The acquisition and management of natural gas supplies is a keypart of San Jose, CA-based Calpine Corp.’s five-year strategy tohave generating plants totaling 25,000 MW by the end of 2004, theaggressive merchant power plant developer/operator’s seniorexecutives told the company’s annual shareholders’ meeting lastweek.

Amid a spreadsheet full of substantial financial growth figuresin revenues (53% to $850 million last year), earnings-per-share($1.23), capitalization ($3.8 billion) and new projects underconstruction or development (about 14,000 MW), Calpine’s executivevice president Ann Curtis said 75% of Calpine’s power plants arenatural gas fueled, and the company intends to continue to seek gasreserves and complementary pipelines to allow them to keep downfuel costs, which represent 60% of the cost of each megawatt ofelectricity produced.

“We have a very good natural gas strategy for assuring that weare going to be the low-cost producer (of electricity),” Curtissaid. “And we must make sure that in light of rising prices infuel, we’ll be able to keep our costs down. One of the ways to dothat is to continue to seek out, identify and purchase gas reservesand complementary pipelines so we can move our gas to our plants atlower prices.”

She noted that what she called “three very strategic” gas dealswere closed last year, representing 238 Bcf, plus complementarypipelines. And more important than the assets in these acquisitionswas the ability to further vertically integrate by bringing in topquality experts in the area of oil and natural gas.

Calpine estimates it will be spending more than $4 billionannually for natural gas after 2004 when it has 25,000 MW of powerin its portfolio, Curtis said. That equates to about 5% of thecurrent gas sold in the U.S.

“We’ve just begun to scrape the surface of what we need to do inproviding natural gas for our future,” said Peter Cartwright,Calpine’s CEO. “The acquisition of the Sheridan Energy Co. and its(Texas-based) team gives us expertise in identifying, negotiatingacquisitions, and in getting the most out of a gas field. It helpsreduce the costs of our operations and the costs of delivering fuelto our plants. It is very, very important that we get a hold of andretain as much gas as we can to reduce the cost of fuel for ourpower plants.”.

In addition to power plants, he said Calpine will expand intoother areas, such as “retail sales,” Cartwright said. For the mostpart now, it sells wholesale to utilities, marketers andaggregators, aside from a limited amount of sales to largeindustrial customers. As other states open up, Cartwright said it”gives us access to selected retail markets selling to largeend-users.” In Texas, Calpine plans to sell directly todevelopments adjacent to plants and to schools and otherinstitutions directly.

The company also announced last week it is going after thehigh-tech and telecommunications industries’ growing need forreliable, high-quality electricity by offering distributedgeneration with back-up reliability services. Calpine has a 30 MWunit going to an undisclosed customer and several other units inthe queue, according to Bob Hepple, president of Calpine’s new”c*Power” business unit. The name stands for “critical power,”which is a term commonly used in the high-tech industries.

Potentially the computer- and telecom-based industries’ appetitefor clean power is insatiable. The market could reach 150,000 MW inthe U.S. alone, equating to potentially tens of billions ofdollars, Hepple said. Calpine proposes to construct, own andoperate distributed generation units ranging from 5 to 50 MW andsell power, chilled water and back-up service to customers. Itwould own and maintain the units, which can be free of the utilitypower grid or attached to it.

Richard Nemec, Los Angeles

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