Moody's Downgrades Calpine; Ratings remain under review for downgrade
Approximately $11.6 Billion of Debt and Preferred Securities Affected.
New York, December 14, 2001 -- Moody's Investors Service lowered its senior unsecured rating for Calpine Corporation to Ba1 from Baa3 and lowered Calpine's affiliates' ratings accordingly. Moody's lowered Calpine's ratings after reviewing Calpine's near-term cash flow, liquidity sources and financial flexibility. The ratings remain under review for further downgrade pending arrangements to obtain additional financing.
A quick-growing capital intensive company, Calpine has acquired a significant debt burden in anticipation of later cash flow generation. The company must now, however, operate, carry out ongoing expansion and service this debt burden in the face of modest operating profits. Furthermore, the company's financial flexibility has been reduced as evidenced by investors' materially lowered earnings expectations and the company's resulting fallen stock price.
Moody's lowered the following ratings:
· Calpine Corporation senior unsecured debt, to Ba1 from Baa3;
· Calpine Canada Energy Finance ULC senior unsecured debt, to Ba1 from Baa3;
· Calpine Canada Energy Finance II ULC senior unsecured notes, to Ba1 from Baa3;
· Tiverton Power Associates Limited Partnership and Rumford Power Associates Limited Partnership pass through certificates, to Ba1 from Baa3;
· South Point Energy Center, LLC, Broad River Energy LLC and RockGen Energy LLC pass through certificates, to Ba1 from Baa3; and
· Calpine Capital Trust, Calpine Capital Trust II and Calpine Capital Trust III convertible preferred securities, to Ba2 from Ba1.
Moody's has examined Calpine's near-term cash flow and liquidity sources assuming the company cannot obtain currently-sought bank financings and later refinancings. The company is endeavoring to raise $1.5 billion in bank facilities to replace its existing $400 million corporate revolver and $300 million letter of credit facilities. In addition, the company will likely need to refinance $878 million in zero coupon convertible bonds in April.
Moody's believes the company's current situation may reduce senior noteholders' debt service coverage for a longer period and increase the likelihood that the senior unsecured note holders will become effectively or structurally subordinated.
Near Term Cash Flow
Moody's believes Calpine's cash flow will be restricted over the coming months. First quarter and second quarter cash flows should also be somewhat depressed-as is generally the case for Calpine--given the expected annual weather cycle. Throughout this time, Calpine will need to continue funding power plant construction expenditures as well as cover ongoing interest payments and preferred dividends on its significant debt and preferred burden. Additionally, the company will require credit support for its marketing and trading operations. Calpine's largest one-time cash need over the coming months will be its likely need April 30th to pay $878 million to holders of a zero coupon convertible bond. The zero coupon's convertible bond indenture also allows the company to pay the holders with Calpine stock. Such a payment, though, would be dilutive to Calpine's current shareholders.
Liquidity Sources
Calpine's near-term liquidity sources, aside from the somewhat restricted cash from operations, are $500 to $600 million of cash on the balance sheet and an undrawn $400 million revolver expiring May 2003. Moody's believes, however, that the $400 million revolver may need to be fully drawn to collateralize Calpine's trading operations because the company's existing $300 million letter of credit facility currently used to provide collateral matures December 31st. To fund its construction expenditures, Calpine plans to draw on the remaining $1 billion of its $3.5 billion construction revolvers.
Ongoing fundings under Calpine's corporate revolver and its project finance revolvers are subject to material adverse change clauses. The company's only ratings triggers are contained in the construction revolvers. The ratings triggers preclude Calpine from drawing under the construction revolvers to fund projects not already being funded if Calpine's corporate rating falls below Ba2. Given that Calpine has no plans over the coming months to begin funding additional projects under the revolvers, Moody's believes those ratings triggers not to be operative.
Calpine, of course, owns somewhat liquid unencumbered assets which could be sold or monetized-such as accounts receivable, a receivable from PG&E and proven gas reserves-but selling or monetizing those assets may not only take time, but would also lower Calpine's future cash flows and effectively or structurally subordinate the senior unsecured notes.
Moody's examination of Calpine's covenants leads it to believe that Calpine can pledge up to $1.7 billion in additional assets without violating its additional lien covenants and take an asset sale loss of $800 million without violating its tangible net worth covenants.
Structural Subordination
Moody's believes Calpine's current situation has placed the senior unsecured note holders at greater risk of effective or structural subordination for four reasons. First, given its challenging financing environment, Calpine may have difficulty arranging financing on unsecured terms. Second, to the extent Calpine continues drawing on the secured project finance-style construction revolvers (maximum $3.5 billion), the structural subordination of the senior notes will increase. Third, because Calpine may have greater difficulty eventually refinancing the secured project finance-style construction revolvers with corporate financing, the senior note holders may also remain structurally subordinated to the construction revolvers significantly longer than originally contemplated. Last, as noted before, monetizing receivables or other assets would effectively or structurally subordinate the senior unsecured note holders to cash flows generated by those assets.
Additional Information
San Jose, California-based Calpine Corporation develops, owns and operates natural gas-fired and renewable geothermal electric generating facilities. To date, the company has approximately 35,100 megawatts of base load capacity and 7,600 megawatts of peaking capacity in operation, under construction and in announced development in 29 states, the United Kingdom and Canada.
New York
Susan D. Abbott
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Andy Jacobyansky
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653 |
