Calpine's stock rises on higher earnings, optimistic forecast

Calpine Corp.'s stock surged Thursday, after the San Jose, Calif., company reported an 80% increase in second quarter net income to $107.6 million, up from $59.5 million in the year earlier period. Company executives forecast continued strong growth in earnings, despite falling power and gas prices.

HOUSTON, July 26 -- Calpine Corp.'s stock surged Thursday, after the San Jose, Calif., company reported an 80% increase in second quarter net income to $107.6 million, up from $59.5 million in the year earlier period.

Company executives forecast continued strong growth in earnings, despite falling power and gas prices. Calpine CEO Peter Cartwright said the company will exceed earnings per share of $2 this year, beating analysts expectations of $1.92/share. Cartwright forecast an average growth rate in earnings of 40% over 5 years.

"Our entire business model is to insulate us from volatility," said Cartwright. "We are not affected by the decreases of the forward prices. The downturn will help us differentiate ourselves."

While other energy companies stock have stumbled under a weakening economy and commodity prices, Calpine's shares gained ground. In mid-day trading, Calpine shares traded at $36.98, up $1.17/share or 3.27%.

Calpine reassured financial analysts much of its portfolio was sold forward before the price curves took a dip. But the efficiency of its fleet of power plants provides more built-in protection against volatile commodity prices.

Calpine executives said the company continues to build efficient power plants, giving the company higher operating margins compared to its peers. Even at "zero spark spread, our heat rate captures value," said Paul Posoli, senior vice-president.

But the most important protection against falling prices and volatility are Calpine's long-term power contracts. The company said it usually locks in two-thirds of its portfolio in long-term contracts, demonstrating forward power curves are not always the best indicator of the company's value.

Forward prices don't capture the value of ancillary services and reserves either, Posoli added. The forward curves reflect the price buyers are willing to pay for power without any flexibility, he said.

In the Texas market, Calpine said it expects to capture 10-20% margin on the spark spread. "In ERCOT [Electric Reliability Council of Texas] the gross margins are on average around $35/Mw-hr," said Posoli.

Meanwhile, Calpine remains on course with its ambitious construction schedule. "By the end of the year, we will have 40 power plants under construction and 34 approved by the board for development," said Cartwright. "Our belief is with deregulation electric prices must come down. But with our new fleet, we will see value."

Next year, the company anticipates 22 new plants will be on line, followed by another 23 in 2003. Executives conceded construction costs are rising, but they said the overall rate of return on new projects remains 18% on equity after taxes, and that rate of return takes into account price expectations.

In California, Calpine has locked in 2500 Mw into long-term contracts, resolved pricing issues for its qualifying facility fleet, and said it will not be impacted by any refund order by Federal Energy Regulatory Commission for sales of power in the past.

Calpine said the atmosphere for power in California is positive. It plans to increase its portfolio in California and nearby western states to 12,000 Mw over the next 5 years.

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