Electricity generator rockets to the top
Earnings-per-share growth zooms with profit from selling a half-dozen power plants
CALPINE CEO Thad Hill is used to being the odd man out in the electricity industry. As vast supplies of cheap natural gas unleashed by the shale boom make it more competitive with coal as a generation fuel, Calpine, which always has operated gas-fired plants, has been enjoying the benefits of a cheaper commodity.
While competing power plant operators grumble about new environmental rules they say will shutter their plants, Calpine defended the Environmental Protection Agency’s authority to regulate pollution, even filing a U.S. Supreme Court brief in support.
And when the Northeast rolled out new penalties for generators that fail to prepare adequately for emergencies, Houston-based Calpine embraced the pay-for-performance structure, boasting about its minimal outages during a brutal 2014 winter that knocked out nearly a quarter of the region’s electricity capacity, Hill said.
The company topped this year’s Houston Chronicle 100 list of publicly traded companies, leapfrogging from No. 100 last year, largely due to 7,600 percent growth in earnings per share after the company pocketed $750 million in profit from selling off six power plants in the Southeast. That decision to shed assets in highly regulated markets underscores Calpine’s continued efforts to reshape its portfolio and allocate cash in smart ways, said Andrew Bischof, an analyst at Morningstar.
“In general, the management team has done a very good job managing the balance sheet,” he said.
Calpine, which was in bankruptcy less than a decade ago, had the highest earnings per share growth in the Chronicle’s annual survey, and it scored well in the three other metrics the survey measures, with 2014 revenue of $8.03 billion, revenue growth of 27.4 percent and total return of 13.4 percent.
Hill said that at a time when the power industry is in upheaval, Calpine’s fresh thinking and its fleet of young, flexible gas-fired plants have given the company an advantage over competitors struggling to weather a national shift away from coal. Emissions regulations that mostly hit coal plants, he said, along with lower prices for cleaner-burning natural gas and growth in wind and solar, are changing the market for baseload generation — plants expected to run all the time to meet continuing power demand.
“Calpine is uniquely wellpositioned to respond to these trends,” Hill said.
But it took a lot of elbow grease to haul Calpine from bankruptcy and transform the company’s good assets and solid technical expertise into a leaner, stronger company prepared for a new era of cleaner electricity generation, Hill said. The company has about 2000 employees, including around 800 in the region.
When Calpine emerged from bankruptcy in 2008, its main focus was on cutting costs and figuring out better ways to operate. Back then, each plant managed its own purchas- ing, an ineffective system for a company with more than 80 such facilities. The new executive team created a centralized procurement system and kept a closer eye on cash flow.
“It’s just good old-fashioned blocking and tackling,” Hill said. “There’s no magic to it.”
And as those decisions helped stabilize and strengthen Calpine, its management began to look outside the company for opportunities to grow.
Since 2010, the company has bought and sold about $7 billion worth of assets, shifting away from the Southeast, where it is difficult to compete against regulated utilities. Meanwhile, the company expanded its footprint in the mid-Atlantic and New England, where providers get paid twice — for generating electricity and for having capacity available on standby.
“We took our chips out of a
“We took our chips out of a region that’s difficult for independent power producers and moved them into more attractive regions, and we did it at good value.”
Thad Hill, Calpine CEO
region that’s difficult for independent power producers and moved them into more attractive regions, and we did it at good value,” Hill said.
Calpine also has expanded two Houston-area plants that had not been operating at their full capabilities. The company spent about $225 million adding additional combustion turbines at the Deer Park plant and Channel Energy Center at the Houston Ship Channel to extend the capacity of existing oversize steam turbines.
“We didn’t build a new car, we just made our V-6 a V-8,” company spokesman Brett Kerr said.
As the U.S. power industry shifts from coal to natural gas and renewable energy, Calpine continues to look for opportunities to grow and change.
It would like to extend its presence in the Northeast, where companies are retiring power plants that run on coal and nuclear power, but Hill said Calpine needs to make sure the price is right before pressing forward with more acquisitions.
“You can never predict it, because if you do, you get impatient and you overpay,” he said. “So it’s important just to be very disciplined.”
Hill also sees benefits in positioning Calpine to take more advantage of the growing presence of wind and solar power on the electricity grid — notably by providing reliable backup to these intermittent resources.
“There’s clearly more competition from renewables, but I think that represents an opportunity for us,” he said. “You’ve got to be there when the sun doesn’t shine and the wind doesn’t blow, and we can respond very quickly.”