Calpine Corp. confirmed Tuesday that it made a $673 million bet — $373 million credit facility and $300 million in stock repurchases — on itself and a long-stalled upgrade of a natural gas-fired generation plant in the heart of the Silicon Valley. Underlying a new credit facility is the belief that the recessionary economy — particularly in California — is going to turn around.

With its newly acquired $373 million credit facility, Calpine plans to finance construction of a 120 MW upgrade to its Los Esteros 180 MW gas-fired peaking facility in San Jose, CA, and repurchase up to $300 million of its own common shares given the current downturn in the economy and the stock market.

On Wednesday, Standard & Poor’s Ratings Service said Calpine’s move to repurchase a lot of stock will not affect its credit rating since it is not using debt to finance the stock buyback and the company had a $1.14 billion cash balance as of June 30 this year.

Los Esteros Critical Energy Facility has long been the target of attempts by the independent power plant operator/developer to develop a new baseload gas-fired combined-cycle generation plant in the always growing and energy-hungry Silicon Valley part of the San Francisco Bay Area. Now Calpine thinks it can have an upgraded plant in place by mid-2013, elevating the current simple-cycle, peaking plant technology that was developed after the energy crisis of 2000-2001 that swept through the West.

The related project finance facility announced today [Tuesday] includes $68 million in letter of credit facilities and a $305 million construction loan that will convert to a 10-year term loan when commercial operations of the plant begin, a Calpine spokesperson said.

There were no mention of existing or new power contracts that Calpine has or is working on related to the existing and expanded facilities at Los Esteros. The most logical major buyer of the plant’s output would be Pacific Gas and Electric Co., which has contracts with a number of Calpine generation plants in Northern California and beyond.

“With the financing of our major construction projects now complete and our liquidity more than sufficient to support these and other near-term growth alternatives, we have turned our focus to the next step in our ongoing capital allocation process [share buy-backs],” said Calpine CEO Jack Fusco, noting that the current volatile stock market and its impact on the company’s share price makes this what Calpine officials consider an ideal time to buy back shares.

“We believe share repurchases at appropriate price levels represent an attractive opportunity to increase returns to our shareholders over the long term,” Fusco said.

The share repurchasing was started immediately with nearly 490 million shares outstanding. Calpine stock closed Tuesday at $13.19, up 26 cents. Its 52-week high was $17.10 and the low was $11.88.

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