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CALPINE CORPORATION: THE

EVOLUTION FROM PROJECT


FINANCE TO CORPORATE FINANCE
Group 1: Section 1
Nikhil Anand
111
Prachi Chandgothia 116
Sarbani Choudhuri 118
Atul Dugar
120
Rajat Gupta
122
Rohit Jain
125
Shraddha Kamat
128

AGENDA

Overview of the Case

US Power Industry and its various phases

New Financing Strategy

Current Status of Calpine

ABOUT THE COMPANY

Founded in 1984, wholly-owned subsidiary of


Electrowatt.
Involved mainly in Power Generation Business.
Present Situation- 22 Operational Plants & 12
under development.
Consolidated Assets of $ 1712 million, Revenues
$ 556 million and Net Income $ 46 million
( 8.27% of Revenue & 2.70% of Assets)
Funding Strategy:
Upto 1994: Project Finance
1994-1999: Corporate Finance
Post 1999: ??????

TARGETS

Increase Capacity to 15000 MW from 2729 MW.


Funds requirement $ 6 billion @ average of $ 0.5
million / MW.
Expected ROE and ROC of 18-22% & 10-12%
respectively.

US POWER INDUSTRY FACTS

Third Largest Industry after Automobiles and


Healthcare
Revenues of $296 and Assets of $686 billion
Total Industry capacity 7,33,000 MW
Investor Owned Utilities Own 72 % of capacity
Long Term Growth Rate estimated at 2%which
implied a cost of $ 7 billion to add 15000 MW of
capacity annually.
Aging Plants.90% to be replaced by 2015.
Reducing Reserve Margin from 35% to 12%
Huge Profit Opportunity due to change in technology
and regulation

U.S. POWER INDUSTRY


Regulated
Phase
Multi-State
Operations
Prohibited
Prices
Regulated
To cater
Specific
Markets only

IPPs Phase
Deregulation
Eliminated
Monopoly
Rights
Weakened
Encouraged
creation of
small power
plants using
nontraditional
fuels

Merchant
Contracts Phase
NEPA allowed
IPPs to sell at
wholesale
competitive
prices
Cogeneration
requirement
removed
allowing IPPs
to build larger
plants

CALPINES NEW FINANCING


STRATEGY

Project Finance
Corporate Finance/ Balance Sheet Financing
Revolving Credit facility

1) PROJECT FINANCING
Advantages

Disadvantages

Non-recourse debt
repayment from
project cash flow
Security over
project assets
Lender places
emphasis on
stand alone
project

Relative high fees


& Margins
Long Processing
Time
Excess capacity
from one plant to
another plant
cannot be
diverted

CORPORATE FINANCE

REVOLVING CREDIT FACILITY

BENEFITS OF USING PROJECT FINANCE FOR


FINANCING POWER PLANTS WITH LONG TERM
PPAS

Ease of getting project finance due to :


Steady

stream of Cash flows ensured by LT PPAs with credit

worthy Public Utility


Contractual
Ring

Bundle :less possibility of cost overrun

fencing from Other risks associated with parent

company.

Higher tax-shields for the project due to high leverage


Use debt at low cost
No large penalty in funding cost since the power plant
is relatively safe

DID CALPINES STRATEGY OF USING PROJECT


FINANCE MAKE SENSE PRIOR TO 1998 ?
Financial

burden reduced on the Parent company

(non-recourse debt)
Calpine

debt-capitalization ratio varied between 95%

- 80% during 1994-98.


Calpines

bond rating was low at B1/B, thereby

making cost of financing higher (9.12%)

WHAT ARE THE MOST SIGNIFICANT


RISKS??

WHAT ARE THE MOST SIGNIFICANT


RISKS (CONTD..)

WHAT ARE THE MOST SIGNIFICANT


RISKS (CONTD..)

HOW BIG ARE THE POTENTIAL


RETURNS ?

Financial Calculation

AS THE CEO, WOULD YOU EMBARK


ON THE HIGH GROWTH STRATEGY.

Huge Supply-Demand gap. Thus there is opportunity


to power America.

90% of the installed capacity to be replaced by 2015.

Calpine has the technological efficiency (heat rate of


7500 as against industry average 11000).

Availability of a Revolving Credit in which


Use

of the loan for construction of multiple plants

Lower

fee structure

WHAT HAPPENED NEXT

Post-Hybrid Strategy

Syndication of 20 banks for $1 bn revolving loan

Overcapacity > Operate at lower capacity factors +


Cost of gas increased > Affect cash flows

Debt Service Requirements + Operational


Constraints causing Declining Liquidity Position and
Chapter 11 Bankruptcy filing (Reorganization)

WHAT HAPPENED NEXT

2008 Onwards (Post-Bankruptcy)

Emerged from bankruptcy in 2008

Strong balance sheet due to sale of assets and


reduction in operating costs.

Additional financial flexibility due to the


restructuring (for streamline operations and
servicing debt obligations)

Current Capacity approx 22k mw

THANK YOU

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