Grim outlook for energy merchants, says S&P

The future of many US energy merchants hinges on their ability to maintain adequate levels of liquidity over the next several months, according to Standard & Poor’s. Although some energy firms with trading operations are making progress on asset sales, as well as securing time waivers on bank loans, liquidity remains problematic in the sector, the rating agency said.

High liquidity requirements are putting off potential joint venture partners from investing in energy companies’s trading operations, S&P added. Last month, Missouri-based Aquila closed its energy trading division, following a two-month search for a partner. But Houston-based Dynegy is still attempting to find a partner to buy into its energy trading business.

“The biggest cloud facing the industry over the next 18 to 24 months is an estimated $30 billion of debt that needs to be refinanced in the bank and capital markets,” said Suzanne Smith, S&P analyst in New York. “Much of this debt was incurred to finance the acquisition and construction of power plants in the US.”

Furthermore, a lack of parent company credit support for Dynegy from its largest shareholder, ChevronTexaco, shows that companies can no longer rely on parents for liquidity, S&P added. As part of its new energy merchants rating methodology, S&P intends to observe more closely the way cash is moved between parents and subsidiaries.