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Calpine Ruled Against by Delaware Court in Oil/Gas Asset Sale Challenge

Power plant developer/operator Calpine Corp. Tuesday was directed by a Delaware court to work out a plan in the next week for returning more than $300 million in proceeds from oil/gas asset sales whose earlier distribution had been challenged by two sets of corporate bondholders. The monies need to be distributed back into The Bank of New York, a collateral trustee and one of the plaintiffs filing the lawsuit in the Delaware Court of Chancery.

Vice Chancellor Leo E. Strine, Jr. ruled Tuesday that Calpine had improperly used the proceeds. Standard & Poor's Ratings Services (S&P) wasted little time later in the day in placing its "B-" corporate rating on Calpine and its subsidiaries along with a "CreditWatch with negative implications" designation for the future. Calpine stock closed Tuesday at $1.39/share, down 20.5% and near its 52-week low ($1.32/share).

A Calpine spokesperson said the company was limited legally in what it could say about the ruling, referring inquiries to a prepared statement. Calpine filed the original lawsuit and asked for expedited processing when The Bank of New York refused to release any more proceeds from Calpine's sale last July of basically all of its oil/gas assets to Rosetta Resources, which netted about $852 million.

Before the bank halted the proceeds, Calpine had used more than $300 million of the net returns to buy natural gas for its power plants, and the Delaware court has found that was "impermissible" under the indenture (or restrictions) attached to first and second lien bonds. The court vice chancellor left it to Calpine and the bondholders to work out a remedy by Dec. 1, and has indicated he would act quickly after that.

S&P characterized the court ruling as "unfavorable" since it keeps frozen $400 million of sales proceeds in The Bank of New York, and requires the power plant operator to return the $313 million used earlier to the trustee account.

"This development materially harms the company's weak liquidity profile, however, Calpine's significant cash balance and its ability to generate cash from the sale of gas assets in storage should allow the company to meet the potential liquidity demands arising from the lawsuit," S&P said in its analysis.

Even more important, according to S&P's New York City-based credit analyst Jeffrey Wolinsky, "the court decision heightens concerns about Calpine's ability to sell or monetize assets so that management can execute its delivery plan. Of particular concern is the effect of the court's decision on Calpine's ability to monetize portions of the Geysers [California geothermal] facility to meet its liquidity needs."

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