WSJ Article
NEW YORK -- Calpine Corp. (CPN) shareholders will be happy to know that their company isn't much like famous bankrupt Enron Corp. (ENE), which is now under investigation by federal authorities.
Not that the dissimilarity is doing much for their stock, which has fallen 25% this week alone as investors have grown concerned the company won't be able to raise needed cash.
There are good reasons to be skeptical about Calpine and the merchant energy industry in general - as evidenced by the equity analysts that have lowered their outlook for the stock and by Moody's Investors Service, which decided late Thursday to put Calpine's investment-grade debt rating on watch for a downgrade.
But in Calpine's case, the fears are overdone. Calpine's stock tumbled Monday and kept falling after an article in the Sunday New York Times raised comparisons to Enron.
But if you looked for such similarities as huge losses, an inability to pay bills or liabilities outweighing assets, you looked in vain. Calpine's gross profits so far this year have exceeded its interest payments by more than six times.
Instead, the concern is that Calpine can't operate without deep support from the capital markets, and that concern is off the mark. Other observers have their doubts, however, and the Jan. 11 closing date looms large.
Tougher Questions
In a post-Enron world, burned investors are asking much tougher questions of growing energy companies. The skepticism shows itself, at least for now, in lower stock prices and higher interest rates. The easy money is gone, and the days of "trust me" have been replaced by "show me." This may be a painful period for the industry, but it's all for the good, at least when the questions aren't simply inflammatory.
Heavy traders like Aquila Inc. (ILA) and American Electric Power Co. (AEP), face a number of questions about their earnings, including what percentage are noncash and which benchmarks are used to determine the profitability of various contracts. These markets, after all, aren't that transparent.
Generating companies like Calpine must answer this question: Why are you building so many power plants when the current and future prices for electricity are so low? The markets say the country is now oversupplied with generating capacity. But merchant power companies have backed off on very few of their plans to expand, saying that their new, more efficient plants will knock dirty, old, inefficient plants out of the market. That sounds like a classic boom-and-bust commodity cycle.
Calpine hasn't publicly delayed or canceled a single project, arguing that the low prices are temporary, while power plants can take up to five years to build and will last for 50 years. Calpine says it must take the long view, even as the immature electricity forward markets take their cues - too much so - from the spot market, which is particularly bearish now due to exceptionally mild weather.
The other reason bulk power is cheap now is the economic downturn. Electricity use rises and falls with gross national product. Calpine agrees that the recession has contributed to lower power prices, but it expects a rebound in the economy by next summer.
Will the economy and power prices rebound by next summer? |
