Desperate to improve its financial situation, Dynegy Inc. announced it is selling all of Northern Natural Gas Co. (NNG) to Berkshire Hathaway’s MidAmerican Energy Holdings Co. for $928 million in cash and the assumption of $950 million in outstanding NNG debt. The transaction results in nearly a $600 million loss on the asset, which Dynegy bought from Enron late last year for $1.5 billion, but provides much needed liquidity to Dynegy, which has been under intense selling pressure on the stock market, particularly last week when its shares reached a low of 51 cents. Dynegy shares were up 52 cents (76%) on Monday to $1.20.

“The closing of this sale will improve our liquidity position and help us serve our customers,” said Dynegy’s interim CEO Dan Dienstbier. “This is a decisive step forward in our ongoing efforts to improve our financial and business profile. We are committed to achieve a level of financial viability that will create a renewed sense of market and customer confidence in our company.”

The sale also marked MidAmerican, which bought Kern River earlier this year, as an up and coming interstate pipeline company.

Standard & Poor’s, which downgraded Dynegy’s credit ratings last week to junk, said the sale would have no immediate effect on Dynegy’s credit quality. “[It] helps to relieve some near term liquidity issues, since it provides a source of cash and relieves $450 million in maturities coming due in November 2002. However, the sale raises concerns regarding the repayment of a $1.5 billion obligation to ChevronTexaco,” S&P noted.

Dynegy borrowed $1.5 billion from ChevronTexaco last November to help get Enron back on its feet in exchange for a purchase option on Northern Natural Gas, which Enron owned at the time. When the Dynegy-Enron merger fell through the purchase option was initiated and Dynegy ended up completing the deal for NNG in January (see Daily GPI, Nov. 29, 2001, Jan. 7). However, there has been no change in the repayment obligation due ChevronTexaco in November 2003, S&P noted. And despite the sale, S&P said its analysis determines that “Dynegy will be challenged to preserve an adequate liquidity position to meet its obligations over the next 18 months.”

Dynegy previously had planned a partial sale of NNG or a joint venture arrangement as part of its ongoing capital and liquidity plan. Dienstbier said the sale of a 100% stake in NNG will provide a greater source of funds than originally expected. Elimination of the NNG debt leaves Dynegy with only a $300 million maturity due in November and no other significant maturities until May 2003.

Dynegy also has hired ABN Amro Holding NV to sell at least some of its UK-based gas storage assets to pay down debt. It apparently is close to selling the Hornsea cave, one of two gas storage terminals that Dynegy purchased last November for about $600 million (see Daily GPI, Nov. 29, 2001). The two terminals, Rough and Hornsea, are used by nearly half of the UK gas shippers, and between them are able to store 111 Bcf. There are 30 wells and nine salt caverns, as well as pipelines and a gas processing terminal.

Tuesday is expected to be a big news day for Dynegy, as well as its 27% shareholder ChevronTexaco — both will announce their quarterly earnings in the morning. Dynegy goes first at 10 a.m. EST, followed by its largest shareholder at 11 a.m. EST. What the two companies will say about each other remains open to speculation, but several sources think ChevronTexaco most likely will do something to boost Dynegy’s liquidity, either by guaranteeing a loan to back its trading operations or going as far as buying the company outright. Already known is that Dynegy will have losses in the quarter; it issued a guidance on earnings earlier this month after first announcing it thought it would break even in the quarter (see Daily GPI, July 16).

Dynegy’s shareholders have been understandably frustrated by the company’s decimated stock price, despite the fact that it started to gain slightly last Friday and then scooted up following the NNG announcement. However, many ChevronTexaco shareholders are equally upset — the major has about $2.8 billion invested in the Houston midstream energy company, and that investment is worth close to nothing at the moment, which has eliminated about 25% of ChevronTexaco’s share price as well.

Many of ChevronTexaco’s shareholders want it to write off at least some of its investment, which includes $1.3 billion in an initial stake, and another $1.5 billion in convertible securities that were used by Dynegy to secure NNG from Enron. A complete write-off of its stake would represent about 40% of ChevronTexaco’s earnings before charges in 2001 — $2.8 billion — a charge that some analysts still believe to be worth it because Dynegy has cost ChevronTexaco between $5 billion and $10 billion in stock market capitalization this year.

However, there are others — including ChevronTexaco supporters — who believe money could be made in the long run by simply buying the company out, which would almost immediately boost its investment credit rating. Alternately, ChevronTexaco also could sell its stake to another company. Still, if it cut its ties to Dynegy, it also certainly would terminate its gas marketing deal, that has proved lucrative since it was first put in place in 1996. Dynegy currently markets all of ChevronTexaco’s natural gas in North America.

Another reason sources believe ChevronTexaco won’t close the door on Dynegy is another type of control: personnel. Glenn Tilton, who replaced Chuck Watson as Dynegy’s interim chairman, was formerly a ChevronTexaco vice chairman. ChevronTexaco CFO John Watson and Darry Callahan, an executive vice president in charge of gas marketing, sit on Dynegy’s board of directors.

Analyst Matthew Warburton of UBS Warburg said ChevronTexaco is “clearly in a dilemma” because the only way it could completely end its involvement with Dynegy would be either to have it go out of business or sell it. The San Francisco-based oil giant has said little about its business relationship. However, it has never disparaged the company in public meetings. Despite its lukewarm assurances, Warburton said it needs to now do more. “Circumstances have changed in the five or six weeks” since ChevronTexaco said it supported Dynegy, he said. “Further clarification and explanation…is required.”

Meanwhile, at the other end of the table and financial spectrum sits Des Moines, IA-based MidAmerican, which has been on an energy company spending spree since it was bought by Warren Buffett’s Berkshire Hathaway two years ago. The company has been cherry picking various energy pipeline assets as their owners have been caught in the current credit and financial quagmire.

MidAmerican Energy Holdings is the corporate parent of MidAmerican Energy Co., a utility with 653,000 electric customers and 622,000 natural gas customers in a 10,600-square-mile area from Sioux Falls, SD, to the Quad-Cities areas of Iowa and Illinois. The holding company recently bought Kern River Gas Transmission for a $960 million steal (including debt) from The Williams Companies (see Daily GPI, March 8), which took a loss on the sale. The Northern transaction builds MidAmerican into a major gas pipeline company and puts Warren Buffett well on his way toward reaching a $10 billion investment target in the energy industry.

It also gives MidAmerican control over one of the major upstream pipelines that serves its utility system in Iowa. MidAmerican recently entered into a long-term firm transportation agreement with Northern covering a significant amount of capacity to serve its Greater Des Moines Energy Center located in Pleasant Hill, IA. MEC plans to build a $368 million 540 MW gas-fired power plant there, with operations set for the spring of 2003. (see Daily GPI, June 14).

“Northern Natural Gas is a well-managed company with excellent assets,” said Greg Abel, president of MidAmerican. “They share our focus on customer service and operational excellence.”

Of note also is the fact that Berkshire Hathaway is based in Omaha, NE, as is Northern Natural, and current Dynegy President Dan Dienstbier ran the pipeline out of Omaha for a number of years for Enron.

The sale is subject to customary closing conditions, including Hart-Scott-Rodino approval, but is expected to be approved by the end of August. Upon completion, 1,100 Dynegy employees working for NNG will become MidAmerican Energy employees.

The 16,600-mile NNG pipeline extends from the Permian Basin in West Texas to the upper Midwest. NNG provides transportation and storage services to its customers and cross-haul and grid transportation between other interstate and intrastate pipelines in the Permian, Anadarko, Hugoton, and Midwest areas. Its storage capacity is 59 Bcf and its market area capacity is 4.3 Bcf/d.

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