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Calpine interested in Alaska gas Financially troubled company talking with municipal gas line authority Larry Persily Petroleum News Government Affairs Editor
Calpine Corp. is talking with the Alaska Gasline Port Authority about possibly buying billions of dollars of natural gas from the municipally owned project proposed to move North Slope reserves to market. But the San Jose, Calif.-based power company likely will need to overcome its junk-bond credit rating and heavy debt load before it could be in a position to provide the payment guarantees needed to help finance the pipeline.
The port authority wants to line up gas purchasers to guarantee a revenue stream sufficient to obtain 100 percent debt financing of the $26 billion project to move almost 6 billion cubic feet per day of North Slope gas by pipe to mid-America and by liquefied natural gas tankers to U.S. West Coast and overseas markets.
Calpine and the port authority have agreed to put forth their best efforts to strike a deal, but it’s far too early for a sales agreement, said Fairbanks North Star Borough Mayor Jim Whitaker. In addition to the borough the port city of Valdez belongs to the authority, created by voters in the two municipalities in 1999 to build and own a natural gas pipeline.
The company has asked about possibly contracting for as much as the authority’s total output, Whitaker said.
Talks are at a “very preliminary stage,” said Brad Barnds, a vice president at Calpine’s Houston office. “By no means have there been any binding agreements.” Company finances ‘legitimate concern’ The company’s financial problems and its ability to guarantee ship-or-pay contracts are “a legitimate concern,” he said. “Calpine would hope to be in a different financial situation then,” Barnds said of the end of the decade, when an Alaska gas project might be under way.
But that’s a long way off from the company’s current financial difficulties, which are forcing it to pay substantial rates for its borrowing.
After dropping plans in late February to issue $2.35 billion in debt, saying investors wanted too high of interest rates, Calpine returned to the market late last month and successfully closed a $2.4 billion deal with an additional $200 million revolving line of credit for its wholly owned subsidiary, Calpine Generating Co. But the interest rates were high, and floating. Notes due in 2009 were priced at a minimum 5 percent; 2010 notes at a minimum 7 percent; and 2011 notes at a 10.25 percent minimum and some at a fixed 11.5 percent.
Calpine’s stock closed April 13 at $4.66 a share, down more than 10 percent from late February when it first backed away from the debt issue. The stock reached its height of almost $60 a share in spring 2001 and its recent low mark at around $2 in October 2002. Liabilities total almost $23 billion The company carried almost $23 billion in liability as of Dec. 31, 2003, against $4.6 billion in shareholder equity. The debt load is about 10 times what it carried at the end of 1999.
“We have substantial indebtedness that we may be unable to service and that restricts our activities,” the company said in its 2003 annual report to the U.S. Securities and Exchange Commission.
Regardless of its debt problems, the company still needs to secure long-term gas supplies. “We became interested in the (Alaska) project a few months ago,” Barnds said, after the gasline authority contacted Calpine, one of the nation’s leading electrical power producers.
The authority has stepped up its sales efforts in recent months, at the same time it was expanding its proposed project to incorporate a line moving more than 3 bcf a day through Canada to U.S. markets in addition to its original proposal for a pipe leading to an LNG shipping terminal at Valdez.
Calpine is interested in perhaps taking gas through both delivery systems, possibly on a 20-year deal, Barnds said. “Calpine has gas demands throughout North America.” The company also is talking with other possible long-term gas suppliers, though he declined to name them.
Calpine burns almost 2 bcf per day of gas, with more than three-quarters of the supply coming from short- and long-term contracts, Barnds said. The company runs 85 power plants in the United States and Canada, producing almost 23,000 megawatts, with about 700 megawatts of that total coming from geothermal power generation in Northern California, he said. The rest of the plants are gas-fired. Calpine looks to pipe and LNG supplies It gets a little less than one-quarter of its gas from its own reserves, which total about 800 bcf in Alberta, Northern California, south Texas and the Rocky Mountains, Barnds said. The company’s long-term goal is to get 25 percent of its gas from its own reserves, 50 percent by pipe and 25 percent by LNG tankers.
Calpine does not own or operate any LNG receiving terminals, or hold capacity rights at any of the nation’s four existing terminals, but is talking with several potential regasification plant developers. The company recently abandoned plans for its own LNG receiving terminal at Eureka, Calif., after heavy community opposition to the plant.
It’s the heavy debt load, however, and commitments and cash needs to build an additional 14 power plants generating 7,700 megawatts that worry rating agencies and financial analysts. The company also faces more than a dozen class-action lawsuits from shareholders and bondholders, and is involved in other litigation in the fallout from California’s energy crisis and controversial trading schemes of three winters ago. Access to financial markets ‘critical’ “High leverage and the associated interest expense could prove unwieldy, making it difficult to grow cash flows and earnings per share,” said Credit Lyonnais Securities (USA) Inc., in a March 16 report. “The ability to maintain access to financial markets is critical to Calpine’s 2004 liquidity and capex plans.”
But the company could be in a good position if power prices recover in 2005-2006, the analysts’ report said.
Merrill Lynch said in a Feb. 27 report it is skeptical of a 2005 recovery: “Power markets recovery is a long ways off.” A shortage of liquidity over the next year could force the company to defer or cancel some of its discretionary capital spending, Merrill Lynch said.
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