Credibility in jeopardy

By Pam Boschee, Managing Editor

Category: Embarrassing Marketing blurbs. For $500: Reliant’s last straw that broke the credibility camel’s back. Answer: “What is ‘electricity from people you can trust’?”

Yes, Reliant’s homepage on its Web site makes that proclamation in a fairly large font. But given the latest developments in Houston, someone needs to alert Reliant’s Webmaster to the urgent task of doing something about that slogan.

Reliant admitted in mid-May that it engaged in sleight of hand tricks with other industry illusionists to boost apparent trading volumes, thereby also padding revenues.

The latest uncovered trick involves trades in which two parties buy and sell electricity to each other at the same price-also resulting in deception about market share numbers.

Over the past three years, such deals between buddies made up 10 percent of Reliant’s revenues. Last year, they accounted for 20 percent of its electricity trading.

Steve Letbetter, Reliant Resource’s chairman and CEO, said “some misguided employees” were responsible for these trades and that “these transactions are inconsistent with our company philosophy.”

Who were some of the illusion partners? At this early stage of inquiry, fingers are pointing at CMS Energy Corp. and Dynegy.

A confession of sorts was made by Xcel Energy in an attempt to “clarify” its role with Reliant. Xcel issued a press release stating that in 1999 and 2000, Public Service Co. of Colorado, a subsidiary of Xcel, was approached by Reliant Resources to enter into this type of “wash” transaction for which Public Service Co. then received a small profit. Xcel said no transactions of this type were conducted in 2001 or 2002.

Reliant Resource’s decision to cancel a $500 million bond issue after news reports flew about these wash deals had Moody’s considering cutting Reliant’s rating to junk at press time.

You can almost hear the collective groan from trading companies as these revelations act as new sparks re-igniting fires that had, in some cases, finally been brought under control and contained as smoldering hotspots.

For example, Mirant has been plugging away over the last couple months at achieving its goal of strengthening its balance sheets and improving its liquidity. In March, I mentioned its announced goal of raising $1.6 million. At that time, Mirant had completed the sale of its ownership stake in Bewag, a Berlin-based utility-dropping $1 billion into its piggybank. Other sales followed: Mirant’s State Line Ventures Inc. went into Dominion’s pocket for $182 million, and Cleco Corp. agreed to assume Mirant’s $19.5 million future equity commitment to a 50/50 joint venture, Perryville Energy Partners LLC (a 725 MW power plant in northeast Louisiana), between the two companies. Cleco also agreed to pay $48 million to retire Mirant’s project debt.

In early May, Mirant announced two more asset sales-this time with an international twist. It sold its 60 percent interest in a 750 MW power plant (Kogan Creek) in the state of Queensland, Australia, to CS Energy Ltd., who previously held a 40 percent share. Proceeds from the sale were not disclosed. Most recently, Mirant sold its stake in a Chinese power development company, Shandong International Power Development Company Ltd., for $115 million.

On the Friday (May 10) preceding Reliant Resource’s disclosure regarding its wash transactions on Monday (May 13), Marce Fuller, Mirant’s president and CEO said, “Because of the rumor and discussion about our industry, I feel compelled to make it clear that Mirant has not performed any simultaneous buy and sell trades with counterparties for the purpose of inflating its trading volumes or revenues. This type of activity is not tolerated, nor will it ever be tolerated, at Mirant.”

Clearly, Fuller hoped to reclaim credibility for her company. This, however, is not going to be an easy task for any of the trading companies as long as the murky waters remain churned by events such as Reliant’s wash transactions.

I don’t envy the people charged with the responsibility of patching up the blown-out reputations and, more importantly, investors’ perceptions of their companies. Earning their trust-and investment-is going to be a long, hard struggle for many of these companies.

One of these people is Melanie Trent, who was named vice president, investor relations, for Reliant Resources on May 9. I wonder if she was robbed of the deserved celebratory frame of mind, considering what her company was about to announce on May 13 and what the resulting fallout would be. Her weekend was most likely consumed with planning for the impending requirement for damage control.

Trent is an attorney who prior to joining Reliant in 1998 practiced corporate and securities law. I have no doubt that she is now wrapped up in Reliant’s complex corporate and investor strategies and I would not expect her to be bothered with what may be considered small details. But, just in case: Ms. Trent, please take care of that slogan.

Pam Boschee, Managing Editor

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