The power industry is returning to more than just a “commodity business,” and long-term contracts, low-cost supplies and strategic plant locations are going to increasingly determine winners and losers in the industry, according to a Calpine Corp. senior executive who spoke last Wednesday at the three-day Lehman Brothers “CEO Energy/Power Conference” in New York City.

COO James Macias unabashedly called his company the “nation’s leading independent power producer” with low-cost operating know-how and a power plant portfolio that will total 28,000 MW (23,000 MW of baseload) in 23 states, three Canadian provinces and the United Kingdom by 2004. He also predicted the company would more than weather the current industry price and credit declines by emerging this year with $2 billion in cash and paying off an added $1 billion in debt next year to become virtually debt-free by 2004.

Macias reiterated what the company’s senior management has stressed all year: Calpine is evolving into one of the nation’s leading power plant operators from a past that was marked by rapid development of new natural gas-fired plants at an unprecedented pace. His bright outlook is balanced by analyses such as the Standard & Poor’s report last week that predicted several major merchant energy companies are headed for bankruptcy with the “collapse in equity prices and the explosion in credit spreads” (see related story).

He said the company will be selling up to about $300 million of its oil and gas reserves not now used for security to help pay down its debt. These will be “nonstrategic, mostly oil” reserves that will be sold, Macias said. As reported earlier, Calpine expects revenues to be down by about $500 million for the year, and it will “make up that difference through asset sales,” he said.

Calpine is banking on being well positioned at a time when the way power is being developed, bought and sold is changing, according to Macias. “Load-serving entities are no longer willing to rely on a liquid, merchant market in which power is being bought and sold, so we can’t rely on that merchant market to build power plants. The industry is going back to a bilateral market. Companies are going back to buying power long-term. They recognize the current surplus [of power] is short term, and they don’t want to get caught short, so they are beginning to buy more long-term power.”

In this environment, Macias said Calpine’s “low-cost, environmentally clean, and strategically located power plants” give the power supplier an edge over its competitors. Even in the renewable energy area, in which he said Calpine was the largest producer, he sees the company having an advantage nationally as more states begin requiring greater portions of power that comes from so-called “green” sources of wind, solar, biomass and geothermal.

The channels for selling power to end-use customers is changing, Macias said, but “what hasn’t changed is the demand for new technology [to produce power] and the long-term need to replace aging, dirty power plants.”

Macias called the last quarter the “worst power market ever,” but he assured the Lehman audience that Calpine emerged from it with positive cash flows, positive earnings and sufficient coverage of its cost of debt. Calpine’s diverse portfolio allows it to “command premium prices” in its contracts, he said. “We have a very strong contractual position; not only in strong assets, but a very strong customer base, entering this year with about 75% of our capacity forward sold.”

At its peak, Calpine had 37 power plants under construction simultaneously, while Macias said that no other company has ever tried to construct more than four or five at the same time. It currently is in the top 10 among North American power plant operators and by next summer, Macias said it will be in the top five. Calpine brought on 11 new plants in the first half of this year.

Macias said the big issue confronting the power industry is liquidity, and Calpine’s emerging operating company emphasis should do well in this environment. Even though as S&P’s noted in its recent analysis Calpine has “pledged virtually everything that was not already pledged to secure prior debtholders” for a new $2 billion bank line, Macias said the company will continue to sell assets strategically from its oil/gas portfolio and long-term contracts. He admitted that none of the power plants is “sale-able” in the current depressed wholesale power market unless an operator wants to sell them far below what they are worth.

“In our oil/gas reserves we have $2 billion in reserves that is very liquid and very marketable today,” Macias said. “We’re going to end the year with $2 billion in cash with enough to pre-fund our construction next year without having to go to the market.”

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