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Enron Mail |
-----Original Message----- From: Comnes, Alan Sent: Wednesday, December 12, 2001 9:11 AM To: Buerkle, Jim; Foster, Chris H. Subject: Calpine Good detail ... -----Original Message----- From: Robert Weisenmiller [mailto:rbw@mrwassoc.com] Sent: Tuesday, December 11, 2001 6:19 PM To: Comnes, Alan Subject: fyi <x-flowed< < < < Calpine's Credibility Crumbles < <By Peter Eavis <Senior Columnist <12/11/2001 06:49 PM EST < < <Calpine (CPN:NYSE - news - commentary - research - analysis) talks and the <market walks. < <The fast-growing power producer received a ton of flak Monday for taking <no questions on a conference call designed at rebutting a critical article <by The New York Times. Calpine held another call Tuesday -- with the <stated aim of discussing talks to renegotiate power sale contracts with <the state of California -- and spent more than three hours responding to a <range of issues raised by concerned holders and snarky critics. < < < <But soon after this marathon gabfest got under way, Calpine stock, already <down for the day, plummeted after a series of remarks by executives that <the market didn't like. It ended the day down 13% at $15.50, a 52-week low. < <If Detox had to make a list of why the market biffed Calpine during the <call, these would be the reasons: < <1. Dilution. Calpine executives said they would be willing to issue stock <at a low price if cash were needed, and if debt couldn't be issued because <it would push the leverage ratio above acceptable levels. (Leverage is <here defined as debt to total capital, while capital is debt plus equity <and equitylike securities.) The executives didn't say an equity issue was <imminent or probable. However, the fact that an offering could be done at <a low stock price would make it dilutive for existing shareholders. A big <negative. To raise $1 billion at Tuesday's stock price, Calpine would have <to issue about 65 million shares, equivalent to 20% of its shares <outstanding at the end of the third quarter. Notably, Calpine executives <said that they probably wouldn't use an equity issue to pay back a $1 <billion convertible bond that may need refinancing in April. < <2. Natural gas assets. Calpine said it could, if it had to, raise $1 <billion from "monetizing" its natural gas reserves. That would provide the <company with cash, but it would put an up-to-date price on the assets that <could be well below what Calpine recently paid for them. That might force <the company to do a big writedown to equity, which would, in turn, damage <leverage ratios. On the call, Calpine executives played down the notion <that they may have to do a writedown, saying future gas prices suggest one <isn't necessary. < <Related Stories <Calpine Holders Cringe as Cash Questions Swirl <Calpine Offers Cold Comfort <Calpine Offers Its Side of the Story <How Enron Came Undone <Dynegy Dives as Enron Won't Go Quietly < < <3. Earnings outlook. Not only did the company say it may have to revise <2002 earnings guidance, but it also showed uncertainty about <fourth-quarter 2001 earnings. This looks bad for three reasons. First, it <suggests that Calpine has more of its business unhedged than investors <have believed, leaving the company vulnerable to the slump in power <prices. Second, it will add weight to the argument that a glut of power <generation capacity is building. Third, and critically for investors <looking for a bottom in Calpine stock, a large cut in the 2002 earnings <outlook could make the stock look a lot pricier than it is at multiples <based on current Street estimates. Analysts currently expect Calpine to <make $2.52 a share in 2002, putting the stock on a bargain-basement <price-earnings ratio of 6 to 1. But if earnings were to be half that, the <P/E would obviously double to 12, which would actually be quite expensive <for a company that faces liquidity constraints that could force it to <jettison its growth strategy. If Calpine continues to struggle to clear <its name, a floor for its stock price may be book value, currently $9 a share. < <4. Renegotiating California contracts. Although this was the ostensible <subject of the call, too little was said on this issue. The company gave <no indication of how much business might be at stake and was reluctant to <surmise on how much of a hit it might take from recasting the forward gas <purchases made to fuel the power production. < <5. Accounting issues remain. Calpine revealed on the call that it uses it <own in-house method to calculate its leverage. This unorthodox method, <which adds $700 million paid for a Canadian gas company to equity, makes <the company's leverage ratio look lower than it actually is. At one point <on the call, a Calpine executive couldn't detail what was added to net <income to get to the company's earnings before interest, taxes, <depreciation and amortization (EBITDA) number. This is pertinent because <SEC Insight, a research firm that reviews internal Securities and Exchange <Commission documents, said in a report Tuesday that the SEC had talked <with Calpine about the way it presents its EBITDA number in its SEC-filed <financials. < <6. Bank loans and liquidity. Much time was spent addressing whether <Calpine can increase the size of a corporate revolving loan to $1.5 <billion from $400 million. The company said it thought it could do this in <early January. But banks that have gotten burned by lending to Enron <(ENE:NYSE - news - commentary - research - analysis) may now be scaling <back their energy exposure. What's more, Calpine is trying to raise the <size of a corporate loan, implying that the funds aren't needed primarily <for construction purposes. Could the need for new cash have arisen within <the company's trading operations? Calpine said Tuesday that its <counterparties weren't asking for more collateral. But if the trading desk <is consuming more, then it's even more unlikely that the banks will <increase their credit line, considering the Enron meltdown. </x-flowed<
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