UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended September 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________________
to ______________________
Commission File Number: 033-73160
CALPINE CORPORATION
(A Delaware Corporation)
I.R.S. Employer Identification No. 77-0212977
50 West San Fernando Street
San Jose, California 95113
Telephone: (408) 995-5115
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 281,758,924 shares of Common
Stock, par value $0.001 per share, outstanding on November 13, 2000.
1
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CALPINE CORPORATION AND SUBSIDIARIES
REPORT ON FORM 10-Q
FOR THE QUARTER AND PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 ....................... 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 1999 ........ 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999 .................. 5
Notes to Consolidated Financial Statements ....................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ....................................... 18
ITEM 2. Change in Securities .................................... 18
ITEM 6. Exhibits and Reports on Form 8-K ........................ 18
Signatures ................................................................ 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................$ 1,082,896 $ 349,371
Accounts receivable............................................................ 363,749 127,485
Inventories.................................................................... 27,747 16,417
Prepaid expenses............................................................... 28,152 24,848
Notes receivable, current portion.............................................. 63,177 --
Other current assets........................................................... 16,607 8,287
------------ -------------
Total current assets........................................................ 1,582,328 526,408
------------ -------------
Property, plant and equipment, net................................................ 4,810,137 2,866,447
Investments in power projects..................................................... 416,958 284,834
Project development costs......................................................... 27,481 24,018
Notes receivable.................................................................. 76,969 23,548
Restricted cash................................................................... 56,507 43,615
Deferred financing costs.......................................................... 77,202 54,215
Other assets...................................................................... 186,385 168,521
------------ -------------
Total assets................................................................$ 7,233,967 $ 3,991,606
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and borrowings under lines of credit, current portion............$ 2,536 $ 38,867
Project financing, current portion............................................. 13,120 8,603
Capital lease obligation, current portion...................................... 6,377 --
Accounts payable............................................................... 162,344 84,353
Income taxes payable........................................................... -- 8,835
Accrued payroll and related expenses........................................... 29,131 24,345
Accrued interest payable....................................................... 63,442 37,058
Other current liabilities...................................................... 81,363 73,250
------------ -------------
Total current liabilities................................................... 358,313 275,311
------------ -------------
Notes payable and borrowings under lines of credit, net of current portion........ 55,374 97,303
Project financing, net of current portion......................................... 361,188 357,137
Senior notes...................................................................... 2,551,750 1,551,750
Capital lease obligation, net of current portion.................................. 207,941 --
Deferred income taxes, net........................................................ 375,504 291,458
Deferred lease incentive.......................................................... 61,568 64,245
Deferred revenue.................................................................. 85,425 33,876
Other liabilities................................................................. 21,999 23,476
------------ -------------
Total liabilities........................................................... 4,079,062 2,694,556
------------ -------------
Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary trusts.......................... 1,122,828 270,713
Minority interests................................................................ 40,118 61,705
Stockholders' equity:
Preferred stock, $0.001 par value per share; authorized
10,000,000 shares; none issued and outstanding in 2000 and 1999............ -- --
Common stock, $0.001 par value per share; authorized 500,000,000
shares in 2000 and 100,000,000 in 1999; issued and outstanding
279,426,248 shares in 2000 and 252,215,680 shares in 1999................... 279 252
Additional paid-in capital..................................................... 1,563,699 751,215
Retained earnings.............................................................. 428,872 213,165
Accumulated other comprehensive loss........................................... (891) --
------------ -------------
Total stockholders' equity................................................... 1,991,959 964,632
------------ -------------
Total liabilities and stockholders' equity..................................$ 7,233,967 $ 3,991,606
============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Electricity and steam sales ..................................... $ 587,336 $ 225,443 $ 1,092,930 $ 529,765
Service contract revenue ........................................ 67,388 11,219 129,234 35,085
Income from unconsolidated investments in power projects ........ 7,224 15,842 21,841 34,163
Interest income on loans to power projects ...................... -- 517 -- 1,226
Other revenue ................................................... 16,943 -- 33,972 --
----------- ----------- ----------- -----------
Total revenue ................................................ 678,891 253,021 1,277,977 600,239
----------- ----------- ----------- -----------
Cost of revenue:
Fuel expenses ................................................... 185,619 78,807 363,316 194,265
Plant operating expenses ........................................ 58,692 32,560 144,271 84,673
Depreciation expense ............................................ 40,419 14,005 102,083 56,294
Production royalties ............................................ 10,139 4,119 19,290 9,745
Operating lease expenses ........................................ 25,230 9,987 46,360 23,539
Service contract expenses ....................................... 64,624 10,592 125,734 32,680
----------- ----------- ----------- -----------
Total cost of revenue ........................................ 384,723 150,070 801,054 401,196
----------- ----------- ----------- -----------
Gross profit ....................................................... 294,168 102,951 476,923 199,043
----------- ----------- ----------- -----------
Project development expenses ....................................... 6,091 3,419 15,075 7,667
General and administrative expenses ................................ 25,844 12,427 50,798 31,062
----------- ----------- ----------- -----------
Income from operations .......................................... 262,233 87,105 411,050 160,314
----------- ----------- ----------- -----------
Interest expense ................................................... 23,679 23,019 55,996 70,190
Distributions on trust preferred securities ........................ 12,650 -- 28,713 --
Interest income .................................................... (15,896) (6,473) (29,073) (16,305)
Minority interest, net ............................................. 2,390 15 3,182 15
Other income ....................................................... (2,515) (43) (4,710) (1,278)
----------- ----------- ----------- -----------
Income before provision for income taxes ........................ 241,925 70,587 356,942 107,692
Provision for income taxes ......................................... 94,817 27,670 140,000 42,215
----------- ----------- ----------- -----------
Income before extraordinary charge .............................. 147,108 42,917 216,942 65,477
Extraordinary charge, net of tax benefit of $796 in 2000 1,235 -- 1,235 1,150
and $793 in 1999 ----------- ----------- ----------- -----------
Net income ...................................................... $ 145,873 $ 42,917 $ 215,707 $ 64,327
=========== =========== =========== ===========
Basic earnings per common share:
Weighted average shares of common stock outstanding ............. 268,799 217,557 259,126 199,196
Income before extraordinary charge .............................. $ 0.55 $ 0.20 $ 0.84 $ 0.33
Extraordinary charge ............................................ $ (0.01) $ -- $ (0.01) $ (0.01)
----------- ----------- ----------- -----------
Net income ...................................................... $ 0.54 $ 0.20 $ 0.83 $ 0.32
=========== =========== =========== ===========
Diluted earnings per common share:
Weighted average shares of common stock outstanding before
dilutive effect of certain trust preferred securities ........ 285,232 231,960 275,065 211,864
Income before extraordinary charge and dilutive effect of
certain trust preferred securities ........................... $ 0.52 $ 0.19 $ 0.79 $ 0.31
Dilutive effect of certain trust preferred securities(1) ........ $ (0.04) $ -- $ (0.03) $ --
----------- ----------- ----------- -----------
Income before extraordinary charge .............................. $ 0.48 $ 0.19 $ 0.76 $ 0.31
Extraordinary charge ............................................ $ 0.01 $ -- $ (0.01) $ (0.01)
----------- ----------- ----------- -----------
Net income ...................................................... $ 0.47 $ 0.19 $ 0.75 $ 0.30
=========== =========== =========== ===========
(1) Includes the effect of the assumed conversion of certain trust preferred securities. For the three and nine months
ended September 30, 2000, the assumed conversion calculation adds 39,573 and 31,338 shares of common stock and
$7,696 and $15,373 to the net income results, representing the after tax distribution expense on certain trust
preferred securities avoided upon conversion.
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 215,707 $ 64,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 107,516 59,214
Deferred income taxes, net ..................... 77,475 40,481
Income from unconsolidated investments in
power projects ................................ (21,841) (34,163)
Distributions from unconsolidated power projects 26,717 34,178
Loss on sale of assets.......................... -- 364
Minority interest .............................. 2,144 --
Change in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable ............................ (218,009) (31,688)
Inventories .................................... (4,039) 602
Other current assets ........................... (7,151) 584
Notes receivable ............................... (36,650) --
Other assets ................................... 9,548 (10,074)
Accounts payable and accrued expenses .......... 88,456 44,204
Other current liabilities ...................... (1,814) (1,823)
----------- -----------
Net cash provided by operating activities ... 238,059 166,206
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment ........ (1,623,900) (672,843)
Acquisitions, net of cash acquired ................ (369,036) (175,700)
Proceeds from sale and leaseback of plant ......... 400,000 18,436
Increase in notes receivable ...................... (78,383) (5,120)
Capital expenditures in joint ventures ............ (207,973) (21,581)
Maturities of collateral securities ............... 4,745 1,850
Project development costs ......................... (3,689) (33,712)
Increase (decrease) in restricted cash ............ 11,988 7,696
Other ............................................. (3,021) --
----------- -----------
Net cash used in investing activities ....... (1,869,269) (880,974)
----------- -----------
Cash flows from financing activities:
Borrowings from notes payable and lines of credit . 867,369 115,200
Borrowings from project financing ................. 463,105 128,585
Repayments on notes payable and lines of credit ... (991,989) (77,625)
Repayments on project financing ................... (579,047) (170,600)
Proceeds from issuance of senior notes ............ 1,000,000 600,000
Proceeds from issuance of preferred securities .... 877,500 --
Proceeds from issuance of common stock ............ 800,533 206,874
Write-off of deferred financing costs ............. 2,031 1,943
Financing costs ................................... (75,822) (12,466)
Other ............................................. 1,055 --
----------- -----------
Net cash provided by financing activities ... 2,364,735 791,911
----------- -----------
Net increase in cash and cash equivalents ............ 733,525 77,143
Cash and cash equivalents, beginning of period ....... 349,371 96,532
----------- -----------
Cash and cash equivalents, end of period ............. $ 1,082,896 $ 173,675
=========== ===========
Cash paid during the period for:
Interest .......................................... $ 142,351 $ 60,982
Income taxes ...................................... $ 41,035 $ 5,119
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Organization and Operation of the Company
Calpine Corporation, a Delaware corporation ("Calpine" or the "Company"),
directly and through its subsidiaries is engaged primarily in the development
and acquisition of power projects and generation of electricity in the United
States and Canada.
2. Summary of Significant Accounting Policies
Basis of Interim Presentation - The accompanying interim consolidated financial
statements of the Company have been prepared by the Company, without audit by
independent public accountants, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements include the adjustments necessary to present
fairly the information required to be set forth therein. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from these statements pursuant to such rules and regulations and,
accordingly, should be read in conjunction with the audited consolidated
financial statements of the Company included in the Company's annual report on
Form 10-K for the year ended December 31, 1999. The results for interim periods
are not necessarily indicative of the results for the entire year.
Use of Estimates in Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The most significant estimates with regard to these
financial statements relate to future development costs and useful lives of the
generation facilities (see Property, Plant and Equipment), and the realizable
value of natural gas reserves.
Capitalized interest - The Company capitalizes interest on capital invested in
projects during the advanced stages of development and the construction period.
For the nine months ended September 30, 2000 and 1999, the Company recorded net
interest expense of $56.0 million and $70.2 million, respectively, after
capitalizing $96.7 million and $24.5 million of interest on general corporate
funds used for construction in 2000 and 1999, respectively, and after $22.8
million and $4.8 million of interest capitalized on funds borrowed for specific
construction projects in 2000 and 1999, respectively. Upon the commencement of
plant operations, capitalized interest is amortized over the estimated useful
life of the plant. The increase in the amount of interest capitalized during the
nine months ended September 30, 2000 reflects the significant increase in the
Company's power plant construction program.
New Accounting Pronouncements - In June 1999, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement
No. 133." The Statement amends SFAS No. 133 to defer its effective date to all
fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - An Amendment of FASB Statement No. 133."
These rules require that all derivative instruments be reported in the
consolidated financial statements at fair value. Changes in the fair value of
derivatives are to be recorded each period in earnings or other comprehensive
income, depending on whether the derivative is designated and effective as part
of a hedged transaction, and on the type of hedge transaction. Gains or losses
on derivative instruments reported in other comprehensive income must be
reclassified as earnings in the period in which earnings are affected by the
underlying hedged item, and the ineffective portion of all hedges must be
recognized in earnings in the current period. These new standards may result in
additional volatility in reported earnings, other comprehensive income and
accumulated other comprehensive income. The Company will record the effect of
the transition to these new accounting requirements as a change in accounting
principle in the first quarter of 2001.
In December 2000, FASB's Derivatives Implementation Group ("DIG") will consider
whether certain electric capacity sales contracts, which are considered written
options under SFAS 133 and 138, will be able to qualify for normal purchase and
sales exception. The Company will complete its assessment of the adoption of
SFAS 133 and 138 on its results of operations and financial position when this
matter is resolved by DIG.
Reclassifications - Prior period amounts in the consolidated financial
statements have been reclassified where necessary to conform to the 2000
presentation.
6
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3. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Geothermal properties ............................ $ 353,777 $ 366,059
Oil and gas properties ........................... 338,168 214,794
Buildings, machinery and equipment ............... 1,851,885 1,215,063
Power sales agreements ........................... 154,470 145,957
Gas contracts .................................... 126,921 122,593
Other assets ..................................... 97,585 78,735
----------- -----------
2,922,806 2,143,201
Less accumulated depreciation and amortization ... (310,844) (227,059)
----------- -----------
2,611,962 1,916,142
Land ............................................. 4,157 3,419
Construction in progress ......................... 2,194,018 946,886
----------- -----------
Property, plant and equipment, net ............... $ 4,810,137 $ 2,866,447
=========== ===========
</TABLE>
4. Results of Unconsolidated Investments in Power Projects
The following details the Company's income from investments in unconsolidated
power projects and the distributions recorded by the Company related to those
power projects (in thousands):
<TABLE>
<CAPTION>
Ownership Income Distributions
Interest at --------------------- --------------------
September 30, For the Nine Months Ended September 30,
2000
2000 1999 2000 1999
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sumas Power Plant ............................ -- $ 12,339 $ 20,244 $ 12,339 $ 20,244
Gordonsville Power Plant ..................... 50% 3,222 2,814 2,950 3,000
Lockport Power Plant ......................... 11.4% 3,366 2,821 2,763 2,737
Bayonne Power Plant .......................... 7.5% 2,030 2,741 2,271 2,177
Kennedy International Airport Power Plant (1) 100% (2,754) 3,868 -- --
Stony Brook Power Plant (1) .................. 100% (939) 1,100 1,820 370
Auburndale Power Plant (2) ................... 100% 599 (38) 1,350 1,500
Grays Ferry .................................. 40% 3,762 -- 3,000 --
Aidlin Power Plant (3) ....................... 100% -- 181 -- 336
Agnews Power Plant (3) ....................... 100% 37 (53) -- --
Dighton Power Plant .......................... 50% -- 322 -- 3,810
Other ........................................ -- 179 163 224 4
-------- -------- -------- --------
Total ..................................... $ 21,841 $ 34,163 $ 26,717 $ 34,178
======== ======== ======== ========
</TABLE>
(1) Calpine acquired the remaining 50% interests in the Kennedy International
Airport Power Plant and the Stony Brook Power Plant in May 2000.
Accordingly, the Company thereafter consolidated the operations of these
power plants.
(2) Calpine acquired the remaining 50% interest in the Auburndale Power Plant
in June 2000. Accordingly, the Company thereafter consolidated the
operations of this facility.
(3) In August 2000, Calpine acquired the remaining 45% and 80% interests,
respectively, in the Aidlin Power Plant and the Agnews Power Plant.
Accordingly, the Company thereafter consolidated the operations of these
power plants.
5. Senior Notes
On August 1 and 2, 2000, we announced the completion of consent solicitations to
effect certain amendments to six Indentures governing certain outstanding
Calpine public debt securities which are due in the years 2004-2009.
Supplemental Indentures effecting such amendments were executed by the Company
and the respective Trustees.
7
<PAGE>
On August 10, 2000, the Company completed a public offering of $250.0 million of
its 8-1/4% Senior Notes due 2005 and $750.0 million of its 8-5/8% Senior Notes
due 2010. The 8-1/4% Senior Notes mature on August 15, 2005 and interest is
payable semi-annually on August 15 and February 15 of each year. The 8-5/8%
Senior Notes mature on August 15, 2010 and interest is payable semi-annually on
August 15 and February 15 of each year. Transaction costs incurred in connection
with the offerings were recorded as a deferred charge and are amortized over the
life of the Senior Notes using the effective interest rate method. Both
issuances of the Senior Notes may be redeemed at any time prior to their
respective stated maturity at a redemption price equal to 100% of the principal
amount of the Senior Notes being redeemed plus accrued and unpaid interest plus
a make-whole premium.
6. Trust Preferred Securities
On August 9, 2000, Calpine through its wholly-owned subsidiary, Calpine Capital
Trust III, a statutory business trust created under Delaware law, completed a
private offering of 10,350,000 Remarketable Term Income Deferrable Equity
Securities ("HIGH TIDES") at a price of $50.00 per share. The gross proceeds
from the offering were $517.5 million.
The net proceeds from the offering were used by Calpine's subsidiary to invest
in convertible subordinated debentures of Calpine, which represent substantially
all of the subsidiary's assets. Calpine effectively has guaranteed all of the
subsidiary's obligations under the HIGH TIDES. Financing costs related to the
issuance of the HIGH TIDES are amortized over 30 years. The HIGH TIDES accrue
distributions at a rate of 5% per annum, have a liquidation value of $50.00 per
share, are convertible into shares of Calpine's common stock at the holder's
option at a ratio of 1.151 shares of common stock for each HIGH TIDES, which
ratio is subject to change following the tender notification date, and may be
redeemed at any time on or after August 5, 2003 at a redemption price equal to
101.25% of the principal amount plus any accrued and unpaid distributions
declining to 100% of the principal amount on or after August 5, 2004.
Additionally, Calpine has the right to defer the interest payments on the
debentures for up to 20 consecutive quarters, which would also cause a deferral
of distributions on the HIGH TIDES. Currently, the Company has no intention of
deferring interest payments on the debentures.
7. Common Stock
On August 9, 2000, Calpine completed a public offering of 23,000,000 shares of
its common stock at $34.75 per share. The gross proceeds from the offering were
$799.3 million.
8. Acquisitions
On July 5, 2000, Calpine completed three acquisitions of natural gas reserves
for $206.5 million, including the acquisition of Calgary-based Quintana Minerals
Canada Corp., three fields in the Gulf of Mexico and natural gas assets in the
Piceance Basin, Colorado and onshore Gulf Coast.
On July 20, 2000, the Company completed the acquisition of the 1,000-megawatt
natural gas-fired Oneta Energy Center, under development in Coseta, Oklahoma,
from Panda Energy International, Inc.
On August 16, 2000, Calpine acquired the remaining 80% interest in the Agnews
cogeneration facility, a 29-megawatt natural gas-fired, combined-cycle facility
located in San Jose, California, from GATX Capital Corporation. Calpine first
acquired a 20% equity interest in the Agnews facility in 1990. The purchase
price was approximately $4.9 million.
On August 31, 2000, Calpine acquired the remaining 45% equity interest in the
Aidlin geothermal facility, a 20-megawatt electric generating facility, from an
affiliate of Sumitomo Corporation. Calpine initially acquired a 5% equity
interest in the Aidlin geothermal facility in 1989. That interest was increased
to 55% with the acquisition of two other partners' interests in 1999. The
purchase price was approximately $6.4 million.
9. Credit Facilities and Sale Leaseback Transaction
As part of the common stock, High Tides III and Senior Notes offering in August
2000, the Company repaid outstanding borrowings. The Company repaid the
outstanding balance of $93.3 million under its borrowing base facilities with
Bank One, Texas, N.A. ("Bank One"). The Company repaid the $509.0 balance on the
$1.0 billion Bridge Credit Agreement ("Bridge"), with a consortium of commercial
lending institutions with Credit Suisse First Boston as agent. The Company
repaid the $25.0 million balance on the credit facility with MeesPierson Capital
Corporation. The Company also repaid $355.7 million outstanding under the
amended and restated $400.0 million credit facility with a consortium of
commercial lending institutions with Bank of Nova Scotia as agent. In addition,
the Company repaid the outstanding balance of $355.3 on its Calpine Construction
Finance Company's credit facility, with a consortium of banks with The Bank of
Nova Scotia as the lead arranger. At September 30, 2000, the Company had an
additional $47.9 million outstanding under this credit facility.
8
<PAGE>
On August 31, 2000, Calpine repaid the outstanding balance of $224.2 million
under the credit agreement with ING (U.S.) Capital LLC for the construction of
the Pasadena facility expansion.
On September 1, 2000, Calpine completed a leveraged lease financing transaction
to provide the term financing for both Phase I and Phase II of the Pasadena,
Texas cogeneration project. Under the terms of the lease, the Company received
$400.0 million in gross proceeds and recorded a deferred gain of approximately
$65.0 million, which is classified in deferred revenue and is being amortized as
a reduction of operating lease expense over the remaining life of the lease.
10. Comprehensive Income
In connection with the acquisition of Quintana Minerals Canada Corp., the
Company now reports comprehensive income, as defined by FASB SFAS No. 130, as
including foreign currency translation gains and losses and other unrealized
gains and losses that have been previously excluded from net income and
reflected instead in stockholders'equity. Total comprehensive income is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net Income ................... $ 145,873 $ 42,917 $ 215,707 $ 64,327
Foreign Currency
Translation Adjustment (891) -- (891) --
--------- --------- --------- ---------
Total Comprehensive Income.... $ 144,982 $ 42,917 $ 214,816 $ 64,327
========= ========= ========= =========
</TABLE>
11. Earnings per Share
All share data has been adjusted to reflect the two-for-one stock split
effective October 7, 1999, the two-for-one stock split effective June 8, 2000,
and the two-for-one stock split that became effective on November 14, 2000.
<TABLE>
<CAPTION>
Periods Ended September 30, 2000 1999
(in thousands, except per share amounts) --------------------------------- ---------------------------------
Net Net
Income Shares EPS Income Shares EPS
---------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS:
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary charge ........ $ 147,108 268,799 $ 0.55 $ 42,917 217,557 $ 0.20
Extraordinary charge net of tax benefit
of $796 in 2000 ....................... (1,235) (0.01) -- --
--------- ------- ------ -------- ------- ------
Basic earnings per common share ........... $ 145,873 268,799 $ 0.54 $ 42,917 217,557 $ 0.20
========= ======= ====== ======== ======= ======
Common shares issuable upon exercise of
stock options using treasury stock
method .................................. 16,433 14,403
------- -------
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary charge ........ $ 147,108 285,232 $ 0.52 $ 42,917 231,960 $ 0.19
Effect of conversion of certain
dilutive HIGH TIDES ..................... 7,696 39,573 -- -- --
(0.04)
Extraordinary charge net of tax benefit
of $796 in 2000 ......................... (1,235) -- (0.01) -- -- --
--------- ------- ------ -------- ------- ------
Diluted earnings per common share ......... $ 153,569 324,805 $ 0.47 $ 42,917 231,960 $ 0.19
========= ======= ====== ======== ======= ======
9
<PAGE>
NINE MONTHS:
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary charge ........ $ 216,942 259,126 $ 0.84 $ 65,477 199,196 $ 0.33
Extraordinary charge net of tax benefit
of $796 in 2000 and $793 in 1999 ........ (1,235) (0.01) (1,150) (0.01)
--------- ------- ------ -------- ------- ------
Basic earnings per common share ........... $ 215,707 259,126 $ 0.83 $ 64,327 199,196 $ 0.32
========= ======= ====== ======== ======= ======
Common shares issuable upon exercise of
stock options using treasury stock method 15,939 12,668
------- -------
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary charge ........ $ 216,942 275,065 $ 0.79 $ 65,477 211,864 $ 0.31
Effects of conversion of certain
dilutive HIGH TIDES ..................... 15,373 31,338 (0.03) -- --
Extraordinary charge net of tax benefit
of $796 in 2000 and $793 in 1999 ........ (1,235) -- (0.01) (1,150) (0.01)
--------- ------- ------ -------- ------- ------
Diluted earnings per common share ......... $ 231,080 306,403 $ 0.75 $ 64,327 211,864 $ 0.30
========= ======= ====== ======== ======= ======
</TABLE>
For the nine months ended September 30, 1999, the Company recognized an
extraordinary charge of $1.2 million or $0.01 per share (net of tax benefit of
$793,000), representing the write-off of deferred financing costs related to the
repayment of non-recourse project financing for the Gilroy Power Plant.
For the three and nine months ended September 30, 2000, the Company recognized
an extraordinary charge of $1.2 million, or $0.01 per share (net of tax benefit
of $796,000), representing the write-off of deferred financing costs related to
the repayment of the Bridge and the Bank One borrowing base facilities described
in Note 9 above.
Unexercised employee stock options to purchase approximately 134,820 and
2,883,200 shares of the Company's common stock during the nine months ended
September 30, 2000 and 1999, respectively, were not included in the computation
of diluted shares outstanding because such inclusion would be anti-dilutive.
12. Commitments and Contingencies
Legal Matters
An action was filed against Lockport Energy Associates, L.P. and the New York
Public Service Commission ("NYPSC") in August 1997 by New York State Electricity
and Gas Company ("NYSEG") in the Federal District Court for the Northern
District of New York. NYSEG requested the Court to direct NYPSC and the Federal
Energy Regulatory Commission (the "FERC") to modify contract rates to be paid to
the Lockport Power Plant. In October 1997, NYPSC filed a cross-claim alleging
that the FERC violated the Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA"), and the Federal Power Act by failing to reform the NYSEG
contract that was previously approved by the NYPSC. On September 29, 2000, the
New York Federal District Court dismissed NYSEG's complaint and NYPSC's
cross-claim. The Court stated that FERC has no authority to alter or waive its
regulations or exemptions to alter the terms of the applicable power purchase
agreements and that Qualifying Facilities are entitled to the benefit of their
bargain, even if at the expense of NYSEG and its ratepayers. NYSEG has filed an
appeal with respect to this decision.
The Company is involved in various other claims and legal actions arising out of
the normal course of business. The Company does not expect that the outcome of
these proceedings will have a materially adverse effect on the Company's
financial position or results of operations, although no assurance can be given
in this regard.
Capital Expenditures
In July 2000, Calpine entered into an agreement with GE Power Systems to
purchase 21 model 7FB turbines from GE Power Systems, with delivery scheduled to
begin in 2003.
In July 2000, Calpine signed a memorandum of understanding to purchase 85 heat
recovery steam generators from St. Louis, Missouri-based Nooter/Eriksen. Calpine
will begin taking delivery of the generators in 2001, with the bulk of the
contract to be filled through 2004.
13. Subsequent Events
On July 24, 2000, the Company announced plans to enter into a $2.5 billion
revolving construction credit facility with a consortium of banks, including The
Bank of Nova Scotia and Credit Suisse First Boston as lead arrangers. We expect
to sign this agreement during the fourth quarter of 2000.
10
<PAGE>
On October 12, 2000, Calpine completed the acquisition of Northbrook,
Illinois-based SkyGen Energy LLC ("SkyGen") from Michael Polsky and Wisvest
Corporation ("Wisvest"), an affiliate of Wisconsin Energy Corp. The purchase
price was $392.5 million in cash, 2,117,742 shares of our common stock (which
were valued in the aggregate at $57.2 million at the time the Company entered
into the agreement), the assumption of certain recourse and non-recourse
obligations of SkyGen, the assumption of certain contingent obligations of
Wisvest and Wisconsin Energy Corp. on behalf of SkyGen, and the obligation to
make certain additional contingent payments for completion of certain project
development milestones.
On October 16, 2000, Calpine announced an agreement with TriGas Exploration Inc.
("TriGas"), the Calgary-based oil and gas company, under which we will make a
cash offer of $3.20 (Cdn.) per share for all of the issued and outstanding
common shares of TriGas. The aggregate value of the offer is approximately $156
million (Cdn.) including the assumed net indebtedness of TriGas. The acquisition
would provide Calpine with natural gas reserves to fuel its proposed Calgary
Energy Centre, a 26% interest in the East Crossfield Gas Plant, extensive
pipelines and gathering systems and a significant undeveloped land base with
development potential. The offering circular associated with the transaction was
mailed to TriGas shareholders on October 24, 2000 and the offer will expire 21
days thereafter. The offer is conditional on, among other things, at least
two-thirds of the common shares of TriGas being tendered, and receipt of all
necessary regulatory approvals and on conditions customary in transactions of
this nature.
On October 20, 2000, the Company entered into definitive agreements to acquire
strategic power assets from Dartmouth, Massachusetts-based Energy Management,
Inc. ("EMI") for approximately $145.0 million (a cash payment of $100 million
and the issuance of shares of Calpine common stock with a value at closing of
$45.0 million) and the assumption of project financing. Under the terms of the
agreement, Calpine will acquire the remaining interest in three recently
constructed combined-cycle power generating facilities located in Dighton,
Massachusetts, Tiverton, Rhode Island and Rumford, Maine, as well as Calpine-EMI
Marketing LLC, a joint marketing venture between Calpine and EMI. The Company
expects to close this transaction during the fourth quarter of 2000.
On October 20, 2000, the Company announced the signing of a 20-year contract
with Aquila Energy ("Aquila"), a wholly owned subsidiary of UtiliCorp United,
for 580 megawatts of the output of the jointly owned Acadia Power Project
currently under construction in Acadia Parish, Louisiana Cleco Midstream
Resources LLC, a wholly owned subsidiary of Cleco, and Calpine each have a 50%
interest in Acadia Power Partners LLC, which owns the 1,000 megawatt
combined-cycle plant. Under terms of a tolling agreement, starting July 1, 2002,
Aquila will supply the natural gas needed to generate 580 megawatts of
electricity and will own and market the produced power.
On October 26, 2000, the Company announced that our Board of Directors
authorized a two-for-one stock split of our common stock for stockholders of
record as of November 6, 2000. The shares resulting from this split are expected
to be distributed after the market closes on November 14, 2000.
On October 31, 2000, the Company announced with Aquila, the completion of a $270
million construction and leverage lease financing of the Aries Power Project, a
600-megawatt gas-fired power plant under construction in Pleasant Hill,
Missouri. The majority of the plant's capacity and electrical output has already
been sold under a four-year tolling contract (June 2001 - May 2005) to Missouri
Public Service, a division of UtiliCorp. Under the terms of separate tolling
contracts, Calpine and Aquila will purchase the balance of the plant's capacity
and output, remarketing it into the Southwest Power Pool and Southeast Electric
Reliability Counsel regional power markets. The marketing and fuel supply
responsibilities will be handled by Aquila.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical financial information contained herein, the matters
discussed in this quarterly report may be considered forward- looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended and subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
Such statements include declarations regarding our intent, belief or current
expectations. Readers are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties; actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements are: (i) that the information is of a preliminary nature and may be
subject to further adjustment, (ii) the possible unavailability of financing,
(iii) risks related to the development, acquisition, construction and operation
of power plants, (iv) the impact of electricity and gas price fluctuations, (v)
the impact of curtailment of power plant generation due to constrained
transmission capacity or other causes, (vi) the seasonal nature of our business,
(vii) start-up risks, (viii) general operating risks, (ix) dependence on third
parties, (x) risks associated with international investments, (xi) risks
associated with the power marketing business, (xii) changes in government
11
<PAGE>
regulation, (xiii) availability of natural gas, (xiv) the effects of
competition, (xv) dependence on senior management, (xvi) volatility in our stock
price, (xvii) fluctuations in quarterly results and seasonality, and (xviii)
other risks identified from time to time in our reports and registration
statements filed with the Securities and Exchange Commission.
MANAGEMENT OVERVIEW
Calpine is engaged in the development, acquisition, ownership, and operation of
power generation facilities and the sale of electricity and steam principally in
the United States. Today, we have interests in 50 operating power plants having
a net baseload capacity of 4,639 megawatts, 23 power plants under construction
having a net baseload capacity of 11,065 megawatts, and 23 projects under
development with a net baseload capacity of 10,817 megawatts.
On July 18, 2000, we announced plans to purchase from GE Power Systems 21 model
7FB turbines which will produce an additional 5,250 megawatts of electricity
when operated in combined-cycle mode.
On July 19, 2000, we announced we will develop, own and construct a natural
gas-fired, combined-cycle power generation facility in Haywood County,
Tennessee. The proposed Haywood Energy Center represents Calpine's fourth
project that will interconnect with the Tennessee Valley Authority.
On July 21, 2000, we signed a memorandum of understanding to purchase 85 heat
recovery steam generators ("HRSG's) from St. Louis, Missouri-based
Nooter/Eriksen. Calpine will begin taking delivery of the HRSG's in 2001, with
the bulk of the contract to be filled through 2004.
On July 24, 2000, we announced plans to enter into a $2.5 billion revolving
construction credit facility with a consortium of banks, including The Bank of
Nova Scotia and Credit Suisse First Boston as lead arrangers. We expect to sign
this agreement during the fourth quarter of 2000.
On July 25, 2000, we announced three strategic acquisitions that add 205 billion
cubic feet equivalent (bcfe) of proven, natural gas reserves to Calpine's
natural gas portfolio. Calpine acquired these assets for $206.5 million. These
acquisitions increase Calpine's proven reserves to 430 bcfe, which at full
production, can fuel 800 to 900 megawatts of combined-cycle gas-fired power
generation.
On August 1 and 2, 2000, we announced the completion of consent solicitations to
effect certain amendments to six Indentures governing certain outstanding
Calpine public debt securities which are due in the years 2004-2009.
Supplemental Indentures effecting such amendments were executed by the Company
and the respective Trustees.
On August 9, 2000, we completed a public offering of 23,000,000 shares of our
common stock at $34.75 per share. The gross proceeds were $799.3 million.
On August 9, 2000, Calpine through its wholly-owned subsidiary, Calpine Capital
Trust III, a statutory business trust created under Delaware law, completed a
private offering of 10,350,000 Remarketable Term Income Deferrable Equity
Securities ("HIGH TIDES") at a price of $50.00 per share. The gross proceeds
from the offering were $517.5 million.
On August 10, 2000, we completed a public offering of $250.0 million of its
8-1/4% Senior Notes due 2005 and $750.0 million of our 8-5/8% Senior Notes due
2010. The 8-1/4% Senior Notes mature on August 15, 2005 and interest is payable
semi-annually on August 15 and February 15 of each year. The 8-5/8% Senior Notes
mature on August 15, 2010 and interest is payable semi-annually on August 15 and
February 15 of each year.
On August 18, 2000, we announced that we acquired the remaining 80% interest in
the Agnews cogeneration facility, a 29-megawatt natural gas-fired,
combined-cycle facility located in San Jose, California, from GATX Capital
Corporation. We first acquired a 20% equity interest in the Agnews facility in
1990.
On September 1, 2000, we announced that we acquired the remaining 45% equity
interest in the Aidlin geothermal facility from an affiliate of Sumitomo
Corporation. We initially acquired a 5% equity interest in the Aidlin geothermal
facility in 1989, representing Calpine's first megawatt of generation. That
interest was increased 55% with the acquisition of two other partners' interests
in 1999. Located in The Geysers region of northern California, Aidlin is a
20-megawatt electric generating facility.
On September 1, 2000, we completed a leveraged lease financing transaction to
provide the term financing for both Phase I and Phase II of the Pasadena, Texas
cogeneration project. Under the terms of the lease, the Company received $400.0
million in gross proceeds and recorded a deferred gain of approximately $65.0
million.
12
<PAGE>
Transactions Announced or Consummated Subsequent to September 30, 2000
On October 12, 2000, we completed the acquisition of Northbrook, Illinois-based
SkyGen Energy LLC ("SkyGen") from Michael Polsky and Wisvest Corporation
("Wisvest"), an affiliate of Wisconsin Energy Corp. The purchase price was
$392.5 million in cash, 2,117,742 shares of our common stock (which were valued
in the aggregate at $57.2 million at the time we entered into the agreement),
the assumption of certain recourse and non-recourse obligations of SkyGen, the
assumption of certain contingent obligations of Wisvest and Wisconsin Energy
Corp. on behalf of SkyGen, and the obligation to make certain additional
contingent payments for completion of certain project development milestones.
On October 16, 2000, we announced that we entered into an agreement with TriGas
Exploration Inc. ("TriGas"), the Calgary-based oil and gas company, under which
we will make a cash offer of $3.20 (Cdn.) per share for all of the issued and
outstanding common shares of TriGas. The aggregate value of the offer is
approximately $156 million (Cdn.) including the assumed net indebtedness of
TriGas. The acquisition would provide Calpine with natural gas reserves to fuel
its proposed Calgary Energy Centre, and a 26% interest in the East Crossfield
Gas Plant, extensive pipelines and gathering systems and a significant
undeveloped land base with development potential. The offering circular
associated with the transaction was mailed to TriGas shareholders on October 24,
2000 and the offer will expire 21 days thereafter. The offer is conditional on,
among other things, at least two-thirds of the common shares of TriGas being
tendered, and receipt of all necessary regulatory approvals and on conditions
customary in transactions of this nature.
On October 16, 2000, we announced that we signed a one-year marketing agreement
that links the daily price of natural gas to the price of electricity with EOG
Resources, Inc. ("EOG"). EOG agreed to sell 10 million cubic feet of natural gas
per day directly to the Company. The transaction will become effective on
January 1, 2001 and will terminate December 31, 2001.
On October 17, 2000, we announced plans to enter into a long-term power supply
agreement with Pacific Gas and Electric Company ("PG&E") that would provide
competitively priced electricity for PG&E's northern California customers.
Electricity deliveries will begin July 1, 2001 and end December 31, 2003.
On October 17, 2000, we announced that we presented plans, with Tampa,
Florida-based Seminole Electric Cooperative, Inc., to the Florida Public Service
Commission ("FPSC") under which our proposed Osprey Energy Center will supply
electric power under contract to help meet Seminole's member systems' power
needs. Under the terms of the planned agreement, Seminole will have access to
all of the output from the Osprey facility for a period of 17 years, beginning
with the plant's projected commercial operation date. The terms of the agreement
are reviewable by the parties every five years.
On October 20, 2000, we announced that we entered into definitive agreements to
acquire strategic power assets from Dartmouth, Massachusetts-based Energy
Management, Inc. ("EMI") for approximately $145 million (a cash payment of $100
million and the issuance of shares of Calpine common stock with a value at
closing of $45 million) and the assumption of project financing. Under the terms
of the agreement, Calpine will acquire the remaining interest in three recently
constructed combined-cycle power generating facilities located in Dighton,
Massachusetts, Tiverton, Rhode Island and Rumford, Maine, as well as Calpine-EMI
Marketing LLC, a joint marketing venture between Calpine and EMI. We expect to
close this transaction during the fourth quarter of 2000.
On October 20, 2000, we announced the signing of a 20-year contract with Aquila
Energy, a wholly owned subsidiary of UtiliCorp United, for 580 megawatts of the
output of the jointly owned Acadia Power Project currently under construction in
Acadia Parish, La. Cleco Midstream Resources LLC, a wholly owned subsidiary of
Cleco, and Calpine each have a 50% interest in Acadia Power Partners LLC, which
owns the 1,000 megawatt combined-cycle plant. Under terms of a tolling
agreement, starting July 1, 2002, Aquila Energy will supply the natural gas
needed to generate 580 megawatts of electricity and will own and market the
produced power.
On October 23, 2000, we announced that we entered into a project development
agreement to build, own and operate an 850-megawatt natural gas-fired
electricity generating facility to be located on the Ohio River in Hamilton
Township, Lawrence County, Ohio. The proposed Lawrence Energy Center will
represent a $510 million investment, with a target commercial operation date of
2004. Calpine entered into the agreement with Hanging Rock Energy Projects, LLC,
a wholly owned subsidiary of Boston-based CME-NAME, which had initiated
preliminary development efforts for the project.
On October 26, 2000, we announced that our Board of Directors authorized a
two-for-one stock split of our common stock for stockholders of record as of
November 6, 2000. The shares resulting from this split are expected to be
distributed after the market closes on November 14, 2000.
13
<PAGE>
On October 31, 2000, we announced that we entered into a long-term, natural gas
transportation and storage agreement with Kinder Morgan Texas Pipeline, Inc.
("KMTP"), a subsidiary of Kinder Morgan, Inc. Calpine will have access to up to
375,000 MMBtu of firm natural gas transportation service per day from KMTP for a
period of 10 years. The agreement will begin on January 1, 2001.
On October 31, 2000, we announced with Aquila Energy, a wholly-owned subsidiary
of UtiliCorp United, the completion of a $270 million construction and leverage
lease financing of the Aries Power Project, a 600-megawatt gas-fired power plant
under construction in Pleasant Hill, Missouri. The majority of the plant's
capacity and electrical output has already been sold under a four-year tolling
contract (June 2001 - May 2005) to Missouri Public Service, a division of
UtiliCorp. Under the terms of separate tolling contracts, Calpine and Aquila
will purchase the balance of the plant's capacity and output, remarketing it
into the Southwest Power Pool and Southeast Electric Reliability Counsel
regional power markets. The marketing and fuel supply responsibilities will be
handled by Aquila.
SELECTED OPERATING INFORMATION
Set forth below is certain selected operating information for our power plants
and steam fields, for which results are consolidated in our statements of
operations. Results vary for the three and nine months ended September 30, 2000,
as compared to the same periods in 1999, primarily due to the consolidation of
acquisitions, favorable energy pricing, and increased production. See prior
quarters' Form 10-Qs and footnote 8 to the unaudited consolidated financial
statements for further discussion. The information set forth under thermal and
other revenue consists of the results for the Thermal Power Company Steam Fields
prior to the acquisition of the PG&E power plants on May 7, 1999, in addition to
host thermal sales and other revenue. As a result of this acquisition, steam
output was used to produce electricity, whereas this output was previously sold
to third parties.
<TABLE>
<CAPTION>
(in thousands, except average prices) Three Months Ended Nine Months Ended
(unaudited) September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Electricity and steam revenues:
Energy ................... $ 398,567 $ 147,595 $ 725,628 $ 305,648
Capacity ................. $ 154,386 $ 68,761 $ 298,223 $ 182,037
Thermal and other ........ $ 34,383 $ 9,086 $ 69,079 $ 42,080
Megawatt hours produced ....... 7,049,078 4,625,727 16,108,267 10,285,735
Average energy price
per kilowatt hour ........... $ 0.0565 $ 0.0319 $ 0.0450 $ 0.0297
</TABLE>
Megawatt hours produced at the power plants increased 52.4% and 56.6% for the
three and nine months ended September 30, 2000, as compared with the same
periods in 1999. This was primarily due to approximately 57,526 and 1,370,190
additional megawatt hours of production for the three and nine months ended
September 30, 2000, respectively, from the 14 geothermal power plants purchased
on May 7, 1999, 404,238 and 1,166,943 megawatt hours produced for the three and
nine months ended September 30, 2000, respectively, from the plants acquired
when we purchased 80% of Cogeneration Corporation of America on December 17,
1999, and 1,941,371 and 2,003,745 megawatt hours for the three and nine months
ended September 30, 2000, respectively, from the acquisition of the Auburndale,
KIAC, and Stony Brook facilities, and the commencement of operations at our
Hidalgo facility and Pasadena expansion in June and July 2000, respectively.
14
<PAGE>
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999 - CONSOLIDATED OPERATIONS
Revenue - Total revenue increased 168% and 113% to $678.9 million and $1,278.0
million for the three months and nine months ended September 30, 2000, compared
to $253.0 million and $600.2 million in 1999.
Electricity and steam sales revenue increased 161% to $587.3 million for
the three months ended September 30, 2000, compared to $225.4 million in the
same period in 1999. The increase is primarily attributable to favorable energy
pricing and increased production for facilities that we owned in both periods.
These factors contributed approximately $155.6 million in additional revenue
during the three months ended September 30, 2000, versus the same period last
year. An additional $36.0 million was contributed by the Newark, Parlin, Morris,
and Pryor facilities, which we acquired in the fourth quarter of 1999. The
acquisition of the remaining interests in KIAC, Stony Brook, Auburndale and
Agnews during the second and third quarters of 2000 in addition to the
commencement of operations of our Hidalgo facility and Pasadena expansion
project contributed $132.2 million to the overall increase in revenues. The
remainder of the increase was primarily attributable to the restructuring of the
Gilroy power sales contract with PG&E effective September 1, 1999.
For the nine months ended September 30, 2000, electricity and steam
revenues increased 106% to $1,092.9 million as compared to $529.8 million for
the same period last year. The increase is primarily due to $305.6 million of
additional revenue from a full nine months of activity in 2000 of 14 geothermal
facilities at The Geysers acquired in the second quarter of 1999, increased
production and favorable energy pricing. The Newark, Parlin, Morris, and Pryor
facilities contributed $81.4 million of the increase over the prior year. Our
acquisitions of KIAC, Stony Brook, Auburndale and Agnews, in addition to the
commencement of operation at our Hidalgo facility and Pasadena expansion
project, contributed $155.2 million to our results for the nine months ended
September 30, 2000. The balance of the favorable increase was primarily due to
favorable energy pricing, and to the restructuring of the Gilroy power sales
contract with PG&E effective September 1, 1999, partially offset by a decrease
in capacity revenues for the first six months of 2000 at the Texas City
facility.
Service contract revenue increased to $67.4 million and $129.2 million for
the three and nine months ended September 30, 2000, compared to $11.2 million
and $35.1 million, respectively, for the same periods in 1999. The increase was
primarily attributable to increased electric energy and gas marketing and
trading activity associated with power and gas obtained from third parties.
Income from unconsolidated investments in power projects decreased 54% to
$7.2 million for the three months ended September 30, 2000, compared to $15.8
million for the same period in 1999. Approximately $6.8 million of the decrease
is primarily attributable to the consolidation of KIAC, Stony Brook, Agnews, and
Auburndale's results in electricity and steam revenues as a result of our
purchase of the remaining interests in those plants during 2000. We also
recorded $3.4 million less equity income from Sumas, and $2.3 million of income
from our investment in the Grays Ferry facility, which we acquired in the fourth
quarter of 1999. For the nine months ended September 30, 2000, income from
unconsolidated investments in power projects decreased 36% to $21.8 million as
compared to $34.2 million for the same period a year ago. Approximately $7.9
million of the decrease is primarily attributable to the consolidation of KIAC,
Stony Brook, Agnews, and Auburndale's results in electricity and steam revenues.
We also recorded $7.9 million less equity income from Sumas, and $3.8 million of
income from our investment in the Grays Ferry facility.
Interest income on loans to power projects decreased to none in the three
months ended September 30, 2000, compared to $0.5 million in 1999. For the nine
months ended September 30, 2000, interest income on loans to power projects
decreased to none compared to $1.2 million for the same period a year ago. The
decreases are attributable to dividend income received in 1999 from Sheridan
California Energy, Inc., prior to our purchase of the remainder of that company
and its parent company, Sheridan Energy, Inc., on October 1, 1999.
Other revenue increased to $16.9 million and $34.0 million for the three
and nine months ended September 30, 2000, respectively, compared to none in the
same periods last year. Other revenue is comprised primarily of natural gas
sales to third parties. The increase is attributable to the acquisition of
Sheridan Energy, Inc. on October 1, 1999, and other strategic gas acquisitions
during 2000.
15
<PAGE>
Cost of revenue - Cost of revenue increased to $384.7 million and $801.1 million
for the three and nine months ended September 30, 2000, respectively, compared
to $150.1 million and $401.2 million for the same periods in 1999. The increases
of $234.6 million and $399.9 million were partially attributable to growth in
service contract expense of $54.0 million and $93.1 million for the three and
nine months ended September 30, 2000, representing costs primarily associated
with gas and energy marketing activity. The remainder of the increase in cost of
revenue during both periods was due to the incremental effects of power plants
and natural gas operations acquired after September 30, 1999, and due to higher
fuel expense at our gas-fired facilities attributable to substantially higher
natural gas prices.
General and administrative expenses - General and administrative expenses
increased to $25.8 million for the three months ended September 30, 2000,
compared to $12.4 million in 1999. For the nine months ended September 30, 2000,
general and administrative expenses increased to $50.8 million compared to $31.1
million for the same period in 1999. The increases were attributable to
continued growth in personnel and associated overhead costs necessary to support
the overall growth in our operations, and due to recent acquisitions, primarily
of natural gas operations.
Interest expense - Interest expense increased 3% to $23.7 million for the three
months ended September 30, 2000 from $23.0 million for the same period in 1999,
and decreased 20.2% to $56.0 million from $70.2 million for the nine months
ended September 30, 2000 and 1999, respectively. The decrease was primarily due
to capitalization of $44.7 million and $96.7 million of interest on corporate
funds invested in construction projects for the three and nine months ended
September 30, 2000, respectively, as compared to $12.5 million and $24.5 million
capitalized for the same periods in 1999. Interest expense increased during the
three months ended September 30, 2000, as compared to the same period in 1999
due to increased debt, offset by interest capitalized on construction projects.
The increase in the amount of interest capitalized reflects the significant
increase in our power plant construction program.
Distributions on trust preferred securities - Distributions on trust preferred
securities increased to $12.7 million and $28.7 million for the three and nine
months ended September 30, 2000, as compared to none in 1999. The increases are
attributable to the issuance of these securities in October 1999, January 2000,
and August 2000.
Interest income increased 145% to $15.9 million for the three months ended
September 30, 2000, and 79% to $29.1 million for the nine months ended September
30, 2000. These increases are due primarily to higher cash balances as a result
of heavy financing activities during 2000.
Other income increased $2.5 million and $3.4 million for the three and nine
months ended September 30, 2000, respectively, primarily due to $2.0 million of
income recorded in the third quarter as a result of interest rate swaps that
were extinguished in connection with the repayment of Pasadena project level
debt and due to an insurance settlement.
Provision for income taxes - The effective income tax rate was approximately 39%
for the three and nine months ended September 30, 2000, and for the
corresponding periods in 1999. The increase in the provision was due to higher
income in 2000.
FINANCIAL MARKET RISKS
From time to time, we use interest rate swap agreements to mitigate our exposure
to interest rate fluctuations. We do not use derivative financial instruments
for speculative or trading purposes. The following table summarizes the fair
market value of our existing interest rate swap agreements as of September 30,
2000 (in thousands):
<TABLE>
<CAPTION>
Notional Weighted
Principal Average Fair
Maturity Date Amount Interest Rate Market Value
------------- --------- ------------- --------------
<S> <C> <C> <C>
2000............ $ 2,350 9.9% $ (12)
2011............ 60,508 6.9% 619
2012............ 121,968 6.5% 1,712
2014............ 74,932 6.7% (44)
--------- --- -------
Total....... $ 259,758 6.7% $ 2,275
========= === =======
</TABLE>
16
<PAGE>
Short-term investments - As of September 30, 2000, we have short-term
investments of $824.5 million. These short-term investments consist of highly
liquid investments with maturities less than three months. We have the ability
to hold these investments to maturity, and as a result, we would not expect the
value of these investments to be affected to any significant degree by the
effect of a sudden change in market interest rates.
Gas price fluctuations - We enter into derivative commodity instruments to hedge
our exposure to the impact of price fluctuations on gas purchases. Such
instruments include regulated natural gas contracts and over-the-counter swaps
and basis hedges with major energy derivative product specialists. All hedge
transactions are subject to our risk management policy which does not permit
speculative or trading positions. These transactions are accounted for under the
hedge method of accounting. Cash flows from derivative instruments are
recognized as incurred through changes in working capital.
Power Marketing - At September 30, 2000, the Company had positions with a net
fair value of $17.5 million to protect the Company against the risks of
fluctuating market prices. The Company actively manages its positions, and it is
the Company's policy to not have any speculative or trading positions. Net gains
and losses related to commodity swap contracts are recognized when realized. The
Company's credit risk associated with power and fuel contracts results from the
risk-of-loss on non-performance by counter parties. The Company reviews and
assesses counter party risk to limit any material impact to its financial
position and results of operations. The Company does not anticipate
non-performance by the counter parties.
Impact of Recent Accounting Pronouncements
New Accounting Pronouncements - In June 1999, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement
No. 133." The Statement amends SFAS No. 133 to defer its effective date to all
fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- An Amendment of FASB Statement No. 133."
See Note 2 for further information.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
An action was filed against Lockport Energy Associates, L.P. and the New York
Public Service Commission ("NYPSC") in August 1997 by New York State Electricity
and Gas Company ("NYSEG") in the Federal District Court for the Northern
District of New York. NYSEG requested the Court to direct NYPSC and the Federal
Energy Regulatory Commission (the "FERC") to modify contract rates to be paid to
the Lockport Power Plant. In October 1997, NYPSC filed a cross-claim alleging
that the FERC violated the Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA"), and the Federal Power Act by failing to reform the NYSEG
contract that was previously approved by the NYPSC. On September 29, 2000, the
New York Federal District Court dismissed NYSEG's complaint and NYPSC's
cross-claim. The Court stated that FERC has no authority to alter or waive its
regulations or exemptions to alter the terms of the applicable power purchase
agreements and that Qualifying Facilities are entitled to the benefit of their
bargain, even if at the expense of NYSEG and its ratepayers. NYSEG has filed an
appeal with respect to this decision.
The Company is involved in various other claims and legal actions arising out of
the normal course of business. The Company does not expect that the outcome of
these proceedings will have a materially adverse effect on the Company's
financial position or results of operations, although no assurance can be given
in this regard.
ITEM 2. CHANGE IN SECURITIES
On August 9, 2000, Calpine completed a public offering of 23,000,000 shares of
our common stock at $34.75 per share. The gross proceeds from the offering were
$799.3 million, closed on August 9, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation dated May 18,
2000 (incorporated by reference to Calpine's Registration
Statement on Form S-3 filed on June 30, 2000, Registration No.
333-40652)
3.2 Amended and Restated By-laws of the Company (incorporated
by reference to the Company's Annual Report on Form 10-K, dated
December 31, 1999 and filed on February 29, 2000, File No.
033-73160).
27.0 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
1. Current report dated October 26, 2000, and filed on October 27, 2000
Item 5. Other Events - On October 26, 2000, Calpine Corporation
announced record earnings for the three and nine months ended
September 30, 2000. In addition, Calpine's Board of Directors
authorized a two-for-one split of its common stock for stockholders of
record as of November 6, 2000.
Item 7. Exhibits - Press release dated October 26, 2000, announcing
third quarter 2000 results and two-for-one split of common stock.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALPINE CORPORATION
By: /s/ Ann B. Curtis Date: November 14, 2000
---------------------------------
Ann B. Curtis
Executive Vice President
(Chief Financial Officer)
By: /s/ Charles B. Clark, Jr. Date: November 14, 2000
---------------------------------
Charles B. Clark, Jr.
Vice President and Corporate Controller
(Chief Accounting Officer)
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
------- ------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
20
<PAGE>
