Reliant Resources, Energy IPOs Spurs Investors

Reliant Resources, the second energy IPO in as many weeks, lit up the New York Stock Exchange with its initial public offering last Wednesday as the most active stock in heavy trading. The Houston-based unit of Reliant Energy opened the day at a stock price of $30 -- a price that has increased four times since December--and ended 10% up, closing at $33.02 on its first day.

Aquila Inc. made a stellar opening of its IPO less than two weeks ago (see NGI, April 30).

Before its opening, Reliant Resources had raised $1.56 billion through the sale of 52 million shares, about 60% more than was originally anticipated. In Wednesday's trading, more than 17 million shares exchanged hands. With about 292 million shares outstanding, the wholesaler is valued at $9.85 billion.

Reliant Resources will have all of Reliant Energy Inc.'s wholesale generation assets, along with its retail energy, Internet, communications and venture capital businesses. It will acquire and develop power facilities not subject to traditional cost-based regulation. Currently, it sells power at prices determined by the market in five U.S. regions and the Netherlands. It also will offer retail electric services in Texas when the state completely deregulates next year. Reliant Energy owns 80% of the stock, which is expected to be distributed to shareholders within 12 months.

Investors are warming up to energy IPOs, it appears, with huge interest in just the past few weeks. Aquila, the UtiliCorp United spinoff opened 24% above its offering price and has held its gains last week.

"We think the enthusiasm for the energy-wholesale market is well deserved," said George E. Nichols of Morningstar. "Simply put, utilities are generating two things in short supply: energy and cash. Market demand is quite robust --- as witnessed in rising electricity prices nationwide and California's flickering lights. It's unlikely this scenario will change anytime soon --- there's an extended lag time before new power plants can be built to meet this demand; in the meantime, consumers are unlikely to unplug their computers and appliances for the sake of conservation."

Nichols said Reliant Resources shareholders "can take comfort knowing that it isn't a two-bit operation susceptible to collapsing during this market downturn."

Reliant Resources and Aquila are taking the place of the technology and telecommunications stocks because the energy companies will gain from both the higher current prices and increased demand for natural gas. Other companies that are profiting from the move to energy IPOs include independent power producer Calpine Corp., which has seen its stock climb more than 30% since January, and almost 230% since January 2000. The fastest climber this year so far has been the limited partnership issue of units offered by Williams Energy Partners, which has watched its stock climb 55% since its February 5 IPO.

Limited partnerships such as Williams were first offered 20 years ago, and have been popular with energy companies that need to raise capital in a tax-friendly way. However, the partnerships were used less as the energy sector declined in the late 1990s. Now, however, they may be a wave of the future.

According to Michael Friezo of Credit Suisse First Boston, energy-related companies have raised almost $11 billion by selling stock and convertible securities this year alone, compared with $21 billion for all of 2000 and $9 billion in 1999. Of the 24 IPS completed in 2001 so far, eight are from energy-related companies. In comparison, energy stocks only represented 5% of new stock issued in 2000 and 3% in 1999.

Ironically, Reliant Energy Inc. actually delayed the IPO of Reliant Resources --- it was actually set to debut in February --- because of the problems within California's power market. CEO Steve Ledbetter, who will also hold a top post at Reliant Resources, said last week during the company's annual meeting in Houston that the company was ready to "go to market in February, but the California situation became very unsettling at that time, so we decided to pull back until there was more certainty."

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