Calpine Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

OPTION-3

The hybrid option was generated by the company through discussions with Credit Suisse First Boston (CSFB). Under this option, the corporation will incorporate a new subsidiary named Calpine Construction Finance Company under which $1 billion finance will be borrowed in a secured revolving construction facility whereas the company will inject equity of $430 million and any other amount required for the completion of the 4 plants.

Under this facility, the company can focus on construction of additional power plant if the company receives the permission accordingly as with the revolving finance is repaid and re-borrowed for further projects making the finance not limited for a certain project with no limitations on the payment of the principal till the maturity date.

The greatest advantage the company will receive with the option is that a single deal will ensure financing for all four plant and any additional plant saving time, legal cost and other fees but most importantly it fits the growth strategy and enables the company to achieve competitive advantage in the market.

The major problem concerning this option is the refinancing risk, but the finance executives are confident that the loans will be paid back in full within the maturity date as they hold multiple options regarding the refinancing.

Q. WHICH IS THE BEST OPTION OF KELLY?

Considering all the evaluation conducted in the above two questions, the hybrid option seems the most beneficial for the company that makes it a logical choice for Kelly. As option 1 cannot finance all the plants and option 2 will raise the gearing to an alarming level; hence, option 3 is best suited for the company’s growth strategy.

Q. WHY CSFB IS SO FLEXIBLE WITH THE AGGRESIVE GROWTH STRATEGY OF THE COMPANY?

The Credit Suisse First Boston (CSFB) was affiliated with Electrowatt, which was the parent company of Calpine before it got listed on the stock market and Electrowatt sold all of its shares. The name of the company, Calpine is a reflection of its location and affiliation with California and Swiss percentage (California + Alpine = Calpine).

Calpine is a recognized company and it seems that CSFB played its part in its development because CSFB has no reservations with its growth strategy and it is willing to finance it operations for the oblivious reason to earn its own share and for the fact it believes that the company will be able to complete the project and re-finance CSFB before maturity of the loan.

Q. HOW TO CHANGE THE SELECTED FINANCIAL OPTION IF THE OBJECTIVE IS 70,000 MW IN 5 YEARS?

If the company wishes to be able to generate 70,000 MW in 5 years then it will require 30 power plants; each with a capacity of 2365 MW, which will approximately $300 million each. If the company needed to raise $4.5 billion to be able to generate 15000 MW in the same proportion; then the company will need to raise $21 billion.

Again the company will not be able to raise such huge amount of finance as a loan individually or by bond issue as a corporation, hence, the company will need to move into another secured revolving construction facility to be able to finance multiple projects, which the company needs to undertake in order to make 70,000 MW.

Q. RENEGOTIATE SOME OF THE TERMS OF THE FINANCING?

For the company to be able to complete such project, the company needs to move into a secured revolving construction facility under a new subsidiary and it needs to raise $4.2 billion under the maturity of 5 years under which the company should be able to construct 6 plants per year and re-pay and re-borrow the finance to move into the development of new projects in order to complete the target of 70,000 MW.

Q. WHY LEVERAGE PROJECTS?

There are multiple reasons why the company will want to leverage the projects. If the company is not able to refinance the under before the maturity; the company can undertake leverage over the project that is already completed to be able to re-pay the existing debt before maturity.

The other reason under which the projects can be leveraged is that the company requires additional finance for the additional project as current loan may not be re-paid, which means the company will not be able to re-borrow; therefore, the immediate need for finance can be completed by undertaking leverage over the completed projects....................................

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