Calpine to purchase Conectiv energy fleet for $1.65BB

April 21, 2010

Source: Calpine

Calpine Corporation (CPN) announced that it has agreed to purchase 4,490 MW of power generation assets from Pepco Holdings, Inc. (PHI) for $1.65 billion plus adjustments. The purchase of the Conectiv Energy fleet, which includes 18 operating power plants and one plant under construction, is expected to close by June 30, 2010.

"The Conectiv acquisition represents a unique opportunity to transform our company by expanding our portfolio with scale in one of the most robust competitive markets in the country, giving us even greater geographic diversity that we expect will enhance value for our shareholders," said Jack A. Fusco, Calpine's President and Chief Executive Officer. "This adjusted free cash flow and EBITDA accretive transaction meets the criteria we established last year for financially disciplined growth and achieves our stated strategic goal of expanding with scale into an Eastern market.

"Calpine has long been a leader in generating clean energy at our natural gas-fired and geothermal plants. The Conectiv fleet of primarily natural gas-fired plants and renewable generation," Fusco said, "coupled with our decision to operate the two coal plants in the fleet on natural gas, reaffirms our strong sense of environmental stewardship. This transaction also reaffirms our view that natural gas-fired and renewable generation are the core components of the energy solution for our country's future and our commitment to that business model."

Financial and Strategic Benefits

Acquisition of clean fleet (with our decision to switch the two coal plants to natural gas) at an attractive price

  • Accretive to Adjusted EBITDA and Adjusted Free Cash Flow per share

Sizeable entry into strategically targeted Mid-Atlantic region

  • PJM East market features distinct market advantages, including a robust capacity market and a strong likelihood that increasingly stringent environmental regulation will result in the retirement of aging, inefficient coal units, creating new opportunities for our natural gas-fired fleet

Stable cash flows from contracted capacity revenues and new 565 MW contracted CCGT

  • Addition of long-term capacity revenues improves risk profile of overall portfolio
  • Conectiv's capacity-driven cash flows reduce Calpine's sensitivity to gas prices

Portfolio of growth opportunities

  • New, fully contracted 565 MW combined-cycle plant currently under construction, to be completed mid 2011
  • Additional expansion capabilities imbedded within portfolio

Transaction Summary

As a result of the transaction, Calpine will significantly increase its operating capacity in the PJM market, adding 4,490 MW.

Table 1:Asset Profile

Late-model combined-cycle 2,260 MW
Simple-cycle 771 MW
Conventional gas 868 MW
Internal combustion 22 MW
Solar  4 MW
New combined-cycle (under construction) 565 MW
PJM-E Capacity 4,490 MW

The capacities shown above include 3,860 MW of capacity expected to be in operation as of the close of the transaction and 65 MW of upgrades to be completed after the close of the transaction.

Although Calpine is purchasing Conectiv's electrical generation business, it will not acquire Conectiv's trading book, collateral requirements or load-serving auction obligations. In addition, Calpine will assume no off-site environmental liabilities or pre-close pension liabilities.

Funding

Calpine expects to fund the transaction with a combination of subsidiary-level debt and corporate cash. Though final financing terms are subject to change, Calpine has received a commitment from Credit Suisse as lead arranger, along with Citi and Deutsche Bank, for a $1.3 billion amortizing term loan at attractive rates and terms. This seven-year term loan allows Calpine to take advantage of the lower cost of capital of subsidiary-level financing without sacrificing flexibility.

Approvals and Time to Close

Under the contract, the parties are targeting a close of June 30, 2010. The transaction is subject to customary closing conditions, approval from the Federal Energy Regulatory Commission and antitrust review under the Hart-Scott-Rodino Act. No shareholder approval is required.

Advisors

Calpine's financial advisors were Citi and Deutsche Bank, and its legal advisor was White and Case LLP.



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