NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB+' rating to Calpine Corp.'s $562 million first-lien term loan facility maturing May 31, 2023 and $625 million 5.25% senior secured notes due June 1, 2026. The term loan amortizes at 1% per year and is priced at L+300 basis points. The new term loan and the 2026 senior secured notes are secured equally and ratably by a first-priority lien on substantially all of Calpine's and certain of its guarantors existing and future assets. The new financings are pari passu with Calpine's existing first-lien debt including the revolving credit facility. Fitch has assigned a Recovery Rating (RR) of 'RR1' (implying 91% - 100% recovery) to the new financings. The Rating Outlook is Stable.
Calpine used the net proceeds from the new financings, along with cash on hand, to repay approximately $806 million of the first-lien term loan maturing in 2019 and $381 million of the first-lien term loan maturing in 2020. With these new issuances, Calpine has extended its debt maturity profile and has no further corporate debt maturity until 2022.
KEY RATING DRIVERS
EBITDA Resiliency Through Cycles
Calpine's 'B+' Issuer Default Rating reflects Fitch's view that the company can continue to generate stable levels of EBITDA even during periods of extremely low natural gas prices. Given the relative efficiency of Calpine's fleet compared to the market, low natural gas prices can boost the run times for its generation fleet, thus offsetting the compression in generation margins to a large extent. Fitch's base deck for natural gas prices has seen a series of revisions over the last few months and currently stands at $2.25/$2.50/$2.75 per MMBtu in 2016/2017/2018, respectively. At these prices, Fitch expects Calpine to generate 2016 adjusted EBITDA within its stated guidance range of $1.8 billion - $1.95 billion, which compares with 2015 adjusted EBITDA of $1.98 billion. Beyond 2016, Fitch expects adjusted EBITDA to increase modestly reflecting Fitch's expectations of modest improvement in natural gas prices and contribution from the already announced new generation projects and recently completed Granite Ridge acquisition.
Favorable Generation Mix
The combination of efficient natural-gas fired combined cycle plants and Geysers (geothermal) assets make Calpine's fleet cleaner than other coal-heavy independent power projects (IPPs). Calpine's fleet is also much younger than its peers'. As a result, Calpine is comparatively much less vulnerable to both existing and potential stringent environment regulations addressing greenhouse gas emissions, other air emissions including SOx, NOx, Mercury and coal ash, as well as water use. For these reasons, Fitch views Calpine's business mix as relatively strong compared with other merchant generators. Over the medium- to long-term Calpine's dependence on natural gas could be a disadvantage given the rapid penetration and growing threat from renewables, particularly in California and Texas.
Measured Approach to Growth
Fitch has a positive view of management's measured approach to growth, which has been largely geared towards new generation that is backed with long-term power purchase agreements (PPAs) with creditworthy counterparties, and merchant facilities where Calpine has significant cost advantages over other new entrants. Calpine has also been an active and opportunistic buyer and seller of generation assets, monetizing non-core assets and increasing scale in core regions. Enhancements to annual capacity auctions in PJM and New England will benefit Calpine's existing dual-fuel generation fleet and support its strategy of targeting new builds and acquisitions in these regions.
Fitch expects management to continue to monetize its assets in non-core regions. Any asset purchases are likely to be measured, as demonstrated by management's past actions, and will probably consist of natural gas-fired assets so as to maintain the company's relatively clean environmental profile. Any large-scale, predominantly debt-funded acquisition is likely to put downward pressure on ratings given there exists minimal headroom in the credit metrics. Fitch's current view does not incorporate any major foray by the company into the renewable sector, such as wind and solar, over the near term.
High Leverage
Fitch's primary rating concern lies with Calpine's high leverage; in particular net adjusted Debt/EBITDA has consistently trailed management's stated 4.5x target. Calpine's year-end 2015 gross adjusted Debt/EBITDA was 6.1x and the net adjusted debt/EBITDA was 5.7x. Timing of the debt issuance for the Granite Ridge acquisition does have a bearing but, in general, management has opted to operate at or above net adjusted debt/EBITDA of 5.5x. Any deterioration in the EBITDA outlook from factors such as a further drop in natural gas prices, adverse capacity auction outcomes, compression in heat rates or expiration of above-market contracts would be worrisome and place negative pressure on ratings if not accompanied by commensurate debt reduction.
Capital Allocation Geared Toward Growth and Share Repurchases
Fitch expects Calpine to generate approximately $500 million of FCF in 2016; annual FCF could increase to more than $700 million by 2017. These estimates incorporate both maintenance and growth capex based on announced new projects. Significant covenant cushion, incremental first-lien debt capacity and robust FCF generation even in a commodity trough affords Calpine tremendous financial flexibility to deploy capital. The pace of share repurchases has been tracking above Fitch's expectations. As of Dec. 31, 2015, Calpine had repurchased around $2.25 billion in stock over 2013-2015. This elevated level was driven in part by asset sales. Reinvestment of capital in new generation projects under long-term contracts would be viewed positively by Fitch.
Improvement in Credit Metrics
Fitch expects adjusted debt to EBITDAR to be 6.5x in 2016 and improve to 5.5x in 2018. The improvement would be driven by scheduled debt amortizations, incremental debt reduction as contemplated by management, and modest improvement in EBITDA from new generation projects coming on line. FFO adjusted leverage is expected to be 6.8x in 2016 and improve to 5.7x in 2018. Coverage ratios have deteriorated somewhat in 2015 with the timing of debt issuance to finance the Granite Ridge acquisition and are likely to remain in the 2.75x - 3.25x range over 2016-2018, in line with its 'B+' credit profile.
RECOVERY ANALYSIS
The individual security ratings at Calpine are notched above or below the IDR as a result of the relative recovery prospects in a hypothetical default scenario. Fitch values Calpine's power generation assets using a net present value (NPV) analysis. The NPV analysis for Calpine's generation portfolio yields approximately $1,100/kw for the geothermal assets and an average of $425/kw for the natural gas generation assets. Fitch's updated NPV analysis has seen a material degradation in value, in particular for Calpine's California portfolio. Any incremental first lien issuance and/or further degradation in power generation values will put downward rating pressure on the senior unsecured ratings.
KEY ASSUMPTIONS
--Natural gas prices of $2.25/$2.50/$2.75 per MMBtu for 2016/2017/2018, respectively;
--Expected generation hedged per management estimates of 86%, 48% and 28% for balance of 2016, 2017 and 2018, respectively. Hedged margin of $18/24/32 per MWh for balance of 2016/2017/2018, respectively;
--Growth and maintenance capex of approximately $1.9 billion over 2016-2018;
--No additional growth projects except those already announced and under construction;
--In absence of additional growth projects, Fitch has assumed that FCF generation can support an approximately $300 million stock buyback program annually.
RATING SENSITIVITIES
Positive: Positive rating actions for Calpine appear unlikely unless there is material and sustainable improvement in Calpine's credit metrics compared with Fitch's current expectations. Management's net leverage target of 4.5x effectively caps Calpine's IDR at the 'B+' category.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Weak wholesale prices due to unfavorable power demand and supply dynamics, regulatory interference and/or distortion in market pricing signals that depress Calpine's EBITDA and FFO below Fitch's expectations on a sustained basis;
--An enhanced pace of share repurchases without hitting or sustaining the stated net leverage target of 4.5x;
--An aggressive growth strategy that diverts significant proportion of growth capex towards merchant assets and/or inability to renew its expiring long-term contracts leading to a higher open position;
--Inability to reduce its FFO adjusted leverage to below 7x, and total adjusted debt/EBITDAR below 6x over Fitch's forecast period; and
--Incremental first-lien leverage and/or further deterioration in NPV of the generation portfolio that leads to downward rating pressure on the unsecured debt.
LIQUIDITY
Calpine's liquidity position is adequate. Calpine recently extended the maturity of its $1.5 billion revolver to June 2020 and increased the size by $178 million until June 2018. As of March 31, 2016, Calpine had approximately $244 million of cash and cash equivalents at the corporate level and around $1.4 billion of availability under the corporate revolver. The cash on hand has declined from the $906 million available at Dec. 31, 2015 in part due to the acquisition of Granite Ridge Energy Center and other seasonal variations in working capital. There is no corporate debt maturity until 2022 when Calpine's $1.57 billion first-lien term loan matures. The scheduled project debt and term loan amortizations approximate $200 million annually.
Fitch currently rates Calpine as follows:
Calpine Corp.
--IDR 'B+';
--First Lien Term Loans 'BB+/RR1';
--First Lien Senior Secured Notes 'BB+/RR1';
--Revolving Credit Facility 'BB+/RR1';
--Senior Unsecured Notes 'BB-/RR3'.
Date of Relevant Rating Committee: April 26, 2016
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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