Costly Shakeout Still Looms, Energy Watchers Warn

There are some who would say that that the energy sector could stand to adopt one last Enron-like practice.

The energy merchants whose shares rose, plunged and are now rising again could employ Enron's old "survival of the fittest" strategy to shake out weak competitors, so that the strong can move on. And the Enron case could in turn leave the sector with a final lesson that actually brings less harm than good.

It's "all about corporate revitalization -- eliminating wealth-destroying practices and freeing up resources for higher-valued uses," economic consultant David Haarmeyer recently wrote in the New Power Executive. "This is certainly what the energy industry requires."

But instead, many energy merchants are hooked up to life-support systems that, some say, simply drain precious capital while delaying inevitable doom. In recent months, many struggling merchants -- including AES (AES Quote), Allegheny (AYE Quote), Aquila (ILA Quote), Dynegy (DYN Quote) and Reliant (RRI Quote) -- have convinced lenders to float them billions more so they can weather the bad times and rebuild for the good times they hope will return. With immediate liquidity pressures lifted, the companies' stocks have soared to post some of the most spectacular gains in the market. But underneath those strong, new stock prices, critics say, are the same weak companies that first dragged the shares down.

"The refinancing transactions push out the maturities with more medium-term debt, without addressing the underlying fundamental credit issues," Standard & Poor's recently observed.

Industry critic Karl Miller is more succinct.

"Hope is not a strategy," said Miller, a former industry executive who now leads an energy-related acquisition firm. "And there's a lot of hoping going on in this industry right now."

Making a Mess

In an empirical study of financially distressed companies published by New Power Executive, Haarmeyer cast some light on what could happen to junk-rated companies now attempting to restructure in the merchant energy sector. He emphasized that restructuring is a "messy process," involving multiple players with differing views, that sometimes can be cleaned up only in bankruptcy court.