Fitch Upgrades Calpine's IDR to 'B+'; Outlook Stable
NEW YORK -- May 29, 2013
Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) of Calpine Corp.
(Calpine) and its subsidiary, Calpine Construction Finance Company (CCFC) by
one notch to 'B+' from 'B' and revised the Rating Outlook for both companies
to Stable from Positive. Reflecting the one-notch upgrade in the IDRs and
based on an updated recovery analysis, the instrument ratings for the first
lien senior secured debt at Calpine and CCFC were upgraded to 'BB+/RR1' from
KEY RATING DRIVERS
The rating upgrade is driven by Fitch's view that the fundamental positioning
of the company in the merchant generation sector continues to improve given
its relatively cleaner fuel profile, geographic diversity, exposure to the
Electricity Reliability Council of Texas (ERCOT), and ability to sustain its
EBITDA in different natural gas price scenarios. Capital deployment in the
already announced new generation projects, which comprises projects under
long-term contracts as well as merchant generation in ERCOT and PJM, is
expected to drive EBITDA growth in the near term. Longer term, Calpine remains
positively leveraged to scarcity pricing reflecting demand supply imbalances
in its markets as well as to a recovery in natural gas prices given its highly
efficient fleet and natural gas being on the margin for power prices in most
of the markets it operates in.
Calpine's 'B+' IDR reflects the company's high consolidated gross leverage,
relatively stable EBITDA (due to lower sensitivity to changes in natural gas
prices as compared to coal/nuclear competitive power generators), strong
liquidity position including a growing free cash flow profile, manageable debt
maturities, and consistently demonstrated capital market access. Calpine's
EBITDA has proved to be resilient in different natural gas price scenarios.
While its EBITDA remains biased towards higher natural gas prices given the
relative efficiency of Calpine's fleet compared to the market, low natural gas
prices such as in 2012 boost the generation output, thus, offsetting the
compression in generation margins to a large extent. The level of generation
EBITDA stability demonstrated by Calpine over the last four years is quite
unique among the merchant power generation companies.
Fitch expects Calpine's gross leverage to be approximately 6.2x in 2013 and
steadily improve to 4.5x in 2017. Funds from operations (FFO) to debt is
expected to be approximately 9% in 2014 and improve to 15%-16% in 2017.
Coverage ratios remain strong over 2013-2017, consistent with Fitch's
guideline metrics for a 'B+' IDR, and could potentially improve if the company
is successful in capitalizing on the refinancing opportunities to lower its
interest costs. The forecasted net leverage metrics are even stronger as
Fitch's forecast assumes excess cash builds up on the balance sheet. Fitch
expects Calpine to hit its net debt/EBITDA target of 4.5x in 2014 through a
combination of scheduled debt payments and growth in EBITDA. Fitch does not
expect management to proactively reduce debt from the current levels aside
from the scheduled debt maturities/amortizations.
Fitch's projections embed natural gas price expectation of $3.50/MMBtu for
2013 and $4.00/MMBtu in 2014 and an increase thereafter to reach a long-term
price expectation of $4.50/MMBtu. Fitch has assumed a 0.5%-1.5% growth in
demand across the markets that Calpine operates in and only a modest
improvement in spark spreads from the levels implied by current commodity
Fitch expects Calpine to generate more than $800 million of free cash flow in
2014; annual free cash flow is expected to climb upwards of $1 billion 2015
onwards. These free cash flow estimates incorporate both maintenance capex and
growth capex based on committed new projects. Management has been increasingly
focusing on growth capex and share repurchases as its primary uses of excess
cash. Since August 2011, Calpine has announced $1 billion of share
repurchases; the pace of share buybacks so far has been modestly above Fitch's
Calpine is actively pursuing new generation projects as part of its growth
strategy. The company is bringing 773 MWs of contracted capacity on line in
2013, 520 MWs of merchant capacity in the tight ERCOT market in 2014 and 309
MWs of merchant capacity in 2015 that has cleared the PJM capacity auction.
The company is looking at additional merchant capacity of 650s MW and
contracted capacity of 345 MWs in the 2016-2017 time frame, however, these
potential additions have not been factored in Fitch's forecasts. The company
remains an active buyer and seller of assets and it is possible that limited
new development opportunities could enhance the appeal of M&A. Fitch will
evaluate each transaction in the context of business risk, means of financing
and strategic focus. Within the new development opportunities, projects backed
by long-term contracts would be viewed positively by Fitch.
It is Fitch's expectation that management continues to prudently invest the
excess cash flow proceeds in growth oriented projects and manage its balance
sheet in a conservative manner. Fitch acknowledges the success that Calpine
has had in simplifying its capital structure, pushing out debt maturities and
gaining financial flexibility in capital allocation decisions. Calpine's
liquidity position is strong with approximately $962 million of cash and cash
equivalents and $778 million of availability under the corporate revolver, as
of March 31, 2013.
In accordance with its Parent and Subsidiary Rating Linkage Criteria, Fitch is
currently linking the IDRs of Calpine and CCFC. Calpine and CCFC are distinct
issuers, the subsidiary debt is non-recourse to the parent, and there are no
cross-guarantees or cross-default provisions between the two entities.
However, there are strong contractual, operational and management ties between
Calpine and CCFC. CCFC sells a majority of its power plant output under a
long-term tolling arrangement with Calpine's wholly owned marketing
subsidiary. CCFC is also a party to a master operation and maintenance
agreement and a master maintenance services agreement with another wholly
owned Calpine subsidiary. For these reasons, Fitch is assigning the same IDR
to CCFC as the parent even though its standalone credit profile is stronger.
The individual security ratings at Calpine are notched above or below the IDR,
as a result of the relative recovery prospects in a hypothetical default
Fitch values the power generation assets that guarantee the parent debt using
a net present value (NPV) analysis. A similar NPV analysis is used to value
the generation assets that reside in non-guarantor subs and the excess equity
value is added to the parent recovery prospects. The generation asset NPVs
vary significantly based on future gas price assumptions and other variables,
such as the discount rate and heat rate forecasts in California, ERCOT and the
Northeast. For the NPV of generation assets used in Fitch's recovery analysis,
Fitch uses the plant valuation provided by its third-party power market
consultant, Wood Mackenzie as well as Fitch's own gas price deck and other
Fitch has upgraded Calpine's corporate revolving facility, first lien term
loans and senior secured notes, which rank pari passu, to 'BB+/RR1' from
'BB/RR1'. The 'RR1' rating reflects a three-notch positive differential from
the 'B+' IDR and indicates that Fitch estimates outstanding recovery of
Fitch has assigned its 'BB+/RR1' rating to the new first lien senior secured
term loan facility at CCFC. The new term loan facility at CCFC comprises a
$900 million seven-year term loan B tranche maturing May 3, 2020 and a $300
million 8.5 year term loan B tranche maturing Jan. 31, 2022. The first tranche
is priced at LIBOR plus 225 basis points and the second tranche is priced at
LIBOR plus 250 basis points, each with a LIBOR floor of 0.75%. The proceeds
from the new term loans are being primarily used to redeem $1 billion of
CCFC's outstanding 8% senior secured notes due 2016 at a redemption price of
The collateral package for the term loans includes the recently acquired 800
MW natural gas combined cycle Bosque generation facility in Texas, and
excludes the Sutter generation facility from the prior six natural gas-fired
combined cycle power plants that secured the 8% senior secured notes being
redeemed. The refinancing will lead to lower interest costs and provide
greater financial flexibility to CCFC due to less restrictive restricted
Fitch has upgraded the ratings for CCFC's 8% senior notes to 'BB+/RR1' from
'BB/RR1' and expects to withdraw the ratings on these notes once the notes are
Further Positive Rating Actions Unlikely: Positive rating actions for Calpine
and CCFC appear unlikely after today's upgrade unless there is material and
sustainable improvement in Calpine's credit metrics compared with Fitch's
current expectations. Management's net leverage target of 4.5x effectively
caps Calpine's IDR at the 'B+' category.
Weak Wholesale Power Prices: Calpine's EBITDA is sensitive to the level of
power demand and the supply dynamics in each of the markets it operates in.
Regulatory construct and market rules can distort pricing signals relative to
the underlying power demand and supply fundamentals. These factors could
depress Calpine's EBITDA and FFO below Fitch's expectations and, if sustained
over a period of time, could lead to negative credit actions.
Aggressive Capital Allocation Strategy: An enhanced pace of share repurchases
without hitting or sustaining the stated net leverage targets would be a cause
Higher Business Risk: An aggressive growth strategy that diverts significant
proportion of growth capex towards merchant assets could lead to negative
rating actions. Inability to renew its expiring long-term contracts could
potentially lead to a higher open position and elevate the business risk for
Fitch has upgraded the following ratings and revised the Outlook to Stable
--IDR to 'B+' from 'B';
--Corporate revolving facility to 'BB+/RR1' from 'BB/RR1';
--Senior secured first lien term loan to 'BB+/RR1' from 'BB/RR1';
--Senior secured first lien notes to 'BB+/RR1' from 'BB/RR1'.
--IDR to 'B+' from 'B';
--Senior secured notes to 'BB+/RR1' from 'BB/RR1'.
Fitch has assigned the following ratings with Stable Outlook:
--Senior secured first lien term loan at 'BB+/RR1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
--'Rating North American Utilities, Power, Gas and Water Companies', May 16,
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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Shalini Mahajan, CFA, +1-212-908-0351
Fitch Ratings, Inc.
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Philip Smyth, CFA, +1-212-908-0531
Glen Grabelsky, +1-212-908-0577
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