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The Honolulu Advertiser
Posted on: Tuesday, December 18, 2001

Power firms struggle as stock values slide

By Michael Liedtke
Associated Press

New York Stock Exchange traders yesterday exchanged shares of Calpine Co., following Moody's decision Friday to downgrade the San Jose, Calif.-based power generator's credit rating to junk. The company has $11.6 billion in debt.

Associated Press

SAN FRANCISCO — In early October, investors still seemed willing to give Calpine Corp. whatever it needed to realize its goal of becoming the nation's largest power generator.

When Calpine turned to the public markets to issue $2 billion in debt, the response was so overwhelming that company management said it could have raised $5 billion. It settled for $2.6 billion instead.

Two months later, investors are dumping Calpine stock and analysts are advising the company to slow down.

The rapid change in sentiment underscores the harsh reversal in fortune of the power industry, which entered the year riding a wave of record profits and is ending it with industry giants fighting to improve debt-laden balance sheets.

The tide began to turn during the summer as energy prices fell. A further blow came with the collapse last month of the sector's most prominent company, Enron Corp.

Although Enron's business practices are under scrutiny, the bankruptcy raises worries about nearly every other major company in the industry.

Natural gas giant El Paso Corp. last week unveiled a reorganization plan that includes the sale of $2.25 billion in assets. To conserve cash, the company is reducing its capital expenditures from $4.6 billion this year to $3.1 billion next year.

Houston-based Dynegy Inc. yesterday announced plans to generate an additional $750 million by selling assets and reducing capital expenditures. Dynegy also plans to sell $500 million in stock by next September.

Industry analyst Thomas Hamlin of Wachovia Securities noted that unless power generators do something to support their stocks, they will become increasingly vulnerable to takeover bids by stronger companies, including oil giants, looking to snap up potentially valuable assets at bargain prices.

Calpine, whose stock has slid by 40 percent so far this month, is among the more attractive takeover candidates, Hamlin said.

The company's shares fell 30 cents to close at $12.90 yesterday. Calpine's market value has plunged by 78 percent, or $12.6 billion, since the company's stock peaked at $58.04 in March.

At the same time, Calpine is the fastest growing power company. It had just under 6,000 megawatts of power capacity at the end of last year. The company now has about 12,000 megawatts of capacity and is building 30 more power plants around the country that will add an additional 17,800 megawatts.

By 2005, Calpine wants to have 70,000 megawatts in operation to make it the country's biggest generator.

Industry analyst Gordon Howald of Credit Lyonnais Securities calls Calpine's goals unrealistic.

"The reality is we are in a global recession and energy demand is down," he said. "This is not the time to be adding more capacity."

Two major credit rating agencies apparently agree. Moody's Investor Service lowered Calpine's rating to junk status while Fitch warned it is considering a similar move.

"What Calpine is trying to do may have made sense a few years ago, but not today," said Fitch analyst Alan Spen.

In a prepared statement yesterday, Calpine said it intends to regain its investment-grade credit rating and was "committed to taking the steps necessary to address today's challenging financial and power markets." The company provided no further information.