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 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 parent level.
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 projects.
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.