Calpine Corp. offered $41 million in cash to purchaseHouston-based Sheridan Energy yesterday in an attempt to add amajor gas exploration and production arm to its extensive powergeneration assets. The offer breaks down to a $5.50 per shareproposal for Sheridan’s common stock. The tender offer is expectedto be completed 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.

“That California investment certainly established ourrelationship,” said Katherine Potter, a Calpine spokesperson.

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.

“This is by far our largest gas reserves acquisition,” Pottersaid. “It represents 9% of our daily gas requirements.Transportation cost is a big element in the fuel mix, and the moreextensive a system you develop, the better off your transportationcosts will be.” She added that while Calpine hopes to retain all 39Sheridan employees, cutbacks and overlap have not yet beendetermined.

San Jose, CA-based Calpine, which is a leading power generatorin Texas and California, said the reserves are locatedstrategically in places where it is already developing low-cost gassupplies and extensive pipeline systems to support its cogenerationplants. The access to Sheridan’s reserves will add flexibility andcost effectiveness to Calpine’s operations, the company said. Italso said it plans to sell any non-strategic assets acquired inthis deal by the end of the year.

“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 andCalpine’s stock rose nearly $2 to finish at $87.06.

“I think it’s a big plus,” said Ron Barone, a PainWebberanalyst. “Calpine offered to buy at an attractive price, the assetsare strategically located, and it’s a continuation of the company’simpressive track record put together over the past year or so. I’veraised my earnings outlook for Calpine as a result of this deal.”Barone added that the $5.50 per share offer is a 75% premium overSheridan’s 12-month average trading price.

Like many other exploration and production companies, Sheridanis still recovering from the price depression earlier this year.Due to its own acquisitions and energy prices, Sheridan’s borrowingcapacity has been constrained. As a result, it searched forstrategic alternatives. The company reported a net loss applicableto common stock of $1.9 million in the second quarter of 1999 onrevenues of $7.0 million compared to a 2Q98 loss of $1.4 million onrevenues of $4.7 million. Average production for the second quarterof 1999 totaled 38.8 MMcfe/d, an increase of 54% from 2Q98production and 23% from first 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.

The purchase continues an active week for the company. Just a fewdays ago, it bought 18 combustion turbines from Siemens Westinghouse,which will produce 4,900 MW of additional generation by 2004 (seeDaily GPI, Aug. 23).

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