Several wholesale energy companies have “greatly improved” their collateral management and ability to model changes in liquidity requirements as compared to how they approached such issues six months to a year ago, Fitch analyst Ellen Lapson said in a conference call last week.

“Companies with the best practices in the sector are now able to backtest and perform stress scenarios on their liquidity needs in response to price volatility and to changes in their own credit ratings,” Lapson said.

“The implication of this is that this is influencing the business and the transactions that companies will enter into,” the analyst went on to say. The companies that understand their liquidity requirements the most “are transforming their books in order to get the highest return on the amount of potential collateral in the event of a stress scenario.”

She also said that companies that Fitch has reviewed “continue to show a runoff in the duration of their offtake contracts.” For the companies that have weak credit quality, “the explanation is no doubt that buyers don’t want to accept long-term contracts…without collateral. It’s hard to post collateral on long-term contracts, it just takes up too much liquidity and capital.”

But even those companies with stronger credit and good liquidity “are not eager to lock in long-term contracts at what they currently see as especially low spark spreads or poor margins,” Lapson said.

“The bottom line is that when companies report their third quarter results — those that report on the percentage of their offtake that is hedged — I think will be reporting a declining percentage of their forward output hedged,” Lapson went on to say. “So companies going forward are increasingly exposed to the current weak market price environment.”

Meanwhile, Fitch Analyst Hugh Welton said that 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, Welton 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.

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 analyst pointed out that just last 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 $1.5 billion of ChevronTexaco preferred stock obligations, which had been a negative overhang on their liquidity profile.”

But the 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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