S&P Believes Dynegy Making Progress on Liquidity, Strategy

Dynegy Inc. is making progress on two fronts: liquidity and reshaping its business strategy, according to a report issued by Standard & Poor's RatingsDirect (S&P). The former energy merchant also has moved forward in the board room, after naming three new directors Thursday.

The new bank facility "relieves some concerns regarding Dynegy's liquidity position, because it renews a significant amount of bank line capacity," said S&P analyst John Kennedy. Dynegy pledged its midstream assets and more than 13,000 MW of U.S. generation assets to secure the loans. It also pledged a substantial portion of its current assets, including cash and accounts receivables, and its remaining portfolio of marketing and trading contracts as loan security.

Dynegy's stock jumped nearly 9% to $3.09 on Thursday on news of the report. It was the first time it's been above $3.00 since last July.

It was a generally good day for down-trodden energy companies. Shares of Williams Cos. rose nearly 17% to $5.90 Thursday on the strength of a Lehman Bros. upgrade from "underweight" to "overweight," based on increased liquidity. On Monday, Williams said it would sell Texas Gas Transmission for more than $1 billion. On Tuesday, it announced the appointment of a new CFO. El Paso also gained over 6% to $7.17 Thursday after a series of announcements during the week, including word that a consortium of 50-plus bankers agreed to a one-year extension of the company's $3 billion revolving credit facility that was due to expire in May. Other merchant and marketer stocks also were up by lesser percentages, as were producers in a generally up market.

Although S&P's evaluation assumes that in a "stressed" situation the pledged assets might not be "credit-enhancement opportunities," Kennedy said that it recognized "that a portion of these assets could be available in a liquidation scenario, which provides even greater confidence for full recovery of the loan principal." He also noted that Dynegy had "taken steps to remove ratings triggers in its debt obligations, shored up its balance sheet and refocused its strategy on core businesses such as electric generation and natural gas and liquefied natural gas (LNG) gathering and processing."

However, there is "uncertainty regarding Dynegy's ability to generate substantial cash flow given the current electric generation environment, as well as the price volatility in gathering and processing of natural gas liquids. Given the firm's financial profile, adverse economic conditions, resulting in thinner margins on generation and gathering and processing of LNG, could stress Dynegy's ability to produce reliable cash flow and meet debt-service obligations."

In other news, Dynegy named three new members to its board of directors, bringing the total number to 13. They include David W. Biegler, 56, retired vice chairman of TXU Corp. He also served as chairman, president and CEO of ENSERCH Corp. and is currently chairman of the American Gas Foundation.

Another new member, Patricia A. Hammick, 56, is an independent board member and consultant based in Washington, DC, who previously served as senior vice president of strategy and communications for Columbia Energy Group. She also has served as COO of the Natural Gas Supply Association and currently is an independent director for Consol Energy. The third new member, William L. Trubeck, 56, is executive vice president of Waste Management Inc.'s Western Group. He formerly was CFO of International Multifoods. Russell Reynolds Associates assisted in the search for the new directors.

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