Calpine Corporation - Addition Of Bosque Power Company Does Not Make Its Shares Interesting

| About: Calpine Corporation (CPN)

Calpine Corporation (CPN) announced on Thursday that it will buy a power plant from Bosque Power in a deal valuing the plant at $432 million. Investors are not impressed as shares of Calpine hardly moved on Thursday and Friday, after the announcement of the deal.

The Deal

Calpine Corporation announced that it agreed to purchase a 800 megawatt power plant from the Bosque Power Company. For $432 million plus adjustments, Calpine will acquire the natural gas fired, combined-cycle plant, located in Texas.

CEO Jack Fusco commented on the deal, "Bosque is a modern combined-cycle plant making it a good fit for our clean, efficient fleet while increasing our presence in ERCOT's north zone consistent with our strategy to boost capacity in Texas as electric demand rises and reserve margins tighten. The Bosque acquisition presents a great opportunity for Calpine to add generation capacity at an important time in the evolution of one of our core markets and at a discount to replacement cost."

Calpine did not provide financial information for the facility, other than that it paid approximately $540 per kilowatt of generating capacity. Last week, Integrys Energy Group (TEG) paid $440 million for Fox Energy Company for a 593 megawatt dual-fuel facility. The deal valued Fox Energy at $742 per kilowatt of generating capacity, indicating that Calpine made a relatively good deal based on this simple metric alone.

Calpine expects to close the deal as early as November 2012. The company will acquire the plant in cash. The proposed agreement is subject to customary closing conditions. No shareholder approval is required.


Calpine Corporation ended its second quarter of 2012 with $587 million in cash and equivalents. The company operates with roughly $10.6 billion in short and long term debt, for a net debt position of $10 billion.

For the first six months of 2012, the company generated revenues of $2.1 billion. The company net lost $338 million, or $0.71 per share. Adjusted for swings of unrealized mark-to-market losses on commodity hedges, the company lost $51 million. Because revenues and the bottom line are heavily impacted by commodity hedges, a useful valuation point might be the adjusted EBITDA guidance of $1.7-$1.8 billion for the full year.

Currently the market values Calpine at roughly $8.3 billion. The guidance values the equity of Calpine at 4.7 times adjusted EBITDA and the entire company at 10.5 times adjusted EBITDA.

Currently, Calpine does not pay a dividend.

Investment Thesis

Year to date, shares of Calpine have risen some 10%. Shares moved within a $14-$19 trading range during the first 9 months of 2012, now exchanging hand around $18.

Over the past five years shares have risen some 10% as well. Shares hit lows of $5 in 2009, but steadily recovered to current levels. Net revenues fell from $9.8 billion in 2008, to $6.8 billion in 2011. While the company squeezed out a $10 million profit in 2008, it reported a net loss of $190 million in 2011.

Calpine operates 93 power generation plants, making it the largest independent power producer in the US. Its plants have 28,000 megawatts of generation capacity. Valued at $8.3 billion, the market values the firm at $296 dollar per kilowatt of generation capacity. Adding the net debt position of $10 billion to the valuation, the market values the enterprise at $654 dollar per kilowatt of generating capacity.

At the moment I am not considering an investment in Calpine. I do not like the company for two main reasons. First of all, the company does not pay a dividend, which is quite remarkable for a power producer. Furthermore, attaching a fair value to the company's assets is complicated as a result of large and volatile mark-to-market PL impact on the company's bottom line.

If one would like to invest in the utility industry, there are plenty large other power producers. Other large players in the field including PG&E Corporation (PCG), Dominion Resources (D) and Exelon Corporation (EXC) are solidly profitable and pay dividend yields of 4% or more.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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