Calpine Corp.

Not only is merchant power a price-taking business, but it is also biased toward the downside during recessions. This is because both fuel prices and market heat rates decline during economic downturns. Generally, the coal, oil, and nuclear assets owned by all of Calpine's peers require considerably higher capex than its younger, all-gas fleet. The effects of COVID-19 have only underscored this aspect because we've seen the generation levels of NRG Energy Inc.'s and Vistra Corp.'s fossil-fired fleets decline in 2021 while Calpine's generation volumes have held relatively flat since 2019. Based on forward curves and the company's current level of hedging, we estimate its wholesale EBITDA could decline by 15%-20% in 2023, before accounting for additional hedging or mitigation.

...Our rating assumes Calpine maintains its strong performance through 2022. In our last review, we noted that the company's ability to preserve its cash flows in 2021 would be a material risk if there were subsequent waves of COVID-19 infection in the U.S. or the actual path of the country's economic recovery was much slower than we anticipated. We now believe that Calpine's significant FOCF (funds from operations [FFO] less capital expenditure [capex]) generation in recent years will continue in 2021 and 2022, even after incorporating the effects of the February winter storm (based on its in-place hedges). Not only is merchant power a price-taking business, but it is also biased toward the downside during recessions. This is because both fuel prices and market heat rates decline during economic downturns. Generally, the coal, oil, and nuclear assets owned by all of Calpine's peers require considerably higher capex than its younger, all-gas fleet. The effects of COVID-19 have only underscored...

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