Sales: $847.7 million (1999)
Stock Exchanges: New York
Ticker Symbol: CPN
NAIC: 221112 Fossil Fuel Electric Power Generation (pt)
Calpine Corporation is a leading independent power company with 90 percent of its capacity derived from gas-fired power plants and ten percent derived from geothermal facilities. Calpine is a vertically integrated organization capable of handling each stage of a power plant’s development, including the design, financing, and construction of the facility, as well as each aspect of its operation, such as fuel management, maintenance, and power marketing. The company owns interests in 44 plants with an aggregate capacity of 4,273 megawatts, but construction underway in 2000 is slated to increase Calpine’s capacity to 10,208 megawatts. Calpine sells its electricity and steam to utilities and other third-party end users. California-based Pacific Gas and Electric Company and Texas Utilities Electric Company account for nearly 50 percent of the company’s annual sales.
Calpine was founded by three executives from the San Jose, California, office of New York-based Gibbs & Hill, Inc., an environmental engineering firm specializing in power engineering projects. Peter Cartwright, the senior member of the small group, had spent five years at Gibbs & Hill, serving as the vice-president and general manager of the company’s western regional office. His career, however, included far more than his five-year stint at Gibbs & Hill. Cartwright earned his Bachelor of Science degree in geological engineering from Princeton University in 1952 and his Master of Science degree in civil engineering from Columbia University in 1953. His academic training eventually provided entry into General Electric Co.’s nuclear energy division, where he spent 19 years working on plant construction, project management, and new business development.
When Cartwright left Gibbs & Hill in 1984 to start Calpine, he was joined by Ann Curtis and John Rocchio, two Gibbs & Hill executives who became vice-presidents of the newly formed Calpine. The company received financial backing from Guy F. Atkinson Co., which later sold its 50 percent stake in the firm, and from Electrowatt Ltd., a Switzerland-based utility, industrial products, and engineering services company. (An oversized Swiss cowbell on display at corporate headquarters in San Jose, as well as the “alpine” in the company’s name were testaments to Calpine’s Swiss lineage). Initially, Calpine provided engineering, management, finance, and maintenance services to the then emerging independent power production industry, which was entering a new era of competition as regulatory constraints loosened. Calpine built turnkey power plants—facilities ready for immediate use—for its clients, registering its first annual profit two years after its founding.
Calpine went on to record a string of profitable years, but much of the company’s consistent success was achieved while pursuing a substantially different corporate objective than it had proclaimed at its outset. Cartwright was inspired by the impressive gains of his clients, the operators of Calpine’s turnkey power plants, who were registering tantalizing financial growth. He be-came convinced that the greatest prospects for financial growth were to be found as a power plant operator, rather than serving the operators. Accordingly, in 1989, Cartwright altered Calpine’s business focus by concentrating the company’s energies on the acquisition, development, ownership, operation, and maintenance of gas-fired and geothermal power generation facilities.
As Calpine set out to fulfill its new role as a power plant developer and operator, the company’s growth was measured not only by its financial totals, but also by the number of plants it owned and by the amount of electricity it produced, expressed by the megawatt (one megawatt is sufficient to light 1,000 households). Based on these criteria, Calpine achieved only moderate progress during its first years as a power plant developer and operator. By 1992, the company produced approximately 297 megawatts of electricity at four plants, enabling it to collect nearly $40 million in revenue for the year. Although Calpine’s production capacity represented sufficient electricity to power more than a quarter million homes, the total was unimpressive. Relative to its stature at the end of the decade and relative to the more than $200-billion-a-year power generation industry, the company was a diminutive national force during the early 1990s, its anonymity not helped by its standing as a privately held, wholly owned subsidiary of a foreign parent company.
Despite its lack of status, Calpine was beginning to distinguish itself during the early 1990s. The company was most widely recognized for its geothermal plants, ranking “as one of the top four or five in the business,” according to Tsvi Meidav, president of a geothermal engineering company, in the July 20, 1992 issue of Business Journal—San Jose. “They [Calpine] are most outstanding in the area of engineering and very strong in operations maintenance,” Meidav added. Calpine would add substantially to its list of admirers once it pursued expansion more aggressively. Toward that end, the company announced plans in 1992 to complete an initial public offering of stock in three to five years and to triple its capacity by 1994.
Calpine’s commitment to aggressive expansion occurred at an opportune time. As the company grew, more than tripling its annual revenue volume by collecting $132 million in 1995, the dynamics of the U.S. electric industry were about to be dramatically changed. In what would spark a national movement, the California legislature announced in 1996 that it would deregu-late the state’s electric industry and allow customers to choose their electricity supplier. The state legislation, scheduled to be enacted in 1998, touched off a wave of similar resolutions across the country as deregulation spread state by state. Within a year of California’s announcement, nearly a dozen states had announced they would deregulate their electric industries as well, with 24 other states taking the action under consideration. As the movement toward deregulation intensified, members of the U.S. Congress tried to accelerate the national trend by introducing a bill that would bypass state legislatures and promulgate nationwide electric deregulation.
As an independent power company, Calpine stood to benefit enormously from the fervor for deregulation that swept across the country during the late 1990s. The company’s foundation as a service provider to power plant operators and its subsequent development into a power plant operator itself engendered a vertically integrated enterprise primed for the new competitive era. Calpine presided over every stage of a plant’s development, handling each phase from conceptual design, financing, and construction, to operation, fuel management, and power marketing. With this synergistic approach to the business of producing electricity, the company was capable of offering highly competitive rates that did not sacrifice profitability. Accordingly, Cartwright and his senior executives welcomed the changes that were transforming their industry, particularly be-cause they had anticipated the changes and, unlike many of their competitors, had moved aggressively to take advantage of the changes. The effect of their anticipatory actions was most evi-dent in one pivotal transaction completed in 1996.
Accelerating Expansion: Mid-1990s
Although Cartwright and his team completed scores of deals during the 1990s, their shrewdness reached unprecedented acuity in a purchase from Siemens Westinghouse Power Corp. In 1996, Calpine placed an order with Siemens Westinghouse for 46 gas-fired turbines. The acquisition represented a gamble considering that many of the turbines involved in the deal were purchased before the company had commitments to build new power plants, but Cartwright pressed ahead despite the risk. He had launched an ambitious plan at the beginning of 1996 to develop 6,300 megawatts of new capacity before the end of the decade, expansion that required new equipment to actualize. Although the purchase of 46 turbines shocked outside observers, the timing of the deal later justified Cartwright’s gamble. The purchase was made before the tidal wave of support for deregulation reached its acme and before the majority of utilities realized more industry capacity was needed. Consequently, at the time of the Calpine-Siemen Westinghouse deal, power generation equipment was cheaper and easier to obtain than it would be once the movement toward deregulation took hold.
The combination of Calpine management’s intuitive powers in foreseeing a growing demand for capacity and its willingness to gamble heavily paid handsome dividends. Commitments for new power plants arrived, thereby necessitating the acquisition of the turbines and prompting industry pundits to hail the turbine purchase as the primary cause for Calpine’s glowing success at the turn of the century. Less than three years after the deal, companies were clamoring for turbines, with demand exceeding supply to the point that some companies were selling their turbine delivery slots, essentially exchanging their place in line for cash.
Our strategy is to continue our rapid growth by capitalizing on the significant opportunities in the power market, primarily through our active development and acquisition pro-grams. In pursuing our proven growth strategy, we use our extensive management technical expertise to implement a fully integrated approach to the acquisition, development and operation of power gene ration facilities. This approach uses our expertise in design engineering, procurement, finance, construction management, fuel and resource acquisition, operations and power marketing, which we believe provides us with a competitive advantage.
The decisive Siemens Westinghouse purchase coincided with another important corporate event in 1996, one that saw the Swiss cowbell at company headquarters lose its relevance. Electrowatt Ltd. informed Cartwright that it was narrowing its strategic focus on its industrial business, a decision that paved the way for Calpine’s independence. In response to the news from Switzerland, Cartwright prepared Calpine for its debut as a publicly traded company, completing an initial public offering of stock in September 1996. The stock sale netted the company $82 million and gave management an 11 percent ownership stake in Calpine.
Calpine evolved from a relative unknown in the power industry to a recognizable, burgeoning national force during the mid-1990s. Between the end of 1992 and the end of 1997, the company completed transactions involving 13 gas-fired cogeneration facilities and two steam fields, more than quadrupling its total power generating capacity and substantially diversifying its fuel mix. Calpine achieved its growth by taking on the posture of an aggressive acquirer, resulting in $855 million of total indebtedness by the end of 1997. For Cartwright, the debt taken on was the price to pay for rapidly expanding in the promising business climate of the late 1990s, a sacrifice that greatly elevated his company’s stature. Between 1992 and 1997, Calpine’s net interest in power generation facilities in-creased from 297 megawatts to 1,981 megawatts, fueling a 48 percent compound annual growth rate in revenue that enabled the company to announce $276.3 million in revenue in 1997. Equally impressive, the value of Calpine’s assets increased from $55 million in 1992 to $1.4 billion in 1997. The company’s greatest surge in growth, however, was yet to come.
Ambitious Plans for the Future
Calpine entered the 1990s endeavoring to slip past $40 million in sales. The company ended the decade flirting with the $l-billion-in-sales mark. Much of this growth was achieved between 1997 and 1999, when the company’s revenue volume swelled from $276 million to $847 million as the number of plants in which it held interests increased from 23 to 44. Deregulation was in full swing during the last years of the 1990s, prompting Cartwright to develop expansion plans that promised to exponentially increase the size of his company within the coming five years. With a flurry of acquisitions and development projects that nearly doubled the size of the company’s power plant portfolio, Cartwright fleshed out Calpine’s presence in California, New England, New York, and Texas. By the end of the decade, he had targeted the Southeast, Florida in particular, as the company’s next major growth area for gas-fired generation.
Cartwright’s short-term plans for the first years of the 21st century were of staggering proportions. Building on a total capacity of 4,273 megawatts in 1999, Cartwright hoped to increase the company’s capacity to 25,000 megawatts by 2004. To help finance such expansion, the company secured a $1 billion revolving loan backed by a syndication of more than 20 banks in late 1999. The line of credit provided the means for the construction of approximately six plants, but Cartwright’s plans called for far more than six additional plants. As the company entered the 21st century, ten new power plants were under construction, representing nearly 6,000 megawatts of additional capacity. In addition, the company announced plans for developing 12 more plants in the near future, which represented another 7,990 megawatts of capacity. Based on these projections, Calpine figured to be a major force in the power industry during the 21st century.
Gas Energy Inc.; Calpine Natural Gas Company; Cogeneration Corporation of America (80%).
The AES Corporation; MidAmerican Energy Holdings Company; Sithe Energies Inc.
- With the financial help of Electrowatt, Ltd., Calpine is organized.
- Calpine broadens its business focus to include plant operation and ownership.
- Calpine gains independence and completes initial public offering of stock.
- Company announces plan to increase capacity to 25,000 megawatts by 2004.
Anderson, Mark, “Cogen Plant’s Under Way,” Sacramento Business Journal, December 10, 1999, p. 11.
Gosmano, Jeff, “Calpine’s Eye-Popping Streak Set Off by Canny Turbine Buys,” Natural Gas Week, August 30, 1999, p. 1.
Keegan, Jeffrey, “Building Calpine’s Financing Future,” Investment Dealers’ Digest, December 13, 1999, p. 99347019.
McLane, Tegan M., “Calpine Execs Steamed Up to Power Up,” Business Journal—San Jose, July 20, 1992, p. 1.
Speaker, Scott C, “Calpine Eyes the Sunshine State,” Natural Gas Week, September 13, 1999, p. 10.
—Jeffrey L. Covell