compete in the unregulated retailmarketplace. Doing business as Peoples Plus and East Ohio Energy,the company sells gas and electricity and other products andservices to homeowners and small businesses in Pennsylvania andOhio.

“Within the growing competitive marketplace for energy, webelieve the best prospects for profitable growth are occurring onthe retail side, and we intend to continue to build on our verystrong position in this part of the business,” Davidson said. “CNGalready is the largest non-utility retail energy marketer in theU.S. We do not see the same opportunities to build shareholdervalue in wholesale marketing and trading, despite our determinedefforts over the last five years.”

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