In stunning news by one of the top energy traders in North America, Aquila announced last week it plans to close its Merchant Services unit by the end of summer and fire nearly all of the unit’s 1,200-plus employees across the country and overseas. Merchant Services, once the crown jewel and future of the company, laid off “hundreds” of employees last Monday in Kansas City, and expects to shutter the rest of its North American and overseas trading units within weeks.

Aquila’s news was by far the biggest bomb from energy merchants so far, but little by little, other companies also continue to scale back their trading units. Last week, fellow energy merchant Dynegy Inc. also announced the beginnings of a smaller restructuring, shutting down its online trading arm, Dynegydirect, and trading exclusively through the telephone for the near term. Dynegy also laid off about 340 people last week, including 50 energy traders.

NiSource Inc., saying it would reassess its marketing relationship with Aquila, advised that it also would be cutting about 800 employees. And Boise-based IDACORP on Friday announced it will wind down its power marketing business as part of a commitment to maintain a strong investment credit rating. Its subsidiary IDACORP Energy, will not seek new customers and will limit its maximum value at risk limits to less than $3 million. The subsidary will reduce staff by about 50% — about 60 jobs — over the next 18 months. During this same time period, IDACORP Energy has targeted a reduction of working capital requirements for this business to less than $100 million.

Williams Cos. also said it will announce early this week plans to reduce its energy marketing and trading workforce in the United States and London by 16%, according to spokeswoman Paul Hall-Collins. This will mean that about 135 employees, including front and back office personnel, of its 800-member trading and marketing staff will be laid off in the company’s offices in Houston, TX; Tulsa, OK, and in London, she said. Williams has less than 100 energy traders in the three offices, Hall-Collins added.

Just a year ago, an estimated 12,000 and 15,000 employees were involved in trading divisions of energy merchants, either through sales, administrative or technical jobs (see NGI, June 17), but those numbers are quickly changing. El Paso Corp. already has announced it will cut back its trading arm 50%, eliminating 300 jobs. Williams and CMS Energy Corp. also plan large cuts from their trading units, as well as Reliant Resources Inc. In late April, Calgary-based EnCana said it would shutter its trading operations in Houston, eliminating 100 jobs. At least half of the energy trading companies are headquartered in Houston, with another 20-30% employed in Houston by companies based elsewhere.

“It seems there are trading partners eliminated every day,” a trader at one of the smaller companies told NGI. “We are waiting to see who is next. With all the bigger shops shutting down, we have been picking up a lot of old contacts that had gone away, as well as new business. All of the credit problems that have plagued larger companies haven’t hurt us; in fact it has created lots of opportunities to make deals. The last couple of weeks I have been extraordinarily busy, and it all has happened so fast.

“I have never seen the rip cord pulled so quickly,” he said, “it is cut and run. It was always funny comparing our small company to these large start-ups. It’s like the boom…it is more than a little sad seeing all these trading shops go down. You can’t help feel empathy, you talk to them everyday, and you hate to see good people get laid off,” he said.

“For those not released today, we will need to, as carefully and responsibly as possible, put our beloved company to bed,” Ed Mills, CEO of Aquila Merchant Services, said in a note to employees last Monday. “At the end of this process, the remaining employees, as is true with me, will be let go.” New York investment firm The Blackstone Group has been retained to find buyers or other options for the Merchant Services unit, and it will continue to do so, said Mills. “No one is to blame, it is just an unfortunate reality we have found ourselves in, and we are left with this ugly choice.”

Besides the Kansas City-based staff, other Merchant Services employees in Calgary, Houston, Denver and Omaha were also laid off Monday. In addition, Aquila’s European arm, which is headquartered in London and trades energy and weather derivatives, is expected to lay off all of its 180 employees within the next two weeks and shut down.

Although Aquila still would like to find a buyer for what remains of its quickly fading trading operation, most of the 800 employees in Kansas City are reportedly going to permanently lose their jobs. The newest job cuts are on top of 700 layoffs previously announced within the company’s corporate, utilities and trading units.

At the end of 2001, Aquila employed almost 7,400 worldwide. Last year, energy trading services accounted for nearly 90% of Aquila’s (formerly UtiliCorp United Inc.’s) $40 billion in revenue, making it one of the top three trading companies in North America. It was listed at No. 33 in the Fortune 500, and the Merchant Services unit accounted for almost half of the company’s $704 million in earnings before interest and taxes in 2001.

Aquila still expects to participate in a small amount of trading, but only involving the power and natural gas that it owns. It will no longer be known as a company “that can deliver electricity anywhere in the United States within an hour of a order,” as it once boasted.

CEO Robert Green said a close review of ratings reports by Moody’s Investors Services and Standard & Poor’s (S&P) convinced him that there was no way Aquila could retain its energy trading business. Instead, Aquila will return to its roots and depend on income from its regulated utilities and unregulated power generation, which have more stable cash flow than trading. In 2003, Green said 98% of the company’s income will come from those sources. He also expressed regrets about dropping the energy trading operation on which the company had once staked its future.

“It was a profoundly difficult decision,” he said.

Following the layoffs, Aquila on Tuesday said it will issue 37.5 million shares of common stock in a registered offering, as well as $500 million of senior notes in an offering exempt from registration. Aquila also will reassess a trading and marketing alliance with NiSource Inc. The new strategy, said Fitch Ratings and S&P, likely will lower the company’s tenuous business risks.

The securities offerings are expected to complete Aquila’s capital markets needs for 2002, including refinancing all of its 2002 debt maturities, and will “increase Aquila’s liquidity position while strengthening the company’s credit profile.” The equity and debt transactions are both expected to be concluded next week. Net proceeds from the transactions are expected to total approximately $900 million and will be used to refinance current maturities, as well as provide permanent funding for the acquisitions of Midlands Electricity and Cogentrix Energy.

With Aquila’s repositioning, management revised its operating earnings per share guidance for full-year 2002 to range between $1.30 and 1.40 per share (excluding anticipated non-recurring charges).

In reaction to Aquila’s announcement, S&P said it “represents a positive step toward ratings’ stability, but the plan contains elements that are likely to offset some of the anticipated improvements in credit quality.” S&P currently rates Aquila “BBB,” Rating Watch “Negative,” secured notes “A-2.”

“Most significantly,” said S&P, “Aquila intends to adjust its energy marketing and trading operations in a manner that will greatly reduce its risk profile and, therefore, the capital requirements associated with that business. However, the reduced marketing activities and other planned asset divestitures will also affect the company’s future ability to produce earnings and cash flow to support debt service. The ultimate impact on credit quality will depend, therefore, on the level of asset sales and whether the net effect of the sales on Aquila’s business and financial risk is credit-accretive. The accomplishment of planned issuances of new debt and equity to fund recent acquisitions and improve the balance sheet, along with other steps to strengthen liquidity, will be essential to achieving stable investment-grade ratings.”

Fitch, which currently rates Aquila’s senior unsecured obligations at “BBB-“; preferred stock at “BB+”; and commercial paper at “F3”, said the rating outlook remains “stable.”

Noting Aquila’s revised strategic plan, Fitch noted that the company “will concentrate primarily on its lower risk regulated and asset-based businesses, which include domestic and international networks, as well as the pending acquisition of the Cogentrix generation assets and related long-term power sales contracts.” Earnings before interest and taxes contribution from these businesses is forecasted to exceed 80% in 2003 and 2004, Fitch noted.

If Aquila’s announced financings are completed, said Fitch, the company “will benefit from the added liquidity and the elimination of refinancing risk through 2004.” Aquila currently has a $650 million credit revolver in place, and has plans to add $200-$400 million of additional bi-lateral credit facilities before the end of the year.

Dynegy’s announcements last week, which are scheduled to be discussed in depth during a conference call Monday (June 24), included laying off about 6% of its workforce and temporarily shutting down its Dynegydirect online trading system. Dynegydirect, stopped trading Wednesday morning, affecting about 2,300 users. According to sources, the pullout was mandated by credit ratings services, including Moody’s Investors Services and Standard & Poor’s, which want the energy merchant to scale back its spending and increase liquidity. A spokesman affirmed that the company’s voice trading would continue with customers in North America and the United Kingdom.

On Tuesday, the company also announced the layoffs, including 50 within the trading unit. Nearly 340 employees were cut, including 300 in Houston. Also resigning was 10-year veteran Rob Doty, CFO. Doty, who was named CFO in 2000 and was close to former Chairman Chuck Watson, was replaced by Louis Dorey. Dynegy’s reductions, along with attrition and retirements, are expected to result in annual savings in excess of $35 million.

Dynegy’s customizable real-time trading system offered the same benefits as telephone-based trading through the Internet. Dynegy has never detailed how much trading it was conducting through the platform, which was first set up in November 2000, but it was set up to facilitate use by its own customers. It was a proprietary system much like EnronOnline, but different than an online trading exchange, such as InterContinentalExchange (ICE) in which many participants can transact with each another.

Dynegydirect has about 750 offerings, including online trading; wholesale gas liquids prices and market information; strategic price management program; a European communications network operations center; broadband quotes; and rail shipment tracking of wholesale gas liquids.

Overall, reaction to Dynegy’s initial restructuring was positive. One analyst said the traditional voice trades made by telephone and the “anonymous broker platforms” were a better conduit for energy traders to use because they offered less risk. “This is good news for Dynegy. They don’t need it,” he said. John Olson, an energy analyst with Sanders Morris Harris in Houston, called the move, “one step backward for Dynegy,” but he said, “it reflects the current business cycle in trading.” Dynegy indicated it would reactivate Dynegydirect “when market conditions stabilize.”

Watson, Dynegy’s founder and former chairman and CEO until resigning in late April, acknowledged before he left that the credit crunch on energy traders was smothering the merchant energy business. As credit ratings agencies push for companies to improve their bottom line, he said in an interview with the Wall Street Journal that, “the third and fourth quarters are going to be worse than anyone imagined, because there’s billions of dollars sitting on the sidelines.”

In related news Tuesday, NiSource Inc. said it will reassess its marketing alliance with Aquila, which was formed earlier this year (see NGI, Jan. 21). The alliance had been struck to leverage the companies’ capabilities in providing comprehensive energy solutions, managing risks in operating NiSource’s pipeline and storage assets, and, ironically, to “capitalize on market opportunities” following Enron Corp.’s bankruptcy.

“Based on our discussions with Aquila, we’re confident that they will continue to maintain and fulfill their obligations to us as we re-evaluate any future business activities with them,” said NiSource CEO Gary Neale.

Neale had some bad news of his own during a presentation at the Banc of America Securities Energy Conference on Tuesday. He said NiSource will fire 800 of its 10,000 employees and will sell an unspecified amount of stock following talks with rating companies Moody’s Investors Service and Standard & Poor’s later this month (see related story).

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