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Calpine Takes Plunge into Chapter 11 Bankruptcy

Calpine Corp. and the independent power industry hope to catch their collective breath over the holiday week after the power plant poster child charts a new future in its $27 billion Chapter 11 bankruptcy in federal court in lower Manhattan, not far from Wall Street where it once basked in a Google-like aura in the late 1990s.

Too much debt and over-building in a shriveled-up, post-Enron merchant energy world left Calpine with D-rated credit and a date in bankruptcy court Jan. 5 to get approval to set aside as many as eight unprofitable electric supply contracts, the largest with the state of California.

While Standard & Poor's Ratings Services and Fitch Ratings lowered Calpine and some of its subsidiaries to "D," meaning some obligations are in default, S&P kept current recovery ratings in place for the companies, noting that if in the near future there is insufficient information on Calpine's plans and prospects for recovery, the rating service will withdraw the recovery ratings.

In the meantime, Canadian affiliates, such as the Calpine Power Income Fund, working with its own legal and financial advisors, has filed in Canada under the Companies' Creditors Arrangement Act (CCAA) and it is evaluating any impact on the tolling agreement and the manager loan with Calpine and assessing the range of options available in the event Calpine defaults on either obligation connected with the Income Fund.

Similarly, in the United States, a partner in the Acadia Power Plant, an, 1,160 MW natural gas-fired generation facility in Eunice, LA, Cleco Corp., issued a statement saying it is "prepared to protect its interests" in the bankruptcy proceeding. A Cleco subsidiary holds a 50% interest in the Acadia plant.

"Calpine's decision to file for bankruptcy is unfortunate, but we're not surprised," said Cleco CEO Michael Madison in a prepared statement last Wednesday. "We've been preparing for this possibility for quite some time." He said under the Acadia plant terms, Cleco's subsidiary received preferred cash and income distributions from the power plant.

"We're also prepared should [Calpine Energy Services] reject the tolling agreements for the plant. We then will actively work to realize the value of the plant -- both through marketing its output and by optimizing the asset itself, if necessary," said Madison, who also offered that he was "unclear" on whether the bankruptcy filing could have an impact on Cleco's contract to buy 200 MW from Calpine, beginning Jan. 1.

In its first three days after the filing, Calpine had many other questions swirling around its Chapter 11 filing, but it essentially got what it wanted from the court and the market -- that is, time to regroup and totally re-strategize its future. As part of gaining the financial resucitation, Calpine maintained it was carrying on business as usual.

In response to questions about its future ability to obtain natural gas to run its sizable fleet of power plants, the company said in a prepared answer that Chapter 11 "should remove any financial concerns that natural gas suppliers might have had about selling to Calpine. Under Chapter 11, any amounts owed for natural gas delivered post-filing are entitled to priority status and must be paid. Thus, gas suppliers should feel confident that we can and will pay for post-[bankruptcy] petition delivers."

On Thursday, U. S. Bankruptcy Judge Burton R. Lifland took the first action on Calpine Corp.'s initial motions by granting the company's immediate use of $500 million of some $2 billion debtor-in-possession (DIP) financing and authorizing the company to continue paying employee wages, salaries, and benefits during the court-supervised restructuring. In addition, Judge Lifland set a hearing for Jan. 5 on Calpine's motion to suspend some of its below-market power contracts, two of which are in California, totaling 1,200 MW.

Calpine CEO Robert P. May praised the judge's prompt approval on the first-day motions, which he said will "help Calpine continue its normal business operations without interruption."

Calpine's court motion by its outside legal counsel, Kirkland & Ellis, LLP, said that the company estimated it would lose approximately $1.2 billion if required to perform through the end of the eight identified contracts selling power at below-market prices. In another way of making its argument, Calpine's attorneys said the three most unprofitable contracts would cause the company to lose $1.1 billion in 2006 alone.

The eight projects as listed by Calpine in its motion are:

For one major contract with California's DWR, the California Attorney General's office already filed a petition with the Federal Energy Regulatory Commission asking it to prevent Calpine from walking away from its contractual obligations. In setting the after-New Year hearing, Judge Lifland issued a temporary restraining order (TRO) against FERC taking any action ahead of his action on the company's motion.

"In both fixed rate and heat rate contracts, whether the contract is profitable turns on two key components: the price of natural gas and the price of electricity (in the regions where Calpine sells its power), said Paul Posoli, executive vice president with Calpine and president of Calpine Energy Services in an affidavit filed with the Chapter 11 petition. "The contract becomes unprofiable if the price of natural gs rises to a point where the cost to Calpine to generate electricity is higher than the contract price at which Calpine agreed to sell that electricity."

Posoli said natural gas wholesale prices have risen steeply, citing examples of supplies now costing Calpine two to three times higher than the average gas price over the past five years. He said in preparing the bankruptcy filing the company undertook an extensive process to determine which contracts were unprofitable and that it would ask the court for authority to reject them.

In stating its case, Calpine said its total consolidated debt was about $18 billion, consisting of secured construction/project financing, capital lease obligations, senior notes, various other secured and preferred instruments, and unsecured notes and borrowings under lines-of-credit, leaving the national power plant operator facing approximately $3.9 billion of net operating loss carry-forwards and tax credits. Calpine asked the court to allow it to reject all eight of what it called its "unprofitable contracts," effective as of the petition date (Dec. 20) for its bankruptcy.

In response to separate questions from NGI, Calpine's San Jose, CA-based spokesperson Kent Robertson said it will be business-as-usual with high profile projects, such as a partnership with General Electric to build a new, super-efficient natural gas-fired power plant in Riverside County east of Los Angeles, the long-stalled, partially built Otay Mesa plant-and-San Diego Gas and Electric Co. power supply contract, and a still-developing energy trading partnership with Bear Stearns, CalBear Energy.

"CalBear Energy is a separate corporate entity wholly owned by Bear Stearns and is not involved and won't be affected by the Chapter 11 filing," Calpine said in a prepared statement. The Calpine trading floor in Houston will continue to operate with the same mission of supporting the "efficient operation of Calpine's fleet of power plants."

Calpine has 41 of its 91 power plants in California with 19 being the units at the Geysers geothermal complex in northern California, the biggest geothermal project overall in the world. Of the remaining 22 plants in California, there are about 4,500 MW of capacity collectively, with about 2,250 MW under contract, according to Robertson, although he said that the total should be qualified as not all of the output is tied to specific generation units. Some 675 MW are tied to unit-specific peaking contracts, and another 350 MW are qualifying facility (QF) contracts.

As Robertson said earlier this month, Calpine's proposed Skipanon liquefied natural gas (LNG) project in the mouth of the Columbia River on the Oregon side "continues, and at this point, there are no changes to our plans."

CEO May said the court's authorization Thursday will allow the company "to perform under existing and new power and gas trading contracts and pledge collateral in support of transactions." In turn, May said this should "provide additional assurance that Calpine power plants will continue to provide reliable supplies of electric power to the markets that depend on us."

DIP financing okayed by the court will provide Calpine with "liquidity and flexibility" to continuing running its power plant fleet, which totals some 27,000 MW with facilities in 21 states, several Canadian provinces and Mexico, May said.

The company reiterated it has established a toll-free restructuring information line for all of the stakeholders (1-866-504-6370).

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