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Rating Action:

Moody's Affirms Calpine's Ratings with Negative Outlook

23 Jan 2019

Approximately $11 billion of debt affected

New York, January 23, 2019 -- Moody's Investors Service ("Moody's") today affirmed Calpine's Ba3 corporate family rating (CFR) with a negative outlook. At the same the time, Calpine's senior secured rating of Ba2 and senior unsecured rating of B2 were also affirmed. The affirmations with a negative outlook follow Pacific Gas & Electric Company's (PG&E, Caa3/negative) announcement that it intends to file for a Chapter 11 bankruptcy on or about January 29, 2019.

Outlook Actions:

..Issuer: Calpine Construction Finance Company, L.P.

....Outlook, Remains Negative

..Issuer: Calpine Corporation

....Outlook, Remains Negative

Affirmations:

..Issuer: Calpine Construction Finance Company, L.P.

....Senior Secured Bank Credit Facility, Affirmed Ba2(LGD3)

..Issuer: Calpine Corporation

.... Probability of Default Rating, Affirmed Ba3-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-1

.... Corporate Family Rating, Affirmed Ba3

....Senior Secured Bank Credit Facility, Affirmed Ba2(LGD3)

....Senior Secured Regular Bond/Debenture, Affirmed Ba2(LGD3)

....Senior Unsecured Regular Bond/Debenture, Affirmed B2(LGD5)

RATINGS RATIONALE

"Calpine generates about 15% of its EBITDA from PG&E-related power purchase agreements (PPAs)" said Toby Shea VP -- Senior Credit Officer, "it is unclear if PG&E will reject or reprice the PPAs as a part of its bankruptcy process. If they do, it would likely pressure Calpine's ratings lower."

Calpine's ratings have been on a negative outlook since August 18, 2017, as a result of the company's announcement that it would be acquired by Energy Capital Partners (ECP) for $5.6 billion in cash. The negative outlook at the time reflected our belief that ECP will look to extract value from Calpine's portfolio of assets, primarily through asset divestitures, which may worsen Calpine's business risk and debt leverage. The potential for PG&E's bankruptcy filing is an additional credit negative.

Bankruptcy courts regularly reject above-market executory contracts, which generally encompass PPAs. Rejecting above-market contracts or repricing them to market rates benefits the bankruptcy estate because it lowers the debtor's cost structure, which may translate to more cash flows and stronger liquidity.

However, we are uncertain if PG&E will reject or reprice the PPAs during bankruptcy because PG&E's rates are regulated by the California Public Utility Commission (CPUC) and rate regulation creates a different set of economic incentives for the debtor. PG&E currently has an effective regulatory mechanism to pass its PPA costs to ratepayers dollar for dollar. If PG&E rejects or reprices the PPAs, the CPUC will likely not allow PG&E to keep the savings.

PG&E does benefit from rejecting or repricing PPAs in that it would have a lower cost structure, thus creating headroom for the cost of new investments without raising rates. However, in our opinion the CPUC would most likely want PG&E to affirm the contracts so that generators would feel confident to invest in renewable projects and support California's climate change goals. The CPUC, therefore, may find it objectionable to approve investments that were made possible by headroom created by means that hurt its climate change goals.

Despite continuing the negative outlook for its ratings, Calpine's underlying business fundamentals have improved since the August 2017 assignment of the negative outlook due to tighter market conditions in Texas and California. There have been significant plant closures in both markets. In Texas, Vistra Energy Corp (CFR Ba2/positive) closed about 4,000 MW of coal capacity in 2018. In California, generators retired or mothballed 2,738 MW of gas capacity in 2018. These and other market improvements we believe could add about 200 to 250 basis points to Calpine's CFO to debt ratio.

Calpine has high debt leverage, a credit weakness. Based on Moody's adjusted financials, Calpine's CFO pre-WC/debt ratio was 7.7% for 2017 and 8.1% in 2016. Over the last twelve month period ending September 2018, Calpine's CFO pre-WC to debt rose to 9.5% and we believe that Calpine's CFO pre-WC/debt is likely to improve to around 10% for full year 2018 and 11% to 12% in 2019, assuming PG&E affirms the PPAs. If PG&E rejects or reprices the PPAs, Calpine's CFO pre-WC/debt may be closer to 10%.

Liquidity analysis

Calpine's speculative grade liquidity rating is unchanged at SGL-1. The company continues to possess very good liquidity, with $346 million of unrestricted cash on hand as of 30 September 2018 and about $1,165 million of unused capacity on its corporate revolving credit facilities.

Calpine's next upcoming maturity is $389 million of term loans due in December 2019. Calpine plans to pay this debt off as it matures. Calpine's debt covenants include an interest coverage ratio that must be above 1.5x and a Debt to EBITDA ratio that cannot exceed 7.0x. As of 31 September 2018 the company was in compliance with all of its covenants.

The company generated about $598 million of free cash flow as of 31 September 2018 on a rolling twelve month basis and is forecast to generate about $700 million free cash flow in 2019, assuming PG&E contracts are affirmed.

Rating outlook

The negative outlook reflects the view that Calpine could be more risky under ECP's ownership and the potential that PG&E could reject or reprice Calpine's PPAs during bankruptcy.

Factors that could lead to an upgrade

We could change the outlook back to stable, if PG&E affirms Calpine's PPAs during bankruptcy and Calpine maintains a CFO to debt in the low teens on a sustained basis based on existing business risk.

Factors that could lead to a downgrade

A downgrade is likely should PG&E reject or reprice Calpine's PPAs to market and the company fails to produce a CFO to debt ratio in the low teens. A downgrade could also occur should the company embarks on a strategic direction that substantially raises its business risk profile.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Toby Shea
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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