Calpine under credit review for possible downgrade

By the OGJ Online Staff

HOUSTON, Dec. 13 -- Calpine Corp. faces a possible downgrade of its investment grade credit rating to a junk bond rating by Moody's Investors Service.

The ratings agency Thursday said it has increased concerns regarding Calpine's liquidity, near term cash flow, and reduced financial flexibility. The move comes 1 day after the independent power company said it retired $122 million in debt and had "sufficient" liquidity to meet its capital needs.

Calpine, San Jose, Calif., is facing increasing difficulty because warm weather and a sputtering economy are hurting electricity sales and cutting into power plant profits. The company has also lost financial flexibility as its stock price has declined, said Moody's. The price has declined to the $15 range from a high of almost $60/share late last year.

"Although Calpine enjoyed access to the capital and credit markets in the past, it now finds itself facing skeptical investors and lenders, and Moody's believes the company's market access is materially reduced," the agency said.

Moody's had raised the rating on Calpine 's senior unsecured debt to Baa3, its lowest investment grade, in early October. Moody's said its review would affect $11.6 billion of debt and preferred securities.

The ratings agency said its review will look at the company's prospects to obtain liquidity, refinance convertible bonds in April, and obtain additional financing later without putting existing senior note holders at a higher credit risk.

Calpine has $878 million in convertible debt due in April, and the company wants to increase a bank loan to $1.5 billion from $400 million to support its marketing and trading operation. Given the $11.6 billion in debt, the more "modest" cash flow expectations, and the ongoing capital expenditure needs, this may be difficult, Moody's said.

Standard & Poor's Wednesday confirmed its double B-plus senior unsecured debt rating for Calpine, its highest noninvestment grade rating. The action helped stem a 48% decline in Calpine's shares this week.

Some analysts said there are questions about Calpine's ability to pay the interest charges on loans for its power plants. "Power prices are down. The company has lots of long-term debt. Will the company be able to generate sufficient earnings to service debt and support the trading operation," said Louis Gagliarni, an analyst with John S. Herold, Stamford, Conn. "Investors are nervous."