Shares of independent power producers Calpine, NRG, El Paso, and Mirant sank early Wednesday, prompting a flurry of activity as companies took action to reassure nervous investors.
The 40-company S&P utility index hit a 4-year low early Wednesday, led by Calpine Corp., which lost 20.65% to trade at $12.30. Shares of NRG Energy Inc. were down 12.26% to $11.16 on the New York Stock Exchange, as investors, spooked by the downfall of energy trader Enron Corp. continued to flee companies with large unregulated power holdings.
The stocks rebounded in the afternoon on very heavy volume, in part on reassuring comments by Standard & Poor’s credit rating analysts. “Portfolio managers looked at their utility/energy portfolio and decided to sell almost anything that wasn’t a pure play utility,” said Jon Cartwright, bond analyst with Raymond James & Associates. “These managers were used to utility bonds that were just about bullet proof.”
But the sector has changed considerably as utilities blended with marketing and trading companies and independent power companies, he said. Now managers don’t want to “step up and buy into a firestorm.”
“After Enron, there is fear and that’s why there is the sell off,” he said. “The fear is not based on fundamentals.”
With its bonds trading as low as 10-20¢ on the dollar, Calpine fought back criticism about its balance sheet and repurchased $122 million of its $1 billion of convertible bonds. The balance of the bonds will have to be paid in April 2002 or the company will have to issue equivalent value in common stock.
Calpine announced the purchase minutes after a conference call with Standard & Poor’s ended. Analysts on the call were disturbed because Calpine hadn’t moved to buy back those obligations. They noted the company could issue other debt, commercial paper, or even bank debt at less than 22%.
“These purchases reaffirm our commitment and position that Calpine has sufficient liquidity to meet our current and ongoing capital requirements,” said Calpine senior vice-pres. Bob Kelly. S&P credit analysts reassured the investment community Calpine’s liquidity and debt level are not an issue for the credit rating agency.
The investment community has been agitated about Calpine since a published report compared the company with Enron. The stock is down from a high of $58/share late last year, closing Wednesday at $15.91/share on volume of 73.8 million. The average volume of shares traded for Calpine is about 6 million.
S&P confirmed its double B plus existing rating on Calpine’s bonds. S&P said it didn’t see any weakening of that rating unless Calpine placed assets into separate projects and encumbered them with debt.
“They have no plans to do that,” said S&P analyst Jeffery Wolinsky. “And we have no concerns that there are any underhanded deals there.” S&P said Calpine’s credit rating is based on revenue from electricity assets only. No value from the trading operation was considered in the calculation of cash flow to support the bond payments, Wolinsky said.
El Paso Corp.
El Paso said it will sell $2 billion in assets, cut capital spending, and increase common equity to reduce leverage and simplify its balance sheet in the wake of Enron’s collapse. The Houston company said it has become clear in the last month the market expects energy companies to maintain lower leverage and more simplified balance sheets.
El Paso said it also expects 2002 earnings of $3.40-$3.55/share, down from the $3.60-$3.70/share guidance the company gave analysts in October based an annual average Henry Hub natural gas price of $3/Mcf. The Thomson Financial/First Call consensus estimate is $3.67/share for 2002.
As part of its simplification plan, El Paso said it will add about $2 billion in debt to the balance sheet by adding the debt associated with the off-balance-sheet financings known as Gemstone and Electron. The company said it also will eliminate or renegotiate the rating triggers in certain El Paso financings.
El Paso CEO Bill Wise said Moody’s Investors Service’s change in posture on ratings triggers prompted the the decision. Moody’s Friday said it will step up its analytic focus on the credit risk implications of triggers such as those that helped precipitate defaults and bankruptcies this year by two California utilities and Enron Corp.
Enron’s problems began to snowball after credit rating agencies cut its rating to below investment grade. The downgrade accelerated billions of dollars in debt.
To accommodate the additional debt, El Paso said it will reduce capital spending to $3.1 billion, generating free cash flow in excess of $1.5 billion in 2002, and increase common equity by at least $1.3 billion through a combination of retained earnings and equity financings. El Paso said the plan is expected to reduce the company’s debt to total capital ratio to 50% by the end of 2002 from 56%.
El Paso shares closed up 4.85% at $41.07 for the day Wednesday, after an intraday low of $36.39. More than 20 million shares traded, compared to average volume of 2.7 million shares.
Atlanta-based Mirant said it couldn’t account for the activity in the company’s stock. “We are concerned about this morning’s drop in stock price, but are unaware of any major new corporate developments, not previously disclosed, that would precipitate this drop,” said Mirant CEO Marce Fuller.
Mirant shares closed at $18.79, down 6.52% on volume of 17 million shares, compared to average trading volume of 2 million shares. The stock rebounded after setting an intraday low of $16.24.
NRG Energy Inc.
Power generator NRG Energy Inc. said on Wednesday that it does not know why its stock plunged 12% by noon on Wednesday. The stock closed up 6.13% for the day at $13.50. Some 5.5 million shares traded, compared to average daily volume of 682,818. NRG, which is based in Minneapolis, also said that it would “affirm its sound business model and practices” in a news release to be issued late Wednesday.