US energy marketers admit to 'round trip' power trades but deny use of Enron tactics

By OGJ editors

Tulsa-based Williams Cos. Inc. has become the latest in a growing number of US energy marketers and traders having to step forward to defend its electricity trading practices to the US Federal Energy Regulatory Commission and other government agencies. Williams was among more than 100 other energy marketing companies—which included Houston-based energy firms Dynegy Inc. and Reliant Resources Inc. and CMS Energy Corp. of Dearborn, Mich.—asked by FERC earlier last week to provide information about so-called 'round-trip' electricity trades, especially those sold into California's power grid. The companies have until May 31 to comply with FERC's request, and many in the last few days have already issued statements either denying or explaining such trading practices.

News of the controversial round-trip trades—which involve simultaneous sales and purchases with the same counterparties at the same price—surfaced while government agencies started their investigation into the trading practices of now-bankrupt energy trader Enron Corp. FERC has since focused its probe of such trades on those that some critics claim may have served to artificially elevate electricity prices last year in power-starved California. When conducted, the trades did not translate into any profit, loss, or cash flow for any of the companies but rather would inflate trading volumes, oftentimes misleadingly, critics charge.

Williams's response
After a review of its own trading activities over the last 2 years, Williams, in a written statement, said that it "did not engage in the strategy of so-called 'round-trip trading' for the purpose of inflating volumes or revenues." Steve Malcolm, Williams chairman, president, and CEO, stated, "Round-trip trading didn't add a nickel to our revenues."
Malcolm added, "Even though the number of trades we've found with these characteristics is extremely small, the very nature of reporting on a net basis means that they are not included in our reported revenues. It clearly does not reflect an ongoing business strategy." Williams noted that it is the only major energy marketing company that accounts for its trading revenues on a net, rather than a gross, basis.

"Williams's trading data shows less than 1% of its reported power and gas trading volumes in 2000 and 2001 had any characteristics now associated with 'round trip trading,'" the company said. Malcolm noted, "It's not a surprise that, in our extensive internal review, we didn't find any alleged Enron-style trading strategies because we are—and always have been—very different from Enron."

In a research note commenting on Williams's reaction to FERC's inquiries, UBS Warburg LLC analyst Ronald Barone stated, "With subpoenas flying, we believe the political pressures against Washington [and] the FERC have grown to the point to where some sort of concession on refunds and/or contracts is likely." In addition, Barone noted that FERC's finite timeframe for companies to conduct their own internal investigations, "could suggest the potential for incremental disclosures down the road as transactions are scrubbed."

Barone added, "This is particularly true, given what appears to be seemingly endless requests from the FERC for information on various types of market activities and the alleged accusations that Enron proactively manipulated the market during a time when billions of dollars of sales or contracts were facilitated."

In a release issued Tuesday, Williams said it plans to issue $1-1.5 billion in common equity and sell an additional $1.5-3 billion in assets over the next 12 months. It said it would also reduce costs by $100 million/year and fund a base-level capital expenditure program with cash flow from operations.

"Williams has taken and continues to take quick decisive action to improve our financial strength," Malcolm said. "Clearly we believe that fully executing our plan should put us very solidly in the investment-grade category and allow our business to achieve its long-term growth potential," he said.

Following release of Williams's plan, credit rating agency Standard & Poor's placed Williams's rating under downgrade status. The new rating is BBB- with a negative outlook. Williams said it was "disappointed?but not surprised" by S&P's announcement.

"[Williams's] management has proven to be very proactive in enhancing the company's liquidity position during a time of duress, following the market turmoil caused by the Enron Corp. bankruptcy," S&P reported.

CMS, Dynegy responses
In a written statement last Friday, CMS Energy said it would establish an internal committee to "investigate matters surrounding round-trip trades" carried out by the company's energy marketing unit, CMS Marketing, Services & Trading (CMS-MST). In a separate statement, also issued Friday, CMS Energy announced the resignation of William T. McCormick Jr., as the company's chairman and CEO. McCormick will be succeeded by fellow CMS Energy board director Kenneth Whipple.

McCormick's resignation marks the company's second for a leading executive in a week. Last week, Tamela W. Pallas resigned from her position as president and CEO of CMS-MST (OGJ Online, May 21, 2002).

Separately, Dynegy CEO and Chairman Chuck Watson stepped down from his positions with the company. During a press conference held Tuesday, company executives downplayed any possible link between Watson's resignation and the continuing investigations by the Securities and Exchange Commission into the firm's trading and accounting practices (OGJ Online, May 28, 2002).

In a May 22 FERC filing, Watson said, "We took a comprehensive look at our activities during the 2000-01 timeframe, and we reaffirmed that Dynegy has operated within the rules and protocols established by the California Independent System Operator and the California Power Exchange."

Watson noted in that filing, "Dynegy has consistently participated in discussions with federal and state regulators with the goal of improving California market conditions and is committed to continued open dialogue."

Reliant Resources response
Reliant Resources, a unit of Reliant Energy Inc., this month announced preliminary findings of its review of power trading transactions involving round-trip trades. On May 10 the company canceled its $500 million, 10-year debt private placement when it realized—subsequent to the pricing of the debt offering—that it had "likely engaged" in the practice of round-trip trading.

"While Reliant Resources is still completing its review of these trades, to date it believes that it engaged in trades of this nature on the order of 30 million Mw-hr in 1999, 30 million Mw-hr in 2000, and 78 million Mw-hr and 45 bcf of gas in 2001," the company said. These transactions, the firm noted, increased revenues by about 10% over the 3-year period.

In future recording of such transactions, the company said that it would consider presenting all mark-to-market transactions on a net, rather than gross, basis. "These transactions were inconsistent with our company philosophy," said Steve Letbetter, chairman, president, and CEO. "These transactions resulted from some misguided employees who believed that being higher in the league tables of energy trading was important. These types of transactions are no longer occurring at Reliant and will not occur in the future," Letbetter said.

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