POWER POINTS: Calpine Just Says 'No' To 100% Return
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15:25 ET
=DJ POWER POINTS: Calpine Just Says 'No' To 100% Return
02 Aug 15:25
By Mark Golden
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--If you had a lot of spare cash and were offered the
opportunity to pay off some debt at 50 cents on the dollar, would you?
That would be an easy decision for most of us. But Calpine Corp. (CPN) is
acting as if a 100% return just isn't good enough.
The power-plant developer has a debt problem. Yet even though Calpine says it
could sell off some of its power contracts to buy back some of its bonds, which
are trading at half price, the company says it isn't interested now.
Something's wrong here. Either Calpine is planning to buy back its bonds and
isn't saying so to avoid pushing up their price, or it's financial situation is
bleaker than it's letting on.
Calpine's enormous debt load has pushed the company's bonds to 50 cents on
the dollar and its stock to about 6% of what it was worth last year.
Setting aside questions of credibility raised by Calpine's revised earnings
guidance Thursday - to just 90 cents a share for the year, 25% lower than its
previous worst-case scenario - Calpine is actually in better financial shape
than most of its merchant-energy competitors.
The company has $1.8 billion cash on hand and no major debt maturing until
next May, when a $1 billion corporate revolving credit line comes due. Calpine
expects to turn cash-flow positive by the end of next year, when it will finish
building all its new power plants.
More important, Calpine says it has virtually locked in profits of $6.6
billion in long-term power contracts.
Why Not Sell?
During Calpine's earnings call Thursday, hedge fund manager Andy Levi of Bear
Wagner asked whether the company had considered monetizing any of the contracts
- that is, selling them at a discount to someone who is willing to pay cash now
in exchange for guaranteed receipt of the revenue as power is delivered.
Yes, Calpine has thought about it. It could monetize some contracted profits
with a bank, getting cash up front with proceeds from the contracts flowing to
the bank at around 8% interest, Calpine Chief Financial Officer Bob Kelly said
on the call.
"One thing we've always pointed out is we have that option if we want to do
it," he said.
Calpine could also use every $1 it receives in the bargain to buy back $2 of
its own bonds. But Kelly said the company doesn't want to do that - for reasons
that are less than clear:
"I think I've had every investment banker in the world come in and want to
monetize $6 billion in contracts," Kelly said. "But in monetization, you're
selling the future generation."
"If we monetize the contracts, you're essentially cashing out the day and
you're giving up tremendous cash flow and earnings for the future," Kelly said.
Kelly's explanation makes little sense, and he declined to talk with Dow
Jones Newswires about it. Media only get to listen to these conference calls.
We aren't allowed to ask questions, which in this case would have been: "Huh?"
Calpine wouldn't be selling future generation. It would be selling future
income, which Kelly said the company can do at a a reasonable discount.
Two-For-One Special
Buying back bonds with an 8% interest rate at half price yields a 16%
reduction in interest costs for every dollar spent. That's a pretty good
arbitrage, Kelly said on the call, jumping to the logical conclusion of Levi's
question.
It's more than "pretty good." Not only would such a transaction allow Calpine
to cut costs, it would take debt off the company's balance sheet at a 50%
discount.
Calpine might start thinking more along those lines next year, Kelly said.
"Once you finish the construction program, you churn out a tremendous amount
of free cash," he said, referring to the time next year when the company
finally finishes its buildup of power plants. "The decision we have to make
late next year is what to do with the money coming in. If our bonds are still
trading at 50 cents on the dollar, you'll see an active program to buy back
debt toward the end of next year."
Maybe Calpine shrewdly doesn't want to say it plans to buy back a lot of its
bonds until after it has done so. But if Calpine's biggest worry is what to do
with all the cash that will be coming in, its bonds won't be trading at 50
cents on the dollar at the end of next year.
Maybe Calpine's cash flow next year isn't going to be as good as the company
is saying, which means it has to hold on to every penny now to make it through
next year. Maybe Calpine can't sell the contracts as easily as it says.
"If Calpine had the flexibility of buying back its bonds, the bonds wouldn't
be trading as low as they are now," said independent utilities analyst Paul
Patterson. "Nobody has been willing to sell contracts, it appears, at the
prices purchasers want to pay for them. We have failed to see a substantial
liquid market develop for these types of energy contracts."
Calpine has got breathing room. But if it can take advantage of the very
lucrative opportunity before it and doesn't, it could face continued investor
skepticism.
After all, if Calpine won't spend 50 cents on the dollar to buy its bonds,
why on earth should anybody else?
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
(END) DOW JONES NEWS 08-02-02
03:25 PM |
