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Calpine Corporation
Financing Growth Strategy
What has been the financing strategy of Calpine?
Why was is appropriate?
Used Project Finance
IPP Contractual bundle - Had steady streams of long term cash
No further investment required or spare debt capacity needed
High leverage offered tax shields - tax arbitrage
No need for managerial discretion on use of cash flows
mitigates agency cost
Reduce opportunity cost of under investment in positive NPV
projects : Debt Overhang
Weather using PF would be feasible under
regulatory environment and strategy?
Analyze alternative financing options.
How is Calpine organized? P1, 3 &4
What Business and Model of financing company
practiced? P1,3&4
What has been the financial position of Calpine?
How has been Calpine financing over years PF,
Corporate Debt and IPO? P4
Why did calpine finance projects with high leverage?
Why did calpine use project finance?
Why High Leverage?
Low expected cost of financial distress- COFD
Probability (default) X Cost (given default)
IPP is contractual bundle and generates large cash flows
All business risks are mitigated well
To capture incremental interest tax shield
Assume 300 mn IPP
Difference between 50% and 90% leverage leads to $120 mn
in debt
$3.3 mn of Additional Interest tax Shield ($120 debt X 7.75%
Cost of Debt X 38% tax rate)
Induces agency cost of Debt
Shareowners can force managers to disgorge free cash flow as
debt service
High leverage induces under investment problem
But IPP do not have many growth options & investments other
then routing maintenance
Why Project Finance?
To avoid Debt overhang problem
Corporate debt would leave few financing
options for further projects
Serial Developer
Project finance provides capital to new capital
providers rather then using time to subsidize
senior claimants or dilute more junior
How did Calpine envisage to reduce the costs?
Construction Calpine Construct Method Own EPC
and bulk order of turbines- leverage on its own
experience on building plants avoid negotiations and
contingency reserves
O&M own O&M company
Financing Explore the best financing options -
Life Cycle Avoid myopic decisions at construction
state focus on to reduce life cycle cost as contractor,
owner and operator of the plant.
Fuel Supply
Marketing and Off take management operate as
system and ensure highest availability with lowest cost
of production
Life cycle cost management
Evaluate the financing options for the new
Strategy. See Term sheets- Case Exhibits
Project Finance
Corporate Finance
Revolving Credit Facility
Criteria's for selecting financing options
Execution or issuance cost
Refinancing Risk
Managerial time and effort
Which of the options are feasible?
Which options are more cost effective?
What happened?
Despite Enron debacle and stock price decline,
Calpine deal was viewed a success in PF
Calpine closed $1bn revolving credit facility on
November 3
CSFB was lead arranged
Oversubscribed by 50% -
North American Power Deal of the Year by
Project Finance
Second revolver called CCFC II for $2.5 bn was
issued in December 2000
Raised $9 bn through these two facilities to
finance 22 plants
Other companies tried the Calpine way but few
could match the success
Calpine continued to grow rapidly..
February 2001 Cartwright increase the target to
70000 mw by 2015
Excellent stock market performance See Graph
Calpine Debt rating increased to BBB-
2000-01- Spark Spread increased as Power shortage
became more acute and the wholesale electricity price
increased by 683% while natural gas price increased by
The falling oil prices, Enron Collapse etc brought Calpine
stock price and growth strategy down.
Stock Price was drawn down to $12
Moody cut bond rating to junk status only two months
after awarding an investment grade
Calpine cut back growth strategy Overbuilt cause market
prices to collapse
Calpine plans to complete 27 projects by 2003. Total
26,000 mw a far cry for its 70000 my by 2005
Calpine returned to the project structure for recent
transaction as market closed down on power financing.