18 May 2004 – Moody’s Investors Service assigned a B1 rating to $800m of first priority senior secured revolving credit and term loan facilities, and assigned a B2 rating to $100m of second priority term loans of Calpine Generating Company, LLC (CalGen).
Moody’s assigned a B1 rating to CalGen’s $235m of first priority floating rate notes due 2009, and a B2 rating to $640m of second priority floating rate notes due 2010. Moody’s also assigned a B3 rating to $680m of third priority floating rate notes and $150m of third priority 11.50 per cent notes due 2011 issued by CalGen. The rating outlook for CalGen is stable.
The ratings for the bank credit facilities and the notes for CalGen consider:
1. A substantial dependence upon cash flows from Calpine Energy Services (CES) through various power purchase agreements, and significant reliance upon Calpine Corporation (Calpine: B2 Senior Implied), which guarantees CES’s payment obligations and provides various support services;
2. The volatility of operating cash flows relative to the level of CalGen’s debt;
3. The significant reliance upon the wholesale power market for revenues and cash flow;
4. The risk of a general increase in interest rates, given CalGen’s high reliance on variable rate debt.
However, these concerns are balanced by the following considerations:
1. The diversity of the asset portfolio and the high efficiency of the CalGen fleet relative to the average efficiency of gas fired units;
2. A portion of cash flow is generated from power purchase agreements with unaffiliated third parties;
3. The importance of the CalGen assets to Calpine, including the reliance on CalGen’s assets to satisfy contract requirements in CES’s western book;
4. Payments from CES to CalGen are not dependent upon the dispatch characteristics of the CalGen fleet;
5. An index hedge with Morgan Stanley Capital Group (MSGG) provides a degree of protection against declining electric spark spreads;
6. The asset coverage provided by the collateral is viewed as making full recovery likely in the event of default.
While CalGen’s ratings incorporate the size, geographical diversity, and efficiency of the entire 9820 MW fleet spread across 14 different plants in four different regions, the ratings also consider the reliance on cash flows from CES, CalGen’s marketing affiliate, through a variety of fixed rate and market based contracts.
Together, these contracts represent more than 80 per cent of the expected cash flows to CalGen and have contract maturities that vary between December 2009 and December 2014. CES’s payment obligations under these contracts are guaranteed by Calpine. The remaining cash flow is expected to come from separate long-term contracts with a variety of third party sources for their respective purchase of electricity and steam. The majority of these third party counterparties have investment grade ratings and the contract terms have varying maturities that range between 2007 and 2024.
CalGen’s ratings and outlook could be favorably impacted by a more rapid than expected recovery of market spark spreads, by the arrangement of sales contracts with creditworthy counterparties, and by an upgrade of Calpine. CalGen’s ratings and outlook could be negatively impacted by realization of weaker than anticipated spark spreads, operational difficulties, and a downgrade of Calpine.