Mary Shelley could have written the plot line. An astonishing, bold experiment suddenly goes terribly wrong, ending with an angry mob of citizens chasing a bloodied and confused monster with big clubs and torches.
The scenario is all too familiar for CFOs at energy companies. Afterall, in the wake of the chaos triggered by market deregulation in California — along with other assorted scandals — energy company executives have been all but demonized by politicians and media types.
Of course, in many ways, these executives have only themselves to blame for their current public image, which places somewhere between Spiro Agnew and Vlad the Impaler. The continuing horror show in Texas has not helped, that’s for sure. The Enron Corp. bankruptcy—triggered by questionable off-balance-sheet deals concocted by then CFO Andrew Fastow—touched off a freefall in power industry stock prices. Indeed, stock prices for traditional utilities dropped 5.1 percent after the scandal in Houston first broke, says utility analyst Paul Fremont of Jefferies & Co. More telling, the market capitalization of pure power generators — the independent companies that do not own transmission or distribution assets — sunk by 73.5 percent when Enron unraveled in December.
While the slide in share prices has slowed—the Dow Jones Electric Utilities Index dipped by only 0.66 percent from June 1 to July 1 — the energy/power company sector continues to be dogged by an endless series of accounting fiascos and scandals. Last month, for instance, shares of Michagan-based CMS Energy fell 6 percent to $12 after the company’s management shuttered the “speculative” arm of its energy trading business. The closing followed management’s admission that CMS Energy booked $4.4 billion in round-trip trades and inflated its revenue by as much. All told, the company’s stock price dropped by more than 50 percent over the past year. In May, CMS Energy’s CEO resigned.
Other power providers have not fared any better. In May, Reliant Resources’ share price sunk by 20 percent after management acknowledged the company was being investigated by the SEC. Reliant has continued to battle rumors that it too conducted round-trip trades to boost transaction volume. This month, the CEO and CFO at Dynegy Inc., another big energy player located in Texas, resigned amid revelations that like Enron, it’s executives used a special-purpose entity, dubbed Project Alpha, to hide debt.
What’s all this volatility mean to finance chiefs in the energy sector? For those who still have their jobs, scaring up capital has become a monumentally difficult task. Compounding the problem, says Patric O’Kelley, CFO of industry trade group Edison Electric Institute (EEI), is that most electric company finance chiefs have never had to deal with a cash-crunch before. Many of these executives cut their financial teeth in an industry graced with monopolies and guaranteed returns on capital investments. Now, they face a host of competitors—market mob rule, if you will.
Kelley, who often acts as a sounding board for financial chiefs at more than 100 power companies, says that industry CFOs are working hard to bring back reasonable pricing on debt and equity deals, and rein-in financial covenants that are laden with penalty triggers.