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OWNERS COPE WITH ENRON BANKRUPTCY

By Donna Mitchell

The Enron Corp.’s bankruptcy has so far had only a minor effect on shopping center owners’ day-to-day business, but market observers warn that they should be watchful of the fine print in future contracts to outsource energy services.

Despite Houston-based Enron Corp.’s $50 billion Chapter 11 filing in December, the largest bankruptcy ever in the United States, mall owners are reporting little impact. At press time, Enron officials had not decided whether to continue honoring energy-outsourcing contracts it struck with The Macerich Co. of Santa Monica, Calif., and Indianapolis-based Simon Property Group. The agreements were designed to shield the shopping center developers from free-market price fluctuations and help them manage their energy resources more efficiently.

Enron could seek to sell the most potentially profitable contracts to other energy suppliers, then use the cash to appease creditors, speculated Mario Dottori, a partner at Shaw Pittman, a Washington, D.C., law firm that represents clients in energy-outsourcing deals.

“We’re still talking to [Enron] on a regular basis,” said Scott Mumphrey, president of Simon Business Network, a wholly owned subsidiary that finds ways of reducing operating costs for Simon’s real estate portfolio. “For our part, we must determine our options.”

Simon pioneered energy outsourcing for the shopping center industry in June 2000, when it struck a 10-year, $1.5 billion agreement with Enron Energy Services, a subsidiary providing analysis and management services to property owners. Since then, Enron has negotiated the complicated issue of energy tariffs, arranged for more-efficient billing and helped Simon navigate the choppy waters of regulated and deregulated utilities across the United States. It has also assisted the developer in choosing equipment that is more energy-efficient for its centers.

Enron officials said the company will continue providing energy to its customers as it works through the bankruptcy. But retaining such long-standing customers as Simon, they acknowledge, could be challenging.

“Hopefully, we can sustain the relationship, but it doesn’t look likely, with the bankruptcy,” said Peggy Mahoney, a spokeswoman for Enron Energy Services. If the contract is severed, she noted, then “we believe Simon has learned a lot from us. They will be taken care of.”

For its part, Simon is seeking alternative providers.

“We’re engaging in discussions with power providers and ensuring that the power will continue to flow,” Mumphrey said.

Macerich officials declined to comment for this article.

Going forward, mall owners should be careful when striking energy-outsourcing agreements, said George Owens, president of Energy and Engineering Solutions, an energy consultancy based in Columbia, Md.

“The biggest concern would be for energy contracts in an area that had price protections but subsequently saw rate increases,” Owens said. California, where deregulation and an energy crisis led to unexpectedly higher prices for commercial customers, is one glaring example.

Although Simon and Macerich may not be immediately affected by the bankruptcy, they face significantly higher prices — as much as 50 percent — if the bankruptcy courts nullify their agreements, noted Owens.

In California, where commercial customers experienced power shortages through the winter, the state bought energy directly from suppliers at a locked-in rate to shield users from skyrocketing prices and blackouts. It also barred businesses from doing their own direct buying on the retail market. But then the economic downturn shut offices and slowed industrial production, slashing demand for energy; prices subsequently plunged lower than the locked-in ones the state now offers consumers.

These costlier government-brokered contracts account for about one-third of California’s energy needs, which means that commercial customers there, including mall owners, can expect to pay between 40 percent and 50 percent more for energy in 2002 than they did in 2000, Owens said.

California notwithstanding, prices on the commodities market have come down significantly over the past 18 months, which may explain the retail development industry’s sanguine outlook, Dottori observed.

“That has made the biggest part of the pitch for energy outsourcing — that is, cost savings — less persuasive,” he said.

Despite the Enron debacle, shopping center developers are forging ahead on similar energy contracts with other utility companies. Just three days after Enron’s Dec. 2 bankruptcy filing, Bloomfield Hills, Mich.-based Taubman Centers announced a five-year agreement making Dallas-based TXU Energy its exclusive energy provider and manager in 13 states. Over the next five years, TXU will purchase more than $125 million in energy and manage related issues for Taubman-owned malls, negotiate prices in regulated and unregulated states and notify Taubman if another supplier is offering better prices, said Larry Hunt, Taubman’s vice president of regional management and business initiatives.

In Taubman’s case, the agreement was reached directly with the supplier, said Hunt.

“The Taubman Co. is signing the contract, not our representative, so we do feel comfortable with our arrangement with TXU,” he said.

Taubman Centers had also entertained offers from Enron Energy Services, but he said TXU, the country’s third-largest energy supplier, was more accommodating.

Now that customers might have a slight upper hand in these types of negotiations, Dottori said, shopping center owners considering future energy-outsourcing contracts should take a few steps to protect themselves against potential disasters:

• Contracts should include a provision that prevents them from being transferred. Shopping center owners should pay careful attention to contract clauses allowing for successor companies in mergers to take over the contracts.

• In the request for proposals, ask for audited balance sheets and annual reports. If the energy provider is not investment grade, ask for a letter of credit or other security that the company will perform for the term of the contract.

• Try to get a termination clause that reduces the termination fee in the event of an energy company’s bankruptcy or insolvency.

• Include a clause that entitles the shopping center owner to terminate the contract if the vendor’s credit rating is downgraded.

Mumphrey said that Simon’s contract with Enron had adequate protections and that Simon would prudently seek out stable, efficient energy solutions as the utilities market changes. “Just as we do not shy away from doing department store deals because Montgomery Ward exited the retail scene,” he said, “we would not be dissuaded from considering a contract with another energy company.”

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