Notes from Q&A Conference Call (Part 2)
Q: Is gas locked in for two peaker plants with DWR?
A: Not all the gas. The hours are relatively small and volumes is not major nor significant and it is managed based on contract.
Q: Beyond the new 30,000 MW that have been discussed is there incremental capital committed to new plants in '04 and '05?
A: There is a continuing program. Capital would be committed later on (late '02, '03), however if stopped, no capital would be incurred. It would not make sense to terminate contracts for some of them in '02 because Calpine is already so far in the payment stream.
Q: Has Calpine considered bringing in a strategic partner to infuse capital and add confidence?
A: Everything is up for discussion but nothing is currently on the table. To clarify, buildout will be trimmed down to meet capital constraints if necessary. Calpine is not committed to issuing additional equity.
Q: Yesterday, Calpine said to complete the capital plan would be $2.5 billion and then today, Calpine said that it would need $300 million / month which is $3.6 billion, could you reconcile those numbers?
A: $300 is what it costs as the program is continuing running (also future programs). $2.5 is the correct number (for the 17,000.)
Q: While including the $1.5 billion credit facility allows for flexibility, if you include it, then there is not very much flexibility for letters of credit (LC's). How is required on an annual basis to support the hedging?
A: The company believes an additional $400-500 million is required on a run rate basis. The only reason the lc's are required are for the liquidity risk and the $1.5 billion was/is being set up for that purpose.
Q: There is concern about liquidity and an unwillingness to buy back the convert. But if part of the liquidity concern is because of the convert, doesn't the company reduce that concern by buying back the convert?
A: Yes.
Q: Regarding NYT article. Can you address the comments that Calpine generated 56% of operating income or $260 million through above market contracts with Enron?
A: When transactions were done with Enron, they were solely done with Enron because they were a large player in the market. If Enron was not around, they would have received the exact same prices from someone else. The transactions were at market prices. There would be no impact on gross margins.
Contract prices with other marketing prices are higher as well because they were the market prices. You cannot look at the price and conclude that that correlates directly into net income. Calpine also bought gas at higher prices from Enron. As such it would be inappropriate to just back into margins.
It should also be noted that the contracts were also short term and nearly all contracts with Enron were short term where the market price was higher.
Q: In Texas, the market is pretty poor. Heat rate is $600-700. Having lost Shell contract, will there be a home for the excess power?
A: Market fits in well with being a low cost producer. Low growth marketplace. (5-7% load growth in past five years). Fundamentals are 65-75K MW, greater than 35K of that is old generators that are not very efficient. Calpine sees a tremendous opportunity for displacing those producers.
Calpine also believes that it can get 20-30% higher than market prices because of the additional services it offers.
Having said that, Calpine has experienced fairly low margins in that market and much of capacity is hedged.
One of the positives is that deregulation is starting January 1st. Retail aggregators must contract out power supplies/services. Only a few players, and Calpine can provide that. The only issue is price. Once load capacity increases, Calpine will be in a very good position as the low cost producer.
Q: Regarding UK power plant, have price expectations changed and is there any progress on negotiating contracts there?
A: Prices of 18.50, is lower than expected, as weather has been more mild. Prices a week ago were well above $20. Calpine anticipates prices to be higher again to anticipated levels which is around 20 pounds. Confidence that given the plant is the lowest cost, most efficient, the plant will do just fine.
As to contracts, a number are under consideration talking to more than one party. Have not concluded anything yet though.
Q: How much of trading is expected to be as a percentage of earnings?
A: Trading has increased significantly because they have had to provide customers with what they need. For instance, if they want "shaped" products, Calpine gives them shaped products. If they want financial tools, they must be able to do that. Calpine is also optimizing around asset base.
The issue is that while prices increased, portfolio/capacity has also increased (has doubled), and there was increased activity, therefore Calpine saw higher topline amounts as a result. Calpine's trading division is anticipated to add 10-15% in margins over time as has been proven so far.
Q: Given that capacity is anticipated to double in '02, should we expect that trading will grow in a similar way in '02 as it did for the year prior?
A: It is also a function of what prices do, also if there is a new accounting treatment.
Q: Discuss historical spread between cash taxes disbursed and what is booked as taxes on income statement. Also, please give guidance as to how that will look over time.
A: Effective rate projected to be 35% and to stay stable going forward. If you look at the types of generators that have been purchased, they have depreciation (for tax purposes) of 20 years which is accelerated depreciation (ie the life of the generators are longer -- this is done to encourage investment).
Q: Discuss the prepaid expenses building up on Balance Sheet and where they are coming from.
A: Most of increases related to security deposits on CES activities. This varies with the various contracts with the various parties they have entered into agreements with. Other prepaid expenses include leased operating expense payments, prepaid insurance, software licenses, service agreements, maintenance service agreements ($173 million was related to security deposits).
No noticeable increase by counterparties demands to back up trading business, in fact credit threshold allowed to Calpine increased after the Moody's upgrade.
Q: Are there limitations to leave projects in construction revolver?
A: No limitations. Calpine can borrow it out if it feels like it. It is all four year revolvers, plants are moved in and out as it needs it and cash goes to pay down the debt when it feels like it.
Q: $2.5 billion for program spending, is there any more allocated to acquisitions in addition to this?
A: No acquisitions pending. Everything closed that was done in October this year.
Q: Calpine has stated its philosophy over time of committing to gas only when it has sales contracts. Calpine mentioned earlier its willingness to sell gas reserves if necessary to enhance liquidity. Are these contracts related to gas over and above, what is necessary for sales contracts?
A: Everything is free and clear on gas side. Anything that is a hedge, can be done using a financial instrument.
Q: Are there any liabilities that can be accelerated if credit ratings drop?
A: There is nothing in any document except pricing grid on revolver is function of credit rating (priced based on higher of Moody's or Standard & Poor's) -- which is LIBOR +1, if downgraded, LIBOR +1.25.
Q: Under cost of power purchased, does that include power purchased for Calpine's own portfolio?
A: No, all third party purchases.
Q: How much of megawatts coming online next year already contracted out?
A: 65% of all plants -- existing and new capacity, has been contracted out for '02.
Q: Are there other situations where there is project level debt that disallows cash from flowing up to the parent?
A: No - only in 2 operating leases, where there are "waterfalls" (a debt repayment term), for geyser facility and Pasadena lease but Calpine has never had a problem yet.
Q: Is there any security associated with existing bank facility where Calpine is asking to have it increased?
A: No. The facility is unsecured, and the only difference is the larger size. No lender has ever asked for security.
Q: Can certain facilities be mortgaged to get access to capital?
A: No, under indentures or other credit agreements, bond holders are protected by negative pledge. Only 10% of net assets can be secured. Fundamental philosophy is that bond holders have access to all cash flow from the plants and borrowings are unsecured. Calpine is anti-project finance for most part.
Q: Is it possible to get CAPEX by quarter over next 5-6 quarters to get to 17,000 MW.
A: About $140 million a month, $2.5 billion in total required for next 15-18 months but that would be heavily weighted for next six months. Probably $300 million for next 6 months and then it starts ramping down as plants come online.
Q: $60 M was mentioned as the number if Calpine wanted to get out of their turbine contracts in '04 and '05. Discuss what the cost would be to get out of everything but the 17,000 MW.
A: Breakdown not available at moment.
Q: It looks like Cash of $750 million, operating cash flow of $1.2 billion and $1 billion in construction revolver, and $400 million in revolver making $3.35 billion in sources, and convertible is $1 billion which leaves $2.35 billion for CAPEX. At what point does Calpine have to start cutting projects? When is next project that Calpine would break ground on beyond 17,000 MW? When will commitments start increasing for next phase?
A: June next year is when Calpine must make a decision on whether it would like to go to equity markets to increase beyond 35,000 MW.
Q: On preferred stock, aren't they all puttable in '04 and '05? ie why are they treated as equity?
A: There is a remarketing feature but it can't be put back -- banker remarkets them and there are 20 year maturities.
Q: 90% contracted for '01, is there risk for '01 EPS estimates?
A: "Very sensitive about putting number on table" as far as weather situation, economic turndown and softening prices. October books are closed, November hasn't been closed yet, and December won't be closed. Nothing will be said until Calpine has considerably more facts. If there are changes, there will be another conference call.
For '02, not much more can be said that hasn't already been said on this call.
Q: Trading at 20% yield to put in April. At some point it makes sense to buy them back though, doesn't it?
A: Yes.
Q: Is Calpine still using Arthur Anderson and is there any intention to change auditors?
A: Calpine is continuing to use AA, has used them for 10 years and they are both the tax partners and the auditors. There are no intentions of changing auditors at this time.
Q: Common rumor regarding Calpine is that long term contracts have been placed through Enron, and with Enron out of the picture, the contracts may not be good. Please comment.
A: Calpine did not know that that was one of the rumors, but it is not accurate. The majority of contracts with Enron were very short term in nature to begin with; e.g. next month, intra-month or a quarter or two out. When you look at cash flows in '02 and beyond, most of the contracts are with load serving entities directly. This has been very successful as Calpine has found that it can offer all the financial products that those entities need. There has been zero reliance on Enron to do longer term transactions.
Q: How is Enron removed from a hedge given that trading can be traded many times before reaching ultimate end use party?
A: First off, trades are done with counterparties on a standalone basis. In Calpine's case it looked at transactions in place, and when the troubles first started, Calpine wound down positions to the point where they were immaterial.
Q: Re: PV of California contracts, amount of capacity, and spark spread of $15-18 as compared to spark spread that Calpine has now with California, what would difference be? Ballpark, ignoring natural gas problem.
A: No comment as discussions are ongoing.
Q: It appears that the market's greatest concern is the bank debt in short term, when is it going to close again?
A: January 4th for commitment and close as of January 11th.
Q: Are there insiders buying stock at these levels on the open markets?
A: The trading window is open but management does not know who specifically is buying the stock.
Q: Are the executive officers buying stock?
A: Ann Curtis (CFO) responded that she is not currently, and Pete is not buying currently. Pete interjected that if he had cash he would be buying.
Q: Would that not be a good vote of confidence?
A: There are executive officers who have purchased at much higher prices. There will be, as a result of the options, executives who will have to exercise their options and sell (if they don't have the capital) in '02. And all executives are not allowed to make opposite swing transactions within 6 months. Those who are in the position that they will need to sell their options in 6 months will not be buying stock for this reason.
Q: What is the current state of the private project finance market place is? Is that a source of potential funds to the company?
A: Market is a very difficult market today. This was anticipated given where the industry was going which is why they set up 4 year construction revolvers. There would always be the capital available, and there would be no dependence on the banks for capital.
The banks are at a very very difficult point in time because of Enron so Calpine's strategy is working and working well allowing it not to be caught up in circumstances like this.
Q: Were there any long dated hedges closed and booked as profits in Q3.
A: If you close out hedges, you don't book profits. As positions change, e.g. restructure power contract and unwind gas hedge, that would happen; there would not have gains treatment. You would not see on income statement.
Q: For Texas situation, would it be possible for Calpine to decide to stop building at this point and if so, how many MW could be stopped and at what cost?
A: No answer for monetary cost. There is one short term plan to build shortly but beyond that there are no longer term plans to build additional generation. There is only one project that has not started.
If Calpine so desired, it could still stop construction. It is important to note that many of the plants are industrial in nature for long term contracts (built for specific companies). Bayer is a good example of 700 MW plant with 300 MW sold through long term agreement. Calpine is not entering that market for instance, with full merchant plants.
Q: For next year, are debt levels going to be reaching $15 billion?
A: No, only $11 billion.
Q: What is expectation of depreciation in G&A next year?
A: No numbers off top of their heads.
Q: Debt levels are approximately $10 billion which is lower than 10Q. Can you reconcile?
A: LT and ST. There was a sale leaseback for 800 million which reduced debt and moved to operating lease. There are $2.2 billion in operating leases. AS of 9/30 there are approx. $9 billion. Bob will discuss offline with analyst (408-995-5115).
Q: re: Commitment for remarketing of preferred. Is there a commitment for remarketing of preferred?
A: No.
Q: What will the internal cash flows available to complete build out complete? ie how many MW?
A: Calpine will have roughly 29-30,000 MW total when it is done. At the end of this year, Calpine has 12,000 MW in production and 17,000 in production = 29,000 MW. 11,000 would come online in '02 and remaining 6,000 would come online at beginning of '03. Everything is online as of June '03.
Q: How much in CAPEX would that cost?
A: $2.5 billion.
Q: How much cash tax is expected for next year?
A: $150-200 million
Q: How much cash interest including capitalized interest?
A: Not yet available. Give Rick a call.
Q: Clarification on special purpose vehicles. How does Calpine use them? Was it in project financing? Is there additional debt over and above what is on balance sheet?
A: Each of power plants is separate legal entity in itself. Financing is one of the reasons for that. Calpine has no partnerships like Enron's. Only debt off balance sheet is operating leases. Only other debt is the 50-50 type partnerships where that debt does not show up. There are four left -- they are as follows:
- $26 million at Whitby (50/50)
- $124 million in Aries (50/50)
- $70 million Anderskogen (33%-40% - couldn't quite remember exact amount of ownership)
- $80 million Lockport (12%)
- $68 million Grace Fairy, (40%)
These are all mature projects self contained. No other special purpose vehicles out there. No other off balance shee obligations.
Q: Can you give status on view of gas property writeoffs? If you aren't going to write off, at what price would gas prices have to fall in order to have an impairment?
A: Calpine does not envision any impairment. The 12/31 test is a field by field test so you have to look at each field separately. If you look out to the forward curves, there is no need for any such writedown. Calpine accounts for properties on a successful efforts basis where impairment threshold is higher whereas others account using a full cost accounting basis have had to write off. Trade off is that Calpine expenses exploration costs whereas full costing basis capitalizes them -- which is why it has a lower impairment hurdle.
Q: In worst case scenario, if access to capital markets not available and Calpine monetizes gas reserves (there was a report that said Calpine had purchased $2 billion in reserves in US and Canada), would it be realistic to be able to recoup entire purchase cost?
A: There is no debt associated with reserves so it is totally unencumbered. Calpine has 1.7 billion PCF of reserves x $1.50 = $2.5 to $3.0 billion -- and these are long term proven reserves, so Calpine feels quite confident that it could monetize them.
Q: If cash flow is done for 6 months to the bond's put; $3.4 billion of cash resources available, capex is $1.3 billion ($300M for first 3 months, and $200 for next 3), adding $1 billion bond, that is $2.3 billion of cash usage. Why is there any issue about honoring the puts?
A: Calpine does not understand the issue in the market either. You do have to add in $300-400 for additional credit support. Calpine has always viewed the possibility of the put as a straight refinancing to begin with given that it is in line with their policy of never having more than 10-15% of the debt due in any one year. Capital markets are in disarray now, but Calpine does not believe that it will be in disarray for 4 months.
Q: Let's say the debt markets are in disarray, and capital markets are in disarray, [the analyst] still can't understand why there is any issue about the put.
A: Calpine doesn't understand either.
Q: Could current capex schedule be reduced if need be?
A: Yes - they could extend it out. [Company did not have information available as to what the penalties would but said it could be done]. Calpine will always manage enterprise to its cash flow.
Q: What was the lowest price that the DWR entered into?
A: $58.60 - and that is Calpine's contract.
Q: The analyst spoke to S&P to understand why the company was not at investment grade. The response was Calpine had to curtail its "aggressive" capex to get to investment grade. How bad does Calpine want to get investment grade? (ie will it ramp down capex?)
A: First it is important to note that Calpine is investment grade by Fitch and Moody's. S&P has always been a laggard with Calpine in upgrading Calpine. If you look at Calpine's capex program, it is unprecedented. Calpine's capex program is four times larger than its next nearest competitor/comparative. It has always bothered S&P that Calpine is doing something that hasn't been done before. Yet, Tom and his crew have doubled production since last year on time, and now there are 17,000 MW in construction. Calpine was very optimistic that it would get the S&P upgrade this year but that it was hoping it would have proven itself by doing what it said it would do (moving from 6,000 to 12,000 MW last year).
Q: S&P would say that to get to investment grade, Calpine must have at least 3x interest coverage.
A: Calpine has argued that in the past. S&P's policy has been to look at a project under construction and rate it as if it had been completed. Calpine's interest coverage would be in the 3.5x range once everything was up and running. For some reason because there are multiple plants up and running, it doesn't seem to be looked at in the same way.
Q: Would Calpine look to convertible preferred to increase equity side of capitalization? (this way Calpine could reduce debt/cap)
A: Everytime Calpine goes to the capital markets, it looks at all products whether they be bonds, equity, mandatorily convertible preferreds, preferreds to see what would be the cheapest bearing in mind the target capital structure of 65/35.
Q: What is troubling given the target returns of 18% is that zeroes are being offered at +20% yield-to-put, is that that is inconsistent with generating a return of 18%. Why wouldn't Calpine go into the market now?
A: Calpine does not disagree and it believes it is a short term aberration in the marketplace. If anyone looks at the cash flow projections, why Calpine's bonds would trade at +18% yield to put, is beyond Calpine.
Q: In the situations where contracts were renegotiated, how did those contracts change in those situations?
A: It's probably generic where the contracts have been in or out of the money where there has been fixed priced power or fixed price gas -- where both parties wanted to do something to readjust things whether it be shorten average life of the contract or change the index, etc.. But for the most part, the way it works is that something is above market, and then you ask what do you need, what do we need.
Q: Is Calpine the first company that has been approached to come to the table?
A: Calpine does not know for sure but it expects that it is. Because of past working relationship, that California would want to work something out with Calpine and use it as an example. The lowest price contract for instance may not be something that California wants to talk about.
Q: Please run through cash flow from the income from generating market entity to income statement; just to put number on it. ie in electrical generating Calpine has $471 pre-tax, on income statement, take $2.75 billion of generation and marketing revenue, and take out expenses related to generation and marketing/fuel, you get $570 million. What are the differences?
A: Off top of head, difficult to reconcile, the other case might be market to market gain disclosed in note 8. There is corporate G&A and other expense in Note 14. On a consolidated basis, it ties to $465.
Q: Please clarify with respect to what speculative positions Calpine has.
A: There is a focus on risk management, locking in spark spreads, and optimization activities. Calpine comes across opportunities in the market place because it meets with so many load serving entities to do things with customers before assets are online. Rather than turning backs on customers, Calpine will do transactions. They are not speculative rather, managing customer business using marketplace to do that. Very immaterial portion of business, but very small piece of business. All positions are closed out through hedging, so they are not open ended.
Q: On Thursday, Moody's is holding call on NRG, Mirant and Calpine. Does Calpine believe that Moody's is fully supportive of rating?
A: It is Calpine's understanding because Moody's was receiving all these calls, that they wanted to have the call to say that it believed Calpine, NRG, and Mirant have completely different business models than Enron and get messages across. Yesterday and today, Calpine had to answer questions with respect to New York Times article and they have been asking questions like everyone else. That is all Calpine knows about thursday's call.
Q: This is 14th call in year. Calpine management is doing great job explaining itself. Calpine appears to therefore be facing liquidity problem and to a certain extent, so is the financial industry because it is nearing year end. There are big issues where company will get the $1 billion to roll over zero, collateral damage within energy markets, etc. It sounds like the Company has been selling its story well to the banks who are continuing to commit to $1.4 billion revolver. In terms of strategic partnerships, the analyst believes that Calpine is in a position to be able to sit back. Calpine needs something whether it is a capital infusion to put it in a position to realize long term vision. What is Calpine going to do to restore confidence?
A: Calpine talks to people in industry, just about all investment bankers and Calpine is open to any strategic partners that make sense. There are none currently on the table right now, but Calpine would be open to them. The purpose of the conference call was to air the issues and to be open to everyone. Calpine has a plan to get it through this turbulent period. Calpine has the resources to cut back on the capex plan to minimize cash flow going out and Calpine believes it is highly respected in the business.
30,000 MW will put Calpine in front row of generators -- not only the top portfolio but the best portfolio -- so it is looking at all options, and keeping in touch will all alternatives and so far, Calpine feels what it is doing is "solid".
Q: Analyst believes that Calpine missed having a more stable capital base at beginning of year (at prices of around $32) and it "couldn't" sell equity and now the situation is deteriorating. If Calpine doesn't get bank financing, that everyone is expecting, there will be a new set of issues to deal with. The analyst believes something must be done now. As a shareholder, he would like to see a strategic sale of equity to get short term issues cleared up and zeroes out of the way.
A: Calpine appreciates commitment and will certainly consider those comments.
Q: Is it possible that California wants to speak to Calpine because they want to know Calpine's capacity is to assume other people's contracts if those people do not have solid contracts for whatever reason?
A: Could be.
Q: Back to the debt question - to get to $10.3 billion, what is included?
A: LC, project financing, capital lease financing, zero coupon, LT, notes payable, and senior notes. $1.2 billion was used to trade off bridge financing (so new debt issued did not actually make a difference to debt levels). Company raised $2.8 billion; $1.2 paid off $1.2 billion, $800 million reduced debt, so it was brought down from sale lease back and moved to operating lease and then you had $750 million in cash.
Q: Construction revolver - how long left in two tranches?
A: In first 2.5 years, in second, over 1 year -- so three years left. The intention was that they wanted the revolvers to be available for the length of the capex program so that Calpine would never be hit with liquidity crunch. CCFC1 is $1 billion and CCFC2 is $2.5 billion. |
