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A Rising Power in California

Calpine Corp., which is heavily exposed to the Golden State, should be one of the walking wounded. Instead, it's soaring, so you know Peter Cartwright, the CEO of San Jose-based energy company Calpine Corp. (CPN)

, must be grinning right about now.

Just a few months ago, Calpine was holding millions in uncollected bills as a result of doing business with bankrupt utility Pacific Gas & Electric, a unit of San Francisco-based PG&E Corp. (PCG)

. More recently, energy supplies -- particularly stockpiles of natural gas -- have grown faster than expected, pushing energy prices down. That's a potentially lethal long-term trend for an energy company, whose growth strategy is pegged largely to the climbing demand for electricity generated by burning natural gas.

Calpine -- which gets its name from "Cal" for California and "Alpine" from its original Swiss investors -- also seemed especially vulnerable to the California crisis, since roughly one-third of its 9,300 megawatt generating capacity stems from the Golden State. It also is one of the few U.S. power producers to invest exclusively in natural-gas-fired and geothermal steam-power plants. In other words, it has no coal and no nukes at a time when some experts think those could be the main new power sources of the future. Calpine's low-pollution generating methods have won it some green admirers. Says Rich Ferguson, research director for the Center for Energy Efficiency and Renewable Technologies in Sacramento: "They've made a special commitment" to environmentally friendly power.

Uneasy about Calpine's future, investors has driven down the company's shares from a high of $58.04 on March 30 to $35.99, where it closed July 31. The 71-year-old Cartwright, a onetime nuclear power exec with General Electric Corp., may still enjoy the last laugh. In early July, a bankruptcy judge ruled that Calpine should receive about $267 million for power it sold to PG&E. And on July 26, the company handily beat Wall Street's expectations when it reported that quarterly profits had soared to $132.2 million, or 39 cents per share, on revenues that quadrupled to $1.6 million. That represents an increase of 55% vs. a year ago.

As a result Calpine has raised its earnings-per-share target for 2001 to around $2 per share, a dime higher then previously anticipated. Cartwright thinks it might do even better. "I am very confident we will exceed $2 a share this year," the CEO told analysts during a conference call on July 26. Impressively, it did all this despite rapidly falling energy prices.

GOOD NEWS AND BAD. Cartwright, who founded the company back in 1984, attributed a good chunk of the higher profits to making smart bets in the wholesale energy market, where traders buy and sell power. Roughly two-thirds of Calpine's generating capacity is secured under long-term contracts, which allow utilities to lock in prices for electric power when prices are high and avoid losses when energy prices drop in the spot market, as now is the case. "We capitalized on the volatility in the market in the past couple of quarters," Paul J. Posoli, senior vice-president of Calpine Energy Services, said during the conference call.

Given such positive profit numbers, it's hard to believe that, not so long ago, shares of Calpine and other power companies -- such as Constellation Energy Group Inc. (CEG)

, which includes Baltimore Gas and Electric -- were spiraling south. On July 24, Salomon Smith Barney analyst Raymond Niles noted depressed power price trends, or forward curves, and subsequently lowered his investment ratings on some brand-name energy companies, including Calpine and global energy company AES Corp. (AES), which is based in Arlington, Va.

Niles' analysis was one more bit of bad news in a market already spooked by falling energy prices. Natural gas prices, for example, are trading around $3 per 1,000 cubic feet vs. a record all-time high of $10. And on July 20, Constellation became one of the first power companies to lower its full-year earnings guidance because of plunging industrial energy consumption and cool temperatures. Shares of Constellation sank to a new 52-week low of $29 on July 24, which is down 44% from its yearly high of $52.06 on Sept. 27. AES stock also posted a new yearly low of $33.60 on July 25, off 54% from its 52-week high of $72.81 on Oct. 3.

BIG PLANS. Calpine's Posoli argues that his company has been smart to hedge against the volatile commodity market, as the recent earnings indicate. He also contends that looking at forward trends for power prices, which rely heavily on spot-market commodity prices, offers a poor snapshot of Calpine's overall earnings potential. Indeed, Calpine remains focused on its goal of becoming one of the biggest -- perhaps the biggest -- independent power producer nationwide by 2005. If successful, Calpine will have generating capacity of roughly 70,000 megawatts -- enough electricity to light 70 million homes, vs. 9,300 megawatts now.

Toward that goal, the company is already building 24 plants totaling 13,400 megawatts. Next, it plans to spend an additional $25 billion to build dozens of new plants, financing all the construction from internal cash flow and stock and debt offerings.

It's an ambitious growth strategy. But Cartwright sees tremendous opportunity in replacing the nation's aging power infrastructure and, despite his early years in nuclear power, is convinced that natural gas is the fuel of the future. Having neatly sidestepped the California crisis and turned a nice profit in a volatile period will only add to his credibility with investors. By Heesun Wee in New York

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