An Invitation From Ken Lay
The Year of Living Dangerously
Energy companies' best-laid plans in 2001 were put on hold, after circumstance and fate stepped in.
The year 2001 will not be remembered as a very good year in our industry. Energy chieftains who had positioned their companies to reap the rewards of merchant generation, energy trading, global power privatization, US energy restructuring and a stock market environment that had rewarded the bold risk-takers in the beginning of the year, found by the end of the year that the risks were not being outweighed by the rewards.
In fact, every significant utility and energy company strategy suffered some sort of setback. Those pursuing a retail competition strategy watched as the California Crisis precipitated a decline in interest by states in retail competition. Also, after the California Crisis, merchant generators were no longer estimated to reap the same windfall profits, and distributed generation companies no longer had rolling blackouts to point to as a reason to buy their product. In fact, the decline in the economy, combined with continuous merchant plant development, had Wall Street investors devalue the merchant sector's earnings estimates in September. It seems that fortune did not reward the risk takers, but the conservative, stable players, which kept their non-regulated businesses under the same umbrella with their regulated businesses.
In fact, it was low-risk, stable earning companies like KeySpan that were rewarded this year at the Edison Electric Institute Finance Conference for long-term financial achievement. The company received the EEI Index Award for having achieved 265 percent total return over the five-year period 1996-2000, exceeding the S&P return of 114 percent for the same period. In previous years, EEI had awarded its coveted prize to companies that had diversified and pursued aggressive non-regulated activities such as generation and telecommunications.
Not this time. KeySpan is a large distributor of natural gas in the Northeast, and the largest investor-owned electric generator in New York State.
Maybe it is no coincidence that several companies announced dramatic shifts in their corporate plans following the conference itself, shifts back to an integrated utility structure.
In fact, UtiliCorp United's CEO Richard C. Green, Jr. decided to bring his company's power marketing and trading company back into the fold by reacquiring all the shares of the partly spun-off company. This was less than a year after the company had spun off its Aquila subsidiary. What happened?
"The recent significant changes in the merchant energy sector, the general economy and the impact of these changes on the capital markets were definitely factors in the board's decision,'' said Green.
Of course, Green was not the only one this year to reposition his company. In a surprise announcement, Constellation Energy Group announced that it had chosen to remain a single company with two major lines of business, thereby canceling its previously announced plans to separate its merchant energy business from its retail business, which includes Baltimore Gas & Electric.
Even more of a surprise, Constellation and Goldman, Sachs terminated its power advisory relationship. I still remember being given a tour of Constellation's swank, hard-wood