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Calpine Points for Restructuring After Turbulent Week

With its board dismissing its CEO/founder and Wall Street expecting a bankruptcy filing soon, San Jose, CA-based Calpine Corp. received a reprieve of sorts in a Delaware court on Friday, giving the company until Jan. 22 to return $313 million to bondholders from the sale last summer of substantially all of it oil and natural gas assets.

Whether the added seven weeks will allow the national independent power producer to avoid a cash implosion was unclear Friday, but the company's financial situation appeared to be worsening almost daily.

Calpine said it will immediately file an appeal with the Delaware Supreme Court, requesting expedited treatment, as soon as it receives the Chancery Court's final order. Calpine had sought 90 days and a lesser amount ($199 million) needed to be returned from the Delaware Chancery Court in Wilmington, and bondholders were asking for all the money by Dec. 9, following a ruling just before Thanksgiving finding Calpine misappropriated part of the more than $800 million in proceeds from the oil/gas assets sale to Rosetta Resources last July.

In a separate announcement Friday, a financing affiliate of Calpine -- Canadian-based Calpine Power Income Fund -- said it is reviewing its options regarding its future commercial relations with the power generation company. It mentioned concerns about the developing situation and how a bankruptcy filing would impact the operation of the Fund's Canadian and U. S. power plants.

Calpine told the Delaware court Thursday that an immediate return of the monies would threaten its already teetering financial situation, causing "severe financial disruption." Calpine and other parties on Wednesday filed separate memoranda with the court responding to Vice Chancellor Leo Strine's Nov. 22 ruling.

"Calpine believes an appropriate remedy would be the restoration of $199 million, plus accrued interest at a rate of 3.5% per annum to the collateral account or the use of that amount for reinvestment in qualifying designated assets or repurchase of secured debt," said a Calpine spokesperson. Wilmington Trust Company, as trustee for the second lien bondholders, sought the full restoration by the end of next week.

"As a consequence, Calpine continues to evaluate its options, including the possibility of filing for bankruptcy," the company said in a prepared statement.

Calpine also reported on a status conference held Nov. 22 in a second pending legal action in a New York state court brought by the hedge fund Harbert convertible Arbitrage Master Fund, Ltd., and related parties, holders of Calpine's 6% Contingent Convertible Notes due 2014. Calpine continued to maintain that it was in full compliance with the indenture restrictions related to the Convertible Notes.

By week's end Calpine found its stock cut to less than 30 cents/share, downgrades in its credit ratings further into the junk category by the three major rating agencies, and uncertainty over whether in the days and weeks ahead it will have enough cash to pay its debt costs, take care of operating the nation's largest fleet of merchant electric generating plants, and satisfy the Delaware court's latest ruling.

Moody's Investors Service Friday lowered Calpine another notch -- ten levels below investment grade -- to "Ca". It called this a "very speculative" rating with a negative outlook, all of which reflects Moody's opinion that a default by Calpine on its $17.7 billion mountain of debt is likely.

"The downgrade also reflects expectations that poor results will continue in the near term due to difficult market conditions for the company's natural gas-fired generating fleet," Moody's said.

Under a headline that cited Calpine's references Thursday to a "financial emergency," the Wall Street Journal reported Friday on the company's dire-sounding filing to the Delaware court, and Fitch Ratings response leaving the first- and second-lien bonds involved in the court case at their current ratings (B and B-, respectively), but lowering the rating on Calpine's $5.6 billion of senior unsecured notes and convertible debt to double-C (CC) from a triple C-minus (CCC-).

Most of the buzz that picked up momentum in the energy industry and among the financial community by week's end had bankruptcy being the ultimate outcome for Calpine following a week that began with its board getting rid of Peter Cartwright, 75, the former General Electric nuclear engineer, who founded Calpine in 1984 and was its CEO until last Monday, along with long-time Executive Vice President/CFO Robert Kelly, 48.

In the immediate aftermath, the head of the California Independent Energy Producers (IEP) Association called the latest setback for the once-highly regarded merchant power plant company both "expected and tragic." Cartwright was called a "visionary" by Jan Smutny-Jones, head of the Sacramento, CA-based IEP group, despite Calpine's inability to get out from under its debt load.

Jon Kyle Cartwright (no relationship to the dismissed CEO), an institutional research director at BOSC Inc., a firm owning Calpine shares and selling the company's bonds, said Calpine's deposed CEO and CFO were "fighting to keep the company out of bankruptcy," according to a business report in the Los Angeles Times. Now, he told the LA Times his firm is expecting the company in the next 30 days to announce some form of restructuring, possibly including bankruptcy.

Elizabeth Parrella, a Merrill Lynch research analyst, said her firm believes the top management change is "a strong indication that the [Calpine] board is considering a bankruptcy filing, or at least a substantial restructuring of the debt outside bankruptcy." Parrella noted that Calpine remains "significantly liquidity challenged," with net debt at $17.7 billion, and what she called "weak EBITDA" (Earnings Before Interest Taxes Depreciation and Amortization)" of $1 billion of less this year.

Standard & Poor's Ratings Services Tuesday lowered Calpine's credit rating further into the junk, "speculative" category to "CCC" with a negative outlook. S&P analyst Jeffrey Wolinsky expressed strong concerns about Calpine's future ability to effectively sell or monetize assets to reduce its nearly $18 billion in debt. Worsening the situation, Wolinsky said, was last month's unfavorable court decision against Calpine's past handling of more than $300 million for the sale of its natural gas assets this summer.

"Pete Cartwright was a great guy, a visionary who really built Calpine from a very, very small enterprise into a premier independent power producer," said Smutny-Jones, acknowledging that "obviously the last four years have been a challenge." He said he viewed the board's decision to name a new CEO and CFO at the beleaguered company as a "change of coaches."

In response to whether this portends to a bankrutpcy filing, Smutny-Jones said "I have to imagine the company has all sorts of options open to it and is looking at all of them," Smutny-Jones said. "Mr. [Board Chair/Interim CEO Kenneth] Derr is someone well respected in the business community, and that by itself will send a very positive business signal."

S&P said it added the "negative outlook" to the lower rating (from a previous "CreditWatch with negative implications") because it thinks the Calpine board's decision to get rid of both Cartwright and the long-time CFO Kelly signals that it may "have a greater willingness to consider a financial restructuring as an option."

Smutny-Jones said he has no way of knowing what the Calpine board's intent is in terms of naming a new permanent CEO, although he expects it will be done relatively quickly. In response to a question about whether the company will be greatly downsized through selling off of various power plants in the 21 states where it still has operations, Smutny-Jones said Calpine is involved in various power markets with a mix of challenges and opportunities, but in some, such as California, he sees a lot of upside because of a "significant amount" of growth.

"I think [in California] they are probably well positioned to take advantage of the growth when the opportunity presents itself. And that is all dependent upon all the activities now unfolding at the California Public Utilities Commission and California Independent System Operator (CAISO). They obviously have developed some very good assets; their plants run very well, so I would expect they will do a region-by-region analysis."

He doesn't expect anything like a "fire sale" of Calpine assets to commence, although he acknowledged that the amounts of debt and the adverse court ruling have posed a "very significant challenge" for the company.

Calpine shares lost more than half of their value (71 cents, or 56.8%) Tuesday to close at 54 cents/share, after the company announced the departures of Cartwright and Kelly. In light of the company's $17 billion debt load and recent court decision that it must return more than $300 million in proceeds from oil and gas asset sales to corporate bondholders, the company's board said management changes are "essential to better address Calpine's financial challenges and to provide a new direction for the company."

Calpine's lead director Kenneth Derr has been named chairman and acting CEO. Derr retired from Chevron in 1999 after serving 11 years as its chairman and CEO. Eric N. Pryor, executive vice president and deputy CFO, will serve as interim CFO.

Built on a strategy of an ever-deregulated electricity industry in the United States and a sort of "build-them-and-they-will-come" philosophy for merchant, natural gas-fired generation plants, Calpine's stock price tumbled and never recovered in the wake of the Enron meltdown in 2001 and the increasingly decreased margins in the merchant power plant sector that followed. Along with the continuing build-up of debt and interest expenses, the company's credit ratings have plummeted to junk bond levels.

"Pete founded Calpine and has been the driving force behind the company's tremendous growth in the North American power industry," Derr said Tuesday in a statement. "His 20-plus years of leadership have culminated in Calpine becoming one of North America's largest power producers."

In building the largest merchant gas-fired power generation fleet in the nation, Calpine also has piled up a mountain of debt and has been selling off assets in a struggle to meet its payments. Earlier this year it sold all of its oil and gas assets to Rosetta Resources for about $852 million. It used some of the proceeds to purchase gas to fuel its power plants. However, that move was challenged by two sets of corporate bondholders.

Calpine owns, leases and operates power plants in 21 states and in three Canadian provinces and is building a plant in Mexico.

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