Calpine Contends With Capital Challenges
By Christopher Edmonds
02/07/2002 11:17
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Vail, COLO. -- Executives at beleaguered Calpine CPN remain intrepid after potentially damaging revelations of a Securities and Exchange Commission inquiry into the merchant power developer's disclosure practices.
Calpine shares slid $1.95, or 22.3%, to close at $6.80 Wednesday on news of the informal SEC probe. The SEC's enforcement division contacted the company looking for information about Calpine's alleged selective disclosures to analysts, which were reported in a January news article. Calpine also said it received comments from the SEC's nonenforcement division of Corporation Finance, seeking clarity and offering guidance on certain disclosures.
"These comments do not require the company to alter any aspect of its financial results," the company said in a statement. Calpine "has made no inappropriate disclosure, and is working with the SEC to clarify this matter."
Calpine revealed the SEC contact only after word of the inquiry was making the rounds among investors. "It's just another bad data point for Calpine and the group," says Jeff Dietert, merchant energy analyst at Simmons & Co. and a member of the TSC Energy Roundtable. "This is not the kind of news investors want to see."
With Enron's implosion fresh in investors' minds, any apparent misdeed by a member seems to punish the entire merchant energy group. In fact, at the Credit Suisse First Boston energy summit in Vail, Colo., this week, executives of merchant energy companies bemoaned the operating difficulty in the wake of Enron. "Calpine's revelation Wednesday just makes it that much more difficult," says Dietert.
Holding Their Breath
With Calpine stock down 60% since January and more than 88% from its 52-week high, management has to be humbled. But if the presentation of Robert Kelly, Calpine's executive vice president and its finance unit president, at this week's CSFB confab is any indication, the company's executive suite is somewhat indignant.
"To be frank, nobody is listening to us anymore," Kelly said to a roomful of portfolio managers and analysts. "The reaction in the marketplace is totally different than it was a year ago. A year ago, it was good. Today, everyone is trashing it."
One reason for the trashing may be Calpine's overly ambitious power generation development program. After assuring investors the plan was on track, the company slashed the program in half when it announced earnings in January. Instead of going forward with more than 60 plants exceeding 30,000 megawatts of generation, Calpine is now developing only 27 new plants totaling 15,200 megawatts.
Or is it? During his presentation, Kelly seemed like the overzealous real estate developer who knows only one way to operate: develop. While he did note that 34 projects had been scrapped, he kept saying they were on "hot standby" and could be jumpstarted on a moment's notice. "We have a flexible program," he said. "We can build plants when the market is right."
Sound familiar? Kelly's frustration and that of Calpine's senior management are very similar to frustrated real estate developers who seem never to learn the art of disciplined growth. Unfortunately for Calpine and its shareholders, discipline is being forced upon it.
Challenges Ahead
As my colleague Peter Eavis has exceptionally chronicled , Calpine will struggle simply to make ends meet, let alone complete the 27 development projects that Kelly says are on track. "Construction continuing. Funding in place," read his prepared presentation notes regarding the projects. But as Eavis notes, Calpine's assumptions may be optimistic, given the current state of the power markets.
In response to questions about financing for the projects, Kelly again proclaimed, "We have enough money. We will build the projects."
Then Kelly's tune seemed to change a bit when he was pressed about the company's liquidity needs through the completion of the current developments, scheduled for 2003.
When asked about options to raise cash, he pointed to Calpine's ability to sell its natural gas production assets. Through its acquisition of Canada-based Encal and other natural gas asset purchases, Calpine currently owns 1.3 trillion cubic feet of proven natural gas reserves in North America.
"We can sell the gas at any time," Kelly said. But with current gas prices hovering around $2 per million British thermal units, compared with $4-plus per mmBtu when Calpine purchased the gas, the sale would be a very expensive way to raise cash.
Peddling new equity capital at current prices is impractical, and access to additional debt financing would be costly, both in interest expense and potential further deterioration of Calpine's credit rating. The company now has nearly $900 million in untapped credit lines.
Kelly tried to assure investors that the company would be fine once the development plan is complete. "You have tremendous cash in this business once you stop building, and we have stopped building," he said.
But when asked by an analyst how Calpine would make it to the development finish line, Kelly admitted what many critics of the company's capital plan feared. "Can you hold your breath long enough to get through?" he asked.
Like many of his merchant company peers, Kelly blamed Enron's implosion for many of Calpine's woes. "Everything out there is taken very negatively," he said regarding speculation about Calpine's financial situation. "The two big issues in the sector and for Calpine are liquidity and accounting."
With concerns about Calpine's capital base and now the SEC inquiry, those issues are very serious indeed. |
