March 11, 2002 — Fitch Ratings has lowered its rating on Calpine Corporation’s (Calpine) senior unsecured debt from ‘BB+’ to ‘BB’ and the rating on the company’s convertible trust preferred from ‘BB-‘ to ‘B’.
The Rating Watch Negative has been removed, and replaced by a Stable Rating Outlook. This action follows Calpine’s announcement that it has pledged its U.S. and Canadian natural gas reserves, United Kingdom Saltend power plant, and equity investment in nine U.S. power plants to the financial institutions providing $2 billion of funding, under a new secured debt financing arrangement.
The rating downgrades reflect the following factors. The pledged collateral will secure a total of $2 billion of term debt and borrowing capacity that is structurally senior to Calpine’s unsecured debt. In addition, by pledging these assets, the amount of asset protection available to unsecured bondholders has been reduced. The value of the pledged assets is significant.
Management recently valued its natural gas reserves at around $2.7 billion, and they had been considered a viable source of near-term liquidity either through a direct sale or reserve base financing. Fitch notes that the transactions have some significant positive implications for all Calpine creditors. By completing these transactions, the company’s near-term liquidity position has improved and rating outlook stabilized. In particular, the new loans and cash on hand will provide funds to pay off $685 million of zero-coupon convertible debentures due 2021, puttable in April 2002, and satisfy working capital and construction funding requirements for the remainder of 2002.
While the debt downgrades are deemed appropriate, based primarily on corporate structural issues, Fitch does not see a reduction in Calpine’s overall ability to meet timely payments to creditors at this time.
Calpine has for some time been working to bolster its cash and liquidity positions, including seeking a new, expanded credit facility. The company previously announced that it was in discussions to arrange a $1 billion unsecured credit facility.
Instead, Calpine has entered into an amended $400 million and a new $1 billion revolving credit facility, expiring on May 24, 2003, that together provide $1.4 billion in borrowing and letters of credit capacity, and a new two-year $600 million term loan, which will be available upon satisfaction of certain assumptions, which Calpine expects to satisfy within 30 days.
These credit facilities are in addition to the $3.5 billion construction revolvers used to fund the development and construction of power generating facilities, of which $125 million is now available.
With regard to Calpine’s construction program, the company recently announced plans to moderate its construction and capital funding plans. The revised plan calls for completion of 27 natural gas-fired energy plants under construction, totaling 15,200 megawatts (mw), bringing capacity in service to 23,200 mw by year end 2002, and to 26,300 mw by year-end 2003 (compared with 11,100 mw at December 31, 2001). The plan also calls for deferring on a flexible basis 1,300 mw of capacity planned for 2003, plus all new projects after 2003 (estimated at 15,100 mw).
The company has also agreed with certain equipment vendors to stretch out delivery dates, without substantial fees or penalties to Calpine. As of March 11, 2002, the company estimates sources of cash at $5.16 billion against cash requirements of $4.62 billion for calendar year 2002.
The company said it continues to evaluate opportunities to further enhance liquidity, including initiatives involving its Calpine Energy Services (CES) group. These may include joint ventures, outsourcing the marketing of certain blocks of power and tolling arrangements. Fitch recently reviewed CES’s energy and trading unit in Houston and found its risk management and control policies and business practices to be prudent and consistent with the company’s objective of trading around its generating assets and hedging the returns on assets in operation and under construction.
Calpine has secured multi-year contracts with load serving entities, industrial customers and other wholesale counterparties for approximately 70% of its portfolio in 2002. With regard to contracts with the California Department of Water Resources (DWR), recently the California Public Utility Commission filed a complaint at the Federal Energy Regulatory Commission (FERC) asking the FERC to abrogate contracts between the DWR and energy providers including Calpine.
Fitch considers it very unlikely that FERC will abrogate the contracts with Calpine, but will continue to monitor this proceeding.