I’ve linked dozens of articles over the years from the always excellent Paul Ring, over at Energy Choice Matters. Earlier this week, he published another great article where he spoke with several executives at NRG Energy, the company that owns Reliant Energy, Green Mountain Energy, Pennywise Power, and Energy Plus.
What was most interesting about the article to me was not necessarily what the executives said, but the fact that they admitted it at all on the record. That being said, the interview is pretty interesting. You might recall that a month or two back, I wrote an article where I took a look at the dangers of the summer electricity crisis and predicted that several Retail Electricity Providers might go out of business. In that time, not a single provider has gone out of business, which certainly hasn’t helped my batting average. However, what is interesting, is that according to the NRG executives, THEY are just as surprised that no REP’s have gone out of business as me. Apparently, that’s also what they were predicting.
“To be frank we have been surprised that we haven’t seen more visible fallout from that in terms of other participants in the market,” Crane said. Though REPs which exit the market can do so quietly if no default is involved, Crane confirmed that NRG has seen “very little” fallout from the August wholesale pricing to date.
“We don’t have a good explanation for that,” Crane added, agreeing with an analyst that more fallout was expected, particularly for small REPs and those not owning generation.
Given that more than 30 days have passed since the end of August (and 45 days since the middle of the month), the lack of fallout is not simply due to a lag in the ERCOT settlement process, Crane added.
The Crane who was quoted in the article above is NRG CEO David Crane, by the way. And while there’s plenty to discuss in that quote, I would like to draw attention to his last statement regarding generation. I found it interesting that Crane admitted that companies like NRG and Energy Future Holdings (who owns TXU) and other companies like Direct Energy have advantages for also having ties to the actual energy generation part of this process. Crane’s statement that he expected REPs not tied to any generation resources to struggle directly counters the blog post by a Stream Energy (the largest REP in the country without any ties to generation resources) employee who stated in a blog post that the intense heat and drought in Texas this summer didn’t stress their ability to procure wholesale energy.
The blog post in question was direct response to the original piece I wrote about market dangers which I have already linked above. And of course, what else could the Stream Energy representative say? He was assuring his customers and his multi-level marketing associates that Stream wasn’t in any kind of financial trouble and were in good shape. And by all accounts, he was right, as Stream seems to be doing fine as well as many other REPs in the market, as supported by Crane’s statements. And by fine I mean still in business. But still, it would definitely seem from both statements that there’s some inconsistency on whether or not having ties to energy generation is an advantage for a retail electricity provider, if not in procuring energy than certainly in profitability. Interesting.
The article then goes onto discuss the presence of “lockbox providers” that basically act as financial stop-gaps for smaller or mid-sized REPs. Something like a co-signer on a loan, although that is an EXTREME over-simplification. The point is that Lockbox providers/partners only work with businesses they find sound financially and operate with good business practices, since these partners don’t actually want to run and operate an REP themselves. The short of it is that NRG’s CEO is suggesting that many of these lockbox providers were likely willing to step in and cover the summer losses with the thought of long term interests instead of letting their partner REPs default and leave the market. It is my understanding that because of the current environment of the Texas Energy market, almost all providers operating have some kind of lockbox agreement in place just do business. That, or they’re big enough that they don’t need one.
Anyway, back to the initial article. How nasty might the summer crisis have effected the REP’s operating in the Texas deregulated electricity market? We’ll never know, since no one seems to be going out of business (although many companies have sold to huge energy conglomerates recently). But, we might be able to speculate based on some info at the end of Paul Ring’s article:
As a result of August, NRG lowered its forecast of adjusted EBITDA for 2011 to a range of $1.775 billion to $1.85 billion, down from the August 4 guidance of $1.9 billion to $2.0 billion.
At Reliant, adjusted EBITDA guidance is now $550-$575 million versus the earlier $610-$660 million. At Green Mountain, the adjusted EBITDA guidance is now $60-$70 million versus the earlier $70-$80 million.
For those of you that don’t speak Math or Accounting (like me), EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. “EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.” So what do the numbers mean? All of NRG, which includes nuclear power plants, many natural gas and coal power plants across the country, as well as Reliant, Green Mountain Energy and more, is down 225 million dollars from their initial projections before the summer started. That’s almost 13%. For all of NRG. Reliant’s projections are down almost 20%. Green Mountain is down approximately 12.5%. From one month. Keep in mind, those numbers represent the ENTIRE YEAR of 2011. Because of approximately 6 or 8 weeks of horrendous weather.
That is taking a beating in the marketplace, in my opinion.