Calpine says ‘uncharted territory’ benefits its natural gas plants

Independent power producer Calpine (NYSE: CPN) says its natural gas plants are benefiting from cheap gas.

Calpine officials said during a Feb. 10 earnings conference call that its fleet of combined-cycle power plants are running more steadily with fewer “starts and stops” than ever before. The gas price has sunk below $3/mmBtu “and stayed there,” CEO Jack Fusco said during the conference call. The low price helped Calpine’s gas fleet capture market share from coal-fired plants, he said.

The level of increased demand for power from Calpine’s gas plants is so unusual, it’s “uncharted territory” Fusco said.

Gas prices fell below the price of Eastern coal a few years ago and recently also fell below the price of low-sulfur Western coal from the Powder River Basin, Fusco said.

The resulting coal-to-gas switching trend has led Calpine to narrow its earnings expectations for the near term. 

“We now project adjusted EBITDA of $1.6bn to $1.725bn, and adjusted recurring free cash flow of $425m to $550m,” Fusco said. Coal to gas switching is one of the key reasons for the better forecast, Fusco said.

The CEO said he would be more bullish were it not for the fact that power prices are also decreasing along with natural gas prices.

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,” Fusco said. “Since then the tables have turned with shale discoveries that have provided us with an abundant, affordable domestic supply of natural gas.”

“In sum, the current low natural gas price environment drives opportunity for the volume expansion among our fleet in the off-peak hours,” Fusco said. “Theoretically, we should see fewer starts and stops resulting in more baseload operation and less variable maintenance expense. This phenomenon has never existed for Calpine and quite frankly, we’re excited to verify our operational thesis.”

Things were so good in Texas that in January 2012 Calpine’s capacity factors for its Texas fleet were 59% compared to 34% in January 2011, company executives said.

Calpine, California seek to avoid Sutter plant shutdown

On another topic, Calpine officials said they are working with California to prevent the shutdown of the 570-MW Sutter combined cycle power plant in Yuba City.

The plant’s contract expired at the end of 2011.  In California, the energy market alone does not provide sufficient margin to cover the plant’s operating expenses, including maintenance, company officials said.

“We are hopeful that a solution will be reached for Sutter and in any event, it is clear Sutter is acted as a catalyst for longer term more fundamental market reform to occur,” said Calpine’s Executive Vice President and COO Thad Hill.

Both the California Independent System Operator (ISO) and California Public Utilities Commission (CPUC) are looking for ways to keep the plant operating.  The California ISO has said Sutter’s capacity and operational flexibility will be needed for reliability at the end of 2017, or sooner depending on the rate of economic recovery.  

The combined-cycle gas plant became operational in 2001.

As for East Coast power plant news, Calpine dislikes a Maryland plan to contract with generation developers for new facilities that could hurt the economics of existing plants. Calpine officials said the same legal interstate commerce questions raised about New Jersey’s program also apply to Maryland’s effort.

“As a result, we think it’s unlikely that the Maryland process would continue in anything closer to its current scale or proposed timing,” Hill said in a transcript.

Calpine, which emerged from bankruptcy a few years ago, reported fourth quarter 2011 adjusted EBITDA of $379 m, compared to $386 m in the prior year period, and adjusted recurring free cash flow of $108 m, compared to $59 m in the prior year period.

 

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.