Calpine Corporation Essay

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CALPINE CORPORATION: The Evolution from Project to Corporate Finance Case Analysis I. Introduction Being in the power generation industry where the demand for electric power has no other way but up, Calpine Corporation had to cope up and ramp up its growth strategy. The new growth strategy would mean raising its current generating capacity of 3,000 megawatts to 15,000 MW. Doing so would also require huge financing which is not that easy for a company that has not so impressive credentials with only an asset of $1.7 billion and a debt-to-capitalization ratio of 79% and a rating of BB. II. Project Valuation To be able to come up with a sound financing strategy the following projection and valuation of the project using the NPV was made for one proposed power generating plant for Calpine Corporation (Attached Excel file) Sensitivity Analysis Capacity Factor: As the production capacity of the power generation plant is reduced at the same price level of electricity, the NPV also decreases. The minimum capacity of the plant should not be lower than 60% in order to maintain a positive NPV. Price of Electricity: In the price of electricity sensitivity analysis, it shows that when price goes down, the revenue is affected as it goes down with the price. The NPV also goes down as the price of electricity goes down. The project can only afford to have a minimum of $29 per MWh rate before NPV becomes negative and the project to be non acceptable. Since the price of electricity will inevitably go down as projected (exhibit 5) the company cannot afford to delay the project and start operating within the $31 to $29 per MWh price of electricity range. Heat Rate For the heat rate sensitivity, the change in the heat rate would not affect revenues but would still affect the gross profit and eventually the
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