After Enron, more energy firms face peril
By Neela Banerjee (The New York Times)
Friday, July 26, 2002
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Just when it seems that things cannot become worse in the electricity
marketing and trading business, they do.
Dynegy Inc. and Williams Co., once the biggest rivals to Enron Corp., are now
themselves at risk of joining Enron in seeking bankruptcy protection, according
to industry analysts. Their collapse could hasten that of others that do
business with them, notably AES Corp., the energy merchant whose interests
are deeply intertwined with those of Williams.
The bottom of the crisis in the energy trading industry, most industry
specialists contend, is still months away.
"We haven't seen the last of the bankruptcies," said R. Martin Chavez,
chairman and chief executive of Kiodex Inc., a New York risk management firm
specializing in the energy sector. "There are somewhere between five and 10
companies that used to have more than $1 billion in revenues that could be
filing for Chapter 11 protection by the end of the year."
But, as Chavez crisply put it, this is not the end of the world. The shakeout
may be showing investors, regulators and analysts the true face of an industry
that had insisted Enron was a rogue in its midst. However reluctantly, they are
being forced to acknowledge that many of the companies were badly run
despite their well-spoken managements - and cash-poor despite their hefty
profits.
Industry experts say the culling within the industry is unlikely to drive up power
prices or tatter reliability in the next year or so, despite warnings from some
marketers and traders. It might, instead, transform the business of energy
marketing and trading into a going concern, though probably a far more modest
and less profitable one than was being promoted as just a few years ago.
"This will create a more sober and sustainable industry," said Paul Patterson,
an independent-industry energy analyst, "but it's unfortunate it has to happen
this way. People will lose their jobs. 'Investors have already lost a lot of
money."
Every few days for several months now, an unflattering disclosure of some kind
has driven down the credit ratings and stock prices of energy-trading
companies that were once lionized by Wall Street. Now, as some of the
companies try to come clean, in bits and pieces, about the actual value of their
trading assets, investors - rather than rewarding their candor - have abandoned
them. On Monday, Williams said its energy trading portfolio had lost about
$350 million of its value, bringing it to about $2.2 billion. The next day, its credit
ratings on long-term debt were cut to junk status, and its share price sank.
On Tuesday, Dynegy announced that its cash flow would be considerably less
than was forecast the previous week and canceled a bond issue. Immediately
afterward, the stock price of Dynegy, which is partly owned by Chevron Texaco
Corp., plummeted 64 percent.
By midday Thursday, Dynegy was trading at 68 cents a share, down from 98
cents at Wednesday's close, and Williams at $1.02, down from $1.25
Wednesday. Each has lost more than 95 percent of its market value since a
year ago.
Williams declined to comment on rumors of bankruptcy. Dynegy said it had
adequate cash to continue.
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