Fitch says Calpine exposure does not adversely affect public power sector

New York, NY, Dec. 2, 2005 — Fitch Ratings assessed the 140 public power issuers it rates for any exposure to Calpine via power supply contracts or co-ownership in generating units. As a result, Fitch sees no material impact to the ratings of public power entities in the event Calpine files for bankruptcy protection and seeks to reject some individual contracts.

Calpine Corp.’s issuer default rating (IDR) is ‘CC’ and the Rating Outlook is Negative. Calpine and its subsidiary, Calpine Energy Services, sell electricity to utilities, including public power and electric cooperatives throughout the United States. On December 1, 2005, Calpine Corp. said it may not have enough money to pay debts incurred through buying fuel for its power plants and, unless given extra time, could file for bankruptcy.

Fitch’s primary concern is, says a recent press release, if Calpine files for bankruptcy, it could result in a rejection (i.e. termination) of their contracts with public power utilities, causing these utilities to replace the power with less favorable/higher priced sources. From Fitch’s review, in general, public power utilities have limited, if any, exposure to contracts backed by Calpine.

Where utilities have bilateral contracts with Calpine, they tend to be an insignificant part of their total power requirements and/or are tolling arrangements, which are less likely to be terminated. The assessment also found that in instances where a utility has a supply contract or is a co-owner in a gas fired power plant with Calpine, this exposure represents a small portion of the utility’s power requirements and/or is mitigated by the utilities solid financial/liquidity position.

In circumstances where a utility’s exposure appears to be meaningful, such as the California Department of Water Resources (CDWR) which has total outstanding debt of about $10.7 billion, this concern is mitigated as explained below:

Of CDWR’s four contracts with Calpine, accounting for over 25% of their total energy supply, two are tolling agreements and the other two are fixed priced. In the event that any of these contacts were to be terminated, CDWR would no longer be responsible for that supply and that power would need to be replaced by Pacific Gas & Electric. While the loss of a favorable contract would increase CDWR’s energy cost by about 8.5 mills, their total revenue requirement would decline. Finally, this event would accelerate the runoff of CDWR’s total power supply responsibility, and result in a net neutral effect on the rating.

In the event of a Calpine bankruptcy, Fitch anticipates no alteration in wholesale market prices of electricity or in regional supply, as was demonstrated in the earlier bankruptcies of Enron Corp. and Mirant Corp.

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