Fitch Rates Calpine's New First Lien Term Loan and Senior Notes 'BB+/RR1'
NEW YORK -- October 28, 2013
Fitch Ratings has assigned a 'BB+/RR1' rating to Calpine Corp.'s (Calpine)
$390 million senior secured term loan due 2020 and $750 million 6.000% senior
secured notes due 2022. The Rating Outlook is Stable. The net proceeds from
the two issuances will be used by Calpine to buy back its existing $1,080
million 7.25% senior secured notes due 2017. The company has already announced
a cash tender offer for its 2017 notes.
The new issuances will be guaranteed by Calpine's current and future
subsidiaries that guarantee the existing first lien debt. The new first lien
loan and notes will be secured by a first priority lien on all existing and
future assets of guarantor subsidiaries and will be subordinated to the
existing and future liabilities of Calpine Construction Finance Company, L.P.
(CCFC) and certain Calpine subsidiaries that have project finance debt. Fitch
estimates that guarantor subsidiaries that account for approximately 20,000 MW
of generation capacity, including projects under construction, directly
guarantee the parent debt.
KEY RATING DRIVERS
Calpine's 'B+' Issuer Default Rating (IDR) reflects the company's 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. The IDR also reflects high consolidated
gross leverage, strong liquidity position including a growing free cash flow
profile, manageable debt maturities, and consistently demonstrated capital
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.
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.
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 expects Calpine to generate strong free cash flow. Management has been
increasingly focusing on growth capex and share repurchases as its primary
uses of excess cash. 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 $913
million of cash and cash equivalents, including restricted cash, and $760
million of availability under the corporate revolver, as of June 30, 2013.
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
assumptions. The recovery analysis results in a 'RR1' rating for the first
lien debt, which reflects a three-notch positive differential from the 'B+'
IDR and indicates that Fitch estimates outstanding recovery of 91%-100%.
Further Positive Rating Actions Unlikely: Positive rating actions for Calpine
appear unlikely 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
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
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013;
--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013;
--'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: Including Short-Term Ratings and Parent and
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities
within a Corporate Group Structure
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Shalini Mahajan, CFA, +1 212-908-0351
Fitch Ratings, Inc.
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.