Utility Company Mirant Tries to Recover from Enron Debacle, Economic Downturn

By Matthew Quinn, The Atlanta Journal-Constitution Knight Ridder/Tribune Business News Feb. 10--

When Southern Co. spun off its highflying energy trading arm last year, Wall Street was more excited about the newborn -- Mirant Corp. -- than about the stodgy parent, a utility holding company. Mirant Chief Executive Marce Fuller fanned the excitement with her bravado take on a future with "endless opportunities." In a letter to shareholders last March, Fuller said Mirant was on track to become a company with a market value of $50 billion, producing and selling energy on three continents and growing at breakneck speed. "We could be bigger than Southern Co. in five years," Fuller boasted even before the company's separation from its Atlanta-based corporate parent was completed.

A lot of investors and analysts bought into Fuller's vision for Mirant, and for a while it appeared justified. Mirant's profits soared, and its share price shot from an initial $22 to $47.20 last May. But today, Mirant is shrinking rather than growing. Its stock price has lost about 80 percent of its value from its high point. The company's credit rating, vital to its growth, has been downgraded to "junk" status by one of the three leading rating agencies. Major projects are being canceled in a rush to preserve cash. Layoffs are expected at Mirant's corporate headquarters at Perimeter Center. And speculation is rife about a potential merger or takeover of Mirant by a European utility or big oil company.

How Mirant went from being a bold new player in a go-go industry to a wounded also-ran in less than a year is summarized by some in one word: Enron. "We spent a great deal of time worrying about Enron issues," Fuller said in a recent interview. "There was even a word for it -- Enron envy. I would never have thought that what would hurt this company the most would be that Enron would fail." In the wake of Enron's bankruptcy, Fuller and her senior managers are taking great pains to tout Mirant as the un-Enron. "What brought Enron down had nothing to do with what we do out on that trading floor," Fuller said, gesturing from her wood-paneled office toward Mirant's year-old high-tech energy trading operation. It borrows heavily from Enron's innovations. Fuller said the entire energy sector shouldn't be punished for Enron's crash. Because of Enron's business practices, it would have had problems no matter what business it was in, she said. "If Enron had been selling Girl Scout cookies, the same thing would have happened."

Yet there are some striking similarities between Enron and Mirant that go beyond the fact that they're in the same business -- buying and selling energy commodities. Among them: -- Both companies use the accepted, but now controversial, accounting practice that allows energy trading firms to record as revenue the total value of commodities traded. That inflates revenue figures even though the energy companies never get much of the revenue from those deals. -- Both companies used the embattled accounting firm Arthur Andersen as auditor and consultant. Mirant paid the firm $2.2 million in audit fees in 2000 and another $1.2 million for financial information systems services -- plus $10.1 million for other services, including its stock offering and tax consulting. -- Mirant has three "off-the-balance-sheet" partnerships that the company has disclosed. The partnerships include a leasing arrangement for Mirant's Washington, D.C., power plants with $1.2 billion in obligations. Enron allegedly set up hundreds of hidden partnerships to conceal growing debt. Not everything at Mirant mirrored Enron, however. For example, Mirant relies heavily on its own power plants to generate electricity that is marketed through energy trading operations; Enron mostly traded energy and other commodities produced by others. Also, while some Enron executives sold shares worth millions before the collapse, there has been no massive sell-off of Mirant shares by company insiders as Mirant's shares plummeted. In fact, top Mirant executives have been purchasing shares. And Wall Street analysts have commended Mirant for its "transparency" in disclosing financial data. Many analysts couldn't fathom Enron's books. But Enron's shockingly swift fall was just one component of what Sean Murphy, Mirant's vice president and treasurer, calls a "perfect storm" of trouble that rocked Mirant. When a recession and tumbling energy prices converged with the Enron mess, Mirant began taking on water and is still fighting to right itself. It was a stunningly quick fall from Mirant's heyday, just months before. The company had moved into a new headquarters megaplex at Perimeter Center, with a trading floor the size of a football field, for its high-tech push into deregulated electricity and natural gas markets. Twenty-something traders earned as much as $500,000 a year; the parking deck was packed with sports cars. Citing Mirant's $30 billion in annual revenue,

Fortune magazine last October ranked the 41-year-old Fuller as the fifth most powerful businesswoman in the United States, two notches below Oprah. Now Fuller and her team are working to keep Mirant solvent, and it's a struggle. Instead of shaping its own future, as Fuller envisioned a year ago, Mirant's moves are largely being shaped by others, including its creditors and the rating agencies that guide them. In the wake of Enron's bankruptcy, Moody's Investor Service downgraded Mirant's credit rating to "junk" status over concerns about its debt level. Mirant's debt had ballooned to $8.5 billion at the end of 2001 from $1.75 billion at the start of its growth spurt as a Southern Co. subsidiary in 1996. Immediately after the December downgrade, Mirant raised $759 million by issuing new shares. Some $400 million in additional collateral had to be posted to finance Mirant's energy trading business. Mirant also is selling $1.6 billion in assets, canceling power plant projects and cutting capital spending through 2006 to $5 billion. As recently as last fall, the projected spending through 2006 was $23 billion.

The company's new five-year plan presumes no new borrowing, which in any case could be prohibitively expensive following the downgrade by Moody's. The company's European energy trading business also is for sale, and Mirant already had agreed before the Enron bankruptcy to sell its stake in Berlin's electric utility. But $900 million in proceeds will pay off banks instead of funding new projects. The company is expected to report its first-ever net loss for the current quarter -- due to nonrecurring restructuring charges, including severance packages, that could reach $250 million. That follows a $66 million charge Mirant took in the fourth quarter from energy trading deals with Enron, which at one time accounted for 20 percent of Mirant's revenue. A year ago, Fuller predicted annual earnings growth of 20 percent to 25 percent per share. But Mirant now expects earnings per share to decline by 15 percent this year, then be flat in 2003 if current market conditions persist. Starting in 2004, the company expects growth of 10 percent to 15 percent through 2006, assuming the market picks up. Based on a closing stock price of $9.93 Friday, Mirant's market value is now about $3.97 billion. Southern Co.'s is about $17.4 billion, based on its Friday price close of $24.99. Southern Co. is parent of five Southeastern utilities, including Georgia Power Co. "We've taken our medicine," Fuller told a Credit Suisse First Boston energy investment conference in Vail, Colo., last week. "We've faced reality."

But Mirant is not out of the woods. Fuller said she believes the company will retain investment-grade ratings from the two other ratings agencies, Standard & Poor's and Fitch Investor Service. But she conceded she still doesn't have a clear understanding of what Moody's wants Mirant managers to do to regain its higher rating.

Christopher Ellinghaus, an analyst at Williams Capital Group, said Mirant's future could ride on the ratings agencies. Whether Mirant will be able to meet requirements of an anticipated Moody's "white paper" on the independent energy sector could be critical, he said.

For her part, Fuller is trying to push ahead. Mirant will move forward with a focus on the United States, Caribbean and Asia, where it operates two profitable power plants in the Philippines. The company has held talks with banks and insurance companies about using their favorable credit ratings to back up energy trading deals. That would free Mirant cash now being used as collateral. The company has received a number of "feelers," executives have said.

On any given day, investment bankers can be found at the company's offices pitching deals of one kind or another. Fuller doesn't rule out the sale of a minority stake in the energy trading unit to a more creditworthy energy company. Chevron has such a relationship with Dynegy, a Houston-based energy trading firm, she noted. Fuller acknowledged that while such an arrangement might fuel speculation of a first step in a takeover of Mirant, she insisted that perception would be wrong. Murphy said it would be "hard to imagine" an outright sale of Mirant's trading unit because it is such an integral part of the company's strategy. Fuller is betting Mirant will survive intact, with the same basic structure, albeit in slimmed-down form. "I feel certain that we'll look back and say everyone overreacted to the Enron situation," she said.