Calpine Increases Offering to $3 Billion
With hot summer weather in full force and air conditioners eating up electricity across the country, U.S. utilities have more than one reason to celebrate this summer.
In yet another sign the tide has turned for the battered domestic power industry, investors have been eager in recent weeks to buy a raft of bond offerings from cash-needy utilities.
San Jose-based Calpine Corp., for example, Wednesday increased a three-part bond deal to $3 billion from its originally planned $1.8 billion. The offering will rank as the fourth-largest junk, or below-investment-grade, bond offering in the U.S. corporate market, according to Thomson First Call.
Like many of its rivals, Calpine has suffered from a drop in demand and prices for electricity and has faced major financing challenges since the 2001 collapse of energy trader Enron Corp.
Calpine has had its credit rating cut four levels since December 2001 as the company posted losses in three of the last five quarters.
The company’s stock plunged last year to as low as $1.66 from a peak of more than $55 in 2001. The price has rebounded somewhat this year. It closed at $7.84, up 19 cents, on the New York Stock Exchange on Wednesday.
But still-weak utility stock prices haven’t deterred bond investors.
Utilities have issued $25.4 billion in debt this year, more than double the $11.7 billion issued by this time last year, according to a Deutsche Bank report.
Much of the money raised is being used to pay off older, higher-cost debt, giving the companies more financial breathing room.
“Anybody who thinks they can and who hasn’t already refinanced will,” said Dot Matthews, an analyst at CreditSights.
Investors’ comfort with utility bonds has improved as the companies have scaled back their focus on the riskier energy marketing and trading markets to concentrate on their basic utility businesses, analysts said.
What’s more, the deep slide in interest rates has left many investors hungry for decent returns.
Junk bond yields have tumbled as well this year, but with many junk issues yielding 8.5% or more they are paying more than double what’s available on high-quality bonds such as 10-year Treasury securities.
The increase in Calpine’s debt sale “tells you everything about investors’ appetite for risk,” said Marilyn Cohen, head of Envision Capital Management in Los Angeles.
The seven-year notes in the Calpine deal are expected to have a coupon, or interest rate, in the range of 8.5% to 8.75%.
Other utility bond offerings in recent weeks included a $450-million sale by Ohio Power Co., a unit of American Electric Power Co.; a $1.1-billion sale by Reliant Resources Inc.; and an $800-million offering by Williams Cos.
Matthews cited American Electric Power as an example of a company whose image with investors has improved markedly thanks to the firm’s back-to-basics strategy.
