"One is absolute mitigation, where the building is in flames, and that is
Calpine," the trader said. "The second group is where we smell smoke, and that
is Dynegy, NRG and Mirant. And right now, everyone is either smoking or in
flames."
====
Pressure On Energy Cos Has Traders Looking At Exposure
18 Dec 08:30
By Jason Leopold and Jessica Berthold
Of DOW JONES NEWSWIRES
(This article was originally published Monday.)
LOS ANGELES (Dow Jones)--The recent string of credit-ratings downgrades and
falling share prices in the energy sector has trading companies - already
chastened by the collapse of Enron Corp. (ENE) - taking yet another look at the
risks their counterparties pose to their operations.
Some companies said Monday it's business as usual, but that they're
monitoring the situation. Others said they've been paring exposure to power
and gas companies whose stock prices, bond prices and credit ratings have come
under pressure over the past week.
The moves aren't nearly as severe as those taken to deal with Enron, which
was moved out of the market in a period of just weeks by counterparties as its
troubles mounted. But they could mean increased costs and fewer opportunities
for some companies caught in the fallout of the one-time market leader's
meltdown.
"We don't talk about specific counterparties," said Al Butkus, a spokesman
for Aquila Inc. (ILA), a top trader of electricity and natural gas. "But you
can look at our past record in dealing with Enron, and that should speak for
itself."
Aquila aggressively cut its exposure with Enron well before the company was
downgraded by credit-ratings agencies on Nov. 28 and filed for Chapter 11
bankruptcy-law protection Dec. 2.
The adjustments had no apparent impact on prices or liquidity in the North
American power and gas markets, traders said. Trading is normally lighter at
the end of the year, and remained so Monday. The markets were said to be
functioning well.
Under Pressure
Energy companies like one-time Enron suitor Dynegy Inc. (DYN), Calpine Corp.
(CPN), Mirant Corp. (MIR) and NRG Energy Inc. (NRG) have seen their share
prices hammered and access to the capital markets crimped, as investors have
grown wary of energy companies' high leverage and hard-to-decipher earnings.
Shares in those companies have fallen 28%, 40%, 47% and 20%, respectively, in
the past 10 days. On Friday, Moody's Investors Service dropped Calpine and
Dynegy's debt ratings one notch, leaving Calpine in junk-bond territory and
Dynegy just one notch above. Both remain on watch for further downgrades.
Dynegy President and Chief Operating Officer Steve Bergstrom confirmed in a
conference call Monday that his company has been the subject of a "modest"
increase in letters of credit demanded by trading counterparties since Enron's
collapse, although he said volumes on Dynegy's Internet-based trading platform
DynegyDirect are up 20% since Enron's meltdown.
Overall, the industry is paying more attention to trade credit and collateral
after Enron, Bergstrom said.
"There's a lot more focus," he said.
Some companies have moved more aggressively to trim exposure to troubled
companies. Steps may run from cutting companies off to limiting business to
shorter-term deals. A trader with one large trading company said the company
had three levels of response to counterparties whose credit ratings are either
put on review or downgraded.
"One is absolute mitigation, where the building is in flames, and that is
Calpine," the trader said. "The second group is where we smell smoke, and that
is Dynegy, NRG and Mirant. And right now, everyone is either smoking or in
flames."
Calpine didn't respond immediately to a request for comment, but said in a
press release Monday that the downgrade will have "no material impact" on
credit requirements in its power sales agreements and that it continues to do
business with its usual creditworthy counterparties.
Monitoring Developments
Other companies said they were monitoring the situation.
"Right now, it would be business as usual," said Ellen Averill, spokeswoman
for Williams Cos. (WMB). "We have clear creditworthiness standards that we
follow, and we follow these with all companies with which we deal."
Becky Nash, spokeswoman for Duke Energy North America, a unit of Duke Energy
Corp. (DUK), would only say that Duke is "still operating using the appropriate
credit limit with each company," but wouldn't reveal specific details.
Neither spokeswoman would say how the downgrades had affected their
companies' treatment of Mirant or Calpine.
As seen with Enron's meltdown, business as usual doesn't necessarily mean
companies aren't taking action. Traders' credit policies spell out how much
value they can put at risk with counterparties, with limits determined by the
counterparties' creditworthiness. As such, changes such as ratings downgrades
can be expected to result in lowered exposure.
Before Enron, some companies may have let standards slide in some cases. Now,
however, they're tightening up and calling for collateral when needed.
"They may not have been as diligent in the past asking for it, and now they
are," said John Cassidy, a senior analyst covering energy companies at Moody's.
Jeffrey Foose, managing director for trading at Public Service Enterprise
Group (PEG) unit PSEG Energy Resources & Trade LLC, agreed counterparties were
going further to dot the I's and cross the T's.
"We've had more counterparties call us and tighten up documents and things
that weren't signed," Foose said. PSEG is enforcing its credit policies, but
won't reveal what that means for specific counterparties, he said.
Paul Patterson, an analyst with ABN Amro in New York, said credit quality
issues among energy companies could substantially impact the industry.
"We are concerned that trading operations of lower credit quality companies
may be required to post more collateral in order to maintain their current
levels of trading activity," Patterson said.
-By Jason Leopold, Dow Jones Newswires; 323-658-3874;
jason.leopold@dowjones.com
(Jessica Berthold in Los Angeles, John Edmiston in Houston, and Kristen
McNamara and Andrew Dowell in New York contributed to this article.)
(END) DOW JONES NEWS 12-18-01
08:30 AM |
