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Rating Action:

Moody's assigns B1 rating to Calpine Corporation's senior secured term loan; outlook stable

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.

RATINGS RATIONALE

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.

Assignments:

..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.

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 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 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
William L. Hess
MD - Utilities
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 term loan; outlook stable
No Related Data.
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