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24 May 2010
Approximately $1.4 billion of credit facilities
New York, May 24, 2010 -- Moody's Investors Service today assigned a Ba3 rating to New Development
Holdings, LLC's (NDH) $1.4 billion of senior
secured first lien bank facilities, being offered as a $1.3
billion senior secured term loan and a $100 million senior secured
revolver. Proceeds from the term loan will be used by parent Calpine
Corporation (Calpine: B1 Corporate Family Rating, stable)
to help fund the approximate $1.65 billion acquisition of
4,490 megawatts (MW) generation assets owned by Connectiv Energy
Holding Company (to be renamed Calpine Mid-Atlantic Energy).
The rating outlook for NDH is stable.
The Ba3 senior secured NDH rating reflects the significant interrelationship
between Calpine and wholly-owned NDH, Calpine Mid-Atlantic
Energy (CMAE) and its subsidiaries as we calculate that around 80%
of NDH's future operating revenues will be provided by capacity
payments from Calpine Energy Services (CES) to subsidiaries of CMAE under
18 tolling arrangements to be effective at acquisition close and mature
no later than December 31, 2019. These payments along with
capacity payments from a separate tolling arrangement between Constellation
Energy Commodities Group, Inc. (CECG) and Calpine Mid-Merit
LLC (Delta project), effective from June 1, 2011 through May
31, 2017, provide a very high degree of steady, predictable
cash flow over the life of the debt. Calpine guarantees CES'
payments under its tolls and Constellation Energy Group, Inc.
(CEG: Baa3 senior unsecured, stable) guarantees CECG payments
under the Delta project toll. Such cash flows when combined with
a cash sweep mechanism in the term loan are expected to result in substantial
principal repayments over the seven year tenor of the term loan.
The rating also factors in the existence of monthly capacity payments
paid by PJM Interconnection LLC (PJM: Aa3 senior unsecured,
stable) to Calpine Mid-Atlantic Marketing (CMAM), a CMAE
subsidiary, from the Reliability Pricing Model (RPM) capacity auctions
which provide a high quality and predictable source of cash flow for CMAE
and its subsidiaries. Over the next three years, we calculate
that RPM capacity payments and payments received under the Delta toll
will represent at least 66% of the total capacity payments expected
to be paid by CES to CMAE and its subsidiaries. Moody's also
calculates that based on the results of the May 14, 2010 RPM capacity
auction, CMAE and its subsidiaries will receive approximately $150
million of incremental capacity payments during the June 2013 --
May 2014 period relative to the same 2012/2013 period. While RPM
auction results can be volatile on a year-to-year basis,
Moody's believes that the CMAE generation assets will continue to
be recipients of relatively healthy capacity payments given the transmission
constrained regions that these assets operate and the prospect that several
thousand MWs of old, small, less efficient coal-fired
generation in PJM may permanently shut down over the intermediate term.
From a flow of funds perspective, we understand that PJM will pay
monthly RPM capacity payments to CMAM and that CES will act as the authorized
representative for the receipt of the CMAM funds. CMAM will subsequently
pass on the RPM capacity payments to CES during the tenor of the CES tolls.
Importantly, in the event that CES were to default under any of
its tolling obligations with subsidiaries of CMAE, CMAM has the
right to stop passing the RPM capacity payment to CES related to the toll
or tolls that may be in default. Based on the outcome of the RPM
capacity auctions through May 2014 and the existence of the Delta toll
with CECG, in the unlikely event that CES were to default on all
of its tolling obligations with CMAE subsidiaries, Moody's
calculates that NDH would still be able to generate modest amounts of
positive free cash flow over this period.
The rating further acknowledges that the financing structure features
a 50% excess cash flow sweep which should facilitate a fairly rapid
principal reduction over the tenor of the term loan. We calculate
that at maturity in 2017, the issuer's debt will be reduced
by nearly 50% from the original $1.3 billion with
the expected refinancing amount representing debt/ kW of less than $200
/ kW when considering all of CMAE's generation assets, and
debt / kW of less than $250 / kW when considering only the newest
generation assets (approximately 3,023 MW). We believe that
this level of remaining refinancing risk appears manageable, particularly
when one considers the locational value of the assets.
Through various subsidiaries, Calpine is responsible for the maintenance,
operation, and the delivery of fuel to the CMAE plants through bilateral
agreements, all of which are guaranteed by Calpine. Additionally,
one of Calpine's subsidiaries, Calpine Construction Management
Company, Inc. will provide construction management services
for the Delta project, which is expected to be completed by June
2011. Approximately $65 million of proceeds from the secured
term loan will be used to fund the remaining construction costs of this
Moody's observes that the projected standalone credit metrics appropriately
position the NDH subsidiary within the "Ba" rating category,
based upon Moody's financial metric ranges outlined in the Rating
Methodology: Unregulated Utilities and Power Companies, published
in August 2009. Specifically, cash flow (CFO pre-W/C)
to debt, retained cash flow to debt, and free cash flow to
debt is expected to average 15%, 9%, and 6%,
respectively from 2011 through 2013, while cash flow coverage of
interest expense is expected to average more than 3.0x over the
same next three year period. Notwithstanding these standalone metrics
and the existence of non-Calpine related sources of cash flow,
Moody's believes that the rating on NDH's senior secured debt
will remain closely aligned with Calpine's B1 Corporate Family Rating
(CFR) given the degree of interdependence that exists with the parent.
Moreover, any rating change at Calpine would likely result in a
similar rating action for NDH.
Calpine's B1 CFR incorporates the continued improvement in financial metrics
since the company's February 2008 emergence from bankruptcy, and
the likelihood of a strengthened financial performance in the future based
upon the incremental earnings and cash flow contributions from the CMAE
assets along with the expected incremental contribution from new projects
and new contracts with a number of end-use customers. The
rating considers the company's hedging program, a favorable environmental
profile, the diversification and newness of the Calpine generation
fleet, and an expectation for continued strong operating performance.
For more information on Calpine, please refer to the May 5th press
release and the most recent Credit Opinion, both of which can be
found on moodys.com.
Regarding the acquisition, Calpine will not acquire Connectiv's
trading book, collateral requirements or load-serving auction
obligations, and Calpine will not assume any off-site environmental
liabilities or pre-close pension and retirement welfare liabilities.
Including closing costs and other related expenditures, total consideration
to complete the acquisition is expected to be $1.84 billion
which will be funded by the NDH $1.3 billion secured term
loan and $540 million of corporate cash. Calpine has entered
an agreement to sell its Rocky Mountain and Blue Spruce generation plants
to Public Service Company of Colorado for $739 million, which
should close at year-end 2010. Net proceeds for Calpine
from this transaction are expected to approximate $400 million
after the repayment of subsidiary level debt which will release about
$90 million in restricted cash.
The term loan will mature in seven years from closing while the revolver
will mature in three years. Both the term loan and revolver will
be secured on a first lien basis by most of the assets owned by CMAE,
which includes eighteen generating plants aggregating 3,860 MW located
in Delaware, Pennsylvania, New Jersey, Maryland and
Virginia, as well as the contracts entered into by CMAE and its
subsidiaries, including CMAM. Moody's observes that
the Delta project, a 565 MW natural gas-fired project under
construction, and the related CECG tolling obligation are not included
in the collateral package due to restrictions under the toll. Upon
the May 31, 2017 expiry of this toll, the Delta project will
be included in the collateral package. All obligations of NDH under
the facilities and any obligations under any interest rate protection
arrangements will be unconditionally guaranteed by each existing and subsequently
acquired domestic wholly owned subsidiaries of NDH (Subsidiary Guarantors).
The facilities, the guarantees and any interest rate protection
agreements will be secured by substantially all the assets of NDH and
each Subsidiary Guarantor, with certain exceptions, with the
above referenced Delta project being the only meaningful exception.
The term loan and revolver will have a maximum leverage ratio and a minimum
interest coverage ratio. Given the expected predictability in the
issuer's cash flow, we believe NDH should be able to maintain ample
head room under these covenants.
In light of NDH's dependence on Calpine and its affiliates for revenues,
O & M support and construction services, NDH's stable
rating outlook mirrors that of Calpine's. The stable rating
outlook for Calpine reflects Moody's expectation for execution of the
company's strategy through strong plant performance and a carefully implemented
hedging strategy which is expected to result in free cash flow generation
helping to facilitate continued consolidated debt reduction.
While limited prospects exist for the Calpine or NDH rating to be upgraded
in the near-term, Calpine's CFR could be upgraded if Calpine's
ratio of free cash flow to debt reaches the high single digits,
if Calpine's cash flow to debt exceeds 12%, and if
the company's coverage of interest expense is above 2.3x
on a sustainable basis.
Calpine's rating could be downgraded if the company does not to
execute on its business plan resulting in the company's cash flow to debt
declining below 7%, and its cash coverage of interest expense
falling below 1.8x for an extended period.
Moody's last rating action on Calpine occurred on May 5, 2010 when
the ratings were upgraded, including the company's CFR to
B1 from B2. This is the first time that Moody's is assigning
a rating to NDH.
The principal methodology used in rating Calpine and NDH is Moody's Rating
Methodology: Unregulated Utilities and Power Companies, published
in August 2009 and available on www.moodys.com in the Rating
Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process
of rating these issuers can also be found in the Rating Methodologies
sub-directory on Moody's website.
The ratings for NDH's bank loan were determined using Moody's
Loss Given Default (LGD) methodology. Based upon Calpine's
B1 CFR and PDR, the LGD methodology suggests a B1 for NDH's
senior secured revolver and term loan. The Ba3 rating incorporates
the substantial collateral coverage of NDH debt over the life of the loan
given the existence of the excess cash flow sweep, the fact that
a majority of the contracted cash flows are ultimately sourced by payments
from non-Calpine, investment-grade rated entities,
and the fact that cash flows from the RPM auction can stay at CMAE and
its subsidiaries in the event that CES defaults on its tolling obligations.
..Issuer: New Development Holdings, LLC
....Senior Secured Bank Credit Facility,
Assigned Ba3, LGD3 42%
....Senior Secured Bank Credit Facility,
Assigned Ba3, LGD3 42%
Headquartered in Houston, Texas, Calpine is a major U.S.
independent power company with assets of $16.65 billion
at December 31, 2009. Upon closing the CMAE acquisition,
Calpine will have aggregate generating capacity of 28,297 MW.
NDH wholly owns CMAE, which will have a mid-merit focused
business with 4,490 MW of generation assets in eastern PJM,
3,860 MW in operation across 18 power plants in four states and
one 565 MW CCGT plant under construction in Pennsylvania. We understand
that the transaction has received Hart-Scott-Rodino approval
and we understand that the acquisition is targeted to close on or around
June 30, 2010.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
Moody's assigns Ba3 senior secured rating to New Development Holdings
William L. Hess
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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