Calpine's $500 million trading profit
POWER POINTS: The Other Half Of Calpine's $800 M Deal
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- When Calpine Corp. (CPN) said Thursday that it was essentially selling one of its California electricity supply contracts for $800 million, it should have left power industry observers scratching their heads.
A year ago, that contract was worth a lot of money compared with the forward power market at the time. It isn't worth that much now. Long-term power prices today have nearly returned to the level at which Calpine sold to California. So how is Calpine getting $800 million for the contract? The answer: trading. (Hopefully it's acceptable to use the word "trading" again in a family newswire.)
What's left on the California contract, which runs through 2009, is worth around $300 million in cash today, based on current long-term power prices. Calpine and its bank in this deal, Morgan Stanley (MWD), aren't talking about the other half of this deal. Calpine is also essentially selling long-term power purchases it made when electricity prices were at their bottom in late 2001, according to sources. In fact, the majority of the $800-million value comes from selling the cheaply purchased power, not from selling the contract to supply power to California.
In February 2001, Calpine sold a 10-year power supply to the California Department of Water Resources, which was buying power on behalf of the state's busted utilities, for $58.60 a megawatt-hour. Some of that power has already been delivered. And, when the parties renegotiated the deal a year ago, the final two years of the contract were chopped off.
Some 55 million megawatt-hours of supply remain to be delivered from the second half of this year through 2009. The current price of California electricity through 2009 is about $51/MWh, so the California contract is about $8/MWh in the money.
More important than the ballyhooed sale to California, Calpine purchased a lot of long-term power in late 2001 for around $36/MWh. Power prices were so low at that time that they approached Calpine's fuel costs to generate electricity. The company's trading operation in Houston made the easy decision to buy at that time, even though Calpine is mainly in the business of selling power it produces, not buying power from other companies. Those contracts are now $15/MWh in the money.
Since those purchases, gas prices have risen and pushed up power prices. The wholesale power market largely rises and falls with natural gas prices so long as there isn't a shortage of power plants.
The current bond deal takes the sales to California and the purchases from the other company, and hands that package over to a financing vehicle run by Morgan Stanley. The banker's commodities division must buy some more power in the current market to fully supply California's 1,000 MW, but that's a minor note.
Given the current forward power price of $51/MWh, what's more valuable: sales at $59 or purchases at $36? Obviously, the purchases are almost twice as valuable.
But Calpine doesn't seem to want to talk about that. Beyond what it put in its press release, the company is prohibited from talking about the deal until the bonds are sold, a spokeswoman said. If nothing else, talking about the company that sold the power to Calpine at $36/MWh could violate a confidentially agreement. After all, Calpine's $500 million trading profit on those purchases was a $500 million loss to the seller.
More generally, Calpine doesn't like to talk about its trading operation, because after the fall of Enron Corp. (ENRNQ) Wall Street hates the idea of power and gas companies trading. To Calpine's credit, it has never issued the "we've stopped trading" statement that so many of its merchant-energy competitors have.
But the fact is, by selling at the high and buying at the low, Calpine's traders created $800 million in value. That's more than enough to build a 1,000-MW power plant.
But trading, according to Wall Street, is too risky for these companies. Nothing could be further from the truth. A good trading operation combined with good assets and a strong balance sheet can create enormous value, as this week's Calpine deal proves.
The idea of a power company not trading is stupid. It isn't really even possible. What does it mean to not trade if you produce electricity? Just sell your output on a daily basis? That would be an insanely risky business model. Power producers need to make decisions constantly about when to buy gas and sell power, and - when the market presents the right opportunity - to buy power and sell gas.
It isn't a question of whether trading is good or bad, but whether a company's trading operation is good or bad. Figuring that out, though, may require too much homework for Wall Street.
Quietly, Calpine is doing the right thing by keeping its trade floor in Houston going, although those traders have a very hard time doing long-term deals because of the company's poor credit rating.
The sale of the contracts is important because Calpine can do similar deals several more times. Whether it needs more cash upfront to pay for plant construction or to repay debt, the company has shown that it will monetize contracts as necessary.
The sense among traders and other Calpine observers is that Calpine's stock has risen to near its fair value of $6. But, because Calpine has billions more dollars in contractual value that it can access, its actively traded corporate bonds, which pay 8.5% interest and mature in 2011, are ridiculously underpriced now at 70 cents on the dollar.
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
(Mark Golden has reported on electricity markets and policy for six years.)
Updated June 6, 2003 2:07 p.m. |
