Calpine: Q1 Results
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Calpine Corporation (CPN) reported Net Loss1 of $56 million, or $0.16 per diluted share, for the first quarter of 2017 compared to $198 million, or $0.56 per diluted share, in the prior year period. The period-over-period decrease in Net Loss was primarily due to the favorable variance in our net mark-to-market activities driven by changes in forward commodity prices and the positive effect of our retail hedging activities. Cash provided by operating activities for the first quarter of 2017 was $94 million compared to $31 million in the prior year. The increase in cash provided by operating activities was primarily due to a decrease in working capital employed resulting from the period over period change in net margining requirements associated with our commodity hedging activity, partially offset by a decrease in income from operations, adjusted for non-cash items.
Adjusted EBITDA2 for the first quarter was $326 million compared to $374 million in the prior year period, and Adjusted Free Cash Flow2 was $43 million compared to $102 million in the prior year period. The decreases in Adjusted EBITDA and Adjusted Free Cash Flow were primarily due to lower Commodity Margin2, largely driven by lower energy margins due to decreased contribution from wholesale hedges and weaker market conditions, lower regulatory capacity revenue in our East segment and the sales of Mankato Power Plant in October 2016 and Osprey Energy Center in January 2017. These changes were partially offset by our retail acquisitions of Calpine Energy Solutions in December 2016 and North American Power in January 2017.
Net Loss, As Adjusted2, for the first quarter of 2017 was $114 million compared to $104 million in the prior year period. The increase in Net Loss, As Adjusted, was primarily due to lower Commodity Margin, as previously discussed, as well as increases in plant operating expense and depreciation and amortization expense primarily due to our retail acquisitions, partially offset by a higher income tax benefit resulting primarily from changes in estimated tax benefits and a favorable adjustment to our reserve for uncertain tax positions.
“This year’s first quarter results reflect our ability to meet our financial commitments despite a very mild winter in Texas and the East and above-normal hydroelectric generation in the West,” said Thad Hill, Calpine’s President and Chief Executive Officer. “We are reaffirming our full year guidance range of $1.8 to $1.95 billion of Adjusted EBITDA, given upside in the back half of the year from our retail acquisitions and higher regulatory capacity payments in the East.
“During the quarter, we began executing on our deleveraging plan while continuing to make progress on controlling costs and integrating our retail platform. We have completed $233 million of our full year target of $850 million in debt reduction, and we are on track to complete our $2.7 billion of planned debt paydown by the end of 2019.
“We also continued our relentless focus on managing our portfolio for long-term value. Specifically, I am pleased to announce three great examples of how our customer-focused efforts helped us find mutually beneficial solutions. First, we have signed a 10-year PPA with Guadalupe Valley Electric Cooperative to supply 200 MW of power from our existing Texas fleet, replacing our prior agreement to construct a new 418 MW peaking power plant. Secondly, we are announcing the monetization of a legacy development site in Louisiana, where we have entered into a construction and sale agreement with Entergy Louisiana for a natural gas-fired peaking power plant. Finally, we completed the sale of our Osprey Energy Center to Duke Energy Florida.
“We also took further action to economically optimize our portfolio by filing to retire four of our natural gas-fired peakers in California at the beginning of 2018 when their contracts expire. The California Independent System Operator has since declared that two of the units are required for reliability, and we are currently negotiating Reliability Must Run contracts that will appropriately compensate us for providing critical reliability to the grid.
“Finally, we have been advocating for competitive power markets, including opposing out-of-market nuclear bailouts that are being debated or implemented in multiple states. We fundamentally disagree with adding more subsidies into functioning wholesale markets and are actively challenging them at the state level and in the courts. Regardless of those outcomes, we are optimistic that independent system operators and the new FERC will move through tariff reform to protect the integrity of their markets from state intervention. Competitive wholesale power markets need to provide non-discriminatory forward price signals that result in market-driven solutions that ensure reliable power. Calpine’s clean, modern and flexible fleet is integral to maintaining reliability in each of our wholesale power markets.”
1 Reported as Net Loss attributable to Calpine on our Consolidated Condensed Statements of Operations.
2 Non-GAAP financial measure, see “Regulation G Reconciliations” for further details.
3 Includes generation from power plants owned but not operated by Calpine and our share of generation from unconsolidated power plants.
4 Excluding working capital and other adjustments.
SUMMARY OF FINANCIAL PERFORMANCE
First Quarter Results
Adjusted EBITDA for the first quarter of 2017 was $326 million compared to $374 million in the prior year period. The year-over-year decrease in Adjusted EBITDA was primarily related to a $22 million decrease in Commodity Margin and $24 million increase in plant operating expense5, which was largely driven by net portfolio changes including our retail acquisitions, as previously discussed. The decrease in Commodity Margin was primarily due to:
– lower energy margins due to decreased contribution from wholesale hedges and weaker market conditions due to milder weather in the Texas and East segments and increased hydroelectric generation in the West segment,
– lower regulatory capacity revenue, primarily in the East segment and
– the net impact of our portfolio management activities, including the sales of Mankato Power Plant in October 2016 and Osprey Energy Center in January 2017, partially offset by
+ increased contribution from our retail hedging activity following our retail acquisitions, as previously discussed, and
+ the positive effect of a new PPA associated with our Morgan Energy Center in the East segment, which became effective in February 2016.
Adjusted Free Cash Flow was $43 million in the first quarter of 2017 compared to $102 million in the prior year period. Adjusted Free Cash Flow decreased due to lower Adjusted EBITDA, as previously discussed, and higher major maintenance capital expenditures primarily due to improvements of our Geysers assets.
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, 2017 and 2016.
Our capital allocation philosophy seeks to maximize levered cash returns to equity while maintaining a strong balance sheet. We seek to enhance shareholder value through a diverse and balanced capital allocation approach that includes portfolio management, organic or acquisitive growth, returning capital to shareholders and debt reduction. The mix of this activity shifts over time given the external market environment and the opportunity set. In the current environment, we believe that paying down debt and strengthening our balance sheet is a high-return investment for our shareholders. We also consider the repurchases of our own shares of common stock as an attractive investment opportunity, and we utilize the expected returns from this investment as the benchmark against which we evaluate all other capital allocation decisions. We believe this philosophy closely aligns our objectives with those of our shareholders.
Managing Our Balance Sheet
We further optimized our capital structure during the quarter ended March 31, 2017, as follows:
2023 First Lien Notes:
— As part of our commitment to reduce debt and interest expense, on March 6, 2017, we redeemed the remaining $453 million of our 7.875% First Lien Notes due in 2023 using cash on hand along with the proceeds from a new $400 million, three-year First Lien Term Loan priced at LIBOR + 1.75% per annum. We intend to repay the 2019 First Lien Term Loan in full by the end of 2018. This accelerates debt reduction and results in substantial annual interest savings of more than $20 million in the interim.
2017 First Lien Term Loan:
— We repaid approximately $150 million of our 2017 First Lien Term Loan using cash on hand during the first quarter of 2017.
Expanding Our Customer Sales Channels
We continue to focus on getting closer to our customers through expansion of our retail platform, which began with the acquisition of Champion Energy in 2015 and was followed by the acquisitions of Calpine Energy Solutions in late 2016 and North American Power in early 2017. Our retail platform geographically and strategically complements our wholesale generation fleet by providing forward liquidity with sufficient margins. The combination of our wholesale origination and retail platform provides Calpine access to both direct and mass market sales channels. Our direct sales efforts aim to provide our larger customers with customized products, leveraging both our successful wholesale origination efforts and Calpine Energy Solutions’ presence among large commercial and industrial organizations to secure new contracts. Our mass market approach relies upon our expanded Champion Energy retail platform to serve the needs of both residential and smaller commercial and industrial customers across the country. We believe that our retail platform is strategically complete and are now focused on integrating it into our business and optimizing its financial performance.
Acquisition of North American Power & Gas, LLC
On January 17, 2017, we completed the purchase of North American Power for approximately $105 million, excluding working capital and other adjustments. North American Power is a growing retail energy supplier for homes and small businesses and is primarily concentrated in the Northeast U.S., where Calpine has a substantial power generation presence and where Champion Energy has a substantial retail sales footprint that is enhanced by the addition of North American Power, which has been integrated into our Champion Energy retail platform. With this acquisition, we now serve residential load in 63 utility service territories as compared to 51 in 2016.
Washington Parish: On April 21, 2017, we entered into an agreement with Entergy Louisiana (Entergy), a subsidiary of Entergy Corporation, to construct an approximately 360 MW natural gas-fired peaking power plant on a partially developed site that we own near Bogalusa, Louisiana. Within a short period of time subsequent to the plant commencing commercial operations and meeting certain performance objectives, Entergy will purchase the plant for a fixed payment, including a fair market return. Construction on the facility will not commence until 2019 with COD expected in early 2021. The agreement contains conditions precedent to effectiveness including, but not limited to, approval of the Louisiana Public Service Commission. We plan to fund the project with a construction loan that will be repaid upon receipt of sale proceeds.
York 2 Energy Center: York 2 Energy Center is an 828 MW dual-fuel, combined-cycle project that is 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 is under construction, and the initial 760 MW of capacity cleared PJM’s last three base residual auctions with the 68 MW of incremental capacity clearing the last two base residual auctions. Due to construction delays, we are now targeting COD in early 2018.
Osprey Energy Center: On January 3, 2017, we completed the sale of Osprey Energy Center to Duke Energy Florida, Inc. for approximately $166 million, excluding working capital and other adjustments. This transaction supports our effort to divest non-core assets outside our strategic concentration.
Clear Lake Power Plant: On February 1, 2017, we retired our 400 MW Clear Lake Power Plant due to a lack of adequate compensation in Texas. Built in 1985, Clear Lake utilized an older, less efficient technology.
Guadalupe Peaking Energy Center: In April 2017, we canceled an agreement with Guadalupe Valley Electric Cooperative (GVEC) related to the construction of a 418 MW natural gas-fired peaking power plant to be co-located with our existing Guadalupe Energy Center. In lieu of building the facility, we will now serve GVEC with 200 MW of generating capacity under a 10-year PPA beginning in June 2019.
California Peakers: As a result of the pending expiration of a PPA in December 2017, we informed CAISO of our intent to suspend operations at four of our California peaking natural gas-fired power plants with capacity totaling 186 MW. CAISO has determined that two of these power plants, Yuba City and Feather River energy centers, are needed to continue reliable operation of the power grid. We are currently negotiating Reliability Must Run contracts for these two power plants.
South Point Energy Center: As a result of the denial by the Nevada Public Utility Commission of the sale of South Point Energy Center to Nevada Power Company in February 2017, we terminated the corresponding asset sale agreement in the first quarter of 2017. We are currently assessing our options related to South Point Energy Center.
First Quarter Power Operations Achievements:
— Delivered strong fleetwide starting reliability: 97.5%
— Generated more than 21 million MWh3
— Texas fleet: Record low first quarter forced outage factor
— Westbrook Energy Center: 100% starting reliability across 215 starts
2017 Operating Event at our Delta Energy Center
On January 29, 2017, we experienced an operating event at our Delta Energy Center that resulted in an emergency shutdown of the power plant and significant damage to the steam turbine and steam turbine generator. Our current plan is to return the unit to service in simple-cycle steam bypass configuration in June 2017 and full combined-cycle configuration in the fourth quarter of 2017. We anticipate that insurance will cover a significant portion of our losses, after applicable deductibles.
Calpine Corporation is America’s largest generator of electricity from natural gas and geothermal resources with operations in competitive power markets. Our fleet of 80 power plants in operation or under construction represents approximately 26,000 megawatts of generation capacity. Through wholesale power operations and our retail businesses Calpine Energy Solutions and Champion Energy, we serve customers in 25 states, Canada and Mexico. Our clean, efficient, modern and flexible fleet uses advanced technologies to generate power in a low-carbon and environmentally responsible manner. We are uniquely positioned to benefit from the secular trends affecting our industry, including the abundant and affordable supply of clean natural gas, environmental regulation, aging power generation infrastructure and the increasing need for dispatchable power plants to successfully integrate intermittent renewables into the grid. Please visit www.calpine.com to learn more about how Calpine is creating power for a sustainable future.