Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
CALPINE CORPORATION: THE EVOLUTION FROM PROJECT FINANCE TO CORPORATE FINANCE Group – 1: Section – 1 Nikhil Anand Prachi Chandgothia Sarbani Choudhuri Atul Dugar Rajat Gupta Rohit Jain Shraddha Kamat 111 116 118 120 122 125 128 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 CALPINE’S 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 Advantages Disadvantages • Lending decisions on the basis of parent company’s balance sheet • Relatively low fees and margins • Bond holders had no right to approve individual projects • No Collateral required • Short to Medium term tenure and refinancing risk • Cost of negative arbitrage and spread was as high as 250300 basis points • Huge debt may reduce its bond rating REVOLVING CREDIT FACILITY Advantages Disadvantages • Collateral from CCFC and no additional burden on Calpine • Finance 12 plants instead of 4 • Competitive interest rates as compared to project financings • Convince 20 banks to finance • Associated refinance risk with 4 year maturity 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