Calpine Corp

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Executive Summary: Calpine Corporation's Senior Vice President of Finance (S.V.P.) Bob Kelly and Vice President (V.P.) of Finance Robin Crabtree knew 1999 was going to be a difficult year. Chief Executive Officer (C.E.O.) Pete Cartwright had recently announced a bold ramp-up in Calpine's growth strategy, raising the 5-year target for generating capacity from 6,300 to 15,000 megawatts (MW). The financial requirements were formidable. Adding 12,000 MW to Calpine's current 3,000 MW electric generating portfolio would mean building or acquiring 25 new electric power generating plants, Moreover, at a cost of roughly $500,000 per Megawatt (MW) for a BB rated company with total assets of only $1.7 billion and a debt-to-capitalization ratio of 79%, financing would not be easy. To get to 15,000 MW in five years, they needed to raise at least $4.5 billion from debt and equity markets assuming Calpine generated $1.5 billion of cash from operations as projected. In the near term, however, they needed to finance four merchant plants with a total capacity of 2,265 MW at a cost of $300 million each. We have analyzed the three options that Calpine has and looked at their pros and cons below to arrive at the conclusion. Strategy for Vertical Integration - Calpine sensed that the future of the industry was the large, gas-fired generating units selling power into competitive markets. To achieve this, the company decided to build a vertically integrated company with engineering, construction, operating, fuel supply, power marketing and financing capabilities in a single firm. The model, being scalable as well as exportable, could use environmentally-friendly and highly-efficient gas turbines to lower the costs significantly. * By using a standardized plant design and ordering turbines and other equipment in bulk, the company could reduce its $300M capex by at least 25% * By developing an in-house maintenance group and having system operators rather than duplicative plant...
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