Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Calpine (NYSE:CPN)

Q1 2013 Earnings Call

May 02, 2013 10:00 am ET

Executives

W. Bryan Kimzey - Vice President of Investor Relations

Jack A. Fusco - Chief Executive Officer and Director

John B. Hill - President and Chief Operating Officer

Zamir Rauf - Chief Financial Officer and Executive Vice President

W. Thaddeus Miller - Chief Legal Officer, Executive Vice President and Secretary

Analysts

Stephen Byrd - Morgan Stanley, Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Gregg Orrill - Barclays Capital, Research Division

Steven I. Fleishman - Wolfe Research, LLC

Keith Stanley - Deutsche Bank AG, Research Division

Angie Storozynski - Macquarie Research

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Paul B. Fremont - Jefferies & Company, Inc., Research Division

Jonathan Cohen - ISI Group Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the first quarter '13 earnings call. My name is Brandon, and I'll be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn it over to Mr. Bryan Kimzey, Vice President of Investor Relations. Mr. Kimzey, you may begin.

W. Bryan Kimzey

Thank you, operator, and good morning, everyone. I'd like to welcome you to Calpine's Investor Update Conference Call, covering our First Quarter 2013 Results. Today's call is being broadcast live over the phone and via webcast, which can be found on our website at www.calpine.com. You'll find the access to the webcast and a copy of the accompanying presentation materials in the Investor Relations section of our website.

Joining me for this morning's call are Jack Fusco, our Chief Executive Officer; Thad Hill, our President and Chief Operating Officer; and Zamir Rauf, our Chief Financial Officer. Thad Miller, our Chief Legal Officer, is also with us to address any questions you may have on legal and regulatory issues.

Before we begin the presentation, I encourage all listeners to review the Safe Harbor Statement included on Slide 2 of the presentation, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. For additional information, please refer to our most recent SEC filings, which are on file with the SEC and on Calpine's website. Additionally, we would like to advise you that statements made during this call are made as of this date, and listeners to any replay should understand that the passage of time, by itself, will diminish the quality of these statements. After our prepared remarks, we'll open the lines for questions. [Operator Instructions] I'll now turn the call over to Jack to lead our presentation.

Jack A. Fusco

Thank you, Brian. Good morning to you all. Thank you for joining us for the first quarter 2013 earnings conference call, and thank you for your continued interest in Calpine. As you know, just 3 weeks ago, we hosted an Investor Day here in Houston, where we provided in-depth disclosures and comprehensive updates on our business and growth prospects.

I want to extend my thanks to the investors and analysts who joined us for that event and hope that we provided some valuable insights about the company, our strategy, capital management and the value we see in Calpine's future. Because not much time has passed since Investor Day, I've asked Thad and Zamir to keep today's comments fairly brief, and we'll primarily focus on the first quarter results, which as you can see from the slide, were in line with our expectations.

As we had previously indicated, we expect that the first quarter adjusted EBITDA would be down compared to the prior year, while we expect the third quarter to be up largely as a result of portfolio changes.

Like last year, we divested 1,450 megawatts of contracted noncore power plants at attractive prices. We redeployed a portion of the proceeds from these sales into the acquisition of an 800-megawatt merchant combined cycle plant in Texas. The net impact of this M&A activity on the first quarter was a decline in adjusted EBITDA, given the disposition of those related contracts. However, we would expect to recover a significant amount of that lost annual contracted value in the second and third quarters from our increased merchant position in Texas, as well as from the addition of our 2 contracted plants currently under construction in California.

We also saw higher gas prices in the first quarter of 2013 compared to the ultra-low prices experienced during the first quarter of 2012, which caused our fleets generation output to decrease year-over-year. However, the resilience in the West and the North helped to mitigate weaker market conditions in Texas and the Southeast, where gas-fired plants run the margin, demonstrating once again the value of Calpine's competitive and geographically diverse fleet. The impact on our margin from the reversal back to coal-fired generation from natural gas is predominantly a first and second quarter phenomena.

As summer approaches demand increases, natural gas-fired generation should set the price much more frequently. Throughout the first quarter, our plant personnel continue to demonstrate our commitment to excellence under varying market conditions, delivering impressive safety and operating statistics once again. We also maintained our dedication to wellness and being a good corporate citizen within the Calpine family, as well as in the communities where we are located.

Already this year, we have supported teams of well over 100 employees in each of the Houston Marathon, and the MS 150 bike ride, raising hundreds of thousands of dollars for charity. We have also partnered with the Houston Astros to restore a local Little league, intercity baseball field and hosted its season opener just a few weeks ago. I'm extremely proud of the difference we are making in our communities and appreciate the support of the Calpine team, led by Norma Dunn, in these first class efforts.

Today, we are reaffirming our full year 2013 guidance, having recently raised the bottom end. We are projecting adjusted EBITDA of $1.8 billion to $1.96 billion and adjusted free cash flow of 615 million to $775 million. These ranges reflect what we believe to be asymmetric risk to the upside and incorporate favorable events that are scheduled to impact our earnings over the balance of the year regardless of the year-over-year change in gas prices.

Turning to the next slide. I'd like to comment a bit more on the sensitivity of our fleets generation output to the changes in the annual strip for natural gas prices. The chart on the left reflects our historical production relative to the average gas price during the respective year. We also show our projected output for 2013. Caleb Stephenson covered this chart in detail during the Investor Day and that recording is still posted on our website. I should mention that we have made a change to this chart since we presented it at Investor Day. The 2013 projections shown on this chart now includes incremental production from our new plants that are scheduled to come online later this year. Previously, it did not include these plants in order to present an apples-to-apples comparison that we feel is more helpful to present it as it is now shown.

The point of this graph is to remind you that our generation output does change with gas prices. However, our margins are not as sensitive to these changes. We are able to capture value from our flexible fleet regardless of where natural gas prices are in any given year. The nature of our modern, efficient and very flexible combined-cycle fleet captures that value over the long term.

The table on the right compares the operational data of 2 technologically similar merchant plants in different markets during the first quarter of 2013. You can see by the capacity factor and starts statistics that our Hermiston plant in Oregon ran baseload for the first quarter, with a capacity factor of 91% and a very reliable 0% forced outage factor. Meanwhile, with gas on the margin, our Freestone plant in Texas was cycled fairly frequently. In fact, Freestone represented a daily option, capturing the on-peak spread while shutting at night and most weekends. Freestone's capacity factor was only 48%, but its reliability was an impressive 0% forced outage factor. Our combined cycle power plants are designed, retrofitted and capable of operating competitively, reliably and effectively under both market scenarios and it is the flexibility of the technology that makes it the ideal solution as new generation is needed for a variety of purposes in different markets across America.

Now let me turn the call over to Thad Hill for his review of our markets and operations.

John B. Hill

Thank you, Jack, and good morning to all of you in the call. As Jack said, given the recent Investor Day in Houston and the disclosures made at that time, I'll keep my comments short and primarily focused on the first quarter. Before beginning, I would note that although our hedge position has not changed that much since our Investor Day, and so I won't dwell on that today, we have provided our standard updated hedge disclosure in the Appendix.

Operationally, the first quarter was strong but with some notable shifts in market dynamics versus the first quarter of 2012. As can be seen on this slide, the focus and effort to create a safe workplace for our employees has continued. We continue to perform well by any relative measure. And on availability, we turned in a 1.5% forced outage factor in the first quarter, well below our goal of 2.5%.

At our Investor Day, John Adams and his team described for you in some detail our operational philosophy and practices that drive such strong results. At the lower right of the page is the honor roll of plants with exemplary safety and availability performance for the first quarter. We will endeavor to maintain this strong track record.

Perhaps more interesting is the production data from the quarter in the upper right of the slide. As you can see, production in California and at the Geysers continues to be strong year-over-year. However, in Texas, the Southeast and the North, with gas prices in the first quarter 2013 just over $1 higher than the first quarter of 2012, production is down a bit. Despite a winter, it was somewhat colder than 2012, higher gas prices mean generally less run time for our units as you just heard Jack described.

On the next slide, this dynamic is export from a regional perspective. In the upper left are the on-peak spark spreads for Texas, the mid-Atlantic and California for the first quarter of 2013 versus the first quarter of 2012. As you can see in the East in and in Texas, the spark spreads were modestly lower. Zamir will describe for you the year-over-year drivers of change in regional adjusted EBITDA, as well as make the point that the outlook for the balance of the year is strong. But at a high level, our first quarter adjusted EBITDA was approximately $40 million lower than last year. Very simply, about half of which was driven by the plant sales that occurred in the end of last year and the other half, which was driven by a broad set of puts and takes, including the lower sparks in 2013 versus 2012.

That said, as you can see in the upper right, summer 2013 sparks have moved up across our key regions, in part due to the higher gas prices. Gas versus coal economics are not relevant in the summer and in part to improving power fundamentals. There are 2 final points in the first quarter that are worth making. First, despite the lower year-over-year sparks in Texas, the fundamentals continue to improve. As you can see in the lower left, on-peak load grew at 3% and maybe even more interestingly, off-peak load grew at 4%, which potentially signals a strong growth in industrial production here in the Gulf Coast.

Secondly, in California, AB 32 in the greenhouse gas cap and trade program which is in full swing is behaving as expected. The cost of carbon is fully reflected in the power price and this is benefiting us.

On our combined-cycle fleet, since we're more efficient in the average price setting gas unit, we're picking up some incremental margin on what we call the queen spark spread or the power price less gas cost less CO2 cost demonstrated in the lower right. And on our geothermal plants, we're receiving an absolute higher power price since those plants were exempt from the cap and trade requirements.

On the next slide are a set of items that can fundamentally impact our outlook, some for 2013 and some more long term. What is noteworthy about this list is that much, if not all, of this will come into more clarity over the next several months. It will be a fascinating time.

Over the balance of this year, we look towards more resolution around market design and structure issues in Texas and PJM and, we hope, California. We continue to push efforts forward in the Southeast with our utility customer base there. How these issues are resolved will fundamentally impact the way we compete over the next several years.

In the nearer term, recognizing the seasonal nature of our business, we eagerly anticipate what the summer 2013 has in store. With an ongoing drought in Texas, the low hydro conditions and nuclear outage in California, and in the East Coast where on hot days, oil fired units and perhaps no demand response set the price, there is some potential for much volatility.

With that, I'll turn it over to Zamir.

Zamir Rauf

Thank you, Thad, and good morning, everyone. As Jack mentioned earlier, we are reaffirming our full year guidance, having achieved first quarter results that were in line with our expectations. We'll review the details of these results in just a moment, but let's first take a look at the chart on the top left of this slide, which shows the main drivers for the remainder of the year.

Our first quarter 2013 adjusted EBITDA of $286 million was down $39 million compared to the first quarter of 2012, while our full year guidance represents an increase of approximately $50 million to $210 million compared to last year.

Over the balance of this year, there are several known factors that are driving this favorable year-over-year variance. First, PJM regulatory capacity payments are meaningfully higher this year and represent an uplift of approximately $90 million over the balance of this year compared to the same period in 2012. In addition, you will recall that we sold 2 of our noncore contracted plants, Broad River and Riverside, late last year, acquired Bosque, a merchant plant in Texas, and are on schedule to bring Russell City and Los Esteros, 2 new contracted plants in California online during the third quarter of this year. The expected net impact over the balance of the year for these portfolio changes is a favorable, approximately, $20 million.

Finally, we expect net changes in contracts to add an incremental $35 million of adjusted EBITDA over the balance of this year compared to the same period of last year, primarily in the West and Southeast. Beyond these known items, we remain open to market movements and year-over-year changes in the impact of our hedges. To put it in perspective, even if the market and our hedges were down by $55 million for the balance of this year compared to the same period last year, we could still meet the bottom end of our guidance range, whereas $105 million year-over-year improvement would put us at the top end of our range. You saw the chart on the bottom left of this slide at our recent Investor Day, which reiterates the point that the first quarter of 2013 is down compared to the prior year period, whereas the third quarter of 2013 is expected to be up. This is the result of the factors I just described, as well as differences in the shaping of our hedges.

Whereas the left-hand side of the slide addresses adjusted EBITDA, we remain focused on adjusted free cash flow per share. And we continue to look for opportunities to deliver on and exceed our targeted compound annual growth rate.

Along these lines, last week, we launched the process to refinance our $1 billion 8% CCFC bond with a term loan. This transaction extends the CCFC maturity by 4 years and, more importantly, represents material expected annual interest savings, which will directly benefit adjusted free cash flow per share. We intend to fund the term loan and terminate the bonds in early June.

For the balance of 2013, we still have a few refinancing opportunities available, including our 2017 notes, which are callable in October, as well as the 10% call option on each of our corporate bonds. We will continue to take advantage of this low interest rate environment, and we'll continue to capture opportunities to lower our cost of capital and to increase adjusted free cash flow per share whenever possible.

Turning to the following slide, let's review the first quarter results in more detail. There are 2 key trends that we can observe across the regions. First, portfolio changes. In the fourth quarter of 2012, we sold Riverside in the North region and Broad River in the Southeast region, both of which were contracted. We also acquired Bosque in Texas, which is merchant. The plant sales created negative year-over-year variances in the north and southeast, while the acquisition was comparatively favorable in Texas.

The second trend we can observe is lower generation output. As you previously heard from Thad, in Texas, the North and Southeast, we experienced higher gas prices in the first quarter of 2013, which drove lower production compared to last year.

Aside from these broad trends, we benefited from new contracts in the West and Southeast, higher generation output and higher margins on our open positions in the West and modestly higher capacity payments in the North. Meanwhile, we remain very focused on controlling our cost, with recurring plant operating expense and SG&A slightly below last year's first quarter after taking the portfolio changes into account.

In sum, we are on track to achieve our full year guidance, the bottom end of which we recently raised. We continue to demonstrate the flexibility and resilience of our fleet, and we remain well positioned to benefit from the secular trends that are shaping today's power generation sector. Rest assure that this management team is committed to being good stewards of your investment in Calpine, driving long-term shareholder value through increased free cash flow per share.

With that, I thank you, again, for your time this morning. And we will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] From Morgan Stanley, we have Stephen Byrd on the line.

Stephen Byrd - Morgan Stanley, Research Division

I just wanted to go back to Texas, that you had laid out load growth in Texas. And we recently saw the updated CDR in Texas. Can you just talk a little bit about the -- as you see the dynamics on the regulatory front, is there a growing awareness of the fact that there is, in fact, load growth and increasing tightening? Obviously, you presented some data on load growth that's higher than some folks have been predicting. Just curious if some of this is altering the discussion landscape in the state.

John B. Hill

Sure, Stephen, And I'll start and then Thad Miller is here, too, and he may have some additional comments. Our view is that the regulators in Austin understand the dynamic that load is growing and that there is a supply crunch coming and there's a concern about it and a willingness to act on it. And we expect, after the legislative session ends, as we get into June, that we'll start to see kind of a reacceleration of the activity in Austin and I'll leave any other comments to Thad on that. As far as the dynamics themselves, the CDR did come out yesterday, and -- which is the updated supply and demand forecast, no raw material change for this summer. And a couple of the projects that were known got moved up in the CDR, but the reality of it is the market already knew that. 2014 sparks were down a little bit yesterday, but under $1, which actually shows the news from the CDR was full expected. And '15, '16, et cetera are in exactly the same state. Finally, we would point out that the CDR uses the low growth case from Moody's. And it certainly wasn't here in Texas. Anecdotally, where growth feels a lot better, than the low growth case. So with that, I'll turn it over to Thad Miller.

W. Thaddeus Miller

Sure. Just -- I think you had it exactly right, Thad. Just a little bit more color on it right now in the legislature. The Sunset Bill is under consideration and it has been that the House and Senate versions have been put into a conference. I think the conferees on the House set have been appointed. I think the Senate side either have been or about to be appointed. And so the objective is to reauthorize the PUC in a clean Sunset Bill and, therefore, as Thad said, the regulators and ERCOT I think are being prudent in cautiously lying low at the moment, and there's time to address these issues once the legislative session is over at the end of May.

Stephen Byrd - Morgan Stanley, Research Division

Great. And just as follow-up on a completely different subject. Just the Southeast and the amount of power produced there is a pretty substantial drop-off, a bit more than I, I guess, I would have thought. I'm just curious if you could just talk a little bit more about the drivers for the change in output in the Southeast.

John B. Hill

Sure. Well, first, we sold Broad River and -- which was several hundred thousand-megawatt hours. Stephen and I don't have the exact number for it. It was several hundred thousand. And then other than that, the higher gas price definitely had an impact. Some of our units last year were running overnight. And this year, they were not running all night, although they were still running some on peak. And so the combination of the asset sale and the higher gas prices and the lack of baseload operation there combined to have that impact.

Operator

From UBS, we have Julien Dumoulin-Smith on the line.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So focusing on California, again, here. I wanted to just dig down here for a second. Where do we stand on the CHP, the Combined Heat and Power, deals with Los Medanos and Gilroy?

Jack A. Fusco

Julien, I'm going to let Thad Miller answer that question for you.

W. Thaddeus Miller

Julien, as we previously put out there, the contracts were entered into with PG&E and SCE and submitted to the PUC for approval. The PUC was scheduled to first consider that a couple of weeks ago. They put it on hold and I'm sure that the PUC realizes the benefits to the ratepayers, in both PG&E and SCE service territories of these contracts. Obviously, it was awarded to us, I think, as low bidder. And what we are facing is, there was some opposition on the basis that perhaps some aspects of these contracts were not consistent with the CHP settlements. We think there's folks who definitely believe that they are very consistent and there are others who were still looking at it. And so we are awaiting what the PUC is going to do on that.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And how do you feel about recontracting some of the other assets out in California? I mean, obviously, sort of post stutters, some of the other assets without contracts are looking at opportunities even for your assets today as they roll off. Where is pricing trending broadly speaking? And where are the recontracting opportunities? Is there anything via, let's say, some of these flexible ramping opportunities?

W. Thaddeus Miller

Yes Julien, it's the other side. The several RFP processes that are out there right now, a couple in particular, in which our assets have opportunities to play into and we think those will be kind of ongoing as the utilities procure for their needs, particularly for -- and we've seen a mix as we disclosed in Analyst Day some of our assets received are A contracts. Other of our assets have received full-pulling contracts. And we expect that will continue on. There's general understanding that the flexible capacity is needed and even prior to any kind of market reform, there's an ongoing utility procurement process that we're actually participating in.

Operator

From Barclays, we have Gregg Orrill on line.

Gregg Orrill - Barclays Capital, Research Division

I was wondering if you could touch base a little bit on the Geysers and thoughts on expansion there. And what might hurdles be, if any?

Jack A. Fusco

Sure Julien. We -- as we've talked about, we have, what we believe, is a very good geothermal resource in the northern part of the Geysers that had not yet been developed. We have done drilling, we verified the resource and, in fact, we're actually taking some of the scheme from that part of the Geysers and moving it via pipeline to some of our existing power plants. However, we do think there's an opportunity to develop that there, but given that California market structure, we can't develop without a long-term contract. Because of the Stimulus Act and the beneficial solar IT themes that were not extended to geothermal or other types of wind, there's a little bit of a disconnect between the subsidies that solar receives versus the geothermal mine. But we are working at contracting opportunities but we will not, unless there's a contract, will not develop. But it's still active.

Operator

From Wolfe Research, we have Steven Fleishman on line.

Steven I. Fleishman - Wolfe Research, LLC

Just one quick question on -- there's a -- in the quarter you mentioned a positive from a reversal of retroactive regulatory fees. Could you -- what was the size of that? And what is that?

Jack A. Fusco

Go ahead, Zamir.

Zamir Rauf

Yes. Those were regulatory fees. They are approximately $10 million. It was what we call Section 185 fees that we've been accruing, expecting to have a liability but then the laws worked in our favor or rather the ruling was in our favor, and so we didn't need to have that reserve anymore.

Steven I. Fleishman - Wolfe Research, LLC

Okay, great. That's pretty small.

Jack A. Fusco

Yes, it's a small number. And these were for NOx emissions and nonattainment areas. And there's a ruling out there, but we don't think that we'll be subject to payment requirement for any payment in the past, while we're maybe subject to something going forward.

Steven I. Fleishman - Wolfe Research, LLC

Okay. And one other question. Just, I think, subsequent to your Analyst Day, we had this FERC ruling regarding treatment of DR and the upcoming RPM auction. It looks like they're not going to make changes that we'd hoped for this auction. Does that change your views much on the outcome of this upcoming auction? Just maybe some color on that.

Jack A. Fusco

Well, certainly, Steve I'd like say 2 things on that. First, yes, on the margin, it certainly could put a little more pressure on the auction that we're expecting from DR. And secondly, it also is our view taking the longer-term view and I'll come back to the auction -- this auction. Obviously, we think PJM believes that those rules are appropriate and FERC's issues were procedural rather than content wise, so we think we'll be back for the next auction. At least we're hopeful. As far as this auction goes, DR penetration actually peaked and was back off a little bit in the last auction in the east. And while there could be some modest changes there, I don't think we'll see a lot more room for DR penetration in the east, at least, the material. There is still some room on the west. And so we'll see how things plays out on that.

Operator

From Deutsche Bank, we have Keith Stanley.

Keith Stanley - Deutsche Bank AG, Research Division

On Slide 9, you have continued progress on contracts in the Southeast shown as a 2014 and beyond bucket. Does this imply we shouldn't expect much activity on this front over the balance of 2013? And it's more of a medium-term objective?

Jack A. Fusco

No, I hope not. What this slide is intending to display is that any financial benefit from contracts are likely to be not occurring this calendar year, given the fact that our customers in that part of the world forward procure, with a lot of forward planning. So I'm hopeful in 2013, there is some progress to report, but the financial impact of the progress wouldn't be until later years.

Keith Stanley - Deutsche Bank AG, Research Division

Got it. And one quick follow-up. The Texas demand in Q1. Do you have any view on whether normalized demand because it's actually a little surprising to me that demand was an up a little more than 3% to 4%, just given the very favorable weather change year-over-year with the mild winter a year ago?

Jack A. Fusco

Yes. But remember, the -- the winter in Texas was not nearly as extreme as -- relative to last year as the East Coast. January was a little colder. February in Texas is actually warmer year-over-year. And while March was colder, it was also winter in the quarter. So if you listed January and February, which is most of the winter weather down here, it was pretty flat, with March being a little colder. So while weather normalization problem would moderate these numbers down a bit, the disparity in winter isn't the same here as it occurred on the East Coast.

Operator

From Macquarie, we have Angie Storozynski.

Angie Storozynski - Macquarie Research

Can I ask a question about Slide 5? So you're showing us the projected volumes for 2013, and they seemed really low. I mean, we're below, like roughly about, what, 97 million-megawatt hours, which is, obviously, a massive reduction versus 2012 probably more than I would have expected. Now how should we think about it going forward? I know that you're not giving us any volumetric guidance. But given additions of your -- of the, well, 12-month contribution from Russell City and Los Esteros and the additional funds that are coming online, are we still going to be roughly in 100 to million megawatt hour environment based on the forward curve?

Jack A. Fusco

The forward curve, Angie, is flat. I mean, it's actually remarkable that the balance in year '13 is almost equal to what the current '14 curve, which is almost equal to what the '15 year curve is. So absent any ongoing load growth, so if you normalize 4-year kind of supply-demand in the power business. And if '15 will start to have coal plant retirements which changes things, but you wipe all that away, yes. In this gas price environment, things will be flattish.

John B. Hill

So you would get a full year of Russell City and Los Esteros versus a partial year in '13, full year for '14. You would get the addition of the 2 Texas plants would come online for the summer, which is where they're going to produce most of their generation. So yes, you'd have to add -- you may be able to curve fit with this line, and where we've got is, you will then have to add back load growth projects.

Angie Storozynski - Macquarie Research

Yes. I tried to do that, but maybe we can fill it up online -- offline, but it just still seems just above 100 million-megawatt hours. Now following on previous questions about what's happening in Texas, it seems like the legislature is trying to come up with some proposed bills that are vaguely or remotely related to DR. We have another one now, which for now reads as an energy efficiency bill, but we're -- it's our understanding that DR is the ultimate goal. I mean, what's your take how likely is it that we would actually end this legislative session with some legislation on demand response, backstops, something that was actually debated earlier this year, well, last year actually? Demand responded to backstop.

W. Thaddeus Miller

Angie, it's Thad Miller. Obviously, this is a day-by-day dynamic at the state legislature. And as I mentioned or alluded to before, the sunset bill, a clean sunset bill, I think, is the first priority. But I think we haven't seen overwhelming support that -- for any of the bills that you mentioned. So we think it's an uphill push for those bills to get through. But as I said, this is dynamic and that could change.

Operator

From SunTrust, we have Ali Agha on line.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

One other question on the Texas CDR board. So I think that, you alluded to this as well, they are now showing a stronger reserve margin for '14, with some new capacity coming in, actually above the -- on the minimum threshold. And, obviously, still comes down beyond that. But I'm just wondering from a practical point of view, we've seen them sort of kick the can down the road for '13, given then '12 wasn't so bad of a year. Are you concerned that they look at these numbers and, say, "Okay. Hey, no urgency. Let's think about this maybe even later than '14." I mean, do you think that the margin continues to cause them to move on a snail pace on this?

Jack A. Fusco

No, I don't think so. I mean, I think that people realize that this is going to have to be taken into account. I think the slowdown you've seen has generally been a response to the current political environment, which is, let's get through the legislative sessions or other political priorities. And then deal with this since there's no legislation required to deal with this, unlike some of the other issues that are being faced here in Texas with growth. So I think you'll see robust engagement this summer regardless of the weather this summer.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then secondly, in the past, you had said if you look at the latest forward curves as they stand right now for '13, does that still imply that it would put you somewhere in the sort of the lower half of your guidance range for the year? Is that still a fair way to think about it?

Jack A. Fusco

I think the best way to think about it is-- the guidance range is the guidance range. Curves move every day. So I would just let the guidance range speak for itself.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. But, I mean, I think we've talked on this before. The curves haven't moved that much for '13, right, I mean, versus where you've had these discussions with us before? Is that fair?

Jack A. Fusco

The overall annual curve hadn't moved that much. There's been some shape. For example, in Texas, the shoulders have softened and the summer is strengthened. So there will be some shape moves. And so you're right. Generally, overall, the curves haven't moved that much, but we're just going to let the guidance range speak for itself right now.

Operator

From Tudor, Pickering, Holt, we have Neel Mitra on line.

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

A question on California. As we go into the summer and there are some issues with the nuke outage and less hydro, what implications does this have for maybe some shorter-term bilateral capacity payments? And then over the longer term, is there any sort of sentiment change with the regulators or the regulated utilities in California to either create a capacity market or bridge the gap between existing generation and new generation?

Jack A. Fusco

Well, I'll answer the first part of the question then I'll let Thad Miller maybe answer the second part. Obviously, we don't know whether San Onofre is going to be off this summer or not. And, I guess, we'll find out in June whether it will be restarting or not. And so, obviously, the plant being off makes things tighter and it's on -- it makes things less tight. What I will say is I think that the utilities in California are planning forthrightly for the contingency. And so I think either way, there'll be low aid plans in place. And certainly, we've seen the summers move up. And so there's been some benefit in the fourth so we'll just have to see as the summer plays out. Thad, you want to...

W. Thaddeus Miller

Yes. I think as we talked about at Analyst Day, the CAISO obviously wants to move forward on some of the market reform issues that the PUC obviously is struggling with the FERC jurisdictional issue, but recognizes that they need to do something. And as to your specific question on the IOUs, we think they've been constructive in this conversation all along. Obviously, there's always the tension in terms of their own procurement between us and them. But that said, we think that they are supportive of some market reform and exactly how that shapes up, and the discussion is yet to be determined.

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Great. And a second question on Texas. We know demand is strong and a lot of that is from migration into the state. How is underlying customer usage kind of shaping up? And looking at your industrial and steam customers, what are some of the trends you're seeing there?

Jack A. Fusco

No, a good question and, obviously, other people will have better data than we have on kind of per household or per meter type usage. Our steam load is held constant, but that is over the last year. But I think that's fine after recovery obviously from the recession. Because of our steam customers typically are generally utilizing most of their capacity. What is more interesting besides migration into the state is that there are a lot of new industrial projects that are being considered right now. We're in conversations with various customers. There are others that have been announced around expansion or production capacity or even brand new production facilities. So Neel, I would say, from our steam load, we're flat-ish but that's because the capacity was already being utilized and there is a lot of discussion about new industrial capacity that will take a lot of new power and new steam. And it looks like a lot of projects are going to be moving forward.

Operator

From Jefferies, we have Paul Fremont on line.

Paul B. Fremont - Jefferies & Company, Inc., Research Division

I guess, I'm hoping to get a little bit of clarification on Slide 16, which is the guidance for premium or discount. You're talking generally about flat gas prices and flat volumes based on the current sort of outlook for gas. So any volume increases that your fleet is going to experience? As you pointed out earlier, it would likely come from new generation. And those changes could easily move you into different sort of premium discount buckets without any change in market conditions. So does this -- I mean, should we be counting that incremental generation towards these volume numbers, even though there seems to be sort of no market-driven change that's taking place?

Jack A. Fusco

Yes, no, I think that's a fair point. As we add capacity on -- without other changes in gas price volumes or supply-demand characteristics, we would expect those new assets to have the same peakiness characteristics as our existing fleet, Paul. As we roll forward in time and we add capacity in megawatt-hours, that, by itself, shouldn't drive the expected premium down. This chart is intended -- and we'll make sure we follow up as well. This chart is intended that in a lower gas price environment like we had last year, as volume expands, we actually run more off peak. And so there's a deduct in the premium. But your writing more capacity with some more profiles or through the degree that fundamentals actually improve. And, therefore, we're running on megawatt-hours like fundamentals on the power supply-demand not gas price shifts. This chart would apply less. And so we'll get back to you and we'll also make sure that we are more crisp on that.

Operator

From ISI Group, we have Jon Cohen on line.

Jonathan Cohen - ISI Group Inc., Research Division

I just had a quick question. I was reading through your news release and there was something that caught my eye on, the funding of Garrison Phase 1, where you talked about the options won over project or nonrecourse financing. I was wondering if you could just give us an update on where you see the project financing environment now for uncontracted assets. And the reason for the question is really just because there's a handful of private developers in PJM that are contemplating bidding into this auction. And I was wondering what kind of terms they may be seeing?

Zamir Rauf

Yes, and this is Zamir. I don't think there's much of a market for merchant project financing at this point. I mean, if you've got a long-term contract, obviously, there's a market out there. But for merchant plants, it's really difficult to get any sort of good financing. I mean, you've seen a few plants being financed in different markets. And I think you've got to give away a lot to maybe get 50% off of the debt. So for us, it's a very different story, of course, because we're financed at the corporate level and then we have many opportunities. So for somebody like us funding Garrison, either you with cash or your raise money somewhere else. But I think for a private developer who doesn't have a contract, it's really going to be tough.

Jack A. Fusco

Or a strong balance sheet.

Zamir Rauf

Exactly.

Operator

I will now turn it back over to Mr. Bryan Kimzey for any final remarks.

W. Bryan Kimzey

Thanks to everyone for participating in our call today. For those of you that joined late, an archive recording of the call will be made available for a limited time on our website. If you have any further questions, please don't hesitate to call us in Investor Relations. Thanks, again, for your interest in Calpine.

Operator

And this concludes today's conference. Thank you for joining. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Calpine Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts