Calpine Sees Considerable 3Q Net Income Growth

November 8, 2019

Calpine Corportation says its 3Q net income was way up because of an increase in commodity revenue thank to higher energy margins.

The Houston-based electricity generator from natural gas and geothermal resources reported a net income of $485 million, compared to $272 million during the same period od 2018.

“The commencement of commercial operations at our York 2 Energy Center in March 2019; and a favorable period-over-period change in our income taxes resulting from the application of intraperiod tax allocation rules to our interim results” were also positive factors, the company said.

The downside included a decrease in non-cash, mark-to-market earnings on Calpine’s commodity hedge position for the third quarter of 2019 compared to the prior year period and the sale of the Garrison and RockGen Energy Centers in July 2019.

Cash provided by operating activities for the third quarter of 2019 was $912 million compared to $817 million in the prior year period.

Calpine’s 3Q 2019 report is detailed below:

 

Summary of Third Quarter 2019 Financial Results (in millions):

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

% Change

2019

2018

% Change

Operating Revenues

$

2,792

$

2,890

(3.4

)%

$

7,990

$

7,158

11.6

%

Income from operations

$

682

$

568

20.1

%

$

1,484

$

657

125.9

%

Cash provided by operating activities

$

912

$

817

11.6

%

$

1,431

$

873

63.9

%

Net Income1

$

485

$

272

78.3

%

$

926

$

26

NM

Commodity Margin2

$

1,127

$

974

15.7

%

$

2,658

$

2,280

16.6

%

Adjusted Unlevered Free Cash Flow2

$

767

$

676

13.5

%

$

1,546

$

1,248

23.9

%

Adjusted Free Cash Flow2

$

614

$

509

20.6

%

$

1,081

$

749

44.3

%

____________
(1)

Reported as Net Income attributable to Calpine on our Consolidated Condensed Statements of Operations.

(2)

Non-GAAP financial measure, see “Regulation G Reconciliations” for further details.

NM – Not meaningful

 

Net Income for the first nine months of 2019 was $926 million compared to $26 million in the prior year period. The key drivers of the increase in Net Income were a period-over-period increase in commodity revenue, net of commodity expense, which largely resulted from higher energy margins in Texas during the third quarter of 2019 compared to the prior year period; the commencement of commercial operations at our York 2 Energy Center in March 2019; and increased non-cash, mark-to-market earnings on our commodity hedge position for the first nine months of 2019 compared to the prior year period. These period-over-period increases were partially offset by the sale of our Garrison and RockGen Energy Centers in July 2019. Cash provided by operating activities for the first nine months of 2019 was $1,431 million compared to $873 million in the prior year period. The period-over-period increase in Cash provided by operating activities was primarily due to an increase in commodity revenue, net of commodity expense, as previously discussed, as well as a decrease in working capital employed resulting from a period-over-period net decrease in margin posting requirements and a change in environmental products balances.

REGIONAL SEGMENT REVIEW OF RESULTS

Table 1: Commodity Margin by Segment (in millions)

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

Variance

2019

2018

Variance

West

$

393

$

356

$

37

$

908

$

782

$

126

Texas

369

187

182

704

504

200

East

265

320

(55

)

765

729

36

Retail

100

111

(11

)

281

265

16

Total

$

1,127

$

974

$

153

$

2,658

$

2,280

$

378

West Region

Third Quarter: Commodity Margin in our West segment increased by $37 million in the third quarter of 2019 compared to the prior year period. Primary drivers were:

+ higher contribution from hedging activities and

+ higher resource adequacy revenues, partially offset by

– lower revenue from reliability must run contracts.

Year-to-Date: Commodity Margin in our West segment increased by $126 million in the first nine months of 2019 compared to the prior year period. Primary drivers were:

+ higher contribution from hedging activities and

+ higher resource adequacy revenues, partially offset by

– lower revenue from reliability must run contracts.

Texas Region

Third Quarter: Commodity Margin in our Texas segment increased by $182 million in the third quarter of 2019 compared to the prior year period, primarily due to higher market spark spreads during August and September 2019.

Year-to-Date: Commodity Margin in our Texas segment increased by $200 million in the first nine months of 2019 compared to the prior year period. Primary drivers were:

+ higher market spark spreads during August and September 2019, partially offset by

– higher revenue in the first quarter of 2018 associated with the sale of environmental credits with no similar activity in the current year period.

East Region

Third Quarter: Commodity Margin in our East segment decreased by $55 million in the third quarter of 2019 compared to the prior year period. Primary drivers were:

– lower regulatory capacity revenue in PJM and ISO-NE and

– the sale of our Garrison and RockGen Energy Centers in July 2019, partially offset by

+ the commencement of commercial operations at our York 2 Energy Center in March 2019.

Year-to-Date: Commodity Margin in our East segment increased by $36 million in the first nine months of 2019 compared to the prior year period. Primary drivers were:

+ higher contribution from hedging activities,

+ higher regulatory capacity revenue in PJM and ISO-NE during the first half of 2019, and

+ the commencement of commercial operations at our York 2 Energy Center in March 2019, partially offset by

– lower regulatory capacity revenue in PJM and ISO-NE during the third quarter of 2019,

– lower market spark spreads,

– the sale of our Garrison and RockGen Energy Centers, and

– a gain associated with the cancellation of a PPA recorded during the first quarter of 2018 with no similar activity in the current year period.

Retail

Third Quarter: Commodity Margin in our Retail segment decreased by $11 million in the third quarter of 2019 compared to the prior year period, primarily driven by decreased contribution from gas supply hedging activity during the third quarter of 2019 compared to the prior year period.

Year-to-Date: Commodity Margin in our Retail segment increased by $16 million in the first nine months of 2019 compared to the prior year period, primarily driven by increased sales revenue activity.

LIQUIDITY, CASH FLOW AND CAPITAL RESOURCES

Table 2: Liquidity (in millions)

September 30, 2019

December 31, 2018

Cash and cash equivalents, corporate(1)

$

706

$

141

Cash and cash equivalents, non-corporate

86

64

Total cash and cash equivalents

792

205

Restricted cash

407

201

Corporate Revolving Facility availability(2)

1,394

966

CDHI revolving facility availability(3)

45

49

Other facilities availability(4)

4

7

Total current liquidity availability(5)

$

2,642

$

1,428

____________

(1)

Our ability to use corporate cash and cash equivalents is unrestricted.

(2)

Our ability to use availability under our Corporate Revolving Facility is unrestricted. On April 5, 2019, we amended our Corporate Revolving Facility to increase the capacity by approximately $330 million from $1.69 billion to approximately $2.02 billion. On August 12, 2019, we amended our Corporate Revolving Facility to extend the maturity of $150 million in revolving commitments from June 27, 2020 to March 8, 2023, and to reduce the commitments outstanding by $20 million to approximately $2.0 billion. The entire Corporate Revolving Facility now matures on March 8, 2023.

(3)

Our CDHI revolving facility is restricted to support certain obligations under PPAs and power transmission and natural gas transportation agreements as well as fund the construction of our Washington Parish Energy Center. Pursuant to the terms and conditions of the CDHI credit agreement, the capacity under the CDHI revolving facility was reduced to $125 million on June 28, 2019. The decrease in capacity did not have a material effect on our liquidity as alternative sources of liquidity are available.

(4)

We have three unsecured letter of credit facilities with two third-party financial institutions totaling approximately $300 million at September 30, 2019.

(5)

Includes $125 million and $52 million of margin deposits posted with us by our counterparties at September 30, 2019 and December 31, 2018, respectively.

Liquidity was approximately $2.6 billion as of September 30, 2019. Cash, cash equivalents and restricted cash increased by $793 million during the first nine months of 2019, largely due to cash provided by operating activities and the proceeds from the sale of our Garrison and RockGen Energy Centers, partially offset by the payment of a dividend to our parent and capital expenditures on construction and growth projects.

Table 3: Cash Flow Activities (in millions)

Nine Months Ended September 30,

2019

2018

Beginning cash, cash equivalents and restricted cash

$

406

$

443

Net cash provided by (used in):

Operating activities

1,431

873

Investing activities

(137

)

(313

)

Financing activities

(501

)

(240

)

Net increase in cash, cash equivalents and restricted cash

793

320

Ending cash, cash equivalents and restricted cash

$

1,199

$

763

Cash provided by operating activities for the nine months ended September 30, 2019 was $1,431 million compared to $873 million in the prior year period. The period-over-period increase was primarily due to higher income from operations, adjusted for non-cash items, that resulted largely from an increase in Commodity Margin, as previously discussed, and from a decrease in operating and maintenance expense, general and other administrative expense, and other operating expenses driven primarily by merger-related costs incurred in the first quarter of 2018 that did not recur in the current year period. In addition, Cash provided by operating activities also increased as a result of a decrease in working capital employed resulting from a period-over-period net decrease in margin posting requirements as well as a change in environmental products balances.

Cash used in investing activities was $137 million during the nine months ended September 30, 2019 compared to $313 million in the prior year period. The decrease primarily related to the receipt of proceeds from the sale of our Garrison and RockGen Energy Centers during the third quarter of 2019 partially offset by an increase in capitalized maintenance activity in the first nine months of 2019.

Cash used in financing activities was $501 million during the nine months ended September 30, 2019, primarily related to the payment of a dividend to our parent, CPN Management, LP, as well as the net repayment of debt.

Portfolio Management

On July 10, 2019, we, through our indirect, wholly owned subsidiaries Calpine Holdings, LLC and Calpine Northbrook Project Holdings, LLC, completed the sale of 100% of our ownership interests in Garrison Energy Center LLC (“Garrison”) and RockGen Energy LLC (“RockGen”) to Cobalt Power, L.L.C. for approximately $360 million, subject to certain immaterial working capital adjustments and the execution of financial commodity contracts. Upon closing, we recognized a liability of $52 million for the fair value of the financial commodity contracts on our Consolidated Condensed Balance Sheet, and the related proceeds are reflected within the financing section on our Consolidated Condensed Statement of Cash Flows. Garrison owns the Garrison Energy Center, a 309 MW natural gas-fired, combined-cycle power plant located in Dover, Delaware, and RockGen owns the RockGen Energy Center, a 503 MW natural gas-fired, simple-cycle power plant located in Christiana, Wisconsin. We recorded an immaterial gain on the sale during the third quarter of 2019 and an impairment loss of $55 million during the nine months ended September 30, 2019, to adjust the carrying value of the assets to reflect fair value less cost to sell.

Capital Allocation

On July 18, 2019, our board of directors approved a special cash dividend of $400 million to be paid to our parent, CPN Management, LP, which was funded with the proceeds from the sale of the Garrison and RockGen Energy Centers, along with cash on hand, and was paid on July 18, 2019.

Balance Sheet Management

During the first nine months of 2019, we repurchased $48 million in aggregate principal amount of our Senior Unsecured Notes for $44 million. In connection with the repurchases, we recorded approximately $4 million in gain on extinguishment of debt. Since the fourth quarter of 2018, we have cumulatively repurchased $438 million in aggregate principal amount of our Senior Unsecured Notes for $399 million.

On August 12, 2019, we entered into a $750 million first lien senior secured term loan (“2026 First Lien Term Loan”), which bears interest at LIBOR plus 2.50% per annum (with a 0% LIBOR floor) and matures on August 12, 2026. An aggregate amount equal to 0.25% of the aggregate principal amount of the 2026 First Lien Term Loan is payable at the end of each quarter with the remaining balance payable on the maturity date. We paid an upfront fee of an amount equal to 0.5% of the aggregate principal amount of the 2026 First Lien Term Loan, which is structured as original issue discount, and recorded approximately $11 million in debt issuance costs during the third quarter of 2019 related to the issuance of our 2026 First Lien Term Loan. The 2026 First Lien Term Loan contains substantially similar covenants, qualifications, exceptions and limitations as our First Lien Term Loans and First Lien Notes. We used the proceeds from our 2026 First Lien Term Loan, together with cash on hand, to repay the remaining 2023 First Lien Term Loans with a maturity date in May 2023 and to repay project debt. We recorded approximately $12 million in loss on extinguishment of debt during the third quarter of 2019 associated with the repayment.

On August 12, 2019, we amended our Corporate Revolving Facility to extend the maturity of $150 million in revolving commitments from June 27, 2020 to March 8, 2023, and to reduce the commitments outstanding by $20 million to approximately $2.0 billion. The entire Corporate Revolving Facility now matures on March 8, 2023.

PG&E Bankruptcy

On January 29, 2019, PG&E and PG&E Corporation each filed voluntary petitions for relief under Chapter 11. We currently have several power plants that provide energy and energy-related products to PG&E under PPAs, many of which have PG&E collateral posting requirements. Since the bankruptcy filing, we have received all material payments under the PPAs, either directly or through the application of collateral. We also currently have numerous other agreements with PG&E related to the operation of our power plants in Northern California, under which PG&E has continued to provide service since its bankruptcy filing. We cannot predict the ultimate outcome of this matter and continue to monitor the bankruptcy proceedings.