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01 Mar 2011
Approximately $1.3 billion of debt affected
New York, March 01, 2011 -- Moody's Investors Service assigned a B1 rating to Calpine Corporation's
(Calpine) new senior secured term loan due March 2018. Concurrent
with this rating assignment, Moody's has affirmed Calpine's
ratings including its B1 Corporate Family Rating (CFR) and B1 Probability
of Default Rating, along with the B1 rating on the company's
senior secured revolver and senior secured notes. Calpine's
rating outlook is stable.
Calpine's B1 CFR reflects continued improvement in the company's
overall financial performance and an expectation for strengthened cash
flow and earnings following last year's purchase of generation assets
located in eastern PJM, since renamed Calpine Mid-Atlantic
Energy (CMAE). The rating also considers actions taken by the company
to produce more predictable cash flow and earnings over the intermediate
term through new contracted projects being developed and bilateral arrangements
in place between the company and various end-users. The
rating considers the company's hedging program, a favorable environmental
profile, and the sustained operating performance of the generation
fleet. At year-end 2010, we calculate the ratio of
Calpine's cash flow (CFO-pre W/C) to debt at 7.9%,
its cash flow coverage of interest at 2.0x and its free cash flow
to debt at 5.2%. In light of the company's
development plans and the incremental cash flow and earnings expected
from the CMAE assets, we believe that future financial performance
will position the company's CFR reasonably well as a strong "B" rated
unregulated power company.
The B1 (LGD4, 50%) rating for the secured term loan incorporates
the fact that all of the Calpine corporate debt will be first lien debt,
and as such, should carry the same rating as the company's CFR.
The collateral securing the term loan will consist of a first priority
lien on a material percentage of all 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, a first lien
on natural gas-fired power generation facilities with a combined
capacity of 11, 296 MW located throughout the US and a first lien
on 3,919 MW of the CMAE assets. The collateral package also
includes a first lien on the equity interests in virtually all of the
remaining plants. The Calpine secured term loan holders will share
in this collateral package with existing lenders in the company's
$1 billion revolver and with existing holders of $5.9
billion in secured notes (both rated B1). The secured term loan
will not have any financial covenants and will have debt incurrence language
that allows the company to issue first lien debt so long as the net tangible
assets of the guarantors equal 166% of the total first lien debt
(CNTA ratio). Moody's observes that the CNTA ratio also exists
in the company's bond indenture and revolver 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 and
term loan lenders will have limits placed on their voting rights in certain
circumstances until such time as the revolver has been reduced to less
than $500 million.
Proceeds from the term loan will be used to repay any and all outstanding
obligations under the existing credit agreement of New Development Holdings,
LLC, (NDH) established in June 2010 to partially finance Calpine's
purchase of the CMAE assets. Moody's intends to withdraw
the NDH ratings and outlook including the Ba3 rating assigned to NDH's
secured term loan due 2017 and the Ba3 rating assigned to NDH's
secured revolver due 2013 upon the closing of Calpine's secured
term loan and subsequent repayment and termination of the NDH facilities.
Moody's believes that the completion of this transaction,
while helping to simplify the capital structure and lowering consolidated
interest expense for the company, is likely to slow down efforts
by Calpine to de-lever. The terms of the NDH credit facility
that will be repaid and terminated requires the borrower to utilize 50%
of any excess cash flow for NDH debt repayment. As the new term
loan will not have a excess cash flow sweep mechanism, consolidated
debt reduction will occur at a slower pace and increased free cash flow
generation is expected to be available for discretionary uses, including
investments in growth projects or share repurchases.
The stable rating outlook reflects our expectation for continued execution
of the company's strategy through strong plant performance and a carefully
implemented hedging strategy which is expected to continue to result in
free cash flow generation.
In light of the May 2010 rating upgrade and our belief that future debt
reduction will occur at a slower pace, limited prospects exist for
the CFR to be upgraded in the near-term. 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 with all on
a sustained basis.
The rating could be downgraded if the company is not able to execute on
its current plan through strong plant performance and a carefully implemented
hedging strategy leading to the company's cash flow to debt declining
below 7%, and its cash coverage of interest expense falling
below 1.8x on a sustained basis.
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.
..Issuer: Calpine Corporation
....Senior Secured Bank Credit Facility,
Assigned B1 LGD4, 50%
....Senior Secured Bank Credit Facility,
Assigned B1 LGD4, 50%
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 nearly 27,490 MW and 1,149
MW under construction. During 2010, Calpine had operating
revenues of $6.5 billion.
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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
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
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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.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns B1 rating to Calpine Corporation's senior secured term loan; outlook stable
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