Fitch Rates Calpine's 5.875% Senior Notes Due 2024 'BB+/RR1'
NEW YORK -- November 5, 2013
Fitch Ratings has assigned a 'BB+/RR1' rating to Calpine Corp.'s (Calpine)
$490 million 5.875% senior secured notes due 2024. The Rating Outlook is
Stable. The 'RR1' rating reflects a three-notch positive differential from the
'B+' Issuer Default Rating (IDR) and indicates that Fitch estimates
outstanding recovery of 91%-100%.
The new senior secured notes rank 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, such as
Calpine Construction Finance Company, L.P. (CCFC) and other subsidiaries that
have project finance debt. The new notes are secured by a first priority lien
on substantially all of Calpine's and certain of its guarantor's existing and
future assets. Fitch estimates that guarantor subsidiaries account for
approximately 20,000 MW of generation capacity, including projects under
construction. 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, other than the recently issued
6.000% senior secured notes due 2022, at 103% of par value. The refinancing
will lower the run rate of interest expenses.
KEY RATING DRIVERS
Calpine's 'B+' 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 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.
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+'
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
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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
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