Deutsche Banc Alex. Brown utility analysts put strong buy on Calpine following convertible issue

By Ronda Fears

Nashville, Tenn., Dec. 24 - On the heels of Calpine Corp.'s new $1 billion convertible offering, Deutsche Banc Alex. Brown electric utility analysts James Dobson and Jason West reiterated a strong buy on the underlying stock, noting that while the convert somewhat dilutes the stock it goes far to address and ease investor concerns about the independent power producer that has been punished by the markets in light of Enron Corp.'s demise.

"Although the new convertible issue is somewhat dilutive to earnings, it should importantly alleviate investor concerns about Calpine's access to the capital markets, and the company's ability to meet financing obligations and capital expenditure objectives," analysts Dobson and West said in a report Monday.

"We are reducing our 2001 and 2002 earnings estimates for CPN to $1.95 and $2.00 per share from $2.05 and $2.65, previously. Our revised estimates primarily reflect lower wholesale power price assumptions, dilution from the convertible issue, and less capitalized interest. We are initiating a 2003 estimate of $2.30 per share. We are reiterating our Strong Buy rating on CPN. The stock has been negatively impacted by concerns about a liquidity crisis and lack of access to the capital markets. However, we continue to argue that these concerns are overdone, and that Calpine's fundamental business model remains sound."

With the convertible bond issue of $1 billion, Calpine has about $4.5 billion of capital sources to fund total uses of capital of around $4 billion over the next 12 months, the analysts said. The sources of funds, the analysts said, are the new convertible debt, a $1 billion construction revolver, $1.2 billion of operating cash flow, about $600 million of cash on the balance sheet, a $400 million corporate revolver and about $265 million to be received from PG&E Corp. The use of funds are some $2.5 billion of capital expenditures to complete plants under construction, $600 million in capitalized interest on the expenditures and the estimated $898 million repayment of the zero coupon convertible bond in April 2002.

"Importantly, we believe the successful completion of this convertible offer increases the probability that Calpine will be able to negotiate an increase in its corporate revolver to $1.5 billion in January 2002," Dobson and West said in the report.

"This should provide the company with additional funding flexibility."

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