Calpine, AES gain as investors bail out of CMS, Reliant Energy

By Ronda Fears

Nashville, Tenn., May 13 - As federal probes into energy trading activity took down Reliant Energy and CMS Energy, traders said, sellers in those names were picking up downtrodden power generators AES and Calpine. Elsewhere in trading, semiconductor names gained ground on high hopes attached to reports of higher-than-expected orders for equipment maker Applied Materials.

"The specter of Enron's ill-fated energy trading activities reared its ugly head and cast a pallor over an otherwise upbeat day," although volume was pretty slow, said the head trader at a major investment bank in New York.

"Reliant Energy went down and took CMS with it but Mirant was holding up. We saw some people switching into AES and Calpine."

Reliant Energy's disclosure that its 80% owned Reliant Resources Inc. engaged in so-called "round trip" energy trading, which boosted revenues by as much as 10% on paper, caused energy trading names to spiral lower. The sector has been under pressure since Enron's collapse, and most recently as a result into questionable energy trading practices by Dynegy, which sparked investigations into Reliant, CMS and Mirant.

After Friday's close, CMS and Mirant said federal regulators were scrutinizing electricity trades that were allegedly for the sole purpose of inflating trading volumes or revenues.

Mirant, a spin-off from Southern Co., disclosed Friday that the Federal Energy Regulatory Commission has requested data about its energy marketing operations. CMS said it is cooperating with an informal inquiry by the SEC into the deals it did last year with Dynegy.

Reliant said it discovered the so-called "round trip" trading practices and has put an end to it.

"These transactions were inconsistent with our company philosophy," said Steve Letbetter, CEO of Reliant Resources, in a company statement.

"We are about creating value for our shareholders and acting with integrity. These transactions resulted from some misguided employees who believed that being higher in the league tables of energy trading was important. These types of transactions are no longer occurring at Reliant and will not occur in the future."

Reliant Resources said it is calling for a "time out" to reassess its mark-to-market trading activities. In the interim, the company said it will more narrowly focus its trading activities on optimizing the value of its core physical assets, which will entail a reduction in mark-to-market activities not directly tied to assets.

Reliant Energy took the brunt of the market's reaction, however.

The Reliant Energy 2% exchangeable due 2029 dropped 2.75 points to 29.75 bid, 30.75 offered although the issue converts into AOL stock, which closed up 37c to $17.35. Reliant Energy shares ended down $3.86 to $17.59. Reliant Resources shares lost $2.06 to $9.94.

"It's a credit-quality situation and people are bailing out, scared that this could be another Enron situation or that they could just be left holding on to paper that's not going to be worth anything for a long, long time," said a dealer.

That sentiment spread to CMS, the dealer said, but Mirant found support from buyers.

The CMS convertible preferred fell 4.25 points to 20.25 as the underlying stock lost $3.24 to $16.05.

Mirant's 2.5% convertible due 2021 was quoted flat at 76.5 bid, 77.5 offered. The underlying stock closed off 8c to $8.03. Mirant is scheduled to make a presentation at the Morgan Stanley convertible conference on Thursday and the comments are expected to be available on the company's website.

"The power and energy sector has been hit hard since the fall of Enron, but there are believers and there had already been some buying started in names like Calpine and AES, which really are more power generators," the dealer said.

Calpine's 4% convertible due 2006 added 1 point to 85.25 bid, 85.5 offered with the stock up 30c to $8.85

AES' 4.5% convertible due 2005 gained 1.75 points to 62.5 bid, 64.5 offered with the stock up 9c to $6.81. The AES 6.75% convertible preferred added 3.65 points to 23 bid, 23.75 offered.

Otherwise, the market was generally higher as well.

Applied Materials, which makes equipment used by chipmakers, was pushing much of the tech sector higher, traders said, as several stock analysts were anticipating a stronger-than-expected recovery in orders and that was being translated into a recovery signal for most of the group.

In addition to Applied Materials, which announced earnings Tuesday, other chip names heading north sharply on Monday included Amkor, ATMI, Atmel, Fairchild Semiconductor, LAM Research, LSI Logic, Teradyne and Veeco.

Teradyne's 3.75% convert due 2006 added 4.625 points to 138.5 bid, 139 offered with the stock up $1.34 to $30.63. Veeco's 4.125% convert due 2008 added 3.875 points to 103 bid, 103.75 offered as the shares rose $1.87 to $30.61.

One trader also noted some buying in the Providian 0% convert due 2021 at 29. The 0% was quoted closing flat at 30 bid, 31 offered. The Providian 3.25% due 2005 was quoted flat at 61.5 bid, 63.5 offered. Providian shares ended up 8c to $7.09.

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