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| CPN > SEC Filings for CPN > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our accompanying Consolidated Financial Statements and related notes. See the cautionary statement regarding forward-looking statements on page 1 of this Report for a description of important factors that could cause actual results to differ from expected results. See also Item 1A. "Risk Factors."
INTRODUCTION AND OVERVIEW
Our Business
We are an independent wholesale power generation company engaged in the ownership and operation of natural gas-fired and geothermal power plants in North America. Our portfolio of power plants is comprised of two types of power generation technologies: natural gas-fired combustion turbines (primarily combined-cycle) and renewable geothermal conventional steam turbines. As of December 31, 2008, our portfolio, including partnership interests, consisted of 76 power plants, with an aggregate operating generation capacity of approximately 24,187 MW with an additional nearly 1,000 MW under construction or in advanced development at two power plants. Our generation capacity consisted of 4,080 MW of baseload capacity from our Geysers Assets and Cogeneration power plants (natural gas-fired power plants that produce and sell both power and steam), 15,057 MW of intermediate load capacity from our combined-cycle combustion turbines and 5,050 MW of peaking capacity from duct-fired generation and generation from our simple-cycle combustion turbines.
We sell wholesale power, steam, capacity, renewable energy credits and ancillary services to our customers, including industrial companies, retail power providers, utilities, municipalities, independent electric system operators, marketers and others. We engage in the purchase of natural gas as fuel for our power plants and in related natural gas transportation and storage transactions, and in the purchase of electric transmission rights to deliver power to our customers. We also enter into natural gas, power and other financial derivative and commodities transactions to hedge our business risks and optimize our portfolio. We seek to grow our business through financially disciplined power plant development, construction and acquisition as well as through expansion or upgrades of our existing power plants, in each case, based primarily on whether we expect to achieve an attractive return on invested capital.
During 2006 and through the Effective Date, we conducted our business in the ordinary course as debtors-in-possession under the protection of the Bankruptcy Courts. We emerged from Chapter 11 on January 31, 2008, as described below in "- Emergence from Chapter 11 and Implementation of Plan of Reorganization."
We remain focused on increasing our earnings and generating cash flows sufficient to maintain adequate levels of liquidity to service our debt and to fund our operations. We will continue to pursue opportunities to improve our fleet performance and reduce operating costs. In order to manage our various physical assets and contractual obligations, we will continue to execute commodity hedging agreements within the guidelines of our commodity risk policy.
Ongoing state, regional and federal initiatives to implement new environmental regulations are expected to have a significant impact on the power generation industry. At the federal level, there has been increased attention to climate change, RPS and energy efficiency. Several bills to regulate GHG emissions and to impose a national RPS and energy efficiency standards, as well as to provide economic incentives to develop and operate renewable power generation and energy efficiency, have already been introduced in Congress. Several states and regional organizations are also developing, or have developed, state-specific or regional initiatives to reduce GHG emissions and to promote RPS and energy efficiency through mandatory programs. We are actively participating in these debates at the federal, state and regional levels. Although the ultimate legislation and regulations that result from these activities could have a material impact on our business, we believe we will face a lower compliance burden than some competitors due to the relatively low GHG emission rates of our fleet; however, it is too early to determine the likely impact of proposed RPS and energy efficiency regulations.
We assess our business primarily on a regional basis due to the impact on our financial performance of the differing characteristics of these regions, particularly with respect to competition, regulation and other factors impacting supply and demand. Our reportable segments are West (including geothermal), Texas, Southeast, North and Other. Our Other segment includes fuel management, our TMG and certain non-region specific natural gas marketing and optimization and other corporate activities. In these segments we have 7,487 MW of capacity in Texas, 7,246 MW in the West, 6,104 MW in the Southeast and 3,350 MW in the North (including Canada). Our Geysers Assets, located in northern California and included in our West segment, produce approximately 725 MW from 15 operating power plants and represent the largest geothermal power generation portfolio in the U.S.
Our Key Financial Performance Drivers
Our Commodity Margin and cash flows from operations are primarily derived from the sale of power and power-related products generated predominantly from our natural gas-fired power plant portfolio. Thus, the spread between natural gas prices and power prices contributes significantly to our financial results and is the primary component of our Commodity Margin. In addition, our plant operating performance and availability are key to our performance.
Natural gas prices and power prices are generally correlated in our two primary markets, the West and Texas, because plants using natural gas-fired technology tend to be the marginal or price-setting generation units in these regions. Holding other factors constant, where natural gas is the price-setting fuel, higher natural gas prices tend to increase our Commodity Margin because our combined-cycle plants are more fuel-efficient than many other older gas-fired technologies and peaking units. Conversely, decreases in natural gas prices tend to decrease our Commodity Margin. However, the positive relationship between natural gas prices and our Commodity Margin may be diminished by the effects of our fixed-price PPAs and where natural gas-fired units are not on the margin as is often the case in off-peak periods or in markets where non-gas-fired capacity can satisfy the majority of the demand. Our Geysers Assets do not consume natural gas, and because there is a direct relationship between power prices and natural gas prices in the West, increases in natural gas prices generally benefit our Geysers Assets.
Weather could have a significant short-term impact on supply and demand. Historically, demand for and the price of power is higher in the summer and winter seasons when temperatures are more extreme, and therefore, our revenues and Commodity Margin could be negatively impacted by relatively cool summers or mild winters. Also as a result of weather patterns, a disproportionate amount of our total revenue is usually realized during our third fiscal quarter. We expect this trend to continue in the future as U.S. demand for power generally peaks during this time.
Generation outages and reserve margins also impact supply and demand and the price for power, particularly in markets where reserve margins are low or transmission constraints require that baseload generation be served from generation units operating within that market (such as in the West). In addition,
efficient operation of our fleet creates the opportunity to capture Commodity Margin in a cost effective manner. However, unplanned outages during periods of positive Commodity Margin could result in a loss of that opportunity. We generally measure our fleet performance based on our availability factors, Heat Rate and plant operating expense. The higher our availability factor, the better positioned we are to capture Commodity Margin. The less natural gas we must consume for each MWh of power generated, the lower our Heat Rate and the higher our Commodity Margin.
Emergence from Chapter 11 and Implementation of Plan of Reorganization
From the Petition Date and through the Effective Date, we operated as a debtor-in-possession under the protection of the Bankruptcy Courts. We emerged from Chapter 11 on January 31, 2008. At the Petition Date, we carried $17.4 billion of debt with an average interest rate of 10.3%. As a result of retiring unsecured debt with reorganized Calpine Corporation common stock, proceeds received from the sale of certain of our assets and the repayment or refinancing of certain of our project debt, we reduced our pre-petition debt by approximately $7.0 billion. Upon our emergence from Chapter 11, we carried $10.4 billion of debt with an average interest rate of 8.1%.
Pursuant to our Plan of Reorganization, first and second lien Calpine Corporation debt claims, allowed administrative claims and unsecured convenience claims (subject to certain exceptions, all unsecured claims $50,000 or less) have been or are being paid in full in cash and cash equivalents; priority tax claims have been or are being paid in full in cash and cash equivalents or with a distribution of reorganized Calpine Corporation common stock; and other allowed secured claims have been or are being reinstated, paid in full in cash or cash equivalents, or had the collateral securing such claims turned over to the secured creditor. In addition, all shares of our common stock outstanding prior to the Effective Date were canceled, and the issuance of 485 million shares of reorganized Calpine Corporation common stock was authorized for distribution to holders of certain allowed claims, primarily holders of allowed unsecured claims. Through the filing of this Report, approximately 427 million shares have been distributed to holders of allowed unsecured claims against the U.S. Debtors, approximately 10 million shares are being held pending resolution of certain inter-creditor matters and approximately 48 million shares remain in reserve for distribution to holders of disputed claims whose claims ultimately become allowed. Any unresolved claims will continue to be subject to the claims reconciliation process under the supervision of the U.S. Bankruptcy Court. We estimate that the number of shares reserved is sufficient to satisfy the U.S. Debtors' obligations under the Plan of Reorganization even if all disputed unsecured claims ultimately become allowed. To the extent that any of the reserved shares remain undistributed upon resolution of the remaining disputed claims, such shares will not be returned to us but rather will be distributed pro rata to claimants with allowed claims to increase their recovery. We are not required to issue additional shares above the 485 million shares authorized to settle unsecured claims, even if the shares remaining for distribution are not sufficient to fully pay all allowed unsecured claims. Accordingly, resolution of these claims could have a material effect on creditor recoveries under the Plan of Reorganization as the total number of shares of common stock that remain available for distribution upon resolution of disputed claims is limited pursuant to the Plan of Reorganization.
On September 22, 2008, the U.S. Bankruptcy Court approved our settlement with the holders of the CalGen Second Lien Debt settling their claims asserted in our Chapter 11 cases for, among other things, prepayment premiums and default interest for $64 million plus interest accruing from September 30, 2008. Pursuant to the settlement, which resolved the largest disputed claims outstanding after our emergence date, unsecured claims to the holders of the CalGen Second Lien Debt were allowed $110 million in the aggregate. These unsecured claims were satisfied with distributions of 5,358,300 shares of the reorganized Calpine Corporation common stock reserved under the Plan of Reorganization.
Certain disputed claims, including prepayment premium and default interest claims asserted by the holders of CalGen Third Lien Debt, which remain disputed, may be required to be settled in cash and cash
equivalents, which may be generated from the sale of the allowed claim (which claim would be an unsecured claim and therefore settled with reorganized Calpine Corporation common stock held in reserve pursuant to the Plan of Reorganization). To the extent that the common stock reserved on account of the CalGen Third Lien Debt prepayment premium and default interest claims is insufficient in value to satisfy such claims in full, we will be required to use other available cash to satisfy such claims unless otherwise approved by the U.S. Bankruptcy Court. No assurances can be given that settlements may not be materially higher or lower than confirmed in the Plan of Reorganization or than we originally estimated.
Pursuant to the Plan of Reorganization, we were also authorized to issue up to 15 million shares under the Calpine Equity Incentive Plans, and, as of December 31, 2008, approximately 2 million shares of restricted stock, net of forfeitures, and options to purchase approximately 9 million shares of common stock, net of forfeitures, had been issued under the Calpine Equity Incentive Plans. Holders of allowed interests in Calpine Corporation (primarily holders of Calpine Corporation common stock existing as of the Petition Date) received a pro rata share of warrants to purchase approximately 48.5 million shares of reorganized Calpine Corporation common stock at $23.88 per share. Warrants for 21,499 shares of common stock were exercised prior to expiration. The remaining unexercised warrants expired on August 25, 2008. Holders of subordinated equity securities claims did not receive a distribution under the Plan of Reorganization and may only recover from applicable insurance proceeds.
Upon the application of the Canadian Debtors and other foreign entities, on
February 8, 2008, the Canadian Court ordered and declared that (i) the unsecured
notes issued by ULC I were canceled and discharged on February 4, 2008, (ii) the
Canadian Debtors and other foreign entities had completed all distributions
previously ordered in full satisfaction of the pre-filing claims against them,
(iii) the Canadian Debtors and other foreign entities had otherwise fully
complied with all orders of the Canadian Court and (iv) the proceedings under
the CCAA were terminated, including the stay of proceedings. As a result of the
termination of the CCAA proceedings, the Canadian Debtors and other foreign
entities, consisting of a 50% ownership interest in the 50 MW Whitby
Cogeneration power plant, approximately $34 million of debt and various working
capital items, were reconsolidated on the Canadian Effective Date.
In connection with our emergence from Chapter 11, we recorded certain "plan effect" adjustments to our Consolidated Balance Sheet as of the Effective Date in order to reflect certain provisions of our Plan of Reorganization. These adjustments included the distribution of approximately $4.1 billion in cash and the authorized issuance of 485 million shares of reorganized Calpine Corporation common stock primarily for the discharge of LSTC, repayment of the Second Priority Debt and for various other administrative and other post-petition claims. As a result, our equity increased by approximately $8.9 billion. We borrowed approximately $6.4 billion under our Exit Facilities, which was used to repay the outstanding term loan balance of $3.9 billion (excluding the unused portion under the $1.0 billion revolver) under our DIP Facility. The remaining net proceeds of approximately $2.5 billion were used to fund cash payment obligations under the Plan of Reorganization including the repayment of a portion of the Second Priority Debt and the payment of administrative claims. The reorganization items on our Consolidated Statements of Operations are primarily driven by our financing and restructuring activities. Our historical financial performance during the pendency of the Chapter 11 cases and CCAA proceedings is likely not indicative of our future financial performance.
See Note 3 of the Notes to Consolidated Financial Statements for further information regarding our Chapter 11 proceedings and our emergence from Chapter 11.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive. Our ability to successfully grow our business is dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business and to meet certain near-term debt repayment obligations is dependent on maintaining sufficient liquidity.
Volatility in the financial markets through 2008 and into 2009, including the failure or merger of certain financial institutions and continued uncertainty surrounding many others has constricted access to capital and credit markets in the U.S. and worldwide, including within our industry, for us and for our counterparties. We expect these conditions will continue during 2009 and possibly longer. As a result, we and the industry have experienced increased credit and liquidity risk over the past few months. Even if we are not impacted directly, we could be impacted indirectly in the event our counterparties are unable to perform under their contractual obligations with us. We actively monitor our exposure to our counterparties including their credit status.
As of December 31, 2008, we had $1.7 billion in cash and cash equivalents including $725 million borrowed on October 2, 2008, under our Exit Credit Facility revolving facility. This borrowing, which was invested in money market funds, which are mainly invested in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities, was a proactive financial decision to increase our cash position and reduce the risk of nonperformance from institutions that hold a commitment in our Exit Credit Facility revolving facility during a period of uncertainty in the capital markets. Our remaining availability under our Exit Credit Facility revolving facility as of December 31, 2008, is approximately $16 million for future letters of credit or cash borrowings. Our decision to repay, hold or pay down other debt with the cash collected from our $725 million draw under our Exit Credit Facility revolving facility will be determined based upon our future liquidity needs and confidence in future credit markets. We have $716 million in current maturities of long-term debt as of December 31, 2008. We believe that we have adequate resources to repay our current maturities as they become due with a combination of cash and cash equivalents on hand and cash expected to be generated from future operations. In the event confidence in the credit markets returns and if we are able to obtain favorable credit terms, we may decide to refinance portions of our current maturities or other more costly debt.
Significant changes in commodity prices and Market Heat Rates can have an impact on our liquidity as we use margin deposits, cash prepayments and letters of credit as credit support (collateral) with and from our counterparties for commodity procurement and risk management activities. Utilizing our portfolio of transactions subject to collateral exposure, we estimate that, as of February 11, 2009, an increase of $1/MMBtu in natural gas prices would result in an increase of collateral required of approximately $154 million. If natural gas prices decreased by $1/MMBtu, we estimate that our collateral requirements would decrease by approximately $143 million. Changes in Market Heat Rates also affect our liquidity. For example, as demand increases, less efficient generation is dispatched, which increases the Market Heat Rate and results in increased collateral requirements. Based upon historical relationships of natural gas and Market Heat Rate movements, we derived a statistical analysis that indicates that a change of $1/MMBtu in natural gas is comparable to a Market Heat Rate change of 170 Btu/KWh. We estimate that, as of February 11, 2009, an increase of 170 Btu/KWh in the Market Heat Rate would result in an increase in collateral required of approximately $40 million. If Market Heat Rates were to fall at a similar rate, we estimate that our collateral required would decrease by $24 million. In the second quarter of 2008, we experienced higher commodity prices and Market Heat Rates which exposed us to increasing collateral requirements and margin calls which then decreased in the third quarter.
In order to reduce the cash collateral and letters of credit that we would otherwise be required to provide to our counterparties, we have granted additional liens on the assets currently subject to liens under the Exit Credit Facility to collateralize our obligations under certain of our power and natural gas agreements that qualify as "eligible commodity hedge agreements" under the Exit Credit Facility, and certain of our interest rate swap agreements. The counterparties under such agreements will share the benefits of the collateral subject to such liens ratably with the lenders under the Exit Credit Facility. Such liens had also been permitted under the DIP Facility prior to the conversion of the loans and commitments under the DIP Facility to our exit financing under the Exit Credit Facility. See Note 11 of the Notes to Consolidated Financial Statements for further information on our margin deposits and collateral used for commodity procurement and risk management activities.
To provide for increased liquidity in periods of rising commodity prices, we entered into two credit facilities, the Knock-in Facility and Commodity Collateral Revolver that increase our liquidity available to
collateralize obligations to counterparties under eligible commodity hedge agreements during periods of increasing natural gas prices. The Knock-in Facility, maturing on June 25, 2009, provides an initial $50 million of available capacity for the issuance of letters of credit up to a total maximum availability of $200 million contingent on natural gas futures contract prices exceeding certain thresholds. The Commodity Collateral Revolver, maturing July 8, 2010, under which we received an initial advance of $100 million, provides up to a total maximum availability of $300 million contingent on mark-to-market exposure amounts under certain reference transactions. As of the date of this Report, no additional amounts under either facility are available as current natural gas prices do not exceed stated thresholds.
We could potentially face downward pressure on our Commodity Margin as a result of the recent economic recession. The impacts would be highly dependent on the severity and duration of the economic downturn. During pronounced recessionary periods, there can be a decrease in power demand primarily driven by decreased usage by the industrial and manufacturing sectors. This "softening" of demand typically results in more demand satisfied by baseload and intermediate units using lower variable cost fuel sources such as coal and nuclear fuel, and less demand served by higher variable cost units such as natural gas-fired peaking power plants. Additionally, a recessionary environment can result in lower natural gas pricing which may adversely impact our Commodity Margin as our cost of production advantage relative to less efficient natural gas-fired generation is diminished on an absolute basis. However, with our combined forward power sales and natural gas purchases, we believe that we have substantially hedged our gross Commodity Margin for 2009 and therefore do not expect further declines in natural gas prices or softening of demand to significantly impact our liquidity in 2009.
It is difficult to predict future developments and the amount of credit support
that we may need to provide as part of our business operations should financial
market and commodity price volatility persist for a significant period of time
beyond 2009. Our ability to generate sufficient cash is dependent upon, among
other things: (i) improving the profitability of our operations; (ii) complying
with the covenants under our Exit Credit Facility and other existing financing
obligations; (iii) stabilizing and increasing future contractual cash flows; and
(iv) our significant counterparties performing under their contracts with us.
Our significant financing activities and debt agreements entered into during the year ended December 31, 2008, are summarized below.
Exit Facilities - Upon our emergence from Chapter 11, we converted the approximately $4.9 billion of loans and commitments outstanding under our DIP Facility (including the $1.0 billion revolver) into loans and commitments under our approximately $7.3 billion of Exit Facilities. The Exit Facilities provide for approximately $2.1 billion in senior secured term loans and $300 million in senior secured bridge loans in addition to the loans and commitments that had been available under the DIP Facility. The Exit Facilities include:
• The Exit Credit Facility, comprising (i) approximately $6.0 billion of senior secured term loans; (ii) a $1.0 billion senior secured revolving facility; and (iii) the ability to raise up to $2.0 billion of incremental term loans available on a senior secured basis in order to refinance secured debt of subsidiaries under an "accordion" provision; and
• The Bridge Facility, which, prior to its repayment as described below, provided for a $300 million senior secured bridge term loan.
On the Effective Date, we fully drew on our approximately $6.0 billion of senior secured term loans and the $300 million Bridge Facility and we drew approximately $150 million under the $1.0 billion senior secured revolving facility. The proceeds of the drawdowns, above the amounts that had been applied under the DIP Facility as described below, were used to repay a portion of the Second Priority Debt, fund distributions under the Plan of Reorganization to holders of other secured claims and to pay fees, costs, commissions and expenses in connection with the Exit Facilities and the implementation of our Plan of Reorganization. Term loan borrowings under the Exit Credit Facility bear interest at a floating rate of, at our option, LIBOR plus 2.875% per
annum or base rate plus 1.875% per annum. Borrowings under the Exit Credit Facility term loan facility require quarterly payments of principal equal to 0.25% of the original principal amount of the term loan, with the remaining unpaid amount due and payable at maturity on March 29, 2014.
The Bridge Facility was repaid in full on March 6, 2008, with proceeds from the sales of the Hillabee and Fremont development project assets.
The obligations under the Exit Credit Facility are unconditionally guaranteed by certain of our direct and indirect domestic subsidiaries and are secured by a security interest in substantially all of the tangible and intangible assets of Calpine Corporation and the guarantors. The obligations under the Exit Credit Facility are also secured by a pledge of the equity interests of the direct subsidiaries of each guarantor, subject to certain exceptions, including exceptions for equity interests in foreign subsidiaries, existing contractual prohibitions and prohibitions under other legal requirements. The Exit Credit . . .
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