Calpine Corporation: The Evolution from Project to Corporate Finance

Harvard Business School, Case No.: 201-098 5/19/01; Teaching Note No.: 5-201-097 5/23/01

Posted: 23 Aug 2001


SUBJECT AREAS: project finance, electric power, deregulation, financial and corporate strategy, organizational structure

CASE SETTING: May 1999, California, US Electric Utilities, $6B investment

In early 1999, Calpine Corporation's CEO Pete Cartwright adopted an aggressive growth strategy with the goal of increasing the company's aggregate generating capacity from approximately 3,000 to 15,000 megawatts (MW) by 2004. He changed the strategy because he believed there was a fleeting opportunity to re-power America given the inefficiency and age of current generating capacity as well as the recently-granted ability to compete in wholesale power markets. To achieve the new goal, Calpine will have to build or acquire as many as 25 power plants at a total cost of $6 billion (approximately $500,000 per 1000MW). For a company with assets of $1.7 billion, a sub-investment grade debt rating, a debt-to-capitalization ratio of 79%, and an after-tax cash flow of $143 million in 1998, raising this much money would be a formidable challenge.

The case opens with Calpine's finance team trying to decide how to finance four power plants currently under development. Should they use project finance, corporate finance, or a new hybrid structure with elements of both? Knowing the importance of speed, feasibility, and efficiency, SVP Bob Kelly and VP Rohn Crabtree must select a financial strategy that not only supports the company's high-growth competitive strategy, but also maximizes firm value.

This case describes what project finance is, how it differs from corporate finance, and why firms use it to finance capital investments. While the case illustrates two benefits of using project finance - it encourages investment by solving the debt overhang problem and increases value from interest tax shields, it also illustrates the disadvantages of using project finance: it is time consuming and costly to arrange, and very rigid once in place. The case also illustrates the profit opportunities in the US power industry created by changes in technology and regulation, and the importance of adapting a company's financial strategy to support a new, high-growth competitive strategy designed to capture these fleeting profit opportunities.

Suggested Citation

Esty, Benjamin C., Calpine Corporation: The Evolution from Project to Corporate Finance. Harvard Business School, Case No.: 201-098 5/19/01; Teaching Note No.: 5-201-097 5/23/01, Available at SSRN:

Benjamin C. Esty (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

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