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CPN 4Q 2016 UPDATE

|Includes: Calpine Corporation (CPN)
Average Capacity Factor , excl. peakers (%) 4Q 2015 4Q 2016   2015 2016  
East 42.7% 44.4%   48.8% 50.4%  
West 59.0% 41.1%   56.8% 43.2%  
Texas 57.0% 46.0%   59.5% 57.8%  
Total 53.4% 44.4%   55.6% 51.2%  
             
Generation (MWh) 4Q 2015 4Q 2016 Chg. YoY 2015 2016 Chg. YoY
East 6,707 7,668 14% 30,751 35,434 15%
West 9,036 6,460 -29% 34,836 26,256 -25%
Texas 11,969 9,749 -19% 49,377 47,877 -3%
Total 27,712 23,877 -14% 114,964 109,567 -5%
             
Commodity Margin ($ MM) 4Q 2015 4Q 2016 Chg. YoY 2015 2016 Chg. YoY
East 204 161 -21% 944 958 1%
West 263 242 -8% 1,106 991 -10%
Texas 153 144 -6% 736 655 -11%
Total 620 547 -12% 2,786 2,604 -7%
             
Adj.EBITDA ($ MM) 4Q 2015 4Q 2016 Chg. YoY 2015 2016 Chg. YoY
East 150 106 -29% 760 737 -3%
West 156 164 5% 735 669 -9%
Texas 84 86 2% 481 409 -15%
Total 390 356 -9% 1,976 1,815 -8%
             
Commodity Margin per MWh ($) 4Q 2015 4Q 2016 Chg. YoY 2015 2016 Chg. YoY
East 30.42 21.00 -31% 30.70 27.04 -12%
West 29.11 37.46 29% 31.75 37.74 19%
Texas 12.78 14.77 16% 14.91 13.68 -8%
Total 22.37 22.91 2% 24.23 23.77 -2%
             
Adj.EBITDA as percentage of Commodity Margin (%) 4Q 2015 4Q 2016   2015 2016  
East 73.5% 65.8%   80.5% 76.9%  
West 59.3% 67.8%   66.5% 67.5%  
Texas 54.9% 59.7%   65.4% 62.4%  
Total 62.9% 65.1%   70.9% 69.7%  

Summary: Calpine reported 4Q 2016 and full year 2016 results on Feb 11, 2017, set 2017 EBITDA guidance largely in line with 2016 actual result (i.e. +3% y/y), committed to reduce debt by $2.7 Bn by FYE19, and reaffirmed 4.5x TD leverage target.

4Q 2016 and full year 2016:

4Q 2016 Adj.EBITDA registered at $356 MM, down by 9% y/y, driven largely by lessened hedge contribution (-$52 MM), lower contracted and capacity revenues (-$25 MM), partially offset by normalized results at Geyser Geothermal portfolio (+$44 MM), which was not fully operational in 4Q 2015 due to wildfire. On a segment basis, East continued to report generation growth (+14% y/y) despite of the sale of Mankato plant in Oct, 2016; while generation at West and Texas segments was weaker y/y, both segments reported higher Adj.EBITDA, thanks largely to cost reductions at plant-levels and across corporate functions. On a consolidated basis, operating profit margin (as measured by Adj.EBITDA as percentage of Commodity Margin), improved by 220bps y/y to 65.1%.

Full year 2016 Adj.EBITDA of $1.815 Bn is at the lower-end of prior guidance ($1.80 - $1.85 Bn), and is in line with our internal projection. Adj.EBITDA remained solid in our view, and has not deviated from 5-yr average, despite of the noticeable drop in wholesale dispatch. It was a tough year for merchant generators, but we are impressed by Calpine's good effort in bringing down costs, improving capacity factors at intermediate fleet (i.e. Texas merchant plants with full-year capacity factors > 65%), and expanding into retail space (which partially offset the decline at wholesale).

Adj.FCF (defined as free cash flow before growth Capex) continued to be satisfactory at $736 MM, in line with 2012 - 2015 average of $728 MM. For 2016, Calpine spent $1.68 Bn on acquisitions ($526 MM for Granite Ridge Energy Center, a CCGT in PJM, and $1.15 Bn for Noble Energy retail platform), but TD only moderately increased by $469 MM, as Calpine was able to partially fund acquisitions by proceeds from asset optimization / monetization.

Calpine exited 2016 with 6.7x TD/Adj.EBITDA. While TD leverage was higher y/y (5.9x at FYE15), Calpine was able to extend maturity, increase RCF size, and lower borrowing costs through several refinance transactions in 4Q. At FYE16, Calpine had $418 MM unrestricted cash (incl. $73 MM at non-recourse subs), and $1.255 Bn availability under $1.79 Bn RCF. The aggregate $1.9 Bn liquidity, together with its positive FCF generation, is more than adequate to cover roughly $750 MM debt maturity in 2017 (incl. $550 MM bridge facility and $200 MM mandatory debt amortization).

2017 Guidance:

Management guides 2017 Adj.EBITDA to be $1.875 Bn (+3% y/y) and Adj.FCF to be $785 MM. Targets are realistic in our view, given (1) increased hedge ratio for 2017 (now 87% of expected generation is being hedged with average hedged wholesale commodity margin of $19/MW), (2) the full year contribution from Noble and Champion retail platforms, and (3) the fact that York 2, an 828 MW CCGT recently built and cleared PJM BRA, will start operation in 2H 2017. Growth Capex will further decline, and management explicitly stated that Calpine will focus on integration and synergy realization, rather than additional retail acquisitions. Adj.FCF will be used primarily for debt reduction, and management aims to reduce debt by $2.7 Bn by FYE19. Calpine does not provide details on source of funds, but previously stated that proceeds from pending asset divestitures to be $500 MM and W/C inflow from Nobel to be $200 MM. This, together with roughly $600 MM per annum FCF generation (after $200 - $220 MM growth Capex), and potential interest savings, should be adequate to cover the $2.7 Bn debt reduction target, in our view.

Summary: Calpine reported 4Q 2016 and full year 2016 results on Feb 11, 2017, set 2017 EBITDA guidance largely in line with 2016 actual result (i.e. +3% y/y), committed to reduce debt by $2.7 Bn by FYE19, and reaffirmed 4.5x TD leverage target.

4Q 2016 and full year 2016:

4Q 2016 Adj.EBITDA registered at $356 MM, down by 9% y/y, driven largely by lessened hedge contribution (-$52 MM), lower contracted and capacity revenues (-$25 MM), partially offset by normalized results at Geyser Geothermal portfolio (+$44 MM), which was not fully operational in 4Q 2015 due to wildfire. On a segment basis, East continued to report generation growth (+14% y/y) despite of the sale of Mankato plant in Oct, 2016; while generation at West and Texas segments was weaker y/y, both segments reported higher Adj.EBITDA, thanks largely to cost reductions at plant-levels and across corporate functions. On a consolidated basis, operating profit margin (as measured by Adj.EBITDA as percentage of Commodity Margin), improved by 220bps y/y to 65.1%.

Full year 2016 Adj.EBITDA of $1.815 Bn is at the lower-end of prior guidance ($1.80 - $1.85 Bn), and is in line with our internal projection. Adj.EBITDA remained solid in our view, and has not deviated from 5-yr average, despite of the noticeable drop in wholesale dispatch. It was a tough year for merchant generators, but we are impressed by Calpine's good effort in bringing down costs, improving capacity factors at intermediate fleet (i.e. Texas merchant plants with full-year capacity factors > 65%), and expanding into retail space (which partially offset the decline at wholesale).

Adj.FCF (defined as free cash flow before growth Capex) continued to be satisfactory at $736 MM, in line with 2012 - 2015 average of $728 MM. For 2016, Calpine spent $1.68 Bn on acquisitions ($526 MM for Granite Ridge Energy Center, a CCGT in PJM, and $1.15 Bn for Noble Energy retail platform), but TD only moderately increased by $469 MM, as Calpine was able to partially fund acquisitions by proceeds from asset optimization / monetization.

Calpine exited 2016 with 6.7x TD/Adj.EBITDA. While TD leverage was higher y/y (5.9x at FYE15), Calpine was able to extend maturity, increase RCF size, and lower borrowing costs through several refinance transactions in 4Q. At FYE16, Calpine had $418 MM unrestricted cash (incl. $73 MM at non-recourse subs), and $1.255 Bn availability under $1.79 Bn RCF. The aggregate $1.9 Bn liquidity, together with its positive FCF generation, is more than adequate to cover roughly $750 MM debt maturity in 2017 (incl. $550 MM bridge facility and $200 MM mandatory debt amortization).

2017 Guidance:

Management guides 2017 Adj.EBITDA to be $1.875 Bn (+3% y/y) and Adj.FCF to be $785 MM. Targets are realistic in our view, given (1) increased hedge ratio for 2017 (now 87% of expected generation is being hedged with average hedged wholesale commodity margin of $19/MW), (2) the full year contribution from Noble and Champion retail platforms, and (3) the fact that York 2, an 828 MW CCGT recently built and cleared PJM BRA, will start operation in 2H 2017. Growth Capex will further decline, and management explicitly stated that Calpine will focus on integration and synergy realization, rather than additional retail acquisitions. Adj.FCF will be used primarily for debt reduction, and management aims to reduce debt by $2.7 Bn by FYE19. Calpine does not provide details on source of funds, but previously stated that proceeds from pending asset divestitures to be $500 MM and W/C inflow from Nobel to be $200 MM. This, together with roughly $600 MM per annum FCF generation (after $200 - $220 MM growth Capex), and potential interest savings, should be adequate to cover the $2.7 Bn debt reduction target, in our view.

Supporting Documents

  1. Calpine_4Q_UPDATE.docx