Calpine Corp.

: The Evolution from Project to Corporate Finance

Harvard Business School Case #
201098
Case Software # XLS-681

Copyright 2010 President and Fellows of Harvard College. No part of this product may be
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Exhibit 2 U.S. Power Industry (generating capacity in Megawatts)

North American Electric Reliability

Council (NERC) Region

States in Region

Market
Size in
1999a

Percent
Projected New Development by
Merchant in
2002
2002 (est)
Salomon SB Resource Data

Northeast Power Coordinating Council

Mid-Atlantic Area Council
East Central Area Reliability Coordination
Mid-America Interconnected Network
Mid-Continent Area Power Pool

NPCC
MAAC
ECAR
MAIN
MAPP

ME,VT,NH,CO,MA, RI.NY
PA.NJ.MD
MI,IN,OH,KY,WV
M,IL,WI,MI
MT,ND,SD,NE,MN, IA.WI

59,000
58,000
106,000
52,000
33,000

68%
90
26
59
0

7,000
5,000
5,000
4,000
0

20,322
11,714
19,895
14,777
1,501

Southeastern Electric Reliability Council

SERC

LA,AR,MO,MS.AL, GA,SC,NC,VA,TN

150,000

17

14,000

39,250

Florida Reliability Coordinating Council

Southwest Power Pool
Electric Reliability Council of Texas
Western Systems Coordinating Council
Total

FRCC
SPP
ERCOT
WSCC

FL
TX,OK,KS,LA,AR
TX
CA,NV,NM,CO,UT, WA,OR,ID,MT,WY

38,000
43,000
60,000
136,000
733,000

0
3
89
35

0
2,000
13,000
9,000
57,000

8,499
9,124
22,122
21,487
168,681

Source: Hiller and Mclsaac, "Talkin' 'Bout Their Generation," Part II, Salomon Smith Barney Research Report, 12/1/2000.
a

Of this total amount, coal accounted for 51.0%, nuclear for 19.7%, natural gas for 15.3%, hydro-electric for 8.3%, oil for 3.2%, and other for 2.4% according to the US Department of Energy.

Exhibit 3a Calpine Corporation Summary Consolidated Financial Data ($ millions)

Income Statement
Total revenue
EBITDA
Deprec./amort. expense
Interest expense
Net income

1994

1995

1996

1997

$94.8
53.7
20.3
23.9
6.0

$132.1
69.5
25.9
32.2
7.4

$214.5
117.4
36.6
45.3
18.7

$276.3
172.6
46.8
61.5
34.7

$555.9
255.3
74.3
86.7
45.7

$145.9
46.3
19.0
21.0
3.9

n/a
n/a

n/a
n/a

$1.45
1.22

$1.74
1.65

$2.27
2.16

$0.19
0.18

n/a

n/a

$0.00

$0.00

$0.00

$0.00

$421.0
27.3
196.8
334.4
18.6

$554.5
85.9
190.6
407.7
25.2

$1,030.2
37.5
278.6
601.1
203.1

$1,380.9
113.0
182.9
855.9
240.0

$1,728.9
5.5
114.2
1,071.4
287.0

$2,562.6
5.5
115.2
1,786.5
470.3

Earnings per ShareBasic a

Earnings per ShareDiluted
Dividends per Share
Balance Sheet
Total assets
Short-term debt
Project finance debt
Total debt
Total equity
Leverage/Capitalization
Debt ratings (Moody's/S&P)
EBITDA to interest expense
Total Debt/Capitalization
Total debt to EBITDA

1998 3/31/1999

B1/B
2.23X
95%
6.23X

Ba3/B+
2.11X
94%
5.87X

Ba3/BB2.41X
75%
5.12X

Ba2/BB2.60X
79%
4.96X

Ba2/BB
2.74X
80%
4.20X

Ba2/BB
2.20X
79%
n/a

Common shares outstanding

at year-end (millions)

n/a

n/a

19.8

20.1

20.2

26.3

Period-end share price

n/a

n/a

$20.00

$14.88

$25.25

$36.44

Operations
Number of operating plants
Capacity-gross (MW)
Capacity-net (MW)

5
221
141

8
349
268

10
589
508

18
2,194
1,268

22
2,729
2,064

Source: Calpine Corporation Annual Reports

a

Basic and fully diluted earnings per share in the first quarter of 1998 were ($0.15) and ($0.15), respectively.

22
3,018
2,064

Exhibit 3b Calpine Corporation's Issuance of Public Capital, 1984 1999 ($ in millions) a

1994
S&P Debt Rating
Debtb
Net proceeds to Calpine
Underwriter discounts (bp)
Common Stock
net proceeds to sellers

B
$105.0
101.0
262.5
---

1995

1996
B-----

BB$180.0
175.0
250.0
$317.0
298.0

1997
BB$275.0
265.0
195.0
---

1998
BB
$400.0
392.0
190.0
---

3/99
BB
$600.0
589.8
162.5
$213.9
203.8

Source: Calpine Corporation Annual Reports; casewriter estimates.

Notes:
a

Prior to 1994 there were no capital markets issues.

Debt issues consisted of Calpine Corporation senior unsecured fixed-rate notes with either seven or ten-year bullet
cmaturities. Underwriter discounts and other fees represent the difference between gross and net proceeds to Calpine.
Combined initial public offering by Calpine and secondary offering by its parent Electrowatt; proceeds-$109 million for
b

Calpine IPO and $189 million for Electrowatt. Offering price was $16 per share.

Exhibit 5 Representative Economics for a Combined-Cycle Gas Fired Power Plant

Key Assumptions
Output (megawatts)
Capacity Factor (availability)
Electricity Price ($ per MWh)
In 1999
In 2009
Fuel (Gas) Price ($ per MMBtu)
Plant Heat Rate (Btu per kWh)
O&M Expense ($ per MWh)

1,000
90%
$31.00
$24.00
$2.20
7,500
$3.50

assuming a market heat rate of 11,000

assuming a market heat rate of 7,500
note: 1 MMBtu = 1,000,000 Btu
note: 1000 kWh = 1 MWh

Capital Costs (millions)

Depreciable Life (years)
Debt-to-Capitalization Ratio
Debt Interest Rate
Inflation Rate
Tax Rate

$500
30
65%
7.75%
2.00%
38%

note: construction period = 2 years

Dollars
For the
Per MWh
Plant ($000) Produced
Production (MWh)
Revenue
Expense
Fuel
O&M Expense
Depreciation
Total Expense
Gross Profit
Interest Expense
Profit before Tax
Taxes @38%
Net Income

7,884,000
$244,404

$31.00

130,086
27,594
16,667
174,347
70,057
25,188
44,870
17,051
27,819

16.50
3.50
2.11
22.11
8.89
3.19
5.69
2.16
3.53

Source: Company documents and casewriter estimates.

Exhibit 6a Selected Financial Market Data

May 17,1999
Yields on U.S. Treasury Bills, Notes, and Bonds
1 - year
2 - year
5 - year
10 - year
30 - year

4.90%
5.31
5.53
5.66
5.91

Yields on 10-year Corporate Bonds (by S&P Rating)

AAA
AA
A
BBB
BB
B
C

6.27%
6.34
6.53
6.84
7.76
9.12
10.21

Interest Rates
3-month LIBOR
6-month LIBOR
3-month CD
Prime Rate

5.03%
5.13
4.94
7.75

Calpine Corporation
Equity Beta (calculated using 2 years of daily data)
Asset Beta (calculated using 2 years of daily data)

Source: Federal Reserve Bulletin, Bloomberg, and Datastream.

0.60
0.20

Exhibit 6b Assumed Gas and Electricity Prices in Certain Regional Markets

1999

2000

2001

Electricity ($/MWh)
California/Arizona
Texas
New England

$24.69
25.22
35.18

$26.50
26.21
36.48

$27.73
26.00
37.86

$29.54
26.36
40.15

Gas ($/mmBTU)
California/Arizona
Texas
New England

$2.24
2.19
2.84

$2.19
2.14
2.94

$2.28
2.23
2.99

$2.38
2.33
3.07

11,024

12,101

12,164

12,413

11,515
12,400

12,246
12,409

11,661
12,658

11,314
12,678

Hypothetical Heat Ratesa

California/Arizona
Texas
New England

Source: Morgan Stanley Dean Witter, US Investment Research on Calpine Corp., 6/18/99.
a

Assuming 100% availability and fuel (gas) costs only.

2002

Exhibit 9 U.S. Corporate Bond Issuance by S&P Rating and Project Debt, 19901999 (in $ billions)
1985

1986

1987

US Corporate Bond Issuance (by S&P Rating)

AAA
$22.2
$63.8
$78.0
AA
23.4
53.8
42.2
A
23.5
32.9
24.8
BBB
11.2
21.6
19.4
BB
3.3
6.0
5.7
B
5.9
20.2
21.5
CCC
2.0
5.2
5.2

Global Project Debt

Loans
n/a
Bonds
n/a

n/a
n/a

n/a
n/a

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

$79.3
31.7
28.9
15.2
2.9
18.5
5.9

$54.2
37.3
32.8
13.9
4.5
20.0
1.0

$119.2
108.8
105.5
36.4
7.2
1.5
0.0

$170.7
116.3
215.8
52.9
20.6
6.2
0.5

$188.4
105.5
203.6
100.5
23.0
27.9
1.0

$213.1
140.2
228.5
115.7
33.4
39.8
1.6

$207.9
67.8
182.9
101.2
21.0
23.7
1.9

$167.2
82.3
322.2
105.7
26.6
20.0
1.0

$242.3
100.0
329.7
146.5
40.9
44.6
1.8

$329.2
237.9
529.9
219.2
82.6
82.9
3.0

$517.1
336.8
647.6
323.2
104.9
92.8
9.4

n/a
n/a

n/a
n/a

n/a
n/a

n/a
n/a

n/a
n/a

n/a
n/a

13.7
4.0

23.3
3.8

42.8
4.8

67.5
7.5

56.7
9.8

Source: Securities Data Corporation, Project Finance International (various issues).

1998