The Daily 750









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LNG: What Isn't Discussed

Monday, December 05, 2005

Kitty O'Keefe is one of several special people who chose to move to the Upper Left Edge in the past five years or so. In Southern California she was a financial advisor to individuals who made their living in the entertainment industry, taught graduate economics at UCLA, and occasionally spent a summer teaching remedial math at an inner city high school. Among other things. She retired at an age at which many people are still wondering what to do with their lives and, while keeping her hand and immense brainpower in the financial world, has turned her talents to art, creating authentic and awesome vodou works and assisting galleries in ways both operational and artistic.

To my knowledge, Kitty was the first to research Calpine's financial records and tell the story of their sorry state. Her latest essay was submitted to the Daily Astorian for publication last week but did not appear.::::::::
Liquefied Natural Gas--What Isn't Discussed

Apparently, our Port Commission is indifferent to two economic realities of going into business with Calpine.

First, that of the unquestionably dire financial condition of the company on which the county will rely for payroll and county taxes. Let’s take a look at our potential partner in building this facility.
Assets (what they own)...$27 billion
Debt (what they owe)......$23 billion
Generally speaking, a desirable ratio of assets to debt is 33%. Calpine’s ratio is 85%. As we all know, huge debt is a very bad thing.

Let’s look at how Calpine will pay this crushing debt load.

Earnings.....-$1.85 (note the minus sign) for every share of stock over the last twelve months (Forbes). There are 538,016,014 shares of common stock (ValueLine). That’s a negative $995.3 million in earnings over the last year.

Not only is Calpine losing money, but the losses are increasing very significantly over last year.

Why? One reason is the higher costs of building new plants. Yes, Calpine is building new plants, when they are using less than half the capacity of their current plants. Another reason is the increasing interest rates on their huge debt. So, what was their plan?

Calpine’s plan was to sell natural gas producing properties to get some cash. As promised, Calpine did sell $395 million worth of oil and gas fields this year. What are they trying to do with the money? Pay down their huge debt? No. They want to use the money from the sale of oil and gas fields to buy natural gas to run their power plants.

On November 22, the courts ruled that Calpine must use this money to pay their debts. The Courts gave Calpine and its lenders until November 30 to propose a settlement.

Meanwhile, Calpine’s stock price is down 56% this year, and speculation has been raised that it might be forced to seek bankruptcy protection.

Perhaps you agree that we need employment opportunities in our area. Perhaps you agree that the county coffers will be improved with a large employer being added to our community. These are valid points, and are worthy of consideration. But, do we want to form a partnership with a company whose financial condition is in such dire straits that the courts are forcing the company to pay its debt?

Some, including Don McDaniel and Peter Gearin, both Port Commissioners, and Calpine spokesperson John Compere, concede that Calpine may not have the financial ability to actually complete the LNG project in Warrenton. It is, in their publicly stated opinion, worth beginning the project, however. Then, the assumption is that another company, one with appropriate financial and LNG capabilities, would complete the project.

That takes us to economic reality number two.

What company has both LNG capabilities and the financial resources to purchase Calpine? My research resulted in one company that meets both criteria: AES.

In the event that this research is correct, we can make a few assumptions based on historical data regarding assets purchased in bankruptcy.

First, such assets are purchased for pennies on the dollar. It stands to reason that, if one is the only bidder, the purchase price will be low. It also stands to reason that the tax benefits afforded that bidder would be generous, as any tax payment is preferable to none at all.

Secondly, purchasers generally consolidate employees, with theirs replacing the purchased company in the vast majority of cases.

Further, since Calpine has no experience running an LNG facility, AES employees will have more experience, and will likely replace Calpine (or locally hired Astoria) employees.

Conclusion? We’ll get pennies on the dollar for the county tax coffers, and replacement employees for those locally hired.

Aren't these economic realities worth a response from both Calpine and its supporters?

Kitty O'Keefe, November 27, 2005

UPDATE, Dec 1: Calpine's Board fired the CEO and CFO, the stock dropped below $1 a share. After the close of trading on Tuesday, Calpine, a San Jose, Calif.-based energy provider, had a market capitalization of about $307 million, ranking 500th in the index. The Standard and Poor's 500 Index replaced Calpine with a more, uh, viable company -- Genworth. Genworth closed down 4 cents at $34 on November 30, while Calpine shares plummeted 71 cents, or 57%, to close at 54 cents. On the November 30 deadline for paying its debtors, Calpine asserted that paying the debt as agreed will force it to consider bankruptcy protection under Chapter 11.