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In her brief tenure as CEO of energy provider Mirant Corp., Marce Fuller has had to deal with one crisis after another. In the 20 months since she oversaw the spin-off of Mirant from Southern Co. -- a move that allowed the Atlanta-based regional utility to cut loose its unregulated and fast-growing "merchant energy" operations -- Fuller has had to weather the political attacks on out-of-state energy producers by California politicians and the fallout from the Enron scandal.
While the California controversy has since blown over, the company continues to suffer in the wake of Enron. Fuller has been forced to make tough cuts in Mirant's operations as investors grow skittish about the prospects for the new breed of independent power producers. In December, Mirant (MIR
) was rocked when Moody's Investors Service downgraded its credit rating two notches from Baa2 to Ba1, which is considered "junk" status.
Moody's concern: that Mirant's cash flow would be restricted if its trading income drops. That in turn would test its ability to meet its obligations, which include financing power-plant construction, making interest payments on its debt, and paying dividends on its preferred stock. (The other rating agencies, Standard & Poor's and Fitch's, haven't changed their ratings on Mirant.) Investors have become spooked as well, bidding down Mirant's shares from a 52-week high of $47.20 last May to around $10 now.
While Fuller disagreed with Moody's move -- noting afterward that she still expected Mirant to have $4.8 billion in liquidity available in 2002 -- she nonetheless has scaled back her ambitious growth plans. She has cut jobs, sold off assets in Europe and South America, and slashed investment plans for new power plants. On Jan. 30, Mirant reported a 55% drop in fourth-quarter earnings, to $30 million, due in large part to a $66 million exposure to bankrupt Enron. It said 2002 profits would fall between roughly $576 million and $612 million, or 15% less than previously forecast.
Dean Foust, BusinessWeek Atlanta bureau chief, recently spoke to Fuller about the tougher climate for independent power companies and how her company is faring. Edited excerpts of their conversation follow:
Q: What effect has the Enron bankruptcy had on Mirant?
A: There's no question our sector is out of favor. If a company the size of Enron could go bankrupt, then anyone could. You'll see companies scale back their plans for growth. We've had to adjust our growth plan to meet this new market reality. We're not in trouble financially, but we've cut our capital budget by 40%, reduced our growth rate, and sold some assets.
We're the 13th-largest owner of power plants in this country. That's the reason we're in trading and marketing -- to minimize the risks of these plants. Some 80% to 90% of the money we make is from our [generating] assets. That isn't well understood. I would not want to own assets without having a trading operation. The key is to integrate the two.
Q: Do you think there's a risk that Enron's failure creates a political backlash against deregulation that could legislate the merchant business away?
A: I don't think it will. The competitive wholesale markets have proven they are robust and viable. They will continue.
Q: Is Enron's collapse going to spell doom for the burgeoning merchant-energy business?
A: With every day that goes by, it's beginning to look more and more like Enron's failure was due to very bad business behavior that was unique to Enron as a company. I think [what happened to] Enron is not a reflection of our market. It's a reflection of that company and its behavior. It appears there was a culture of arrogance, a culture of greed, a culture of secrecy. It's not an acceptable part of [Mirant's] culture to behave that way.
Enron's failure had nothing to do with the merchant-energy business. In fact, [energy trading] was the business that they tried to preserve to the very end.
Q: What effect has Enron's collapse had on the trading business?
A: There were predictions that if Enron went away, you'd see price spikes. There has been nothing like that.... We had 13,000 transactions we had to net out of or cover within hours or a few days [after Enron announced its bankruptcy], and we did. The industry has functioned very well -- probably better than anyone would have imagined.
Q: There are market rumors that some of your trading partners have stopped doing business with you for fear you're suffering from a cash or liquidity crunch. Have any customers stopped trading with you?
A: The vast majority of people we do business with have not cut us off. There are some who have, but it is not a lot. We're still making money on trading. Our business is still functioning and operating very well.
Q: Have you changed your accounting methods in wake of Enron's collapse?
A: We don't have anything to hide. The only off-balance-sheet activity we have is very vanilla lease financing.
Q: So if most of your trading is simply selling and hedging the power you're generating in your own plants, why did Moody's downgrade you?
A: I don't know. We would like to have a better understanding of why the criteria changed and what it changed to. It's certainly their prerogative to change the criteria. [Having a junk credit rating] is a very inefficient way to finance our business.
Edited by Patricia O'Connell
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