Notes from Q&A Conference Call (Part 1)
Announcement:
Meeting with state to discuss DWR contracts. Discussing opportunities to improve contracts for both parties. This has been done before (a list cited). Possibilities include improving flexibility of contracts.
View on Five Year Forecasts:
- a year ago, 70,000 MW projected
- targets are still at a high growth projectory but recognize that new building requires high hurdle rates (18%), strong projects, review by corporate investment committee, as well as availability of capital to develop projects
- if capital is not comfortably there, and conditions not met, Calpine will delay projects
- if it means slowing down projects, Calpine believes it has plenty of time
Q: Reconcile cost of building a plant & target return with spark spreads required to justify return
A: Basic model for gas powered plants is that Calpine requires that it generates $100K in EBITDA; this is based on 350 gas, $12.50 spark spread. To build it costs $500-550 / kW to build which is done using a 65%:35% capital structure. This gets you 18%. Two variables - $100K of EBITDA and $15-18 spark spread. Those spark spreads are much higher now. For 9 months, Calpine has had a $42 spark spread.
Q: When only 2/3 of revenues are hedged with 1/3 being sold on the spot markets, how can one be comfortable with earnings guidance?
A: All assets are marked to market every night looking at forward curves of power and forward curves of natural gas. This changes and has changed -- you will see a change in valuation between '01 and '02 based on changes in market conditions.
Over last 12 months, guidance does reflect changes in the market place. What hasn't been captured by only considering the 35% is that the 65% that has been hedged has been captured at much higher rates than Calpine had been anticipating.
For instance, where as $100 EBITDA/MW is forecast for each plant, Calpine has been getting $150 EBITDA/MW.
No forecasts are being revised, but the entire portfolio is being reevaluated. Power prices are softening, and economic slowdown is happening. November has been second most mild november in their history. If there are changes, analysts will be informed as soon as they know.
Q: Re: yesterday's discussion about financing, Calpine seemed very sure about getting that financing. Is Calpine really sure? Or is that based on just their guess?
A: Originally, they were just trying to reduce the number of banks. Calpine went to NY when Enron went bankrupt, and it was a bad time to be there. The week that Calpine was in NY, there was a positive response from banking community. The shadow book exceeded $1.7. Though there were few calls, they have started to call with questions in last few days.
Calpine talked to person responsible for syndications at Bank of Nova Scotia and he talked to the entire syndications group (about 20) and he said there was positive feedback. So Calpine still has scheduled January 4 as a deadline for commitments and a close at January 11th.
Q: How much cash has Calpine spent since September 30th?
A: As at the end of September, they had spent $6.5 B, now $7 B - so $500 million was spent. $750 million in cash was generated in debt deal in October.
$2.3 billion in EBITDA in 2002 less $800 million in interest (10 billion times 8%), $150 in maintenance CAPEX and $150 million in taxes gets you FCF of about $100 million a month. [Editorial note - the taxes was not actually described here... it was described later on. In how he described the math here, it originally didn't foot. Only in answering a question with an analyst later on, was this clarified.]
There are operating leases of $2.2 billion of leases not on the balance sheet -- related primarily to peaking facilities, geothermal and facilities on Indian land. This allows for capitalization of interest costs.
Coverage ratios in EBIT do tno include capitalized interest.
Q: Discuss California contracts and hedging around those contracts
A: When DWR contracts were executed, gas reserves were purchased (by buying Encal) to hedge contract. Remainder was hedged financially. Financial swaps were done. Business model is to ensure fixed cost spread.
Majority of contracts are perfectly hedged over time. Financial hedges have been done to nearly fully hedge prices while on a present value basis, they are fully hedged.
Q: Based on where trading fixed income bonds are trading, will Calpine issued equity if need be?
A: Outlook has not changed. Originally, if refinancing were needed, then they would attempt to get a stronger credit. The downside plan was to refinance in marketplace. Calpine has always wanted to maintain capital structure, debt is included in it, but if Calpine could not refinance it (through various fixed income markets), would want to maintain investment grade capital structure, and it would be willing to issue equity.
Q: Is there any risk to Calpine Capital to Enron's energy trades of any kind?
A: As stated earlier, Calpine has a netting agreement. On a net basis, as of yesterday, contracts were terminated, and positions are being covered. Process defined in agreements and calculating termination value. Much of it is covered.
Other subsidiaries have non material transactions that have been terminated (e.g. gas sales agreements).
Q: Is there any Calpine capital at risk from any Enron relationships?
A: None that are material.
Q: Interest coverage was said as being 6.8x. Why is that so high temporarily?
A: A lot of interest is capitalized, so it is actually in line with the targeted 3.4-3.5x (because of $6.5 billion invested in plant).
Q: When does the equity lockup for management expire?
A: There is no lockup right now. Senior management does have stock options that expire in 2002 granted to the founding members of Calpine. Calpine "must" put in place a 10b-51 plan to exercise those options. If they are not exercised by December 31, they will expire worthless and cannot be repriced.
As a result of this plan, you will see some exercising and sales. Senior management will likely not sell stock unless they really had to raise cash.
Q: Describe in worst case scenario, counterparty risk, renegotiation risk, etc. with respect to any utility contracts (where power is sold forward).
A: Calpine is not aware of any contracts that have been "abrogated" in the power industry. They are commercial legal contracts with 110 bilateral agreements. Average life is 10 years, average credit is A- with municipals, utils, end users of capital. Outlier being PG&E (500MW vs 11,000 MW of contracts), recently reaching agreement where they will pay all of their receivables. The DWR contract only represents 7% of future cash flows.
Q: Discuss how NPV is derived in existing portfolio.
A: Every night a mark to market is taken of all contracts. Marking it at AA Libor (5.25%). $13 billion is what you get.
Point made yesterday - how can stock be at $15/$16? It does not factor in new 30,000 MW of plants in construction.
Q: How will long will negotiations go with DWR in California?
A: Difficult to predict but Company believes it will be relatively short.
Q: Given the pressures on prices, and more conservative buildout, what amounts are committed and must be bought regardless? ie how flexible is CAPEX?
A: re: Turbine orders. 260 million turbines in inventory, 60 steam turbines (320 total). None have been cancelled. If criteria for building new plants are not being met, there are possibilities for flexibility including changing delivery schedule of turbines, portfolio could also be trimmed.
If '04 and '05 turbines were to be terminated (representing 69 gas turbines, 27 steam turbines). It would cost $60 million, trimming 30% of the portfolio. There are no plans to do so however, but if need be, it could be done.
Q: In the worst case scenario, what would 2002 CAPEX be? (ie conservative build out plan)
A: Roughly with 17,000 MW, Calpine spends $300 million a month in CAPEX.
Q: In a nightmare scenario -- ie unable to refinance convertible, and stock price is low, so they do not want to dilute themselves, how would put be satisfied?
A: Safety valve is that 1.7 m PcF of gas reserves that can be sold. Worth $2-2.5 billion. It can be sold in 30-45 days.
Q: Why not buy the converts on the market, given how they are trading?
A: Because of liquidity, to be conservative, Calpine felt it was better to "stay the course".
Q: Re: California contracts, are gains on balance sheet what is at stake in a renegotiation?
A: You should note that there are several billion off balance sheet that will flow through income statement. Beyond that, it would be inappropriate for Calpine to comment at this time given the talks are for later this week. There are potential other areas that could be discussed that do not affect the contract spreads.
Q: Describe netting agreement and when signed and whether it can be backward looking.
A: Signed in last month (mid-November). Addressed underlying contracts superseding existing conditions in contracts. When termination value is calculated, it is in present. Calpine is very confident that they will be brought forward.
Q: On Debt to cash ratio, what numbers are being used to get to 35/65?
A: 10 billion of debt, 5 million of mezzanine capital. When Encal was purchased on pooling basis, for $851 million; on $151 million was obtained in cash. The difference was assumed to be the equity. Trust preferreds are equity (long dated maturities over 20 years).
Q: How do you reconcile $2.3 billion EBITDA to EPS?
A: Detailed forecasts are not in front of them. Calpine will revisit later. But on a contractual basis, we know there is $1.7 billion coming in for the next 10 years on existing megawatts, 11,000 is coming in over year, taking an average of 5,500 megawatts, you can get the amount pretty easily after where you figure out where the spark spreads are, you get $2.3 billion.
Q: With 12,000 megawatts, is there is a schedule?
A: There is a spreadsheet by Rick and Karen that has been put together with what is out there, with construction and development. Commercial operation dates, etc.. Contact via e-mail (rickb@calpine.com).
Q: For 2/3 of revenues locked in, how many MW? What is average Spark spread?
A: Take $1.7 billion of ebitda, and 12,000 MW. You will also be able to see in spreadsheet or 90 million Mw hours in '02.
Q: On press release, 5,100 mw was described as being in development in California, what is the investment in them? What does Calpine think they will do with those megawatts in context with renegotiations?
A: Amounts are just a fraction of what is out there. Items are in late stage development. Specifically for the state. They are in late stage development but relatively small amounts have been capitalized in terms of development. Specific numbers are not available to them at this time.
Q: Discuss further the process of the sale of gas assets.
A: It was discussed earlier in a worst case type scenario. When things are bad, and you cannot raise money, you start to sell assets. The easiest asset to sell is the gas assets because they are commodity type assets in nature. The process is just to call three of Calpine's favorite investment bankers and they just sell them.
Q: Spark spreads were stated to be $42. Is that an all in number (ie including hedging activities)? How does that compare to what is in Q which is $72?
A: $72 was an all in electric price. $42 is gross profit spark spread.
Q: DWR contracts represent 10% of contractual cash flows in '03 & '04 period?
A: Yes.
Q: In '03 period, how much of total generation is under contract?
A: Approximately 50%.
Q: Have there been any calls for higher cash collateral in the market?
A: No. There have been none.
Q: Re- DWR contracts, what type of framework/floor, as these negotiations are considered?
A: It would be inappropriate to speculate before hand.
Q: Of those that are locked in and hedged, what is a win-win scenario?
A: No comment but bear in mind that the gas contracts could still be unwound as Calpine is very active with a strong team in the gas markets.
Q: What is the average on MW hours that are not locked in on the contracts?
A: About 50% of MW that are not on contracts are bought back and then resold. About 50% of open position is bought back and resold.
Q: How should analysts treat cash needs of trading business?
A: Assume that it generates incremental cash flows. It is not a cash intensive business. The objective of the business is to maximize spark spreads over time locking in margins. The entire reason of why the commercial credit line was requested to be increased from 0.4 billion to 1.0 billion is because of it, to meet short term cash needs of the business. You need credit support when gas goes down for the mark-to-mark.
Q: When you think about cash flow and EBITDA, what is cash available at the end of the day, available to invest in projects?
A: About $100 million a month.
Q: In 2000 10K, there are 300 subsidiaries, partnerships. Do they share any similarities in terms of triggers, to what is of concern? Any other contingent issues?
A: Yes, Calpine has SPP's at each of its contracts. Therefore there are at least two legal entities at each -- one with a limited liability company and then a member entity beneath that. Each one of the special purpose projects is of the plain vanilla variety. There are no financial partnerships like Enron.
There are no special purpose corporations that are similar to the ones that Enron had. There are partnerships, but the program has been to buy those partnerships. Calpine has bought out nearly all of their partners over the past few years.
Q: What is timing for California projects?
A: Depends on decision process at state level. Very difficult to say, but anticipates something quick.
Q: Could this open pandora's box, everyone wants to sit down to renegotiate?
A: Things like this have happened in the past where contracts are renegotiated to add value for both parties. It is a normal course of business.
Q: What is ability for Calpine to get rid of the zero early? Is there possibility of taking it out ahead of time?
A: Calpine can take it out at any time. Economics will dictate what is fair.
Q: How does hedging work, and why hedge?
A: re: FAS 133 - there is supplemental disclosure in 8-K on August 24, 2001 as background material of how it is done. Hedging is done to give greater certainty of results.
[See my last post for more of an explanation - I'm getting lazy 1:10 minutes into the notes for the call]
Calpine is at the forefront in terms of lobbying for disclosure requirements with SEC, etc and in the disclosure itself.
Q: NYT article said that derivatives accounting accounts for 10% of gross profits.
A: That number is on a year to date basis. For instance in entering into transactions with clients in markets where it is about to build a plant, there may be short term trading to supply the power before the plant is built. Derivatives are also used to lock in rates. Always however, the trading is to maximize the assets of the company.
Q: Clarify comment about refinancing and selling more equity.
A: The answer is that it is a last resort alternative. The other point is that if need be, CAPEX can be ramped down pretty quickly.
Q: Does the debt number used, $11 billion, exclude the replacing zero but include of debt costs for building out the 17,000 MW?
A: Yes.
Q: On hedging, how much is from areas where plants have not been built?
A: 65% of the mark to market in 2001 related to those types of transactions. There will be no fluctuation in those mark to market contracts over their duration.
Q: What is maintenance Capex on a per megawatt basis?
A: A couple of million per plant -- $2 million per plant on 500 megawatts ie $4,000 per MW.
Q: $13 billion NPV, what is accrued EBITDA associated?
A: Roughly $1.7 billion a year for next 10 years.
Q: What percentage of revenues are peaking contracts?
A: Less than 5%.
Q: What is being seen in terms of spark spread nationally over next two years? What are you using for mark to market for cash flows?
A: When positions are mark to marketed, Calpine looks at plants as options and it looks at forward curve for electricity and gas. The forward markets are in a trough, and very volatile in last few months. High 10's to 12,000 heat rate range. Pretty low lows because of weather, and economy. (Editorial note: I am not very familiar with how this works, so I'm not sure if I'm quoting it right).
Q: If we assume a 7,000 heat rate plant, what would that work out to in terms of spark spread?
A: Call it $350-325 in terms of Gas in north east, there would be $15 spark spreads on peak but that does not take into account optionality, in the west, similar numbers. Other services can add up to $1.50. Over time, Calpine would like to be able to boost spark spreads by up to 30% based on the fact that they can sell other services in those markets.
Q: Review hedging for '03; Output for plants (current and future) has been 50% hedged?
A: Yes 50% of 30,000 has been hedged.
Q: With respect to California contract please elaborate as to its significance and flexibility that Calpine has.
A: In '04, contracts represent 10% of all contracts. Spot prices are at high 50's low 60s, and there is one peaker plant that has a strike price in the low 70s. Gas has been locked in as well but it would not be too difficult to unwind and start over again.
Q: How comfortable are you on uncontracted/unhedged piece of business that you will get $15-18 / MW?
A: Dependent on economy, weather, where spot market ends up liquidating. Over time, Calpine feels that it will do better than the market and the market is a function of different things (ie +150-200 basis points).
Q: With prices so low, is there increased interest from LSE's (sp?) in locking in contracts?
A: Calpine is always active in speaking with customers. To the extent that customers want to lock in contracts, Calpine will not turn them away.
Q: Is $13 billion net of tax?
A: No. This is the number which is used to support any debt capital raising.
Q: $700 million was put back into equity line because of Encal for the debt/equity calculation - Clarify why that was done.
A: Just a function of pooling and to maintain debt-equity calculation. |
