Calpine Reports Third Quarter 2012 Results, Narrows 2012 Guidance, Provides 2013 Guidance and Announ

Calpine Reports Third Quarter 2012 Results, Narrows 2012 Guidance, Provides 2013 Guidance and Announces Sale of Broad River Energy Center

HOUSTON--(BUSINESS WIRE)-- Calpine Corporation (NYS: CPN) :

Summary of Third Quarter 2012 Financial Results (in millions):

 
  Three Months Ended September 30,   Nine Months Ended September 30,
2012   2011   % Change 2012   2011   % Change
   
Operating Revenues $ 1,996 $ 2,209 (9.6 )% $ 4,111 $ 5,341 (23.0 )%
Commodity Margin $ 897 $ 825 8.7 % $ 2,023 $ 1,921 5.3 %
Adjusted EBITDA $ 706 $ 638 10.7 % $ 1,434 $ 1,347 6.5 %
Adjusted Recurring Free Cash Flow $ 463 $ 361 28.3 % $ 523 $ 381 37.3 %
Per Share (diluted) $ 0.99 $ 0.74 33.8 % $ 1.10 $ 0.78 41.0 %
Net Income (Loss)1 $ 437 $ 190 $ 99 $ (177 )
Net Income, As Adjusted2 $ 215 $ 195 $ 164 $ 30
 

Narrowing 2012 Full Year Guidance and Providing 2013 Full Year Guidance:

       
2012 2013
(in millions)
Adjusted EBITDA $1,725 - 1,775 $1,760 - 1,960
Adjusted Recurring Free Cash Flow $525 - 575 $575 - 775
Per Share Midpoint (diluted) $1.16 $1.45

Note: 2013 guidance range reflects all pending acquisition and divestiture activity, including today's announced sale of Broad River Energy Center, which we estimate would have contributed approximately $40 million of Adjusted EBITDA in 2013.

Recent Achievements:

  • Operations:
    — Generated more than 33 million MWh3 of electricity in the third quarter of 2012, a record for the period and a 14% increase compared to the third quarter of 2011
    — Held year-to-date plant operating expense4 essentially flat, despite a 31% increase in generation3
    — Delivered lowest year-to-date fleetwide forced outage factor on record: 1.6%
    — Produced highest year-to-date fleetwide starting reliability on record: 98.5%  
    — Achieved best year-to-date safety performance on record
  • Commercial:
    — Announcing sale of Broad River Energy Center, an 847 MW simple-cycle power plant in South Carolina, for $427 million5, or $504/kW
    — Announced acquisition of Bosque Energy Center, an 800 MW combined-cycle power plant in Central Texas for $432 million5, or $540/kW
    — Signed 15-year PPA for 260 MW of capacity, energy and ancillary services from our Oneta Energy Center commencing in June 2016
  • Capital Structure:
    — Simplified capital structure by entering into $835 million first lien term loan at an attractive rate, using proceeds to redeem 10% of existing first lien notes and retire project-level BRSP debt

Calpine Corporation (NYS: CPN) today reported third quarter 2012 Adjusted EBITDA of $706 million, compared to $638 million in the prior year period, and Adjusted Recurring Free Cash Flow of $463 million, or $0.99 per diluted share, compared to $361 million, or $0.74 per diluted share, in the prior year period. Net Income1 for the third quarter was $437 million, or $0.94 per diluted share, compared to $190 million, or $0.39 per diluted share, in the prior year period. Net Income, As Adjusted2, for the third quarter of 2012 was $215 million compared to $195 million in the prior year period.

Year-to-date 2012 Adjusted EBITDA was $1,434 million, compared to $1,347 million in the prior year period, and Adjusted Recurring Free Cash Flow was $523 million, or $1.10 per diluted share, compared to $381 million, or $0.78 per diluted share, in the prior year period. Net Income1 for the first nine months of 2012 was $99 million, or $0.21 per diluted share, compared to a Net Loss1 of $177 million, or $0.36 per diluted share, in the prior year period. Net Income, As Adjusted2, for the first nine months of 2012 was $164 million compared to $30 million in the prior year period.

"Calpine's power plants continue to deliver record operating results," said Jack Fusco, Calpine's President and Chief Executive Officer. "Our versatile fleet generated nearly 90 million MWhs through the first nine months of 2012 - 31% more than last year - while holding plant operating expenses essentially flat. This was due in large part to our focus on operational excellence and preventive maintenance, which yielded our best year-to-date forced outage factor and starting reliability on record. In addition, our commercial optimization efforts resulted in significant contribution from our Texas segment during the third quarter due to our seasonal hedging activity, which captured margin above what ultimately proved to be weak market prices driven by mild weather. As a result, we are able to maintain the midpoint of our full-year 2012 Adjusted EBITDA and Adjusted Recurring Free Cash Flow guidance while narrowing the range.

"Consistent with our disciplined capital allocation program, Calpine continues to make significant progress across the board, from acquisitions and divestitures to organic growth to share repurchases. With respect to acquisitions and divestitures, I am pleased to report that we have taken another meaningful step forward in our initiative to realign our portfolio by monetizing non-core assets and redeploying capital to enhance long-term shareholder value. Today, we are announcing the divestiture of our Broad River Energy Center, a contracted peaking plant in South Carolina, for $427 million, which complements our recently announced $432 million acquisition of Bosque, a merchant CCGT in the attractive Texas market. In addition, we expect to receive $392 million by year-end for the sale of our Riverside Energy Center, a CCGT in Wisconsin. Meanwhile, we plan to bring almost 800 MW of contracted growth projects in California online by mid-2013 and continue to advance more than 800 MW of development projects in Texas and Delaware. Finally, we have completed approximately $427 million of our previously announced $600 million share repurchase program."

Zamir Rauf, Calpine's Chief Financial Officer, added, "We've had a great year to date, as evidenced by our 41% growth in Adjusted Recurring Free Cash Flow Per Share, which I believe is the best measure for evaluating shareholder value creation. Free cash flow per share represents cash available for capital allocation and captures value created through asset monetizations, debt portfolio optimization, our substantial NOL tax position and share repurchases. Therefore, in addition to our 2013 guidance, we are initiating an Adjusted Recurring Free Cash Flow Per Share growth target rate of 15-20% compounded annually, which we also believe represents potential annual total shareholder return."

SUMMARY OF FINANCIAL PERFORMANCE

Third Quarter Results

Adjusted EBITDA for the third quarter of 2012 was $706 million compared to $638 million in the prior year period. The year-over-year increase in Adjusted EBITDA was primarily due to a $72 million increase in Commodity Margin, which was driven primarily by:

            +   higher contribution from hedges in our Texas segment, and
+ higher regulatory capacity revenue in the Mid-Atlantic market.

Net Income1 was $437 million for the third quarter of 2012, compared to $190 million in the prior year period. As detailed in Table 1, Net Income, As Adjusted2, was $215 million in the third quarter of 2012 compared to $195 million in the prior year period. The year-over-year improvement was driven largely by:

            +   higher Commodity Margin, as previously discussed, and
+ lower interest expense, primarily resulting from a decrease in our annual effective interest rate, partially offset by
- increased income tax expense due primarily to an increase in various state and foreign jurisdiction income taxes.

Year-to-Date Results

Adjusted EBITDA for the nine months ended September 30, 2012, was $1,434 million compared to $1,347 million in the prior year period. The year-over-year increase in Adjusted EBITDA was primarily due to a $102 million increase in Commodity Margin, partially offset by modest increases in plant operating expense4 and sales, general and administrative expenses6. The increase in Commodity Margin was primarily due to:

            +   higher contribution from hedges, primarily in our Texas segment during the third quarter of 2012 compared to the prior year period
+ higher generation due to increased market opportunities, primarily driven by lower natural gas prices in all segments during the first half of 2012 compared to the same period in 2011, as well as lower hydroelectric generation and a nuclear power plant outage in California during the nine months ended September 30, 2012, and
+ an extreme cold weather event in Texas in February 2011 that negatively impacted our Commodity Margin in that period, which did not recur in the current year, partially offset by
- lower regulatory capacity revenues during the first half of 2012 compared to the prior year period and
- the expiration of contracts.

Net Income1 was $99 million for the nine months ended September 30, 2012, compared to a Net Loss1 of $177 million in the prior year period. As detailed in Table 1, Net Income, As Adjusted2, was $164 million in the nine months ended September 30, 2012, compared to $30 million in the prior year period. The year-over-year improvement was driven largely by:

            +   higher Commodity Margin, as previously discussed, and
+ lower interest expense, primarily resulting from a decrease in our annual effective interest rate.

___________

1 Reported as net income (loss) attributable to Calpine on our Consolidated Condensed Statements of Operations.

2 Refer to Table 1 for further detail of Net Income, As Adjusted.

3 Includes generation from power plants owned but not operated by Calpine and our share of generation from unconsolidated power plants.

4 Increase in plant operating expense excludes changes in major maintenance expense, stock-based compensation expense, non-cash loss on disposition of assets and other costs. See the table titled "Consolidated Adjusted EBITDA Reconciliation" for the actual amounts of these items for the nine months ended September 30, 2012 and 2011.

5 Amounts subject to adjustments upon close.

6 Increase in sales, general and administrative expense excludes changes in stock-based compensation expense, amortization and other items. See the table titled "Consolidated Adjusted EBITDA Reconciliation" for the actual amounts of these items for the nine months ended September 30, 2012 and 2011.

Table 1: Net Income, As Adjusted

 
Three Months Ended September 30,   Nine Months Ended September 30,
2012   2011 2012   2011
(in millions)
Net income (loss) attributable to Calpine $ 437 $ 190 $ 99 $ (177 )
Debt extinguishment costs(1) (4 ) 12 94
Unrealized MtM (gain) loss on derivatives(1) (2) (222 ) (35 ) (103 ) 42
Other items (1) (3)   44   156   71  
Net Income, As Adjusted(4) $ 215   $ 195   $ 164   $ 30  

__________

(1) Shown net of tax, assuming a 0% effective tax rate for these items.

(2) In addition to changes in market value on derivatives not designated as hedges, changes in unrealized (gain) loss also includes de-designation of interest rate swap cash flow hedges and related reclassification from AOCI into earnings, hedge ineffectiveness and adjustments to reflect changes in credit default risk exposure.

(3) Other items include realized mark-to-market losses associated with the settlement of non-hedged interest rate swaps totaling nil and $156 million for the three and nine months ended September 30, 2012, respectively, and $44 million and $147 million for the three and nine months ended September 30, 2011, respectively. Other items for the nine months ended September 30, 2011, also include a $76 million federal deferred income tax benefit associated with our election to consolidate our CCFC subsidiary for tax reporting purposes.

(4) See "Regulation G Reconciliations" for further discussion of Net Income, As Adjusted.

REGIONAL SEGMENT REVIEW OF RESULTS

Table 2: Commodity Margin by Segment (in millions)

  Three Months Ended September 30,   Nine Months Ended September 30,
2012   2011   Variance 2012   2011   Variance
West $ 330 $ 329 $ 1 $ 748 $ 798 $ (50 )
Texas 218 162 56 472 357 115
North 266 259 7 591 578 13
Southeast 83   75   8   212   188   24  
Total $ 897   $ 825   $ 72   $ 2,023   $ 1,921   $ 102  

West Region

Third Quarter: Commodity Margin in our West segment increased by $1 million in the third quarter of 2012 compared to the prior year period. Primary drivers were:

            +   increased generation and higher spark spreads driven primarily by lower hydroelectric generation and a nuclear power plant outage in California during 2012, largely offset by
- lower contribution from hedges associated with our Geysers assets.

Year-to-Date: Commodity Margin in our West segment decreased by $50 million for the nine months ended September 30, 2012, compared to the prior year period. Primary drivers were:

            -   lower contribution from hedges associated with our Geysers assets
- lower revenue due to the expiration of contracts and
- lower Commodity Margin associated with our Sutter Energy Center, which did not run in the first half of 2012, partially offset by
+ increased generation and higher spark spreads resulting from lower hydroelectric generation and a nuclear power plant outage in California during 2012.

Texas Region

Third Quarter: Commodity Margin in our Texas segment increased by $56 million in the third quarter of 2012 compared to the prior year period. The primary driver was:

            +   higher contribution from hedging activities that secured favorable pricing despite lower market prices driven by milder weather.

Year-to-Date: Commodity Margin in our Texas segment increased by $115 million for the nine months ended September 30, 2012, compared to the prior year period. Primary drivers were:

            +   higher contribution from hedging activities that secured favorable pricing despite lower market prices driven by milder weather in the third quarter of 2012 compared to the prior year period
+ higher generation driven by increased market opportunities primarily due to lower natural gas prices and
+ an extreme cold weather event in Texas in February 2011 that negatively impacted our Commodity Margin in the first quarter of the prior year, which did not recur in the current year.

North Region

Third Quarter: Commodity Margin in our North segment increased by $7 million in the third quarter of 2012 compared to the prior year period. Primary drivers were:

            +   higher regulatory capacity revenues and
+ to a far lesser extent, increased generation, the impact of which was mitigated by contracted plants that generated higher volumes, as well as lower margins experienced by the remaining plants.

Year-to-Date: Commodity Margin in our North segment increased by $13 million in the nine months ended September 30, 2012, compared to the prior year period. Primary drivers were:

            +   higher contribution from hedges
+ York Energy Center achieving commercial operation in March 2011 and
+ increased generation driven by increased market opportunities primarily due to lower natural gas prices, partially offset by
- lower regulatory capacity revenues during the nine months ended September 30, 2012, compared to the prior year period.

Southeast Region

Third Quarter: Commodity Margin in our Southeast segment increased by $8 million in the third quarter of 2012 compared to the prior year period. Primary drivers were:

            +   higher contribution from hedges associated with lower natural gas prices, partially offset by
- the expiration of a contract.

Year-to-Date: Commodity Margin in our Southeast segment increased by $24 million in the nine months ended September 30, 2012, compared to the prior year period. Primary drivers were:

            +   higher contribution from hedges and
+ higher generation resulting from increased market opportunities due to lower natural gas prices .

LIQUIDITY AND CAPITAL RESOURCES

Table 3: Liquidity

 
September 30,   December 31,
2012 2011
(in millions)
Cash and cash equivalents, corporate(1) $ 886 $ 946
Cash and cash equivalents, non-corporate 211   306
Total cash and cash equivalents 1,097 1,252
Restricted cash 226 194
Corporate Revolving Facility availability 720 560
Letter of credit availability(2) 25   7
Total current liquidity availability $ 2,068   $ 2,013

__________

(1) Includes $9 million and $34 million of margin deposits held by us posted by our counterparties at September 30, 2012, and December 31, 2011, respectively.

(2) Includes availability under our CDHI letter of credit facility. On January 10, 2012, we increased the CDHI letter of credit facility to $300 million and extended the maturity date to January 2, 2016.

Liquidity remained strong at over $2 billion as of September 30, 2012.

Cash flows from operating activities for the nine months ended September 30, 2012, resulted in net inflows of $608 million compared to $536 million in the prior year period. The increase in cash provided by operating activities was primarily due to an increase in income from operations (adjusted for non-cash items), partially offset by an increase in cash paid for interest due to timing of interest payments on our debt.

Cash flows used in investing activities increased to $701 million for the nine months ended September 30, 2012, compared to $660 million in the prior year period, driven largely by the termination of our legacy interest rate swaps and by an increase in restricted cash associated with 2011 changes in project related debt that did not recur in the nine months ended September 30, 2012.

Cash flows used in financing activities were $62 million for the nine months ended September 30, 2012, and were primarily related to the payments we made under our share repurchase program, offset by the receipt of proceeds from project financings related to our Russell City and Los Esteros construction projects. In addition, we incurred lower financing costs and lower repayments on project debt due in part to the refinancing activities we completed during the nine months ended September 30, 2011.

Adjusted Recurring Free Cash Flow was $523 million for the nine months ended September 30, 2012, compared to $381 million for the prior year period. Adjusted Recurring Free Cash Flow increased during the period primarily due to an $87 million increase in Adjusted EBITDA, as previously discussed. Lower maintenance capital expenditures related to our plant outage schedule and lower interest expense further contributed to the increase compared to the prior year period.

Consistent with our efforts to optimize and simplify our capital structure, on October 9, 2012, we announced that we had entered into a $835 million term loan, the proceeds of which we intend to use to redeem 10% (or approximately $590 million) of our senior secured notes and to retire variable rate project-level BRSP debt (approximately $218 million remaining balance). The term loan, which amortizes at a rate of 1% per year, matures in 2019. The term loan bears interest at LIBOR plus 3.25% per annum (subject to a LIBOR floor of 1.25%) and is expected to produce annual interest savings of approximately $25 million. "As a result of this opportunistic refinancing," said Zamir Rauf, Calpine's Chief Financial Officer, "we have improved our capital structure while reducing o


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