Energy marketers and merchant power generators have watched their stocks drop precipitously as investors continue to run from companies even remotely associated with, or similar to, bankrupt Enron Corp. The walking wounded include Mirant (down about 36% by midday Friday from the prior Friday’s close), Calpine (down 37% for the week), Williams (-16%) and Dynegy (-17%), NRG (-14%), Aquila (-14%), El Paso (down 6%), and Reliant (-5%).

Many of those companies took action during the week to try and stem the negative tide of investor sentiment but had little effect. On Wednesday after its stock had fallen more than 25% since the previous Friday, despite no new strategic or financial news, Mirant CEO Marce Fuller was forced to reassure the market there was nothing of substantance to warrant the decline. “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,” she said. By Friday afternoon, the company’s shares had tumbled more than 35% from levels just one week earlier, and the Mirant officials once again were trying to calm shareholders.

Mirant CFO Ray Hill on Friday reaffirmed the company’s credit quality and financial flexibility. He said the company expects to end the year with over $1 billion of available cash and credit lines. “As we have stated repeatedly, we manage our business with the financial flexibility to operate under a variety of capital market conditions. Our commitment to credit quality remains a cornerstone of Mirant’s business.” The company reiterated that it has no ratings related accelerations in its current corporate facilities. Mirant is rated Baa2 by Moody’s, BBB- by Standard & Poor’s, and BBB by Fitch, Inc.

Hill believes Mirant is well positioned within its ratings categories, but acknowledges the “evolving nature of ratings criteria in light of recent developments in the sector.”

Mirant previously had disclosed material off-balance sheet financing, which consists of the Mirant Mid-Atlantic (MIRMA) lease facility and two lease facilities used to finance certain capital equipment. None of those facilities contain contingent equity commitments from Mirant, the company said. Unexpected off-balance sheet disclosures were what triggered a negative chain reaction that crippled Enron Corp.

El Paso said last week it would simplify its balance sheet to remove any off-balance sheet debt. In order to enhance its liquidity, the company also announced plans for $2.25 billion in assets sales by the second quarter in the Gulf of Mexico, Midcontinent and the Rocky Mountains (see Daily GPI, Dec. 14)).

“The credit requirements in our industry have changed and we have decided to implement a plan to respond proactively to that change,” said CEO William Wise. He noted that Moody’s a week earlier had announced it was taking a “new posture” toward ratings triggers in financings (see Daily GPI, Dec. 10).

Independent power generator Calpine Corp. had a particularly rough week, which ended with Moody’s Investors Service lowering its senior unsecured rating to “junk,” or Ba1, from Baa3. Moody’s lowered Calpine’s ratings after reviewing the company’s near-term cash flow, liquidity sources and financial flexibility. The ratings remain under review for further downgrade pending arrangements to obtain additional financing.

After The New York Times ran an article last Monday comparing Calpine’s operations and financial structure to Enron’s, the company spent several days and two conference calls doing damage control. And just when it appeared it had finally won over investors and its stocks were rising again, Moody’s announced on Thursday it was placing the company and its affiliates on review for possible downgrade. Fitch did the same on Friday, noting that “questions have arisen regarding CPN’s ability to refinance $878 million of maturing zero coupon notes and to fund future capital requirements.”

“A quick-growing capital intensive company, Calpine has acquired a significant debt burden in anticipation of later cash flow generation,” Moody’s said on Friday. “The company must now, however, operate, carry out ongoing expansion and service this debt burden in the face of modest operating profits. Furthermore, the company’s financial flexibility has been reduced as evidenced by investors’ materially lowered earnings expectations and the company’s resulting fallen stock price.”

Moody’s expects Calpine’s operating profitability to suffer from the warmer than normal heating season and lower power prices. “In addition, investor concern has increased throughout the entire energy sector,” Moody’s said.

The climate just isn’t right for Calpine’s aggressive 65% (debt), 35% (equity) strategy, other analysts said, projecting that without access to the capital markets the company would be forced to cancel some of its far-reaching power plant projects. That action may have been coming anyway as energy markets decline. Friday Sithe Energy announced it was canceling a 510 MW project in Ramapo, NY, because of the “uncertain climate.”

NRG is in the same boat as Calpine and has taken significant steps to improve the situation. Since Moody’s placed it on review for possible downgrade to junk status earlier this month because of cash and liquidity concerns, the company has announced plans to cut spending by $900 million in 2002 and received $300 million in equity from parent Xcel Energy. Like Calpine, NRG has big plans for new power generation and asset purchases that depend on capital markets for execution.

“The capital markets have effectively been shut down for many of our energy merchants and unregulated power companies as equity and debt values have plummeted,” Merrill Lynch’s Carl Kirst said in a research note last week. Kirst said the fallout from Enron’s bankruptcy has been worse than expected.

“We believe investor concerns are primarily threefold, he said: 1) profit growth/accounting/earnings quality, 2) balance sheet and liquidity concerns and 3) near-term earnings outlook given a multitude of challenges at hand.”

To make matters even worse for the companies, the heating season has been mild, prices are low and the economy is struggling to recover. It’s another virtually perfect storm of events that has come crashing down on the energy sector.

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