Dynegy Inc. was thrown a major financial lifeline late Friday when it closed on the sale of Northern Natural Gas. Co to Berkshire Hathaway’s MidAmerican Energy Holdings Co. Just days earlier, it had told the Securities and Exchange Commission (SEC) that bankruptcy could be in its future if the sale of natural gas pipeline was either delayed or blocked.

The cash-strapped Houston energy company said reorganization under the bankruptcy laws might be its only option, failing the completion of the Northern Natural deal this month and the success of its $2 billion capital restructuring program. The transaction, which got early clearance from the Federal Trade Commission, provides Dynegy with a cash infusion of $928 million, and reduces its debt by $950 million.

The sale wasn’t the only good new last week for Dynegy. On Thursday, it reached a settlement agreement to resolve a $10 billion lawsuit brought by Enron Corp. when Dynegy backed out of a deal last year to acquire the embattled company. The settlement requires Dynegy to pay $25 million to dispose of the lawsuit. (see related story).

The settlement was a “major plus” for Dynegy, said Credit Suisse First Boston analyst Curt Launer. “Beyond the basic idea that the settlement of Enron’s multi-billion dollar claim is good news, we would also note that it clears the way for Dynegy to complete the sale of Northern Natural Gas to MidAmerican,” he noted. This sale “is a critical part of Dynegy’s recovery plan.”

Dynegy’s stock price shot up Friday on the news of the settlement, closing at $1.69 a share, the highest level it has been at in weeks. The announcement about the completion of the Northern Natural sale came after the market had closed.

In the 10-Q statement filed last week, Dynegy also revealed the SEC believes the company 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. Project Alpha, a complex natural gas trading arrangement that Dynegy formed in April 2001, has been under review by federal regulators for several months.

As a result of 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.

Dynegy revealed in its 10-Q filing last week just how crucial the Northern Natural sale was to the future of the company. 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.

FERC earlier this month 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 in a consent agreement it reached with Northern Natural on Aug. 8 (see NGI, Aug. 12).

The Wall Street Journal had reported that the SEC and the Department of Justice also were investigating the Northern Natural-Enron loan, but Dynegy made no reference to this in its filing to the SEC last week.

With its stock price significantly lower than a year ago and its credit rating below investment grade, Dynegy painted a bleak financial picture to the SEC. “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.

Dynegy also said its board of directors had elected not to pay a dividend on the company’s Class A or Class B common stock for the third quarter of this year. In a separate 8-K reported filed with the SEC, it reported payments of dividends for subsequent periods would be at the discretion of the board, and it did not foresee the dividend being reinstated “in the near term.”

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