US energy traders are being faced with a liquidity crisis in the wake of a series of scandals and sharp falls in their share prices. To maintain liquidity they are being forced to position assets for sale. Dynegy, at one time the prospective white knight for troubled Enron, has had to divest itself of a key gas pipeline reluctantly ceded to it by Enron following their failed merger. Dynegy has recently posted a $328 million second quarter loss and cut its earnings estimate by 80 per cent, blaming a variety of causes.
The Northern Natural Gas (NNG) pipeline is to be sold to MidAmerican Energy Holdings for $928 million in cash plus $950 million in outstanding NNG debt. The boards of both companies have approved the deal which is expected to close before autumn this year.
The most recent scandals are over wash, or round trip, trades, where electricity or gas is simultaneously bought and sold at the same price with the same counterparty.
Duke Energy has admitted that it had found 23 such trades made on the Intercontinental Exchange, and though Duke said it had investigated the trades and found they were hedge trades or done at the request of a third party, it nevertheless received subpoenas from the Commodity Futures and Trading Commission and the Houston office of the attorney general. Duke's shares, which had been holding most of their value because its trading arm is small in comparison to its energy supply business, fell sharply when the trades were revealed and the company may now be faced with ratings agency reviews. Such a move has forced other players into divestments or the formation of alliances.
Other companies that have admitted carrying out wash trades include CMS, Reliant and Mirant. Mirant, which recently reported a $151 million second quarter loss, is now to be the subject of shareholder litigation as well as an informal enquiry by the Securities and Exchange Commission over its own admission that it might have misstated $233 million of assets and liabilities in 2001.
In a bid to restore investor confidence in the wake of the scandals, President Bush has called for a new ethic of responsibility in America's corporate community, and prepared the ground for a corporate fraud task force to provide oversight and improved inter-agency co-ordination of investigations. The President also proposes doubling the maximum prison term for mail fraud and wire fraud to ten years and enhancing prison time for criminal fraud when committed by corporate officers and directors. The president also proposes strengthening laws that criminalise document shredding and other forms of obstruction of justice, and new provisions to strengthen the ability of the SEC to freeze improper payments to corporate executives while a company is under investigation.
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