Remember the California power outages a few years back? You can bet that independent energy producer Calpine (NYSE:CPN) does. Those were heady days with rolling blackouts, high demand, and good pricing. It was all good for Calpine.
Since then, though, the independent power market has all but collapsed, and Calpine has had to resort to all but sitting under an overpass with a hand-written sign saying "will generate power for food" just to stay afloat.
Judging by the fourth quarter, things aren't getting easier any time soon. Fools can check out the release for the revenue and earnings, but I'll be delving into some other subjects that are equally important.
The company's spark spread (the difference between the price Calpine gets for power and the cost of the gas to produce that power) declined again in December to $21.36/MWh from $23.90 a year ago. Additionally, the company's capacity factor declined to 45.6% from 48.9% a year ago. Both of these are lower than the third quarter and mean that Calpine is producing less than half of the electricity that it could, while profiting less from that production. Yet the company continues to add to its generation capacity. Go figure.
What's more, Calpine was only about two-thirds successful in achieving its liquidity event targets for 2004. Although the company did complete $2.1 billion in liquidity-enhancing transactions, the original target had been more on the order of $3 billion. Liquidity is key to Calpine, since the company has a mammoth debt load ($18 billion in debt vs. $22.9 billion in total capitalization) and negative cash flow.
If there is any good news, it's that the power industry seems to be at or near a cyclical trough and conditions should begin to improve in 2006 and beyond. Of course, that won't do Calpine much good unless it can hold out that long. Oddly enough, Calpine is something of a weather play these days, since roughly 20% of California's power comes from hydroelectric facilities in the Pacific Northwest.
Given the ongoing drought in that area, there is a chance that there could be additional power shortages in Southern California this year. Should that happen, Calpine might just get enough juice to create a little breathing room for its debt load.
Any Fool looking at this stock needs to be completely aware of the challenges ahead. While it's true that success in the company's efforts to refinance its debt and hold on for a cyclical recovery would make the stock cheap at today's prices, it's equally true that the company could easily be bankrupt within a few years. Given ongoing declines in spark spread and capacity utilization, as well as difficulties in achieving liquidity events, I'd hold off until there are real signs of recovery at Calpine.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
