For those who believe the worst is over, think again. The wholesale energy industry, which has lost 88% of its market value in the past year, has not hit bottom yet, according to several energy executives. It could be as short as four, or as long as seven years, before the wholesale sector earns market confidence again, and most assuredly, an entire new set of players will be in the game.

“The power landscape is more confused and less organized” than it was in the period following Enron Corp.’s collapse, said Lawrence J. Makovich, senior director of Global Gas and Power for Cambridge Energy Research Associates (CERA). Makovich’s company has been sponsoring CERAWeek 2003, and on Thursday, the electric power plenary discussed ways to rebuild value in the power sector.

Many of the formerly strong market players face debt renegotiations this year that probably will “involve defaults, involve turnovers to banks, involve asset sales,” he noted. CERA estimates that some of the assets on the market this year probably will sell for 40 cents on the dollar. For those with “staggering” debt problems, assets could sell as low as 25-40 cents on the dollar, he said. “We believe there will be one more bankruptcy in the year to come.”

On another level, there also are problems for deregulation that have moved into power plant construction woes, he said. “The slowdown in construction will not change much in the five years ahead. Those that are 10 years down the road are now stalled, and drifting in the marketplace.”

Stephen L. Baum, CEO of Sempra Energy based in San Diego, CA, warned that the industry will “have to get through a tougher period than the one we’ve already been through.” Baum noted that in 2001, the major energy merchants had a market capitalization of $45 billion. This year, those same companies have a market capitalization of $8 billion.

“Of 15 energy merchants in the market now, there is $24 billion of debt due in 2003. And between now and 2005, they will have $64 billion of debt due,” said Baum. “I believe we will see in the next year to 18 months signs of changes in the sector that result in the inability to refinance.”

Baum noted that most of the companies requiring refinancing have done so through consortiums, which in part were grouped with European bankers. However, Baum predicted that few of those Euro interests will have anything to do with the troubled North American companies. “The European banks are thoroughly fed up; they will not participate in syndicates” for the distressed companies.

Of the “sweeps” of assets Baum also sees for sale this year, the bulk will be sold during the end of the second quarter or the beginning of the third quarter of 2003. “They may be sold directly, or they may be turned over to lenders,” he noted. He does not believe there will be consolidation in the power sector, nor does he believe that European interests will buy.

“The European players are really put off by what they’ve seen happen in the United States,” said Baum. “The reverberation in the California crisis has become extremely widespread.” The Sempra CEO also noted that to date, few European-based companies have fared well in North America, including Scottish Power and National Grid.

“I think we will see a whole new set of players that come from banking,” said Baum. “The surviving companies, like mine, will have strong balance sheets and a strong credit rating. They will be able to pick up assets.”

However, Baum also stressed his belief in energy trading as an essential component of the energy business — a belief other executives echoed. “Trading is an essential, intelligent function of these assets,” Baum said. In the evolving sector, he believes companies involved in trading will look for companies to partner with and to help operate the assets — something most financial companies are not able to yet do.

“I have no confidence that it will be better in the sector until the dust settles,” Baum said. “We are in for more bad times.”

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