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 Daily GPI, Oct. 17, 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., CMS Energy Corp., Mirant and Reliant Resources Inc. have publicly acknowledged the problems their marketing units are having — but they have not forsaken the business altogether.
“It is unfortunate that the large energy firms are going away,” a source told NGI. “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.”
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 Daily GPI, Oct. 11). 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 Daily GPI, Oct. 2; Aug. 7).
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 Daily GPI, 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 Power Market Today, 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 Power Market Today, Sept. 4).
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.”
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.
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