New York
Throughout 2002, Miller McConville & Co. has continued to raise serious concerns regarding the mounting energy debt crisis and significant management problems in the U.S. power and gas industry. The firm has been critical of industry management and the announced pipeline and production asset sales of the likes of Dynegy, Williams, El Paso, and others. The company believes the market should pause for serious review of recent activities, especially that of senior management.
Asset sales will definitely strip many of these distressed power and gas companies of stable, dependable annuity like cash flows. The senior management teams and the company directors who led these companies into the abyss are still being given carte blanche to collateralize and sell off valuable assets at significant discounts. This activity is being orchestrated primarily to continue funding a volatile portfolio mix, with questionable forward values and to perpetuate management's own position.
Miller McConville has led the charge against the Master Limited Partnerships (MLP), including raising serious fiduciary issues. These issues are now beginning to surface across the industry regarding the relationships and affiliated asset sales. The MLPs are controlled by their General Partners, many of whom just happen to be the energy companies selling the assets. Some examples include El Paso Energy Partners, Williams Energy Partners, TEPPCO Partners and Duke Energy among others. Many of the senior management and directors of the El Paso, Williams and Duke energy companies are also directors of the Partnerships. The companies reap disproportional and substantial fees by acting as the General Partner. "There are some very serious fiduciary issues here and the management and directors of these companies are on very thin ice. Has management learned nothing from the Enron disaster," said Karl W. Miller, a senior partner at Miller McConville.
Other experts agree, and market pressure is mounting for a significant change in management across the power and gas sector. Standard and Poor's lead energy analyst Ronald Barone recently stated, "Senior management had failed miserably in their strategy and not delivered the cash flow over the last five or six years."
The audit trail leads directly back to the senior management teams and their ultimate handlers, the board of directors. "The track record of these management teams is dismal by any measurement and the potential liability is extremely high," said Miller.
Industry professionals continue to question why there has not been wholesale replacement of these senior management teams, who have created such financial devastation. One unnamed industry analyst recently stated, "The board of directors at many of these companies seem to be like deer caught in the headlight on the highway."
Miller agreed, "If you look across the power and gas sector at the executive management teams, not much has changed. Perhaps a bit of window dressing and chair shuffling, but the core architects of the problems remain in place. El Paso Energy is a classic example of window dressing with no real change. They move from one off balance sheet vehicle to the next and shuffle the same management team between offices.
"The industry needs strong leadership with credible management teams in control of the process."
Miller further cited Standard and Poor's credo regarding senior management. "Ultimately a corporate credit rating reflects Standard and Poor's assessment of management ability to define and execute a business strategy. Since much of the power and gas sector has been downgraded to junk status, can we now infer something about the quality of management?"
Many restructuring experts believe that the creditors and shareholders of these distressed companies would fare better if they sought bankruptcy protection immediately, rather than continuing to add on collateralized debt obligations, while at the same time selling off quality assets at significant discounts. Consensus seems to be building that management is sacrificing the future long-term health and stability of these companies for a short-term cash flow fix.
Selling assets at a discount in a distressed environment is not the only alternative. Many experts believe that these companies should negotiate what is commonly referred to as a Pre-Pack or pre-arrangement with existing creditors, which would lead to a much quicker entry and exit from bankruptcy. They believe that asset sales are handled in a more disciplined manner through that process.
"We are facing a long-term structural problem for the entire industry, which will not be easily solved by short-term asset sales. We have to work the sector out of five aggressive years of substantial debt accumulation based on questionable financial pro-formas. I fully expect to see continued write-downs of assets throughout the sector, substantial debt restructurings and liquidation of many distressed public companies. Unfortunately, this ultimately comes at the expense of both secured and unsecured creditors and the common shareholders," said Miller.
Miller McConville & Co. is a New York-based energy acquisition boutique formed by a senior industry management team. For further information, e-mail MillerMcConville@aol.com.
