Investors Pulling the Plug on Utility, Energy Stocks

By E. SCOTT RECKARD

July 24, 2002 12 AM PT

TIMES STAFF WRITER

Investors fleeing yet another economic sector trampled the stocks of energy companies Tuesday, as fears of more accounting scandals haunted a power industry already facing a cash crunch.

The rout further depressed stocks trading far below last summer’s highs, suggesting the kind of investor flight from utilities and energy that devastated dot-com and telecommunications shares.

Dynegy Inc. shares plunged 64% as the pipeline giant warned that its cash flow this year may be 40% less than projected. Williams Cos., Reliant Energy Inc., Reliant Resources Inc., Calpine Corp. and Mirant Corp. also suffered huge declines.

A Senate hearing on how banks helped Enron Corp. disguise its debts served as a worrisome backdrop for the trading session. Shares of El Paso Corp., the nation’s largest natural gas pipeline company, fell 23% to $10.40 on reports that it relied on off-balance-sheet partnerships to keep billions of dollars in debt off its books.

As some analysts downgraded the stocks of companies unable to meet profit projections, the tumbling share prices gave credit-rating firms new reason to worry, because the companies won’t be able to sell new shares to raise cash. Enron toppled into its monumental bankruptcy after it was unable to sell stocks and bonds.

“The cash flows and volumes we had expected just are not there,” said John Whitlock, a director in the Standard & Poor’s energy group. “And a lot of these companies can’t access the capital markets.”

S&P; cut its debt rating for Williams, another pipeline operator, to “junk” status Tuesday, a day after it dropped Dynegy to non-investment grade. Both companies are approaching deadlines to refinance their credit lines, Whitlock said.

In addition to announcing its dwindling cash flow, Dynegy canceled a $325-million bond offering for its Illinois Power utility. “I have serious doubts about their ability to survive,” said Dorothea Matthews, an analyst for research firm CreditSights Inc.

So, apparently, did the stock market as Dynegy shares fell $2.15 to $1.23. Williams, meanwhile, was down 82 cents to $1.19. Both fell below $1 during the session; last August, Williams traded as high as $33.80 and Dynegy at $47.87.

Reliant Energy, which operates three gas utilities and an electric utility, fell $5.77 to close at $7.90. Mirant, which supplies electricity and energy services worldwide, fell $1.28 to $2.77, while Reliant Resources, a producer and trader of electricity, was down $2.93 to $4.50. Both had been downgraded by Banc of America Securities.

Other energy and utility stocks took lesser hits. PG&E; Corp. fell $1.05 to close at $11.39; TXU Corp. was down $3.95 to $34.64; and Aquila Inc. fell 56 cents to $6.

Duke Energy Corp., the nation’s second-largest utility company, fell 30 cents to $19 after reporting a 13% jump in second-quarter earnings to $474 million, as revenue climbed 4.8% to $16.3 billion.

Raymond C. Niles, a Salomon Smith Barney analyst, downgraded Dynegy, AES Corp. and Calpine, citing “mounting evidence of deteriorating industry and corporate fundamentals.”

Shares of AES, an electricity generator and wholesaler, fell 66 cents to $2.24. Calpine, which also produces electricity, was down 96 cents to $3.12; it said second-quarter earnings would be $72 million, down from $108 million a year earlier.

Calpine Chief Executive Peter Cartwright said the firm was cutting capital spending and overhead “to ensure sufficient liquidity.”

The biggest problem for those companies is weak prices for commodities and overbuilding of power plants, Niles said. The expected addition of 48,000 megawatts of generating capacity this year and 35,000 megawatts next year “is highly likely to exceed demand in nearly all scenarios,” he wrote.

Bloomberg News was used in compiling this report.

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Utility Meltdown

Shares of electric power utilities, energy traders and pipeline companies were crushed Tuesday by heavy selling. Most of the stocks had been dramatically beaten down over the last year.

Ticker 52-week Tues. Tues. change:

Stock symbol high close price pctg.

Dynegy DYN $48.15 $1.23 -$2.15 -64%

Reliant Energy REI 32.80 7.90 -5.77 -42

Williams WMB 34.41 1.19 -0.82 -41

Reliant Resources RRI 23.90 4.50 -2.93 -39

Mirant MIR 34.24 2.77 -1.28 -32

Calpine CPN 39.51 3.12 -0.96 -24

El Paso EP 54.05 10.40 -3.15 -23

AES AES 39.25 2.24 -0.66 -23

Texas Utilities TXU 57.05 34.64 -3.95 -10

Aquila ILA 32.74 6.00 -0.56 -9