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After Enron's Failure, Should Calpine Investors Worry?
The New York Times ^ | December 9, 2001 | GRETCHEN MORGENSON

Posted on 12/10/2001 8:58:47 AM PST by Ernest_at_the_Beach

December 9, 2001

After Enron's Failure, Should Calpine Investors Worry?

By GRETCHEN MORGENSON

The Associated Press
Gov. Gray Davis of California, left, and Peter Cartwright, Calpine's chief executive, at a new power plant in Yuba City last summer. Calpine is a Wall Street favorite, but it shows some similarities to Enron.

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The New York Times



As the Enron Corporation (news/quote) collapsed, filing for bankruptcy protection exactly one week ago, companies that had done business with the fallen giant or that had emulated its once-enviable business model rushed to distance themselves from the wreckage. One of the biggest is the Calpine Corporation (news/quote), the nation's largest independent power producer and a favorite on Wall Street.

Calpine differs from Enron in vital ways, but there are enough similarities between the two to have given investors something of a scare. On Monday, the day after Enron filed for Chapter 11 reorganization, Calpine's shares fell 14 percent, to $18.50, well below a March 30 peak of $58.04. Not surprisingly, Calpine executives have been working hard — in a conference call with analysts and investors on Nov. 29, for example — to convince Wall Street of two things: that Calpine is no Enron, and that Enron's failure will have no financial impact on it.

At the end of the week, investors seemed persuaded: Calpine's shares recovered, closing at $21.37 on Friday. The waters were also calm on Wall Street, where 22 of the 23 analysts following the company still recommend it as a buy. Only one firm, Bear Stearns (news/quote), rates it a neutral.

But, in some ways, Calpine is looking more like Enron by the day. Its status as a high-growth company, generating the 30 percent annual earnings growth that Wall Street expects, looks increasingly doubtful, and it, too, has financial statements that are, at times, opaque.

The company, which this year will produce 11,000 megawatts of electricity an hour from 50 plants for sale to municipalities, investor-owned utilities and other wholesale buyers, stresses only the positive side of the comparison with Enron, its rival in Houston — its ability, like Enron's, to trade energy. (Enron had only tiny generating capacity.)

"Calpine is in a unique position in that we can provide our customers with their operational needs and financial tools as well," said Paul Posoli, senior vice president of Calpine Energy Services, the company's commodity trading arm. Being both the producer of power and a trader of it, Mr. Posoli explained, means that Calpine can produce returns to shareholders well above those of a strictly commodity power seller.

But the Enron mess could not have come at a worse time for Calpine. Its balance sheet is loaded with $10 billion in debt, more than half its total capitalization, yet energy prices have plummeted.

Forced to lower its own prices, Calpine says operating income per megawatt hour has fallen 20 percent from levels during the spike in prices of 2000.

Even so, in the first three quarters of this year, Calpine almost doubled its earnings.

Gains from trading energy commodities and energy derivatives made up the difference. For the first nine months of 2001, 10 percent of Calpine's $1.1 billion in gross profit came from derivatives trading activity, which because of the way the company accounts for the transactions flows directly into the income statement. Another 18 percent came from trading energy itself.

But that kind of performance is impossible to count on, given the volatility of these markets.

Enron was the biggest player in that field, and the resemblance is not coincidental. Mr. Posoli, who created Calpine's trading arm, came to the company from Enron. He spent most of his four years at Enron in the group that traded energy derivatives before joining Calpine in 1999.


ALPINE shares other similarities with Enron — first and foremost, financial statements that are so complex as to be almost unfathomable. Mr. Posoli said Calpine, with its auditor, was trying to make its financial reports easier to understand. "We're working with Arthur Andersen to come up with a better way to present our financial statements," he said. "We're working on more disclosure."

Arthur Andersen was also the auditor for Enron; the accounting firm is being sued by Enron shareholders and is part of the investigation into Enron's accounting by the Securities and Exchange Commission.

Perhaps the most important similarity between the two companies is this: Both rely on the kindness of investors and lenders. Without deep support from the capital markets, neither company can operate. Calpine, which went public only in 1996, tapped public capital markets seven times this year, raising $5.7 billion.

Enron, of course, lost investors' confidence through a series of missteps, most significantly its failure to disclose details of lucrative partnerships that its chief financial officer ran, but for which Enron shareholders were ultimately responsible. Calpine, based in San Jose, appears to have no such partnerships.

But while Calpine is still in good favor on Wall Street, investors burned by the debacle at Enron are on the lookout for warning flags that they missed there but that may also be flying at other companies.

How energy trading companies report to their shareholders on the exact nature of their energy contracts is probably the biggest area of concern. Indeed, the nation's top five accounting firms, including Andersen, said last week that they were developing recommendations for improved disclosure on these contracts.

Complications arise for several reasons. Because markets for energy derivatives are not organized as more established markets, valuing these contracts is tricky. Accounting rules require energy trading companies to account for their transactions differently, depending upon whether trades are made to hedge underlying assets or to hedge cash expected to be received from customers.

When trades are made to hedge underlying assets, they are called fair value hedges — and their gains and declines must be recorded in the income statement. But when trades are used to hedge expected cash flows, their gains or losses are recorded on the balance sheet as assets or liabilities until they are closed out.

Continued
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TOPICS: Business/Economy; Extended News; News/Current Events
KEYWORDS: calpowercrisis; calpowergate
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(to be continued )
1 posted on 12/10/2001 8:58:48 AM PST by Ernest_at_the_Beach
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To: Ernest_at_the_Beach

(Page 2 of 2)

The temptation, of course, would be for a company to put on a hedge and wait to see if it rose or fell in value before deciding how to account for it. Under such a ploy, if a hedge rose in price, it would become a fair value hedge and add to profits. If it fell, it would go to the balance sheet and not hurt earnings at all.

To prevent this win-win situation from occurring, said Timothy S. Lucas, technical director at the Financial Accounting Standards Board, accounting rules require trading companies to designate in advance what type of hedge each trade represents. "The rules say you can't shoot the arrow first and then paint the target where it fell," Mr. Lucas said. "And the auditors are presumably looking at that."

Mr. Posoli said most trading activity involved hedges intended to protect the company's underlying assets and cash flows. Such hedges would produce gains and losses on both Calpine's income statement and balance sheet.

UT for the first nine months of 2001, Calpine's hedging activity produced only losses recorded on the balance sheet — $231 million in all — while those derivatives activities the company's management did not designate as hedges produced $113 million of gains on the income statement. Those derivative gains accounted for 10 percent of the company's gross profit.

Asked why Calpine's hedging produced only losses on its balance sheet while those transactions not designated as hedges at all produced gains, Mr. Posoli said he was confident that anyone examining Calpine's books would agree that the gains recorded in income belonged there rather than on the balance sheet. He explained that the gains came from transactions with customers in areas of the country where Calpine had no underlying assets.

"It's all very well documented and it is very clear," he said. Besides, he added: "It is an immaterial portion of our core business, meaning it's less than 20 percent."

Some investors would quarrel with Mr. Posoli's assertion that derivatives trading gains of 10 percent of gross profit are immaterial. Materiality, after all, was one of the ways Enron management had swatted away questions about its own accounting and operations.

Even more puzzling than Calpine's simultaneous good luck with derivatives trading and bad luck with hedges is a series of transactions that the company made with Enron in the third quarter.

Enron became a very big customer of Calpine this year. For the first three quarters, Enron accounted for $1.33 billion, or 23 percent, of Calpine's revenue. As a percentage of Calpine's commodity trading revenue, deals with Enron accounted for approximately 2.3 percent of sales in the first nine months of 2000 and 37.2 percent in the period this year.

"Enron happened to be the largest market maker in the business," Mr. Posoli said. "We did a lot of business with them." And yet, Calpine says Enron's failure will not have an impact on the company's financial performance. "We did not rely on Enron for our gross margin or operating income. We happened to use them."

Neither Mr. Posoli nor Calpine's controller, Chuck Clark, could say how profitable the company's dealings with Enron were. But filings with the Federal Energy Regulatory Commission provide a clue.

In the third quarter of 2001, $768 million, or 26 percent, of Calpine's revenue came from Enron. Also in the quarter, Enron bought 6.5 million megawatt hours of electricity from Calpine. Dividing the revenue generated by Enron by the megawatt hours it bought from Calpine produces an average cost per megawatt hour of $119.13 to Enron.

This cost is significantly higher than what other Calpine customers paid in the same period. Calpine's revenue for all megawatt hours sold during the third quarter averaged just over $84. Sales to non-Enron customers averaged a rate of $75.48 per megawatt hour.

Why would Enron pay Calpine 58 percent more for power than Calpine's other customers did? The sky- high costs cannot be explained by geographic differences in power prices, because Enron's purchases were all over the map. And while spot prices can vary, peak power prices averaged $37 to $58 a megawatt hour during the third quarter, according to Megawatt Daily, an industry publication.

Mr. Posoli could not explain why Enron's cost was so much greater than that for Calpine's other customers. He said that the filings might be showing power sold by Calpine to Enron earlier this year, when prices were much higher.
But a search through the energy commission's filings back to February 2000 shows only one other power sale agreement that Calpine struck with Enron — and that was one covering Jan. 13 and 14, 2001. This transaction could not account for the third-quarter business.


N any case, Enron made a big difference to Calpine's quarter. By comparing the amount Enron paid per megawatt hour with Calpine's cost per megawatt hour sold, it is possible to estimate the windfall that Calpine made on the Enron revenue: $281 million, or 56 percent of Calpine's operating income in the third quarter.

Mr. Posoli cautioned against trying to assign a profit margin to the Enron transactions. "It would be very difficult to try to back into a gross margin for the Enron transactions," he said. "We did transact with Enron at much higher prices, but we also bought from them." Mr. Clark, the controller, said the company never thought to calculate profits generated by Enron. "We don't consider it meaningful," he said.

It is possible that investors will continue to view Calpine as a growth company even if it must supplant falling profits in its core business with volatile trading gains.

Analysts can probably be counted on for continued optimism about the company. After all, Calpine will have to visit the capital markets many times in the coming years to finance its $15 billion construction plan to increase its power generation capabilities to 70,000 megawatts in 2005. Wall Street firms will be eagerly competing for the fees these offerings will generate. Already this year, Calpine's stock and bond offerings in the public market have generated $62 million in fees to the Street, according to Securities Data.

But that means that when it comes to Calpine, investors will undoubtedly continue to be on their own, judging for themselves. Just as they had to do with Enron. 

2 posted on 12/10/2001 9:01:40 AM PST by Ernest_at_the_Beach
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To: *calpowercrisis; randita; SierraWasp; Carry_Okie; okie01; socal_parrot; snopercod; quimby...
Just thought this might be of interest since Calpine was a favorite investment for many of Gov Davis consultants and appointees!!!!

To find all articles tagged or indexed using calpowercrisis

Click here: calpowercrisis

To find all articles tagged or indexed using calpowergate

Click here: calpowergate

3 posted on 12/10/2001 9:05:37 AM PST by Ernest_at_the_Beach
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To: SierraWasp
Do I hear the cry of the albatross?
4 posted on 12/10/2001 9:07:32 AM PST by Carry_Okie
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To: Ernest_at_the_Beach
Enron, of course, lost investors' confidence through a series of missteps, most significantly its failure to disclose details of lucrative partnerships that its chief financial officer ran, but for which Enron shareholders were ultimately responsible. Calpine, based in San Jose, appears to have no such partnerships.

This one statement goes counter to the rest of the article.

The non-disclosed off-balance-sheet deals by Enron appear to have been the primary cause of its demise. If Calpine isn't involved in such shenanigans, this reporter seems to be just scaring people unnecessarily.

5 posted on 12/10/2001 9:14:47 AM PST by Bob
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To: Bob
The non-disclosed off-balance-sheet deals by Enron appear to have been the primary cause of its demise. If Calpine isn't involved in such shenanigans, this reporter seems to be just scaring people unnecessarily.

Almost. The partnerships that Enron created did create some significant losses which were hidden from Wall Street analysts, but they were only the trigger that began the crash. The real cause of Enron's demise was the realization by shareholders and creditors that they couldn't understand any of Enron's disclosures. A crisis of confidence was unleashed and a company that made a significant portion of its income in complex financial swaps and hedges suddenly was too suspect to trust with further business.

Calpine may not have been involved in any similar partnerships, but the reporter's analysis that something looks suspect about Calpine's accounting is a legitimate position for him to take, especially since Calpine engaged in much of the same business as Enron.

I've thought Calpine's very cozy relationship with Governor Davis all during the year when he was going out of his way to blast every other energy producer was extremely suspect. I tried to do some research on this company early this year to find out who they were and why they might have a special relationship to Davis, and it was difficult to piece together.

In my opinion, there's something very fishy about Calpine and I don't trust them. I certainly wouldn't invest in their stock.

6 posted on 12/10/2001 9:31:49 AM PST by Dog Gone
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To: Ernest_at_the_Beach
good articles
7 posted on 12/10/2001 9:57:37 AM PST by Libertarianize the GOP
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Comment #8 Removed by Moderator

To: Libertarianize the GOP
Ouchie. Calpine stock dropped 15% today after this article was printed in the NY Times.
9 posted on 12/10/2001 11:33:00 AM PST by Dog Gone
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To: Ernest_at_the_Beach

Calpine States New York Times Article Is Inaccurate and Misleading

Company to Host Conference Call to Address Article

SAN JOSE, Calif., Dec. 10 /PRNewswire/ -- Calpine Corporation (NYSE: CPN - news) announced it is hosting a conference call today at 1:30 p.m. PST to respond to the inaccuracies of the December 9 article published in The New York Times.

The call is available in a listen-only mode by calling 1-800-322-9079 five minutes prior to the start of the conference call. International callers should dial 1-973-872-3100. In addition, Calpine will simulcast the conference call live via the Internet. The web cast can be accessed and will be available for 30 days on the investor relations page of Calpine's website at www.calpine.com.

SOURCE: Calpine Corporation

10 posted on 12/10/2001 11:34:31 AM PST by Dog Gone
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To: dpwozney

Calpine's Shares Plunge 17 Percent on Fears of Enron-Style Collapse

By MICHAEL LIEDTKE
AP Business Writer

SAN FRANCISCO (AP) -- Calpine Corp.'s (NYSE:CPN - news) shares plunged 17 percent Monday as investor feared the rapidly expanding power generator was headed down the same perilous path that ruined one of its biggest business partners, Enron Corp. (NYSE:ENE - news)

The fallout from Enron's stunning collapse and its subsequent bankruptcy filing has hurt the stocks of most major power wholesalers, reflecting worries that its demise will ripple through the entire power industry.

Calpine had been a focal point of Wall Street's concerns because the San Jose-based company collected $1.3 billion -- 23 percent of its total revenue -- from Enron through the first nine months of the year.

But the fears took on a new dimension over the weekend with the publication of a New York Times article that asserted Calpine's financial statements have become as befuddling as Enron's.

The comparison unnerved investors because Calpine -- like Enron in its heyday -- has put together a run of robust earnings that made it one Wall Street's hottest stocks earlier this year as the company pursued its goal of becoming the nation's largest power producer.

While pointing out the differences between the two companies, the New York Times wrote, ``Calpine is looking more like Enron by the day.''

Calpine on Monday labeled the Times article ``inaccurate and misleading,'' but the company's reassurance didn't soothe investors still licking their wounds from the Enron debacle that wiped out nearly $70 billion in shareholder wealth.

Calpine's shares fell $3.58, or 17 percent, to $17.79 Monday during trading on the New York Stock Exchange. The stock peaked at $58.04 in March when electricity prices in California and the rest of the nation were still rising.

The steep decline in energy prices over the summer didn't put a serious dent in Calpine's growth in the third quarter, though. The company earned $320.8 million in the three months ended Sept. 30, more than doubling its profit from the prior year.

Calpine's energy trading division has helped the company shore up its earnings even as it receives less money for the electricity generated at the roughly 50 power plants that it runs around the country.

Because a trading arm depends on complex financial contracts known as derivatives, the earnings from the operations are notoriously difficult to decipher, acknowledged industry analyst Ronald Barone of UBS Warburg.

But that complexity doesn't mean Calpine is engaging in the same type of dubious accounting that contributed to Enron's demise, Barone said.

One of the biggest differences between Calpine and Enron is the basic structure of the two businesses.

Calpine is ``asset heavy'' with about 80 percent of its earnings coming from its power plants, Barone said. Enron, in contrast, is ``asset light'' with three-fourths of its earnings coming from byzantine energy trading and investment partnerships, Barone estimated.

Calpine shares at least one trait with Enron: the company is unlikely to meet the earnings goals recently laid out by management. Calpine promised Wall Street annual earnings increases of 30 percent, but Barone and other analysts believe the company's profit will grow at about half that rate.

11 posted on 12/10/2001 2:08:17 PM PST by Dog Gone
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To: Dog Gone
I'm always suspicious whenever I see Accenture (formerly Andersen Consulting) near Arthur Andersen in the same company. This little web page lists Accenture, Enron, and Calpine all in the same Florida grid meeting... Andersen Florida Grid
12 posted on 12/10/2001 2:29:00 PM PST by Southack
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To: Dog Gone
I wonder how many Calpine put options the editors of the NYT purchased last week.
13 posted on 12/10/2001 2:41:38 PM PST by snopercod
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To: snopercod
No kidding. The ability to profit from a negative story that you know is going to printed in the NYT is obvious.
14 posted on 12/10/2001 3:26:57 PM PST by Dog Gone
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To: Ernest_at_the_Beach
who me worry?--gov grey.
15 posted on 12/10/2001 4:25:57 PM PST by ken21
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To: Carry_Okie; Dog Gone; Ernest_at_the_Beach
This is interesting: See After hours Action Down below Chart
16 posted on 12/10/2001 8:15:22 PM PST by SierraWasp
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To: snopercod
Did'ja see what I said to ya early this AM? Over on yur thred?
17 posted on 12/10/2001 8:19:09 PM PST by SierraWasp
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To: snopercod
Interestingly enough Louis Navallier, after pumping this stock up over the last 6-8 months, suddenly dropped it in his latest issue. I'm sure he knew this story was coming. I'll bet a large institutional investor wanted in and asked the NYT writer to do a hatchet job on them. Looks like a great buying opportunity to me, although the business cycle for this sector is not the greatest for immediate gratification.
18 posted on 12/10/2001 8:23:19 PM PST by Rockitz
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To: SierraWasp
Shares of Calpine regained some of the ground they lost in the regular session. In a conference call after hours, the company disputed an article in the New York Times comparing it to fallen energy giant Enron. After falling nearly 17 percent to $17.79 in the regular session, shares rose to $18.43 after hours.

Looks like they regained some after hours!

19 posted on 12/10/2001 8:24:09 PM PST by Ernest_at_the_Beach
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To: Ernest_at_the_Beach
Comments above in Italics came from a CBS marketwatch
article accessible from the Link Sierrawasp put in post #16!
20 posted on 12/10/2001 8:27:45 PM PST by Ernest_at_the_Beach
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