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The Green Utility That's in the Black


Back in the early 1990s, some folks in the power business thought Calpine CEO Peter Cartwright, a boating enthusiast, had gone off the deep end. After working in the nuclear-power business at General Electric Co. (GE) for 19 years, Cartwright decided to forge ahead with an idea he had for a different type of power company--and founded Calpine Corp. (CPN) in 1984. While other utilities were grappling with the difficulties of nuclear power, shuttering old coal-burning plants, and lamenting the prospects of the slow-growth power business, Calpine, based in San Jose, Calif., began snapping up older gas-fired power plants that were cleaner-burning than coal plants. In addition, the company ordered enough gas turbines to build dozens of new facilities. Why do all that, the skeptics asked, when the crystal ball for energy profits looked so murky?

After months of energy shortages in the Golden State, however, the reason has become obvious. "It's the need for power," says Cartwright, 71, the rare Silicon Valley executive who still wears a suit and tie to work. "The power infrastructure in this country was getting older and was highly polluting. I saw a tremendous opportunity to replace that." Today, Calpine is in the midst of an audacious $20 billion plan to build dozens of environmentally friendly power facilities. The company spends millions to win community support for new construction, standardizes the design of the generating plants, erects them in clusters to cut costs, and buys up its own gas fields--when it can--to supply the plants. Cartwright wants Calpine to be the green utility that's in the black.

Investors believe he can do it. Since Dec. 31, 1999, Calpine shares, now about $46 each, have almost tripled in price. And despite a sagging stock market, the stock is still close to its 52-week high of $52.97, set last October. That tops off a banner year in which Calpine generated profits of $324.7 million--up from $96.2 million in 1999. New facilities and higher prices for energy more than doubled revenues last year, to $2.26 billion. More impressively, Morgan Stanley Dean Witter expects revenues to rise at an 84% annual average through 2004 as Calpine completes its ambitious buildout of 60 new plants, at a cost of $17 billion to $20 billion.

VOLATILE. Those plants would generate enough electricity to power 70 million homes--equal to the needs of New York State and California combined. Although little known before California's energy crisis, Calpine is already the world's ninth-largest electricity producer. "These guys were the first to put their money behind a perception that there was going to be a power shortage in the U.S., and that has paid off handsomely for investors," says Morgan Stanley analyst Kit Konolige.

Yet if Calpine can't secure enough natural gas for its plants, or if the economy goes into a deep recession, its strategy could falter. An economic slowdown could derail the nation's growing demand for power and also make it more difficult to service the company's $4 billion of debt. Also, Calpine's new facilities were planned years ago--when natural gas was cheap, which it no longer is. Last year, Calpine spent $600 million on the fuel. By 2005, Cartwright expects Calpine's natural-gas bill to hit $10 billion. That's enough to buy up 10% of all existing U.S. production, and it would make Calpine the nation's biggest consumer of natural gas.

The U.S. market for electricity is strong right now, but energy executives note that it won't always be. "Any time you are committing enormous quantities of capital to a production process that makes a highly volatile commodity, that's risky," says Jeffrey K. Skilling, chief executive officer of Enron Corp. (ENE), the largest wholesale marketer of natural gas and electricity in the U.S. "The real issue Calpine has is timing. And the timing so far has been excellent."

Calpine--the name is a combination of "Cal" for California and "Alpine" from its original Swiss investors--has assured itself of natural gas by signing long-term contracts with suppliers. But that won't suffice to meet all of its projected needs. So in February, the company agreed to buy Calgary's Encal Energy Ltd. (ECA) for $1.2 billion, a deal that will increase Calpine's gas holdings by 143%. That follows the purchase in recent months of TriGas Exploration Inc. and the acquisition of additional gas reserves in the San Joaquin Valley in California. It's all designed to hedge against shortfalls and escalating prices--although some rival power executives say that Calpine still has to worry about getting the gas out of the ground and to its plants, a specialized business all its own. Ultimately, Calpine hopes to secure 25% of its natural gas on a long-term basis.

Another hangup: Despite the rise in electricity costs, Calpine still faces not-in-my-backyard (NIMBY) resistance when it comes to plants in densely populated residential areas. Calpine has courted local communities with everything from park projects to scholarship programs. In one California city, it contributed $15 million toward helping build a library.

The company's most effective pitch is that its plants are 40% more efficient than coal-fired ones--and generate fewer emissions. "I don't know too many power companies that count the Sierra Club and the American Lung Assn. among their supporters," says Michael P. Florio, a lawyer for the Utility Reform Network, a consumer watchdog group in San Francisco.

Such tactics usually work. But not in the case of Calpine's most public battle--in its own backyard. The company has so far been thwarted in its plans to build a 600-megawatt plant in the rolling hills near Cisco Systems Inc.'s (CSCO) San Jose headquarters. Cisco says the emissions will be higher than normal because the plant will be turned off and on many times during the year. "We are concerned about the health and safety of our employees," says Cisco spokesman Steve Langdon. Cartwright counters: "San Jose desperately needs this power." Although the city has turned down the plant, Calpine has appealed its case to the state energy commission. It expects to get approval in July.

Even without new construction, however, Calpine has acquired and built enough power plants to have seen its assets soar from just over $1 billion at the end of 1996 to $9.7 billion today. Its 50 gas-fired and geothermal plants in 15 states and Canada--about half of them located in Northern California--can generate 5,900 megawatts of power. (One megawatt lights 1 thousand homes.) And that doesn't include 25 plants under construction and a further 35 being planned. Its Sutter Power Plant, a 545-Mw, $300 million installation in Yuba City, near Sacramento, is typical: The plant has a five-year contract to sell 150 Mw of electricity to the Sacramento Municipal Utility District and will contribute to Calpine's 10-year deal to sell California 2,500 Mw. If there is excess power, Calpine can sell it on the open market.

NO UNIONS. In the next five years, Calpine will spend $7 billion to buy 220 gas turbines. Along with a few other companies, such as AES Corp. (AES) and Duke Energy Field Services Corp. (DUK), Calpine has nearly cornered the near-term market for new turbines. To finance them, the company last year raised more than $8.2 billion through equity offerings, private placements, leveraged-lease financing, and additional revolving credit lines--all while staying well within its debt-to-equity target of 65% or less.

The company isn't looking to put a plant on every corner. But its big buildout allows it to adopt a standardization model similar to McDonald's Corp. (MCD) or Wal-Mart Stores Inc. (WMT) during construction and afterwards. The cookie-cutter approach, handled by Calpine's in-house construction-management and design subsidiary, means fewer experts on board. It also gives Calpine major economies of scale. That's one reason Calpine's capital cost per kilowatt-hour is 10% below the industry average. It also runs plants cheaper with less labor by rotating crews to plants clustered in an area. And most of its plants are nonunion.

Cartwright is looking beyond the current downturn and, his spat with Cisco aside, he sees technology markets as a big opportunity. Recently, Calpine started a c*Power Inc. subsidiary that specializes in power systems for server farms and other ravenous tech users that require ultrareliable power supplies. Right now, though, Calpine is doing just fine selling the regular type. And if Cartwright can stay the course, the company could live up to its marketing slogan: "We're Repowering America." By Douglas Robson, with Cliff Edwards, in San Mateo, Calif., and with Janet Ginsburg in Chicago


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