operations. A large integrated oil company that wanted to move into power had been consid-
ered for some time to be the type of partner that Calpine needed, but some questioned whether
any of the oil companies would be interested in such a partnership.
Calpine’s results for the first quarter of 2002 reflected a US$168 million charge result-
ing from cancellation of orders for 35 turbines. As of April 2002 Calpine had 12,000 MW of
capacity in operation at 64 plants and an additional 14,000 MW at 24 plants under construc-
tion. Most of the plants under construction were scheduled to come on line in 2002 or 2003.
Elizabeth Parrella, an analyst at Merrill Lynch, estimated that Calpine had sold under contract
about 65 to 70 per cent of its capacity for 2002 and 50 per cent of its forecast output for 2003.^2
In August 2002 Calpine increased its estimate of asset sales for the year to US$650 mil-
lion. Unlike power plants for sale in the current market environment, the company’s gas
reserves and power sales contracts were bringing good value. The more gas reserves Calpine
sold, the more its power plants would be subject to market prices for natural gas, but the com-
pany still expected to retain about one trillion cubic feet of proven natural gas reserves.
Reflecting the sharp decline in electricity prices and spark spreads, Calpine reported a 50
per cent decline in net profit in the third quarter of 2002 compared to the same period in 2001,
even though it was generating 70 per cent more electricity. A more positive interpretation was
that the company was still profitable in a difficult market. The issue was whether it could ser-
vice a US$13 billion debt load over the next couple of years while it was completing power
plants that were already under construction. As of the end of 2002 Calpine had 20,950 MW
capacity in operation and 9,874 MW under construction. Company executives hoped that a
recent slight firming of electricity prices would help them to negotiate an extension of US$2
billion of debt coming due in 2003 and another US$3.5 billion coming due in 2004.
Lessons learned
An unfavourable market environment forced a drastic scaling back of the largest construction
programme in the history of the world power industry. Calpine has funded its aggressive cap-
ital expenditure programme and growth targets with high debt, which threatens its survival
over the next couple of years. Nonetheless, the company is likely to survive because it con-
sistently has completed its power plants on time and within budget, and it has become a lead-
ing low-cost IPP in the US market.
(^1) This case study is based on ‘The Brave New World of U.S. Power Project Finance,’ by Enid L. Vernon and Louis
D. Iaconetti, Journal of Project Finance, Spring 2001, Calpine Corporation: The Evolution from Project to
Corporate Finance,a Harvard Business School case (N9-201-098, 19 May 2001) by Michael Kave, Dean’s
Research Fellow and Professor Benjamin C. Esty, a review by Rohn Crabtree of Calpine, and recent articles in the
financial press.
(^2) ‘Financial Woes Prompt Marketers to Stop Trading with Calpine’, Megawatt Daily,8 April 2002, p. 1.
CALPINE, UNITED STATES