Search the Internet          Tips  Sites: Finance, Investment

Enron woes bite into its energy trading

Former energy trading giant Enron's financial straits and plunging share price are drying up its core business as other market players seek out safer trading partners.

While most US utilities and trading houses say they are still striking deals with Enron, they also admit now to slashing their financial exposure to the battered company.

"We haven't stopped trading with Enron," said Terry Francisco, a spokesman for rival Duke Energy.

"We will continue to closely monitor the situation and make prudent adjustments when necessary in accordance with our credit policies," he added.

For Enron, those policies are starting to sting.

The company has seen its credit rating cut to just above "junk" status following disclosure of off-balance sheet dealings by a senior officer and a downward revision of its earnings for the past four years.

Enron, which until recently handled 20 per cent of the North American electricity and natural gas market, has seen its share price plummet from a year high of $84.88 to close today at a mere $4.14 on the New York Stock Exchange.

Cross-town rival Dynegy Inc agreed earlier this month to buy Enron in a stock deal valued at $10.55 a share.

But given Enron shares' continued slump, Dynegy said Tuesday it was seeking to renegotiate the deal.

DEARTH OF SELLERS

Amid all this bad news, energy traders said they were now reluctant to sell energy to Enron.

This, in turn, has raised concerns Enron might have a hard time securing enough power and gas to meet its long-term sales commitments, though there so far has been no evidence it has missed any deliveries or failed to pay for what it buys.

Nevertheless, Mirant Corp, another of the nation's top energy trading houses, confirmed Tuesday it was no longer willing to sell energy products to Enron.

"Right now, we're just purchasing from them," Mirant spokesman Chuck Griffin said.

This cautionary approach was also confirmed at several municipal and federal power companies, including the mighty Bonneville Power Administration in Portland, Oregon.

"We have severely limited our business with Enron," said Stephen Oliver, vice president of power marketing for BPA, which sells wholesale electricity from a string of huge dams along the Northwest's Columbia River.

Oliver said BPA, which has done business with Enron for six years, owes the company money but he declined to say how much.

"We have zeroed out their credit limit, and any business going forward with Enron would be within the amount of money owed to them," he said.

PAYMENT UP FRONT

Enron's shaky financial status has prompted some traders to demand payment up front, a move taken by the Western Area Power Administration, which markets hydroelectricity from 56 federal dams for the US Department of Energy.

WAPA spokeswoman LaVerne Kyriss said some of their regional offices have halted spot market dealings with Enron and are seeking to renegotiate a 10-year deal to buy power from Enron.

"We are working to protect our utility customers and the federal government," Kyriss said.

Traders throughout the utility industry said they had curbed or dropped long-term trades with Enron, which involve deals lasting anywhere from a week to several years.

As Enron's financial woes deepen, traders said they are searching for "sleeves", or middlemen, to provide a financial buffer in brokered spot market deals with the company.

In such a deal, a utility, for example, will offer to sell its surplus electricity or gas through a broker, trusting the broker to line up the best anonymous bid in the market.

If the top bidder turns out to be Enron, many utilities will turn down the deal unless they have a middleman willing to take ownership and guarantee payment of the energy being sold.

This allows a utility trader to indirectly conduct business with Enron while staying within the utility's credit limits.

TAKING A TOLL

The toll all this is taking on Enron's business is hard to measure.

Enron, like most trading houses, does not disclose its market positions or how much of its activity is wrapped up at any given time in natural gas or electricity - its two biggest markets - or its other energy and financial transactions.

"We don't break things out by type of product," Enron spokesman Eric Thode said.

Thode said the company had seen a drop in trading volume, about 60 per cent of which is conducted over its prized EnronOnline Internet trading system and 40 per cent in the over-the-counter market.

But the company's 30-day rolling trade average showed Enron was doing about 5,400 transactions a day, with a daily notional value of $2.8 billion, which is well within its daily average of 4,700 to 5,700 transactions this year.

"Certainly, our volumes have dropped below our 30-day rolling average ... but confidence is still being shown by the great majority of our trading partners," Thode said.

YOU MAY ALSO WANT TO READ:
Dynegy to buy once-mighty Enron for $9 billion

Tell us what you think of this report