Calpine Management Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Calpine Corporation (CPN)

Calpine (NYSE:CPN)

Q1 2014 Earnings Call

May 01, 2014 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

Analysts

Stephen Byrd - Morgan Stanley, Research Division

Neil Mehta - Goldman Sachs Group Inc., Research Division

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

Paul B. Fremont - Jefferies LLC, Research Division

Andrew Bischof - Morningstar Inc., Research Division

Steven I. Fleishman - Wolfe Research, LLC

Gregg Orrill - Barclays Capital, Research Division

Jonathan Cohen - ISI Group Inc., Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

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

Operator

Good morning, and welcome to the first quarter earnings call. My name is Brandon, and I'll be your operator for today. [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 2014 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 will 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. In addition, 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, Bryan, and good morning, everyone. Thank you all for joining us and for your continued interest in Calpine. There is no more fitting start to my final earnings call than to highlight Calpine's best first quarter ever. In 2014, we've hit the ground running on all cylinders: financially, operationally and strategically. Today, we are reporting first quarter 2014 adjusted EBITDA of $446 million, a 56% increase over last year's first quarter in a record high. These financial results reflect the tireless contributions of the professionals at all of our plants in our commercial desks in Houston, whose coordinated efforts more than met the challenges presented by extreme winter weather.

As I mentioned on our last earnings call, our versatile combined-cycle and dual-fuel fleet provided essential, reliable power to the grid this winter during times of scarcity and price volatility. Calpine's modern, clean and flexible fleet is unmatched in the industry.

Beyond our operations and commercial achievement this year, we've also created tremendous shareholder value through effective allocation of capital. Most notable, 2 weeks ago we announced the transformational divestiture, under which we will sell 3.5 gigawatts of assets in our Southeast segment to LS Power for $1.57 billion. The transaction represents meaningful progress towards the achievement of one of our key strategic priorities, monetizing the value of our Southeast portfolio. Once closed, this sale will further enhance our already robust excess cash, leaving us more than $2.2 billion to deploy. As you've heard me say, and as we have demonstrated in the past, we don't hoard cash. We put our capital to work. I've asked Zamir to speak further about capital allocation considerations later in this call.

Despite the mid-year divestiture of 12% of our installed capacity, I am pleased to announce that we are reaffirming our current full year guidance. We continued to project 2014 adjusted EBITDA of $1.9 billion to $2 billion, and adjusted free cash flow of $785 million to $885 million, even after the completion of the plant sale.

Turning to the following slides. Let me briefly review the transaction including key terms. First, to set the appropriate context, we have long considered the Southeast to be a non-core region. It is not a competitive wholesale power market but rather a collection of individual, utility-dominated service territories. This dynamic has presented us with a challenge of having limited scale and less limited influence in the marketplace. As such, our priority for these assets in the region has been to monetize our value through contracts and/or asset sales. Along those lines, we have agreed to sell 6 of our combined-cycle power plants in the Southeast. The Six Pack of assets being sold includes: Oneta Energy Center in Oklahoma; Carville in Louisiana; Decatur and Hog Bayou in Alabama; Santa Rosa in Florida; and Columbia in South Carolina. I'd like to extend my heartfelt appreciation to the men and women at those plants for their contributions towards making Calpine, the premier operating company in this sector. Their dedication of professionalism has benefited us as an organization, and I wish them continued success as they move into a new phase of ownership.

With respect to the assets being sold, over the past 5 years, operations, maintenance and the origination teams have worked to increase the value those assets by improving operating results, lowering maintenance costs and securing several contracts. The results of those efforts have largely driven our ability to exit these positions at very attractive terms. I'll touch more on that in just a moment.

Meanwhile, subject to the receipt of the required approvals and consents, we expect the transaction to close in the second quarter of this year. Upon close, we will retain 1.7 gigawatts of capacity in the Southeast, comprised of natural gas-fired power plants located in Arkansas, Alabama and 2 in Florida. Our priority for these assets remains unchanged. We will continue to pursue opportunities to monetize the value of these assets through excellence in operations and contracting or sell.

Before leaving the slide, it's also worth noting that in February, as we began negotiating the sell in earnest, we temporarily suspended our share repurchase program given the materiality of the contemplated transaction. As such, you will note that we have not repurchased much stocks since our last earnings call. With the announcement of the transaction, in our first quarter results now behind us, we can resume the opportunistic execution of our share repurchase program at our discretion.

The following slide highlights the significant shareholder value that has been unlocked from this historically underappreciated assets as a result of this transaction. The metrics are compelling to say the least. In terms of benefits, this divestiture secures for our investors today, the value of future potential cash flows associated with those assets, and frees up that capital for redeployment into higher return in opportunities in our core markets, either directly through discreet growth investments or indirectly through repurchases of our own stock. We intend to redeploy the sale proceeds in a balanced and opportunistic manner that is accretive to adjusted free cash flow per share, the financial metric by which we measure our business.

In addition, this sale accelerates the use of some of our substantial NOL position, which should almost entirely shield federal and state taxable gains expected from the sale. You may recall that at our 2013 Investor Day, we disclosed that our Southeast assets had an average tax basis of approximately $200 a kW, with the sell price for these 6 assets of approximately $450 a kW, you can see the meaningful value that we will preserve as a result of our NOLs.

The sell price of $450 a kW also raises an interesting point on valuation. As illustrated by the chart in the upper right, Wall Street's typical valuation approach for our entire Southeast portfolio has been to apply a multiple of roughly 9x unarguably depressed EBITDA implying a value of less than $200 a kW for the fleet. With the announced sell of only 6 of our assets at $1.57 billion, not only have we unlocked value for these assets that was previously not reflected in our stock price. There's incremental value in the 4 Southeast assets that we have retained, suggesting an even wider valuation gap. This valuation gap illustrates the shortcomings of EBITDA multiple valuations, which may not fully capture underlying free cash flows, net asset values or potential upside.

The comps, as shown on the bottom of the slide, speak for themselves. On an adjusted EBITDA basis, this transaction outperforms not only Calpine's current implied adjusted EBITDA multiple, but also the expected multiple on which companies are dropping the assets in the YieldCos, without all the headaches of financial engineering.

On an adjusted free cash flow basis, we've updated our chart from the last quarter that compares our free cash flow multiple to those of income-oriented investments including MLPs and REITs, adding in the impressive multiples from this transaction. In summary, the Six Pack divestitures has created tremendous value for our shareholders and demonstrates our commitment to achieving superior returns on their behalf.

In conclusion, the next slide demonstrates the track record for enhancing shareholder value that this management team has worked hard to establish over the past 6 years. When we first joined Calpine, nearly a quarter of the company's footprint was investing in the under-earning, uncompetitive Southeast market. Yet there was virtually no presence in the nation's best functioning competitive market, PJM. Over time, we have repositioned the company's investments into our 3 core regions, transforming the business to provide the best exposure to markets, where our flexible, efficient fleet is strategically advantaged. As part of this transformation, we have redeployed capital through a number of accretive M&A transactions.

In general, we have sold non-core assets at approximately 13x EBITDA, and we have redeployed much of that capital to acquisitions at just over 6x EBITDA, creating significant value along the way. Note, that on an adjusted cash flow basis, the multiples have been even more attractive.

Our transformative efforts over the past 6 years have been focusing on growing adjusted free cash flow per share. I believe that we have uniquely positioned Calpine to continue delivering adjusted free cash flow per share growth, as we navigate the ongoing secular shift in the U.S. power generation sector.

With that, let me take a moment to once again thank all of you for your support of Calpine. As I transition into the coming weeks to the role of Executive Chairman, my passion for Calpine and its role in the power generation sector of tomorrow is unwavering. And while I remain actively engaged in the business, now in a more strategic role, I am confident I'm handing over the helm to the right person to lead the charge into the future. Thad, congratulations on the role and best wishes as we officially complete the CEO succession.

John B. Hill

Thanks, Jack, and good morning to all of you on the call. I'm very excited for the opportunity to lead Calpine. We have a fantastic team, a great set of assets. And as we'll discuss, I believe the next several years will be very exciting for us, given the combination of improving working conditions in Calpine growth potential.

I am very grateful to Jack for all that he has done for Calpine and for me personally. When we arrived to Calpine in the summer of 2008, we found a company with a great set of assets and really good technical capability with the good deal of work to be done in terms of functioning as an operating business and addressing some obvious holes in the regional positioning, most notable PJM. After almost 6 years of Jack's guidance and leadership, Calpine today is the premier power generation operating company. We have repositioned our portfolio to focus on the most competitive wholesale power markets. We have ordered a cost structure, vastly improved our operations and focused the entire Calpine team in running the businesses as if it they were their own. Jack has been a great mentor and friend. He's the most talented executive with whom I've ever worked. And as Executive Chairman, he will continue those roles as he works closely with us on matters of strategy and capital allocation. I am thankful for all he has done and all that he will continue to do for Calpine.

Through both the sale of the Southeast assets and the leadership transition, we will remain focused on our core mission at Calpine. Our strategy and approach will remain consistent. We will operate our plans effectively and safely and with full adherence to our core values. We will run our business as a cash business, focus first and foremost in the returns to our equity shareholders all being prudent with the balance sheet. We will continue our efforts to deploy growth capital but believe that the company provides sufficient cash flow over time to both fund the growth and also have an ongoing program of returning capital to shareholders.

We recognize, as we did with the Southeast, that sometimes, others value our assets more than we do, and when that happens, we'll monetize. And finally, we will continue our advocacy for both environmental responsibility and for competitive wholesale power markets.

Regionally, our strategic approach is appropriately defined by the local regulatory and supply-demand situations. This is a time of great change in our industry. There are significant transitions occurring in the West and the East, in which we will seek opportunity. In the West, it is a transition to a heavy renewable environment at the same time that the fossil fuel reserve margin is shrinking despite the renewable intermittency.

In the East, we're at the beginning of an historic transition from older, less flexible and dirtier, coal-dominated generation system to one renewer, cleaner and more flexible gas units, and demand response will provide a needed resources.

In Texas, the story is less about the transition and more about how our region of the country that is experiencing great economic expansion will or won't and set new investment in generation. In all 3 of these areas, there's a great opportunity for both our existing fleet as well as the deployment of new capital. Many of our key efforts were listed on this slide.

Turning now to the operational review of the first quarter. As a safety culture, we continue to make great strides. Our safety team has re-energized our employee-led efforts at Calpine and as the data shows on the upper left, with good results. Operationally, we turned in another good quarter, but there are a couple of areas that deserve further commentary when looking at the statistics in the lower left. First, late last year, brush fire stirred by extremely high winds to the geysers damaged the cooling towers at 2 of our units. This resulted in a forced outage factor you see listed and contributed to the modestly lower year-over-year production you see in the upper right. We are happy to report that the damaged cooling towers have been rebuilt and we will be back in full operation in the next several days.

Second, the extreme weather events this winter, specifically in our North Region, impacted these metrics. Although we were not perfect, our operations team did a fantastic job in a very difficult circumstances. Our team worked very long hours in harsh outside temperatures, keeping our units running, all 42 old trucks and generally being creative in unprecedent and weather conditions. I would describe their efforts as simply heroic.

The results are that PJM maintained a reliable grid, even with the record amount of cold weather-related outages experienced most acutely in January 7. There has been much written and said about the event, but at its core, the issue was that more than 22% or 40,000 megawatts at PJM's generation fleet was forced off-line when load was at a record-breaking high.

More than 3/4 of these forced outages were associated with equipment breakdowns, startup failures and other problems related to operating in extremely cold temperatures. It is a little-known fact, more coal plants failed in this matter than gas plants. Despite much misinformed dialogue, the January events were not a fuel supply problem. First and foremost, there were winter preparedness problem.

In the lower right, you can see a couple of the key drivers of economic performance. The dual-fuel capability of our PJM New York fleet was tremendously helpful in those days when gas prices were extremely high. As the regulators conduct postmortem to the winter events and think through go-forward implications, we suspect this dual-fuel capability will even be more of an advantage for our fleet.

Additionally, the location of our plants in the load centers in the East will mean [indiscernible] allocation price advantage. Again, our power and commercial operations team did a great job keeping our plants operating and fueled. We were thankful for all of their efforts.

I'd also like to echo Jack's remarks about our employees in the Southeast. We have worked together for nearly 6 years and I'm deeply thankful for all of your professionalism and commitment to safe and reliable operations. I know that as a team, you will continue to be very successful.

The next slide is a variation on our standard quarterly hedged disclosures given the announced Southeast asset divestiture. The blue bar show what we disclosed for each period on our previous earnings call based upon our current fleet. The yellow bars reflect where we are today. The green bar takes the yellow bar one step further and adjusts for the impact in the announced transaction assuming the June 1 closing. We've included the full version of our standard slide including impacts from the announced transactions in the appendix materials.

We've packed a lot of information on the slide. So let me draw your attention to the key takeaways in the top right. First, we have added incremental hedges in 2014 and some in 2015, selling into the recent run-up, we've seen the spark spreads since the beginning of the year. As you can see from the chart in the top left, we're in a highly hedged for the balance of this year, but remain very open for 2015 and '16.

Second, as more of a technical point, you'll see that our hedge margin in 2015 and '16 has declined since our last disclosure. This is not the result of our announced divestiture, but instead it's primarily driven by higher [indiscernible] spark spreads which increased the projected generation volumes from our coal plants. Therefore they decreased the effect of hedged margin per megawatt hour. This is not necessarily a bad thing. Keep in mind that at the same time, we're substantially open positions in both years benefit from the spark spread expansion.

In sum, the Southeast gas asset sales does not materially impact our hedge profile. We continue to dynamically manage our open positions in 2015 to '16 to capture value for market fundamentals that we feel are working to advantage of flexible fleet like ours.

Wrapping up, I want to emphasize why we're so excited about our prospects at this time. Starting in 2008, much volatility left the U.S. power and gas markets. The shale revolution dramatically increased the supply and lowered the price of natural gas. The recession literally crushed power demand and the recovery since has been sluggish at best for much of the country. With the lower and less volatile fuel prices and little [indiscernible] the last several years, with the exception of maybe Texas in the summer of 2011, have been less than thrilling from a power producers perspective. This one, of course, we've seen increased volatility and a significant rise in forward pricing in some markets. We believe this is not an anomaly, but rather an indication that we're in the verge of a fundamental wholesale power market recovery. Yes, much of the recent volatility has been weather-related. That said, all of our core markets are becoming structurally more volatile, as you can see on the slide. What's more, as we think to the next several years, there's not one real argument that can be made with these markets will be less so. We will do all we can to position Calpine to take advantage of these dynamics. Never have we been more excited of what the future holds for us.

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

Zamir Rauf

Thank you, Thad, and good morning, everyone. As you already heard this morning, the year is off to a strong start with record first quarter financial performance. In looking at the key year-over-year drivers, you can see that regulatory capacity revenue increased due to higher capacity payments in PJM during the first half of this year. Changes in the portfolio also contributed to the positive variance with the addition of Russell City and Los Esteros during the third quarter of 2013, along with the acquisition of Guadalupe this February.

Lastly, and as you will see in more detail in the next slide, cooler-than-normal weather in most of our regions created strong market conditions that benefited our flexible and reliable fleet. After taking into account our first quarter performance, strong market conditions, substantial hedge position for the remainder of the year and divestiture of 6 assets, we are reaffirming our 2014 adjusted EBITDA, adjusted free cash flow and adjusted free cash flow per share guidance.

The chart on the right provides an updated grid for 2014 adjusted EBITDA to reflect these and other drivers. Over the balance of this year, we will continue to benefit from our growth projects with 2014 reflecting a full year of operations at Russell City and Los Esteros, and a half year of operations from our Deer Park, in channel expansions. Meanwhile, this increase will be partially offset by the sale of the Southeast Six Pack, lower regulatory capacity payments in PJM in the second half of this year, and contract expirations primarily in our West Region.

Finally, we expect to benefit from improved market conditions, much of which we have already hedged, as Thad detailed earlier.

Turning to the following slide. Let's take a closer look at the first quarter results from a regional level. Overall, there were 3 material drivers of our strong performance. First, and as mentioned earlier, we benefited from portfolio changes, which included the addition of Russell City and Los Esteros in the West, and Guadalupe in Texas. Second, regulatory capacity payments in the North Region increased year-over-year due to higher auction prices in PJM during the first half of this year. Lastly, we benefited from higher market spark spreads across all our regions. In the West, spark spreads were higher due to warmer weather and continuing drought conditions. Meanwhile, energy had earlier, the North, Southeast and Texas regions benefited from extreme winter weather. Most notably, our versatile, dual-fuel fleet in the North Region was able to react to these volatile market conditions and capture significant value while providing stability when the grid needed it most. As a result, adjusted EBITDA doubled in 3 of our 4 regions, quite an achievement.

In sum, the challenges and opportunities the first quarter presented highlight the benefits and market advantage of Calpine's fleet in today's markets. Before leaving this slide, let me just mention that once the sale of our 6 plants closes, we will consolidate the remaining 4 Southeast plants into our North Region and we will be calling it the East region. As such, we will have 3 regions, the West, Texas and our new East region.

Wrapping up on the following slide, you heard Jack mentioned at the beginning of the call that the Southeast asset divestiture will significantly increase our excess cash position. The chart on the left provide some more detailed look at our excess cash projections after incorporating the sale. Despite funding growth projects, that amortization's and only including the year-to-date share repurchases, we are projecting our excess cash to be well over $2 billion at the end of the year. The divestitures presents a great opportunity to free up capital from the non-core, undervalued market and we allocated to drive the metric that matters most, adjusted free cash flow per share.

With more than $775 million of cash already committed to investments this year, 2014 provides a great example of how we think about discipline and balance capital allocation. We have and will continue to put our capital, including the proceeds from the sale to work in ways that provide the best return for our shareholders and maximize adjusted free cash flow per share growth.

With a robust pipeline of organic growth opportunities, nearly $500 million of high interest rate debt callable at year end and approximately $755 million remaining under the current share repurchase program, we are very well-positioned to continue delivering meaningful shareholder value. As we've said before, we believe we have the right fleet in the right place at the right time. The need for flexible and reliable natural gas generation positions Calpine like no other, and we stand ready to benefit as the secular ships continued to materialize.

With that, I would like to thank you once again for your time this morning. Operator, please open the lines for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And from Morgan Stanley, we have Stephen Byrd online.

Stephen Byrd - Morgan Stanley, Research Division

You got a lot to be proud of Jack and Thad. I wanted to -- I know you just did a very large asset sale, but I have to look to the future, and I wanted to just see if you could talk about additional assets that would be good candidates? The contracted California assets as an example. Could you talk through if there are any impediments that you see here? Anything that would sort of technically or structurally hold you back from being able to sell assets that you own that have long-term contracts?

John B. Hill

No, Stephen, there's nothing. There's no impediment to selling any of our assets, on -- any individual assets. The -- as I've said in my remarks, that we will continue -- if somebody values an asset more than we do to monetize it. We also need to look at the role of the overall portfolio when you look at particular assets. A great example of that is Mankato, a couple of years ago. We had an opportunity to perhaps to sell it, but we're pursuing an expansion play right now. We thought it made a lot more sense for us to develop the expansion play versus let it go at that time. So we're not going to get -- talk about specific assets looking forward, we just will do the right thing when the opportunity presents itself.

Jack A. Fusco

Then, Stephen, I've to tell you, I'm really proud of the team. I mean, we spent a enormous amount of time on Calpine overall, but the basic blocking and tackling, we really tightened up the operations to where I feel that operating and maintenance groups are humming and working very well together, and it shows on our forced outage rate. The origination teams have been out there putting contracts on these assets. And as you saw with the Southeast divestiture, we're finding buyers that really value what we've been able to do with these assets both from the origination and the operations and maintenance, and we're getting paid for that. So I think you should expect us to continue to implement our playbook, which I think we have been relatively successful with.

Stephen Byrd - Morgan Stanley, Research Division

And then, just as we think about that large amount of cash that's going to be on your balance sheet which you laid out on Slide 16, it's certainly high-class issue, but nonetheless, just something to think about -- when you think about the deployment of that capital, you have a large share buyback program in place, and you've been active on that. Would there be any appetite for considering something lumpier or something larger in terms of -- assuming that you did want to deploy a lot of money to share buyback? Or do you think staying the course on your overall, the existing program that you have in place is probably the better way to go?

Jack A. Fusco

The only reason, Stephen that we haven't talked about capital allocation, specifically on the extra $1.5 billion, is that the deal is not closed, right? So we've announced the sale, but there's still the consents, and as you know, there's the ways to go before you actually get cash in hand. So I'd like to make sure I have the cash in the door before I invest it, but I can tell you our conviction on our share repurchase program is just as strong today as it was 1.5 year ago when we started it. So there were -- there's been some misreading that the -- because the target is off, our CAGR target of 15% to 20%, that it means maybe that we don't feel like we can achieve it, and that's completely the wrong message. I took that off the slide myself because the implication there was that -- it was going to go negative on us. And that's not the case at all. We feel very good about where we're at, we feel very good about what we've been able to do, and I think our performance there speaks for itself and we have just as much conviction on our 15% to 20% CAGR as we ever did. So my commitment and I -- hopefully, I'll let Thad speak in a minute, is that we will work very hard to invest the proceeds when they come in as quickly as possible.

John B. Hill

We won't hoard cash, we will pursue both growth and returning money to shareholders.

Operator

From Goldman Sachs, we have Neil Mehta online.

Neil Mehta - Goldman Sachs Group Inc., Research Division

On debt reduction, you hinted that, Zamir, in your comments, but can you talk about what opportunity exists to take down debt, what's on the cash proceeds?

Zamir Rauf

Well, sure. I mean there is a very easy opportunity, Neil. At the end of the year, we have 10% of our certain of our corporate bonds that are callable and that's about $470 million. That right there is about $36 million interest rate reduction if you just look at the 7.5% to 8% rates on them. So that's an easy target right there. Beyond that, we've got other opportunities, but that's a good easy one.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And then in terms of Texas here, as you look at the forwards for 2014 and then 2015, that was a tricky exercise, but how many hours of scarcity do you think the market is pricing in right now? And where does -- how does that fare relative to your view of base case scarcity?

John B. Hill

For the next couple of years, assuming the West resting and on peak hours average a 12 heat rate, that implies about 4 hours of scarcity in both '15 and '16 in the current forwards in Texas. Getting that scarcity, we feel very good about load growth here. The weather normalized numbers that we used for the first quarter, weather normalized shown over 4%, 4.5% peak load growth. So in any given year, weather is going to make a difference, but the underlying fundamentals are very strong.

Jack A. Fusco

Neil, if I can just follow-up with Zamir's answer, what you heard from Zamir was there is no debt currently held on that Southeast Six Pack asset. So whatever debt that gets paid down will be truly opportunistic, and measured against our accretion for our free cash flow per share.

Operator

From Tudor, Pickering, we have Neel Mitra online.

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

I have question on the Southeast asset sale, the $100 million in EBITDA, is that a good clean number to kind of used for the earnings power of those assets going forward? Or were there contract escalators or contracts rolling off that would make that number higher or lower going forward?

Zamir Rauf

Yes, Neel, this is Zamir. It's a good number to use for the short-term. Yes, there are some contracts coming on, but then there's also risk in the market view on those assets considering it's not a liquidy -- liquid traded markets. So, yes, the EBITDA goes up somewhat. But even if you look at 2016, the multiple, it's still more accretive than the YieldCo multiples that we show on the page over here. So either way, it's a very strong transaction. So, some growth, I guess, is it's the bottom line but not a whole lot.

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

And then looking at the PJM market, I guess, this question is more for Thad. You talked about how with Marcellus gas kind of trapped in that region that was going to allow your assets to run more. And, I guess, what we've seen is the M3[ph] and Transco[ph] basis have run off in the future curves. One, do you think that's sustainable? And two, how does that impact your dispatch going forward? And how you view the PJM assets?

John B. Hill

Well, I assume you're talking about base is narrowing. Is that right?

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

Right, right.

John B. Hill

Yes, right, but I think you have to break it out by year. Yes, the winter basis is actually reversed and it trades at a premium, it continues to trade at well over premium. But at the same time the summer basis has actually gone to a bigger discount. We were at a -- to just pick a year, September of '16 right now is at a 90% discount, non-New York compared to Henry Hub. So what you've seen as a result of this winter is gas price relative to the hub that's come up in the winter but it's continuing to stay very, very low in the summer, which means that if you kind of read through that, more opportunity for round-the-clock earning in the summer depending, of course, on the absolute level.

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

And if I could just do a quick follow-up, what was the kind of weather-normalized demand growth in Texas over the first quarter?

John B. Hill

The numbers from the consultants that we used are coming in 4.5% weather-normalized. That's peak demand growth, but overall load growth at closer to 5%.

Operator

From Jefferies, we have Paul Fremont online.

Paul B. Fremont - Jefferies LLC, Research Division

I guess my first question is when I look at the hedging information that you provide, for it to be useful for modeling purposes, shouldn't we either have volumes? Or shouldn't the company consider just giving us the hedge numbers based on whatever the anticipated level of volumes were at the beginning of the year? Because it seems like it's hard for us to use those numbers.

John B. Hill

Paul, in the appendix, there's an updated disclosure on -- it doesn't give you the volumes but it does actually tell you what kind of premium you should use at expected volumes, and so we've been staying consistent with we've done our hedge disclosures all the way through it, so there's no change. We have updated disclosures in the appendix on given the Southeast sale. I mean there are 2 things, just so you know, last year, the Southeast reached about 7.5 million-megawatt hours. And, I mean there is another difference, of course, which is our other regions, other than Southeast, particularly in PJM and Texas being the peak year in Southeast which also has an impact on the modeling kits. So if you can check in the appendix, I'm sure IR will be happy to help you at all but there's been no change at all to our hedge disclosure for this call than we've done in the last several years.

Paul B. Fremont - Jefferies LLC, Research Division

Yes, I don't know -- I didn't think your -- I know there's no change, it's just that without knowing the volume, it's just hard to use the numbers. The other question I have is, in the past, when you've talked about Texas, you talked about super peak hours adding roughly $20 per megawatt hour. It looks like there were a lot of super peak hours using your way of calculating it in the North. Is there sort of an equivalent adder that you would use for each super peak hour that you would come up with in the North?

John B. Hill

I'm not quite sure I understand your question. The hedge disclosures that we provided again with premium provided, maybe we can take that particular question off-line. I'm not sure I quite understand what you are asking right now. If you listened...

Paul B. Fremont - Jefferies LLC, Research Division

Maybe as a substitute -- what do you estimate as the effect of the NOL -- the sale of the Southeastern assets on your total NOL position? I think in the past you've talked about $7 billion or $7.5 billion of federal NOLs. How much...

John B. Hill

That's right, Paul. It's about $7.4 billion (sic) [ $7.5 billion ] of federal and about $4 billion of state. We actually saved about $300 million in cash taxes because of our NOL position with this transaction, which is really huge. I mean if you think about $300 million of cash in the door and putting that into a capital allocation, very accretive. As far as NOL usage, it's about $800 billion or so, give or take a little that would be from that, but you can use that as a rough number.

Operator

From Morningstar research, we have Andy Bischof online.

Andrew Bischof - Morningstar Inc., Research Division

I was wondering if you could comment on tax market reform in Texas. We recently saw the commission defer a decision to the legislature. What does this mean for market reform and your overall views in the Texas market?

John B. Hill

If you're talking about the capacity market debate, that clearly for now, has lost momentum. The Public Utility Commission, it has going forward with the proceeding though to determine what they think the right reserve margin should be, but as far as the capacity market, that has kind of passed for now. What the market has turned its attention to is making sure that there's good price formation in the energy market. And there's something called the ORDC, which is an energy market adder, which has been put place, there has been a lot of time and effort to tweak that, to try and make that be highly effective through some changes to it which will be in place this summer, and it will be, I think, an ongoing dialogue around [indiscernible] and how appropriate the ORDC is and whether or not it needs to be further altered in a more positive way as we get into the fall. So capacity market discussion is stopped. There'll be still consideration of what the rate reserve margin is, but a lot of focus on price formation in the energy market. So that's the environment that we are all [indiscernible] for now. We will view that, as we've often said, whether there's capacity market or energy market, prices are still going to have to rise to set new builds, and while we prefer the capacity market and energy market will be volatile and will be very good for us, if the prices in the energy market react a [indiscernible] little well. So on -- we're very bullish, but it's going to be energy, not capacity.

Andrew Bischof - Morningstar Inc., Research Division

And any thoughts on the upcoming PJM auction? Are you still kind of viewing it flattish [indiscernible] here, recent comments a few months ago?

John B. Hill

Yes, it's not -- we've said that I think the bigger picture before the specific auction that given the flat load growth in PJM, there has been a lot of retirements, but most of those retirements have been replaced with the demand response that we've kind of, in our view, PJM will get less compensation going forward from a capacity market and a lot more from an interview market that were extremely bullish, given the fact that we've retired a whole bunch of units with, call it $40 marginal price. And we've replaced it with a lot of demand response, which factors at a very, very high price. So that's very helpful to us. On this particular auction, I think we are in kind of the flattish to the modestly down view. I mean there are some puts and some takes, the low growth assumption is down, there will be probably some new build on -- in the capacity into the map. I'm talking about Eastern PJM, that is up. On the other hand, PJM has pushed forward some very strong rules, most notably I'll mention here, is that you know last, 2016, 2017 auction, almost 10,000 megawatts were limited demand response played into the auction and this year, somewhere between 500 megawatts. So we think that PJM's doing all that they can but we don't have super high expectations for the auction this year that are variable from energy.

Operator

From Wolfe Research, we have Steve Fleishman online.

Steven I. Fleishman - Wolfe Research, LLC

First on the Casper coming back from the dead, could you just give us any maybe an initial thought particularly on implications you might see for the Oregon market?

John B. Hill

Sure. Steve, I'll talk about the market -- the -- and Thad Miller is here as well for any kind of broader read through questions on policy. Since the original Casper, kind of came into play, a few things have happened. First, the targets in Texas have been on -- there's been leeway given and there's been some seasonal operation in some coal units in the state much reported about. And so we actually don't think the next couple of years, that Casper is going to have a particularly big impact. Right after we come in, it's going to have a particularly big impact on the Texas market, on given those changes. Things are tighter still on PJM, although that [indiscernible] hope for time [indiscernible] We're not going to see whether or not we will get 2016 or '17, that's a bit of constrained. So we're thankful to that, maybe they represent some rates. [indiscernible] But I'm not sure we going to see a [indiscernible] commodity price upside on -- in the medium-term from the Casper.

Steven I. Fleishman - Wolfe Research, LLC

Second question is, Thad, you kind of referred to the winter issues not really being as much gas availability, but other issues. I guess I was at FERC last week, and it seemed like FERC struggling to understand why 20% of generation was down at times? And could you just maybe elaborate a little bit more on what you think really was the factor?

John B. Hill

Sure, Steve. So there are 22% equal as I said, 40,000 megawatts. Of those 40,000 megawatts, almost 32,000 were just unavailable, had nothing to do with field curtailment. And in a lot of ways, I think the analogy, the reviews here, as we think about this, and we awfully did better, far better than kind of the average out there, so want to be clear about that. There's we looked at the overall market, we will look a lot like Texas and then in February 2011, when we had unprecedented temperatures, and quite frankly, the generation fleet across all the operators in the state wasn't ready. A lot of reforms have been -- the generators got together and fixed it, we've seen a much better improvement in extreme weathers here, and, yes, we suspect that will happen in PJM too. The people that weren't available to run paid a price. And nothing just people to shift operations like missing a lot of opportunity or even losing money. So we're pretty comfortable that those 30,000 megawatts, which were out for operational issues, we got encouraged from the regulators certainly but that won't happen again.

Steven I. Fleishman - Wolfe Research, LLC

Last question just on -- maybe a little more color on the cone of the acquisition market given that you've got all this cash available to utilize, how good you feel about the opportunities out right now?

John B. Hill

Look we -- as we've said before, Steve, continue to pay attention to the acquisition market, and we'd like an opportunity that fits on kind of the way that we operate our business and fits our rigorous financial discipline. So it's been really hard for us to predict in the past where we've been successful or where we haven't, because we are so financially disciplined. So we will consider opportunities out there, obviously I'm not going to get specific, but they're going to have to fit with our below we operating our financial metrics, and so we'll see.

Operator

From Barclays, we have Gregg Orrill online.

Gregg Orrill - Barclays Capital, Research Division

I was wondering if there is a way to provide some guidance around -- under the net impact of post-'14 on EBITDA of the asset sales versus the benefit you saw and have highlighted of the premium changes to on peak spark spreads with the remaining fleet?

John B. Hill

Post-'14, Zamir, for the remaining fleet.

Zamir Rauf

[indiscernible] Greg, can you just be...

Gregg Orrill - Barclays Capital, Research Division

What are the net finance state of the asset sales versus the improvement of spark spreads and the premiums that you're seeing on the remaining fleet?

Zamir Rauf

Okay. Greg, are you referring to our hedged disclosure on the appendix, sort of the updated premiums?

Gregg Orrill - Barclays Capital, Research Division

Yes, and the improvement in spark spreads.

John B. Hill

Yes, so what's happened is the Southeast. We have modeling tips for the overall fleet. In the Southeast on -- for the merchant megawatt hours in the Southeast, while you could have seriously priced it was a much more less spikey market, I don't know how else to say it. And as we pulled those plants out, the rest of the plants, I mean we've a higher concentration now in particularly in PJM and Texas, and those markets tend to have more extreme pricing, so our modeling tips that you're referring, but adjust down volumes, given the fact that we've divested 7.5 million-megawatt hours, at least that was 2012 -- 2013 number, excuse me. And in addition, we've moved to a more spikey market mix getting Southeast to [indiscernible]. So those were the reasons, the 2 reasons why that changed. So I have fewer megawatt hours, the megawatt hours we do have [indiscernible] a spikier markets. I hope that got your question.

Gregg Orrill - Barclays Capital, Research Division

In part, and maybe it's more of an off-line discussion, but if you're giving it away $100 million-plus in EBITDA, '15, '16, spark spreads did improve forwards[ph] moved up, is there a way to kind of size that difference?

John B. Hill

When that we -- I'm not sure I'm understanding your question, and I'm looking around the table. So why don't we take this off-line, Gregg, and we'll be as helpful as we can be.

Operator

From ISI Group, we have Jon Cohen online.

Jonathan Cohen - ISI Group Inc., Research Division

A couple of questions. Firstly, Thad, given the level of electric planned outages in the Northeast this winter, is it your view that, that exacerbated gas demand in the region and some of these pipeline issues? And if that's the case, do you think that maybe there's a bit of fear premium in forward winter basis?

John B. Hill

Jonathan, I have -- given the fact that of the 32,000 plants that didn't operate for those reasons, over 20,000 of that number was non-gas plants. So that's definitely raised the need of gas plants to run more. I do think it's of note that we're not aware anyway of anybody that has firm transmission that actually did get cut. On -- but certainly, people that were behind when all did see here didn't have current transmission, might have had problems with the gas pipeline. But [indiscernible]. So clearly under that case, you would think that there is the need for more gas, particularly after retirements, but we also argue that there's a lot of investment, which is occurring in the gas infrastructure in the mid-Atlantic. The number is $3 billion of infrastructure investment in the next couple of years. So -- there was a premium there, but I think there's a lot of capital chasing the intra-regional constraints, which should allow plenty of gas supply in that particular country, I would say, that it's a lot harder to understand, how the gas gets out of that region in the country, moved out of the wholesale regions of the country but I think a lot of the intraregion bottlenecks should be removed.

Jonathan Cohen - ISI Group Inc., Research Division

And then over the last few years, we've seen, I guess, what you could call a nontrivial amount of development activity in PJM and ERCOT new gas plants. And I know in the past, you guys have said that you don't think prices justify new build at forward placement cost. And, I guess, the first question is do you still hold that view? And secondly, given that there seem to be some private investors who do see these investments as economic, would you be willing to sell existing merchant plants in PJM and ERCOT to those investors at some discount replacement cost?

John B. Hill

I'll start with the second question, we have monetized part of the plant here in ERCOT, where we sold 25% of our Freestone plant to a public power company, an evaluation that we thought was very fair of the -- represented fundamentalist that we saw in the market. So I think the answer is yes, if there's money that is interested in owning the existing asset or part of an existing asset, it's somewhere closer what these people voting plants for, I think it could be all yours. As far as how much this private money is going to come to the space, we don't know. Clearly, there are a lot of projects out there, but people had a pretty hard time raising equity with the exception of a couple of folks. So we're not certain that there's going to be a whole flood of equity into these markets and certainly there has been some and there will be continuing to be some, but not a flood.

Operator

From UBS, we have Julien Dumoulin-Smith online.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

I suppose following up on some of the last questions here. When you're looking at RPM right now, how are you thinking about new build and potential acquisitions in the Northeast broadly speaking?

John B. Hill

Was that looking at the RPM? So that -- I'm trying to -- was that an M&A question or a capacity market question, Julien?

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Well, I suppose both. As you're thinking about RPM, are you thinking that you could potentially move forward some of the projects you discussed? And then secondarily, are you thinking you could potentially move to acquire more projects in the Northeast to the extent to which you seem quite bullish?

John B. Hill

Yes, so as we said on RPM, we think it's going to be flattish for a while. This one year could be up or down, but with a lot of upside in energy market, just to reiterate a point, I'm not going to get into what we may or we may not do with our own development efforts in the mid-Atlantic, but I would remind folks that if we're going to own a merchant asset, it has to be at a pretty good discount to what we view as competitive replacement cost. So I'll leave that at that. As far as M&A, we would -- at the right place, we would love to own additional assets in the region. The question is can we get them at the right price?

Jack A. Fusco

And it's a pretty high hurdle, Julien, when you measure it through our share repurchase.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Absolutely, actually to that focus, that was my second question. On capital deployment, once you close the sale, is the expectation to get an update on share buyback kind of an incremental to what you've already announced? Or is setting expectations, how are you going to communicate this given your current policy and share buyback?

Jack A. Fusco

I think it's a fair request for Thad and Zamir. At the close of the sale they will come back and talk about capital allocation to the investors. I think that would be a fair request. I don't think talking about what or how we're going to invest the proceeds before we close the sale makes any sense. I think we need to get that behind us first. But I think that's a very fair request. And [indiscernible], Julian.

Operator

We have time for one final question. From SunTrust, we have Ali Agha online.

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

One point on this LS Power acquisition of Southeast portfolio. They signed up on this lock-up affect until the transaction closes. I wanted to get a little better sense from your perspective, the motivation was? And are you expecting now that they are buying directly the portfolio that you may look for them to exit that Calpine ownership, was that the thinking?

Jack A. Fusco

Ali, you need to talk to them, specifically about what their plans are for the portfolio. I don't want to act like I know what their overall strategy is with doing the transaction. We're very pleased at the sale and we're very pleased to be able to monetize those assets for our investors, but other than that, I think you had to talk to them about this specifically, their plan.

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

What was the lock-up? I mean, that was coming from your side? I just wanted to understand the -- your thinking behind the lock-up.

Jack A. Fusco

Yes, our thinking behind the lock-up is we wanted to make sure that the investors near that they've with the straight up divestiture of assets, and there were no any other games being played. And until our investors get the benefit of those proceeds that are in Zamir's bucket of cash, we wanted to make sure folks realize that LS is an investor in Calpine with -- willing not to have the ability to trade-in the stock.

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

And my last question, just to clarify couple of early remarks. As you looking at the forward curves and you already alluded to the fact that you've seen some pick up there, whether it's PJM or ERCOT, how would you look at the curves today for '15, '16 versus your fundamental view? Do you think is that being better or accurately deflected? Or you still seeing upside, just to get a sense of that?

John B. Hill

Good question. First is our fundamental view, of course, we're going at the right way. Ali, I will tell you that. We are -- we remain in this curves, particularly in ERCOT, we remain well below, which required to [indiscernible] you investments, and in PJM, there's a lot of volatility as we make this transition. And particularly having demand response being a part of the risk versus mix that we don't think it's reflected. So we continue to be bullish both markets from the current levels.

Operator

We will now turn it back to Mr. Bryan Kimzey for final remarks.

W. Bryan Kimzey

Thanks to everyone for participating in our call today. For those of you who 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 Investor Relations. Thanks again for your interest in Calpine.

Operator

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

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