Reuters, October 20, 2003 Money and Business/Financial Desk
(The following statement was released by the rating agency)
Approximately $12 Billion of Debt Securities Affected
NEW YORK, Oct 20 - Moody's Investors Service (News - Websites) downgraded the debt ratings of Calpine Corporation (NYSE:CPN - News; Calpine), including the downgrade of its Senior Implied rating to B2 from Ba3. The rating action concludes a review for possible downgrade that was initiated on June 20, 2003. The rating outlook is stable.
Ratings downgraded include:
- Senior Implied Rating to B2 from Ba3
- Senior Unsecured Notes, Issuer Rating, Senior Unsecured Convertible Notes, to Caa1 from B1
- Calpine Canada Energy Finance Senior Unsecured Notes (guaranteed by Calpine), to Caa1 from B1
- South Point Energy Center, LLC, Broad River Energy LLC and RockGen Energy LLC Pass Through Certificates, to B2 from B1 (South Point)
- Tiverton Power Associates Ltd. Partnership and Rumford Power Associates Ltd Partnership Pass Through Certificates, to B3 from B1 (Tiverton)
- Calpine Capital Trust Preferred Securities, to Caa3 from B2
- Shelf registration for the issuance of various senior unsecured debt, trust preferred, and preferred securities to (P)Caa1from (P)B1, (P)Caa3 from (P)B2, and (P)Ca from (P)B3,
respectively.
This rating action reflects:
1) Weak operating cash flow relative to Calpine's substantial debt leverage;
2) Moody's belief that financial performance will continue to be weak in the near term;
3) The company's growing reliance upon non-contracted merchant energy revenues and cash flows to meet future obligations;
4) The expected continuation of unfavorable spark spreads for non-contracted wholesale energy sales, due to over-capacity in the wholesale power market and high natural gas prices;
5) Reduced financial flexibility as the company has pledged or securitized a number of assets, reducing the assets and cash flow that are available to support its corporate debt, while facing refinancing that totals approximately $3.3 billion in late 2004.
Calpine's financial performance during 2002 and through the six months of 2003 remains weak, with funds from operations coverage of fixed charges averaging about 1.7 times and funds from operations amounting to about 6% of total adjusted debt. Calpine's creditworthiness will be significantly dependent upon its ability to maintain a high percentage of contracted wholesale revenues that have healthy spark spreads through contract extensions or through new contracts, or to achieve improvement in spark spreads from its uncontracted portfolio. This is a difficult challenge under current market conditions. The challenge is amplified by the amount of new generating capacity that Calpine and other generators are bringing into service in spite of excess capacity. Reserve margins have increased throughout the country.
While a few load pockets are exceptions, reserve margins will remain uncomfortably high for several years in many areas. Although Calpine has a fleet of highly efficient natural-gas fired generating assets, this provides only limited protection against poor spark spreads resulting from generating overcapacity and the very high price of natural gas. While market conditions will eventually improve, and efficient plants should gradually produce stronger cash flows, Moody's does not expect meaningful improvement before 2005.
Calpine's liquidity position has strengthened in the past year as the company completed approximately $6.4 billion of financings, contract monetizations, or asset sales during 2003.
Of the $6.4 billion, approximately $4.6 billion relate to refinancing of existing bank and bond transactions and $900 million relate to contract monetizations. As a result, Calpine expects to end fiscal year 2003 with liquidity of around $2 billion. However, Calpine will face another large refinancing bulge in late 2004, when $3.3 billion of debt either matures or can be put to the company, including $2.2 billion of bank loan construction financing.
The rating downgrade of Calpine's senior unsecured debt to Caa1 from B1 incorporates the diminished recovery prospects for this class of debt due to the sizeable amount of collateral that has been pledged to banks and bondholders during 2003, associated with the $4.6 billion in debt financing. Of the company's $18 billion in on-balance sheet and off-balance sheet debt, approximately $10 billion of the debt is secured. Calpine's assets have largely been pledged to creditors, and collateral may be an important factor in executing future debt financing.
The downgrade of South Point to B2 from B1 reflects the lower rating of Calpine as guarantor of project indebtedness. However, the South Point rating derives significant support from a collateral package that includes project assets, as well as intermediate term power purchase agreements with various load serving entities. The downgrade of Tiverton to B3 from B1 reflects the lower rating of Calpine as guarantor, and a collateral package that includes power plants that sell electric output on a merchant basis in the NEPOOL energy market.
The stable rating outlook considers the near completion of Calpine's construction programs, with the result that capital expenditures are expected to materially decline from previous levels. While substantial challenges remain for the company, the stable outlook also incorporates the belief that Calpine most likely will be able to achieve an orderly refinancing of its maturing obligations in 2004.
Headquartered in San Jose, California, Calpine is an independent power producer that owns and operates plants in 23 states in the US, three provinces in Canada, and in the United Kingdom.
