Reliant Resources Drop 11%, Correcting
Recent Runup
DOW JONES NEWSWIRES
By David Bogoslaw
Of DOW JONES NEWSWIRES
NEW YORK -- Shares of Reliant Resources Inc. (RRI) dropped 12% Tuesday in
what was more a correction to a recent runup than a response to any news,
analysts said.
Although there is some concern about whether the independent power producer
will be able to refinance a $2.9 billion bridge loan expiring next month, the stock
price has soared since the new year.
"This is a correction," said analyst Lasan Johong at Blaylock & Partners. "This is
not to say that the stock should not eventually trade at higher levels than it's
trading today."
Investor interest has most likely been sparked by positive pricing of Texas Genco
(TGN), the electric generation unit that was spun off from Centerpoint Energy,
Reliant's former affiliate, earlier this month, Johong said.
Reliant has an option to buy the 81% that Centerpoint owns of Texas Genco for
10 business days, starting Jan. 10, 2004. The company will exercise that option
based on the public trading price of Texas.
"The valuation of Texas Genco on 80 million shares or so would be $968 million,
about $500 million less than what the fair value of TGN would be in the open
market," Johong explained. "People recognize they'd be getting it for cheap."
He estimates the present value of the option at $400 million, 80% of the $500
million differential, and said the time value counts for an additional amount.
Buying back the 80% stake in Texas Genco would reduce Reliant's share value by
about $1.40, bringing it in line with such merchant trader peers as Williams Cos.
(WMB), Calpine Corp. (CPN) and AES Corp. (AES), he added.
Reliant's stock jumped from $3.20 a share on Jan. 2 to a closing high of $5.40 a share on Jan. 17.
Shares recently changed hands on the New York Stock Exchange at $4.75, down 65 cents, on volume of 4.3 million,
compared with its average full-day turnover of 3.2 million.
Hugh Welton, an analyst at credit agency Fitch Ratings, speculated the runup over the past few weeks may have been
in anticipation of Reliant's being able to refinance its bridge loan in February. The loan was taken out to fund the
acquisition of Orion Power Holdings a year ago.
The stock rallied from a very low level, however, Welton said. Fitch might consider changing the debt rating and
credit outlook on the Houston company if it can get the refinancing done. In November, the agency lowered its rating
on Reliant to B, five notches below investment grade and kept it on negative creditwatch.
Johong at Blaylock cited talk in the market that Reliant might seek to increase its credit line above and beyond the $2.9
billion in order to pay for the Texas Genco purchase option.
"The only other security is equity in the retail business," he said. "For the banks it makes sense to do this Texas
Genco financing because those are hard physical assets."
Johong doesn't own shares in Reliant nor does Blaylock do investment banking with the company.
While Reliant is seeking a new credit line in excess of the $2.9 billion, it's meant to cover all debt maturing in the next
two years, Reliant spokeswoman Sandy Fruhman told Dow Jones Newswires. She wouldn't comment on the Texas
Genco option, however.
"In addition to the $2.9 billion bridge loan, we are trying to include $1.6 billion in revolving credit facilities and a
construction agency agreement for $1.4 billion," she said.
Fruhman wouldn't comment on which assets the company planned to offer the banks as security for the refinancing.
And although the company raised the possibility of having to seek chapter 11 bankruptcy protection if it couldn't
secure the refinancing, Fruhman said Reliant was confident it could get the deal done.
PS, thanks for the chart. it supports my view that this drop is a needed breather in a torrid uptrend. larry |
