Motley Fool  Aug 24  Comment 
Low wholesale power prices make it hard for power producers to make money, forcing them to look for alternative strategies like all-out sales.
Motley Fool  Aug 18  Comment 
These stocks gained ground even as Wall Street struggled. Find out why.
Motley Fool  Aug 18  Comment 
Calpine Corporation is being taken private in another big wholesale energy deal.
Financial Times  Aug 18  Comment 
Energy Capital Partners snaps up US electricity group for its stable cash flows
Wall Street Journal  Aug 18  Comment 
Private-equity firm Energy Capital Partners and a group of co-investors has agreed to buy power-generation company Calpine for $5.6 billion.


Calpine Corporation is an electric utility that produces 30% of its energy from Geothermal sources (the remainder is produced with natural gas). Government subsidies for alternative energy - such as California's Renewable Portfolio Standard requiring that 20% of the state's electricity come from renewable energy sources by 2010 - is a major boost for technologies like Calpine's, which also benefits from government subsidies that support the massive infrastructure investments geothermal plants require.

Geothermal produces about 30% of Calpine's revenues, however; the balance (70%) comes from natural gas. Calpine's dependence on gas means its margins are heavily dependent on natural gas prices, which have fluctuated unpredictably over the past few years. The volatility of natural gas is offset, however, by the flexibility of gas-powered plants, which let the company more easily adjust electricity production. In regions where temperature fluctuates heavily through the day and over a year, like the West Coast and Texas, these plants let the company cut operating costs by reducing production when it isn't necessary.

CPN's Geysers Assets located in northern California represent the largest geothermal power generation portfolio in the U.S., and it produced approximately 21% of all renewable energy produced in the state of California.[1] This is significant because California's Renewable Portfolio Standard requires tha 20% of the state's electricity come from renewable energy by 2010- a standard that certainly benefits CPN significantly.

Company Overview

Calpine is an energy company with 24,802 MW of generating capacity with 77 operating plants spread amongst 16 different states.[1] Its primary customers are industrial electricity users, government agencies, and electric utilities; 10% of its revenues come from the California Department of Water Resources.

In December 2005, Calpine filed for Chapter 11 bankruptcy. The company had $17 billion in debt[2], and after the Enron scandal, the collapse of the power market led to investor examination of power company finances - and an eventual run on power stocks, causing Calpine's price to drop from $50/share to $0.30/share between 2001 and 2004. Calpine emerged from bankruptcy in February of 2008, resuming trading on the NYSE under the ticker "CPN"[3].

Most of Calpine's operations are in its "West" segment, which spans California, Arizona, Colorado, and Oregon, as well as its Texas segment. The company's margins were highest in the West, possibly because of the price premium attached to energy from the company's geothermal plants in California. The West and Texas also have higher energy prices because of seasonal temperature fluctuations, leading to higher sales prices for Calpine.

Business Financials

In 2009, CPN posted total revenues of $6.6 billion, a significant decline from its 2008 total revenues of $9.9 billion. However, this large decline in revenues did not have a negative impact on CPN's net income. Between 2008 and 2009, CPN's net income increased from $10 million in 2008 to $145 million in 2009.

Trends and Forces

Utilities Regulation Can Affect Calpine's Energy Prices

Calpine's margins are further affected by the regulation of electric utilities in the U.S. and Canada. Regional governments set electricity prices to ensure both profitability for utilities companies and accessibility for all consumers. Because of utilities regulation, the prices that energy companies charge the utilities companies must be low enough for the utilities to make a profit; this leads to price competition and depressed margins for the whole energy industry. Calpine remedies this problem by selling energy that is considered "cleaner" than many other types; natural gas does not emit the particulate pollution that coal and oil do, and it has no dangerous wastes, like nuclear. Geothermal energy is almost completely clean. With cleaner electricity generation methods, Calpine can compete based on electricity users' preferences, as well as on regulatory grounds; without the need to install costly scrubbers and filters, it can sell electricity for slightly cheaper than its coal competitors.

Calpine's Use of Natural Gas Makes it Regionally Competitive

Utilities regulation can vary by region, depending on electricity use patterns and the dominance of certain energy sources. Calpine's main markets are in the Western U.S. and Texas, where electricity use tends to come in peaks and valleys because of temperature changes depending on season and time of day. These regions tend to see higher set electricity prices, making natural gas plants useful; though gas is more expensive than most base-load plants, it can be used to provide variable amounts of energy, allowing Calpine to reduce production (and costs) when demand is low. This allows the company to maximize the price at which it sells its electricity.

Legislative Support for Renewable Energy Makes Calpine's Geothermal Plants More Competitive

State governments across the U.S. are implementing legislation to encourage alternative energy production, due to political pressure from public concerns about climate change, oil prices, and energy independence. Twenty-six states have set Renewable Portfolio Standards that set varying targets for the amount of energy to be obtained from renewable sources by certain dates. California, where all of Calpine's geothermal facilities are located, has targeted reaching 20% renewable energy usage by 2010[4]. What this means is that there is now a "premium" on the price of all energy that comes from renewable sources in California, including Calpine's geothermal plants. Electric utilities are scrambling to reach the allotted mix, and Calpine has benefited both from the growing demand for renewables and the hike in geothermal energy prices caused by it. In February 2008, for example, the company made a deal to sell 175 MW of geothermally-produced electricity to western utilities powerhouse PG&E - a deal that will bring the ratio of PG&E's renewable electricity contracts to the required 20%[5].

Stay with this guys, you're hlnepig a lot of people.

To think, I was confused a muntie ago.

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