The biggest merchant-energy bankruptcy since

Enron

threatens to spoil the party for this year's Cinderella stock group.

Just hours before the clock struck midnight,

Mirant

( MIR) filed for Chapter 11 bankruptcy protection Monday. Unlike the many struggling merchants that have been spared over the last year by last-minute financing deals, Mirant lost its race against time -- it had until midnight to seal access to scarce cash -- and investors saw their shares turn into pumpkins.

Now the question is whether the clock is ticking on Mirant's rivals as well. Good news at

Dynegy

(DYN)

, which itself fought off bankruptcy just last year, helped to limit the damage Tuesday across what has been a hot sector. Still, even observers who are bullish on some of these names say the investing landscape has changed.

"A failure by Mirant certainly requires investors to reassess the risk inherent in other distressed energy companies," said Williams Capital analyst Christopher Ellinghaus. "However, we do not believe that it signals an industrywide credit problem that causes further bankruptcy court filings."

Mirant shares plunged 75%, hitting 47 cents, before they were halted early in the session Tuesday. Other stocks across the sector dropped as well, led by

Allegheny

( AYE), off 48 cents, or 6%, at $7.99.

Problems

Until now, many risky energy merchants -- namely

AES

(AES) - Get Report

, Allegheny and

Reliant

(RRI)

-- had managed to dodge the fate of Enron by inking timely new financing deals. As a result, the distressed group has emerged as an unlikely hero of this year's marketwide rally.

Some people on Wall Street clearly expected Mirant to pull through in the same fashion. The stock had danced to a 15% gain Monday, closing at $2.01, even as bankruptcy rumors circulated.

But Mirant arrived at the scene late, expecting far more than the banks would give. Ultimately, the company was turned away without financing or even a prepackaged bankruptcy plan. So Mirant, staring at nearly $5 billion worth of debt maturities, resorted to filing for Chapter 11 protection without a bankruptcy plan in place. That means Mirant stakeholders are left to wonder how much of their investment -- if any -- they can hope to recover.

"While nothing is certain at this point, one should not necessarily expect residual value in Mirant shares," Ellinghaus wrote. "Any reorganization proposal which includes the retention of value for existing shareholders is not terribly likely and should certainly not be assumed, in our view."

Ellinghaus, who's generally optimistic about other energy merchants, expressed disappointment but no surprise about the failure of Mirant. He said Mirant was seeking generous concessions from its lenders -- including long terms and shared collateral -- that other merchants, with less exposure to the risky energy trading business, were not. Moreover, he pointed out, Mirant was the only merchant to signal an openness to bankruptcy by pushing a prepackaged plan.

All in all, he said, Mirant presented a materially different -- and "probably materially poorer" -- financing plan than merchants who've succeeded. The analyst says he does not believe Mirant's failure is a sign of more bad news to come.

Shaping Up

Indeed, Dynegy -- considered a prime bankruptcy candidate a year ago -- unveiled new financing arrangements within hours of Mirant's court filing. The company eliminated its biggest near-term threat by inking a deal to pay off a $1.5 billion debt to its largest shareholder, oil giant

ChevronTexaco

(CVX) - Get Report

, with $850 million in cash and new securities. It also announced plans to issue $1.2 billion in new debt to pay off obligations coming due through 2006.

Investors rushed to celebrate. On a day when Mirant dragged most other players down, Dynegy jumped 20 cents to $4.64.

Ellinghaus viewed the deal as a good one for Dynegy. He said the company will pay a relatively modest price, through a slight rise in interest, to buy itself more turnaround time. But he still stopped short of recommending the shares.

"The deal creates more certainty -- or less uncertainty, anyway," said Ellinghaus, who doesn't own Dynegy himself and rates the stock a hold. "But I don't think there's enough certainty in their numbers yet to really change my rating."

Peter Cohan, a Massachusetts author and investment strategist, took a similar stand. He said the ChevronTexaco deal "helps defer a looming November deadline," but he's still weighing Dynegy's long-term chances of success.

"The real question is whether, by swapping paper due sooner for paper due later, these investors are increasing their expected returns," said Cohan, who has no position in the stock. "The answer depends on whether Dynegy's economic position will improve by the due date of the securities."

At least one industry expert, who asked to remain unnamed, is betting against that recovery. He includes Dynegy in the same risky group as Mirant. He also points to other merchants -- like

Calpine

(CPN)

, Allegheny and

Williams

(WMB) - Get Report

-- that borrowed heavily to invest in a power business that's turned into an expensive drain.

"These gas-fired merchant plants are one big speculative bet," he said. "These companies are living on the hope that profits from their natural gas-fired plants will suddenly appear and pay off their massive debts. ...

But hope is not your best friend -- and certainly not a strategy."