Stung by a negative financial report from an independentnewsletter that dropped its stock price 17%, San Jose, CA-basedCalpine Corp. reacted quickly last week to reiterate its aggressivestrategy for developing groups of gas-fired merchant power plantsthroughout the U.S. over the next five to 10 years. It also said itwould continue to grow its related power and gas marketingoperations.

Senior officials noted the company is busy signing up variouslarge municipal customers for its new plants in California, but itis also looking at retail power sales as a business line that cangrow. The firm also expects to develop a peaking plant offshoot tomany of its new baseload facilities, which are operating, underconstruction or in development in 20 states.

The critical financial report focused on the accounting methodsCalpine used for the potential future revenue streams from severalprojects in Washington and California, as well as the energymarketing and gas resource purchases it made over the past year.

“These types of transactions complement our marketing and powergeneration business and will probably grow in the future, but theyhad zero impact on earnings and very little (less than 2%) impacton revenues in 1999,” said Calpine CEO Peter Cartwright.

Countering the report by the Center for Financial Research andAnalysis, Cartwright said his company’s generation plants areoperating very well and he sees 2000 results on track to be”another great year.”

“New plants will be coming on line this year and electricityprices are up in all of our key markets,” Cartwright told analystsand industry observers in a one-hour conference call open to thepublic. He called the research report “erroneous,” coming from asource with little knowledge of Calpine or its strategy.

“There are no accounting irregularities practiced by Calpine oraggressive accounting positions taken here.”

One focal point for criticism was Calpine’s deal last year torestructure a standard offer (SO) contract for its Gilroy, CA,plant with Pacific Gas and Electric. Cartwright calls it a”landmark” deal that will be used as a “template” for restructuringother deals totaling another 500 MW in northern California, wherehe sees Calpine establishing a regional power network with a totalof 5,000 MW when facilities now under construction come online in afew years.

In other areas where Calpine is trying to build “networks” ofmultiple merchant plants, the same template as used in the PG&Edeal will be negotiated, Cartwright said. “We’re growing ourcompany in a conservative way. Our goal is the to be largest, mostprofitable power plant developer in the United States. Our programfor building new gas-fired combined-cycle plants is probably thelargest of its kind ever in this country (26 plants underconstruction or announced for development).

“Since January we have announced 10 new projects and we willannounce additional projects in the months ahead. We have theresources, people and equipment on order (126 large, advanced gasturbine engines, valued at more than $5 billion). We’re veryconfident that our earnings will continue to grow as our portfoliocontinues to grow.”

Cartwright said Calpine will eventually move into internationalmarkets, including looking for opportunities along the Canadian andMexican borders. “We’re already looking at opportunities. We’reworking with some of our large industrial customers who have cogenfacilities and have large industrial facilities overseas. That is anew area with tremendous growth potential.”

Calpine is also looking at other opportunities for sellingretail power with a number of customers and government entities,said Cartwright, noting that none of these are included in currentrevenue and earnings projections. Calpine sees all of its 25,000 MWof power (targeted to be online by 2004) as being Calpine-owned,baseload power.

“We can find opportunities to add peaking power to all of ourplants longer term. That is a whole new market that could add verysignificantly to earnings and revenues, but none of that isincluded in our forecasts.” Cartwright said.

Richard Nemec, Los Angeles

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