Presentation on theme: "C ALPINE C ORPORATION : T HE E VOLUTION FROM P ROJECT F INANCE TO C ORPORATE F INANCE Group – 1: Section – 1 Nikhil Anand 111 Prachi Chandgothia116 Sarbani."— Presentation transcript:
C ALPINE C ORPORATION : T HE E VOLUTION FROM P ROJECT F INANCE TO C ORPORATE F INANCE Group – 1: Section – 1 Nikhil Anand 111 Prachi Chandgothia116 Sarbani Choudhuri 118 Atul Dugar 120 Rajat Gupta122 Rohit Jain 125 Shraddha Kamat 128
A GENDA Overview of the Case US Power Industry and its various phases New Financing Strategy Current Status of Calpine
A BOUT THE C OMPANY 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 : Corporate Finance Post 1999: ??????
T ARGETS Increase Capacity to MW from 2729 MW. Funds requirement $ 6 average of $ 0.5 million / MW. Expected ROE and ROC of 18-22% & 10-12% respectively.
US P OWER I NDUSTRY F ACTS 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 MW of capacity annually. Aging Plants….90% to be replaced by Reducing Reserve Margin from 35% to 12% Huge Profit Opportunity due to change in technology and regulation
U.S. P OWER I NDUSTRY 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 non- traditional fuels Merchant Contracts Phase NEPA allowed IPPs to sell at wholesale competitive prices Cogeneration requirement removed allowing IPPs to build larger plants
C ALPINE ’ S N EW F INANCING S TRATEGY Project Finance Corporate Finance/ Balance Sheet Financing Revolving Credit facility
1) P ROJECT F INANCING Advantages Non-recourse debt repayment from project cash flow Security over project assets Lender places emphasis on stand alone project Disadvantages Relative high fees & Margins Long Processing Time Excess capacity from one plant to another plant cannot be diverted
C ORPORATE F INANCE Advantages 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 Disadvantages Short to Medium term tenure and refinancing risk Cost of negative arbitrage and spread was as high as basis points Huge debt may reduce its bond rating
R EVOLVING C REDIT F ACILITY Advantages Collateral from CCFC and no additional burden on Calpine Finance 12 plants instead of 4 Competitive interest rates as compared to project financings Disadvantages Convince 20 banks to finance Associated refinance risk with 4 year maturity
B ENEFITS OF U SING P ROJECT F INANCE FOR FINANCING POWER PLANTS WITH LONG TERM PPA S 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
D ID C ALPINE ’ S S TRATEGY OF U SING P ROJECT F INANCE M AKE S ENSE PRIOR TO 1998 ? Financial burden reduced on the Parent company (non-recourse debt) Calpine debt-capitalization ratio varied between 95% - 80% during Calpine’s bond rating was low at B1/B, thereby making cost of financing higher (9.12%)
W HAT ARE THE MOST S IGNIFICANT R ISKS ?? Acquiring the Best Possible Sites. Supply-side Constraints of cycle gas turbines. Completion Risks Efficient ways of generating energy Technological Changes Technological Risks
Approval of 20 banks for revolving credit facility. Adhering to Banks terms and conditions. Failure to generate cash flow requirements. Financial Risks Electricity cannot be stored. Industry growth < Calpine’s growth rate. Competition from other players Market Risk W HAT ARE THE MOST S IGNIFICANT R ISKS ( CONTD..)
No long term power purchase agreements Competition in retail distribution Price Risks Deregulation Risks. Adherence to Legislative Provisions: PURPA, 1978 NEPA, 1992 Legal Risks W HAT ARE THE MOST S IGNIFICANT R ISKS ( CONTD..)
H OW BIG ARE THE POTENTIAL RETURNS ?
A S THE CEO, WOULD Y OU 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 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
W HAT H APPENED N EXT … 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)
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 W HAT H APPENED N EXT …