Those deals, many running out over a decade, often lock the companies into contracts to supply power plant owners with expensive natural gas and sell the electricity into weak wholesale markets. "Some of the bigger (contracts) are still out there," said Arleen Spangler, credit analyst with Standard & Poors. "It's a big cash drain on them."
Credit analysts said the contracts are worth billions of dollars, but exact figures are hard to come by since many companies list them on their balance sheets under unspecified obligations.
Companies eager to control wholesale supply snapped up power generating capacity during the sector boom that unraveled with the collapse of Enron and the California energy crisis in 2000 and 2001.
Many companies, including Aquila Inc. and Dynegy Inc. have sought to renegotiate or buy their way out of the deals, but there have been few successes.
Dynegy has so far bought out of two contracts for $265 million, but has another five still on its books. But Aquila and others have found their power plant partners reluctant or unable to hash out new terms because they have tied the deals to complicated financial instruments. Other companies, such as Mirant Corp. or Xcel Energy Inc.'s NRG Energy, sought relief from bankruptcy courts, which have so far sided with the suffering merchants and indicated a willingness to dismiss the contracts.
"To ask for a restructuring, the threat is, 'Do it with us now or we'll do it in a bankruptcy court,'" said Stephen Schaefer, head of the energy consulting practice for Huron Consulting Group.
That threat helped Mirant reach a deal with Pepco Holdings on Monday to increase Pepco's payments by $60 million for two supply contracts to its customers in Maryland and the District of Columbia. However, federal courts have yet to decide whether the jurisdiction over the issues lies with bankruptcy judges or the Federal Energy Regulatory Commission, which has sought to keep the contracts in place.
DEBT BUBBLE
Many companies were driven to sign the contracts by efforts to prop up earnings, analysts said, rather than a strategic wholesale market motivation.
Those financial drivers were epitomized by Enron, which boosted earnings by booking long-term contract revenues on an immediate basis, even though the contracts later turned unprofitable. Companies have abandoned those accounting techniques, relying now more on cash received for earnings. That has exposed the money-losing contracts as bad commercial deals that prevent merchant companies from trimming their debt.
A report published by S&P's Spangler last week showed that 23 key merchant energy companies had so far refinanced about $47 billion of their total $90 billion in debt obligations set to mature through 2006.
Though banks had been willing to accept delays in debt repayments for a few years, companies have little extra cash because oversupply of power in many parts of the country has has depressed prices. Although many merchant power companies are seeking security from better structured, long-term supply deals, few buyers are signing up because of the current low prices.
"We're not seeing a big groundswell of people -- consumers -- that want to lock in supply," Schaefer said. That may hurt companies' financial health if a rebound in the wholesale sector does not happen before payment on the debt come due.
"The next round of financing that goes up in front of the banks in '06 or '07 -- (banks) may not agree to extend debt," Spangler said.