Another fast and loose management playing with the markets..But the gold market is not manipulated?
05/09 10:33
Dynegy Power Trades in November Get SEC Scrutiny (Update3)
By Todd J. Shriber and Loren Steffy
Houston, May 9 (Bloomberg) -- Dynegy Inc. recorded two trades last year in which the company sold and instantly repurchased for the same price enough electricity to dwarf the Hoover Dam's annual output and light the city of Houston for a year.
The trades equaled one-third of the value of Dynegy's power contracts in the fourth quarter, a period when its trading revenue almost tripled. Chairman Chuck Watson said yesterday that the fifth-largest electricity trader executed the Nov. 15 transactions at the request of a customer to test an online trading system. He said Dynegy didn't include the trades in its results.
U.S. Securities and Exchange Commission investigators are reviewing the transactions, expanding a probe announced yesterday into separate natural-gas trades by Dynegy, people familiar with the matter said. Investors and analysts said so-called in-and-out trades are common in the power market, prompting speculation Dynegy used them to suggest to investors its trading business was surging.
``They wanted to look like they were the main player,'' said Jim Smith, a bond manager at Bedrock Management who sold Dynegy bonds last month. ``They want to be market leaders.''
CMS Energy
Dynegy's counterparty in the trades was CMS Energy Corp., owner of Michigan's largest utility and the fourth-largest power- trading customer in 2001 of Dynegydirect, the company's online trading network, according to an internal Dynegy document. CMS spokesman Kelly Farr declined to say ``who approached who in this situation.
``Transactions like this are common in the energy-trading business,'' Farr said. ``CMS stopped doing them last year because they're just too much trouble.''
Dynegy, which is 27 percent-owned by No. 2 U.S. oil company ChevronTexaco Corp., is facing intensifying scrutiny. The Houston- based company said yesterday that SEC investigators have asked the commission to open a formal investigation into natural-gas trades that inflated how much cash the company generated from operations. The SEC has the authority in a formal probe to subpoena documents.
``We had previously hoped a formal investigation wouldn't be necessary,'' Watson said on a conference call yesterday with analysts and investors. ``I understand the decision by the SEC to make this a formal investigation in order to resolve the issues surrounding gas trades.''
Shares Plunge
Dynegy's stock plunged 17 percent Tuesday on concern that energy companies might have to pay more than $1 billion in refunds to California power users after Enron Corp. documents suggested the company had manipulated the market there.
In mid-morning trading, Dynegy shares rose 60 cents to $11.75, after earlier falling as much as $1.34 to $9.81. The shares are down 78 percent in the past year.
Dynegy's 6 7/8 percent coupon notes maturing in 2011 were bid at 71 cents this morning, down from 73.5 cents yesterday, traders said. Yield on the debt rose to 12.3 percent from 11.8 percent.
According to a Dynegy document obtained by Bloomberg News, the company sold CMS 15,000 megawatts at 10:08 a.m. on Nov. 15 and bought it back in the same minute for the identical price, $25.50 per megawatt-hour over 20 days, or $244.8 million. That amount of electricity is enough to power the city of Houston for a year.
Twenty minutes later, Dynegy sold CMS an additional 5,000 megawatts and again repurchased it within a minute, according to the document. This power, twice what the Hoover Dam generates a year, was priced at $34 per megawatt-hour and was to be delivered over the course of a year. The transactions were worth $1.43 billion.
Customer Request
Watson said Dynegy did not record those values.
``It did not influence or impact market prices whatsoever,'' Watson said on the call, without identifying the customer or size and dates of trades. ``We did not benefit financially or volumetrically. It was to fulfill a customer's request and to test the parameters of our online platform.''
His remarks followed requests by Bloomberg News for a comment on the transactions.
CMS spokesman Farr said the company didn't report any impact from the trades on its financial statements.
``CMS did do these transactions with Dynegy,'' Farr said. ``We didn't book them to revenue or earnings because we saw no financial gains from them.''
Dynegy's notional value for power trades, which is calculated by multiplying volume, price and time, rose to $5.6 billion in the fourth quarter from $1.9 billion in the previous quarter, according to a Dynegy document.
In its fourth quarter financial statement, Dynegy reported $43 billion in notional value last year for all four of the commodities it trades -- electricity, natural gas, natural-gas liquids and coal.
Dynegy's trades with CMS took place less than a week before the company offered to buy rival Enron for $23.3 billion in stock.
Value Surged
Dynegy's notional power values were $1 billion or less in the weeks leading up to Nov. 15. The week of the Nov. 15 trades, the value surged to more than $3 billion, its highest in at least seven months. Dynegy's data doesn't show whether the Nov. 15 trades were included in the value figures.
``Dynegy wanted it to seem like they were generating a lot of volume so the Enron buy would go over more favorably,'' said Bedrock's Smith.
Dynegy abandoned its bid for Enron after Standard & Poor's Corp. cut Enron's credit rating to junk status. The decision helped force Enron into the largest U.S. bankruptcy.
In the fourth quarter last year, Dynegy was the fifth-largest U.S. electricity trader, with volumes that surged 156 percent from the year-earlier period, according to Natural Gas Week, a newsletter published by Energy Intelligence Group. Dynegy was ranked No. 7 in natural gas, with volumes up 14 percent.
Trading Volumes
``If you're looking at a company's trading volumes and building expectations of future profit, then you're being entirely misled,'' said Daniel L. Stevens, an investment analyst for the State of Montana Board of Investments, which has $9 billion under management. ``It kind of makes you say -- what's the viability of marketing and trading volumes in the industry as a whole?''
Investors and regulators are scrutinizing Dynegy and other energy traders more closely following Enron's bankruptcy. The U.S. Federal Energy Regulatory Commission yesterday told energy traders to preserve all documents relating to strategies they used in California's energy market during the state's power crisis in 2000 and 2001.
California Crisis
FERC is investigating whether California power sellers should refund as much as $1.5 billion after electricity prices soared in late 2000 and early last year.
``Yesterday's stories don't contain anything new about the California crisis,'' said Stephen Bergstrom, Dynegy president and chief operating officer, on the call. ``The industry and Dynegy is being painted with the same brush as Enron. There's really no change in the investigation.''
Bergstrom didn't return calls to his home seeking comment.
``Right now, Dynegy's reputation has taken a beating from government investigations,'' said Cary Wasden, managing partner of Reed, Wasden, and Associates. He rates Dynegy ``buy'' and doesn't own shares. |
