What a difference a year makes. As if anyone wanted to be reminded, it was Oct. 16, 2001 when Enron Corp. released its third-quarter earnings, boasting of continued growth, despite a billion-dollar write-off. Within weeks, that incidental write-off that was barely discussed during a conference call with analysts by then-CEO Ken Lay, eventually would erase the entire company (see NGI, Oct. 22, 2001). Fast forward to one year later, and despite its disappearance, Enron’s once mighty shadow continues to darken the marketplace.

Dynegy Inc.’s announcement Wednesday (see related story) that it would withdraw from energy marketing and trading and restructure its business units was just the latest in a series of events since late last year. Those left to wonder about the future — or history — of energy marketing and trading as a viable business in the current environment may want to consider this: Natural Gas Clearinghouse, formed in 1985 by Oklahoma entrepreneur Chuck Watson and several investors, was the granddaddy of all the U.S. energy and marketing ventures. With imagination and a competitive spirit, it was Watson who renamed the company “Dynegy” in 1998, merging his vision of having a “dynamic energy” company.

However, “dynamic” would be about the last word to describe any of the once powerful energy brokers in North America. Aquila Inc. and American Electric Power (AEP) already have shut down future speculative trading, and others have either cut back or are just not talking about it. El Paso Corp., Calpine Corp., CMS Energy Corp., Duke Energy, UBS Warburg, Mirant, Williams and Reliant Resources Inc. have publicly acknowledged the problems their marketing units are having, and have reduced staff and resources.

In a filing with the Securities and Exchange Commission (SEC) last Wednesday, Allegheny Energy also acknowledged it would reduce its wholesale trading business, and move toward proprietary trading. It requested authority for its merchant energy entity, Allegheny Energy (AE) Supply, to borrow up to $2 billion. It stated that entry into the wholesale market in 1999 and 2000 was a “reasonable business decision, given the dynamics of the energy markets at the time.”

In its filing, Allegheny told the SEC, “Now, in difficult market conditions, AE Supply’s merchant power business is creating stress on its financial performance.” AE Supply, which acquired more than 7,000 MW from three Allegheny generators between 1999 and 2001, and plans to now provide generation back to the three: West Penn Power, Potomac Edison and Monongahela Power.

AEP, routinely a top five North American wholesaler for both natural gas and power since its Energy Services unit was created in 1997, decided earlier this month that it was time to exit the volatile trading arena and return to its more conservative roots as a utility (see NGI, Oct. 14). Aquila’s Merchant Services subsidiary was considered the company’s future at one time as it moved to shed its former UtiliCorp image, but heavy losses following Enron’s departure and loss of investor confidence pushed the Kansas City, MO-based utility giant into massive asset sales, management shakeups and closure of its trading unit (see NGI, Aug. 12).

At Reliant Resources Inc., former parent Reliant Energy Inc. wasted no time distancing itself from the once dynamic trading arm, spinning off RRI and then assuming its new identity, CenterPoint Energy Inc., late last month. Since the separation, RRI already has fired almost 170 traders throughout the country, and COO Steve Naeve said RRI’s wholesale markets “are at a trough” (see NGI, Sept. 23). And Atlanta-based Mirant, though not giving up completely on marketing and trading, said it still is looking for a viable and liquid partner to help shore up its faded energy trading operations. CEO Marce Fuller said in September that Mirant was in talks with a financial/insurance company to give it stronger credit strength for its long-term structured transactions (see NGI, Sept. 9). However, there has been no announcement so far on that plan.

There are other companies with energy marketing units, and several that in some way or another have been severely impacted this past year. However, none have yet nose-dived a la Enron. Still, Standard & Poor’s Ratings Services analysts believe it is a possibility. Credit analyst Peter Rigby said in September that “few doubt that one or more energy merchant companies may soon file for bankruptcy. Signals are appearing and getting stronger” (see NGI, Sept. 9).

Noting the industry’s “mass exodus” from trading in recent months, Rigby said S&P “had always been skeptical of the long-term sustainability of trading, particularly at the levels that companies forecast, and, therefore, rarely included significant trading revenues in its credit analyses.” However, energy merchant companies that “are able to restructure their balance sheets and pay down debt may stand a chance of reversing their diminishing profitability. But reducing debt, particularly for those with liquidity problems, may be difficult.”

Long before Dynegy made its decision to pull out, or Allegheny decided to cut back, the trading sector was damaged and is not the “death knell for the industry,” said Ken Silverstein, director of Energy Industry Analysis (EIA). Instead, he said, “it may only hasten the changing face of energy trading, which has seen a number of investment and commercial banks express a keen interest. Financial institutions like Morgan Stanley, Goldman Sachs and UBS Warburg all have the credit ratings to assure would-be trading partners. The departure also serves to reinforce the notion that trading organizations have become supplemental to companies’ core businesses — not the engines that drive earnings growth.”

Silverstein noted that the “astonishing” changes within the energy business overall were undoubtedly set off by Enron Corp.’s “fall from grace.” Now, he noted, with the cost of borrowing higher and the uncertain economy, “investors may be wary of this particular sector for a long time. The re-making of this segment of the energy sector, however, may be a natural evolution — not the final nail. Power and natural gas trading is still a valuable function that helps companies hedge against price volatility and a force that could bring prices down.”

Silverstein said, “the names may change.” But with “money-centered banks that have deep pockets and investment-grade ratings, will fill the void. To a great extent, they have the Dynegies of the world to thank for breaking down some of the barriers and for their new-found opportunities.” Another energy marketer who did not want his name or company disclosed, told NGI, “It is unfortunate that the large energy firms are going away. However, there will always be a need for a middleman in this market. The survivors will have to live through a sustained period of low liquidity and the slimmest of margins.”

Although it is a dastardly period for companies with energy marketing units, Charlie Sanchez, an energy markets manager for Gelber & Associates, said those companies that disband their operations now will not kill trading and marketing’s eventual rise from the ashes. “Energy markets are threatened right now, but there are a few organizations that are going strong and should be able to prevail,” he said. “We believe that there will be some consolidation, and there may be some new faces as well.”

Since the beginning of the year, with Swiss-based UBS the first to make its overture into energy marketing when it took over Enron under its UBS Warburg flag, several European investment firms, as well as U.S.-based companies like Bank of America, have announced they too were interested in being part of the energy marketing business. For now, at least, Dynegy will not be one of them.

Atlanta-based AGL Resources is one of the companies that believes there are opportunities as other merchants leave the marketplace. Its Houston-based wholesale natural gas trading unit, Sequent Energy Management, is seeing its earnings up in the third quarter, and AGL said it expects the unit to “be in a position over the long term to pick up business” cast off by other companies.

AGL CEO Paula G. Rosput said during an earnings conference call last week that the Southeast market, where Dynegy had once dominated, “is a major market opportunity for us.” Sequent vice president Dana Grams said the pullout by other energy merchants from wholesale trading “leaves a huge void for us to fill.” There remains a “true need for a middleman,” said Grams, and Sequent already has become “purchaser of choice” for many producers because of its investment-grade credit.

In the third quarter, Sequent contributed $1.3 million to AGL’s earnings before interest and taxes, compared with a $5.5 million loss for the same period of 2001 (see related story). Sequent profited from supply interruptions related to the recent tropical storms in the Gulf of Mexico. This coming winter, when gas demand is higher, should offer even more opportunities for Sequent, said AGL executives.

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