-----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


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 >
 >
 >   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.


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