The Securities and Exchange Commission (SEC) believes Dynegy Inc. has violated antifraud and federal securities laws through its involvement in the so-called “Project Alpha” natural gas deal and its round-trip trading activity with CMS Energy. On top of that, Dynegy said bankruptcy may be in its future if its sale of Northern Natural Gas Co. to MidAmerican does not move forward.

If its $2 billion capital restructuring program falls short and the sale of Northern Natural Gas does not go through as planned, cash-strapped Dynegy noted reorganization under the bankruptcy laws could be its only option. A settlement agreement with Enron Corp. late Thursday, however, makes a speedy Northern sale more likely (see related story).

In an 10-Q statement filed with the federal agency this week, Houston-based Dynegy said SEC staff already has informed it that it believes the energy company’s actions were illegal. Project Alpha, a complex natural gas trading arrangement that Dynegy formed in April 2001, has been under review by the SEC for several months.

As a result of the questions raised about the gas transaction, Dynegy told the SEC it expects to restate several financial statements: reported operating cash flow for the year ended Dec. 31, 2001 will be reduced by about $300 million; reported operating cash flow for the first half of 2001 will be cut by more than $100 million to $263 million; retained earnings for 2001 will be sliced by about $79 million; reported net income for the second quarter of 2001 will be reduced by about $27 million; and reported net income for the first half of 2001 will be cut by $27 million. Dynegy’s outside accountant, PricewaterhouseCoopers, currently is re-auditing the company’s financial results for 1999-2001.

In November 2001, Dynegy said it carried out two sets of round-trip trades with Michigan-based CMS Energy for a total of 25 million MW of electricity, but it claims neither deal artificially boosted the company’s revenues or trading volumes. The Federal Energy Regulatory Commission, Commodity Futures Trading Commission and the U.S. Attorney’s Office in Houston also are investigating the company’s bogus trading activities.

While the market has speculated about a possible Dynegy bankruptcy, the SEC filing marked the first time the company publicly used the B-word. Dynegy is pinning its future on the Northern Natural sale to Berkshire Hathaway’s MidAmerican Energy going through as planned (see Daily GPI, July 30 ). If the “Northern Natural sale is not completed or is significantly delayed or if other adverse developments impact cash liquidity, Dynegy may not be able to meet its near-term obligations…It may be forced to consider other strategic alternatives or a possible reorganization under the protection of bankruptcy laws,” it said in the SEC filing.

Dynegy said it expects the pipeline sale to be completed later this month. FERC had raised questions about a $450 million loan that Northern Natural, a former Enron pipeline subsidiary, secured on behalf of its parent before Enron descended into bankruptcy last year, leading some to speculate that this could hold up the sale of the pipeline. But the Commission’s concerns were resolved last week in a consent agreement it reached with Northern Natural (see Daily GPI, Aug. 9).

The Wall Street Journal recently reported that the SEC also was investigating the Northern Natural-Enron loan, but Dynegy made no reference to this in its filing to the SEC.

With its stock price at $1.30 a share and its credit rating below investment grade, Dynegy painted a bleak financial picture. “The credit downgrades have limited and will likely continue to limit significantly the company’s ability to refinance its debt obligations and to access the capital markets, and will likely increase the borrowing costs incurred by the company in connection with any refinancing cost,” Dynegy said, adding that it faces “significant debt maturities” over the next year.

Dynegy said its debt and preferred stock maturities will be $14 million in the third quarter of this year; $386 million in the fourth quarter (excluding the $450 million loan of Northern Natural); $241 million in the first quarter of 2003; $1.86 billion in the second quarter of 2003; $233 million in third quarter of next year; and $1.54 billion in the fourth quarter.

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