Calpine Corporation
CCGT Economics
Assumptions
Output in MW 1,000
Availability 90%
Market price of electicity ($/MWh)
1999 $ 31.00 market heat rate = 11,000
2009 $ 24.00 market heat rate = 7,500
Gas price ($/MBtu) $ 2.20
Plant heat rate (Btu/kWh) 7,500
Implied fuel cost ($/MWh) $ 16.50
Implied spark spread (1999) $ 14.50
O&M expense ($/MWh) $ 3.50
Capital costs $ 500,000,000
Years to construct 2
Depreciable life 30
Debt to capitalization ratio 65%
Pretax cost of debt 7.75%
Tax rate 38%
Inflation rate 2%
Annual investment in NWA $ -
Parameters
Hours per year 8,766
Hours per month 730.50
Calpine Corporation
CCGT Economics
Cost of Capital
Asset Beta 0.2 Exhibit 6
Risk free rate (10-yr TBond) 5.66% Exhibit 6
Equity risk premium 5.70% Assumption
Unlevered cost of equity 6.80% CAPM
Calpine Corporation
CCGT Economics
Valuation
1999 2000 2001 2002
Capex $ 250,000,000 $ 250,000,000
Debt $ 162,500,000 $ 325,000,000 $ 325,000,000 $ 325,000,000
Interest $ 12,593,750 $ 25,187,500 $ 25,187,500 $ 25,187,500
Interest tax shield $ 4,785,625 $ 9,571,250 $ 9,571,250 $ 9,571,250
Production (MWh) 7,889,400 7,889,400
Electicity price ($/MWh) $ 31.00 $ 30.30 $ 29.60 $ 28.90
Revenue $ - $ - $ 233,526,240 $ 228,003,660
Expenses:
Fuel $ 130,175,100 $ 130,175,100
O&M $ 27,612,900 $ 27,612,900
Depreciation $ 16,666,667 $ 16,666,667
Total $ 174,454,667 $ 174,454,667
Gross profit (EBIT) $ 59,071,573 $ 53,548,993
Free cash flow
EBIT $ - $ - $ 59,071,573 $ 53,548,993
Cash taxes $ - $ - $ 22,447,198 $ 20,348,617
EBIAT $ - $ - $ 36,624,375 $ 33,200,376
Depreciation $ - $ - $ 16,666,667 $ 16,666,667
CapEx $ 250,000,000 $ 250,000,000 $ - $ -
Change in NWA $ - $ - $ - $ -
FCF $ (250,000,000) $ (250,000,000) $ 53,291,042 $ 49,867,043
Interest tax shield $ 4,785,625 $ 9,571,250 $ 9,571,250 $ 9,571,250
Capital cash flow $ (245,214,375) $ (240,428,750) $ 62,862,292 $ 59,438,293
Terminal value
PV of CCF $ (229,601,475) $ (210,787,034) $ 51,603,179 $ 45,685,808
Sum $ 118,360,719
2003 2004 2005 2006 2007
$ 325,000,000 $ 325,000,000 $ 325,000,000 $ 325,000,000 $ 325,000,000
$ 25,187,500 $ 25,187,500 $ 25,187,500 $ 25,187,500 $ 25,187,500
$ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250
7,889,400 7,889,400 7,889,400 7,889,400 7,889,400
$ 28.20 $ 27.50 $ 26.80 $ 26.10 $ 25.40
$ 222,481,080 $ 216,958,500 $ 211,435,920 $ 205,913,340 $ 200,390,760
$ 130,175,100 $ 130,175,100 $ 130,175,100 $ 130,175,100 $ 130,175,100
$ 27,612,900 $ 27,612,900 $ 27,612,900 $ 27,612,900 $ 27,612,900
$ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667
$ 174,454,667 $ 174,454,667 $ 174,454,667 $ 174,454,667 $ 174,454,667
$ 48,026,413 $ 42,503,833 $ 36,981,253 $ 31,458,673 $ 25,936,093
$ 48,026,413 $ 42,503,833 $ 36,981,253 $ 31,458,673 $ 25,936,093
$ 18,250,037 $ 16,151,457 $ 14,052,876 $ 11,954,296 $ 9,855,715
$ 29,776,376 $ 26,352,377 $ 22,928,377 $ 19,504,377 $ 16,080,378
$ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667
$ - $ - $ - $ - $ -
$ - $ - $ - $ - $ -
$ 46,443,043 $ 43,019,043 $ 39,595,044 $ 36,171,044 $ 32,747,045
$ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250
$ 56,014,293 $ 52,590,293 $ 49,166,294 $ 45,742,294 $ 42,318,295
$ 40,312,766 $ 35,438,724 $ 31,021,922 $ 27,023,893 $ 23,409,217
2008 2009
$ 325,000,000 $ 325,000,000
$ 25,187,500 $ 25,187,500
$ 9,571,250 $ 9,571,250
7,889,400 7,889,400
$ 24.70 $ 24.00
$ 194,868,180 $ 189,345,600
$ 130,175,100 $ 130,175,100
$ 27,612,900 $ 27,612,900
$ 16,666,667 $ 16,666,667
$ 174,454,667 $ 174,454,667
$ 20,413,513 $ 14,890,933
$ 20,413,513 $ 14,890,933
$ 7,757,135 $ 5,658,555
$ 12,656,378 $ 9,232,379
$ 16,666,667 $ 16,666,667
$ - $ -
$ - $ -
$ 29,323,045 $ 25,899,045
$ 9,571,250 $ 9,571,250
$ 38,894,295 $ 35,470,295
$ 550,354,713
$ 20,145,283 $ 284,108,435
Calpine Corporation
CCGT Economics
Valuation
1999 2000 2001 2002
Capex $ 250,000,000 $ 250,000,000
Debt $ 162,500,000 $ 325,000,000 $ 325,000,000 $ 325,000,000
Interest $ 12,593,750 $ 25,187,500 $ 25,187,500 $ 25,187,500
Interest tax shield $ 4,785,625 $ 9,571,250 $ 9,571,250 $ 9,571,250
Production (MWh) 7,889,400 7,889,400
Electicity price ($/MWh) $ 31.00 $ 30.30 $ 29.60 $ 28.90
Revenue $ - $ - $ 233,526,240 $ 228,003,660
Expenses:
Fuel $ 130,175,100 $ 130,175,100
O&M $ 27,612,900 $ 27,612,900
Depreciation $ 16,666,667 $ 16,666,667
Total $ 174,454,667 $ 174,454,667
Gross profit (EBIT) $ 59,071,573 $ 53,548,993
Free cash flow
EBIT $ - $ - $ 59,071,573 $ 53,548,993
Cash taxes $ - $ - $ 22,447,198 $ 20,348,617
EBIAT $ - $ - $ 36,624,375 $ 33,200,376
Depreciation $ - $ - $ 16,666,667 $ 16,666,667
CapEx $ 250,000,000 $ 250,000,000 $ - $ -
Change in NWA $ - $ - $ - $ -
FCF $ (250,000,000) $ (250,000,000) $ 53,291,042 $ 49,867,043
Interest tax shield $ 4,785,625 $ 9,571,250 $ 9,571,250 $ 9,571,250
Capital cash flow $ (245,214,375) $ (240,428,750) $ 62,862,292 $ 59,438,293
Terminal value
PV of CCF $ (229,601,475) $ (210,787,034) $ 51,603,179 $ 45,685,808
Sum $ 76,777,749
2003 2004 2005 2006 2007
$ 325,000,000 $ 325,000,000 $ 325,000,000 $ 325,000,000 $ 325,000,000
$ 25,187,500 $ 25,187,500 $ 25,187,500 $ 25,187,500 $ 25,187,500
$ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250
7,889,400 7,889,400 7,889,400 7,889,400 7,889,400
$ 28.20 $ 27.50 $ 26.80 $ 26.10 $ 25.40
$ 222,481,080 $ 216,958,500 $ 211,435,920 $ 205,913,340 $ 200,390,760
$ 130,175,100 $ 130,175,100 $ 130,175,100 $ 130,175,100 $ 130,175,100
$ 27,612,900 $ 27,612,900 $ 27,612,900 $ 27,612,900 $ 27,612,900
$ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667
$ 174,454,667 $ 174,454,667 $ 174,454,667 $ 174,454,667 $ 174,454,667
$ 48,026,413 $ 42,503,833 $ 36,981,253 $ 31,458,673 $ 25,936,093
$ 48,026,413 $ 42,503,833 $ 36,981,253 $ 31,458,673 $ 25,936,093
$ 18,250,037 $ 16,151,457 $ 14,052,876 $ 11,954,296 $ 9,855,715
$ 29,776,376 $ 26,352,377 $ 22,928,377 $ 19,504,377 $ 16,080,378
$ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667 $ 16,666,667
$ - $ - $ - $ - $ -
$ - $ - $ - $ - $ -
$ 46,443,043 $ 43,019,043 $ 39,595,044 $ 36,171,044 $ 32,747,045
$ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250 $ 9,571,250
$ 56,014,293 $ 52,590,293 $ 49,166,294 $ 45,742,294 $ 42,318,295
$ 40,312,766 $ 35,438,724 $ 31,021,922 $ 27,023,893 $ 23,409,217
2008 2009
$ 325,000,000 $ 325,000,000
$ 25,187,500 $ 25,187,500
$ 9,571,250 $ 9,571,250
7,889,400 7,889,400
$ 24.70 $ 24.00
$ 194,868,180 $ 189,345,600
$ 130,175,100 $ 130,175,100
$ 27,612,900 $ 27,612,900
$ 16,666,667 $ 16,666,667
$ 174,454,667 $ 174,454,667
$ 20,413,513 $ 14,890,933
$ 20,413,513 $ 14,890,933
$ 7,757,135 $ 5,658,555
$ 12,656,378 $ 9,232,379
$ 16,666,667 $ 16,666,667
$ - $ -
$ - $ -
$ 29,323,045 $ 25,899,045
$ 9,571,250 $ 9,571,250
$ 38,894,295 $ 35,470,295
$ 464,611,594
$ 20,145,283 $ 242,525,465
Calpine Corporation
Exchange Option
Assumptions
years
Output in MW 1,000
Market price of electicity ($/MWh) $ 24.00 2
Value of 1mo output (V) $ 15,778,800.00 2 1/12
2 1/6
Gas price ($/MBtu) $ 2.50 2.25
Plant heat rate (Btu/kWh) 7,500 2 1/3
Fuel cost ($/MWh) $ 18.75 2 5/12
raw spark spread $ 5.25 2.5
O&M expense ($/MWh) $ 3.50 2 7/12
Value of 1mo fuel+VC (U) $ 14,628,262.50 2 2/3
2.75
Volatilities (annual) 2 5/6
Power (sigma V) 30% 2 11/12
Gas (sigma U) 20% 3
Correlation 10% 3 1/12
3 1/6
Convenience yields (per annum) 3.25
Power 0% 3 1/3
Gas 5% 3 5/12
3.5
Option calculation 3 7/12
T (in years) 2.00 3 2/3
sigma 34% 3.75
d1 0.60460 3 5/6
d2 0.11880 3 11/12
N(d1) 0.72728 4
N(d2) 0.54728 4 1/12
Option value $ 4,231,610.78 4 1/6
4.25
Total Option value 15 yrs $ 1,287,776,480.05 4 1/3
4 5/12
4.5
Capital costs $ 500,000,000 4 7/12
Years to construct 2 4 2/3
Cost of Capital 6.80% 4.75
PV of capital cost $ 484,082,397 4 5/6
4 11/12
5
5 1/12
5 1/6
5.25
5 1/3
5 5/12
5.5
5 7/12
5 2/3
5.75
5 5/6
5 11/12
6
6 1/12
6 1/6
6.25
6 1/3
6 5/12
6.5
6 7/12
6 2/3
6.75
6 5/6
6 11/12
7
7 1/12
7 1/6
7.25
7 1/3
7 5/12
7.5
7 7/12
7 2/3
7.75
7 5/6
7 11/12
8
8 1/12
8 1/6
8.25
8 1/3
8 5/12
8.5
8 7/12
8 2/3
8.75
8 5/6
8 11/12
9
9 1/12
9 1/6
9.25
9 1/3
9 5/12
9.5
9 7/12
9 2/3
9.75
9 5/6
9 11/12
10
10 1/12
10 1/6
10.25
10 1/3
10 5/12
10.5
10 7/12
10 2/3
10.75
10 5/6
10 11/12
11
11 1/12
11 1/6
11.25
11 1/3
11 5/12
11.5
11 7/12
11 2/3
11.75
11 5/6
11 11/12
12
12 1/12
12 1/6
12.25
12 1/3
12 5/12
12.5
12 7/12
12 2/3
12.75
12 5/6
12 11/12
13
13 1/12
13 1/6
13.25
13 1/3
13 5/12
13.5
13 7/12
13 2/3
13.75
13 5/6
13 11/12
14
14 1/12
14 1/6
14.25
14 1/3
14 5/12
14.5
14 7/12
14 2/3
14.75
14 5/6
14 11/12
15
option value
$ 4,231,610.78
$ 4,231,610.78
$ 4,314,116.57
$ 4,395,184.75
$ 4,474,886.17
$ 4,553,285.49
$ 4,630,441.93
$ 4,706,409.87
$ 4,781,239.42
$ 4,854,976.87
$ 4,927,665.10
$ 4,999,343.94
$ 5,070,050.46
$ 5,139,819.24
$ 5,208,682.59
$ 5,276,670.79
$ 5,343,812.25
$ 5,410,133.66
$ 5,475,660.16
$ 5,540,415.47
$ 5,604,421.96
$ 5,667,700.83
$ 5,730,272.13
$ 5,792,154.88
$ 5,853,367.14
$ 5,913,926.09
$ 5,973,848.08
$ 6,033,148.68
$ 6,091,842.75
$ 6,149,944.47
$ 6,207,467.41
$ 6,264,424.54
$ 6,320,828.27
$ 6,376,690.52
$ 6,432,022.71
$ 6,486,835.80
$ 6,541,140.31
$ 6,594,946.39
$ 6,648,263.77
$ 6,701,101.84
$ 6,753,469.63
$ 6,805,375.88
$ 6,856,828.97
$ 6,907,837.05
$ 6,958,407.94
$ 7,008,549.24
$ 7,058,268.27
$ 7,107,572.13
$ 7,156,467.68
$ 7,204,961.59
$ 7,253,060.29
$ 7,300,770.06
$ 7,348,096.94
$ 7,395,046.83
$ 7,441,625.44
$ 7,487,838.34
$ 7,533,690.91
$ 7,579,188.40
$ 7,624,335.93
$ 7,669,138.45
$ 7,713,600.80
$ 7,757,727.70
$ 7,801,523.71
$ 7,844,993.32
$ 7,888,140.89
$ 7,930,970.65
$ 7,973,486.76
$ 8,015,693.27
$ 8,057,594.11
$ 8,099,193.14
$ 8,140,494.14
$ 8,181,500.77
$ 8,222,216.64
$ 8,262,645.26
$ 8,302,790.07
$ 8,342,654.42
$ 8,382,241.62
$ 8,421,554.87
$ 8,460,597.33
$ 8,499,372.08
$ 8,537,882.15
$ 8,576,130.50
$ 8,614,120.02
$ 8,651,853.57
$ 8,689,333.92
$ 8,726,563.81
$ 8,763,545.93
$ 8,800,282.89
$ 8,836,777.27
$ 8,873,031.62
$ 8,909,048.41
$ 8,944,830.08
$ 8,980,379.03
$ 9,015,697.60
$ 9,050,788.12
$ 9,085,652.84
$ 9,120,294.00
$ 9,154,713.79
$ 9,188,914.36
$ 9,222,897.83
$ 9,256,666.29
$ 9,290,221.79
$ 9,323,566.33
$ 9,356,701.90
$ 9,389,630.45
$ 9,422,353.89
$ 9,454,874.13
$ 9,487,193.01
$ 9,519,312.37
$ 9,551,234.00
$ 9,582,959.69
$ 9,614,491.18
$ 9,645,830.19
$ 9,676,978.43
$ 9,707,937.55
$ 9,738,709.20
$ 9,769,295.02
$ 9,799,696.59
$ 9,829,915.50
$ 9,859,953.30
$ 9,889,811.52
$ 9,919,491.68
$ 9,948,995.26
$ 9,978,323.74
$ 10,007,478.56
$ 10,036,461.15
$ 10,065,272.94
$ 10,093,915.30
$ 10,122,389.62
$ 10,150,697.26
$ 10,178,839.54
$ 10,206,817.80
$ 10,234,633.33
$ 10,262,287.43
$ 10,289,781.37
$ 10,317,116.40
$ 10,344,293.77
$ 10,371,314.70
$ 10,398,180.41
$ 10,424,892.08
$ 10,451,450.90
$ 10,477,858.03
$ 10,504,114.64
$ 10,530,221.85
$ 10,556,180.80
$ 10,581,992.60
$ 10,607,658.34
$ 10,633,179.13
$ 10,658,556.02
$ 10,683,790.09
$ 10,708,882.39
$ 10,733,833.95
$ 10,758,645.80
$ 10,783,318.96
$ 10,807,854.43
$ 10,832,253.22
$ 10,856,516.29
$ 10,880,644.63
Calpine Corporation
Debt Overhang
Base Case
Good state Bad state Expected Value
Probability 0.5 0.5
Firm value 160 60 110
Risky debt 100 60 80
Equity 60 0 30