A Tale of Two Generators: Financial Liberation Plans

By Published On: October 3, 2003

Big utilities complain bitterly about their financial straits, but they have the ears?and often the sympathy?of legislators and regulators. Private companies that generate power in California have public and political sympathy close to that of Simon Legree. Politicians and regulators in this state would rather eviscerate them than give them a break?even though the power they sell into the market is deemed a necessity. While a half-dozen major generation companies are suffering financial woes these days, Calpine and Mirant started with two different business plans for becoming profitable once again in California’s deregulated market. And they have two methods of climbing back to revenue heaven?or at least escaping from balance sheet hell. Both companies operate far beyond California’s borders, but in-state operations are a big part of their portfolios. Calpine likes steel in the ground, its own structures and turbines from projects it started and runs itself. It never had much of a trading business. Mirant, formerly Southern Energy and newly spun off from the huge utility Southern Company at the time of deregulation, bought existing plants from Pacific Gas & Electric. Unlike Calpine, Mirant had extensive trading and marketing divisions. In May of this year, both companies reported big losses and the outlook for both seemed bleak. Calpine began selling off assets to achieve plans for $2.3 billion in liquidity. It reported a $23.4 million loss for the second quarter alone this year. “We said we’d go out and raise $2.3 billion through liquidity transactions to complete construction” after deciding to finish the power plants the company had started?such as the Metcalf facility in San Jose, said Rick Barraza, Calpine senior vice president of investor relations. Measures to raise needed funds included monetizing an $82 million power sales agreement with Bonneville Power Administration. Calpine has also sold off partial interests in several power plants outside California and has a deal pending to finance $270 million in project costs using 11 California peaking plants. The company is using its long-term peaking contract with the Department of Water Resources as collateral. In addition, Calpine refinanced $4.55 billion with junk bond-level securities. Of the $2.3 billion Calpine identified for cash, the company has arranged or completed deals for $2 billion, according to Barraza. Although earnings estimates continue to slip, Calpine has no intention to extricate itself from the state. “The California market in general is one of the better ones in North America,” Barraza said, adding that demand for electrcity in the state is increasing and no new plants are on the horizon. The company’s saving grace in California might be the 800 MW of renewable power generated by its massive geothermal Geysers facility. With the state requiring investor-owned utilities to have renewables in their portfolios, Calpine is practically guaranteed a market for those megawatts with five-year contracts for both PG&E and Southern California Edison. Calpine’s long-term contracts with DWR will last for at least another five years, including 2,000 MW of baseload production. Calpine was the first in a group of mostly reluctant generators to renegotiate its long-term pacts with the state. The company might also be interested in partnering with utilities on some of its plants, but at this point “anything is preliminary,” said Joe Ronan, Calpine senior vice president of government and regulatory affairs. “PG&E may be very interested in Metcalf and Russell City. We’ve had discussions, but they’re just not in the position” financially to follow up, Ronan added. “Because they were never investment grade and always had to post collateral, that may have made them more resourceful,” said Standard & Poor’s analyst Jeff Wolinsky regarding Calpine. “I think they’ll probably persevere.” Mirant filed for Chapter 11 bankruptcy reorganization July 14 after reporting net losses for 2002 of $2.4 billion and trying unsuccessfully to restructure $5.3 billion in financing. The company’s 10-K filed with the Securities and Exchange Commission earlier this year noted about 37 percent of the company’s revenues for 2001 came through DWR deals. Those contracts expired at the end of 2002. This spring, chief executive officer Marce Fuller said she expected about $50 million less in revenue from California operations this year than last year. “The beginning of the end started with a late December 2001 downgrade of the company’s credit rating to speculative grade, which triggered about $700 million in collateral calls, mostly related to energy trading and marketing operations,” said Standard & Poor’s analyst Arleen Spangler in an August 28 report. “We had $20.6 billion in assets and $11.4 billion in debt,” said David Payne, Mirant spokesperson. Although CEO Fuller noted the lack of income from California earlier this year, Payne denied any relationship between the state’s energy crisis and bankruptcy. “It’s ridiculous to suggest that,” he said. The expiration of Mirant’s DWR contracts wasn’t the only hit the company took on the debt side of its balance sheet. In addition, the Bay Area Air Quality Management Board had been pressing Mirant to install expensive pollution control equipment on at least four of the company’s Pittsburg plants. (Mirant had recently installed scrubbers on four other plants.) Unlike Calpine, which had or is building a raft of new facilities with best-available technologies, Mirant bought older facilities from PG&E, thus avoiding the problem of establishing new transmission interconnections but inheriting more pollution difficulties. Also on the debt side, Mirant and the state have a settlement pending at the Federal Energy Regulatory Commission. Payne would not divulge any details of the agreement-in-principle. Since Mirant has not yet tendered its bankruptcy reorganization plan, its options remain open. With utilities having resumed procurement and possibly poised to develop new generation, Mirant could go into business with IOUs at some level, though Payne said that the company has not been discussing this option. Though Mirant’s plants have lost their DWR contracts, the units are mostly under reliability-must-run deals with the California Independent System Operator. Payne added that Mirant has been running its plants at a higher rate for the last several years than PG&E used to. But the Cal-ISO contracts will not be enough to keep all the plants running. Mirant is planning to shut down several units. “The Bay Area Air Quality Management Board?that’s pretty much the reason,” said Payne. Those plants will be Pittsburg Units 1 through 4, which together have a capacity of 595 MW.

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