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SAN FRANCISCO — In early October, investors still seemed willing to give Calpine Corp. whatever it needed to realize its goal of becoming the nation’s largest power generator. 

When Calpine turned to the public markets to issue $2 billion in debt, the response was so overwhelming that company management said it could have raised $5 billion. Calpine settled for $2.6 billion instead. 

Two months later, investors are dumping Calpine stock and analysts are advising the company to back off its aggressive expansion if it hopes to regain the market’s confidence. 

The rapid change in sentiment underscores the harsh reversal in fortune facing the entire power industry, which entered the year riding a wave of record profits that emboldened companies such as San Jose-based Calpine to lay out ambitious plans to become even bigger and more prosperous. 

Now, industry giants are shrinking to beef up their debt-laden balance sheets. 

In the last few days, both El Paso Corp. and Dynegy Inc. have announced major asset sales in an attempt to appease Wall Street. Other major players are expected to take similar steps as they try to boost sagging stocks and ward off downgrades by increasingly critical credit rating agencies. 

“The only reason to buy a stock is if you think it’s going to be worth more tomorrow and there is no reason to really think that until this industry has a chance to regroup,” said industry analyst Thomas Hamlin of Wachovia Securities. 

If power generators don’t do something to support their stocks, they will become increasingly vulnerable to takeover bids by stronger companies, including oil giants, looking to snap up potentially valuable assets at bargain prices, Hamlin predicted. 

Calpine, bedeviled by a stock that has slid by 40 percent so far this month, is among the more attractive takeover candidates, the analyst said. 

The tide began to turn against the power industry during the summer as energy prices descended. Then the bottom fell out last month with the collapse of the sector’s most prominent company, Enron Corp. 

Enron’s devolution from powerhouse to pauper raised worries about almost every other major company in the industry. 

“Every company in this industry needs to face reality, particularly the companies that have been expanding like Calpine,” said industry analyst Gordon Howald of Credit Lyonnais Securities. “The reality is we are in a global recession and energy demand is down. This is not the time to be adding more capacity. Calpine is holding on to the idea that their business model is still sound, but they are building on a delusion.” 

Although the distaste for power stocks is widespread, none of the industry’s heavyweights have been as hard hit as Calpine. The company’s shares fell 30 cents to close at $12.90 Monday on the New York Stock Exchange. Calpine’s market value has plunged by 78 percent, or $12.6 billion, since the company’s stock peaked at $58.04 in March. 

The investor retreat is prompting power generators to scrap expansion plans to avoid taking on new debt and sell some assets to raise more cash to reassure investors fearing a repeat of Enron’s debacle. 

Natural gas giant El Paso Corp. became the first major player to retrench last week when it unveiled a reorganization plan that includes the sale of $2.25 billion in assets. To conserve cash, the company is reducing its capital expenditures from $4.6 billion this year to $3.1 billion next year. 

Houston-based Dynegy Inc. followed suit Monday by announcing plans to generate an additional $750 million by selling assets and reducing capital expenditures. To raise even more cash, Dynegy plans to sell $500 million in stock by September 2002. 

No company is growing faster than Calpine, which had just under 6,000 megawatts of power capacity at the end of last year. The company now has about 12,000 megawatts of capacity and is currently building 30 more power plants around the country that will add an additional 17,800 megawatts. 

By 2005, Calpine wants to have 70,000 megawatts in operation to make it the country’s biggest generator. 

Two major credit rating agencies cast doubts about the expansion in separate actions last week. Moody’s Investor Service lowered Calpine’s rating to junk status while Fitch warned it is considering a similar move. 

Both rating agencies are worried Calpine is taking on too much debt against the backdrop of its plunging stock price and declining prices for its power. 

In a statement Monday, Calpine said it intends to regain its investment-grade credit rating. Toward that end, the company is “committed to taking the steps necessary to address today’s challenging financial and power markets,” said Bob Kelly, president of Calpine Finance Co. A company spokeswoman declined to elaborate beyond the prepared statement. 

“What Calpine is trying to do may have made sense a few years ago, but not today,” said Fitch analyst Alan Spen. 

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On The Net: 

http://www.calpine.com