Hi Tim, thanks for the Heads up on DYN. You're doing some proactive thinking and analysis.
I've kind of been thinking that DYN May be a good buy over the next few weeks. I need to read up more on the latest events.
But it's diturbing to hear another company that is creating significant portions of it's cash flow from fictious activity.
Tim, How deeply does this creative revenue and cash flow generation permeate American companies balance sheets?
who's asking that question and where do we go to learn more?
Here's that article you mention.
John
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Size and Timing of Dynegy Trades
Draws the Attention of Regulators
SEC Formally Expands Probe Into Energy Company
To Include Two Pairs of Huge Electric-Power Trades
By PAUL BECKETT and JATHON SAPSFORD
Staff Reporters of THE WALL STREET JOURNAL
The Securities and Exchange Commission is widening its probe of the big energy company Dynegy Inc., examining two pairs of massive electric-power trades last fall -- executed at precisely the same moment for exactly the same price -- that canceled each other out and didn't yield any profits for Dynegy or its trading partner. The trades, which appear to have significantly boosted Dynegy's trading volume last year, were meant to help burnish the company's public image just as it was seeking to take over the dominant position in online energy trading from Enron Corp., according to people familiar with the situation.
On Wednesday, Dynegy said the SEC also plans to seek a formal investigation into a previously reported natural-gas deal known internally as "Project Alpha," which lowered Dynegy's tax bill last year and sharply increased its reported cash flow from operations. That upgraded SEC move gives the agency power to issue subpoenas and gather testimony. Dynegy said it "intends to continue to cooperate fully with the SEC in resolving this issue."
Since the announcement of the first SEC probe into Project Alpha two weeks ago, Dynegy's stock has tumbled 59%. At 4 p.m. in New York Stock Exchange composite trading Wednesday, the shares stood at $11.15, down 9.1% on the day.
'Crisis of Confidence'
In the face of that stock-price drop, Dynegy officials late Wednesday afternoon went on the offensive, holding a conference call with investors and analysts. Chief Executive Chuck Watson said that the company and the energy industry were suffering from a "crisis of confidence" and that Dynegy was a "strong and viable going concern."
"Our stock is not the same as Enron," he added.
At the time of last fall's trades, Enron's travails had thrown much of the energy-trading business up for grabs, and its Houston rival's Dynegydirect online business stood to benefit if it was seen as the new industry heavyweight. Dynegy also was engaged in an ultimately unsuccessful attempt to acquire what was left of Enron.
Though Dynegy's trading actions themselves apparently weren't illegal, the SEC is now looking into the trades, people familiar with the matter said. An SEC spokesman declined to comment.
'Round-Trip' Trades
Experts say such "round-trip" trades happen regularly in the industry, where there is fierce competition for online trades in all types of energy, from oil to coal to electricity. "It's very common," said Art Gelber, an energy consultant with Gelber & Associates, Houston. "The prevalent reason is to create the perception of business being done. It creates an illusion of volume."
Dynegy's partner on the trades was a unit of CMS Energy Corp. of Dearborn, Mich. The transactions, valued internally by Dynegy at a combined $1.7 billion, would have accounted for 13% of the total fourth-quarter value traded on Dynegydirect and more than half of the increase in trading values between the third and fourth quarters, according to people familiar with the trades and Dynegy's disclosed volume numbers for Dynegydirect.
Kelly Farr, a CMS spokesman, said the company conducted the trades as a favor to Dynegy . Mr. Farr also said such deals were commonplace in the energy business. In 1997, for example, Occidental Petroleum Corp. drew an informal inquiry from the SEC for a slew of trades that produced no profits, and which the company later conceded were made in large part for appearances. No action has been taken against Occidental.
Mr. Farr said CMS has conducted a number of such trades. "They were done for the convenience of our trading partners, and we stopped doing them late last year because they became too much trouble," he said.
Both Dynegy and CMS said they received no financial benefits from the trades. "We did not book these trades to revenue or income," said CMS's Mr. Farr.
"Looking at the trades at face value, it's hard to understand the purpose other than to increase the volume of trading activity," said Patti Harper-Slaboszewicz, senior industry analyst at San Jose, Calif., consulting firm Frost & Sullivan.
Dynegy President Steve Bergstrom said the electricity trades with the CMS unit were conducted "to fulfill a customer requirement" and to "stress test" Dynegydirect because the platform had been "having problems with large transactions."
"Six months ago, nobody would be talking about this," Mr. Bergstrom said. "All of a sudden, in this environment, it's some sort of smoking gun."
Dynegy spokesman John Sousa, in an e-mail response to questions, said the "volumes associated with the energy contract were eliminated from all public disclosures in 2001 and will not be included in any 2002 disclosures." He didn't specify when the volumes were eliminated from last year's disclosures.
The controversy could hardly come at a worse time for Dynegy . The company for weeks has been working to stave off a downgrade from Moody's Investors Service, which last month put Dynegy's credit rating on review for a possible downgrade. Moody's already rates the company's debt at one notch above "junk" status, and if it lowers the rating to junk, Dynegy would have to pay higher rates for credit, making it far more difficult to trade and borrow. It was unclear how the SEC's latest moves would affect Moody's decision, and the rating agency declined to comment. But rival credit-rating agency Standard & Poor's said it had placed Dynegy on CreditWatch with negative implications after the news that the SEC planned to seek a formal investigation.
Dynegy is also taking heat for its energy trading in California after federal regulators this week disclosed documents allegedly illustrating how Enron manipulated California's energy market. The documents say other energy companies were also engaged in similar practices, raising the prospect that rivals like Dynegy , which also operates in California, will also come under regulatory scrutiny. Mr. Bergstrom said on the conference call that Dynegy "did not engage in any collusion with Enron" or any other companies in its trading strategies during California's power crisis.
The two pairs of trades with the CMS unit took place on Nov. 15, just as Dynegy was in the middle of merger negotiations with Enron -- talks that ultimately failed because of what Dynegy said were Enron's breaches of its merger agreement.
Here's how the trades worked, according to Dynegy documents reviewed by The Wall Street Journal. At 10:08 a.m. CST, Dynegy bought a month's worth of electric capacity at $25.50 per megawatt hour. At exactly the same time, Dynegy sold CMS the same amount at the same price. Twenty minutes later, at 10:28 a.m. CST, Dynegy conducted another trade to simultaneously buy and sell a year's worth of electric capacity from CMS, at a price of $34 per megawatt hour. When energy companies trade capacity, they buy or sell the promise to deliver a stream of electric power at a fixed price for a set period of time.
Write to Paul Beckett at paul.beckett@wsj.com and Jathon Sapsford at jathon.sapsford@wsj.com
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