The condition of our nation's power suppliers is far from prosperous, but judging from recent numbers, the situation isn't as gloomy as some analysts would have you believe.
Seeing Goldman Sachs downgrade Calpine
Despite the late analyst downgrades, there is a silver lining here. Calpine reported substantially lower earnings and lowered its outlook for 2003 on Thursday, but the company managed to quietly execute its restructuring plans and improve its liquidity position.
Excluding charges, Calpine met the Thomson First Call consensus estimate of $0.09 per share. That number fell to a loss of $18 million, or $0.05 a share, after the inclusion of numerous charges associated with the delay or cancellation of construction projects and expenses related to work force reduction. However, the company will realize a cost savings of $3.4 billion due to the successful restructuring of its turbine agreements, the costs of which were included in the charges.
Revenues were up 29% to $1.9 billion in the quarter, and the company should close the year with $650 million in cash, though that number could be as high as $1.3 billion if it succeeds in its plans to shed more assets. Thus far, it appears the company has been able to accomplish its restructuring goals, including over $4 billion in cuts to its capital-spending budget for 2002 and 2003, without any major surprises to investors.
Clearly, the refinancing of $6.6 billion of debt coming due in 2003 and 2004 is still the major unknown pressuring Calpine's shares, but the company claims to be in very advanced stages of negotiation with its lenders. Despite the challenges, it should succeed in its refinancing endeavors, as high-quality assets back the majority of the credit facilities.
The analyst downgrade comes on concerns around the debt refinancing and on Calpine's valuation compared to other independent power producers. But arguably, none of the information in the release should be news to an analyst that's been following the company for more than six months. The need for debt refinancing has been apparent for at least a year now, and the company is trading near the bottom of its 52-week price range. Is now really the time for a valuation call? Further, the analyst report points to the company's net asset value (NAV) as a means of making the overvalued determination, but the NAV is not terribly useful as a valuation tool for a company with such a high level of debt. The NAV will change dramatically when the company starts pouring its free cash into paying off debt instead of building new power plants.
Duke Energy earned a new coverage rating of "underperform" from Bear Stearns today, partially due to fears of further credit downgrades in the industry. (This is another example of analysts making decisions on news that is really surprising and timely.)
Duke, however, remains confident in its financial projections for 2003 due to its focus on regulated earnings and cash-generation activities. The company also plans to make approximately $600 million this year from asset sales.
Don't get me wrong. The power generators still have their challenges, including power prices that were down nearly 30% in '02, but Calpine and Duke won't be holding "going out of business" sales anytime soon. When we start seeing analyst downgrades and pessimistic coverage initiated on companies that are 90% off their highs, perhaps it's time to take a closer look at going long. Maybe this should be the new criteria for a "Strong Buy" rating.
New Fool writer Mathew Emmert owns shares in Calpine.