New York, April 2, 2002 — Moody’s Investors Service downgraded the debt ratings of Calpine Corporation including the rating on its senior unsecured debt to B1 from Ba1.
These rating actions conclude Moody’s Calpine review announced December 14, 2001. The ratings outlook is negative. Moody’s also assigned a Ba3 rating to Calpine’s $2 billion of senior secured credit facilities. These facilities consist of $1.4 billion in revolving credit facilities expiring May 24, 2003, and a two-year $600-million term loan.
Security for the facilities includes Calpine’s US natural gas properties, equity in various power projects and Canadian natural gas assets. A list of the rated debt is attached below.
The downgrades reflect Calpine’s high leverage, limited financial flexibility, substantial ongoing capital expenditure requirements to complete its reduced build out program, and concerns about the company’s liquidity profile. The senior unsecured notes have been notched below the senior implied rating of Ba3 to reflect the increasing proportion of secured debt as well as the substantial structural subordination to liabilities at subsidiaries. The $8 billion of senior unsecured notes are structurally subordinated to project financings and leases that total about $6 billion, and are effectively subordinated to usage under the $2 billion senior secured facilities.
As reported in Calpine’s 10-K report filed on March 29th, net cash provided by operations (after working capital changes) totaled $557 million, or about 3.5% of debt (including off-balance sheet financings and convertible preferred stock). Calpine’s debt is expected to grow over the course of the coming year in connection with the continued development of committed projects.
Although Calpine’s total megawatt sales will increase this year as the company completes additional plants, net cash provided by operating activities is expected to remain very low. The company’s exposure to price swings will increase as the company increasingly relies on merchant sales. In addition Moody’s expects that market conditions will result in lower spark spreads over the near-term.
The negative outlook reflects the possibility that the ratings could be further downgraded should Calpine’s liquidity position further deteriorate or its cash flow fall below expectations.
Calpine’s near-term liquidity continues to be tight even with $2 billion of senior secured facilities. Calpine plans to fund completion of 22 gas-fired power projects and 2 project expansions during 2002 and 2003. The company’s 2002 estimated sources of funds depend on additional financings, asset sales and merchant power sales. Calpine’s 10-K estimates that the company’s 2002 uses of funds will total $4.6 billion, including $2.5 billion of new construction.
Expected sources of funds total $6.2 billion, including $1.2 billion from operations, $1.3 billion from additional financing and asset sales, and $2 billion under the credit facilities. In addition to substantial debt maturities over the next two years, the $1.4 billion secured revolving credit will mature in May 2003. The Ba3 rating on the secured credit facilities reflects the benefits and limitations of the collateral package.
A portion of the collateral package consists of Calpine’s equity interests in Saltend and the nine US power plants, which in turn, is effectively subordinated to project finance-style financings. A principal part of the collateral package is Calpine’s interests in its natural gas properties, which may be subject to fluctuation in value based on changes in reserves and gas prices. A portion of these gas reserves is not proven.