Big Cap Value
Calpine Looks For Energy Rebound
Tara Murphy, Forbes.com, 01.17.02, 8:30 AM ET
NEW YORK - With a rebound in the economy expected to fuel higher power prices, San Jose, Calif.-based power firm Calpine could see its profits surge once again as it prudently adds more plants to its power portfolio.
Investors drove Calpine's (nyse: CPN - news - people) share price down 40% since Nov. 1, 2001, out of fear that energy prices would not snap back fast enough in 2002. But pricing should firm with the onset of the economic recovery, and that bodes well for the company, which builds power plants and sells their output, as it finishes construction on 27 power projects this year.
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Backed by almost $5 billion in financing, the company is well equipped to complete its building projects in 2002, but it is also taking measures to make sure that it doesn't get ahead of itself. Calpine yesterday announced it will postpone building 34 new plants, at a savings of $2 billion, and will revisit those plans only "when market conditions permit." The stock bounced up $1.09, or 7.8%, to $14.94 on the news. The company also lowered its earnings for fiscal 2001, saying it will post a profit for the year of $1.95 per share. That leaves it trading at just 7 times its earnings forecast.
"Earnings could explode if prices regain a positive trend," says Chris Ellinghaus, analyst at Williams Capital, who has a "strong buy" rating and a 12-month price target of $40 on the stock.
Ellinghaus, who says power prices have bottomed out, thinks that the economic rebound will give gas and electricity prices life in the second half of 2002. After spark spreads--a measure of profitability per unit of electricity sold--soared to more than $30 per megawatt-hour one year ago, they've plunged to $5 to $10 per megawatt-hour, he says.
Calpine earned 88 cents per share for the third quarter, an 80% increase over the year-ago quarter, while raking in almost $3 billion in revenue. Eight new plants were added to its portfolio in 2001, increasing its capacity by 3,600 megawatts. That gave the company 61 operating facilities with a total capacity of 11,100 megawatts.
After scaling back its construction plans, Calpine said that bringing 27 new plants on line this year will give it an additional 15,200 megawatts of capacity, bringing its total to 23,200 megawatts by the end of 2002, and 26,200 megawatts by the end of 2003. Some investors are worried that too much capacity could hinder pricing, according to Ellinghaus.
After issuing $2.6 billion in bonds, $1.2 billion in convertible bonds and obtaining $1 billion in unsecured working capital, Calpine is loaded with almost $5 billion in financing. "[It has] more than adequate funding sources for the next two years," he says, pointing out that Calpine can strengthen its balance sheet by selling equity. But that won't happen until the stock price improves.
Having slowed its spending, Calpine will be able to use its free cash to repurchase shares or retire debt. Ellinghaus estimates that Calpine should be $1.7 billion to $2 billion cash-flow positive by 2004. |
