Message-ID: <2842093.1075844153993.JavaMail.evans@thyme> Date: Tue, 20 Feb 2001 08:17:00 -0800 (PST) From: lorna.brennan@enron.com To: courtney.barker@enron.com, mike.barry@enron.com, joni.bollinger@enron.com, laura.lantefield@enron.com, loren.penkava@enron.com, chris.sebesta@enron.com, lisa.valley@enron.com, josie.call@enron.com, bret.fritch@enron.com, donna.martens@enron.com, keith.petersen@enron.com, donald.vignaroli@enron.com, michele.winckowski@enron.com, ken.anderson@enron.com, doug.aschwege@enron.com, judy.beck@enron.com, gary.choquette@enron.com, carolyn.descoteaux@enron.com, robert.johnson@enron.com, bryan.reinecke@enron.com, becki.souci@enron.com, steve.thomas@enron.com, roger.westfall@enron.com, sebastian.corbacho@enron.com, john.goodpasture@enron.com, michael.ratner@enron.com, yuan.tian@enron.com, john.dushinske@enron.com, bill.fowler@enron.com, kent.miller@enron.com, dave.neubauer@enron.com, vicki.berg@enron.com, sean.bolks@enron.com, janet.bowers@enron.com, theresa.branney@enron.com, craig.buehler@enron.com, bob.burleson@enron.com, reyna.cabrera@enron.com, lee.ferrell@enron.com, morgan.gottsponer@enron.com, stephen.herber@enron.com, martha.janousek@enron.com, tim.johanson@enron.com, karen.lagerstrom@enron.com, penny.mccarran@enron.com, vernon.mercaldo@enron.com, jan.moore@enron.com, sue.neville@enron.com, jeff.nielsen@enron.com, frank.oldenhuis@enron.com, larry.pavlou@enron.com, eileen.peebles@enron.com, frank.semin@enron.com, michael.stage@enron.com, ld.stephens@enron.com, bob.stevens@enron.com, larry.swett@enron.com, kay.threet@enron.com, kimberly.watson@enron.com, steve.weller@enron.com, chuck.wilkinson@enron.com, jo.williams@enron.com, jim.wiltfong@enron.com, lynn.blair@enron.com, rick.dietz@enron.com, steven.january@enron.com, sheila.nacey@enron.com, donna.scott@enron.com, drew.fossum@enron.com, mike.mcgowan@enron.com, mary.miller@enron.com, michel.nelson@enron.com, julia.white@enron.com, rita.bianchi@enron.com, patrick.brennan@enron.com, mary.darveaux@enron.com, glen.hass@enron.com, tim.kissner@enron.com, ranelle.paladino@enron.com, david.marye@enron.com, sarabeth.smith@enron.com, shelley.corman@enron.com, allen.cohrs@enron.com, john.fiscus@enron.com, steve.gilbert@enron.com, dana.jones@enron.com, stephanie.korbelik@enron.com, don.powell@enron.com, ken.powers@enron.com, steven.harris@enron.com, lindy.donoho@enron.com, jeffery.fawcett@enron.com, kevin.hyatt@enron.com, lorraine.lindberg@enron.com, tk.lohman@enron.com, michelle.lokay@enron.com Subject: Article on Gas Marketers: Top Gas Gorillas Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Lorna Brennan X-To: Courtney Barker, Mike Barry, Joni Bollinger, Laura Lantefield, Loren Penkava, Chris Sebesta, Lisa Valley, Josie Call, "Fritch, Bret" @SMTP@enronXgate, Donna Martens, Keith Petersen, Donald Vignaroli, Michele Winckowski, Ken Anderson, Doug Aschwege, Judy Beck, Gary Choquette, Carolyn DesCoteaux, Robert L Johnson, Bryan Reinecke, Becki Sans Souci, Steve Thomas, Roger Westfall, Sebastian Corbacho, John Goodpasture, Michael Ratner, Yuan Tian, John Dushinske, Bill Fowler, Kent Miller, Dave Neubauer, Vicki Berg, Sean Bolks, Janet Bowers, Theresa Branney, Craig Buehler, Bob Burleson, Reyna Cabrera, Lee Ferrell, Morgan Gottsponer, Stephen Herber, Martha Janousek, Tim Johanson, Karen Lagerstrom, Penny McCarran, Vernon Mercaldo, Jan Moore, Sue Neville, Jeff Nielsen, Frank Oldenhuis, Larry Pavlou, Eileen Peebles, Frank Semin, Michael G Stage, LD Stephens, Bob Stevens, Larry Swett, Kay Threet, Kimberly Watson, Steve Weller, Chuck Wilkinson, Jo Williams, Jim Wiltfong, Lynn Blair, Rick Dietz, Steven January, Sheila Nacey, Donna Scott, Drew Fossum, Mike W McGowan, Mary Kay Miller, Michel Nelson, Julia White, Rita Bianchi, Patrick Brennan, Mary Darveaux, Glen Hass, Tim Kissner, Ranelle Paladino, David Marye, Sarabeth Smith, Shelley Corman, Allen Cohrs, John Fiscus, Steve Gilbert, Dana Jones, Stephanie Korbelik, Don Powell, Ken Powers, Steven Harris, Lindy Donoho, Jeffery Fawcett, Kevin Hyatt, Lorraine Lindberg, TK Lohman, Michelle Lokay X-cc: X-bcc: X-Folder: \Michelle_Lokay_Dec2000_June2001_2\Notes Folders\Articles X-Origin: LOKAY-M X-FileName: mlokay.nsf Note the discussion on market share halfway through the article. Top Gas Gorillas Show Strong Volume Growth The year 2000 was a banner year for the top players in gas marketing, with huge increases in gas prices, enormous volatility, continuing growth in sales volumes and major potential for profits. Physical gas sales volumes for the top 20 marketers in NGI's ranking grew 17% to nearly 150 Bcf/d, and profits among the larger players came in very strong with companies such as Williams reporting 2,000% profit increases in their energy merchant segments. However, for many of the smaller players it was a tough year. "The big news here is probably the price pressure the marketers have had to withstand," said Ben Schlesinger, president of Maryland-based consulting firm Schlesinger and Associates, which tracks energy marketing. "These people have price exposure on both sides of their business: the buy side and sell side. They've actively sought to hedge these risks, but there's no question that there have been some real stresses in their businesses as a result of quadrupling gas prices in 2000." Significant shuffling has begun to take place and will continue, not just among the leadership but among the whole roster of 500 marketing companies, predicted Schlesinger. "For the first time I'm not sure all 500 will make it because of the price volatility, and the stresses that it creates on their balance sheets and their ability to meet the different needs of their customers." If you are on the wrong side of a transaction these days in California, you are going to suffer significantly. It's not much different at the Henry Hub either, he noted. The harsh reality is that only the strong will survive. Ronald J. Barone of UBS Warburg believes the California energy crisis and fears of lack of gas supply and capacity are driving customers to the strongest marketers. "I think that over the long term it will be a positive for the bigger players, such as Enron. Customers want to go with somebody who is big, has facilities, somebody who is going to guarantee it, somebody who can do risk management for them. Enron is the 800-pound gorilla here." Enron has been the 800-pound gorilla in gas marketing for years but there were always plenty of 750-pound gorillas around. Last year, however, Enron found a way to trade natural gas over the Internet and at last glance was well over 1,600 pounds, more than double the size of its next closest rival gorilla, Duke Energy. Enron sold 23.8 Bcf/d of gas last year compared to only 13.3 Bcf/d the year prior and compared to the 11.9 Bcf/d sold by Duke Energy, which came in second place in NGI's ranking of gas marketers by physical sales volume. Enron catapulted itself to the next level with the help of its handy new tool, EnronOnline, its web-based proprietary energy and commodity trading system that now handles about 3,000 mainly natural gas transactions each day. In 2000, Enron completed its first full year of deploying EnronOnline, which quickly became the world's largest web-based e-commerce site. During the year, Enron executed 548,000 transactions online with 3,000 customers, totaling $336 billion of gross value. The tremendous success of EnronOnline led many observers to wonder whether market concentration was beginning to take place in the industry. When you look at Enron's massive increase in wholesale transactions you have to wonder about that concentration. Enron's 23.8 Bcf/d is pretty large (35%) when compared with the 69 Bcf/d that is actually consumed in North America. But you have to factor in multiple trades --- one marketer trades a given molecule of gas to another marketer and so on. According to Schlesinger, the so-called "churning factor" is close to three. "In the past several years when we've been polling marketers, we got numbers (in 1999) that came to about 60 Tcf. We added up all the physical sales by all the marketing companies. We did not have 100% response in our survey --- some of the mid-sized and smaller companies didn't respond. We reasonably extrapolated that about 65 Tcf, maybe even 70 Tcf of gas was traded each year in North America. Physical consumption in North America is about 25 Tcf so 70 divided by 25 is about 2.8." Using that calculation, Enron with 23.8 Bcf/d of physical gas sales in 2000 ends up with a not unreasonable 12% market share. When the Federal Trade Commission looks at markets and market share, it uses several tools, one of which is the Herschman-Herfindahl Index, a measure of market concentration. It's the sum of the squares of the market share of each participant. If one company owns the entire 100% of the market, that's an HHI of 10,000. The Department of Justice has been using 1,800 as a red flag when it considers approval of mergers and acquisitions. According to Schlesinger, the total gas industry has an HHI of only about 200, way below any suggestion of market concentration. "It's so low that it's unbelievable. It's a highly competitive business. Even if one competitor has 12% of the market (HHI of 144) and the next competitor has 6% and on down, it certainly doesn't send up any red flags," he said. "It could be that market concentration in the gas industry has risen a bit in 2000, but this information alone would not diminish the fact that the industry is one of the most competitive businesses in the United States. However, there may be some regional issues we have to think about," he added. "We haven't looked at that, so I can't comment on whether anyone has undue market power in a particular region or state, for example." There is a snowball effect going on among the top marketers. The leaders keep getting larger. Volume growth averages at least 10% per year or more. Several factors should fuel future growth. Price increases, volatility and uncertainty of supplies are driving buyers to the larger marketers, according to both Schlesinger and Barone. Online trading has become a new springboard for additional growth by allowing greater efficiency and many more trades to take place. Schlesinger said he believes electronic trading was responsible for a good part the 17% increase in volumes. Enron attributed much of its growth to the online business. According to some observers, online trading still has plenty of room to grow. Altra Energy CEO Paul Bourke believes about 30% of all gas trading now takes place over the Internet. Bourke said Altra had 8,000 natural gas trades on its system in December. However Barone predicts there eventually will be a slowdown in gas marketing growth in the United States as international energy markets grab the attention of many marketers. "International should pick up the slack and contribute increasingly to the bottom line," he said. Barone also expects the current market situation and the continued interest in service, supply and commodity versatility to continue driving marketing companies together. "I think size, scope and scale are incredibly significant." Only one of the top 20 major marketers last year resulted from the combination of two separate predecessors: Axia, which grew out of the combination of Koch Energy and Entergy. The rest of the group achieved its growth without major acquisitions or mergers. Thirteen out of the 20 top marketers showed double- or triple-digit volume growth with only two companies in the minus column. PG&E had the largest volume deterioration of any of the large marketers with a 40.1% decline in annual volumes and a 42% decline in quarterly volumes. PG&E went through a significant reorganization last year. The move of its National Energy Group (NEG) to Bethesda, MD, from Houston, had the greatest impact on its trading activity. But the company also sold its energy services business and its Texas gas transmission assets among other changes. "It really slowed down our trading [and] a large number of people stayed behind in Houston," said company spokesman Patrick Hurston. At the time of the move, the company estimated about half, or 100, would make the move. Hurston wouldn't say how many actually made the trip, but the company is still actively hiring. TransCanada, which also underwent a massive reorganization last year, was the other company in the minus column with a 3% decline in sales volume. The remainder of the group experienced large increases in volumes: Enron at 94%, Duke with 15% growth, Sempra with 51% and BP Amoco with 100% growth.