Calpine: Q1 Results
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Calpine Corporation (CPN) reported a first quarter 2016 Net Loss of $198 million, or $0.56 per diluted share, compared to $10 million, or $0.03 per diluted share, in the prior year period. The year-over-year increase in Net Loss was primarily due to net non-cash mark-to-market losses driven by decreases in forward power and natural gas prices during the first quarter of 2016.
Adjusted EBITDA for the first quarter was $374 million, compared to $338 million in the prior year period, and Adjusted Free Cash Flow was $102 million, or $0.29 per diluted share, compared to $25 million, or $0.07 per diluted share, in the prior year period. The increase in Adjusted EBITDA was primarily due to higher Commodity Margin driven by higher contribution from hedges (including retail), higher regulatory capacity revenue in PJM and ISO-New England and changes in our power plant portfolio. The increase in Adjusted Free Cash Flow was primarily driven by a decrease in major maintenance expense associated with our plant outage schedule, as well as an increase in Adjusted EBITDA, as previously discussed.
Net Loss, As Adjusted, for the first quarter of 2016 was $104 million compared to $62 million in the prior year period. The increase in Net Loss, As Adjusted,was primarily due to an increase in estimated income tax expense in state jurisdictions where we do not have net operating losses, and an increase in depreciation and amortization expense driven largely by power plant portfolio changes, partially offset by an increase in Commodity Margin, as previously discussed.
“I am pleased to report that first quarter Adjusted EBITDA increased $36 million year-over-year, despite mild winter weather across much of the country,” said Thad Hill, Calpine’s President and Chief Executive Officer. “This performance was due to solid operations and effective hedging, and has kept us on track to reaffirm our full year guidance.
“Our first quarter results demonstrate the continued benefits of our geographically diverse, flexible and clean generation fleet. These modern, natural gas-fired power generation resources allow us to be resilient to low natural gas prices in the near term, while favorably positioning us for the long term.
“We also remain focused on building and developing our customer relationships. Over time, we think our customer focus, through both our Champion Energy retail business and our wholesale origination efforts, will deliver better results than simply being a price-taker. Since our last call, we have signed a new five-year contract in the East, expanded our retail service territory in New England and reached an agreement to sell our South Point Energy Center in Arizona to a local utility. This is in addition to the new ten-year toll of our Morgan plant with the Tennessee Valley Authority that we announced in February.
“The sale of our South Point Energy Center represents progress toward our stated goal of divesting non-core assets through accretive transactions,” added Hill. “Subject to certain conditions and regulatory approvals, we expect this transaction to close no later than the first quarter of 2017. I would like to recognize the South Point employees for their dedication and professionalism as members of the Calpine team.
“The South Point sale proceeds, along with proceeds from our previously announced sale of Osprey Energy Center at the end of this year, will further enhance our capital allocation flexibility as we continue to pursue a well-balanced program consisting of growth, capital return and debt reduction.”
1 Non-GAAP financial measure, see “Regulation G Reconciliations” for further details.
2 Reported as Net Loss attributable to Calpine on our Consolidated Condensed Statements of Operations.
3 Includes generation from power plants owned but not operated by Calpine and our share of generation from unconsolidated power plants.
4 According to EEI Safety Survey (2014).
SUMMARY OF FINANCIAL PERFORMANCE
First Quarter Results
Adjusted EBITDA for the first quarter of 2016 was $374 million compared to $338 million in the prior year period. The year-over-year increase in Adjusted EBITDA was primarily related to a $45 million increase in Commodity Margin, partially offset by an $8 million increase in plant operating expense5 primarily related to portfolio changes. The increase in Commodity Margin was primarily due to:
+ higher contribution from hedges, including retail,
+ higher regulatory capacity revenue in PJM and ISO-NE, and
the net impact of our portfolio management activities, including approximately two months of operation of our 695 MW Granite Ridge Energy Center, which was acquired on February 5, 2016, and a full quarter of operation of our 309 MW Garrison Energy Center, which commenced commercial operation in June 2015, partially offset by the expiration of the operating lease related to the Greenleaf power plants in June 2015,
– a decrease in generation and lower market spark spreads in the West resulting from lower natural gas prices in the first quarter of 2016 and an increase in hydroelectric generation in California and the Pacific Northwest in March 2016, and
– the expiration of a tolling contract associated with our Pastoria Energy Center in December 2015.
Adjusted Free Cash Flow was $102 million in the first quarter of 2016 compared to $25 million in the prior year period. Adjusted Free Cash Flow increased during the period primarily due to an increase in Adjusted EBITDA, as previously discussed, and a decrease in major maintenance expense resulting from our plant outage schedule.
5 Increase in plant operating expense excludes changes in major maintenance expense, stock-based compensation expense, non-cash loss on disposition of assets and other costs. See the table titled “Consolidated Adjusted EBITDA Reconciliation” for the actual amounts of these items for the three months ended March 31, 2016 and 2015.
Our capital allocation philosophy seeks to maximize levered cash returns to equity on a per share basis while maintaining a strong balance sheet. We strive to enhance shareholder value through the combination of investing for growth at attractive returns, managing the balance sheet through debt pay down and returning capital to shareholders. 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. We are committed to remaining fiscally disciplined and balanced in our capital allocation decisions.
Acquisition of Granite Ridge Energy Center
In February 2016, we completed the purchase of Granite Ridge Energy Center, a power plant with a nameplate capacity of 745 MW (summer peaking capacity of 695 MW), for approximately $500 million, excluding working capital and other adjustments. The addition of this modern, efficient, natural gas-fired, combined-cycle power plant meaningfully increased our capacity in the constrained New England market. The power plant features two combustion turbines, two heat recovery steam generators and one steam turbine. We funded the acquisition with a combination of cash on hand and financing obtained in the fourth quarter of 2015.
Corporate Revolver Extension and Expansion
On February 8, 2016, we amended our Corporate Revolving Facility, extending the maturity by two years to June 27, 2020, and increasing the capacity by an additional $178 million to $1.678 billion through June 27, 2018, reverting back to $1.520 billion through the maturity date. Further, we increased the letter of credit sublimit by $250 million to $1.0 billion and extended the maturity by two years to June 27, 2020.
Growth and Portfolio Management
Garrison Energy Center: We are in the early stages of development of a second phase of the Garrison Energy Center that will add approximately 450 MW of dual-fuel, combined-cycle capacity. PJM has completed the project’s system impact study and the facilities study is underway.
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 and 2018/2019 base residual auctions. The project is now under construction, and we expect commercial operations to commence during the second quarter of 2017. PJM has completed the interconnection study process for an additional 68 MW of planned capacity at the York 2 Energy Center. This incremental 68 MW of planned capacity cleared the 2018/19 base residual auction.
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 satisfied final regulatory approval requirements in March 2016. Commercial operation of the expanded capacity is expected by June 1, 2019.
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 in 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, which will be consummated in January 2017 upon the conclusion of a 27-month PPA. The sale has received FERC and state regulatory approvals and represents a strategic disposition of a power plant in a wholesale power market dominated by regulated utilities.
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 by 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.
South Point Energy Center: On April 1, 2016, we entered into an asset sale agreement for the sale of substantially all of the assets comprising our South Point Energy Center to Nevada Power Company d/b/a NV Energy. The sale is subject to certain conditions precedent, as well as federal and state regulatory approvals, and is expected to close no later than the first quarter of 2017. The natural gas-fired, combined-cycle plant is located on the Fort Mojave Indian Reservation in Mohave Valley, Arizona, and features a summer peak capacity of 504 MW. This transaction supports our effort to divest non-core assets outside our strategic concentration. Financial terms are not being provided at this time due to confidentiality terms specified in the agreement.
Turbine Modernization: We continue to move forward with our turbine modernization program. Through March 31, 2016, we have completed the upgrade of 13 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 East Region power plants.
First Quarter Power Operations Achievements:
— Maintained top quartile4 safety metrics: 0.79 total recordable incident rate
— Delivered strong fleetwide starting reliability: 97.6%
— Four gas-fired plants with first quarter capacity factors greater than 70%: Hermiston, Pasadena, Pine Bluff and Stony Brook
Geysers Wildfire Impact
In September 2015, a wildfire spread to our Geysers assets in Lake and Sonoma counties, California. The wildfire affected five of our 14 power plants in the region, which sustained damage to ancillary structures such as cooling towers and communication/electric deliverability infrastructure. Our Geysers assets are currently generating renewable power for our customers at more than 80% of the normal operating capacity and will be restored to pre-fire levels once repairs are completed, which is expected during the third quarter of 2016. We believe the repair and replacement costs, as well as our net revenue losses relating to the wildfire, will be limited to our insurance deductibles of approximately $36 million, all of which was recognized in 2015. Any losses incurred in 2016 related to the wildfire will be primarily offset by insurance proceeds, when such proceeds are realizable. We record insurance proceeds in the same financial statement line as the related loss is incurred. We do not anticipate the impact of the wildfire or timing of insurance proceeds recovery will have a material impact on our financial condition, results of operations or cash flows.
First Quarter Commercial Operations Achievements:
— We entered into a new ten-year PPA with Tennessee Valley Authority to provide 615 MW of energy and capacity from our Morgan Energy Center commencing in February 2016.
— Champion Energy expanded its New England service territory and now offers electricity service to commercial and industrial customers in Maine and Connecticut.
— We satisfied final regulatory approval requirements for our 20-year PPA with Xcel Energy, which will facilitate a 345 MW expansion of our Mankato Power Plant.
— We entered into a new five-year PPA with a third party to provide 50 MW of capacity from our RockGen Energy Center commencing in June 2017, which increases to 100 MW of capacity commencing in June 2019.
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.