Fitch Rates Calpine's $835MM First Lien Notes 'BB/RR1'
NEW YORK -- October 05, 2012
Fitch Ratings has assigned its 'BB/RR1' rating to Calpine Corp's (Calpine)
$835 million senior secured term loan due 2019. The 'RR1' rating reflects a
three-notch positive differential from the 'B' IDR and indicates that Fitch
estimates outstanding recovery of 91-100%. The Rating Outlook is Positive.
The new senior secured term loan ranks equally and ratably with Calpine's
existing senior secured term loans, revolving credit facility and first lien
notes and is subordinated to all existing and future liabilities of Calpine's
subsidiaries that do not guarantee Calpine's revolving facility. The new term
loan is secured by a first priority lien on substantially all of Calpine's and
certain of its guarantor's existing and future assets, together which
comprises 725 MW of geothermal assets and approximately 19,000 MW of natural
gas-fired generation capacity. The same collateral secures the revolver,
existing term loans and the first lien notes.
The net proceeds from this offering, along with cash on hand, will be used by
Calpine to redeem 10% of the original aggregate principal amount of each of
the series of its existing first lien notes and pay down existing project
level debt for Broad River and South Point. While incurring a call premium of
approximately $17 million in addition to other transaction costs, the
refinancing will lower the run rate of interest expenses and further simplify
the capital structure. After this transaction, Calpine has only $120 million
left of its $2 billion accordion feature under its first-lien senior secured
debt, which allows the company to refinance portions of project debt at the
Calpine's ratings reflect its high consolidated gross leverage, relatively
stable EBITDA (due to lower sensitivity to changes in natural gas prices as
compared to other coal/ nuclear competitive power generators), strong
liquidity position including a growing free cash flow profile, manageable debt
maturities, and consistently demonstrated capital market access.
Some of the key trends in the U.S. power generation sector, namely tightening
environmental regulations, looming generation scarcity in certain markets such
as in the Electricity Reliability Council of Texas (ERCOT), and a sharp fall
in natural gas prices in the recent months that has reversed coal-to-gas
spreads, are all favorable for Calpine. These trends are reflected in Fitch's
upwardly revised EBITDA and cash flow estimates for 2012 as Calpine has
benefited from a run up in market heat rates in ERCOT and significant
coal-to-gas switching in various power regions it operates in.
A prolonged low natural gas price environment and consequently depressed
economics are likely to further accelerate the pace of retirements at several
coal-fired power plants. Fitch expects this trend to further bolster Calpine's
competitive position and support improved credit metrics in 2013 and beyond.
Longer-term, Calpine remains positively leveraged to a recovery in natural gas
prices with its highly efficient fleet and natural gas being on the margin for
power prices in most of the markets Calpine operates in.
Fitch estimates Calpine's consolidated gross leverage to be approximately 5.9x
and funds flow from operations (FFO) to total debt to reach 10% in 2013, which
is in line with Fitch's guideline ratios for a high risk 'B' rated issuer.
Fitch expects Calpine's gross leverage to approach a range of 4.5 - 5.0x and
FFO to total debt to be in the 12-14% range by 2015. Given the company's
strong excess cash position, the net leverage metrics are much stronger.
Management has a stated net leverage target of 4.5x, which Fitch expects to be
reached by 2014.
Calpine's liquidity position is strong with approximately $762 million of cash
and cash equivalents and $659 million of availability under the corporate
revolver, as of June 30, 2012. Fitch expects Calpine to generate upwards of
$600 million in free cash flow in 2014 and beyond. These free cash flow
estimates incorporate both maintenance and growth capex based on announced new
Fitch does not expect management to proactively reduce debt from the current
levels aside from the scheduled debt maturities/ amortizations. Over the last
12 months, management has announced $600 million in share repurchases, which
has been above Fitch's expectations. The level of free cash flow generation is
strong enough to accommodate modest level of share repurchases, which is
incorporated in Fitch's forecasts. However, it is Fitch's expectation that
management prudently invests excess cash flow proceeds in growth oriented
projects and continues to manage its balance sheet in a conservative manner.
Fitch expects to resolve its Positive Outlook for Calpine over the next 12-24
months after gaining further evidence of how Calpine's fleet fares in the
current commodity environment. Any material change in the company's capital
allocation decisions will also play a part in the future rating decisions by
Fitch, most notably the pace of share repurchases. A significant proportion of
growth capex diverted towards merchant assets could be a cause for concern.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Aug. 14, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Parent and Subsidiary Rating Linkage
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Shalini Mahajan, CFA, +1-212-908-0351
One State Street Plaza
New York, NY 10004
Philip Smyth, CFA, +1-212-908-0531
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, +1-212-908-0549
Press spacebar to pause and continue. Press esc to stop.