Wall Street was so enthusiastic Tuesday that even the merchant energy stocks rose.

Promising news from a number of these beleaguered players sparked a sectorwide rally, reversing Monday's sharp selloff and leading to yet another session of double-digit percentage moves. Of course, with most of these stocks trading in the low single digits, it doesn't take much to get a 10% change, but investors who have seen 90% drops this year will take what they can get.

Cash-strapped Dynegy ( DYN) set the tone with premarket reassurance that its $1.8 billion pipeline sale to Warren Buffett's MidAmerican Energy should close by month's end. The transaction, expected to save Dynegy from a devastating cash crunch, has come under doubt recently due to liens placed on the pipeline by former owner Enron.

Dynegy said it has submitted a proposal to federal regulators that could clear the way for the immediate sale of its Northern Natural Gas pipeline to Buffett's company.

"Provided the proposed resolution is accepted by the Federal Energy Regulatory Commission , the companies expect to secure the necessary approvals and complete the transaction in August 2002, as originally planned," Dynegy and MidAmerican Energy announced Tuesday.

Although FERC has yet to rule on the proposal, the market displayed confidence. Dynegy's stock soared 29.1% to $1.82 in midday trading.

Xcel-lent

Beleaguered Xcel Energy ( XEL), hammered last month by sell recommendations from analysts, rebounded Tuesday after eliminating the pressing threat of a bank default. The Minneapolis company announced Tuesday that its lenders have agreed to strike a cross-default provision that would have punished it for the financial struggles of NRG, an unregulated subsidiary that it spun off two years ago but repurchased in June in a vain effort to keep NRG's debt from being downgraded to junk.

Recently, all three ratings agencies downgraded NRG's credit to junk. NRG has also defaulted on a key credit payment, which threatened Xcel's access to capital prior to the new bank arrangements.

"We're delighted that we were able to reach these agreements," said Xcel Chief Executive Wayne Brunetti. "This was a critical step for the company and gives us the added financial flexibility we need."

Shares of Xcel soared on the news, climbing 25.8% to $8.20.

But at least one analyst warned that NRG remains in "deep trouble" even after the bank negotiations.

"With the news Monday that NRG was defaulting on construction payables to Shaw SGR, the subsidiary's bankruptcy is looking more likely -- that is, unless it can talk its lenders into easing its debt covenants," wrote Morningstar analyst Paul Larson.

Aquila's Out

In other industry news, Aquila ( ILA) announced that it's exiting the energy trading business that fueled one of its most explosive periods of growth. The Kansas City-based company said it will refocus on its core utility business, representing a stark turnaround from a year ago, when the company boasted one of the largest energy trading operations in the country and changed its name from Utilicorp to Aquila as a reflection of its strategy.

Malcolm Berko, a fund manager and syndicated columnist, said he lost all faith in the company at that time.

"When companies like this change their name to Aquila, it's time to get out," said Berko, who has no financial interest in the stock. "This energy trading stuff, as far as I'm concerned, is smoke and mirrors and fluff.

"I don't trust it, and the Street doesn't trust it, either."

Aquila, formerly known as Utilicorp, had long traded in the mid-$20s before de-emphasizing its utility business during the merchant energy heyday that ended with Enron's bankruptcy. Since then, Aquila has joined a crowd of competitors that have attempted to sell their flailing trading operations without any success.

The stock was down a nickel to $5.69 early Tuesday afternoon.

In contrast, ONEOK ( OKE) defied the industry trend by posting strong second-quarter results, lifted by the strength of its own energy trading business. Unlike many of its struggling peers, the Tulsa company focuses on gas, rather than power, trading and short-term contracts that are far less vulnerable to mark-to-market deterioration.

"Our strategy of focusing on the physical side of the business and trading around our asset base continues to yield positive results," said ONEOK Chief Executive David Kyle.

ONEOK posted second-quarter profits of $38.8 million, or 32 cents per share. The company easily topped analysts' expectations of 25 cents a share and last year's second-quarter profits of 20 cents a share.

Following its earnings release, ONEOK gained 6.2% to hit $18.37 in Tuesday afternoon trading.

Elsewhere in the industry, both Williams ( WMB) and Mirant ( MIR) racked up significant gains on Tuesday. Williams, which has closely followed the stock path of Dynegy, soared 17.3% to $2.71.

Mirant climbed 12.6% to $3.30, regaining some of the ground it lost Monday after announcing that the Securities and Exchange Commission is questioning its accounting.

The SEC began questioning Mirant after the company's recent revelation that it may have overstated the value of certain assets and receivables by roughly $250 million. The company has denied participating in controversial round-trip trades, identical energy swaps that artificially boost trading volumes and revenues for the players involved.

Lasan Johong, an analyst at Blaylock & Partners, attributed much of Tuesday's industry gains to favorable weather news and natural gas pricing. He also greeted the SEC's interest in Mirant with some relief.

"I happen to think this is a very good thing for a company such as Mirant," said Johong, who owns no stock in the company. "If the SEC says the company did nothing wrong -- that it didn't do any stupid trades or anything -- then this could get rid of a cloud that's hanging over Mirant.

"Actually, I'm very encouraged this is happening."

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