Calpine's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Calpine Corporation (CPN)

Q4 2011 Earnings Call

February 10, 2012 11:00 a.m. ET

Executives

Bryan Kimzey – VP, IR

Jack Fusco - President, CEO

Thad Hill - EVP, COO

Zamir Rauf - EVP, CFO

Thad Miller - Chief Legal Officer

Analysts

Paul Fremont - Jefferies & Co., Inc.

Stephen Byrd - Morgan Stanley

Angie Storozynski - Macquarie Research

Dave Katz - JPMorgan

Julien Dumoulin-Smith - UBS Investment Research

Ameet Thakkar - Bank of America – Merrill Lynch

Brandon Blossman - Tudor Pickering Holt & Co.

Gregg Orrill - Barclays Capital

Ted Durbin - Goldman Sachs

Ali Agha - SunTrust Robinson Humphrey

James Dobson - Wunderlich Securities

Keith Stanley - Deutsche Bank

Presentation

Operator

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Welcome to the Calpine Corporation Fourth Quarter and Full Year 2011 Investor Update Conference Call. My name is Mitchell and I will be your operator for today’s call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to the Vice President of Investor Relations, Mr. Bryan Kimzey. Mr. Kimzey, you may begin.

Bryan Kimzey

Thank you, operator, and good morning, everyone. I’d like to welcome you to Calpine’s investor update conference call covering our fourth quarter and full year 2011 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 President and Chief Executive Officer; Thad Hill, our 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 regulatory issues.

Before we begin the presentation, I encourage all listeners to review the Safe Harbor statement included on slide two 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 2011 annual report on Form 10-K which is now on file with the SEC. After our prepared remarks, we will open the lines for questions. In the interest of time, each caller will be allowed one question and one follow-up only.

I’ll now turn the call over to Jack to lead our presentation.

Jack Fusco

Thank you, Bryan and good morning everyone. Thank you for joining us and for your continued interest in Calpine. Traditionally our earnings calls focus heavily on a recap of historical performance and financial results. However, today we find ourselves in non-traditional times or what I would like to call, uncharted territory, especially given the extremely low natural gas price environment, resulting in high demand for our competitive fleet. I understand that investors are challenged to understand the opportunities that these market forces present to Calpine, especially when a sector overall is struggling.

So today, after we discuss a few of the 2011 highlights, we will spend much more time during our prepared remarks highlighting one of Calpine’s key differentiating factors, our resilience in an extremely low gas environment. What I like to do before setting the state for the conversation is to briefly summarize my take on 2011 and our positioning for 2012.

In 2011, we continued to deliver solid operating and financial performance and maintained our commitment to effective capital allocation. We produced over 94 billion kilowatt hours of electricity. We executed nearly 1400 megawatts of long-term power contracts and advanced on our strategic growth initiatives. Throughout the organization, we are continuing to position Calpine for the future.

With respect to the near term, I am pleased to announce that we are tightening our 2012 guidance range, including raising the bottom end. We now project adjusted EBITDA of $1.6 billion to $1.725 billion, and adjusted recurring free cash flow of $425 million to $550 million. We were able to narrow this range as a result of opportunistic hedging activity done in the fourth quarter of 2011 as well as a behaviour of our fleet under low gas price conditions, including benefits from coal to gas switching, which leads to the following slide.

Shifting fuel cost fundamentals is one of the four primary forces that are shaping the power sector today, and certainly among the most topical. Thinking back to 2008 when I joined Calpine, natural gas was viewed as a commodity with limited domestic supply whose prices were tied to oil, and coal was cheaper, more abundant and entirely domestic. Since then the tables have turned with shale discoveries that have provided us with an abundant, affordable domestic supply of natural gas.

Clearly, this paradigm shift has become even more pronounced in recent months as gases dropped below $3 an mmbtu and stayed there. I have asked Thad Hill to discuss in detail what this means to our market position later on in this call.

Meanwhile the power generation sector is also coming to grips with stricter environmental regulations and aging infrastructure with limited replacement capacity under construction and an overall return to fiscal discipline on behalf of tax payers and rate payers. Amid these forces, Calpine remains well positioned for the future of the industry.

Over the last three years, we have successfully stayed the course, effectively reengineered our internal organization and processes and repositioned our portfolio of plants and balance sheet to capitalize on future opportunities. The future is upon us.

The following slide provides a closer look at coal and gas price dynamics and how our fleet has responded under these conditions. As you can see from the chart on the left, natural gas prices began dropping below Eastern coal back in 2009, which corresponds to an uptick in capacity factors among our Southeast and Mid-Atlantic combined cycle fleet as shown in the chart on the right.

In our opinion, the overall effects of this dynamic were muted by long term rail and take or pay coal commodity contracts. As gas prices continued to decline in late 2011, we began to experience even higher utilization among our fleet. Since then we have seen natural gas prices decline to levels where it has displaced PRB coal generation and ERCOT such that our January 2012 capacity factors for our Texas fleet were 59% compared to 34% in January 2011, despite much milder weather.

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