Going forward the restructured energy industry is going to have some unfamiliar names and faces and they’ll be operating with new ground rules, William Hobbs, president and CEO of Williams Energy Marketing and Trading told state regulators meeting in Chicago last Tuesday.
“New entrants will emerge, old players will disappear and unique partnerships will form,” Hobbs said, describing the three groups of major industry players he expects to see going forward. Hobbs spoke at the annual convention of the National Association of Utility Regulatory Utility Commissioners (NARUC).
The utilities, majors and other integrated energy companies will have a place, “but they will likely though have a different look about them,” Hobbs said. “If not already balance-sheet strong…these players will be forced to conform to new ratings agencies’ stipulations…They’ll emerge a stronger, more focused company.”
He sees commercial investment banks becoming “formidable industry players.” While they lack the “physical expertise” to deliver energy, he noted they do have the financial wherewithal. Hobbs cited Bank of America, UBS Warburg and Morgan Stanley as key examples.
The third group of players, hedge funds, will enter the marketplace at least in the marketing and risk-management sectors, Hobbs said. He pointed to companies like Louis Dreyfus and Cargill.
“As far as pure trading…big volume companies like Enron, I don’t see those in the future,” Hobbs said. Instead, he said he foresees asset-based companies that are “able to offer customers reliable energy and risk management.
“Most agree an A-rated balance sheet, significant flexibility and liquidity are pre-requisites [going into the future],” he said, but he believes “triple B companies all may dig a foothold with access to capital.”
Hobbs said it was “generally believed” that considerable consolidation would take place in the energy industry “sooner rather than later,” but other experts on the NARUC panel disagreed. And Hobbs noted that Williams is encountering some resistance in its attempts to sell individual assets and its trading book because “people are scared to death” about the uncertainty of the Federal Energy Regulatory Commission’s investigation into the price manipulation of traders in California during the energy crisis.
“Clearly we’ve got right now some of the financial sponsors fishing around the industry” for the first time, such as Warren Buffett, said Jeffrey Yingling, executive director of Morgan Stanley. Buffett’s Berkshire Hathaway — with an insurance company base — has purchased Kern River Gas Transmission and Northern Natural Gas, and made high interest loans to CenterPoint and Williams.
Like Hobbs, he said he expects to see “continued consolidation” within the energy industry. Institutional investors favor corporate combinations to boost the sagging liquidity positions of companies, Yingling noted. But he believes there will be far fewer stock-for-stock transactions because of the uncertainty over stock prices.
Heading into the future, liquidity will be “hugely important,” but management strength and credibility will be “probably the greatest premium” for energy companies, Yingling said.
Yingling and others believe more energy company bankruptcies are a near certainty, but they refused to name names. “If you just look at the marketplace today,” where bonds and stocks are trading, “that would indicate that there’s a pretty high level of risk that these companies may not be able to finance themselves in their current state.”
The companies that “chose to build up their energy trading and marketing businesses and take [on] a great amount of debt and assets are now caught in the crosswinds of falling wholesale electricity prices, unrecoverable commodity prices, federal investigations of market manipulation and [a] declining number of investors,” said Judith Waite, director of corporate ratings for Standard & Poor’s.
Energy companies have been stung by the “destruction” that followed the collapse of Enron, and by their involvement in the California energy market, she noted. “I now think of California as kind of the Pleasure Island” in the Pinocchio story, with the market players in the end being turned into “donkeys” and being shipped off.
“At the ratings agencies, we were walking on eggs” as companies’ bottom lines continued to worsen, Waite said. “We wonder how much surprise debt…will jump out of the closet. We wonder which companies have launched [a strategy] that will turn sour” and be quickly abandoned, leaving investors high and dry, she noted.
“What we’re looking for…[is] the stability, the lack of volatility and predictability of cash flow” from companies, Waite said. This can be accomplished in four ways:
Most important, “all of this needs to happen as fast as possible,” she told the NARUC conference. Williams Energy’s Hobbs also added that the energy industry needs to “get these investigations behind us.” The industry will continue to have a “cloud over our head” until that is done, he said, but he noted the wrongdoers “should be punished clearly.”
The trading and pricing practices of energy companies, including Williams, are being investigated by FERC, the Securities and Exchange Commission, the Department of Justice and the Commodity Futures Trading Commission.
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