While Calpine Corp., Williams, Dynegy and Reliant Resources all have made “very good progress” over the past six months in solving near-term liquidity problems, an analyst with Fitch Ratings on Wednesday said that some of the basic credit problems facing the merchant sector have yet to be solved, including exorbitant debt leverage and anemic wholesale market conditions.

In a conference call, Fitch Analyst Hugh Welton noted that Calpine and the other three companies have moved to shore up their short-term liquidity positions primarily through accessing the high yield debt capital markets and, in the case of Williams particularly, through asset sales.

“This is particularly noteworthy as some of these companies found themselves at or near the brink of bankruptcy at some point during the past year and a half,” Welton said.

The Fitch analyst pointed out that just this week, the ratings agency revised the rating outlook for Williams’ B+ senior unsecured debt rating to “positive” from “stable.” The ratings move “reflects the company’s continuing to strengthen [its] liquidity position, the solid financial performance of its core natural gas businesses and what we see as good prospects for continued deleveraging and gradual credit quality improvement in the coming months.”

“I think that it’s safe to say that just from a pure liquidity standpoint, Calpine, Reliant and Dynegy appear to be out of the woods for the time being,” Welton said. “Effectively, we think they have bought more time,” he added. “Underpinning this belief is the fact that Reliant and Calpine’s ratings now actually carry stable rating outlooks, albeit within the speculative single B rating category.”

Welton also noted that Dynegy’s outlook was revised to positive in August “due to the company’s improving financial flexibility, including the important restructuring of $1 billion and a half dollars of ChevronTexaco preferred stock obligations, which had been a negative overhang on their liquidity profile.”

But the Fitch analyst also said that these liquidity boosts have not solved “some of the basic fundamental credit problems belying this sector, including excessive debt leverage and weak wholesale market conditions.”

Welton noted that the recently completed financings have resulted in higher interest costs going forward, “a factor that will suppress cash flows and credit protection measures.”

Fitch’s “overriding concern” continues to center “on the reality that wholesale power market conditions are weak and are likely to remain so for the foreseeable future,” Welton said. As such, the “ultimate restoration of credit ratings in this sector really depends not only a reduction in debt leverage,” but also a recovery in commodity prices, he added.

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