Regional strategy catapults Calpine

April C. Murelio

Associate Editor

Gathered with Calpine`s four other founders to toast the fledgling company`s first megawatt in 1984, Peter Cartwright, CEO and chairman, raised his champagne glass and set a course.

“By 2000, we`re going to see this 1MW grow to 1,000MW,” said Cartwright, recalling that first celebration. “It was a pretty daring goal at the time, but we reached that prediction in 1988.”

Today and many groundbreakings later, Calpine ranks as one of the nation`s fastest growing independent power producers (IPPs), with 5,900MW of capacity in operation, under construction or in development across 11 states.

Based in San Jose, Calif., Calpine, which originally offered management services to other IPPs, opened offices last year in Sacramento and Pleasanton, Calif., Houston, and Boston.

Rick Barraza, Calpine`s investor relations vice president, said the openings represent the company`s efforts to decentralize its strategic energy program and better serve its Western, Central and Eastern markets.

“This regional approach allows us to integrate our power plants as generating systems with corporate level financing, pooled gas procurement and the ability to meet customer needs from the most cost-effective facilities,” Barraza said. “Instead of operating individual power plants, we operate integrated power systems.”

The Sacramento office, which will handle project and construction management, opened after Calpine purchased Walsh Power/Industrial-the power plant construction division of Guy F. Atkinson Construction.

Overall, Cartwright said, Calpine maintains the same strategic philosophy it`s held since that first 5 percent stake in Aidlin, a 20MW geothermal plant in California.

“One, we focus on power generation and operating the most efficient, low-cost technologies we can,” he said. “Two, we focus on the U.S. power market.”

In 1988, Calpine shifted a bit from its geothermal core and developed its first gas-fired project. Although still a major geothermal presence-the nation`s second largest producer-Calpine`s future seems to be gas fired.

Net income for 1998 at $45.7 million represented a 32 percent increase over last year`s $34.7 million. Revenue for 1998 jumped 101 percent to $555.9 million from $276.3 million a year ago.

Through acquisitions and greenfield development, Calpine hopes to build on this financial success and deliver a 15,000MW portfolio by 2004. Currently, the IPP has 970 net MW under construction and 2,185 net MW under development in Arizona, California, New England and Texas.

Other 1998/99 greenfield developments:

– Calpine entered a strategic partnership with Bechtel Enterprises to develop 2,000MW of gas-fired production to serve the San Francisco Bay area. An 880MW plant in Pittsburg, Calif, at the Dow Chemical facility represents the first of these joint ventures.

– Considered Calpine`s flagship project and one of the nation`s first true merchant facilities financed with non-recourse debt, the 240MW Pasadena, Texas, plant went into operation in 1998. Plans call for adding 510MW, with power deliveries from that expansion scheduled for June 2000.

– Calpine formed a power marketing venture with Energy Management Inc. (EMI). Based in North Dartmouth, Mass., Calpine/EMI will sell electricity into the New England market from its three gas-fired power plants under construction in Maine, Massachusetts and Rhode Island.

Finance and acquisition highlights:

– Calpine raised about $1 billion to finance its continued growth, including $400 million in a corporate debt offering of senior notes due 2008, which made Calpine the

second non-investment grade IPP ever to price below 8 percent.

– Calpine received a Moody`s credit rating upgrade to Ba2 from Ba3.

– It purchased the remaining 50 percent interests in the 450MW Texas City and 377MW Clear Lake plants in Texas.

– Expanding its eastern presence, Calpine acquired an interest in the 165MW Bayonne plant in New Jersey, and secured a remaining 55 percent stake in the 57MW Beth page facility in New York.

– Further strengthening its geothermal operations, Calpine acquired a 60MW geothermal power plant at The Geysers area of Northern California, the world`s largest producing geothermal source.

– Calpine also announced plans to buy Pacific Gas and Electric`s (PG&E) 14 geothermal plants and finalized a $101 million deal with Unocal for its steam field assets at The Geysers, which will add 690MW of geothermal capacity to Calpine`s portfolio.

Despite a reinvig-orated acquisition program in 1998, Calpine remains primarily a greenfield developer doggedly committed to gas-fired, combined-cycle power, with the inefficiency of America`s generation one of Cartwright`s pet subjects.

In interviews and speeches delivered across the country to encourage deregulation and the replacement of an aging generation fleet, Cartwright points out that about 45 percent of the power plants operating today are more than 25 years old, 18 percent are more than 35 years old, and “many are much older.” For example, PG&E`s Hunters Point and Potrero units in San Francisco started operation 50 and 33 years ago, respectively.

“We don`t drive 30-year-old cars, or operate 30-year-old computers, or use 30-year-old telephones, so why do we continue to generate electricity and pollute our air with aging power plants?” Cartwright said. “It doesn`t really make sense, and it certainly doesn`t make sense in a competitive market.”

New, combined-cycle plants use 40 percent less fuel to generate a kWh than the average fossil-fueled plant, he said. Eliminating inefficient plants means a potential annual fuel savings of $20 billion to $40 billion.

“IPPs are taking a larger role in supplying generation for this country and the last vestiges of monopoly power are coming to an end,” Cartwright said. “With this in mind, we believe the workhorses of the future will be state-of-the-art, gas-fired, combined-cycle power plants.”

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Considered Calpine`s flagship development, the 240MW gas-fired Pasadena facility was one of the nation`s first true merchant plants. Expansion plans include adding 510MW, with power deliveries scheduled for June 2000.

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