Calpine Corp.: The Evolution from Project to Corporate FinanceHarvard Business School Case # 201098Case Software # XLS-681

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North American Electric ReliabilityStates in RegionCouncil (NERC) Region Salomon SB Resource Data

Northeast Power Coordinating Council NPCC ME,VT,NH,CO,MA, RI.NY 59,000 68% 7,000 20,322Mid-Atlantic Area Council MAAC PA.NJ.MD 58,000 90 5,000 11,714

East Central Area Reliability Coordination ECAR MI,IN,OH,KY,WV 106,000 26 5,000 19,895Mid-America Interconnected Network MAIN M,IL,WI,MI 52,000 59 4,000 14,777Mid-Continent Area Power Pool MAPP MT,ND,SD,NE,MN, IA.WI 33,000 0 0 1,501

Southeastern Electric Reliability Council SERC LA,AR,MO,MS.AL, GA,SC,NC,VA,TN 150,000 17 14,000 39,250

Florida Reliability Coordinating Council FRCC FL 38,000 0 0 8,499Southwest Power Pool SPP TX,OK,KS,LA,AR 43,000 3 2,000 9,124Electric Reliability Council of Texas ERCOT TX 60,000 89 13,000 22,122Western Systems Coordinating Council WSCC CA,NV,NM,CO,UT, WA,OR,ID,MT,WY 136,000 35 9,000 21,487Total 733,000 57,000 168,681

Source: Hiller and Mclsaac, "Talkin' 'Bout Their Generation," Part II, Salomon Smith Barney Research Report, 12/1/2000.

Exhibit 2 U.S. Power Industry (generating capacity in Megawatts)

Market Size in 1999a

Percent Merchant in 2002 (est)

Projected New Development by 2002

a Of this total amount, coal accounted for 51.0%, nuclear for 19.7%, natural gas for 15.3%, hydro-electric for 8.3%, oil for 3.2%, and other for 2.4% according to the US Department of Energy.

1994 1995 1996 1997 1998 3/31/1999

Income StatementTotal revenue $94.8 $132.1 $214.5 $276.3 $555.9 $145.9EBITDA 53.7 69.5 117.4 172.6 255.3 46.3Deprec./amort. expense 20.3 25.9 36.6 46.8 74.3 19.0Interest expense 23.9 32.2 45.3 61.5 86.7 21.0Net income 6.0 7.4 18.7 34.7 45.7 3.9

n/a n/a $1.45 $1.74 $2.27 $0.19

Earnings per Share—Diluted n/a n/a 1.22 1.65 2.16 0.18

Dividends per Share n/a n/a $0.00 $0.00 $0.00 $0.00Balance Sheet

Total assets $421.0 $554.5 $1,030.2 $1,380.9 $1,728.9 $2,562.6Short-term debt 27.3 85.9 37.5 113.0 5.5 5.5Project finance debt 196.8 190.6 278.6 182.9 114.2 115.2Total debt 334.4 407.7 601.1 855.9 1,071.4 1,786.5Total equity 18.6 25.2 203.1 240.0 287.0 470.3

Leverage/CapitalizationDebt ratings (Moody's/S&P) B1/B Ba3/B+ Ba3/BB- Ba2/BB- Ba2/BB Ba2/BBEBITDA to interest expense 2.23X 2.11X 2.41X 2.60X 2.74X 2.20XTotal Debt/Capitalization 95% 94% 75% 79% 80% 79%Total debt to EBITDA 6.23X 5.87X 5.12X 4.96X 4.20X n/a

n/a n/a 19.8 20.1 20.2 26.3

Period-end share price n/a n/a $20.00 $14.88 $25.25 $36.44

OperationsNumber of operating plants 5 8 10 18 22 22Capacity-gross (MW) 221 349 589 2,194 2,729 3,018Capacity-net (MW) 141 268 508 1,268 2,064 2,064

Source: Calpine Corporation Annual Reports

Exhibit 3a Calpine Corporation – Summary Consolidated Financial Data ($ millions)

Earnings per Share—Basic a

Common shares outstanding at year-end (millions)

a Basic and fully diluted earnings per share in the first quarter of 1998 were ($0.15) and ($0.15), respectively.

1994 1995 1996 1997 1998 3/99

S&P Debt Rating B B- BB- BB- BB BB$105.0 -- $180.0 $275.0 $400.0 $600.0

Net proceeds to Calpine 101.0 -- 175.0 265.0 392.0 589.8Underwriter discounts (bp) 262.5 250.0 195.0 190.0 162.5

Common Stock -- -- $317.0 -- -- $213.9net proceeds to sellers -- -- 298.0 -- -- 203.8

Source: Calpine Corporation Annual Reports; casewriter estimates.

Notes:

Exhibit 3b Calpine Corporation's Issuance of Public Capital, 1984 –1999 ($ in millions)a

Debtb

a Prior to 1994 there were no capital markets issues.bDebt issues consisted of Calpine Corporation senior unsecured fixed-rate notes with either seven or ten-year bullet maturities. Underwriter discounts and other fees represent the difference between gross and net proceeds to Calpine.c Combined initial public offering by Calpine and secondary offering by its parent Electrowatt; proceeds-$109 million for Calpine IPO and $189 million for Electrowatt. Offering price was $16 per share.

Key Assumptions

Output (megawatts) 1,000Capacity Factor (availability) 90%Electricity Price ($ per MWh)

In 1999 $31.00 assuming a market heat rate of 11,000In 2009 $24.00 assuming a market heat rate of 7,500

Fuel (Gas) Price ($ per MMBtu) $2.20 note: 1 MMBtu = 1,000,000 BtuPlant Heat Rate (Btu per kWh) 7,500 note: 1000 kWh = 1 MWhO&M Expense ($ per MWh) $3.50

Capital Costs (millions) $500 note: construction period = 2 yearsDepreciable Life (years) 30Debt-to-Capitalization Ratio 65%Debt Interest Rate 7.75%Inflation Rate 2.00%Tax Rate 38%

Exhibit 5 Representative Economics for a Combined-Cycle Gas Fired Power Plant

Production (MWh) 7,884,000Revenue $244,404 $31.00Expense

Fuel 130,086 16.50O&M Expense 27,594 3.50Depreciation 16,667 2.11

Total Expense 174,347 22.11Gross Profit 70,057 8.89Interest Expense 25,188 3.19Profit before Tax 44,870 5.69

Taxes @38% 17,051 2.16Net Income 27,819 3.53

Source: Company documents and casewriter estimates.

For the Plant ($000)

DollarsPer MWh Produced

May 17,1999

Yields on U.S. Treasury Bills, Notes, and Bonds1 - year 4.90%2 - year 5.315 - year 5.5310 - year 5.6630 - year 5.91

Yields on 10-year Corporate Bonds (by S&P Rating)AAA 6.27%AA 6.34A 6.53BBB 6.84BB 7.76B 9.12C 10.21

Interest Rates3-month LIBOR 5.03%6-month LIBOR 5.133-month CD 4.94Prime Rate 7.75

Calpine CorporationEquity Beta (calculated using 2 years of daily data) 0.60Asset Beta (calculated using 2 years of daily data) 0.20

Source: Federal Reserve Bulletin, Bloomberg, and Datastream.

Exhibit 6a Selected Financial Market Data

1999 2000 2001 2002

California/Arizona $24.69 $26.50 $27.73 $29.54 Texas 25.22 26.21 26.00 26.36New England 35.18 36.48 37.86 40.15

Gas ($/mmBTU)California/Arizona $2.24 $2.19 $2.28 $2.38Texas 2.19 2.14 2.23 2.33New England 2.84 2.94 2.99 3.07

11,024 12,101 12,164 12,413

California/ArizonaTexas 11,515 12,246 11,661 11,314New England 12,400 12,409 12,658 12,678

Source: Morgan Stanley Dean Witter, US Investment Research on Calpine Corp., 6/18/99.

Exhibit 6b Assumed Gas and Electricity Prices in Certain Regional Markets

Electricity ($/MWh)

Hypothetical Heat Ratesa

aAssuming 100% availability and fuel (gas) costs only.

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

US Corporate Bond Issuance (by S&P Rating)AAA $22.2 $63.8 $78.0 $79.3 $54.2 $119.2 $170.7 $188.4 $213.1 $207.9 $167.2 $242.3 $329.2 $517.1

AA 23.4 53.8 42.2 31.7 37.3 108.8 116.3 105.5 140.2 67.8 82.3 100.0 237.9 336.8A 23.5 32.9 24.8 28.9 32.8 105.5 215.8 203.6 228.5 182.9 322.2 329.7 529.9 647.6

BBB 11.2 21.6 19.4 15.2 13.9 36.4 52.9 100.5 115.7 101.2 105.7 146.5 219.2 323.2BB 3.3 6.0 5.7 2.9 4.5 7.2 20.6 23.0 33.4 21.0 26.6 40.9 82.6 104.9

B 5.9 20.2 21.5 18.5 20.0 1.5 6.2 27.9 39.8 23.7 20.0 44.6 82.9 92.8CCC 2.0 5.2 5.2 5.9 1.0 0.0 0.5 1.0 1.6 1.9 1.0 1.8 3.0 9.4

Global Project DebtLoans n/a n/a n/a n/a n/a n/a n/a n/a n/a 13.7 23.3 42.8 67.5 56.7Bonds n/a n/a n/a n/a n/a n/a n/a n/a n/a 4.0 3.8 4.8 7.5 9.8

Source: Securities Data Corporation, Project Finance International (various issues).

Exhibit 9 U.S. Corporate Bond Issuance by S&P Rating and Project Debt, 1990–1999 (in $ billions)