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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: Second_Titan who wrote (11012)	12/10/2001 2:59:19 PM
From: aerosappy	Respond to of 23153

Second_Titan ==> CPN. My business partner and I hold positions in CPN. We are watching it closely, and noted that Morgan Stanley still projects $2.65 EPS for '03. Excerpts from Morgan review of 12/10: LOWERING CPN TO NEUTRAL FROM STRONG BUY In conjunction with our call this morning to downgrade the unregulated power companies to market weight. · NEAR-TERM HEADWINDS VS. LOW VALUATIONS It’s hard to make this call at these levels but we are forced to conclude that the near-term outlook holds more negatives than positives. · LONG-TERM FUNDAMENTALS STILL INTACT Secular pressures in developing energy supply and deregulation gave rise to the long-term investment thesis. When the market improves we believe industry leaders can grow 12%-15%. NEUTRAL Price (December 7, 2001): $21.37 Price Target: NA 52-Week Range: $58 - 18.25 WHAT’S CHANGED Rating: Strong Buy to Neutral Earnings (2003): From NA to $2.65 Change of Target Price: $77 to NA Company Description Based in California, Calpine Corp. is an independent power producer engaged in the development, acquisition, ownership, and operation of natural gas-fired and geothermal electric generating plants. FY ending Dec 31: ............2000A 2001E 2002E 2003E EPS($)......1.11 2.10 2.50 2.65 CEPS($)... 2.23 2.49 4.01 5.11 Price/Book...2.5 1.6 1.1 0.8 Market Cap ($ m) 6,970 Debt/Cap (09/01) (%) 65.8 Return on Equity (09/01) (%) 23.2 L-T EPS Grth (‘yy - ‘yy) (%) 35.4 P/E to Growth 0.29 Shares Outstanding (m) 326.2 ++++++++++++++++++++++++++++ Near-term Headwinds = Downgrade to Neutral Summary and Investment Conclusion In conjunction with our call this morning downgrading the unregulated power sector to market perform, we are lowering our rating on Calpine from Strong Buy-V to Neutral-V. (Please see our larger report titled “Don’t Fight the Tape—We’re Getting More Cautious”) We continue to see support from long-term fundamentals for the industry— namely the inherent problems in adding energy supply infrastructure in this country and the potential of industry deregulation—and expect the industry winners to emerge from the current environment with better than utility growth rates of 12%-15%. However near-term headwinds have continued to build. Despite potentially attractive valuations, we have been forced to conclude that the upside for the stocks over the next several months is likely to be limited and outweighed by looming negatives that include: · Weak sparks spreads that do not currently support the economics for new combined cycle power plant construction. In particular off-peak pricing has collapsed, jeopardizing the economics of combined cycle units. Forward curves alone are not ideal indicators of actual plant economics (produced by illiquid markets; don’t fully reflect the value received from locational premiums, ancillary services, etc.), but the direction is negative and the magnitude of the weakness great enough that we believe new plant economics are under pressure. - Political risk that just won’t go away and on one front—the CA contract re-negotiation process—may be about take a turn for the worse. CPN has indicated that they do not believe it will be necessary to renogotiate their contract but at least one seller has acknowledged that they expect to do so—with a loss of economic value. Not only would this be damaging for investor psychology toward the group but we believe once one generator agrees to renogotiate the pressure on the others will increase. · Balance sheet issues. CPN was recently upgraded to investment grade by Moody’s (but not by S&P) and we believe the company can handle its financing issues by cutting back on cap-ex and simply completing the existing development program. However many companies’ balance sheets are stretched and equity markets are virtually closed. On the debt side the Enron shakeout has pushed spreads wider and NRG is on negative credit review. May Be Too Late to Sell We want to make it clear that this is not necessarily a call to sell the merchant stocks—valuation is too low to merit this view. This will likely be a trading group near-term—one that has underperformed—but it is hard to say precisely how much of this bad news is already in the stocks. Our recommendation change does reflect our belief that the near-term commodity, political, and financial risk to these stocks is generally greater than we previously believed.