CALPINE CORP (CPN)

2014 Climate Risk Disclosure Analysis

Industry Group: Electric Power & Gas Utilities

Standard Industrial Classification: Electric Services

Index Membership: Russell 3000

Financial Year End: Dec 2013

We are a premier wholesale power producer with operations throughout the U.S. We measure our success by delivering long-term shareholder value. We accomplish this through our focus on operational excellence at our power plants and in our commercial activity and on a disciplined approach to capital allocation that includes investing in growth, returning money to shareholders through share repurchases, and prudent balance sheet management. We are one of the largest power generators in the U.S. measured by power produced. We own and operate primarily natural gas-fired and geothermal power plants in North America and have a significant presence in major competitive wholesale power markets in California, Texas and the Mid-Atlantic region of the U.S. Since our inception in 1984, we have been a leader in environmental stewardship. We have invested in clean power generation to become a recognized leader in developing, constructing, owning and operating an environmentally responsible portfolio of power plants. Our portfolio is primarily comprised of two types of power generation technologies: natural gas-fired combustion turbines, which are primarily efficient combined-cycle plants, and renewable geothermal conventional steam turbines. We are among the world's largest owners and operators of industrial gas turbines as well as cogeneration power plants... 10-K Filing (2014-02-13)

Disclosure Breakdown

Disclosure Rank

99th percentile in Russell 3000

Disclosure Abstract

Relevance:
30%
ABBREVIATION DEFINITION
2017 First Lien Notes The $1.2 billion aggregate principal amount of 7.25% senior secured notes due 2017, issued October 21, 2009
2018 First Lien Term Loans Collectively, the $1.3 billion first lien senior secured term loan dated March 9, 2011 and the $360 million first lien senior secured term loan dated June 17, 2011
2019 First Lien Notes The $400 million aggregate principal amount of 8.0% senior secured notes due 2019, issued May 25, 2010
2019 First Lien Term Loan The $835 million first lien senior secured term loan, dated October 9, 2012, among Calpine Corporation, as borrower, and the lenders party hereto, and Morgan Stanley Senior Funding, Inc., as administrative agent and Goldman Sachs Credit Partners L.P., as collateral agent 2020 First Lien Notes The $1.1 billion aggregate principal amount of 7.875% senior secured notes due 2020, issued July 23, 2010
2020 First Lien Term Loan The $390 million first lien senior secured term loan, dated October 23, 2013, among Calpine Corporation, as borrower, and the lenders party hereto, and Citibank, N.A., as administrative agent and Goldman Sachs Credit Partners L.P., as collateral agent 2021 First Lien Notes The $2.0 billion aggregate principal amount of 7.50% senior secured notes due 2021, issued October 22, 2010
2022 First Lien Notes The $750 million aggregate principal amount of 6.0% senior secured notes due 2022, issued October 31, 2013
2023 First Lien Notes The $1.2 billion aggregate principal amount of 7.875% senior secured notes due 2023, issued January 14, 2011
2024 First Lien Notes The $490 million aggregate principal amount of 5.875% senior secured notes due 2024, issued October 31, 2013
AB 32 California Assembly Bill 32
Adjusted EBITDA EBITDA as adjusted for the effects of (a) impairment charges, (b) major maintenance expense, (c) operating lease expense, (d) unrealized gains or losses on commodity derivative mark-to-market activity, (e) adjustments to reflect only the Adjusted EBITDA from our unconsolidated investments, (f) adjustments to exclude the Adjusted EBITDA related to the noncontrolling interest, (g) stock-based compensation expense, (h) gains or losses on sales, dispositions or retirements of assets, (i) non-cash gains and losses from foreign currency translations, (j) gains or losses on the repurchase or extinguishment of debt, (k) non-cash GAAP-related adjustments to levelize revenues from tolling contracts and (l) other extraordinary, unusual or non-recurring items AOCI Accumulated Other Comprehensive Income Average availability Represents the total hours during the period that our plants were in-service or available for service as a percentage of the total hours in the period ii ABBREVIATION DEFINITION
Average capacity factor, excluding peakers A measure of total actual generation as a percent of total potential generation. It is calculated by dividing (a) total MWh generated by our power plants, excluding peakers, by (b) the product of multiplying (i) the average total MW in operation, excluding peakers, during the period by (ii) the total hours in the period Bankruptcy Code U.S. Bankruptcy Code Bcf Billion cubic feet Broad River Broad River Energy LLC, formerly an indirect, wholly-owned subsidiary of Calpine that leased the Broad River Energy Center, an 847 MW natural gas-fired, peaking power plant located in Gaffney, South Carolina Btu British thermal unit(s), a measure of heat content CAA Federal Clean Air Act, U.S. Code Title 42, Chapter 85
CAIR Clean Air Interstate Rule CAISO California Independent System Operator Calpine Equity Incentive Plans Collectively, the Director Plan and the Equity Plan, which provide for grants of equity awards to Calpine non-union employees and non-employee members of Calpine's Board of Directors Cap-and-trade A government imposed emissions reduction program that would place a cap on the amount of emissions that can be emitted from certain sources, such as power plants. In its simplest form, the cap amount is set as a reduction from the total emissions during a base year and for each year over a period of years the cap amount would be reduced to achieve the targeted overall reduction by the end of the period. Allowances or credits for emissions in an amount equal to the cap would be issued or auctioned to companies with facilities, permitting them to emit up to a certain amount of emissions during each applicable period. After allowances have been distributed or auctioned, they can be transferred or traded CARB California Air Resources Board CCFC Calpine Construction Finance Company, L.P., an indirect, wholly-owned subsidiary of Calpine CCFC Finance CCFC Finance Corp.
CCFC Notes The $1.0 billion aggregate principal amount of 8.0% Senior Secured Notes due 2016 issued May 19, 2009, by CCFC and CCFC Finance CCFC Term Loans Collectively, the $900 million first lien senior secured term loan and the $300 million first lien senior secured term loan entered into on May 3, 2013, between CCFC, as borrower, and Goldman Sachs Lending Partners, LLC, as administrative agent and as collateral agent, and the lenders party thereto CDHI Calpine Development Holdings, Inc., an indirect, wholly-owned subsidiary of Calpine CES Calpine Energy Services, L.P., an indirect, wholly-owned subsidiary of Calpine iii ABBREVIATION DEFINITION
CFTC U.S. Commodities Futures Trading Commission Chapter 11 Chapter 11 of the U.S. Bankruptcy Code CO2 Carbon dioxide COD Commercial operations date Cogeneration Using a portion or all of the steam generated in the power generating process to supply a customer with steam for use in the customer's operations Commodity expense The sum of our expenses from fuel and purchased energy expense, fuel transportation expense, transmission expense, environmental compliance expense and realized settlements from our marketing, hedging and optimization activities including natural gas transactions hedging future power sales, but excludes the unrealized portion of our mark-to-market activity Commodity Margin Non-GAAP financial measure that includes power and steam revenues, sales of purchased power and physical natural gas, capacity revenue, REC revenue, sales of surplus emission allowances, transmission revenue and expenses, fuel and purchased energy expense, fuel transportation expense, environmental compliance expense, and realized settlements from our marketing, hedging and optimization activities including natural gas transactions hedging future power sales, but excludes the unrealized portion of our mark-to-market activity and other revenues Commodity revenue The sum of our revenues from power and steam sales, sales of purchased power and physical natural gas, capacity revenue, REC revenue, sales of surplus emission allowances, transmission revenue and realized settlements from our marketing, hedging and optimization activities, but excludes the unrealized portion of our mark-to-market activity Company Calpine Corporation, a Delaware corporation, and its subsidiaries Corporate Revolving Facility The $1.0 billion aggregate amount revolving credit facility credit agreement, dated as of December 10, 2010, and was amended on June 27, 2013, among Calpine Corporation, Goldman Sachs Bank USA, as administrative agent, Goldman Sachs Credit Partners L.P., as collateral agent, the lenders party thereto and the other parties thereto CPUC California Public Utilities Commission Creed Creed Energy Center, LLC
Director Plan The Amended and Restated Calpine Corporation 2008 Director Incentive Plan Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EBITDA Net income (loss) attributable to Calpine before net (income) loss attributable to the noncontrolling interest, interest, taxes, depreciation and amortization Effective Date January 31, 2008, the date on which the conditions precedent enumerated in the Plan of Reorganization were satisfied or waived and the Plan of Reorganization became effective iv ABBREVIATION DEFINITION
EIA Energy Information Administration of the U.S. Department of Energy EPA U.S. Environmental Protection Agency Equity Plan The Amended and Restated Calpine Corporation 2008 Equity Incentive Plan ERCOT Electric Reliability Council of Texas EWG(s) Exempt wholesale generator(s)
Exchange Act U.S. Securities Exchange Act of 1934, as amended FASB Financial Accounting Standards Board FDIC U.S. Federal Deposit Insurance Corporation FERC U.S. Federal Energy Regulatory Commission First Lien Credit Facility Credit Agreement, dated as of January 31, 2008, as amended by the First Amendment to Credit Agreement and Second Amendment to Collateral Agency and Intercreditor Agreement, dated as of August 20, 2009, among Calpine Corporation, as borrower, certain subsidiaries of the Company named therein, as guarantors, the lenders party thereto, Goldman Sachs Credit Partners L.P., as administrative agent and collateral agent, and the other agents named therein First Lien Notes Collectively, the 2017 First Lien Notes, the 2019 First Lien Notes, the 2020 First Lien Notes, the 2021 First Lien Notes, the 2022 First Lien Notes, the 2023 First Lien Notes and the 2024 First Lien Notes First Lien Term Loans Collectively, the 2018 First Lien Term Loans, the 2019 First Lien Term Loan and the 2020 First Lien Term Loan FRCC Florida Reliability Coordinating Council GE General Electric International, Inc.
GEC Collectively, Gilroy Energy Center, LLC, Creed and Goose Haven Geysers Assets Our geothermal power plant assets, including our steam extraction and gathering assets, located in northern California consisting of 15 operating power plants and one plant not in operation GHG(s) Greenhouse gas(es), primarily carbon dioxide (CO2), and including methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs)
Goose Haven Goose Haven Energy Center, LLC
Greenfield LP Greenfield Energy Centre LP, a 50% partnership interest between certain of our subsidiaries and a third party which operates the Greenfield Energy Centre, a 1,038 MW natural gas-fired, combined-cycle power plant in Ontario, Canada Heat Rate(s) A measure of the amount of fuel required to produce a unit of power v ABBREVIATION DEFINITION
Hg Mercury IRC Internal Revenue Code IRS U.S. Internal Revenue Service ISO(s) Independent System Operator(s)
KIAC KIAC Partners, an indirect, wholly-owned subsidiary of Calpine that leases our Kennedy International Airport Power Plant, a 121 MW natural gas-fired, combined-cycle power plant located at John F. Kennedy International Airport in New York KWh Kilowatt hour(s), a measure of power produced, purchased or sold LIBOR London Inter-Bank Offered Rate Los Esteros Project Debt Credit Agreement dated August 23, 2011, between Los Esteros Critical Energy Facility, LLC, as borrower, and the lenders named therein LTSA(s) Long-Term Service Agreement(s)
Market Heat Rate(s) The regional power price divided by the corresponding regional natural gas price MISO Midwest ISO
MMBtu Million Btu MRO Midwest Reliability Organization MW Megawatt(s), a measure of plant capacity MWh Megawatt hour(s), a measure of power produced, purchased or sold NAAQS National Ambient Air Quality Standards NDH New Development Holdings, LLC, an indirect, wholly-owned subsidiary of Calpine NDH Project Debt The $1.3 billion senior secured term loan facility and the $100 million revolving credit facility issued on July 1, 2010, under the credit agreement, dated as of June 8, 2010, among NDH, as borrower, Credit Suisse AG, as administrative agent, collateral agent, issuing bank and syndication agent, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc. and Deutsche Bank Securities Inc., as joint book-runners and joint lead arrangers, Credit Suisse AG, Citibank, N.A., and Deutsche Bank Trust Company Americas, as co-documentation agents and the lenders party thereto repaid on March 9, 2011
NERC North American Electric Reliability Council NOL(s) Net operating loss(es)
NOX Nitrogen oxides NPCC Northeast Power Coordinating Council NYISO New York ISO
vi ABBREVIATION DEFINITION
NYMEX New York Mercantile Exchange NYSE New York Stock Exchange OCI Other Comprehensive Income OMEC Otay Mesa Energy Center, LLC, an indirect, wholly-owned subsidiary of Calpine that owns the Otay Mesa Energy Center, a 608 MW natural gas-fired, combined-cycle power plant located in San Diego county, California OTC Over-the-Counter PG&E Pacific Gas & Electric Company PJM PJM Interconnection is a RTO that coordinates the movement of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia Plan of Reorganization Sixth Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code filed by the U.S. Debtors with the U.S. Bankruptcy Court on December 19, 2007, as amended, modified or supplemented PPA(s) Any term power purchase agreement or other contract for a physically settled sale (as distinguished from a financially settled future, option or other derivative or hedge transaction) of any power product, including power, capacity and/or ancillary services, in the form of a bilateral agreement or a written or oral confirmation of a transaction between two parties to a master agreement, including sales related to a tolling transaction in which the purchaser provides the fuel required by us to generate such power and we receive a variable payment to convert the fuel into power and steam PUCT Public Utility Commission of Texas PUHCA 2005 U.S. Public Utility Holding Company Act of 2005
PURPA U.S. Public Utility Regulatory Policies Act of 1978
QF(s) Qualifying facility(ies), which are cogeneration facilities and certain small power production facilities eligible to be 'qualifying facilities' under PURPA, provided that they meet certain power and thermal energy production requirements and efficiency standards. QF status provides an exemption from the books and records requirement of PUHCA 2005 and grants certain other benefits to the QF
REC(s) Renewable energy credit(s)
Report This Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 12, 2014
Reserve margin(s) The measure of how much the total generating capacity installed in a region exceeds the peak demand for power in that region RFC Reliability First Corporation RGGI Regional Greenhouse Gas Initiative Risk Management Policy Calpine's policy applicable to all employees, contractors, representatives and agents which defines the risk management framework and corporate governance structure for commodity risk, interest rate risk, currency risk and other risks vii ABBREVIATION DEFINITION
RMR Contract(s) Reliability Must Run contract(s)
RPS Renewable Portfolio Standards RTO(s) Regional Transmission Organization(s)
Russell City Project Debt Credit Agreement dated June 24, 2011, between Russell City Energy Company, LLC, as borrower, and the lenders named therein SEC U.S. Securities and Exchange Commission Securities Act U.S. Securities Act of 1933, as amended SERC Southeastern Electric Reliability Council SO2 Sulfur dioxide Spark Spread(s) The difference between the sales price of power per MWh and the cost of fuel to produce it SPP Southwest Power Pool Steam Adjusted Heat Rate The adjusted Heat Rate for our natural gas-fired power plants, excluding peakers, calculated by dividing (a) the fuel consumed in Btu reduced by the net equivalent Btu in steam exported to a third party by (b) the KWh generated.
item 1. Business
3 Relevance:
4%
Our Geysers Assets located in northern California represent the largest geothermal power generation portfolio in the U.S. and produced approximately 18% of all renewable energy in the state of California during 2012. We sell wholesale power, steam, capacity, renewable energy credits and ancillary services to our customers, which include utilities, independent electric system operators, industrial and agricultural companies, retail power providers, municipalities, power marketers and others.
3 Relevance:
9%
We have invested the necessary capital to develop a power generation portfolio that has substantially lower air emissions compared to our competitors' power plants using other fossil fuels, such as coal. In addition, we strive to preserve our nation's valuable water and land resources. To condense steam, our combined-cycle power plants use cooling towers with a closed water cooling system or air cooled condensers and do not employ 'once-through' water cooling, which uses large quantities of water from adjacent waterways, negatively impacting aquatic life. Since our plants are modern and efficient and utilize clean burning natural gas, we do not require large areas of land for our power plants nor do we require large specialized landfills for the disposal of coal ash or nuclear plant waste. We believe that we will be less adversely impacted by Cap-and-trade limits, carbon taxes or required environmental upgrades as a result of future potential regulation or legislation addressing GHG, other air pollutant emissions such as mercury, as well as water use or emissions, compared to our competitors who use other fossil fuels or older, less efficient technologies.
Our scale provides the opportunity to have meaningful regulatory input, an ability to leverage our procurement efforts for better pricing, terms and conditions on our goods and services, and to develop and offer a wide array of products and services to our customers. Finally, geographic diversity helps us manage and mitigate the impact of weather, regulatory and regional economic differences across our markets to provide more consistent financial performance Our principal offices are located in Houston, Texas with regional offices in Dublin, California and Wilmington, Delaware, an engineering, construction and maintenance services office in Pasadena, Texas and government affairs offices in Washington D.C., Sacramento, California and Austin, Texas.
7 Relevance:
12%
Because geothermal is a renewable source of energy, we receive a REC for each MWh we produce and are able to sell our RECs to load serving entities. New Jersey has a solar specific RPS which enables us to sell RECs from a 4 MW photovoltaic solar generation facility located in Vineland, New Jersey.
Fourth, our cogeneration power plants produce steam in addition to electricity for sale to industrial customers for use in their manufacturing processes or heating, ventilation and air conditioning operations.
Fifth, we provide ancillary service products to wholesale power markets. These products include the right for the purchaser to call on our generation to provide flexibility to the market and support operation of the electric grid. For example, we are sometimes paid to reserve a portion of capacity at some of our power plants that could be deployed quickly should there be an unexpected increase in load or to assure reliability due to fluctuations in the supply of power from variable renewable resources such as wind and solar generation. These ramping characteristics are becoming increasingly necessary in markets where intermittent renewables have large penetrations.
In addition to the five products above, we are buyers and sellers of emission allowances and credits, including those under California's AB 32 GHG reduction program, RGGI, the federal Acid Rain and CAIR programs and emission reduction credits under the federal Nonattainment New Source Review program
Although all of the products mentioned above contribute to our financial performance and are the primary components of our Commodity Margin, the most important are our sale of wholesale power and capacity. We utilize long-term customer contracts for our power and steam sales where possible. For power and capacity that are not sold under customer contracts or longer-dated capacity auctions, we use our hedging program and sell power into shorter term wholesale markets throughout the regions in which we participate When selling power from our natural gas-fired fleet into the short-term or spot markets, we attempt to maximize our operations when the market Spark Spread is positive. Assuming economic behavior by market participants, generating units generally are dispatched in order of their variable costs, with lower cost units being dispatched first and units with higher costs dispatched as demand, or 'load,' grows beyond the capacity of the lower cost units. For this reason, in a competitive market, the price of power typically is related to the variable operating costs of the marginal generator, which is the last unit to be dispatched in order to meet demand. The factors that most significantly impact our operations are reserve margins, the price and supply of natural gas and competing fuels such as coal and oil, weather patterns and natural events, our operating Heat Rate, availability factors, and regulatory and environmental pressures as further discussed below Reserve Margins Reserve margin, a measure of excess generation capacity in a market, is a key indicator of the competitive conditions in the markets in which we operate. For example, a reserve margin of 15% indicates that supply is 115% of expected peak power demand under normal weather and power plant outage conditions. Holding other factors constant, lower reserve margins typically lead to higher power prices because the less efficient capacity in the region is needed more often to satisfy power demand or voluntary or involuntary load shedding measures are taken. Markets with tight demand and supply conditions often display price spikes, higher capacity prices and improved bilateral contracting opportunities. Typically, the market price impact of reserve margins, as well as other supply/demand factors, is reflected in the Market Heat Rate, calculated as the local market power price divided by the local natural gas price During the last decade, the supply and demand fundamentals in many regional markets have been negatively impacted by the combination of new generation coming on line and a general decline in weather normalized load growth rates due to the economic recession and energy efficiency measures. Although uncertainty exists and there are key regional differences at a macro level, continued economic recovery and thus, corresponding net load recovery, with the lack of broad new power plant investments and the retirement of older, uneconomic units in our key markets should lead to lower reserve margins and higher Market Heat Rates. Reserve margins by NERC regional assessment area for each of our segments are listed below:
2013(1)
West:
WECC 24.7% Texas:
TRE 12.9%
North:
NPCC 20.1%
MISO 18.8%
PJM 29.3%
Southeast:
SERC 30.3%
SPP 39.4%
FRCC 28.4%
___________
(1) Data source is NERC weather-normalized estimates for 2013 published in May 2013.
8 Relevance:
2%
Although availability is generally not an issue, localized shortages (especially in extreme weather conditions in and around population centers), transportation availability and supplier financial stability issues can and do occur.
9 Relevance:
5%
During periods of high or volatile natural gas prices, we could be required to post additional cash collateral or letters of credit Despite these short-term dynamics, over the long-term, we expect lower natural gas prices to encourage new combined-cycle gas turbine power plant investment, thus enhancing the competitiveness of our modern, natural gas-fired fleet by making investment in other technologies such as coal, nuclear or renewables less economic and, in fact, making it more challenging for existing generation resources that utilize such technology to continue operating economically Weather Patterns and Natural Events Weather generally has a significant short-term impact on supply and demand for power and natural gas. Historically, demand for and the price of power is higher in the summer and winter seasons when temperatures are more extreme, and therefore, our unhedged revenues and Commodity Margin could be negatively impacted by relatively cool summers or mild winters. However, our geographically diverse portfolio mitigates the impact on our Commodity Margin of weather in specific regions of the U.S. Additionally, a disproportionate amount of our total revenue is usually realized during the summer months of our third fiscal quarter.
10 Relevance:
11%
Regulatory and Environmental Trends We believe that, on balance, we will be favorably impacted by current regulatory and environmental trends, including those described below, given the characteristics of our power plant portfolio:
Economic pressures continue to increase for coal-fired power generation as state and federal agencies enact environmental regulations to reduce air emissions of certain pollutants such as SO2, NOX, GHG, Hg and acid gases, restrict the use of once-through cooling, and provide for stricter standards for managing coal combustion residuals. We anticipate that older, less efficient fossil-fuel power plants that emit much higher amounts of GHG, SO2, NOX, Hg and acid gases, which operate nationwide, but more prominently in the eastern U.S., will be negatively impacted by current and future air emissions, water and waste regulations and legislation both at the state and federal levels which will require many coal-fired power plants to install expensive air pollution controls or reduce or discontinue operations. As a result, any retirements or curtailments could enhance our growth opportunities. The estimated capacity for fossil-fueled plants older than 50 years and the total estimated capacity for fossil-fueled plants by NERC region are as follows:
Generating Capacity Older Than 50 years Total Generating Capacity West:
WECC 9,469 MW 133,348 MW Texas:
TRE 3,059 MW 82,920 MW
North:
NPCC 7,286 MW 57,428 MW
MRO 4,736 MW 46,037 MW
RFC 25,234 MW 195,002 MW
Southeast:
SERC 26,556 MW 232,000 MW
SPP 5,037 MW 60,093 MW
FRCC 279 MW 58,805 MW
Total 81,656 MW 865,633 MW
An increase in power generated from renewable sources could lead to an increased need for flexible power that many of our power plants provide to protect the reliability of the grid and premium compensation for that flexibility; however, risks also exist that renewables have the ability to lower overall wholesale prices which could negatively impact us. Significant economic and reliability concerns for renewable generation have been raised, but we expect that renewable market penetration will continue to be assisted by state-level renewable portfolio standards and federal tax incentives.
11 Relevance:
5%
Although we cannot predict the ultimate effect any future environmental legislation or regulations will have on our business, as a clean energy provider, we believe that we are well positioned for almost any increase in environmental rule stringency. We are actively participating in these debates at the federal, regional and state levels. For a further discussion of the environmental and other governmental regulations that affect us, see ' Governmental and Regulatory Matters.With new environmental regulations, the proportion of power generated by natural gas and other low emissions resources is expected to increase because older coal-fired power plants will be required to install costly emissions control devices, limit their operations or retire. Meanwhile, the federal government and many states are considering or have already mandated that certain percentages of power delivered to end users in their jurisdictions be produced from renewable resources, such as geothermal, wind and solar energy
Competition from other sources of power, such as nuclear energy and renewables, could increase in the future, but likely at a lower rate than had been previously expected. The nuclear incident in March 2011 at the Fukushima Daiichi nuclear power plant introduced substantial uncertainties around new nuclear power plant development in the U.S. Low power prices are even challenging the economics of existing nuclear facilities, resulting in the retirement or potential retirement of certain existing nuclear generating units Federal and state financial incentives and RPS requirements continue to foster renewables development. However, the production tax credit for wind expired at the end of 2013 (although if plants were 'under construction', they could keep the credit) and for solar the investment tax credit expires at the end of 2016. Unless the tax credits are extended and/or natural gas prices increase substantially from today's levels, competition from new renewables will likely diminish.
15 Relevance:
3%
Geothermal power is considered a renewable energy because the steam harnessed to power our turbines is produced inside the Earth and does not require burning fuel. The steam is produced below the Earth's surface from reservoirs of hot water, both naturally occurring and injected. The steam is piped directly from the underground production wells to the power plants and used to spin turbines to make power. For the past thirteen consecutive years, our Geysers Assets have continued to generate approximately 6 million MWh of renewable power per year.
20 Relevance:
9%
We were an EPA Climate Leaders Partner with a stated goal to reduce GHG emissions, and we became the first power producer to earn the distinction of Climate Action Leader TM. We have certified our GHG emissions inventory with the California Climate Action Registry every year since 2003. In 2012, our emissions of GHG amounted to approximately 49 million tons Natural Gas-Fired Generation Our natural gas-fired, primarily combined-cycle fleet consumes significantly less fuel to generate power than conventional boiler/steam turbine power plants and emits fewer air pollutants per MWh of power produced as compared to coal-fired or oil-fired power plants. All of our power plants have air emissions controls and most have selective catalytic reduction to further reduce emissions of nitrogen oxides, a precursor of atmospheric ozone and acid rain.
21 Relevance:
7%
Geothermal Generation Our 725 MW fleet of geothermal turbine-based power plants utilizes a natural, renewable energy source, steam from the Earth's interior, to generate power. Since these power plants do not burn fossil fuel, they are able to produce power with negligible CO2 (the principal GHG), NOX and SO2 emissions. Compared to the average U.S. coal-, oil- and natural gas-fired power plant, our Geysers Assets emit 99.9% less NOX, 100% less SO2 and 96.9% less CO2.
22 Relevance:
3%
The EPA is required to issue technology-based national emissions standards for hazardous air pollutants ('NESHAPs') to limit the release of specified HAPs from specific industrial sectors. Mercury and Air Toxics Standards On December 21, 2011, the EPA issued the NESHAP from Coal- and Oil-fired Electric Utility Steam Generating Units and Standards of Performance for Fossil-Fuel-Fired Electric Utility, Industrial-Commercial-Institutional, and Small Industrial-Commercial-Institutional Steam Generating Units, otherwise known as the Mercury and Air Toxics Standards ('MATS').
22 Relevance:
82%
CAIR established annual Cap-and-Trade programs for SO2 and NOX as well as a seasonal program for NOX. On July 11, 2008, the D.C. Circuit invalidated CAIR. The court did not overturn the existing Cap-and-Trade program for SO2 reductions under the Acid Rain Program or the existing ozone season Cap-and-Trade program under the NOX State Implementation Plan Call. As a result of an EPA petition for rehearing, on December 23, 2008, the court left CAIR intact but remanded it to the EPA for further proceedings consistent with the July 11, 2008 opinion. As a result, CAIR went into effect on January 1, 2009, for many of our power plants located throughout the eastern and central U.S. Due to the low-emitting nature of our fleet, the net financial impact of this program to us is neutral to marginally positive Cross-State Air Pollution Rule On July 6, 2011, the EPA finalized the Cross-State Air Pollution Rule ('CSAPR') as the replacement program for CAIR. CSAPR would require a total of 28 primarily eastern states, to reduce annual SO2 emissions, annual NOx emissions and/or ozone seasonal NOx emissions to assist in attaining three NAAQS: the 1997 annual PM2.5 NAAQS, the 1997 8-hour ozone NAAQS, and the 2006 24-hour PM2.5 NAAQS.As with MATS, CSAPR was extensively challenged through both administrative and judicial processes. As a result of one of these challenges, on August 21, 2012, the D.C. Circuit vacated CSAPR, and ordered the EPA to continue administering CAIR. The U.S. Supreme Court heard the case on December 10, 2013 after granting certiorari. We cannot predict the outcome of this case. A decision is expected during summer of 2014. In the event that the D.C. Circuit decision is upheld, the EPA must continue to implement CAIR while it creates a replacement for CSAPR. GHG Emissions On April 2, 2007, the U.S. Supreme Court in Massachusetts v. EPA ruled that the EPA has the authority to regulate GHG emissions under the CAA. In response to Massachusetts, the EPA issued an endangerment finding for GHGs on December 7, 2009, determining that concentrations of six GHGs endanger the public health and welfare. Further, pursuant to the CAA's requirement that the EPA establish motor-vehicle emission standards for any air pollutant which may reasonably be anticipated to endanger public health or welfare, the EPA promulgated the so-called 'Tailpipe Rule', which set GHG emission standards for cars and light trucks Under the EPA's longstanding interpretation of the CAA, the Tailpipe Rule automatically triggered regulation of stationary sources of GHG emissions under the Prevention of Significant Deterioration ('PSD') program (which requires construction permits for stationary sources that have the potential to emit over 100 or 250 tons per year ('tpy'), the applicable threshold depending on the type of source, of 'any air pollutant') and Title V (which requires operating permits for stationary sources that have the potential to emit at least 100 tpy of 'any air pollutant'). Accordingly, the EPA issued two rules phasing in stationary source GHG regulation. In the Timing Rule, the EPA delayed when major stationary sources of GHGs would otherwise be subject to PSD and Title V permitting to correspond to the effective date of the Tailpipe Rule. In the Tailoring Rule, the EPA departed from the CAA's 100/250 tpy emissions thresholds and provided that only sources with emissions exceeding 75,000 or 100,000 tpy carbon dioxide equivalent, depending on the program and project, would initially be subject to GHG permitting
The EPA has issued guidance to permitting authorities on the implementation of GHG best available control technology ('BACT') that focuses on energy efficiency. Our Russell City Energy Center, a 619 MW combined-cycle power plant (our 75% net interest is 464 MW) in Hayward, California, voluntarily accepted GHG BACT limits in its PSD permit before such limits were required by law. Our Deer Park and Channel Energy Center expansions in Texas and our Garrison Energy Center in Delaware were all subject to PSD review for GHG emissions and were issued permits using unit efficiency as the basis for BACT. Based on this experience, for the foreseeable future, we expect that our efficient power plants will be found to meet BACT for GHGs where required to undergo PSD review. Accordingly, and taking into consideration the highly efficient nature of our fleet, we believe that the impact of EPA's GHG permitting rules will be neutral or marginally beneficial to us More than sixty petitions for review of these EPA rules were filed by industry and states, which were subsequently consolidated in the D.C. Circuit case Coalition for Responsible Regulation v. EPA. On June 26, 2012, the D.C. Circuit upheld all of the challenged GHG regulations. After D.C. Circuit appeals were denied, on October 15, 2013, the U.S. Supreme Court granted petitions for certiorari to review Coalition for Responsible Regulation, but only for consideration of one limited issue. Due to the narrowness of the question before the Court, this case does not appear to call into question the EPA's endangerment determination or the legal basis for regulating GHGs under the CAA, as confirmed by the Supreme Court in Massachusetts v. EPA. We expect that a ruling will be issued by summer 2014. We cannot predict the outcome of the Supreme Court's review or its implications on the EPA's GHG regulations or our operations at this time On June 25, 2013, President Obama announced a Climate Action Plan aimed at reducing GHG emissions in the U.S. to 17 percent below 2005 levels by 2020, and at the same time instructed the EPA to develop and implement (1) New Source Performance Standards ('NSPS') for GHG emissions from new electric generating units and (2) GHG emissions guidelines for existing power plants. In April 2012, the EPA had previously proposed a power sector NSPS of 1,000 lbs CO2 per Megawatt-hour ('lb CO2/MWh') for new fossil fuel-fired generating units, including boilers, integrated gasification combined-cycle units and stationary combined-cycle turbine units greater than 25 MW, irrespective of fuel type and generating technology. The President's memorandum directed the EPA to re-propose the new source rule by September 20, 2013. Next, the EPA is directed to propose a rule for modified, reconstructed and existing power plants by June 1, 2014. Finally, the EPA is directed to promulgate a final existing source rule no later than June 1, 2015. The memorandum also directs the EPA to require states to submit their implementation plans for the existing source role to the EPA by June 30, 2016. On September 20, 2013, the EPA re-proposed the power sector GHG NSPS. The re-proposed rule, while similar to the original proposal in some respects, contains different emission standards for different generating technologies. Specifically, large combined-cycle turbines are subject to a standard of 1,000 lb CO2/MWh, small combined-cycle turbines are subject to a standard of 1,050 lb CO2/MWh, and traditional boiler-based power generation facilities are subject to a standard of 1,100 lb CO2/MWh. The standards for combined-cycle turbines are based on the EPA's determination of what is achievable using natural gas combined-cycle technology. The standards for boiler-based units are based on the EPA's determination of what is achievable from new coal-fired utility steam generating units utilizing partial carbon capture and storage technology. The proposed standards effectively exempt most simple-cycle turbines operated as peaking units. We expect no negative impact on Calpine's fleet or development plans if the 2013 NSPS is finalized as proposed.
It is unclear what form the EPA's rule for regulating the GHG emissions from existing power plants will take. Accordingly, we cannot predict how the existing source rules for GHG emissions will regulate power plants and, thereby, the impact of this rule on Calpine is unknown.
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Our analysis of the final regulations indicates that we will have no fee obligation in either state Acid Rain Program As a result of the 1990 CAA amendments, the EPA established a Cap-and-trade program for SO2 emissions from power plants throughout the U.S. Starting with Phase II of the program in 2000, a permanent ceiling (or cap) was set at 10 million tons per year, declining to 8.95 million tons per year by 2010. The EPA allocated SO2 allowances to power plants. Each allowance permits a unit to emit one ton of SO2 during or after a specified year, and allowances may be bought, sold or banked. All but a small percentage of allowances were allocated to power plants placed into service before 1990. Our power plants currently receive sufficient free SO2 allowances; therefore, we will have no compliance expense for this program Regional and State Air Emissions Activities Several states and regional organizations have developed state-specific or regional initiatives to reduce GHG emissions through mandatory programs. The most advanced programs include the RGGI in the northeast states and California's suite of GHG policies promulgated pursuant to AB 32, including its Cap-and-trade program. The evolution of these programs could have a material impact on our business In both of these programs, a cap is established defining the maximum allowable emissions of GHGs emitted by sources subject to the program. Affected sources are required to hold one allowance for each ton of CO2 emitted (and, in the case of California's program, other GHGs) during the applicable compliance period. Both programs also contain provisions for the use of qualified offsets in lieu of allowances. Allowances are distributed through auctions or through allocations to affected companies. In addition, there are functional secondary markets for allowances. We obtain allowances in a variety of ways, including participation in auctions, as part of power purchase agreements, and through bilateral or exchange transactions California: GHG Cap-and-Trade Regulation California's AB 32 requires the state to reduce statewide GHG emissions to 1990 levels by 2020. To meet this benchmark, the CARB has promulgated a number of regulations, including the Cap-and-Trade Regulation and Mandatory Reporting Rule, which took effect on January 1, 2012. These regulations were further amended by the CARB in 2012.
Under the Cap-and-Trade Regulation, the first compliance period for covered entities like Calpine began on January 1, 2013 and runs through the end of 2014. The second and third compliance periods cover 2015 through 2017 and 2018 through 2020, respectively. Covered entities must hold and surrender compliance instruments, which include allowances and offsets, in an amount equivalent to their emissions from sources of GHG located in California and from power imported into California
The GHG emissions market is currently functioning and the cost of allowances is reflected in market pricing The California Cap-and-trade program has been challenged through administrative and judicial processes at both federal and state levels. Thus far, none of these challenges has been successful. We cannot predict the ultimate success of any of these lawsuits nor can we predict whether there will be any additional legal challenges filed against the Cap-and-Trade Regulation or what the associated impacts of any such litigation would be On April 19, 2013, the CARB Board approved amendments to the Cap-and-Trade Regulation to link its program with Quebec's Cap-and-trade program starting January 1, 2014. While the linkage is currently effective, joint auctions of GHG allowances are not expected to occur until later in 2014. The CARB's economic analysis estimates that linkage between California and Quebec has the potential to increase California's GHG allowance prices by 5% to 15%.On September 4, 2013, the CARB proposed regulatory amendments to, among other things, provide allowances through 2017 to covered entities that have long-term contracts that do not allow the costs of compliance with the Cap-and-Trade Regulation to be passed through to their industrial host customers. If ultimately implemented in a form similar to the proposal, these amendments are expected to result in a modest benefit to us. The proposed amendments are likely to go into effect in late 2014. Overall, we support AB 32 and expect the net impact of the Cap-and-Trade Regulation to be beneficial to Calpine. We also believe we are well positioned to comply with the Cap-and-Trade Regulation Northeast and Mid-Atlantic States: CO2 - RGGIOn January 1, 2009, ten northeast and Mid-Atlantic states implemented a Cap-and-trade program, RGGI, which affects our power plants in Maine, New York and Delaware (together emitting about 3.9 million tons of CO2 annually). In 2011, New Jersey announced its withdrawal from the RGGI program effective as of the 2012 compliance year We receive annual allocations from New York's long-term contract set-aside pool to cover some of the CO2 emissions attributable to our PPAs at both the Kennedy International Airport Power Plant and Stony Brook Power Plant. We do not anticipate any significant business or financial impact from RGGI, given the efficiency of our power plants in RGGI states
Consistent with the original memorandum of understanding under which the states created RGGI, the overall success of the RGGI program was reviewed in 2012. This program review led to a number of changes, most significant of which was a reduction of the aggregate RGGI cap downward from 165 million tons to 91 million tons, slightly less than RGGI-wide emissions in 2012. We do not expect any material impact to our business from this change in regulations Texas: NOXPursuant to authority granted under the CAA, regulations adopted by the TCEQ to attain the one-hour and eight-hour NAAQS for ozone included the establishment of a Cap-and-trade program for NOX emitted by power plants in the Houston-Galveston-Brazoria ozone nonattainment area.
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Renewable Portfolio Standards Policymakers have been considering variations of an RPS at the federal and state level. Generally, an RPS requires each retail seller of electricity to include in its resource portfolio (the resources procured by the retail seller to supply its retail customers) a certain amount of power generated from renewable or clean energy resources by a certain date Federal RPSAlthough there is currently no national RPS, President Obama has stated his goal is to have 80% of the nation's electricity provided from clean energy resources, which includes natural gas resources, by 2035, and some U.S. Congressional members have expressed interest in national renewable or clean energy standard legislation. It is too early to determine whether or not the enactment of a national RPS will have a positive or negative impact on us. Depending on the RPS structure, an RPS could enhance the value of our existing Geysers Assets. However, an RPS would likely initially drive up the number of wind and solar resources, which could negatively impact the dispatch of our natural gas-fired power plants, primarily in Texas and California. Conversely, our natural gas power plants could benefit by providing complementary/back-up service for these intermittent renewable resources or by being included in a clean energy standard California RPSOn April 12, 2011, California's Governor signed into law legislation establishing a new and higher RPS. The new law requires implementation of a 33% RPS by 2020, with intermediate targets between 2010 and 2020. The previous RPS legislation required certain retail power providers to generate or procure 20% of the power they sell to retail customers from renewable resources beginning in 2010. The new standard applies to all load-serving entities, including entities such as large municipal utilities that are not subject to CPUC jurisdiction. Under the new law, there are limits on different 'buckets' of procurement that can be used to satisfy the RPS. Load-serving entities must satisfy at least a fraction of their compliance obligations with renewable power from resources located in California or delivered into California within the hour.
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As a result, there can be no assurance that we will not incur a liability under CERCLA in the future Federal Litigation regarding Liability for GHG Emissions Litigation relating to common law tort liability for GHG emissions is working its way through the federal courts. While the U.S. Supreme Court has established that, in light of the EPA regulation of GHGs under the CAA, companies cannot be sued under federal common law theories of nuisance and negligence for their contribution to climate change, questions remain as to the viability of related state-law claims. In general, these state law-related claims have been unsuccessful in assigning tort liability for GHG emissions to power generators.
item 1a. Risk Factors
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Long- and short-term power and natural gas prices may also fluctuate substantially due to other factors outside of our control, including:
 * increases and decreases in generation capacity in our markets, including the addition of new supplies of power as a result of the development of new power plants, expansion of existing power plants or additional transmission capacity;
 * changes in power transmission or fuel transportation capacity constraints or inefficiencies;
 * power supply disruptions, including power plant outages and transmission disruptions;
 * Heat Rate risk;
 * weather conditions, particularly unusually mild summers or warm winters in our market areas;
 * quarterly and seasonal fluctuations;
 * changes in commodity prices and the supply of commodities, including but not limited to coal, natural gas and fuel oil;
 * changes in the demand for power or in patterns of power usage, including the potential development of demand-side management tools and practices;
 * development of new fuels or new technologies for the production or storage of power;
 * federal and state regulations and actions of the ISOs;
 * federal and state power, market and environmental regulation and legislation, including mandating an RPS or creating financial incentives, each resulting in new renewable energy generation capacity creating oversupply;
 * changes in prices related to RECs; and changes in capacity prices and capacity markets.
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We cannot predict the future development of regulation or legislation nor the ultimate effect such changes in these markets could have on our business; however, we could be negatively impacted Existing and future anticipated GHG/Carbon and other air emissions regulations could cause us to incur significant costs and adversely affect our operations generally or in a particular quarter when such costs are incurred Environmental laws and regulations have generally become more stringent over time, and this trend is likely to continue. In particular, there is growing likelihood that carbon tax or limits on carbon, CO2 and other GHG emissions will be implemented at the federal or expanded at the state or regional levels In 2009, ten states in the northeast began the compliance period of a Cap-and-trade program, RGGI, to regulate CO2 emissions from power plants. California has implemented AB 32 which places a statewide cap on GHG emissions and requires the state to return to 1990 emission levels by 2020. In December 2010, CARB adopted a regulation establishing a GHG Cap-and- trade program which is in effect for electric utilities and other 'major industrial sources,' and in 2015 for certain other GHG sources In 2011, the EPA finalized regulations governing GHG emissions from major sources as well as emissions of criteria and hazardous air pollutants from the electric generation sector.
item 6. Selected Consolidated Financial Data
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We own and operate primarily natural gas-fired and geothermal power plants in North America and have a significant presence in major competitive wholesale power markets in California, Texas and the Mid-Atlantic region of the U.S. We sell wholesale power, steam, capacity, renewable energy credits and ancillary services to our customers, which include utilities, independent electric system operators, industrial and agricultural companies, retail power providers, municipalities, power marketers and others. As a result of our investment in cleaner power generation, we have become a recognized leader in developing, constructing, owning and operating an environmentally responsible portfolio of flexible and reliable power plants. In order to manage our various physical assets and contractual obligations, we execute commodity and commodity transportation agreements within the guidelines of our Risk Management Policy. We purchase primarily natural gas and some fuel oil as fuel for our power plants and engage in related natural gas transportation and storage transactions. We purchase electric transmission rights to deliver power to our customers. We also enter into natural gas and power physical and financial contracts to hedge certain business risks and optimize our portfolio of power plants. Seasonality and weather can have a significant impact on our results of operations and are also considered in our hedging and optimization activities Our goal is to be recognized as the premier power generation company in the U.S. as measured by our employees, customers, regulators, shareholders and the communities in which our facilities are located We assess our business on a regional basis due to the impact on our financial performance of the differing characteristics of these regions, particularly with respect to competition, regulation and other factors impacting supply and demand.
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We entered into two new PPAs with the Marin Energy Authority consisting of a one-year contract to provide 3 MW of renewable power during 2014 and a ten-year contract to provide 10 MW of renewable power commencing in January 2017. The renewable power to be delivered under both contracts will be generated from our Geysers Assets.
We entered into a 100 MW financial PPA with a counterparty in PJM which commenced in November 2013 and extends through 2016.
We entered into a new five-year PPA commencing in 2014 for approximately 50 MW and extended the existing steam agreement for ten years beyond 2016 with Celanese Ltd for power and steam generated from our Clear Lake Power Plant.
We entered into a new ten-year PPA with the Sonoma Clean Power Authority to provide 10 MW of renewable power from our Geysers Assets commencing in May 2014. The capacity under contract will increase in increments each year, up to a maximum of 18 MW for years 2020 through 2023.
Our Regulatory and Environmental Profile We are subject to complex and stringent energy, environmental and other governmental laws and regulations at the federal, state and local levels in connection with the development, ownership and operation of our power plants. Federal and state legislative and regulatory actions continue to change how our business is regulated. The EPA is moving forward on climate change regulation, and has already promulgated regulations related to other air pollutant emissions, and some states and regions in the U.S. have implemented or are considering implementing regulations to reduce GHG emissions. We are actively participating in these debates at the federal, regional and state levels. For a further discussion of the environmental and other governmental regulations that affect us, see ' Governmental and Regulatory Matters' in Item 1. of this Report. Although we cannot predict the ultimate effect future climate change regulations or legislation could have on our business, we believe that we will be less adversely impacted by potential Cap-and-trade limits, carbon taxes or required environmental upgrades as a result of future potential regulation or legislation addressing GHG, other air emissions, as well as water use or emissions, than compared to our competitors who use other fossil fuels or steam condensation technologies Since our inception in 1984, we have been a leader in environmental stewardship and have invested in clean power generation to become a recognized leader in developing, constructing, owning and operating an environmentally responsible portfolio of power plants. The combination of our Geysers Assets and our high efficiency portfolio of natural gas-fired power plants results in substantially lower emissions of these gases compared to our competitors' power plants using other fossil fuels, such as coal. Consequently, our power generation portfolio has the lowest GHG footprint per MWh of any major wholesale power producer in the U.S. In addition, we strive to preserve our nation's valuable water and land resources. To condense steam, we primarily use cooling towers with a closed water cooling system or air cooled condensers. Since our power plants are modern and efficient and utilize clean burning natural gas, we do not require large areas of land for our power plants nor do we require large specialized landfills for the disposal of coal ash or nuclear plant waste Our Market and Our Key Financial Performance Drivers The market Spark Spread, sales of RECs, revenues from our PPAs and steam sales and the results from our marketing, hedging and optimization activities are the primary drivers of our Commodity Margin and contribute significantly to our financial results. The market Spark Spread is primarily impacted by fuel prices, weather and reserve margins, which impact our supply and demand fundamentals.
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The increase in Commodity Margin was also due to higher revenue from a tolling contract which became effective in January 2013 and stronger market conditions resulting from lower hydroelectric generation, warmer weather and the impact of the January 1, 2013 implementation of the AB 32 carbon market.
Not Classified
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We have a significant presence in major competitive wholesale power markets in California, Texas and the Mid-Atlantic region of the U.S. We sell wholesale power, steam, capacity, renewable energy credits and ancillary services to our customers, which include utilities, independent electric system operators, industrial and agricultural companies, retail power providers, municipalities, power marketers and others.

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