estimated US supply, at an annual cost of about US$10 billion. To assure its supply and pro-
tect its costs Calpine started to take steps to secure 25 percent of its natural gas on a long-
term basis through long-term contracts with natural gas suppliers, and also through
acquisitions of companies with natural gas reserves. In 2000 Calpine purchased TriGas
Exploration, Inc., and in 2001 it agreed to purchase Encal Energy, Ltd, a Canadian compa-
ny based in Calgary, Alberta.
Credit ratings February and April 2001
In February 2001, following Calpine’s issuance of US$1.15 billion of senior notes due in 2011
and its announcement that it would acquire Encal Energy, Standard & Poor’s affirmed its
‘BB+’ corporate rating for Calpine. It assigned a ‘BB+’ rating to the US$1.15 billion note
issue, while affirming its ‘BB+’ ratings for US$366 million in passthrough certificates and
senior unsecured debt, and a ‘B’ rating for US$1.12 billion in convertible preferred securities.
The ‘BB+’ corporate rating reflected the following risks.
- Cash flows exposed to market-based energy prices were expected to increase from about
60 per cent in 2000 to about 80 per cent in 2004. A sudden drop in energy prices could
impair the company’s financial flexibility. - Recent acquisitions and financing had reduced Calpine’s base-case-minimum and aver-
age consolidated funds-from-operations (FFO) interest coverage ratios to 1.9 times and
2.6 times, respectively, and lower energy prices could reduce these ratios to 1.7 times and
2.1 times over the following five years. These coverage ratios reflected the agency’s
adjustment to account for lease guarantee payments and partial debt treatment of con-
vertible preferred stock. - While Calpine was then managing just 5,000 MW of generating capacity, its aggressive
growth strategy was predicated on being able to develop and manage 70,000 MW of
capacity by 2005. - The company’s high forecast gross margins depended on its ability to acquire about 8.1
trillion cubic feet of natural gas reserves at below-market cost, a task that could become
expensive – as much as US$2 billion per year – and perhaps even riskier than generation. - Calpine was just beginning to develop its expertise in achieving market power from a
large asset pool in geographically diverse markets – markets that in general were just
beginning to face deregulation and competition. - Calpine’s rapid growth forecast, which assumed that it could achieve operating margins
of 30 per cent margins through its predominant gas-fired, F-generation technology, could
come under pressure if high margins attracted other entrants or if other technologies or
fuels became more competitive in the future.
•With a target of 65 per cent debt to total capitalisation, Calpine was more exposed to
electricity price volatility than more conservatively leveraged generation companies.
Standard & Poor’s cited several strengths as offsetting these risks.
- Because less than half of Calpine’s existing power plant portfolio had project-level debt,
the portfolio was expected to provide adequate cash flow to service the company’s senior
debt obligations.
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