Calpine: Expecting higher earnings

In an uncertain natural gas market, independent power producer Calpine Corp. has set goal of locking up about 65% of its gas supply in 6-7 year contracts and owning about 25% of its needs, Senior Vice-Pres. Diana Knox said Tuesday in Houston. Rising gas prices have 'certainly' made for an 'interesting' market, but Calpine remains focused on the spark spread in setting electricity prices, Knox said at the Dain Rauscher Wessels Energy 2000 Conference.


Kate Thomas
OGJ Online

In an uncertain natural gas market, independent power producer Calpine Corp. has set goal of locking up about 65% of its natural gas supply in 6-7 year contracts and owning about 25% of its needs, Senior Vice-Pres. Diana Knox said Tuesday in Houston.

The company's gas-fired plants presently burn about 500 million bcf/day at 100% load factor. But by 2004, Calpine will be using 7-8 bcf/day�or about the equivalent of 10% of US production capacity�to fuel nearly 60,000 Mw of electric generating capacity. The company has 20 plants under construction and will have about 30 plants under construction at its building peak.

Rising gas prices have "certainly" made for an "interesting" market, but Calpine remains focused on the spark spread in setting electricity prices, Knox said at the Dain Rauscher Wessels Energy 2000 Conference. "We are hedging whenever we need to in order to avoid being left undone on either side."

Knox said Calpine selects power plant sites where gas pricing will permit electricity prices to rise with gas prices, where there are multiple gas pipelines, and near electric transmission lines.

With a goal of owning about 25% of its gas needs Calpine is already set to become one of the region's largest natural gas producers. This summer the company acquired 205 bcfe of proved natural gas reserves in three transactions for a combined $206 million (US), boosting its proved reserves to 430 bcfe.

The company is concentrating its efforts in California, the Northeast, and Texas, where it will have about a 10-12% market share in the high-growth Electric Reliability Council of Texas (ERCOT), Knox said. Electricity demand was up 5.4% in ERCOT between August 1999-August 2000.

Texas plants complete
Calpine recently completed two Texas plants and is building another in north Texas in Freestone County. Knox said the Freestone plant should help the company circumvent south-to-north transmission constraints that dogged Texas independent power producers all summer. The plant will be built near a large gas field, helping resolve a longstanding issue that has largely stymied power plant development in north Texas.

"That's been the problem with building a plant in north Texas," Knox said. "You cannot get enough firm gas to support a 500 Mw base load plant."

While power shipments to customers near Dallas were canceled this summer because of the transmission constraints, Knox said, Calpine was able to sell power to Reliant Energy Inc. and "still make money," although not as much if the original deals had been consummated.

Texas is a good market because many plants are still operating, which have a heat rate of 11,000 btu/kw-hr, compared to the newest and most efficient units which have heat rates as low as 6,000 btu/kw-hr, Calpine officials said. Experts expect many of the older inefficient plants to be retired.

Knox said the company expects to beat First Call consensus earnings forecast of $1.50/share for this year. By 2004, the company is projecting earnings of $5.75/share that could rise to as much as $8/share, including additions from cost savings, peaking capacity, and new services.

PaineWebber Inc. Tuesday raised its 2000 earnings estimate for Calpine to $1.80/share from $1.50/share and its 2001 estimate to $2.25/share from $1.90/share. Analyst Ronald Barone attributed the increase to strong power prices in areas where Calpine operates, especially California, and the projected completion of two power plants there next year.

He said risks to the company's outlook include unexpected shifts in energy costs, increased competition, lower-than-expected returns on power projects, construction delays, and the ability to obtain additional financing for future growth.

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