In an attempt to dissuade anyone from the notion that power markets are going to become over-built any time soon, Calpine Corp. held the second of a series of three conference calls last week with the financial community, reinforcing that it is not backing off its goal of having 70,000 MW of new capacity on line by the end of 2005, and growth in its $1.4 billion natural gas holdings will increase along with the new plants.
To date, Calpine has 34,900 MW of baseload capacity and 7,600 MW of peaking capacity in operation, under construction, pending acquisitions or announced for development in 29 states, the United Kingdom and Canada. Its 70,000 MW in operation by the end of 2005 would include a total of 10,000 MW of peaking capacity and 5,000 MW of acquired capacity.
As part of its model for adding this precedent-setting portfolio of natural gas-fired power plants, Calpine is assuming gas prices averaging the $3.50 to $4/MMBtu level, noting that with what it describes as “highly efficient plants” Calpine feels it is immune to having gas prices adversely affect its development and/or operation of new plants.
Calpine officials indicated they continue to use what they call a “conservative spark-spread” of between $15 and $18 in assessing the economic viability of their new combined-cycle 7,000-heat rate power plants. And for the long term, the company is assuming earnings of $35,000/MW, even though its current net income is $67,000/MW and it is projected to grow to $70,000/MW next year, according to Calpine executives.
The company will continue to make natural gas acquisitions, although officials declined to give any details on this conference call, but said the company currently has the equivalent of about 400 MMcf/d of gas supplies it owns, providing the equivalent of $400 million in gross earnings. A fourth conference call may be added next month to talk about the natural gas aspects of the power plant developer’s business, said Peter Cartwright, Calpine’s CEO/founder.
Generally, Ron Walter, Calpine senior vice president for planning/development, said that the company has analyzed power markets throughout North America and finds reserve levels 5-to-10 % below historic averages, and even in markets like Texas and New England there is room for more new power plants. Calpine’s projections indicate the Texas/New England markets will have reserve margins of 12-15% by the end of 2005, compared to historic levels of 20-25% in the utility industry during recent decades in the past century.
Cartwright said Calpine has more than 100 developers working across all U.S. markets with the assignment of “bringing projects along to where they are ready to be reviewed by our internal investment committee” (Calpine’s senior management). In addition, on a weekly basis, there are about a half-dozen other small developers coming to the company with preliminary power plant projects.
He reiterated Calpine’s commitment to the 70,000 MW program as do-able given the market, financing and construction resources.
Going back to 1994, Calpine, which was then two years shy of going public as an eight-year-old small power plant generator, mostly in the geothermal industry, bet that electricity growth would greatly exceed most national forecasts, which were then in the 2% annual range. Currently growth over the next five years is assumed to be 2.7% annually for electricity, Walter said.
“We assumed the then-existing fleet of power plants would be incapable of meeting these new demands,” Walter said. “We also observed that natural gas would become the fuel of choice as the technology to produce electricity from gas would far out-perform other technologies.”
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