CPN Initiation Report

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Market Price (1/29/2016): $15.31/share; ST-Target: $24/share; NIV: $37/share

Calpine is the template for the future of independent power

Given environmental regulations/legislations, we believe Calpine Corporation is not only the model for all future IPPs in the US, but also, and perhaps more importantly, the voice of the industry, in our opinion. Despite this CPN is trading at inappropriate levels due mostly to natural gas prices and soft US economy. However, we believe there’s room for CPN to move to ~$24/share over the ST. Strategically, there is little to criticize. We also applaud management’s move towards using unsecured debt and taking advantage of low interest rates. We believe Granite Ridge, Fore River and Guadaloupe deals reflect management’s good judgment, and we feel CPN’s growth program is on target, for now. However, we would like to hear more about its plans to not only solidify its competitive advantage, but also how it plans to extend this advantage over the next 1-2 decades. Development of Glass Mountain geothermal would be good move in right direction, in our opinion. In the NT, we feel commodity prices will continue to challenge CPN, but over ST-to-MT the importance of heat rates will likely start to dominate IPP valuations as, finally, older and less efficient plants are retired. Champion Energy acquisition leaves us somewhat puzzled and is an unexpected development, the prudency of which is yet to be decided. Lastly, we believe virtually all environmental issues work towards CPN’s advantage, but we can’t accurately nor absolutely evaluate impact of more renewable developments.

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