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Stocks C / Calpine Corporation


Subject:  Re: Sea-Change in NatGas Industry Date:  5/16/2009  12:42 PM
Author:  Littlechap Number:  10842 of 10845

Hi Guys,

Nice article that features CPN. If the article is right, CPN should do well...

Big IF. Most of the rationale in that article is identical to the supposed reasons why CPN was a hot prospect in 2001. Supposedly the coal plants were all going to be phased out within a couple of years. Supposedly electricity was going to become more expensive, giving Calpine a bigger profit margin because natgas would be cheaper than other sources. Supposedly Calpine would outlast its peers because its fleet was newer, yadayada...

But the company sold off huge pieces of itself trying to avoid bankruptcy, which didn't work, and ended up being a smaller company than projected. Also, it was a growth play in 2001-2 because it was developing dozens of new plants and increasing its portfolio. Well, most of the plans post 2002 were cancelled, as were orders for new equipment to build them. Time has passed, and by now some of those "new" plants are already 8-9 years old.

...They’re the largest unregulated power generator in the United States, and they run on natural gas.

I'd want to check that data. They're not the largest power generating company in the U.S. so presumably that word "unregulated" is a key part of that sentence. And I don't think it's true in the sense that people think. The main difference with Calpine is that it is not a Utility company, unlike other entities responsible for wiring homes and installing meters etc.

But some of those utility companies also have large generating portfolios. The regulations on the utility portion of the company do not necessarily hinder the power generation enough to make them suffer versus a company like Calpine, I don't think. In other words, does Calpine have a huge competitive "moat" when it comes to generation? I doubt it.

I happen to be very bearish on natural gas, so I think we’ll see a long-term decline in the cost of Calpine’s fuel.

Interesting prediction, considering potential increases in demand, like the Pickens plan to switch vehicle engines from gasoline to natgas. Among other things, like homeowners switching from oil to gas for heating, and manufacturing uses of gas, and so on.

I also think we’re going to see a long-term increase in the cost of electricity, thanks mostly to new cap-and-trade legislation that is going to be put through Congress.

IMHO the cost of electricity will not be driven primarily by regulation, but by supply and demand like everything else.

Cap-and-trade is not the only new initiative. There are also many incentives for home-based solar generation and other small-scale activities that could accumulate to drive down demand for centrally-generated power like that supplied by companies like Calpine.

Other initiatives include improvements to the grid. Just speaking hypothetically, if they could reduce transmission waste of power (to heat) by just 5%, that's a 5% increase in the supply of actual delivered power to end users -- and that efficiency benefits every company feeding the grid, including coal plants. Such changes would most likely be local or regional at first, but it is one of many ideas on the table for discussion and long-term planning.

Energy conservation dropped California's demand by over 10% during hard times back in 2001 or 2002, I forget. (The articles are probably still here somewhere.) Gasoline use dropped in 2008 when prices got too high. Never rely too hard on future earnings in a business where the consumer has a fairly easy option to say "No" -- like turning off lights, using less air conditioning, buying more efficient appliances.

Also don't forget that energy conservation is a *financial* goal for any business, too, because it increases overall productivity and bottom line earnings. The point here is that there are many reasons to be cautious about predicting endless increases in demand for Calpine's product -- and it only has that one product.

We saw the first of that new kind of legislation in mid-April, when the EPA ruled for the first time ever that carbon emissions cause global warming and that global warming is a threat to the country.

That is not a business headline. It is a new administration signaling that it will not be as stupid about science as the previous one. It is more about survival of the species than it is about making money. I don't know if the EPA actually said that global warming is just a threat to the USA, but the point is that it's a threat to everybody. The biggest problems for global warming are in diplomatic relations with China (putting the most carbon into the atmosphere) and Brazil (destroying the biggest carbon-sequestering forests on earth).

These things are secularly bullish for Calpine

Last I knew, burning natgas yields carbon dioxide just like coal does. Perhaps it is more efficient in terms of BTUs per unit of C02, I haven't checked in a while. But Calpine's plants are still greenhouse gas producers and eventually -- sooner or later -- will suffer in comparison to solar and wind, the latter being the other big part of the Pickens plan.

The smoke from a natgas plant lacks most of the heavy metals, particulates, sulfur compounds and other junk that a coal plant yields, and I think those are more of an immediate issue than CO2 per se. If we want to get people into electric cars or trains, which is yet another part of the overall environmental plan, we will need to keep the coal plants around for a while. At least the smoke from one plant can be captured and dealt with (scrubbed, sequestered, whatever) unlike the smoke from millions of separate vehicles.

I guess I should just say that CPN adherents predicted the death of coal plants years ago, and it hasn't happened. But the hype ran the stock up just enough to clean out a lot of people's pockets.

and meanwhile, you can still buy the stock. It was at $5 when I recommended it six weeks ago. It was at $8.98 May 5. It’s not quite as incredibly attractive as it was but it’s still very, very cheap relative to assets and relative to earnings. A stock like that is a better investment than just an ounce of gold.

That's a big claim to make. One thing gold will never do is go to zero. You can't say that about ANY stock, period.

As for recent price changes, that's a scare story in my view. Any stock that has nearly doubled in six weeks is too volatile to put a lot of money into without really researching it. Articles like the one cited here sound a lot like the "pump and dump" stuff that was going on in the early days when CPN split and doubled several times, only to crash to Zero. CPN was cooking the books back then and there was a lot of nonsense going on. Nobody could read the balance sheets, and it turned out that they were largely fantasy.

I recommend that any potential CPN investor learn all about the power industry in the larger sense, rather than just reading Calpine's PR stuff or the opinion of a single analyst. Also, read all of its SEC publications, and if you do not understand what they say, don't buy. These simple steps could have saved a lot of people a lot of money, last time around.

Speaking from experience.......
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