US energy sector shakes off Enron’s legacy

Five years after Enron's collapse pushed the US merchant energy sector into a crisis of confidence, the companies that emerged from the wreckage are shifting their focus from restructuring to growth.

In recent months, a string of companies has announced plans to build new pipelines and power plants, while others have put out feelers for mergers and acquisitions.

Some of the deals seem premature. In June, Mirant's shareholders forced it to withdraw its $8bn hostile takeover of NRG Energy, just five months after Mirant had emerged from bankruptcy.

But analysts support most efforts to pursue growth by those companies that survived the crisis, after years of offering little in the way of shareholder returns.

“They made it,” said Dan Gabaldon, vice-president of the energy practice at Booz Allen Hamilton, the management consultancy. “Now they have to deliver sustainable returns to investors – that's their challenge.”

It does not come without risks, he said. The companies could again get deep in debt pursuing deals or overbuilding in certain segments, such as coal, where the market could end up with overcapacity, he added.

That is especially true given the plethora of financing opportunities.

Timothy Sutherland, chairman and chief executive of consultancy Pace Global Energy Services, is projecting $400bn in new US power generation investments in the next 25 years.

Mr Sutherland cautions that investment should not come in a rush that continues the boom-bust cycle from which the industry is only now emerging. Fears of another such cycle were reawakened with NRG's recent announcement of plans to build $16bn in new generation.

Some analysts questioned whether the move signalled a repeat of the rush towards investment of the late 1990s, when financial planning was minimal.

“People just built the plants and did not care who they would sell the power to,” said David Crane, NRG's president and chief executive officer.

But that would not happen this time round, he said. “It's going to take 10- to 20-year supply contracts for us to put metal into the ground.”

Analysts are supportive of the conservative financing NRG has planned, recalling that it and Mirant were among four of the energy traders, as they became known, that went bankrupt following the excesses leading up to Enron's 2001 collapse.

The others were NEG, which has since been liquidated, and Calpine, which only filed for bankruptcy at the end of last year.

“Most utilities and energy companies that participated in the boom-bust cycle of the late 1990s learned a valuable lesson,” said Brian Russo of Broad Wall Capital.

Duke Energy counts itself among them. Jim Rogers, its new president and chief executive, is hoping to return Duke’s credit to the “A category’’ from the current BBB rating it has climbed back to after falling to just above junk.

At the end of June, Duke struck a deal to sell its once-prized trading business to Fortis, the European financial services company, putting its days of chasing energy trading deals behind it.

Duke is starting to invest once again in hard assets, such as pipelines and coal and nuclear plants, but this time it is doing so conservatively, structuring deals to get paid as it goes.

“There is a mindset of a company that has been on the edge – we’re not just going to let ourselves get into that situation again,” Mr Rogers said.

Neither is Dynegy, according to Bruce Williamson, hired to lead the company after its share price fell to 60 cents in October 2002, from a high of $55 in December 2000.

Today its shares are just over $5, and its debt is trading at par, up from 20 cents on the dollar at its trough.

Dynegy has shed its “mezzanine of hybrid securities and off-balance-sheet debt” while selling businesses and assets along the way, so that it is now only an independent power producer.

But it is one with experience in turning around troubled assets, something Mr Williamson hopes to exploit.

As such deals take hold, Karl Miller, chief executive of MMC Energy, a power plant acquisition company, is preparing to buy the small assets that will be sold as redundant or non-strategic.

Such consolidation is overdue, given the US’s more than 200 utilities and power generation companies. Many of them have private equity and hedge fund investors that took them on during the troubled years and have no managerial expertise with such assets.

“It's a phenomenal opportunity for MMC and a lot of players who can organise themselves,” Mr Miller says.

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