-- PRESS RELEASE: S&P Rates Calpine Corp. $400M Conv Debs B+ --
Following is a press release from Standard & Poor's:
NEW YORK (Standard & Poor's) Dec. 19, 2001--Standard & Poor's today assigned its single-'B'-plus rating to the planned issuance of Calpine Corp.'s $400 million-$500 million of convertible debentures, due 2006. Standard & Poor's has also affirmed its double-'B'-plus corporate credit rating on Calpine and its double-'B'-plus rating on the company's existing senior unsecured debt. In addition, Standard & Poor's has affirmed its single-'B'-plus rating on $1.1 billion of Calpine's outstanding convertible debentures. The outlook remains stable.
The double-'B'-plus corporate credit rating reflects the following risks:
-- Current market conditions may hurt Calpine's business and place stress on liquidity. Lower power prices, a potential economic recession that could reduce demand growth, and the difficulty in issuing equity in the current market may collectively challenge Calpine's capitalization targets, which in turn could increase Calpine's debt service load.
-- Calpine's merchant portfolio, one-third of its capacity, exposes cash flow to potential volatility as evidenced by this year's dramatic swings in U.S. western power market prices. Even contracted revenues may be affected by market cyclically because the contracts will expire and be replaced with new contracts, priced at rates higher or lower than the initial contracts.
-- Calpine has substantial exposure to the California market through contracts with Department of Water Resources and PG&E, which represent about 25% of cash available for debt service in 2005. The California Public Utility Commission publicly challenged the validity of these contracts, and the company has already begun talks about renegotiating the contracts.
-- Calpine's minimum and average consolidated funds from operations (FFO) interest coverage ratios of 2.2 times (x) and 2.8x fall below investment-grade targets for the next five years for developers with a speculative component to their revenue streams. The risks are exacerbated because about 25% of the debt will be at floating interest rates. Standard & Poor's adjusts the coverage ratios to account for guarantees on lease payments and partial debt treatment of the convertible preferred stock.
Calpine's target of 65% leverage to total capitalization makes the company vulnerable to electricity price volatility, or even a period of sustained price depression. Adding lease obligations and partial debt treatment of the convertible preferred stock to the total debt increases leverage to about 70%.
Because of Calpine's preferred method of construction, Calpine is fully responsible for construction delays and cost overruns and does not benefit from the liquidated damages offered in many engineering, procurement, and construction contracts. Calpine is also vulnerable to having stranded assets in construction if long-term prices for electricity drop.
Nonetheless, the following strengths adequately mitigate the above risks at the double-'B'-plus rating level:
-- Calpine's growth strategy has focused on adding assets in the U.S. and other developed markets, such as the U.K and Canada, thereby mitigating sovereign and regulatory risk, when compared to a peer group that has invested heavily in Latin America and Asia.
-- Over the past year, Calpine has proven its ability to manage and construct multiple plants in a timely and efficient manner. Calpine has successfully built its projects on time and within budget. Calpine can standardize the design of its plants and achieve economies of scale in design and maintenance because most of the new plants are combined-cycle facilities, using "F" turbine technology.
-- Calpine has built up a strong trading and marketing organization in slightly more than a year by acquiring top talent from leading energy trading companies and investing heavily in supporting technology. Calpine's trading organization focuses on stabilizing earnings and cash flow by managing commodity risk exposures arising from Calpine's generating assets and gas reserves.
-- Highly efficient gas turbines increasingly make up a larger percentage of Calpine's fleet, which should ensure a higher level of dispatch compared to the older plants that Calpine's competitors have purchased over the past few years. Calpine mitigates merchant risk through its strategy covering two-thirds of its capacity under long-term contract. Revenues from existing contracts over the next five years, assuming steady state conditions, cover 100% of debt service, but not at levels commensurate with an investment grade rating.
-- Calpine has been successful in recruiting and retaining a strong and capable management team that has been able to direct the many new aspects of Calpine's business--development, gas exploration and production, construction, marketing and trading, and operations.
-- Calpine's revenue stream benefits from a portfolio effect because of its generating assets and gas reserves in various U.S. markets, a diversity that will soon extend to locations in 34 states and six major markets. Nonetheless, a strict concentration in gas-fired generation, F-technology, and the U.S. market will offset some of this diversity when compared to other developers that own generation, transmission, and distribution assets in various parts of the world.
Calpine, a San Jose-based corporation founded in 1984, is engaged in the development, acquisition, ownership, and operation of power generation facilities, principally in the U.S. Calpine's current portfolio consists of 61 operating projects, with a net ownership interest in about 11,085 MW. Calpine's development and growth strategy seeks to capitalize on opportunities in the power market through an ongoing program to acquire, develop, own, and operate electric power generation facilities or interests in such facilities, and marketing power and energy services to utilities and other end users.
OUTLOOK: STABLE
The stable outlook reflects the expectations that Calpine will continue to construct its plants on time and within budget and that the high level of expertise of its newly formed power-marketing group will continue to stabilize revenues. The outlook may change to positive when the political and regulatory environment in California becomes more predictable and stable. This would greatly reduce the counterparty risk exposure that characterizes the highly politicized California power market. An upgrade to investment grade would require a change in the capital structure of the company to a higher level of equity or an increase in contractual revenues approaching 90%. Under the current contractual strategy of keeping two-thirds of the capacity under long-term contract, minimum FFO interest coverage would have to approach 3.0x to achieve an investment-grade rating. If Calpine continues in its growth plan without issuing equity; however, Standard & Poor's may lower its rating. |
