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Calpine Corp. Continues its Acquisition Binge

Calpine Corp. Continues its Acquisition Binge

Calpine Corp., the San Jose, CA-based merchant power plant developer/operator, continued its aggressive growth strategy last week, announcing separate acquisition and strategic alliances in the central midsection of the U.S., along with startup and development of new projects in Texas and California, respectively. This latest growth spurt eventually could make Calpine by 2005 the nation's largest merchant power plant operator with the youngest, most natural gas-intensive electricity generating network.

In total, the 16-year-old, multi-billion-dollar company, which went public four years ago, began the week by paying $576 million and agreeing to take on more than $100 million in additional debt to corral 43 plants or proposed plants in various stages of development and the rights to an additional 58 General Electric gas turbines capable of producing up to 14,000 MW of power. The assets being acquired are all privately held.

Later, Calpine announced the startup of the 500-MW Hidalgo Energy Center in Edinburg, TX, a plant in which it holds majority ownership (78.5%) with the Brownsville (TX) Public Utilities Board. Subsequently, on Thursday the company announced plans to build, own and operate a fifth merchant generating plant in California on an American Indian reservation in Southern California.

Calpine said it has acquired the rights to pursue a 600 MW gas-fired generation facility near the town of Thermal in Riverside County, CA, through a development deal with Adair International Oil and Gas and a long-term lease agreement with the Torres Martinez Desert Cahuilla Indians.

The $275 million facility, to be called the Teayawa Energy Center, will be sited on the Cahuilla Indians' land in the Coachella Valley, with construction to begin in mid-2001 and commercial operation to get under way in late 2003.

In Texas, Calpine on June 14 began operating the energy center, which is located within one mile of its Magic Valley Generating Station, a 730 MW gas-fired facility currently under construction. The Magic Valley facility is expected to be on line in the summer of 2001. The Hidalgo plant will sell power into the Texas wholesale market and potentially into the growing energy markets of northern Mexico.

However, among the series of announcements last week it was the major acquisition and alliances that promise an unprecedented growth spurt for Calpine as it bought potential expansion into four new states --- Wisconsin, Indiana, South Carolina and Georgia --- increasing the company's potential portfolio of almost-exclusively gas-fired power plants to 89 in 25 states, totaling 26,750 MW by 2005.

For $450 million, and agreement to assume its outstanding debt, Calpine bought SkyGen Energy LLC, Northbrook, IL, from Michael Polsky, its founder, and Wisvest Corp., a Wisconsin Energy Corp. subsidiary. Polsky will continue to run SkyGen as a wholly owned subsidiary of Calpine and will assume a seat on Calpine's board. For another $126 million, Calpine bought into a strategic alliance with Dallas-based Panda Energy International, Inc., obtaining the rights to develop, construct, own and operate a 1,000 MW Panda power plant proposed for Oklahoma and the potential to do the same with seven other Panda projects in various earlier stages of development.

The Panda deal eventually could involve the largest current merchant power plant under development in the U.S., the 2,720 MW El Dorado plant in Arkansas for which Panda just last week announced a contract with Trans-Union Interstate Pipeline to build a 42-mile, 30-inch-diameter natural gas supply pipeline to fuel generating plant with up to 430,000 MMBtu/d. The pipeline will connect the plant with Gulf States Pipeline, Sharon, LA, allowing access to gas basins in three states (Texas, Louisiana and Oklahoma).

In total, Calpine obtains immediate development, ownership and operating rights to Panda's 1,000-MW natural gas-fired Oneta project in Oklahoma, scheduled to begin construction next quarter and becoming Calpine's fourth plant hooked to the Southwest Power Pool; in addition it obtains the rights to do similar acquisitions of seven other Panda projects, including El Dorado. In each case, Calpine will pay Panda a development fee and allow it to share in the plant's eventual cash flow, according to a San Jose-based Calpine spokesperson. Calpine also acquires from Panda the rights to 24 GE gas turbines and 12 steam turbines, representing 9,600 MW of gas-fired generation.

"Panda like Calpine is concentrated on the gas-fired generation market," said Calpine's spokesperson. "What Panda will bring to us is an opportunity to develop a total of eight projects totaling 10,650 MW of generation. It is structured so the seven projects under development-two in advanced stages-once they are financed and ready for construction, Calpine has the exclusive right to buy."

The SkyGen deal, involving mostly cogeneration facilities offering both electricity and steam to large industrial customers, provides Calpine with a diverse portfolio of 45 projects in various stages of development-three now operating (780 MW total); three being built (812 MW); 13 projects in the "late-stage development" (5,258 MW); and another 16 (6,615 MW) classified as "development opportunities."

Richard Nemec, Los Angeles

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