Overall, business for some of the major natural gas industry players — El Paso Corp., Kinder Morgan Inc., Duke Energy, Williams, Dynegy Corp., Calpine Corp. and Mirant — is “good,” but “first they need to show that their businesses have no similarity to Enron’s,” said Credit Suisse First Boston analyst Curt Launer. Launer recapped CSFB’s outlook for the natural gas sector, joined by power analysts to review what’s ahead for the gas and power industry.

Launer said Friday that with the “largest competitor taken out” of the picture, it has become an entirely new playing field for all of the energy market players, not just traders. Faced with a changed environment and intense scrutiny of the balance sheets, Launer said the marketplace is beginning to step up to the plate and will overcome their current problems. “The uniform view is that the second half of 2002 is likely to be much better than the first,” he said.

All of the companies discussed their asset bases at length, said Launer, and “all were very specific in their comments” about accounting issues and mark-to-market accounting changes. In general, the companies acknowledged that their earnings are down from last year, now in the range of single-digit growth. For the short term, growth will be 5-8%, and then 10-15% beyond 2002.

El Paso, said Launer, said it has already gained market share with Enron’s collapse, and has seen a 30-40% hike in power volumes in its merchant energy business. Its asset sale program also is “moving along,” and should be completed by the end of the first quarter of 2002. “Asset sale prices are looking good despite the decline in commodity prices,” Launer said. Dynegy also has found that despite Enron’s “churning in the financial markets,” which brought margins down, it expects to see an increase in the margins in its merchant energy business in the second half of this year.

Kinder Morgan is focusing on its cash-related earnings, and sees a “good flow” of both internal and external projects, Launer noted. Duke, meanwhile, is keyed to the “optionality of its portfolio.” Duke also is planning to build more generation, with the focus on the West Coast, he said.

Williams, beset by recent credit-issue problems, has placed a major focus on its balance sheet progress, said Launer. However, like the other energy companies reviewed, Williams is “not sure what the credit agencies want” for them to maintain their ratings.

CSFB analyst Neil Stein, who reviewed Mirant and Calpine Corp., also reported that “both are struggling to get better criteria” on what the credit ratings agencies need to maintain investment grade ratings. Stein said both Mirant and Calpine are working to be “candid” about their current financial problems, and are not “sugar coating” any solutions. “In terms of liquidity,” said Stein, the two companies believe that 2002 cash requirements will be met without returning to the capital markets, “but it will be easier for Mirant.” He said Calpine continues to have a liquidity crunch, pushed by its falling stock price.

“In the near term, performance should continue to be volatile,” for both Calpine and Mirant, which are faced with the “headline risks” brought about by Enron. “It will take time, but in the longer term, liquidity will be the recovery story,” said Stein. “The market is still very concerned about liquidity, and over the course, we think stock prices can recover. The liquidity position (for Mirant and Calpine) is adequate, but they need to follow through on their capital restructuring programs.”

Stein said both Mirant and Calpine hard assets make up the balance of their asset sheets, and that will generate a “tremendous amount of cash flow.”

Another area of widening opportunity appears to be in the California marketplace, said CSFB analyst Scott Pearl. Pearl said that despite the current investigations into manipulation in the California energy markets, he expects to see “great buying opportunities” there. California regulators, he said, have “turned the corner” on returning to a regulated marketplace, which he does not foresee.

Asked whether it was a buyers’ or a sellers’ market for those interested in picking up assets, Launer said it was better than just a sellers’ market. “It’s an auction market…multiple buyers are surfacing, and they are taking bid packages, signing confidentiality agreements.” He noted there are usually “multiple buyers for properties for sale,” which makes the current environment a good one for any company attempting to strengthen its balance sheet.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.