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Greater Reliance on LNG May Result for Calpine after Gas Assets Sale

In tossing aside a major segment in its aggressive strategy to become the nation's largest independent producer of gas-fired power generation, San Jose, CA-based Calpine Corp. raised questions about how it will fill the fuel gap for its 27,000 MW portfolio. A heavier reliance on liquefied natural gas (LNG) imports may be part of the company's redesigned future, a Calpine spokesperson told NGI.

The company made no reference to new strategic plans for fueling its power plant fleet when it announced the $1.05 billion sale of its gas reserves two week ago to a reconstituted former indirect affiliate, Rosetta Resources Inc. However, for the past three years Calpine CFO Robert Kelly in quarterly earnings conference calls has repeatedly touted the company's natural gas reserves as a strategic asset worth in excess of $1 billion and part of the company's strategy to supply 25% of its own fuel needs, while obtaining the rest from a combination of long-term hedges, LNG, and traditional supply contracts.

"Of course, the LNG projects would either be projects we would be participating in, or ones in which we have a contractual relationship," said Calpine's spokesperson. "One may be able to presume that LNG will be playing a larger role [than its previously estimated 25% portion] in the Calpine fuel supply portfolio.

"If you think of LNG as a reserve, it is a competitively priced option, given the way the market is right now for wholesale natural gas supplies."

Currently, Calpine has no specific plans for building a LNG receiving terminal, nor does it have any contracts, although the company spokesperson said that company is a potential equity partner or purchaser of LNG from any of the existing or developing import receiving terminals nationwide.

"There is nothing we have announced at this point," he said, reiterating that Calpine is "absolutely" a keen potential LNG player. "Calpine, given its power plant portfolio, would make an attractive customer, simply because we do have such a huge appetite for natural gas."

Like other major generators, Calpine's biggest operating cost is for fuel, so anything it can do to manage that cost, it will do, the spokesperson said. LNG has "undeniably the ability" to help reduce power plant fuel costs, he said. "It is coming off a boat cheaper than we can produce it out of the ground here."

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