Independent US power company Calpine Corp. said the purchase of a UK power plant from a unit of Entergy Corp. for $800 million will serve as the launch pad for additional investments in the UK and on the continent, including Italy and Spain.
The San Jose, Calif., company said it signed a binding agreement to acquire the 1,200 Mw natural gas-fired Saltend power plant near Hull, Yorkshire, England, one of the largest natural gas-fired electric power generating facilities in England.
Calpine Chairman Peter Cartwright said the acquisition will serve as the base for its entrée into Europe to sustain beyond 2005 the "dramatic" growth the company has experienced in the US. "We had been working on identifying markets for some time. This is in no way a sudden thing."
Calpine will consider both additional acquisitions and new construction in the UK, said Rick Haviland, senior vice-president, as well as in Italy and Spain. As in the US, he said, the company will aim for 8-10% market share. Meanwhile, while Italy and Spain are just opening up, Calpine will follow a similar strategy there.
Deregulated in the early 1990s, the 52,000 Mw UK power market has limited ability to import power. Over the past decade, the natural gas-fired market has grown from zero to 33%. Coal has fallen from 72% to 33%. Overall market demand is growing about 1.5%/year, but Haviland said it grew about 3.7% in the first quarter of 2001.
Saltend Energy Centre provides electricity and steam to a BP PLC chemical facility at Hull under a 15-year agreement. Calpine will assume operations of the facility and said it expects to hire the facility's existing operations staff. BP Gas Marketing Ltd. will continue to supply natural gas for the plant under the terms of a 15-year contract, which Haviland described as "favorable."
About 1,120 Mw of the plant's output is sold into the deregulated UK power market. Presently, Haviland said 1,120 Mw is sold forward through September, with about 200 Mw sold through the fourth quarter of this year, and 80 Mw into the first quarter of 2001.
With power prices expected to stay flat in the $30-35/Mw-range, Bob Kelly, senior vice-president, finance, said the earnings growth projections from the plant of 3-4¢/share this year, 6-8¢ next year, and 9-10¢/share in 2003 will come from an increase in the spark spread.
Haviland said Calpine is entering the market during a period of uncertainty now that the UK government has eliminated the power pool and substituted the New Electricity Trading Agreements which is geared toward bilateral contracts.
"This fits Calpine's strategy," Haviland said. "We are entering the market at a time when we think there is substantial upside." He said Calpine bought the Saltend plant for a price below its "all in" replacement cost and that Entergy had been seeking to sell it for quite some time.
Kelly said Calpine will pay off the "highly leveraged" project financing for the plant, which will give the company more flexibility in selling the power. The Saltend facility consists of three Mitsubishi Heavy Industries 701F2 gas turbines under license from Westinghouse.
While Saltend is a state-of-the-art facility, selling it offered Entergy a substantial opportunity to immediately harvest value and redeploy capital, said J. Wayne Leonard, CEO of Entergy Corp. New Orleans, La. Leonard said the sale will allow the company to reduce consolidated debt and maintain the desired balance and risk in its portfolio.
Entergy said it will continue to own and operate the 800 Mw gas-fired plant at Damhead Creek, about 30 miles from London, which began commercial operations in February 2001. Including Damhead Creek, Entergy has 4,400 Mw of capacity in operation and development In Europe. This the 1,200 Mw Morata de Tajuna and the 800 Mw Castelnou projects in Spain.
The company also has an 800 Mw project, Cairo Montenotte, in northern Italy, and last month completed commercial agreements for rehabilitation of the 840 Mw Maritza East III project in Bulgaria.