Calpine reassures investors about capital structure

Ann de Rouffignac
OGJ Online

HOUSTON, Jan. 16, 2002 — After slashing 2002 earnings projections 30% and putting 34 power plants on hold, Calpine Corp. executives Wednesday reassured investors the independent power producer has sufficient liquidity and cash flow to fund its $3 billion capital spending program and pay its debts, despite prevailing economic conditions.

US demand for electricity was roughly flat and even negative in California for the last 6 months, said CEO Peter Cartwright, on a conference call. He said the company expected electricity demand to turn up as the economy recovers and weather patterns normalize and older inefficient power plants are retired later this year.

He noted it takes only a $1 change in the spark spread for Calpine to realize a $50 million increase in profits. The spark spread is the difference between the price at which electricity is sold and the cost of the fuel used to generate it.

Meanwhile Calpine has weathered one of the most difficult capital markets brought on partly by Enron’s collapse, said Cartwright. “In the last 3 months it has been a very difficult time in the capital markets,” he said. “But after the Enron crisis we went to the market for $400 million bond offering. We were oversubscribed so we ended up issuing $1.2 billion in convertible bonds.”

Calpine, San Jose, has in place $4.9 billion of credit, he said. That is sufficient to pay the bonds due in April and meet all other operating needs. No other debt is due in 2002, he said.

Nevertheless, Cartwright said 2002 will be “challenging” for Calpine and the entire power industry mostly because it is uncertain when the economy will recover. As a buffer, Calpine had sold forward two-third of its power output affording the company some protection.

But contracts may not be enough in today’s economy. The state of California asked late last year to renegotiate its long-term power contracts with Calpine. Those negotiations are under way.

Peppered with questions by analysts about the negotiations, Calpine executives wouldn’t comment on any aspect of the talks other than to say that the contracts will “retain” their “basic value” to Calpine and also benefit the state. Analysts asked for clarification but were rebuffed. “There will be no changes to 2002 earnings from the renegotiation of these contracts,” Cartwright said.

Cartwright ran through figures to justify a higher enterprise value and stock price than the market is granting. He explained that the net present value of all contracts was $6.5 billion and the value of gas and power assets $16.5 billion. The value of all debt and lease obligations is $15 billion, giving a value of $21.40/share. The stock has been trading in the low to mid teens.

“That figure gives no value for the company’s expertise or development portfolio,” he said. “The stock price should be higher.” Investors bid up the stock up $1.13 or 8.16% to $14.98 in mid-day trading.

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