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Rating Action:

Moody's assigns Ba3 senior secured rating to New Development Holdings

Global Credit Research - 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 project.

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.

Assignments:

..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.

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
Managing Director
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Ba3 senior secured rating to New Development Holdings
No Related Data.
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