(The following statement was released by the rating agency)
Oct 5 - 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 andindicates that Fitch estimates outstanding recovery of 91-100%. The RatingOutlook is Positive.
The new senior secured term loan ranks equally and ratably with Calpine'sexisting senior secured term loans, revolving credit facility and first liennotes and is subordinated to all existing and future liabilities of Calpine'ssubsidiaries that do not guarantee Calpine's revolving facility. The new termloan is secured by a first priority lien on substantially all of Calpine's andcertain of its guarantor's existing and future assets, together which comprises725 MW of geothermal assets and approximately 19,000 MW of natural gas-firedgeneration capacity. The same collateral secures the revolver, existing termloans and the first lien notes.
The net proceeds from this offering, along with cash on hand, will be used byCalpine to redeem 10% of the original aggregate principal amount of each of theseries of its existing first lien notes and pay down existing project level debtfor Broad River and South Point. While incurring a call premium of approximately$17 million in addition to other transaction costs, the refinancing will lowerthe run rate of interest expenses and further simplify the capital structure.After this transaction, Calpine has only $120 million left of its $2 billionaccordion feature under its first-lien senior secured debt, which allows thecompany to refinance portions of project debt at the parent level.
Calpine's ratings reflect its high consolidated gross leverage, relativelystable EBITDA (due to lower sensitivity to changes in natural gas prices ascompared to other coal/ nuclear competitive power generators), strong liquidityposition 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 tighteningenvironmental regulations, looming generation scarcity in certain markets suchas in the Electricity Reliability Council of Texas (ERCOT), and a sharp fall innatural 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 upwardlyrevised EBITDA and cash flow estimates for 2012 as Calpine has benefited from arun up in market heat rates in ERCOT and significant coal-to-gas switching invarious power regions it operates in.
A prolonged low natural gas price environment and consequently depressedeconomics are likely to further accelerate the pace of retirements at severalcoal-fired power plants. Fitch expects this trend to further bolster Calpine'scompetitive position and support improved credit metrics in 2013 and beyond.Longer-term, Calpine remains positively leveraged to a recovery in natural gasprices with its highly efficient fleet and natural gas being on the margin forpower prices in most of the markets Calpine operates in.
Fitch estimates Calpine's consolidated gross leverage to be approximately 5.9xand funds flow from operations (FFO) to total debt to reach 10% in 2013, whichis in line with Fitch's guideline ratios for a high risk 'B' rated issuer. Fitchexpects Calpine's gross leverage to approach a range of 4.5 - 5.0x and FFO tototal debt to be in the 12-14% range by 2015. Given the company's strong excesscash position, the net leverage metrics are much stronger. Management has astated 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 cashand cash equivalents and $659 million of availability under the corporaterevolver, as of June 30, 2012. Fitch expects Calpine to generate upwards of $600million in free cash flow in 2014 and beyond. These free cash flow estimatesincorporate both maintenance and growth capex based on announced new projects.
Fitch does not expect management to proactively reduce debt from the currentlevels aside from the scheduled debt maturities/ amortizations. Over the last 12months, management has announced $600 million in share repurchases, which hasbeen above Fitch's expectations. The level of free cash flow generation isstrong enough to accommodate modest level of share repurchases, which isincorporated in Fitch's forecasts. However, it is Fitch's expectation thatmanagement prudently invests excess cash flow proceeds in growth orientedprojects and continues to manage its balance sheet in a conservative manner.
Fitch expects to resolve its Positive Outlook for Calpine over the next 12-24months after gaining further evidence of how Calpine's fleet fares in thecurrent commodity environment. Any material change in the company's capitalallocation decisions will also play a part in the future rating decisions byFitch, most notably the pace of share repurchases. A significant proportion ofgrowth capex diverted towards merchant assets could be a cause for concern.
(Caryn Trokie, New York Ratings Unit)