Calpine Corporation: Q2 results
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Calpine Corporation (CPN) reported second quarter 2015 Adjusted EBITDA of $457 million, compared to $413 million in the prior year period, and Adjusted Free Cash Flow of $144 million, or $0.39 per diluted share, compared to $99 million, or $0.23 per diluted share, in the prior year period. Net Income1 for the second quarter of 2015 was $19 million, or $0.05 per diluted share, compared to $139 million, or $0.33 per diluted share, in the prior year period. Net Income, As Adjusted2, for the second quarter of 2015 was $33 million compared to Net Loss, As Adjusted2,of $3 million in the prior year period. The increases in Adjusted EBITDA, Adjusted Free Cash Flow and Net Income, As Adjusted2,were primarily due to higher Commodity Margin driven largely by increased generation across all segments resulting from lower natural gas prices in the East and Texas and stronger market conditions in the West during June, as well as higher contribution from hedges across all of our regions.
Year-to-date 2015 Adjusted EBITDA was $795 million, compared to $859 million in the prior year period, and Adjusted Free Cash Flow was $169 million, or $0.45 per diluted share, compared to $229 million, or $0.54 per diluted share, in the prior year period. Net Income1 for the first half of 2015 was $9 million, or $0.02 per diluted share, compared to $122 million, or $0.29 per diluted share, in the prior year period. Net Loss, As Adjusted2, for the first half of 2015 was $29 million compared to Net Income, As Adjusted2,of $53 million in the prior year period. The decreases in Adjusted EBITDA, Adjusted Free Cash Flow and Net Income, As Adjusted2, were primarily due to lower Commodity Margin driven largely by a significant decrease in power and natural gas prices in our East region in the first quarter of 2015, given the unusually high price levels experienced during the polar vortex events in the prior year period, as well as net portfolio changes and lower regulatory capacity revenue in PJM.
“We are proud to report solid operational and financial results, driven by strong execution by the Calpine team on all fronts,” said Thad Hill, Calpine’s President and Chief Executive Officer. “For the second consecutive quarter, we achieved record high generation volume, reflecting the ability of our fleet to thrive in a low natural gas price environment while more broadly highlighting the industry shift away from traditional baseload resources and the increasing need for our flexible natural gas fleet to help integrate growing renewable capacity. Specifically, our Texas and East fleets displaced uneconomic coal-fired generation, while our California fleet demonstrated the value of dispatchable electricity by helping maintain grid reliability during the historic drought.
“On the strategic front, last week we announced the acquisition of Champion Energy, the nation’s largest independent retail electric provider, primarily concentrated in Texas and the Mid-Atlantic. Champion represents an ideal platform to expand our customer channels given its significant geographic overlap with Calpine’s wholesale fleet. Champion’s award-winning customer service mirrors Calpine’s focus on operational excellence. We expect to close this highly accretive transaction by the fourth quarter.
“I am also pleased to report that we remain on track to deliver on our 2015 financial commitments to our shareholders and today are tightening our Adjusted EBITDA and Free Cash Flow Per Share guidance ranges while maintaining the midpoints,” added Hill. “While commodity markets have sold off, including the Texas power market, we remain optimistic about the next several years, given structural improvement in capacity markets and the continuation of the trend toward more reliance on gas-fired generation. We also plan to continue adding value through disciplined and balanced capital allocation and active management of our portfolio. As the industry evolves, we are confident that the benefits of our strategically aligned fleet will continue to generate significant free cash flow for the foreseeable future.”
Acquisition of Champion Energy
In July 2015, we entered into an agreement to purchase Champion Energy for approximately $240 million, excluding working capital adjustments. Champion Energy, a leading retail electric provider, is expected to serve approximately 22 million MWh of commercial, industrial and residential customer load in 2015, concentrated in Texas, the Mid-Atlantic and the Northeast U.S. where Calpine has a substantial power generation presence. The addition of this well-established retail sales organization is expected to provide us an important outlet for directly reaching a much greater portion of the load we serve.
Share Repurchase Program
Returning capital to our shareholders by repurchasing shares of our common stock is an integral component of our capital allocation program. We view our stock as an attractive investment opportunity, and we use the projected returns from share repurchases as the benchmark against which all other investment decisions are measured. Since 2011, we have repurchased approximately $2.8 billion of our common stock, representing approximately 28% of shares outstanding.6
In 2015, through the issuance of this release, we have repurchased a total of 23.3 million shares of our common stock for approximately $475 million at an average price of $20.42 per share.
2022 First Lien Term Loan
In May 2015, we repaid our 2018 First Lien Term Loans with the proceeds from a newly issued 2022 First Lien Term Loan which extended the maturity and reduced the interest rate on approximately $1.6 billion of corporate debt.
Growth and Portfolio Management
Guadalupe Peaking Energy Center: In April 2015, we executed an agreement with Guadalupe Valley Electric Cooperative (“GVEC”) that will facilitate the construction of a 418 MW natural gas-fired peaking power plant to be co-located with our Guadalupe Energy Center. Under the terms of the agreement, construction of the Guadalupe Peaking Energy Center (“GPEC”) may commence at our discretion, so long as the power plant reaches commercial operation between the dates of June 1, 2017, and June 1, 2019. When the power plant begins commercial operation, GVEC will purchase a 50% ownership interest in GPEC. Once built, GPEC will feature two fast-ramping combustion turbines capable of responding to peaks in power demand. This project represents a mutually beneficial response to our customer’s desire to have direct access to peaking generation resources, as it leverages the benefits of our existing site and development rights and our construction and operating expertise, as well as our customer’s ability to fund its investment at attractive rates, all while affording us the flexibility of timing the plant’s construction in response to market pricing signals.
Garrison Energy Center: Garrison Energy Center commenced commercial operations in June 2015, bringing online approximately 309 MW of combined-cycle, natural gas-fired capacity. The power plant features one combustion turbine, one heat recovery steam generator and one steam turbine and is expected to be dual fuel capable by this winter. We are in the early stages of development of a second phase of the Garrison Energy Center.
York 2 Energy Center: York 2 Energy Center is a 760 MW dual fuel combined-cycle project that will be co-located with our York Energy Center in Peach Bottom Township, Pennsylvania. Once complete, the power plant will feature two combustion turbines, two heat recovery steam generators and one steam turbine. The project’s capacity cleared PJM’s 2017/2018 base residual auction. The project is now under construction, and we expect commercial operations to commence during the second quarter of 2017. PJM has completed the feasibility study for increasing York 2 Energy Center’s planned capacity by 70 MW, and the queue position has entered the system impact study stage.
Mankato Power Plant Expansion: By order dated February 5, 2015, the Minnesota Public Utilities Commission concluded a competitive resource acquisition proceeding and selected a 345 MW expansion of our Mankato Power Plant, authorizing execution of a 20-year PPA between Calpine and Xcel Energy. The PPA was executed in April 2015 and remains subject to approval by the North Dakota Public Service Commission. Commercial operation of the expanded capacity may commence as early as the summer of 2018, subject to requisite regulatory approvals and applicable contract conditions.
PJM and ISO-NE Development Opportunities: We are currently evaluating opportunities to develop additional projects in the PJM and ISO-NE market areas that feature cost advantages such as existing infrastructure and favorable transmission queue positions. These projects are continuing to advance entitlements (such as permits, zoning and transmission) for their potential future development when economical.
Osprey Energy Center: We executed an asset sale agreement during the fourth quarter of 2014 for the sale of our Osprey Energy Center to Duke Energy Florida, Inc. for approximately $166 million, excluding working capital and other adjustments. In accordance with the asset sale agreement, the sale will be consummated in January 2017 upon the conclusion of a 27-month PPA. In July 2015, the transaction was approved by the FERC, and the Florida Public Service Commission voted to approve the Florida Commission Hearing Officer’s Recommended Order approving the transaction. This sale represents a strategic disposition of a power plant in a wholesale power market dominated by regulated utilities.
Turbine Modernization: We continue to move forward with our turbine modernization program. Through June 30, 2015, we have completed the upgrade of thirteen Siemens and eight GE turbines totaling approximately 210 MW and have committed to upgrade three additional turbines. In addition, we have begun a program to update our dual-fueled turbines at certain of our power plants in our East region.
6Based upon 490.6 million shares outstanding as of June 30, 2011, immediately prior to announcement of our repurchase program.
Second Quarter 2015 Power Operations Achievements
— Maintained top quartile7 safety metrics: 0.64 total recordable incident rate
— Achieved low fleetwide forced outage factor: 1.9%
— Delivered exceptional fleetwide starting reliability: 98%
— Seven gas-fired plants with capacity factors greater than 70%: Channel, Hermiston, Kennedy, Morgan, Pasadena, Pine Bluff, Russell City
— Pine Bluff Energy Center: 100% starting reliability and 0% forced outage factor
Second Quarter 2015 Commercial Operations Achievements:
— Announced accretive acquisition of retail electric provider Champion Energy for $240 million,4 consistent with our stated goal of getting closer to our end-use customers
— Entered into a new ten-year PPA with Southern California Edison for 50 MW of capacity and renewable energy from our Geysers assets commencing in January 2018. The PPA remains subject to approval by the CPUC.
7 According to EEI Safety Survey (2014).
We are narrowing our 2015 guidance. We expect Adjusted EBITDA of $1.95 billion to $2.05 billion, Adjusted Free Cash Flow of $840 million to $940 million and Adjusted Free Cash Flow Per Share of $2.20 to $2.50. We also expect to invest $355 million in our ongoing growth-related projects during the year, having now completed construction of our Garrison Energy Center and commenced construction of our York 2 Energy Center.
Calpine Corporation is America’s largest generator of electricity from natural gas and geothermal resources. Our fleet of 83 power plants in operation or under construction represents approximately 27,000 megawatts of generation capacity. Serving customers in 18 states and Canada, we specialize in developing, constructing, owning and operating natural gas-fired and renewable geothermal power plants that use advanced technologies to generate power in a low-carbon and environmentally responsible manner. Our clean, efficient, modern and flexible fleet is uniquely positioned to benefit from the secular trends affecting our industry, including the abundant and affordable supply of clean natural gas, stricter environmental regulation, aging power generation infrastructure and the increasing need for dispatchable power plants to successfully integrate intermittent renewables into the grid. We focus on competitive wholesale power markets and advocate for market-driven solutions that result in nondiscriminatory forward price signals for investors. Please visit www.calpine.com to learn more about why Calpine is a generation ahead - today.