There will be more fuel switching from coal to natural gas by power generators in some regions of the country, such as Texas and the Southeast, said Calpine Corp. CEO Jack Fusco. He cited emerging climate change policies, depressed gas prices and the competitive heat rates of gas-fired combined-cycle plants.
There is the near-term reality of a severe spark spread contraction that has been ongoing for the past four months, following the global credit crunch fully unfolding last September, Fusco said. The spread between gas costs and the price at which wholesale power is sold has dropped by about 25% in Texas and by 25-30% in California, said Fusco, who spoke last Tuesday at the Credit Suisse Energy Summit in Vail, CO.
"This is why our hedging is so critical," said Fusco, noting that Calpine has been able hedge at about $28/MWh through 2009. He said the independent power plant operator has "meaningful hedges" in California, Texas and the Southeast. For 2009 the company is 85% hedged.
In response to an analyst's question about whether Calpine expects coal-to-gas switching in the industry, given the prospects of carbon legislation and other factors, Fusco essentially gave a yes answer.
"Our heat rates are extremely competitive," Fusco said. This combined with $4 natural gas yields $24/MWh power at the company's cogeneration facilities. "At that point you should be running more gas units and fewer coal units.
"I don't know what some of my peer group have in elongated coal contracts and train cars, etc., but you should start to see the switching happen between coal and gas, especially with the availability of natural gas today and the price levels that we are seeing." He added that all the climate change legislation being suggested these days should be favorable to Calpine, but he doesn't think it will be fully implemented much before 2013, assuming legislation passes this year or next.
In response to other questions, Fusco was optimistic that Calpine's EBITDA (earnings before interest, taxes, depreciation and amortization) will be about the same level as in 2009 as it was last year, despite the sour global economy. Calpine's long-term debt payments this year and next are relatively small, but there is $1.5 billion due in 2011, half of which is project finance debt tied to what Fusco called "robust plants" that should be able to be refinanced.
He hopes the credit markets come back by 2011, but by then Calpine should be able to finance the other part of its 2011 debt with cash. In terms of seeking a merger, such as the offer from NRG Energy last year, Fusco was adamant that the company can be a very profitable stand-alone enterprise.
Noting that the decision to reject NRG was made by Calpine's interim management before he came on board last August, Fusco said "Calpine is a great stand-alone company at its current scale and size, and I think we are going to be successful over the long term. I hope for a quick economic recovery, and hope it is a recovery where the equity markets lead the credit markets."
In the meantime, Fusco is bullish about Calpine's position in the immediate troubled credit and power sectors.
"With the limited new capacity coming on-line due to reduced access to capital, it means as power markets recover and demand growth occurs, there will be limited supplies available, particularly in the key western markets like Texas and California where we operate," Fusco said. "Under these conditions, in a gas-on-the-margin market, we believe this will improve the economics for Calpine.
"We are likely to be dispatched more often with higher margins. Our fleet is positioned very well for economic recovery when it comes and a changing regulatory environment."
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