By Siân Green
US energy company Aquila announced in early August that it is to exit the wholesale electricity marketing and trading business, resulting in job losses of around 500 in its Merchant Services’ North American and European workforce. The company also announced plans to find a buyer for its share in Avon Energy Partners, the holding company for Midlands Electricity in the UK.
These moves are part of wider plans to reduce risk exposure and restructure the business in the wake of Enron’s collapse, and are typical of the steps taken by a number of other US energy companies. Dynegy, Williams, Mirant and many others are fighting off credit downgrades by cutting costs, selling assets, and restructuring debt.
Aquila will exit the energy trading business by the end of the third quarter 2002. It had already eliminated ‘speculative’ trading and other market-making activities in its Merchant Services business, resulting in a 90 per cent reduction in physical throughput.
Aquila is one of many US energy companies to reduce exposure to the power trading market
“We believe that it is in the best interest of our shareholders to completely exit the wholesale energy marketing and trading business,” said Robert K. Green, president and CEO of Aquila. “Our focus now is to ensure a coordinated and seamless exit.”
The company is also selling its 79.9 per cent share in Avon Energy Partners which it only acquired in May 2002 from FirstEnergy. In total, it is planning to sell $1bn in assets, and the sale of its Avon stake would take Aquila ‘well beyond’ this target. It is also selling United Networks, the largest energy distribution company in New Zealand, and a number of natural gas assets.
Like other US energy trading companies, Aquila has been downgraded by ratings agencies such as Fitch and Standard & Poor’s in a reflection of its exposure to trading and of its balance sheets. In August, Fitch downgraded Aquila’s ratings outlook from stable to negative, but the company retains its investment grade credit rating.
The withdrawal of companies such as Aquila from Europe’s power trading market following the collapse of Enron has left a gap. Enron was the most active trader in the market and its demise has affected the credit standing of other traders as well as the level of liquidity in the market. In July, both Shell and TXU Europe encountered criticism for a number of ‘tolling’ deals they had set up in the UK.
European energy trading companies are now finding it harder to contract as easily as they could in the ‘Enron era’ due to tougher credit scrutiny. However, their exposure to Enron was relatively small and has had little financial impact.
The demise of Enron has also had little impact on energy utilities which carry out trading as part of their wider activities, according to Anthony Flintoff and Paul Lund of Standard & Poor’s. Those with the largest exposure were the banks and financial institutions which backed Enron, says Flintoff.
But it remains to be seen whether the gaps in the trading market left by Enron, Aquila and others will ever be filled. According to Flintoff, the increasing sophistication of Europe’s power utilities with regards to cross border trading means that there is now less demand in the market for trading intermediaries. Large utilities such as RWE are becoming more dynamic with regards to risk management, and with liquidity in the balancing market now reduced, these companies are recognising the need to balance earlier, says Lund.
On the trading side, it seems that the presence of the US companies was not as large or significant as was originally thought. They traded large volumes because margins were small, and so contributed to liquidity, but it seems that Europe’s energy companies do not necessarily need liquidity to operate.
Nevertheless, trading companies in Europe have started to look at ways of improving confidence levels in the market, including standardizing methods of calculating net trading positions between counterparties and coping with contract defaults. A draft agreement has been set up, based on terms designed by the Bond Market Association. Under its terms, firms would be allowed to keep track of their net exposure to trading partners more efficiently, allowing them to be better prepared for contract defaults.
Away from the trading market, the sale of power and natural gas assets owned by US energy companies is creating opportunities for other energy companies to expand their presence in Europe. Utilities such as Electricité de France (EDF), RWE and Scottish and Southern are all keen to fill this gap, especially in the UK market where falling power prices have made life difficult for generators.
Power utilities will therefore be keen to buy assets which will give them access to end consumers as this is an easy way for generators to hedge against risk without trading. This was reflected by Aquila’s Green: “Since announcing our intent to sell $1bn in assets, we’ve had inquiries related to our entire asset portfolio. In the case of Midlands Electricity, we’ve received a sufficient number of serious enquiries that have led us to initiate a bid process.”