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Midday Musings: The Devil in Calpine's Details

The power company slips over cost confusion and uncertainty on a credit deal.
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"Where are you taking me?"

"No, Jack, it's where you have taken us."

Remember that scene in

Patriot Games

? The one where Harrison Ford's Jack Ryan character is being led into a room to watch a satellite feed of a commando raid on a terrorist camp that he initiated? (The 1992 film was eerily and sadly prescient in many ways.)

I kept thinking about that scene this week as market forces led me to view the "battles" being waged in a few individual names.

Last night I reported on the saga of



, which was down another 9.4% at midday. This afternoon I want to revisit

Wednesday's story about



, which was also down at midday, by 3.5%.

In Wednesday's story I noted that a key point of contention between the Calpine bulls and bears was where Calpine's electricity generation should be valued in a breakup scenario. Institutions commonly run such models, but they have taken on added significance in Calpine's case. The company is being dogged by

concerns about its cash flow, although the company says it's taking steps to resolve that, as we'll discuss in a moment.

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Initially, Calpine's spokesman said information on what prices best represent an average wasn't readily available, as I noted in's

Columnist Conversation. "We have so many contracts in so many states, it's difficult to put an average price," he said.

The spokesman promised to get back to me and (glory be!) did so yesterday, pointing me to "supplemental data" in Calpine's Jan. 31 earnings release. The release states the average electric price the firm realized in the fourth quarter was $45.88 per megawatt. For all of 2001, the average was $63.84/mw vs. $75.36/mw in 2000.

But those averages don't take into account what price Calpine has negotiated for generation under construction, nor what effect the drop in the electricity spot market and the ongoing renegotiation of long-term contracts with various entities will have. Renegotiations with the California Department of Water Resources netted Calpine average prices of $58/mw.

"The challenge is they've got multiple plants in multiple regions, with some hedged

generation and some selling into the spot market," said one analyst who follows Calpine. "You'd prefer to see prices by region broken down by spot and term prices; that would give you more confidence in the ability to project earnings and cash flow for the company."

The analyst -- yes, the same one from Wednesday -- requested anonymity because he doesn't formally cover Calpine. He said many refining and exploration and production companies offer that kind of specific volume and pricing information, and he hoped power generators such as Calpine will be equally forthcoming in the push for greater disclosure following



Finally, the average price Calpine garners for electricity doesn't resolve the debate over the book value of its generating assets. That's the key to determining a breakup value for the company, a point about which I was admittedly confused in putting together Wednesday's article. Thanks to's

energy maven Chris Edmonds for helping to clear it up.

Following the Money

Regarding the more pressing issue of the status of a $1 billion credit facility Calpine is negotiating with its lenders, the firm's spokesman said Wednesday evening: "We're still talking with the banks and are still confident we're going to close it."

He said what may have caused rumors to the contrary was the company's disclosure in Wednesday's amended 10-Q that:

In the last quarter of 2001 and early 2002, we have raised nearly $5 billion of capital ... and an additional $1 billion unsecured working capital credit facility, which was recently announced and is expected to close in the first quarter of 2002." (Italics added.)

The company had previously said it expected the facility to close in mid-January, and the spokesman acknowledged that the "in the first quarter" comment may have caused concern, not to mention Calpine's 7% drop on Wednesday.

Late Thursday, Calpine Chairman and CEO Peter Cartwright said he hopes the facility will close within a week.

"We will all be watching carefully to make sure that does in fact close," said the analyst. "If Calpine is going to be able to raise debt and maintain liquidity, there's a potential the stock could double in 12 months."

If it can't, Calpine could find itself another victim of the ongoing war over the credibility of corporate America.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.