Andy Bischof: 2014 was a very strong year for regulated utilities, with the sector's 27% return outpacing every other sector in the S&P 500. This has left many of the regulated utilities in our space overvalued.
However, we think investors can still find value among unregulated independent power producers. One company we find particularly attractive is Calpine (CPN)--currently 4 stars, no moat. It's the only independent producer to which we assign a positive moat trend. The company is very well positioned to benefit from tightening supply-and-demand conditions in some of its key regions, particularly the Mid-Atlantic and PJM.
Calpine has an efficiency advantage that provides a cost advantage against its competition, regardless of the movement of natural gas prices. In a low natural gas environment like we have today, Calpine's fleet runs more often, helping preserve margin in a lower power-price environment.
Additionally, Calpine has additional gross margin opportunities and significant demand events like we had last winter during the polar vortex. Calpine's fleet is also very well positioned for upcoming environmental regulation.
The fleet operates mostly cleaner natural gas generation and also a small portion of geothermal renewable generation. And finally, we see management as very strong capital allocators. Management has reallocated capital to areas with higher return, which we think bodes very well for shareholders.
And if these opportunities don't present themselves, management returns capital to shareholders through share repurchases with a current 6% cash yield.