Calpine Reports Continued Triple-Digit Growth

As part of another glowing quarterly earnings announcement last Thursday, San Jose, CA-based Calpine Corp. said it will be making future merchant power plant investments in California, while outlining an aggressive hedging strategy for the company that is centered on an internal trading operation that has grown to more than 200 people in the past two years.

"We're doing very, very well in California," said Calpine's CEO/found Peter Cartwright, during a conference call in which he announced a 122% increase in net income for the second quarter, compared with the same period last year, and unabashedly predicted that earnings for this year will exceed $2/share, and longer term the company will easily exceed growth of more than 40% each year through 2005 when it is shooting to have 70,000 MW of new generating plants online--more than seven times current capacity (9,300 MW).

Cartwright stressed that three major Calpine power plants opened in the past few weeks that are serving the California market, adding 1,600 MW, claiming that these specific power plants have "helped keep California from having blackouts this summer. We've been the difference between having enough power and not having enough this year."

Calpine has contracts with the state Department of Water Resources (DWR) for 2,500 MW, locking in wide spark spreads for 15 to 20 years, according to Cartwright. He said the company also has resolved qualifying facility (QF) receivable issues with major utilities, and is confident the federal refund settlement will not result in any significant impact on the company. Calpine also has 11 peaking plants under way at six different sites to start up later this year and early next.

"Our long-term view on California is very bullish, and we plan to increase our California and nearby western state portfolio by 4,000 MW in the next five years," Cartwright told analysts.

For the second quarter, net income was $132 million, compared to $59.5 million the second quarter of 2000, or 39 cents/share, before a 7-cent/share charge for nonrecurring merger costs tied to the Encal Energy Ltd. (Encal) pooling of interests.

Among $1.6 billion in revenues for the second quarter--a 284% growth from last year's same period--more than $300 million came from Calpine's expanding oil/natural gas operations, which it continues to increase as part of its goal of owning at least 25% of its fuel supplies for its growing fleet of power plants in North America, and a recently acquired new 1,200-MW power plant in the United Kingdom.

Increasing portions of the earnings growth came from Calpine's trading operations that have only become fully operable this year, and its oil/gas marketing efforts, according to company officials who participated in the 90-minute conference call with financial analysts. Calpine's average cost of natural gas production last quarter was $2.89/mcf, compared with the three-month Nymex average of $4.67/mcf, according to Ann Curtis, Calpine's CFO.

Cartwright said Calpine's "systems approach" is paying off, and he and others predicted that the company is well positioned to take advantage of growth opportunities in the Northeast, Texas and California markets in the months and years ahead.

"With the deregulated electric industry, we are confident that rates will continue to come down, and we're very confident that in the markets in which were participating we'll continue to see very attractive revenue and earnings," Cartwright said. "Our plan to get to 70,000 MW in the U.S. and Canada by the end of 2005 is on schedule, in fact ahead of schedule."

Long-term contracts cover about two-thirds of Calpine's portfolio's output, offering what company officials tout as advantages for locking in spark spreads and earnings, and still allowing flexibility for selling on shorter-term or spot basis, too.

Calpine last year predicted an additional $100 million of gross margin 2001--last week it announced it had already reached that goal in the first six months this year. Calpine attributed the early success to the fact that the company "strategically avoided" selling western region output on forward basis last year to eliminate all exposure to the Cal-PX and ISO.

In contrast, greatly increased forward sales in the first two quarters of this year (from 20% to close to 90%), well before the drop in forward prices, helped the company make a killing as its triple digit earnings growth for the first half of the year indicated.

"We've established a first-mover (early entrant) advantage in Texas, California and New England with programs to expand in other high-growth markets," Cartwright said. He called the Calpine trading operation, which has grown from 3 to more than 200 traders in the past two years, "the very best in the industry."

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