S&P rates Calpine Generating

Standard & Poor's assigned ratings to Calpine Generating Co. LLC's new debt including a B+ with a 1 recovery rating to its $835 million first priority senior secured loan and notes, a B with a 2 recovery rating to its $740 million second priority senior secured loan and notes and a CCC+ rating with a 5 recovery rating to its $830 million third priority secured notes. The outlook is negative. The 5 recovery rating indicates negligible recovery of 0% to 25% in the event of a default.

S&P said the default risk for all securities is the same but the ratings reflect different recovery prospects.

Although the base case debt service coverage ratios are adequate for the rating, S&P said its scenario analysis indicates that CalGen may have to rely on the fixed-price contracts with Calpine Energy Services, existing third-party contracts, the index hedge with Morgan Stanley Capital Group and the $750 million working capital facility to cover fixed costs and interest expense.

The CalGen debt structure exposes lenders to a potentially risky execution of debt refinancing in 2009-2011 due to the energy market's unpredictability, S&P added. As the debt will not amortize significantly, CalGen's refinancing will likely have to depend almost entirely on favorable market conditions.

Except for the $150 million fixed rate debt, all of the remaining debt carries floating interest rates, which expose lenders to higher interest rate risk, a scenario that could materially reduce coverages or potentially force a default, depending on power market conditions, S&P added.

The fact that Calpine Corp. has not structurally separated itself from CalGen introduces compounding credit risk because a Calpine bankruptcy would likely consolidate CalGen into an insolvency proceeding.

Positives include that the Calpine Energy Services and third-party contracts should cover interest expense and fixed costs if spark spreads decline significantly through 2009, S&P added, and said the Morgan Stanley Capital Group index hedge should also help cover interest expense through March 2007.

A $750 million working capital facility should provide liquidity to cover interest expense and fixed costs (as well as business interruption problems, force majeure and liquidated damages), particularly after one of the Calpine Energy Services contracts expires in 2009.

The fact that the portfolio of assets represents 37% of Calpine's total portfolio should provide economic incentive for Calpine to support CalGen when power prices fall.

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