The acquisition of Noble Americas Energy Solutions provides a natural hedge to the independent power producer's fleet in an environment of depressed power prices.
By Andrew Bischof, CFA, CPA | 10-10-16 | 09:25 AM | Email Article

We are reaffirming our $20 per share fair value estimate, along with our no-moat and positive moat trend ratings, after  Calpine  announced plans to acquire Noble Americas Energy Solutions, or NAES, for $800 million plus $100 million of net working capital.

Andrew Bischof, CFA, CPA, is a senior equity analyst for Morningstar.

After accounting for the expected $200 million benefit from collateral synergies and legacy hedge runoff, the transaction values NAES at 5.0 times adjusted EBITDA. This is in line with the 4.5 times adjusted EBITDA Calpine paid in its 2015 purchase of Champion Energy and similar recent transactions. While we would have preferred Calpine to focus on debt reduction, Calpine's management has acquired a best-in-class energy retailer that has substantial overlap with Calpine's existing generation footprint in California, Texas, and the Northeast. The acquisition provides a natural hedge to Calpine's fleet in an environment of depressed power prices.

In the long term, Calpine's leverage from the acquisition will be unchanged, as proceeds from asset sales, namely Mankato Power Plant,  and internally generated cash flow will be used to pay down the $550 million bridge loan in 2017. Calpine's liquidity will remain strong, with $1.2 billion in capacity under Calpine's current corporate revolver remaining after additional collateral requirements are met. We still forecast improvement in Calpine's credit metrics, with debt/EBITDA declining to 5.8 from the current 7.5 times in our five-year forecast.

We still believe the market does not appreciate Calpine's enviable position among independent power producer peers. Calpine's competitively advantaged fleet, its attractive asset positioning, and management's capital allocation make it the only power producer with a positive moat trend. Calpine trades at a 36% discount to our fair value estimate, making it the cheapest U.S. utility in our coverage.

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Andrew Bischof, CFA, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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