Calpine's Sales Mask Debt Woes

Unfortunately, when a company in Calpine's financial situation sells assets that have served as collateral for already existing debt obligations, new debt obligations are triggered because the bonds are no longer secured by the asset, as required in the debt indentures.

Take the sale of its natural gas plant. Of the $835 million raised with the natural gas sale, about $696 million is in escrow and needs to be used to buy back the debt that was secured by the asset. That's because only $139 million of the debt being used to secure the asset has been tendered, meaning the company is still on the hook for the $696 million that is sitting in escrow. In other words, this asset sale had a negligible impact on the company's ability to pay its bills.

And Calpine's other cash obligations -- capital expenditures on maintenance; interest expense; money owed to buy back $620 million in outstanding preferred stock already spent this quarter; the $400 million the company has used to buy back the preferred debt mentioned above; working capital required to secure natural gas to fire its plants -- leave the company with just about nothing at the end of the quarter.

Additionally, there is unconfirmed speculation among a number of hedge funds and analysts that Calpine's sales of its natural gas business back in early July has limited the company's ability to secure natural gas, its main feedstock for power generation. Calpine has a junk debt rating with credit agencies, so securing the financing to buy natural gas can prove quite costly. Without this feedstock for power, the company's total output may be held back during the peak months when demand, and profits, should be soaring.

The bottom line is that Calpine, at some point, is likely to run out of cash and assets to sell. Unlike Williams Companies(WMB Quote) or El Paso(EP Quote), which both climbed out from under massive piles of debt over the past few years and are now operating sustainable business models, Calpine's asset sales are going to pay the interest expense on the financial obligations created by the asset sales themselves, despite the immediate appearance that the company is paying down debt.

When we called the company to ask the CFO for help understanding the financials, we were told he was on vacation and unavailable for comment. Its public relations department was able to confirm the majority of our numbers without dispute, but would not comment on our analysis.