No Reason to Be Leery of Undervalued Calpine
The company's focus on deleveraging should ease investor concerns.
We are reaffirming our $20 fair value estimate, along with our no-moat and positive moat trend ratings, after Calpine (CPN) reported full-year adjusted EBITDA of $1.815 billion, compared with $1.976 billion in the year-ago period, in line with our estimates. Management reaffirmed adjusted EBITDA guidance range of $1.8 billion-$1.95 billion for 2017, in line with our $1.9 billion estimate. Calpine's 2017 adjusted free cash flow guidance of $710 million-$860 million also is in line with our $798 million estimate.
Management has been slow to deleverage compared with its peers, showing reluctance to commit to specific targets and allowing management more capital allocation flexibility. While we were comfortable with management's plan to allocate capital to both deleveraging and share repurchases, investors clearly remained leery in a commodity sensitive environment. Management's accelerated deleveraging calls for $2.7 billion in debt paydown by 2019, reducing leverage 1.5 times against current adjusted EBITDA levels. Against our forward adjusted EBITDA levels, we see deleveraging nearly 2.0 times by 2019. Our previous estimates called for $2.6 billion in share repurchases and debt paydown. The company's plan to shift capital toward deleveraging has no material impact on our fair value estimate.
Calpine continues to build out its retail platform, acquiring residential retail provider North American Power for $105 million. This is in addition to recently acquired commercial and industrial retailer Noble Americas Energy Solutions. We continue to appreciate management's retail efforts, as Calpine Energy Solutions should provide a strong hedge to Calpine's generation fleet in a stubbornly low commodity price environment. Management is deploying capital to retail from recent portfolio changes, mainly the sale of Mankato and Osprey.
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Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.