Calpine Corporation: The Evolution from Project to Corporate Finance

Submitted by:                                                                                                     Submitted to:

Group 2- Disha Singh, Mahesh Tekade and Shraddha Sawaika                                 Prof. P. Saravanan

PGP Mumbai II, AY 2017-18                                         Course Instructor: Project Appraisal and Financing

Brief Case Analysis                                                                                        08 November, 2017

Calpine Corporation: The Evolution from Project to Corporate Finance

Ques 1- What are the most significant risks of taking up this project?

Answer Calpine is changing its strategy dramatically, going towards being proactive for making Re-powering America. The new structure will require company to reduce the cost in all aspects in their value chain. Their aggressive strategy success totally depends on being able to construct and also manage new power plants of more than 15000 Megawatts. This seems to be difficult task as they are not yet experts in market power and natural gas in geographically market like America, which is diversified power markets also they have supply side constraints of cycle gas turbines. Calpine faces a technology risk as they have to go through to develop efficient ways of generating energy which are also environmentally – friendly.

Also their strategy is to stop new entrant in power sector which led to excessive expenditure by the company. The bond of the company is rated as BB and they will need approval of 20 banks for revolving credit facility, and there are certain terms and condition of banks which they have to adhere diligently.

Calpine also have to adhere to legislative provisions such as PURPA, 1978 and NEPA, 1992 and other state regulations.

Other risk associated are risk with the industry and product, electricity is one product that cannot be stored hence they need continuous production capacity and also fixed cost are high.

Ques 2- How big are the potential returns?    

Table 1. Assumptions

Table 2. Calculation of WACC

Table 3. Calculation of returns based on DCF valuation