Download Calpine Corporation: The Evolution from 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
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AGENDA
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Overview of the Case
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US Power Industry and its various phases

New Financing Strategy

Current Status of Calpine
ABOUT THE COMPANY
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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
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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
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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

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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…
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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