Re: The Guardian - Energy's Moribund Tendencies

[Eubulides <paraconsistent@xxxxxxxxxxx>]

----- Original Message -----
From: "nomi prins" <nomiprins@xxxxxxx>
To: <PEN-L@xxxxxxxxxxxxxxxx>
Sent: Monday, July 28, 2003 11:36 AM
Subject: [PEN-L] The Guardian - Energy's Moribund Tendencies


> Some of my current thoughts on the deteriorating state of the US energy
> sector - in today's Guardian.
> Comments most welcome. And thanks to Eugene.
>
> Nomi
======================


Energy's moribund tendencies

Nomi Prins
Monday July 28, 2003
The Guardian

Enron unleashed a flood of corporate failures. Yet, throughout 2002, it
was the telecommunications sector that routinely delivered entries to the
top 10 US bankruptcy list, culminating with WorldCom, the mother of all
chapter 11 filings. The energy sector's woes were less dramatic, giving
the impression it might escape.

But investigations, over-capacity, deceptive accounting and huge debt in a
sea of downgrades characterise nearly every US merchant energy company.
Only the year of debt refinancing with a nervous Wall Street has prolonged
the decay.

Mirant bagged the biggest bankruptcy of the year honours two weeks ago.
There's more to come. The power marketers took advantage of deregulation
to not only control the creation and distribution of energy, but to engage
in complex financial activities designed to inflate profits and gouge
consumers, trading everything from natural gas and electricity to
bandwidth and the risk of earthquakes or rain.

After 1996 deregulation, energy debt issuance rocketed. The sector
borrowed more than $1.2 trillion through loans, credit and bonds; $80bn is
due by 2006, $23bn within the next six months. That debt supported
numerous endeavours, none of which had anything to do with customer
service. It capitalised those highly leveraged, speculative trading
operations, since shut down or still unwinding at huge losses. Debt was
also stashed in "goodwill" buckets on corporate balance sheets.

The sector hasn't produced the write-downs that telecoms did, but this is
coming. Debt funded plant and generator constructions and acquisitions,
contributing to today's capacity glut. US companies raised money to buy
international ones. Debt provided the avenue for energy firms to expand
fibre-optic networks that nobody needed.

The sector vaporised half a trillion dollars in market value. Once
prominent investment grade, merchant companies such as Dynegy, Reliant
Resources, El Paso, Mirant, Calpine, CMS, Aquila and Allegheny were
downgraded to junk and slapped with fraud investigations. Their stock
remains 90% off past highs. Companies shed assets at fire sale prices and
refinanced, yet posted 20% declines in revenue last quarter.

El Paso got a new chief executive after months of searching: Douglas L
Foshee, a former Halliburton boss with no pipeline experience. He received
a $2.65m joining package, not exactly confidence inspiring. El Paso and
others count on Washington buddies to follow a "too big to fail" motto
that has the federal energy regulatory commission handling investigations
with kid gloves.

The FERC dropped a ball by upholding corporate contracts negotiated with
California at the height of the 2000-2001 price gouging period, but
individual states continue fighting. Montana has filed a suit against 13
energy and two Wall Street firms for price rises resulting from their
California market manipulation.

Companies such as Dynegy, Reliant Resources and El Paso remain at death's
door despite huge refinancings, though some analysts think El Paso will
survive because it has real pipelines, providing stable (read regulated)
income.

According to Tyson Slocum, head of energy research at Public Citizen: "The
rough water is far from over; anyone who says otherwise isn't investing
their own money." True. Last week, Aquila in Missouri persuaded the
Colorado public utilities commission to use its assets as collateral for
daily operations, a desperate request.

Then there's Allegheny, which has sought SEC approval for a $2.2bn cash
injection. Because of the entwined relationship between its regulated
utility and unregulated trading businesses, a likely bankruptcy would
cause significant service disruptions. The picture is bleak. The question
of a broad sector implosion is not if, but when. As Robert Rubin, Deutsche
bank utility and energy credit analyst, put it: "There are no winners in
this sector, only non-losers."

·: Former banker Nomi Prins is author of the forthcoming book, Money for
Nothing