Calpine Corporation: Evolution From Project To Corporate Finance

Calpine Corporation:
Evolution from Project to

Corporate Finance
Submitted by:
Group 7
What are the most significant risks of taking up this project?
The current credit rating of Calpine Corporation is BB which may drop further
because of any additional debts. There is a lot of expansion plan for the company and
would require additional capital which would be difficult to raise in case of a further
drop in credit rating.

There is an increase in the cost of equity due to market perception that equity in
starting stages of the project is riskier than in latter stages. This would have negative
impact on a company with expansion plans

The technological risk is one major risk in near future. There is an expected
improvement in heat rate which determines efficiency, and thus, the cost benefit that
firm is having now may be nullified.

In the case of project finance and financing option, plants take off with a different set
of financial contracts which would lead to a difference in opinion in functioning of
plants as a group. For example, a plant could not supply for the deficit in another plant
due to conflict of interest of financiers of different projects.

Deregulation of US power generation market would attract new players and would
increase competition which may be a hindrance to growth strategy of company.

Any fluctuation or change in wholesale price of electricity would affect the revenues
of company and thus future cash flows.
Debt overhand credit rating reduces by taking additional debt

Does your answer to Question asked to Group 5 & 6, change if the corporate goal
shifts from 15,000MW to 25,000MW of generating capacity by 2004? To 70,000 MW
by 2005?
As calculated for method of project finance:
There is positive NPV of 4.5 Billion on 15000 MW capacity building in span of 5 years.
Having a capacity of 3000MW, there need to be construction of 12000 MW capacity plants.
That is, there is a requirement of 24 new power plants which are considered to be built in
span of 5 years which is 5 power plants per year.
It requires 2500 million investment for 5 plants in each year and for project finance option,
half of it is paid as construction loan at end of 2 years and remaining is considered as Term
loan paid in next three years. Considered that plant is constructed in 2 years operational from
third year.
WACC is calculated from exhibit 5 for calculation of NPV of project.
Differences in options of financing the project:
High cost of capital for corporate finance or senior notes (7.75%) compared to project
finance (around 6.5%) and Revolving finance (around 6.7%).

There is good control over plants in case of senior notes compared to that of project
finance. There would be no debt providers in decision making in case of corporate
finance.
Debt repayment will be done at different maturities, which is 10 years for notes which
would not pressurize cash inflows of company fitting with growth strategy. But
project finance need repayments of half of debt as construction loan in 2 years which
is heavy burden to company without generating cash-inflows from project.

Provision of borrowing again soon after repayment of debt in revolution construction
method would allow continuous improvement of expansion plan as per competition as
money could be borrowed in cycles.
Conclusion:
As there is a fixed plan for coming 5 years with expansion plan to 15000 MW, company
would prefer project finance with low cost of capital compared to corporate finance (Senior
notes). But when change of corporate goal is expected from 15000 MW to 25000 MW or
70000 MW Hybrid or revolving construction plan would be recommended because:
It would involve a non-recourse loan, thereby allowing Calpine to raise a large
amount of capital avoiding risk of its balance sheet

Loan through notes would not be possible on huge scale as the present loan would
have deteriorated the rating from BB and thus raising capital for further expansion
would be difficult and costly

Calpine would have the flexibility to manage all the power plants as a single system
which would not be possible in case of project finance.

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Calpine Corporation:

Evolution from Project to

drop in credit rating.

impact on a company with expansion plans

firm is having now may be nullified.

due to conflict of interest of financiers of different projects.

increase competition which may be a hindrance to growth strategy of company.

Debt overhand credit rating reduces by taking additional debt

finance (around 6.5%) and Revolving finance (around 6.7%).

is heavy burden to company without generating cash-inflows from project.

It would involve a non-recourse loan, thereby allowing Calpine to raise a large

amount of capital avoiding risk of its balance sheet

would be difficult and costly

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