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Energy Industry Shudders Again After Downgrade Of Dynegy Debt

Laptop Battery The financial crisis afflicting the electricity and natural gas industry deepened yesterday as investors were unnerved by a credit downgrade on Dynegy, a leading power trader.

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Thinkpad After markets closed Friday, Moody's Investors Service, a credit agency, lowered its rating on Dynegy's bonds to its lowest investment-grade rung. Hoping to restore Wall Street's confidence, Dynegy said yesterday morning that it would trim spending next year, reduce debt and raise cash by selling new shares.

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Microsoft Dynegy said it remained on firm financial footing, but warned that its earnings per share next year would be 10 percent lower than analysts had predicted.

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Laptop Computers But investors remained concerned about the downgrade. Shares in Dynegy and other energy companies tumbled yesterday, continuing a slide that began last month with the collapse of Enron, once the world's largest power and natural gas trader.

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Laptop Computer Over the last two years, Dynegy and its peers have raised tens of billions of dollars to build new power plants, tapping investors giddy about high electricity and gas prices. Today, prices for power have plunged, and investors are worried about the possibility of an electricity glut and the heavy debt loads carried by many energy companies.

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Desktop Computer Wall Street's sudden wariness has led Dynegy and other independent power plant operators to cancel plans for new plants. More cuts from other companies may follow, analysts say, as the industry struggles to shore up its balance sheet.

Notebooks "This is indicative of an industrywide trend," said Carol Coale, analyst at Prudential Securities in Houston. "For a long time, this industry has been carrying leverage that I have been uncomfortable with."

Lenovo Already, Wall Street has almost halted the sale of stock by merchant energy companies. Since the end of August, this industry group has only sold about $500 million of equity, compared with almost $7 billion in the first eight months of the year, according to Thomson Financial. Last year, the sector sold about $6 billion in stock.

Hard Drive The long-term impact of the industry's capital squeeze is unclear. Despite widespread investor fears of a power glut, analysts say a few states, including New York, Florida and California, may eventually face a power shortfall if new plants are not constructed. Earlier this year, a severe electricity shortage in California led to occasional blackouts, but those prices collapsed this summer.

Travelstar Analysts like Jeff Dietert of Simmons & Company in Houston had expected about 150,000 megawatts of power-generating capacity to be added nationwide from this year to 2005. But now he says that total will probably end up closer to 100,000 megawatts.

Gateway Most plants not already financed and under construction have been taken off the drawing board, he said. Currently, the nation has close to 800,000 megawatts of capacity. One megawatt is enough to supply about 800 typical homes.

Laptop Parts But the immediate crisis the industry faces is financial, not electrical.

Software Dynegy shares plunged $3.24, or 13 percent, to $21.70, yesterday. The company's stock has lost 21.9 percent of its value over the last week. Shares of Mirant, which owns independent power plants worldwide, fell 15 percent yesterday and have collapsed 40.5 percent over the last week. Other natural gas and electric companies, including the El Paso Corporation and Calpine, also fell.

Hard Drives Dynegy said yesterday that it would sell $375 million in assets next year and reduce its capital spending by an additional $375 million. The company also plans to sell $500 million in stock next summer. Dynegy said that dilution from the stock sale and lower natural gas and oil prices would cause its earnings to be only $2.30 to $2.35 a share next year, compared with a previous estimate of $2.50 to $2.60.

Electronics "Dynegy is moving forward with a permanent plan, utilizing our existing business model, that addresses market concerns, increases our capital strength, and reduces our debt," said Chuck Watson, Dynegy's chairman, in a statement announcing the restructuring effort. Dynegy said that ChevronTexaco, its largest shareholder, supports the plan. ChevronTexaco, the second-largest United States oil company, owns 35 percent of Dynegy's stock.

Canon Chris Gidez, a spokesman for ChevronTexaco, said ChevronTexaco does support Dynegy's effort. But he said ChevronTexaco has not decided whether to buy more Dynegy shares in the company's stock offering next year. Last month, ChevronTexaco injected $1.5 billion into Dynegy as part of Dynegy's failed effort to buy Enron.

Desktop Pc "We're evaluating it," Mr. Gidez said of the offering.

Desktop Computers After Moody's downgrade, analysts said they worried that Dynegy's credit ratings could be cut further, forcing the company to repay its debts early or post hundreds of millions of dollars in collateral to its trading partners.

Think Pad "There's a risk that they could get downgraded to junk status," said Christopher Ellinghaus, an analyst at the Williams Capital Group in New York, who cut his rating on Dynegy from strong buy to hold yesterday morning. "It would be a pretty material event. The core trading business is very dependent on your credit rating."

Repair Ms. Coale said she was concerned because Dynegy had said that it might have to pay back a portion of its debt immediately if its credit ratings were cut to noninvestment grade, or junk, status. Previously the company had said that it did not face a credit rating trigger, she said.

Data Recovery "Are there ratings triggers or aren't there?" she said.

Cisco Meg Nollen, Dynegy's senior vice president for investor relations, said Dynegy had one loan of about $250 million that it might have to pay back immediately if it received a junk rating from two of the three major credit agencies. The company has cash and credit lines of $900 million, more than enough to repay that loan.

Keyboard Dynegy's stock was also hurt yesterday by an incorrect report from an analyst at J. P. Morgan Chase, Ms. Nollen said. J. P. Morgan has withdrawn the report, she added.

Monitor The report mistakenly said that Dynegy's credit rating had fallen "below junk, which would mean we were bankrupt," Ms. Nollen said. "They made a mistake, they discovered it, and they're going to fix it."

Desktop Anatol Feygin, the J. P. Morgan analyst who covers Dynegy, did not return calls for comment.

Infosys Legislation on 401(k)'s In an effort to address another aspect of Enron's collapse, legislation is expected to be introduced in Congress today aimed at reducing how concentrated employees' 401(k) retirement plans can be in any single investment. The legislation is expected to be introduced by Senator Barbara Boxer, Democrat of California, and Senator Jon Corzine, Democrat of New Jersey.

Refurbished Laptops As Enron's shares fell 99 percent this year, its employees' 401(k) plans lost, on average, over half their value a total of about $1.2 billion because of the high proportion of Enron stock in the plans.

Wipro In the last two years, workers at other large companies who had much of their retirement assets in company stock have also seen their nest eggs shrivel.

Lap Top By Alex Berenson and Richard A. Oppel Jr.
New York Times - 12/18/2001

Topic: Energy

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