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Stock Strategist

Calpine's a Cash Flow Machine

We don't think the market appreciates the steady cash generation and attractive yield.


 Calpine (CPN) offers investors the opportunity to own a best-in-class independent power producer at a substantial discount to fair value, trading at just 5.8 times our 2016 free cash flow forecast. We think Calpine’s generation fleet sits in the sweet spot of its two primary markets, the U.S. mid-Atlantic region and Texas. We expect both regions to endure a rush of new-build generation to capitalize on low gas prices and attractive wind energy economics. But Calpine’s fleet is lower-cost than competing peak generators and can capitalize on low gas prices, high-efficiency generation technology, and a more sustainable environmental profile than coal plants. We think investors are overly bearish on PJM power markets and overly bullish on Texas power markets and don’t appreciate Calpine’s cash flow consistency.

Calpine is the largest natural gas power producer in the United States, with 3.0 gigawatts of simple-cycle combustion turbines, 6.7 GW of combined-cycle cogeneration, and 16.8 GW of combined-cycle gas turbines. Its fleet is located in three primary regions: East (38% of capacity), Texas (35%), and West (27%). It also owns 725 MW of geothermal generation in California and 4 MW of solar generation.

Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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