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As Audience Stirs, Calpine Loses Its Voice

The company goes mum on everything you'd want to know about if you owned it.

In the good old days, when its CEO was predicting awesome profit growth and making the case for a $380 share price,



had a helpful habit of giving investors advance details of upcoming earnings.

No more. That is a great shame. For it is in dark times such as these, when Calpine's very survival is at stake, that financial data could be most useful. So far, the debt-burdened power producer still hasn't given investors notice on what earnings for the fourth quarter of 2001 or this year will be.

How different things were a year ago. With management uncharacteristically silent, we are left to make our own assumptions.

Slow Burn

But before we do that, let's recap the Calpine story. Almost out of nowhere in the late '90s, Calpine emerged as the leading builder of state-of-the-art, gas-fired power plants, tapping the market for enormous amounts of equity and debt in the process. The stock soared as the market assumed spiking power prices were here to stay.

But in mid-2001, Calpine's stock began to suffer amid concerns connected to the California energy crisis. Then, the market started to worry that overcapacity could whack companies such as Calpine. Next,


collapse forced scrutiny of energy companies' accounting,

including Calpine's.

At the end of last year, Calpine faced a solvency crisis as its cash outflows appeared to exceed inflows. It pledged to cut back its steroidal program to build 70,000 megawatts of generation capacity. Moody's downgraded the company to junk status.

Since the end of December, Calpine has issued $1.2 billion of bonds that convert to stock in a bid to meet its outgoings. Yet the stock, not that far off recent lows and showing a bombed-out valuation, is saying that big doubts persist in the market.

After slashing their profit expectations, sell-side analysts have Calpine earning $2.24 per share in 2002, giving the company a price-to-earnings ratio of only 7.5. Why aren't more people buying? No doubt because they need key numbers that the company is holding back. Investors would be foolish to take the plunge without getting up-to-date numbers for the following: total debt, cash on hand, company forecasts for 2002 operating cash flows, earnings and profit margins on future power sales. A Calpine spokeswoman declined to provide any of these, saying investors would get more financial data when fourth-quarter earnings are reported, scheduled for the end of this month.

Debt and cash are important because Calpine still may be facing a liquidity squeeze. Granted, raising $1.2 billion from the recent convertible bond sales gives the company the funds to pay back a $1 billion bond that may come due in April. But the company is also trying to increase the size of a corporate loan from $400 million to $1.5 billion.

Calpine execs said in December that this increase in credit was needed to finance its trading operations, a use the banks can hardly be that enthusiastic about after Enron's demise.

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And the capital needs of Calpine's trading operations are almost certainly going up as counter-parties require higher collateral. The downgrade to junk by Moody's, and the jitters in the energy market, will almost certainly mean higher collateral for Calpine. And the value of its derivatives contracts are falling, too, likely leading to higher margin. In the third quarter, Calpine's gas contracts' fair value dropped to minus $592 million, from minus $294 million in the second quarter. Its power contracts' value also dipped.

In addition, Calpine would've needed $300 million to pay back a letter of credit facility that came due at the end of December. (Details of this cash use only leaked out from a Moody's press release.)

The big question is how much capital expenditures and operating cash flows will be over the coming months. Capex in 2002 could total anything from $1.7 billion to $2.5 billion, depending on analyst estimates. Some $1 billion of that can be covered with a remaining $1 billion left on a construction loan. That leaves operating cash flows and funds raised from possible maneuvers such as contract renegotiations, monetizing assets such as gas reserves and its receivable from


(PCG) - Get PG&E Corporation Report

(around $260 million).

Operating cash flows obviously depend on how much Calpine makes from selling electricity. Chris Ellinghaus, analyst at Williams Capital, says cash flows from operations could be in the $1.2 billion range. (Ellinghaus rates Calpine strong buy and Williams hasn't done recent underwriting for the company.)

The analyst believes the average gross profit margin on power sales, or the so-called spark spread, will be a healthy $22 per megawatt hour in 2002. That's much higher than the spot-market spark spreads of around $11 because Calpine has locked in gains through long-term contracts with California, he says.

And even if the California contracts get renegotiated in the state's favor, as is likely, Ellinghaus believes they can be restructured to maintain their spark spreads.

However, such bullishness is hard to back with available numbers. It's not clear what definition is being used for operating cash flow. It can't be the standard version obtained from

Securities and Exchange Commission

filings, because that number was only $500 million in the first nine months of 2001. There's no way that can jump to $1.2 billion this year if net income, the base component of operating cash flows, is expected to rise only 10% in 2002. In fact, Calpine's nine-month cash flow from operations was


than its net income, reflecting the greedy nature of the trading desk.

In addition, it's hard to see how Calpine can get out of high-priced (and now underwater) gas contracts that were used to fuel the power sales for California without booking large losses.

In fact, Calpine may be degrading the profitability of its California deals to grab cash. There is chatter in the market that the company has pressed California for upfront cash payments in return for better pricing. And investors need to remember that 35% of Calpine's output in 2002 is going to be unhedged and thus vulnerable to the currently thin spark spreads.

The meagerness of these spreads is due to seasonal factors, and they may well fatten up as spring approaches. But much depends on whether there is excess capacity in the energy-production market. If capacity gets used up in an upturn, power prices will jump, and Calpine's cash flows will benefit. (However, spark spreads aren't the final word. Remember that energy companies then have to subtract operating costs of around $8 per megawatt hour from the spark spread; that would leave profit of $3 on current spreads, a paltry sum that's nowhere near enough to pay many companies' steep interest costs.)

The accepted wisdom is that capacity was too low in California in 2001. To a certain extent that was true. But a good part of the problem was that hydroelectric plants were operating well below capacity because of freakishly low precipitation levels. Recent California data, however, show snowpack levels to be 120% of normal, and water levels are currently 95% of normal, compared with 52% of normal in 2001, according to a Morgan Stanley research note published Tuesday.

Yep, investors must be Cal-pining for fresh financials.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.