|Shares Out. (in M):||357||P/E||29.1||16.4|
|Market Cap (in M):||5,085||P/FCF||5.8||4.5|
|Net Debt (in M):||11,039||EBIT||927||1,058|
|2019 Calpine FCF/share at Different Levels of Buyback and Stock Price
Annual Buyback % Current Market Cap
|Calpine Share Price||$14||$3.92||$4.66||$5.52|
|2019 Calpine FCF/share at Different Levels of EBITDA and Buyback
Average Annual EBITDA (m$)
|Annual Buyback % Current MC||5%||$2.99||$3.63||$5.10|
-Coal, peaker gas and nuclear plant retirements in Calpine's markets
-Stabilization in current and forward gas prices and in turn power prices (despite the smile)
-Extreme weather events
|Subject||Re: percentage of earnings from peak power prices|
|Entry||01/29/2016 04:34 PM|
Hi chris815, glad to have posted and thanks for your question.
If you take Calpine's EBITDA in 9M 2015, 37% came from the West, 25% from ERCOT (Texas) and 38% from the East region. In the West at this point very little of Calpine's earnings, in our estimation, comes from the classic midday peak period. We believe more than a third is from contracted volumes (PPAs) from the geysers and a bit from select peaking type assets. These contracts are long-term in nature and we actually think the geysers contracts will roll to similar if not higher prices when they begin to expire in 2022 since they are key renewable assets for California. For the other California PPAs we know when they reset and account for the lower EBITDA. One rolled off at the start of this year resulting in $40m less EBITDA. Another will not roll until 2019. For the rest of the West, what has actually happened is renewables have created new peak periods where they previously did not exist. Solar has resulted in the so-called duck chart where prices are high in the early morning daylight and in the late daylight period. This period used to be served by peaker units that are retiring. Through nine months, Calpine volume is actually up 2% YoY. Long-term in California we see nuclear retirements and the need for flexible units to allow Calpine to maintain earnings in the market.
In Texas the issue is wind. Power prices in Texas are so low that solar will not be a major threat to this market for a long-time (though you will see some projects). There are times when wind drives pricing to zero, and those times may or may not be during "peak" hot periods. However, there are times when the wind stops blowing and at those points you get spikes in power prices because traditional baseload coal is often not running full time. Wind has merely shifted the economics. Texas, to be clear, is a depressed market. 9M EBITDA was down 13% in the market. On-peak power prices are down 32% and average spark spreads are down somewhat less. Wind has grown tremendously during this period. So why is EBITDA only down 13%? Because volume is up 28% YoY. Gas may be on the margin in Texas, which is depressing sparks, but lots of coal and peaker units are out of the market.
In the East we see renewables as a longer tailed threat. There will be solar installations driven by state level renewable mandates, but there will also be retirements. We estimate around 50% of East earnings are from capacity payments. We know what these will be through the first half of 2019. The last auction was very bullish for Calpine as most their PJM capacity is in the constrained EMAAC region, which priced high due to the addition of capacity performance (CP) for 80% of bid units that instituted penalties for units that do not provide the power they bid into auction. This keeps a lot of older peaking type units out of the market. We have also seen limited new supply coming into these auctions as the economics for new build are marginal it is difficult to finance one off units. For the next auction (2019/2020) we see lower pricing, but for the 2020/2021 auction the 80% CP requirement goes to 100%, which should boost pricing. The bulk of the rest of the company's capacity revenue comes from the NE ISO, where capacity auctions have also been strong. Calpine's volume was up approximately 6% in 9M (estimating the contribution from one new plant). Long-term renewables will impact the other 50% of revenue in the East but like with the West will likely present opportunities for efficient CCGTs.
We are not dismissive of the renewables threat but see Calpine's fleet as a relative beneficiary of the inherent intermittency of them.
|Subject||Re: Re: percentage of earnings from peak power prices|
|Entry||08/16/2016 06:09 PM|
Hi Pathbska, thank you for the write-up.
I'm having trouble reconciling that mgmt. will aggressively use FCF for buybacks, especially after the lowered adj. EBITDA guidance. In the most recent slide deck, pg 15. they discuss an "opportunity" to de-lever to 4.5x, which seems to be the focus. While they have bought back ~ 130m shares since 2011, almost all that can be attributed to cash draws and proportional increases in debt. I guess what I find intriguing is the outsized Capex spends during the past 2 years, assuming the majority of that is growth Capex? Curious what assumptions you used to account for maintenance Capex (I believe mgmt. had ~25%?) going forward? and assumptions on growth Capex till 2020.
|Subject||Re: Re: Re: percentage of earnings from peak power prices|
|Entry||08/17/2016 03:04 AM|
Value1929, thank you for the important question.
The picture has been a bit more complicated the past five years. Between 2010 and 2015 the company bought back $2.8 billion in stock while increasing net debt by $1.7b and spending $3.1b in growth capex and $2.1b on maintenance and major maintenance capex. They accomplished all this by effectively swapping their position in the Southeast with a position in the Northeast. It's hard to say in what type of portfolio management they will engage, but as they say they are aways looking on both the buy and sell side.
Growth capex needs at the moment are limited. They will complete their only large project York 2 (in PJM) next year, which will require $200m in 2017 capex. They have two additonal smaller projects to complete over the next 3 years. One is a Mankato exansion in MN, which has a 20 year contract. The second is an expansion at their Guadalupe Energy Center in Texas were they have a captive customer (who will purchase a 50% share upon completion). Together these two will cost approximately $400m. We don't see any obvious growth capex requirements. You cannot build in CA, the returns in TX are not sufficient (projects with captive customers like at Guadalupe and rare), and the company has not cleared any new capacity in the NE or PJM into 2020.
They have spoken about the goal of getting to 4.5x levered since Q4 of last year. During that time they extended their maturity schedule dramatically and other than project debt have no maturities until 2022. They will likely repay some of the expensive 7 7/8% 2023 debt, but they do not have to do that by delevering. They have capacity in the 2023 revolver and/or could issue new debt. They are also due in Q1 2017 roughly $250m from the sale of Osprey to Duke in Florida and South Point in Nevada to Berkshire. Ex these proceeds we see growth capex of $166m in 2017 down to $100m total between 2018 and 2019. We assume $400-$450m in maintenance and major maintenance capex per year.
The company could buyback 6+% of the float per year and be around 4.8-4.9x levered by 2019. We think this is consistent with getting to 4.5x levered "over time", but also think they will be more aggressive than that either by being more levered (now that they have extended their debt) or by selling assets. The CCGTs within Calpine are trading at < $400 per kW when we think the market could pay up to $800 per kW for them. That provides a lot of fexibility in our estimation.
|Subject||Re: Re: Re: Re: percentage of earnings from peak power prices|
|Entry||08/17/2016 02:59 PM|
Thank you very much for the timely clarification around growth/maintenance capex b/w '10-15 (and forward looking), this is very helpful. I guess the point I was trying to get at was for the past 18-24 months it appeared that growth capex was extraordinarily high and was likely to come in substantially, therefore freeing up excess capital potentially for buybacks. The 6%->HSD makes sense to me, not sure about 10%+, but the math works out quite well even in the lower tier.
There definitely appears to be an opportunity here. The market is not giving any credit to some of CPN's long-term strategic advantages. This one has certainly caught our eye with the market pinging around all-time highs. Thanks again!