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Calpine: Western Hydro Impacting Gas-Fired Power

Heavy rainfall in the West is producing potential record hydroelectric supplies that are impacting natural gas-fired power plant operations in California, according to senior officials at Houston-based Calpine Corp.

Calpine reported more red ink in 1Q2011, due largely to debt payoff costs and losses on interest rate derivatives, during a conference call with analysts Friday.

While Calpine reported an increase in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) quarter over quarter ($303 million EBITDA in 1Q2011 compared with $282 million for the same period last year), the nation's major independent power producer recorded a $297 million loss in 1Q2011 compared with a $47 million loss in 1Q2010.

"Hydroelectric production more than doubled in the first quarter, compared with the same period in 2010," cutting the amount of hours for running gas-fired plants said Calpine COO Thad Hill. Run hours were down, but profits were higher quarter over quarter on the fewer hours.

"We don't see any long-term implications from this; it was just a matter of extraordinary weather conditions," Hill said. He expects a return to more "near-normal weather conditions" in 2012-13.

For the second quarter and the remainder of this year, Hill said above-normal hydro conditions will continue. "There is a lot of water, and that is going to continue through the second quarter, but the key for us is that we are very highly hedged for California, regardless of whether the hydro turns a lot worse or a lot better. We're generally neutral."

A lot of California's water will run out in the second quarter, Hill said. But he noted that the excess hydro in the Pacific Northwest will continue into the summer and some of that power could come down to California, where Calpine has its large concentration of gas-fired and geothermal power plants.

Calpine Chief Counsel Thad Miller speculated that some form of cap-and-trade program could be mounted by the California Air Resources Board (CARB) next year despite the current uncertainty caused by a court challenge to its implementation (see Daily GPI, March 25).

"The court hasn't come out with a further decision and CARB has asked the court to rule rapidly so they can continue with their [implementation of AB 32, the state climate law]. CARB is continuing its AB 32 implementation in parallel with trying to satisfy the court on the issues the opponents have raised in their legal action," Miller said.

"We know informally the CARB staff is continuing to work on the refinement to the rules that were implemented last December, but until we have more visibility on what the court is going to do, we can't say definitively that CARB will be moving forward on Jan. 1, 2012. If you look at the forward market, it is applying a very substantial discount to cap-and-trade starting on Jan. 1.

"We still think there is some probability that it would start on Jan. 1, and there is also the possibility that they will look at a partial year's approach to implementing something on carbon later in the year."

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