In what its CEO pointed to as a model in reorganizing its predominantly natural gas-fired generation fleet, Calpine Corp. announced last Wednesday it has agreed to buy Pepco Holdings Inc.’s 4,490 MW independent Conectiv Energy power plant fleet for $1.65 billion in a deal that will make one of the nation’s largest independent power producers considerably larger and broader in market reach. At the same time, Calpine will increase its status as one of the nation’s largest wholesale gas consumers.

Calpine’s approach to the independent power generation market was clearly outlined by its asset sale and purchase deals in April, according to CEO Jack Fusco, speaking during a conference call with financial analysts to discuss the purchase. The deal comes a little more than two years since Calpine emerged from Chapter 11 bankruptcy and with a senior management team that has been in place only for about 18 months.

Anticipated by some players in the financial community, the purchase includes Conectiv’s 18 operating power plants and a plant under construction. Closure of the sale is expected June 30, Calpine said. All but three of the plants run mostly on gas, and two coal-fired plants will be converted to run on gas, Fusco said. There is one small solar energy facility in the mix.

No shareholder approval is required, but the closing will be subject to what Calpine called “customary conditions,” Federal Energy Regulatory Commission approval and antitrust review by the U.S. Justice Department.

Calpine officials cited financial and strategic benefits from the deal, including the acquisition of basically an environmentally “clean” fleet, large entry into the strategically important Mid-Atlantic region, stable cash flows and growth opportunities. The deal will be accretive to Calpine earnings before interest taxes, depreciation and amortization (EBITDA) and to its adjusted free cash flow/share, Calpine said.

The sale of two natural gas-fired generation plants totaling 931 MW in Colorado for $739 million earlier in April and Wednesday’s announcement on the Conectiv purchase of plants in the PJM market when looked at side by side can a “compelling story about how Calpine’s management team intends to approach the domestic, independent power market,” Fusco said.

“I believe these two transactions [taken in tandem] represent an important step forward in achieving our corporate strategy and building Calpine’s foundation for growth,” said Fusco, who further noted that the depth of Calpine’s involvement in California is similar to what it wants to do in two other regions, PJM being one of them.

Conectiv’s fleet offers access to PJM East markets, including a robust capacity market and what Calpine called “a strong likelihood that increasingly stringent environmental regulation will result in the retirement of aging, inefficient coal units” that would create added opportunities for Calpine’s predominantly natural gas-powered plants.

While the existing Conectiv fleet should help reduce Calpine’s sensitivity to wholesale natural gas price swings, the fully contracted 565 MW combined-cycle natural gas-fired plant now under construction will provide other growth opportunities. That plant is scheduled to start operation in mid-2011. In addition, there are other expansion opportunities within the Conectiv fleet, Calpine said.

Calling the Mid-Atlantic “one of the most robust competitive” wholesale electricity markets in the nation, Calpine CEO Jack Fusco said the purchase gives the company greater geographic diversity. In addition, the accretive aspects of the transaction “meet criteria we established last year for financially disciplined growth and achieves our stated strategic goal of expanding with scale into an eastern market.

“This transaction also reaffirms our view that natural gas-fired and renewable generation are the core components of the energy solution for our country’s future and our commitment to that business model.”

A 26-year-old independent power generator, Calpine currently operates a generation fleet approaching 25,000 MW. It emerged from Chapter 11 bankruptcy via a $7.3 billion exit financing facility, including a $300 million bridge loan. Calpine’s exit came a month past the two-year anniversary of its original bankruptcy filing.

For Calpine, Fusco emphasized that the vision is not to be a national independent generator with a collection of assets across many states and regions, but to work toward being one that is more strategic and focused on what Fusco called “being the best operator in the space.”

While natural gas-fired generation is definitely the common thread between Calpine’s historic generation fleet and what it is acquiring from Conectiv, Calpine COO Thad Hill emphasized that the Conectiv purchase is not dependent on a widespread shift away from coal in the next few years. It is beyond that to 2013-14 when the new PJM auction contracts kick in and when Hill expects a continuing acceleration in coal plant retirements, which bodes well for the company’s strategy.

“With eventually more scrutiny from the EPA [U.S. Environmental Protection Agency], you are going to see the coal retirements really accelerate,” said Fusco, who sees a huge growth potential in PJM for independent power providers as a result.

“Our focus right now is to try to migrate ourselves to where we have three main regions, and that is the goal for 2010,” he said. “We want to get a good portion of the way there. At the end of the day, I think you will see that we want to migrate into markets that are friendly to independent power providers that are structured to reward independents, and where we can have a seat at the table to help influence how those markets are developed.”

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