Perfect storm: How a blizzard bonanza came back to bite Macquarie
By Sarah Danckert
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Over five frigid days in February 2021, the United States was buffeted by catastrophic ice and snow storms that caused widespread havoc for millions of Americans.
So fierce was Winter Storm Uri, it led to the biggest blackout in the country for nearly 20 years and 170 million residents in the US and Mexico receiving weather warnings between February 13 and 17.
TV screens across America showed images of people in Texas, Oklahoma, Kansas and other states using outdoor barbecues and wood fires while draped in blankets to warm themselves during the record-low temperatures that Uri brought, ensuring unprecedented demand for energy.
Vehicles at a standstill on Interstate Highway 35 in Texas in February 2021 when Winter Storm Uri delivered historic cold weather and power outages as storms swept across 26 US states. Credit:Getty Images
Uri would also spark considerable recriminations for businesses involved in buying and selling large supplies of power across the US after it was revealed traders made as much as $US11 billion ($16 billion) from the storm.
One of those trading houses copping political ire is Macquarie Group’s rapidly growing commodities trading business Macquarie Energy. An increasingly strong player in the US pipeline and energy markets, it acts as a broker between producers and buyers, such as state utility providers. The division is hugely successful; so much so that this year divisional boss Nick O’Kane earned $57 million, more than the group chief executive, Shemara Wikramanayake.
It is also in the sights of US lawmakers, who say residents are still paying the cost of the storm via higher power bills.
Earlier this year, the state of Kansas took civil court action against Macquarie Energy, accusing it of manipulating gas prices during the crisis to push the price of gas on the Southern Star pipeline servicing Texas, Kansas, and Oklahoma from $US2.50 per MMbtu (metric million British thermal unit) on February 12 to $US622 per MMbtu by February 17.
Kansas is seeking at least $US50 million plus damages relating to the costs of the higher gas prices on its citizens, according to court documents filed on behalf of Kansas Attorney-General Kris Kobach in the Federal District Court.
“These conditions understandably led to increased natural gas prices during this time,” Kobach’s complaint reads.
“However, the natural gas prices and benchmark prices in multiple mid-continent locations – and Southern Star particularly – were not readily understandable: but rather, as aptly described by the American Public Gas Association, ‘unprecedented and unthinkable’.”
Kansas is not Macquarie’s only battlefront. Oklahoma Attorney-General Gentner Drummond is also considering action against the group. “All I can tell you at this point is that the examination is still under way,” Phil Bacharach, director of communications for Drummond’s office said.
In Texas, Macquarie is one of several energy companies named in a suit brought by CirclesX Recoveries, a group led by former Enron director of trading Erik K. Simpson, that also alleges the groups manipulated the market by withholding gas for sale during the storm in that state.
A spokesperson for Macquarie said it would be defending the Texas and Kansas claims.
“Macquarie Energy LLC is just one of 100-plus US energy suppliers involved in ongoing litigation matters stemming from their role in maintaining critical energy supply during unprecedented freezing weather events across the United States in February 2021,” the spokesperson said.
Soaring profits in Macquarie Group’s commodities and global markets unit led to a bumper $57.6 million pay packet for the executive in charge of the division, Nick O’Kane.Credit:Annie Mulligan
“Macquarie believes the Kansas attorney-general’s lawsuit is without merit, and Macquarie has responded with a motion to dismiss the matter in the United States District Court of Kansas detailing the AG’s unfounded claims against Macquarie.”
The legal claims, even if successful, will hardly have a material impact on the group, which this month reported earnings of $5.2 billion for the year to March 2023. Instead, the risks to Macquarie and its trading hub are reputation cost and new regulations from state legislators.
Macquarie has made no secret Uri was a large and unexpected financial windfall for the company.
On February 22, 2021, as the storm was still dissipating across the US, Macquarie upgraded its earnings – after warning on February 9 of a softer result – citing the positive impact of the storm on its coming end-of-year results for the year to March 31.
The upgrade didn’t go unnoticed in Kansas.
Within weeks, Kansas launched an inquiry into the price surge and was soon flagging legal action for breaches of anti-profiteering laws that came into effect when the state declared a state of emergency at the start of the storm.
Kobach’s case alleges that Macquarie’s commodities and global markets division made the equivalent of four years’ worth of profit over just two weeks thanks to the storm.
Macquarie has made no secret Uri was a large and unexpected financial windfall for the company.
Kobach alleges Macquarie Energy’s traders knew
they were able to move the market significantly because the gas price for the Southern Star pipeline area could be based on just a handful of sales rather than an averaging process as in other markets.
The hardline Republican claims that between February 13 and February 16, Macquarie was able to lift the price from $US2.50 a MMbtu to more than $US300 by overbidding on just six contracts. On February 17, as the storm pounded the US, Macquarie made two trades that again worked to double the price to more than $US622.
“No one has ever paid more. Indeed, no one has ever paid any fixed price for Southern Star gas even remotely close to the price that Macquarie agreed to pay,” the Kobach claim alleges.
“Macquarie’s February 16, 2021, behaviour and trade were economically irrational and contrary to its self-interest as a natural gas marketer – unless intended all along to manipulate the February 17, 2021, Southern Star gas daily price.”
The Kansas lawsuit was front of mind for analysts covering Macquarie at the group’s investor day in March in Texas. They asked about the case as well as the risks to Macquarie of regulation and maintaining the perception it was acting in the best interests of market participants.
O’Kane told the briefing that Macquarie operated in markets that were, from time to time, experiencing levels of stress.
“What we’re doing is we’re responding to client needs and responding to the needs of the community. And as a result, we know we’re buying gas and transporting it and moving it around in times when prices might be elevated.”
“In terms of how we manage these types of risks … we have non-financial risk associated with our business that we manage just as robustly as we do with our financial risks.”
O’Kane said that the trading floor in the markets and commodities business had nearly 50 people overseeing risk management and probing trades and deals.
“They are very much part of the team, they’re actively on the floor during the trading day, they’re liaising with our people real time.”
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