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Rating Action:

Moody's assigns B1 rating to Calpine Corporation's senior secured bank facility; outlook stable

Global Credit Research - 10 Dec 2010

Approximately $1.0 billion of bank facilities affected

New York, December 10, 2010 -- Moody's Investors Service assigned a B1 rating to Calpine Corporation's (Calpine) new senior secured revolving bank facility due December 2015. Calpine's rating outlook is stable. Concurrent with this rating assignment, Moody's affirmed Calpine's speculative grade liquidity rating at SGL-2.

RATINGS RATIONALE

Calpine's B1 Corporate Family Rating (CFR) reflects a financial profile which has exhibited good improvement over the past few years and our expectations for additional strengthening in cash flow and earnings following the July 1st purchase of Conectiv Energy's generation assets. The rating also considers actions taken by the company to produce more predictable cash flow and earnings over the intermediate term through the pursuit of multi-year contracted power sale projects and bilateral arrangements. The rating considers the company's hedging strategy, a more favorable exposure to increasingly stringent environmental mandates, and the sustained operating performance of the reasonably young generation fleet. At 12 months ending September 30, 2010, we calculate the ratio of Calpine's cash flow (CFO-pre W/C) to debt at 8.2%, its cash flow coverage of interest at 1.9x and its free cash flow to debt at 7.0%. We believe that future financial performance will position the company's CFR reasonably well as a strong "B" rated unregulated wholesale power company.

The B1 (LGD4, 50%) rating for the new secured revolver incorporates the fact that all of the Calpine corporate debt is first lien debt. As such, the secured first lien debt should carry the same rating as the company's CFR, consistent with our Loss Given Default methodology. The new $1 billion senior secured bank facility replaces the existing $1 billion senior secured bank facility, and matures on December 10, 2015, an extension of approximately 22 months. The collateral securing the new revolver consists of a first priority lien on a material percentage of all of Calpine's assets, including equity in subsidiaries of Calpine and the guarantors to the extent permitted by existing contractual arrangements. Key components of the collateral package include a direct first lien on the Geysers, a 725 MW base load geothermal collection of plants in California, as well as a first lien on twenty natural gas-fired power generation facilities with a combined capacity of 11,296 MW located throughout the US. The collateral package also includes a first lien on the equity interests in virtually all of the remaining plants with 15,469 MW of generation capacity. The new revolving credit facility will have financial covenants that require 1.5x minimum coverage of consolidated interest expense and limits the amount of consolidated net debt relative to consolidated EBITDA to 7.0x.

The new revolving credit facility lenders share pari-passu in this collateral package with existing lenders in the company's secured term loan, rated B1 (approximately $1.164 billion remains outstanding), and with existing holders of $4.7 billion in secured notes, also rated B1. Moody's observes that while the collateral securing the new revolver, the secured term loan and the secured notes remain largely unchanged, the terms of the new revolver provide Calpine with incremental financial flexibility. For example, the new revolver no longer places a limit on the amount of capital expenditures incurred each year nor does it have any limitations on restricted payments. In addition, the new revolver permits the removal of first lien debt guarantors, as long as the net tangible assets of the remaining guarantors equal 166% of the total first lien debt (CNTA ratio). Moody's observes that the CNTA ratio also exists in the company's most recent bond indenture as an incurrence test.

Moody's further observes that while the first lien secured creditors share in the collateral on a pari-passu basis, note holders will continue to have limits placed on their voting rights in certain circumstances until such time as the new revolver or the existing term loan has been reduced to less than $500 million. Moody's expects Calpine to refinance the remaining $1.164 billion in term loans with secured notes at some future point thereby making the new revolver the operative agreement for all first lien secured creditors.

The SGL-2 liquidity rating reflects our view that Calpine will have good liquidity over the next 12 months based upon internal cash flow generation, balance sheet liquidity, and headroom under the company's covenants. Moody's calculates Calpine's annual free cash flow of around $500 million for 2010 and around $400 million for 2011. At September 30, 2010, Calpine had unrestricted cash of $914 million, and with the net proceeds from the Rocky Mountain and Blue Spruce assets sales to PS Colorado and the December 8th sale of a 25% interest in the Freestone plant, Moody's believes that unrestricted cash on hand at year-end will exceed $1.0 billion. With the closing of the new credit facility, Calpine will have access to a $1 billion secured revolver to December 2015, of which $740 million is available based on the $260 million of letters of credit being issued under the facility at September 30, 2010. Moody's expects the company to be able to satisfy its project level maturing debt requirements over the next 12 months from internal sources, and expects the company to remain comfortably in compliance with the financial covenants in its credit facilities. With respect to other forms of liquidity, virtually all of the company's assets are pledged to creditors under either project level subsidiary agreements or under the company's first lien credit agreements. However, the value ascribed to the Rocky Mountain, Blue Spruce, and Freestone transactions supports our view that Calpine's highly efficient fleet of natural-gas fired generation could provide a meaningful source of future alternate liquidity for the company.

The stable rating outlook reflects Moody's expectation for continued execution of the company's strategy through strong plant performance and a carefully managed hedging strategy which is expected to result in free cash flow generation helping to facilitate consolidated debt reduction.

In light of the May 2010 rating upgrade, limited prospects exist for the CFR to be upgraded in the near-term. Nevertheless, Calpine's CFR could be upgraded if the company's ratio of free cash flow to debt reaches the high single digits, its cash flow to debt exceeds 12%, and cash coverage of interest expense is above 2.3x on a sustainable basis.

The rating could be downgraded if the company is unable to successfully execute on its business plan focused around free cash flow generation helping to facilitate consolidated debt reduction. Specifically, Calpine's CFR could be downgraded if the company's cash flow to debt drops below 7%, and its cash coverage of interest expense falls below 1.8x.

The principal methodologies used in this rating were Global Unregulated Utilities and Power Companies published in August 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in Houston, Texas, Calpine is a major U.S. independent power company that owns 91 operating power plants with an aggregate generation capacity of approximately 27,500 megawatts (MW) . For the 12 months ending September 30, 2010, Calpine had operating revenues of $6.7 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
James Hempstead
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B1 rating to Calpine Corporation's senior secured bank facility; outlook stable
No Related Data.
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