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April 21 (Bloomberg) -- Calpine Corp. agreed to buy Pepco Holdings Inc.’s wholesale electricity plants for $1.65 billion to gain a larger presence in the world’s biggest power market.

The purchase includes 18 operating plants and one that’s under construction, Houston-based Calpine said today in a statement. Calpine, already the largest U.S. generator of natural-gas-fueled electricity, also will secure its position as the biggest U.S. independent power producer after rivals Mirant Corp. and RRI Energy Inc. agreed this month to merge.

Calpine, which has 76 plants in Texas, California and 15 other states, will gain capacity in the Mid-Atlantic region. The purchase includes the plants of Washington-based Pepco’s Conectiv unit, which supplies power in PJM, the world’s largest power market by volume of megawatts traded. Pepco will retain utilities in Washington and three surrounding states, as well as Conectiv’s energy-trading contracts and collateral requirements.

“The transaction gives Calpine exposure to PJM East, one of the most capacity-constrained power markets in the U.S.,” said Angie Storozynski, an analyst at Macquarie Capital USA Inc. in New York. She said the deal will increase Calpine’s cash flow and earnings right away and won’t require the company to sell stock for funding.

The Conectiv plants, most of which are fueled by gas, are in the eastern half of PJM, where coal-fired generators will likely be retired, leaving more demand to be met by cleaner sources of supply, Calpine said in the statement.

Shares Gain

Calpine rose 56 cents, or 4.6 percent, to $12.73 as of the 4 p.m. close of New York Stock Exchange composite trading. The stock climbed 3.7 percent yesterday, after Bloomberg reported that Calpine was negotiating to buy Conectiv. Pepco rose 4.1 percent to $16.92, its biggest gain since September.

Calpine, which expects the transaction to close by June 30, said it will fund the purchase with cash and debt after it secured a $1.3 billion term loan. The company raised its forecast for 2010 adjusted earnings before interest, taxes, depreciation and amortization to a range of $1.63 billion to $1.73 billion from $1.5 billion to $1.6 billion.

For Pepco, the sale reduces risks from energy markets and strengthens its balance sheet, Chief Executive Officer Joseph M. Rigby said in a separate statement. He said the deal eliminates the need to issue new shares until at least 2012.

Citibank and Deutsche Bank AG advised Calpine on the acquisition, and its legal counsel was White & Case LLP. Credit Suisse Group AG and Morgan Stanley advised Pepco, whose legal counsel was Covington & Burling LLP.

To contact the reporter on this story: Katarzyna Klimasinska in Houston at

To contact the editor responsible for this story: Susan Warren at

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