When Pacific Gas & Electric Company was forced to sell the plants, Calpine had the
right of first refusal, but had only 60 days to raise the financing. A Rule 144A private place-
ment issue was considered, but it was ruled out because it could not be completed in less than
four to six months. The leases, on the other hand, could become effective as soon as Calpine
acquired the plants. Newcourt Capital had leasing experience and was able to provide Calpine
with quick access to long-term financing through the Newcourt Capital Project Finance Fund,
a US$500 million fund whose investors are eight major US insurance companies: American
General, CIGNA, John Hancock, ING Investment, Lincoln National, Mutual of Omaha, New
York Life and Pacific Life. Based on the credit strength of the geothermal projects, the financ-
ing received a ‘BBB-’ credit rating.
The second financing, provided by the same investors, was a US$53 million 23-year
leveraged lease to purchase an 80 MW geothermal plant, also in the Geysers region. It com-
prised US$40 million in senior debt and US$12.8 million in lease equity. The lease was
backed by a power purchase contract from Pacific Gas & Electric Company.
As a result of these two transactions Calpine gained control of 80 per cent of the Geysers
geothermal resources.
Calpine Construction Finance Company
In 1999 Calpine created the first open-ended revolving-credit project finance construction
facility for a portfolio of greenfield merchant plants. Pricing comprised a commitment fee of
50 basis points (bps) over the London interbank offered rate (Libor) and borrowing margins
ranging from 150 to 212.5 bps over Libor, depending on Calpine’s leverage. As borrowed
funds are repaid the company can borrow under the facility again to construct additional
plants. At any one time there might be eight to 10 construction projects under way.
To provide security for the facility the company pooled four combined merchant/con-
tracted power projects together in a flexible, crosscollateralised structure called Calpine
Construction Finance Company (CCFC). The projects, located in Arizona, California, Texas
and Maine, represent a combined capacity of 2,355 MW. With mortgages on these four plants
serving as collateral, the company has the flexibility to finance the construction of addition-
al plants. Unlike traditional project financing, this facility provides for financing of future
plants not even conceived when the revolver was put in place.
To protect the interests of the 27 lending banks Calpine formed a four-bank ‘technical
committee’ to conduct due diligence on each future project and accept or reject it as part of
the loan portfolio, based upon the project’s completing a set of prescribed conditions prece-
dent to funding.
To help to syndicate this innovative facility Calpine provided US$430 million of equity
up front, which would amount to 30 per cent of the total capitalisation. The company planned
to refinance some of the plants on a longer-term basis and some through leveraged leases, but
most of the debt was expected to be taken out in the capital markets.
This new approach to power plant construction financing was motivated by the new mer-
chant power environment, which made traditional project financing difficult considering
Calpine’s extraordinary growth rate. The company expected to construct in excess of one new
power plant per month. Because Calpine was building primarily merchant plants, it could not
always offer the power purchase agreements (PPAs) that secured traditional single-project
loans. Further, the company and its banks would have found it virtually impossible to arrange
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