NGI The Weekly Gas Market Report
Calpine Corp. jumped into the center of the energy industryM&A activity last week, as it made bids to purchase Houston,TX-based Sheridan Energy and acquire 80% of Cogeneration Corp. ofAmerica (CGCA). Both mergers are expected to be completed by theend of the year.
Calpine stands to increase its generation capacity by 20% andgain access to nearly 10% of its daily gas requirements if the bidsare successful.
“We’ve said all along we want to be the leading independentpower producer in the United States,” said Bill Highlander, aCalpine vice president. “We saw an opportunity to substantially addto our capacity and acted on it.”
In 1999, Calpine has unabashedly gone after a continual streamof expansions through acquisitions and the development of new powerplants and increasing its access to strategically located gassupplies. “I can’t go into the details at this time, but I can saywe’re going to be very aggressive in trying to reach our goals,”Highlander added. “The guys and gals are out there looking hard forplaces to develop and assets to acquire to move us toward ourgoal.”
The proposed $145 million merger with CGCA would increaseCalpine’s natural gas-fired energy production to 2,476 net MW ofcapacity. The acquisition will be consummated by a merger pursuantto which, each CGCA shareholder will receive $25. Calpine willrefinance approximately $80 million of CGCA corporate level debt.
Minneapolis, MN.-based CGCA owns interests in six naturalgas-fired facilities in the U.S. totaling approximately 580 MW ofcapacity. Calpine’s net ownership interest (after deductingminority interests) would be 400 MW. The plants are located inPennsylvania, New Jersey, Illinois and Oklahoma. Calpine willassume operation of four of the facilities upon completion of theacquisition.
“The addition of [CGCA] should be a good fit given the company’sU.S. market focus, emphasis on gas-fired generation and use oflong-term contracts for its output-which is all part of Calpine’sstrategy,” said Ron Barone, a PaineWebber analyst. “..This will notonly increase Calpine’s gas-fired production 20%, but it will alsoprovide access to the Midwest energy market, namely Illinois andOklahoma.”
The deal also bolsters Calpine’s extensive power presence on theEast Coast. Even before this acquisition, the company ownedinterest in three power plants, totaling 130 MW, operating in NewYork, and had four other plants in construction in parts ofMassachusetts, Maine and Rhode Island.
Also as a result of the merger, NRG Energy, Inc., a subsidiaryof Northern States Power, would have its 45% interest in CGCAreduced to 20%. Under the terms of the agreement, Calpine would payNRG $37.5 million for 1.5 million shares. All operating, managementand services agreements between NRG and CGCA will be terminatedupon completion of the acquisition and will be replaced byagreements between Calpine and CGCA. NRG said its recent U.S.acquisitions have focused on larger generating stations, making theCGCA assets a better overall fit with Calpine’s strategic focus oncombined-cycle natural gas-fired and geothermal power generation.
The transaction is subject to approval of CGCA’s shareholders. Aspecial meeting of CGCA’s shareholders will be scheduled followingapproval of proxy materials by the Securities and ExchangeCommission. Donaldson, Lufkin & Jenrette served as financialadvisor to CGCA in this transaction.
Yet adding to its power capacity total was not the only goalCalpine accomplished last week. By buying Sheridan Energy, Calpinepurchased significant gas reserves in Texas and California, areaswhere it has a significant power presence and hopes to grow.
“This is by far our largest gas reserves acquisition,” saidKatherine Potter, a Calpine spokesperson. “It represents 9% of ourdaily gas requirements. Transportation cost is a big element in thefuel mix, and the more extensive a system you develop, the betteroff your transportation costs will be.” She added that whileCalpine hopes to retain all 39 Sheridan employees, cutbacks andoverlap have not yet been determined.
Calpine offered $41 million in cash to purchase Houston-basedSheridan The offer breaks down to a $5.50 per share proposal forSheridan’s common stock. The tender offer is expected to becompleted in September of this year.
The boards of directors of Calpine and Sheridan have bothapproved the transaction. Certain Sheridan shareholders have agreedto tender their shares, representing an aggregate of 51% of theoutstanding shares. Additionally, Calpine already owned a 20%interest in Sheridan’s northern California properties through aninvestment in Sheridan California Energy Inc., an affiliate ofSheridan, last January.
Sheridan’s properties are primarily located in Texas, NorthernCalifornia, Arkansas, Louisiana and Oklahoma. The company’s top 10fields represented over 77% of proved reserve value, and over 80%of reserve value was operated by the company. In total, Sheridanhas 148 Bcf of proven reserves, 93% of which is natural gas.
“Sheridan is a strategic addition to Calpine’s fuel capabilitiesand brings to Calpine a wealth of expertise in every facet of gasexploration and development,” said Tom Mason, Calpine executivevice president. “In addition, Sheridan’s portfolio of proven gasreserves will further strengthen our ‘wellhead-to-burner tip’ fuelprogram, giving Calpine a stronger competitive advantage as energymarkets across the country deregulate.”
The offer met with approval from Wall Street, as SheridanEnergy’s stock price soared over 33% to finish at $5.38 onWednesday and Calpine’s stock rose nearly $2 to finish at $87.06.
“I think it’s a big plus,” said Barone. “Calpine offered to buyat an attractive price, the assets are strategically located, andit’s a continuation of the company’s impressive track record puttogether over the past year or so. I’ve raised my earnings outlookfor Calpine as a result of this deal.” Barone added that the $5.50per share offer is a 75% premium over Sheridan’s 12-month averagetrading price.
Sheridan reported a net loss applicable to common stock of $1.9million in the second quarter of 1999 on revenues of $7.0 millioncompared to a 2Q98 loss of $1.4 million on revenues of $4.7million. Average production for the second quarter of 1999 totaled38.8 MMcfe/d, an increase of 54% from 2Q98 production and 23% fromfirst quarter 1999 production.
Calpine currently has approximately 8,500 MW of capacity inoperation, under construction or in announced development in 12states – which the company said is enough energy to power 8.5million households. Calpine has regional offices in Houston, TX;Pleasanton, CA; and Boston, MA.
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