Reliant, Calpine in Ratings Lens

Two generators doing business in California recently reappeared on investors? radar following incidents not expected to thrill rating agencies. Surprisingly, a move by Reliant?s banker to foreclose on a power plant actually helped to improve a credit outlook rather than lowering it. Calpine?s appearance in a research report questioning the generator?s internal accounting made the news for Reuters but turned out to be old news for the company's ratings. Late last month, lenders said they would foreclose on Reliant?s Liberty power plant in Pennsylvania. The company has been in default on payments since 2003. The 530 MW power plant, purchased as part of Orion Power Holdings in 2002, had a contract through 2016 with a PG&E Corp. subsidiary. When Pacific Gas & Electric went bankrupt, the contract terminated, leaving $262 million in debt outstanding. Reliant will write off the net book value of $75 million, plus any goodwill. The foreclosure, however, was good news to Standard & Poor?s. The same day as the foreclosure notice, August 27, S&P upgraded Reliant and its related companies to stable from negative. S&P affirmed its B corporate rating. The credit-rating agency expects Reliant?s financials to improve as a result of debt reduction and savings. S&P?s key concern was Reliant?s criminal indictment from the federal attorney general?s office in April?for which there has been no public aftermath ( Circuit , April 9, 2004). The rating agency said that any penalties would not pressure the current rating. S&P originally reacted to the indictment with a negative outlook because it expected civil cases to piggyback on the federal case. However, no civil cases based on the alleged market manipulation were filed. Analyst Arleen Spangler said she was looking only at the indictment?s effects and didn?t consider other factors, such as the changes to Reliant?s California power plant contracts with the California Independent System Operator. Calpine has also been in the financial news recently with a tiff over the media and the generator?s accounting practices. Last week, Reuters reported an analysis by RateFinancials that said Calpine had underplayed expenses. Reuters cited details, such as not recognizing the cost of internally produced natural gas as a fuel expense. ?Flagrant, misleading and inaccurate allegations? is how Calpine responded to the story. ?Under Generally Accepted Accounting Principles, intercompany transactions (such as Calpine?s sales of its own gas production to its power plants) must be eliminated in consolidation,? the company added. A second Reuters article, appearing the day after Calpine?s statement, noted, ?While Calpine has not violated any accounting rules, its 2003 financial statements alone cannot be trusted to provide the true financial health of the company, according to analysis by RateFinancials Inc., an independent research firm.? S&P rates Calpine B with a negative outlook. S&P is concerned that funds from operations interest coverage could drop if the company is able to refinance $1 billion. The RateFinancials report didn?t faze S&P analyst Jeff Wolinsky. ?I read that report, but most of those things were included? in S&P?s June analysis of Calpine, he said. ?We make our own adjustments? to a company?s financial reports. Also this week, Calpine said it had finished selling its natural gas reserves in the Colorado Piceance Basin and the New Mexico San Juan Basin for approximately $223 million, as well as its Canadian reserves for $625 million. Calpine said the proceeds from the Colorado/New Mexico sale would be used to pay down $500 million in first lien indebtedness. More California Ratings Standard & Poor?s project finance report card released August 31 covered these in-state developments: SMUD: The Sacramento Cogen Authority, rated BBB , has an availability record of over 97 percent. ?The rating reflects Sacramento Municipal Utility District?s obligation to pay debt service as long as the availability of the project remains above 70 percent.? A second Sacramento Cogen development, at Campbell Soup, was raised from BBB? to BBB . The Central Valley Financing Authority got a stable BBB rating because the plant was available more than 98 percent of the time. A turbine replacement cost $2.7 million. Southern California Edison: Salton Sea geothermal received a BB+ rating because the plant has fixed pricing through May 2007. S&P expects the ratings to be ?volatile? after that. Higher-than-expected operating costs will require the plant to get about 3 cents/kWh to break even from 2007 to 2009. Department of Water Resources : GWF Energy got a BBB? rating. Its outlook is stable as revenues from DWR are predictable and the company?s plants had a 99 percent availability from March 2003 to March 2004. FPL: The wind developer FPL Energy American and sister company FPL Energy Caithness got BBB? ratings. FPL Energy Wind Funding received a BB? rating. The High Winds project achieved financial completion, even though it has been in operation for nearly a year.

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Reliant, Calpine in Ratings Lens

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