Calpine (CPN) shares rose over 30% yesterday (from $1.98 per share to $2.64 per share) in response to its announcement that the merchant power generation (merchant power generation is generation that is dedicated for sale in the wholesale markets, rather than the retail markets ... and often not under long-term contract) company is going to aggressively address its financial stress by accelerating debt repayment and cutting operating costs even deeper through more aggressive asset sales and shutting down of uneconomic power plants.
Whether or not this effort will be able to repair Calpine's difficult financial condition is an open question, frankly. But for the 1st time in a long time, Calpine management team seems to at least publicly acknowledge the urgency of its problems.
For full details of the Calpine announcement, please read the company's 8-K, linked here: Calpine 5/25/05 8-K on Debt Repayment Acceleration Plan.
One could rattle on for thousands of words on this issue, and not cover all the possibilities for Calpine or the power generation industry. I will highlight just a few points that I find interesting, of the many possible:
- Execution is everything for the next 6-12 months ... execution of the asset sales required to reduce debt in 2005 by $3 billion more than CPN had initially planned for. Can Calpine actually sell the additional 8 power plants (beyond what had previously been announced for sale) in a timely enough manner? And will CPN be able to achieve the selling prices that will be required to reduce the debt by the amount promised? And will the company accept a lower price than desired in order to reduce the debt somewhat, even if it means they fall short of their $3 billion target. As this unfolds, it will be interesting to see whether the Bulls or the Bears carry the day on merchant power generation sales (see the article we posted just yesterday: Bulls vs. Bears in a Point ... Counterpoint article on The Utility Stock Blog).
- Part of CPN's plan in past years had been to partner with a financial institution to either help its power trading efforts (improve its risk management profile). They announced that part of this plan included such an effort again. But CPN has been unable to successfully execute this part of business plan in the past. Many merchant power companies have tried to partner with such financial partners (important to improve credit, reduce collateral obligations, and more effectively market excess power generation) ... but few have succeeded. I suspect because it means giving up too much of the cash and profits of the business to the new partner.
- Calpine also specifically announce they would more aggressively mothball, or temporarily shut down, power plants "with negative cash flow, until market conditions warrant start-up." So ... the company announced that it would temporarily shut down plants that ARE UNECONOMIC TO OPERATE at this time. Hmmm ... WHY ARE THEY OPERATING NOW? The obvious answer is that CPN has had a view of the market that indicated that the plants would BE economic in the near future, so the company would continue to operate them even at a negative cash flow in the hopes the marketplace would recover and permit positive cash flow. Calpine has either thrown in the towel on some of these plants, and the strength of the power market for the near future (supporting the Bear view), or they have decided that due to the company's financial stress they cannot wait for the market to turn the way they hope ... that they cannot take the negative cash flow power plants anymore.
Just a couple of small points, for perspective. CPN is just accelerating the debt repayment by 1 year ... this was debt that they had planned to pay down in 2006 anyway. And this debt represents just 16% of CPN's debt ... which tells you the scale of Calpine's debt load.