Calpine Corporation: The Evolution from Project to Corporate Finance
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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 FinancingBrief Case Analysis 08 November, 2017Calpine Corporation: The Evolution from Project to Corporate FinanceQues 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. AssumptionsKey Assumptions 4 plants with same output capacity Output in MW1000(Capacity factor) Availability90%Market price of electricity ($/MWh) 1999 $ 31.00 2009 $ 24.00 No of hours8760.00 Gas price ($/MBtu)2.2Plant heat rate (Btu/kWh)7500Implied fuel cost ($/MWh)16.5O&M expense ($/MWh)3.5 Capital costs 5000,00,000 Years to construct2Depreciable life30Debt to capitalization ratio65%Pre-tax cost of debt7.75%Tax rate38%Inflation rate2%
Table 2. Calculation of WACCWACC Beta0.6(exhibit 6a)Risk free Rate5.66%(Exhibit 6a)Risk premium6% Return on equity9.2600% Return on debt4.81% Equity35.00% Debt65% WACC6.3642500% Table 3. Calculation of returns based on DCF valuation 199920002001200220032004Capacity in MWs 4000400040004000Production in MWh 31536000315360003153600031536000Price 30.5332.016666732.65733.31014Revenue 962794080100967760010298711521050468575Expense Fuel (Pg. 6 reduction 5%) 494326800494326800494326800494326800O&M Expense (Pg. 6 reduction 10%) 99338400993384009933840099338400Depreciation (Pg. 5 reduction 25%) 49905720499057204990572049905720Tota Expense 643570920643570920643570920643570920Gross Profit 319223160366106680386300232406897655Interest Expense 100599840100599840100599840100599840Profit Before tax 218623320265506840285700392306297815Tax Rate 83076861.6100892599108566149116393170Net Income 135546458164614241177134243189904645Operating Cash flow 185452178214519961227039963239810365Capex ( for 4 plants)125000000125000000125000000125000000 FCF-125000000-12500000060452178.489519960.8227039963239810365Terminal value 109897630Total FCF₹ -1250,00,000-12500000060452178.489519960.8227039963349707995NPV₹ 3195,71,037.80 IRR35%