Calpine Corp. is evaluating the sale of up to eight power plants to capture stronger market valuations under a broader strategic initiative rolled out last Wednesday aimed at dramatically enhancing the company’s financial strength.
The program is targeting accelerated debt reduction of more than $3 billion by the end of 2005, $275 million of annual interest savings, and approximately $200 million in annual operating cost reductions.
Calpine said the program will strengthen the company’s core North American power assets and enhance Calpine’s financial flexibility by:
With respect to asset sales, Calpine said it is pursuing opportunities to add value to its portfolio, reduce corporate debt and increase cash flow through sales of both its gas assets and certain of its power assets.
Calpine is finalizing its review of bids received for the sale of its 1,200 MW Saltend Energy Centre in the United Kingdom. The proceeds generated from such a sale are expected to be used to redeem $620 million of preferred equity related to the project, with the balance to be used in accordance with the company’s existing bond indentures.
As announced recently, Calpine is evaluating strategic alternatives for its U.S. oil and gas assets, including the potential sale of all of or a portion of these resources. The proceeds generated from such a sale are expected to be used in accordance with the company’s existing bond indentures. The company has said that it is considering selling all or a portion of its U.S. natural gas assets, which include about 389 Bcfe of proved gas reserve (see NGI, May 23).
On the power side, the generator is also considering temporarily shutting down power plants with negative cash flow, until market conditions warrant start-up, to further reduce costs and more effectively focus the company’s financial and sales resources.
In the area of credit enhancement, the company is in discussions with a leading financial institution to form a partnership that will lower its collateral requirements and establish a significant third party customer business. “The combination of Calpine Energy Services’ people, systems and processes, and the credit and financial resources of an investment grade financial institution, will enable the partnership to provide customers across the energy industry with unique products, services and energy solutions.”
Through technological innovations and other programs, Calpine is enhancing the operating performance of its power plant fleet and is working to reduce its operating costs by approximately $200 million per year.
Calpine is in negotiations to terminate all remaining long-term maintenance agreements. This will allow the company’s plant and turbine maintenance groups to provide major maintenance and component and parts repairs at considerable cost savings.
Calpine also plans to incorporate fleet-wide initiatives, some of which include innovative components that it has developed to reduce off-peak operating losses, resulting in considerable fuel cost savings. Further promoting this effort, the company’s manufacturing and parts components subsidiary, Power Systems Manufacturing (PSM), recently installed its new combustor system, Flamesheet, at a Calpine plant to increase the operating range of the gas turbines while meeting the environmental permitting requirements.
The company will also continue to incorporate fuel efficiency technologies fleet-wide to lower its annual fuel costs. To capture these cost savings, Calpine is targeting up to a 4% reduction in fuel costs through incremental improvements in power plant heat rates. For example, at Calpine’s 263 MW Rumford Power Plant, the company recently installed and tested PSM proprietary parts and low-emissions systems, and customized plant operating procedures, resulting in a 2% heat rate improvement that could provide annual savings approaching $1 million at the plant.
Through the program of asset sales, credit enhancement, and fuel and operating cost reductions, Calpine is accelerating by one year its plans to repurchase more than $3 billion of corporate debt by the end of 2005. This aggressive debt reduction program will continue in 2006 and beyond.
Calpine Chief Financial Officer Bob Kelly stated, “Our number one financial priority is de-levering the balance sheet to bring it in line with the current and future power markets and the related spark spread-generating capability of our modern fleet. This program is the first step toward achieving our long-term target of total debt equal to six times EBITDA, as adjusted. With the new financial focus and power initiative outlined today, we expect to significantly strengthen our balance sheet, lower our annual interest payments and improve our debt coverage ratios.”
Calpine will host an East Coast “Investor Day” in the Fall to provide a comprehensive overview of the company, including a progress report on the strategic initiatives announced today. Further information on the date and location of the event will be announced shortly.
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