It was a volatile day on Wall Street for the utility and energy merchant sector Wednesday, opening with a heavy sell-off by frazzled investors, with calm finally restored by noon, as the intrepid stepped in to buy what they hope become good bargains. The Dow Jones Industrial Average, which soared 488 points, carried with it nearly the entire energy marketplace, with few exceptions. Only two utilities, National Fuel Gas Co., off just over 1%, and Delta Natural Gas, down 4%, lost ground.

The biggest gas utility gainers were Energy South, up 17%; Southern Union, up 14%; Cascade Natural Gas Co., up 13%; NUI Corp, up 10%; and Consolidated Edison, Sempra Energy, Southwestern Energy and Southern Co., all up 9%. Meanwhile, Allegheny Energy, Exelon, FPL Group, Public Service Enterprise Group and Xcel Energy traded higher Wednesday, despite a downgrade to “neutral” from “outperform” by Salomon Smith Barney.

In the energy merchant sector, there were only four losses, and three of them were extremely heavy: Reliant Energy Inc. closed down 32%; its subsidiary Reliant Resources Inc., was down 24%; and Dynegy Inc. was off 20%. Aquila also lost 6%. For the once stellar Dynegy, it was another frenetic up-and-down day, finally closing down at 98 cents, with more than 24.8 million shares exchanging hands.

While the day was positive overall for the utilities, no one is breathing easily yet. After all, Thursday’s market has yet to open, and then there’s Friday and next week and, well, you get the picture. And some of the companies that have seen their stocks mangled in the past few months most likely are at a turning point of surviving or plunging into the Enron pit.

The weakest marketers at the moment appear to be Dynegy and Williams Cos. (which closed up 5%), and they were slapped again with another downgrade to their credit ratings by Moody’s Investors Service, which also warned that they remain under review for another cut. Moody’s also warned Nicor Inc. that its ratings are under review for a possible downgrade. Only Duke Energy managed to get a positive word from Moody’s, which affirmed the company’s ratings, but said its outlook was “negative” (see related story). Nicor closed up just over 1%, while Duke climbed 16% on Wednesday.

Besides the credit rating agencies, the energy merchants and those involved in marketing and trading also are being brutalized by nearly all of the energy analysts, who are finding almost nothing to like and few companies to recommend within the merchant sector. Morningstar analyst Paul Larson even went so far as to warn investors from buying any energy merchant stock in a report on Wednesday.

“The imploding stocks and pending liquidity crisis have slammed the entire industry because finding a creditworthy trading partner is becoming increasingly difficult,” he wrote. “The falling shares will also make it that much more difficult for firms to shore up their balance sheet, making multiple bankruptcies in the sector a growing possibility.”

Salomon Smith Barney analyst Raymond Niles raised his risk rating on El Paso Corp. to “speculative” because of increased scrutiny of the company’s electricity restructuring business and ongoing probes of trading practices by federal agencies. However, UBS Warburg analyst Ron Barone held his “strong buy” recommendation on the stock.

On the upside, Merrill Lynch analyst Elizabeth Parrella said she expects Mirant Corp. to be among the survivors in the group. “The primary financial challenge is the amount of debt maturing in 2003-2004, although this would be alleviated by a new bank facility,” she wrote. Mirant is talking with its lenders about a new credit line. “The ability to refinance maturing debt should improve in later years, as the commodity cycle recovers.”.

Parrella also sees no near-term liquidity crisis at Calpine. As with Mirant, the challenge to Calpine involves upcoming debt maturities in 2003 and 2004 “in the event that the capital markets are still foreclosed to this sector.”

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