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Dynegy, Williams Charge Back From the Brink

The rebound in two big energy merchants illustrates investors' change of heart in a struggling sector.

Rumor has it that some nice betting pools, filled to the brim during merchant energy's darkest days, have yet to be claimed.

Last summer, many people felt safer betting on a merchant company's bankruptcy than on the company itself. The only real challenge, it seemed, was picking which player would follow


into bankruptcy first. In Enron's hometown of Houston -- the energy capital of America -- the stakes climbed particularly high.


Oil Daily

, a trade publication fed by industry insiders, captured the dark mood precisely.

"One bit of gallows humor making the rounds in the Houston trading community," the paper said, "was whether the funds at risk in various informal betting pools, speculating on which company will declare bankruptcy first, exceeded the value of that particular company's trading book."

At the time of that article, published last July,





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were no doubt clear favorites in the race to Chapter 11. Before the week finished, both companies would see their once-lofty stock prices tumble below $1 to astonishing record lows of 49 cents and 78 cents, respectively. With the companies running on fumes and their credit ratings in shambles, doom seemed inevitable.

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Looking back, veteran energy analyst John Olson resorts to a now-familiar war term -- "shock and awe" -- to describe his feelings at the time.

"I was in a state of disbelief," said Olson, an analyst at Houston-based Sanders Morris Harris who owns no stock in either company. "Everybody was expecting the worst."

As it turns out, of course, gamblers willing to take the long odds on the other side of those "sure-fire" bankruptcy bets have scored the giant jackpots. These days, Dynegy fetches nearly $5 a share -- up 920% from last summer's lows and 325% this year alone. Williams has also rocketed. At around $8.50 a share, the stock is up 989% from its record low and 215% for the year.

The last time either stock hit such levels was on the horrifying ride down. Before the slide, the stocks commanded $35 -- or more -- a share. So even after their recent bounces, the shares still retain only a fraction of their old value. But then, the companies themselves are little more than shadows of the giants they once were.

Reinventing Dynegy

Last week, Dynegy CEO Bruce Williamson opened the company's annual meeting by declaring Dynegy "a fundamentally different company" than the one that hosted a similar meeting less than one year ago.

Williamson couldn't have chosen a bigger understatement. Gone was former CEO Chuck Watson -- and with him, the heart and free-wheeling spirit of the company he'd built. Energy trading, the high-stakes business that propelled Dynegy to stardom, was now a thing of the past.

The audience, reminded of this change, applauded with relief.

"The Dynegy you see today was really born in October," Williamson said. "This team gets things done."

Indeed, October brought huge changes -- including a new CEO and a planned exit from energy trading -- for Dynegy. But the stock, which had bounced on summer news of a big pipeline sale to Warren Buffett's group, was nevertheless sliding back into dangerous territory. With cash running low again -- and Williamson too new to assess the situation -- investors were left to make their own decisions.

Prudential analyst Carol Coale threw in the towel, recommending that clients sell their Dynegy shares and dropping coverage of the stock in anticipation of an imminent bankruptcy. The

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, noting Dynegy's sub-$1 share price, threatened to delist the stock. And in consistently heavy trading, frightened investors sold cheap Dynegy shares to speculators who could stomach the risk.

Less than a month later, when Williamson took the floor at his first investor conference, those gamblers began to reap their rewards. Williamson announced that Dynegy had reversed the recent cash drain, and the stock took an immediate 50% bounce above the $1 dollar mark. It never dropped below it again.

Instead, the stock blossomed on a steady diet of good news. The company continued to sell assets -- exiting noncore businesses like telecommunications -- and settle claims with investigators. It paid down bank lines and arranged new ones. Then, in April, it iced the cake with surprising first-quarter profits that hinted the turnaround was for real.

Today, investors widely expect a comeback. Dynegy's 2005 maturity bonds -- once selling for 30 cents on the dollar -- now trade near par value, even though the company has become junk-rated since the bonds were first issued as investment-grade securities. And the company's stock, nearly sentenced to the Bulletin Board late last year, has gone on to rank as the market's top performer.

Williamson attributes this rebound to the hard work -- and changes -- Dynegy continues to carry out.

"These are simply the right things to do," he said. "And we have the confidence that the right thing will, in turn, continue to happen to our share price."

Tulsa's Tale

Perhaps the only company that can match Dynegy's comeback story is Tulsa-based Williams.

Shares of the two companies have, in fact, traded very much in unison through the roller-coaster ride of the past year. But the companies are not as similar as their stock charts might suggest.

After all, Dynegy is a relatively young company that made its name as an energy trader -- and it became even more famous when it tried to swallow up industry giant Enron. Williams, on the other hand, spent most of the past century as a solid pipeline company that only recently followed the Enron-led herd into energy trading.

But in short order, Williams was relying on trading -- with its fast mark-to-market gains -- for more than half of its operating profits. Once Enron collapsed, taking an entire industry down with it, those profits began to evaporate. But the huge debts, taken on to invest in the fast-growth business, remained.

Less than eight months after Enron filed for bankruptcy, Williams finally hit a wall. On July 29, Williams reported that its ailing energy-trading unit had pushed second-quarter results $350 million into the red. The rating agencies slashed Williams' credit to junk. And the company, scrambling for cash to pay off a looming credit bill, felt bank doors slam in its face.

For Williams -- which had only days to save itself from bankruptcy -- the perfect storm had hit.

"We had very few options to keep the doors open," admits company spokesman Kelly Swan.

Williams employees, troubled by the stock's drop below $20 and stunned by its slide to the single digits, were numb when it fetched only pocket change. But the company's top executives, blasted in their hometown for breaking promises and shattering dreams, refused to give up.

As the market braced for a bankruptcy filing, Williams hammered out three big asset sales -- all for instant cash -- and two crucial loans. The company escaped bankruptcy by a matter of hours.

Exhausted employees, eager to call it a day, found a surprise waiting for them. Volunteers from United Way, an agency long supported by Williams, had been planning a support rally for the company for weeks. By coincidence, the volunteers had chosen to show up the same day Williams inked its life-saving deals.

"As employees were coming out of the elevators, they were greeted with a gauntlet of cheering," Swan recalls. "They were made to feel like professional athletes or entertainers. ... The lobbies were lined with hundreds" of fans.

Later, some critics would challenge the company's last-minute deals. Industry veteran Karl Miller promptly accused management of accepting "loan shark" financing -- and putting the company's future on the line -- just to keep their jobs. Feeling personally slapped, many Williams employees went on to complain that they'd been sold or laid off by senior executives who'd weathered none of their pain.

Clearly, Williams' escape from bankruptcy hadn't come cheap. For weeks, in fact, the company would field steady criticism for taking out a short-term loan, partly financed by Buffett, that carried a staggering 34% interest rate and placed some choice assets, pledged as collateral, at risk.

"I still get calls about that loan," Swan admits. "And I tell everyone the loan was absolutely worth every penny. It preserved our shareholders, and it preserved the company."

In April, Williams announced that it had the means to pay the loan off early. But that victory, in some ways, is mostly symbolic. The company still carries a huge debt load. And even after selling $2 billion worth of assets this year alone, the company needs to sell or collect on about $2 billion more to right its overburdened balance sheet.

Only after paying off yesterday's excesses can Williams start pouring real money into future growth. And for that reason, even some who are impressed by Williams' rebound will remain on the sidelines for a while.

Right now, Olson is leery of Williams and Dynegy alike.

"I expect them to be survivors," he admits. "But I would be very cautious about jumping in now. I think you'll have time to buy both of these companies at better prices in the future."

Jake Dollarhide, a top executive at Fredric E. Russell Investment Management in Tulsa, agrees. The firm has invested repeatedly in Williams -- last time at a steep loss. Dollarhide, and Russell himself, shudder at the mention of last summer's dive. But even after that harrowing ride, Dollarhide says "you never say never" about a stock. Still, he sees no good reason to take the plunge now.

"Many people are attracted to yesterday's winner," Dollarhide said. "But if Williams still runs into problems, it could be another torturous dropback to 70 cents or 80 cents a share. Things can change quickly, as we've already seen."