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 Merchant
IPPs Phase
Phase Contracts Phase
• Multi-State • Deregulation • NEPA allowed
Operations Eliminated IPPs to sell at
Prohibited • Monopoly wholesale
• Prices Rights competitive
Regulated Weakened prices
• To cater • Encouraged • Cogeneration
Specific creation of requirement
Markets only small power removed
plants using allowing IPPs
non- to build larger
traditional plants
fuels
CALPINE’S NEW FINANCING STRATEGY
 Project Finance
 Corporate Finance/ Balance Sheet Financing
 Revolving Credit facility
1) PROJECT FINANCING

Advantages Disadvantages

•Non-recourse debt •Relative high fees

repayment from & Margins
project cash flow •Long Processing
•Security over Time
project assets •Excess capacity
•Lender places from one plant to
emphasis on another plant
stand alone cannot be
project diverted
CORPORATE FINANCE

Advantages Disadvantages

• Lending decisions on • Short to Medium

the basis of parent term tenure and
company’s balance refinancing risk
sheet • Cost of negative
• Relatively low fees arbitrage and spread
and margins was as high as 250-
• Bond holders had no 300 basis points
right to approve • Huge debt may
individual projects reduce its bond
• No Collateral rating
required
REVOLVING CREDIT FACILITY

Advantages Disadvantages

• Collateral from CCFC • Convince 20 banks to

and no additional finance
burden on Calpine • Associated refinance
• Finance 12 plants risk with 4 year
instead of 4 maturity
• Competitive interest
rates as compared to
project financings
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 Bundle :less possibility of cost overrun
 Ring 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 CALPINE’S 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.

 Calpine’s bond rating was low at B1/B, thereby

making cost of financing higher (9.12%)
WHAT ARE THE MOST SIGNIFICANT
RISKS??
Completion Risks

• Acquiring the Best Possible Sites.

• Supply-side Constraints of cycle gas
turbines.

Technological Risks

• Efficient ways of generating energy

• Technological Changes
WHAT ARE THE MOST SIGNIFICANT RISKS
(CONTD..)

Financial Risks

• Approval of 20 banks for revolving credit

facility.
• Adhering to Banks terms and conditions.
• Failure to generate cash flow
requirements.

Market Risk

• Electricity cannot be stored.

• Industry growth < Calpine’s growth rate.
• Competition from other players
WHAT ARE THE MOST SIGNIFICANT RISKS
(CONTD..)

Price Risks

• No long term power purchase

agreements
• Competition in retail distribution

Legal Risks

• Deregulation Risks.
• Adherence to Legislative Provisions:
• PURPA, 1978
• NEPA, 1992
HOW BIG ARE THE POTENTIAL RETURNS ?
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