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Calpine Continues Legal Skirmishes Amid Bankruptcy Expectations

Financially battered Calpine Corp. ended the week squarely facing a date with destiny, but how soon the day would come was still unknown.

It could be Jan. 22, the date on which a Delaware court has ordered Calpine to return nearly $313 million in asset sale proceeds from an alleged misapplication of the funds, or it could come earlier in a Chapter 11 filing by the national independent power producer, which has been crushed by more than $17 billion in debt.

Most immediately in play is an appeal to the Delaware Supreme Court by Calpine to which last Thursday the court granted expedited treatment and set oral arguments this coming Thursday (Dec. 15). "We would expect a ruling by the court shortly thereafter," said Merrill Lynch analyst Elizabeth Parrella on Friday while continuing her recommendation of "sell" on Calpine's badly depressed stock.

"Should Calpine lose its appeal, we would expect it to file bankruptcy proceedings shortly thereafter and in any event by Jan. 22," Parrella said. "We continue to rate the stock as a 'Sell' as we believe that in a bankruptcy there would be no residual equity value."

In the meantime, the other developments Wall Street will be watching regarding Calpine this month are an announcement from the company on the naming of a permanent new CEO, and court hearings in Nova Scotia on Calpine Canada's bondholder litigation scheduled for Dec. 19-20. There is also a pending lawsuit in a Texas state district court in Harris County (Houston) that Calpine filed last month against one of its customers, Utility Choice Electric (UCE), an energy service provider, seeking $16 million in alleged unpaid bills for bulk power.

While Calpine was being publicly chastised by the Texas company for the lawsuit and its allegations, a peace agreement of sorts was reached last Thursday in the Delaware Chancery Court involving Calpine's bondholder trustees. The two sides agreed to drop pending actions and await the court's Jan. 22 deadline for the San Jose, CA-based power plant operator to restore the previously misappropriated oil/natural gas asset sale proceeds. As part of the stipulation in court, Calpine will drop its request earlier in the month for a temporary restraining order (TRO) against Wilmington Trust Company, and Wilmington agreed not to issue a notice of default on some $3 billion in bonds due between 2007 and 2013.

The latest move -- reached mid-day Thursday -- is subject to modification if there is any reversal or modification by the Delaware Supreme Court of the lower Chancery Court's final order directing the restitution of the more than $300 million next month. With a request for a TRO in play and the threat of a default notice on all the bonds, Calpine and Wilmington talked into the wee hours early Thursday morning. The negotiations were the latest standoff in the high-stakes poker game being played out that may hasten Calpine's move into Chapter 11 bankruptcy.

"Calpine agreed to withdraw its motion for a TRO under a stipulation reached with the Second Lien Trustee [Wilmington Trust] and an Unofficial Steering Committee of Second Lien Debtholders of Calpine," the power plant operator said, noting that it had been notified that the unofficial committee currently includes the holders of more than 50% of each of the Second Lien Notes due 2010, 2011, and the Second Lien Notes due 2013, and the holders of more than 30% of the Second Lien Notes due 2007.

In return, the Second Lien Note trustee and the unofficial committee agreed not to push "directly or indirectly" to accelerate the court's Jan. 22 deadline or the filing of a notice of default. Specifically, in play now subject to appeals by both sides, is Monday's final ruling by court Vice Chancellor (judge) Leo E. Strine, Jr. giving Calpine until Jan. 22 to restore to the Bank of New York collateral account $311.78 million, plus interest.

A side issue emerging in news reports is what Calpine's natural gas suppliers may do in terms of extending credit for supplies the power plant operator depends on to operate its fleet of gas-fired generating plants in 21 states. Calpine is the nation's single largest buyer of natural gas, and earlier this year it sold all of its own gas reserves to Rosetta Resources in a transactions whose proceeds are the focus of the Delaware court proceedings.

In its request earlier in the week for the TRO from the Delaware court against further legal action by Wilmington, Calpine said enforcing the default on the $3 billion in notes would "trigger other defaults and irreversibly damage the company," according to the Reuters report, which cited analysts and legal experts as agreeing such a default notice would mean an almost immediate bankruptcy filing.

One ratings company executive said bankruptcy can help with anxious suppliers, such as the natural gas providers who are watching Calpine's situation daily as it unfolds and are thought to be unlikely to sell gas to Calpine on credit. Once in bankruptcy court, the suppliers don't have to worry about getting paid, the ratings executive told Reuters.

In the Texas lawsuit initiated by Calpine against UCE, the lawyer and executives for the energy service provider issued a news release alleging that the state court had agreed with its contention that Calpine was acting improperly is suing the company and subsequent remarks about UCE its representatives made in the news media.

UCE's representatives characterized Calpine's lawsuit and public comments as the actions of a "collapsing company grasping at straws to come up with cash quickly in an unfortunate situation." UCE said that it now thinks that even Calpine "realizes it acted hastily and made an enormous mistake."

UCE attorney Rob Potosky said a problem for everyone is the fact that Calpine may soon file for Chapter 11 bankruptcy protection, if news media reports prove to be true, and "that would leave UCE stuck holding the bag when (and if) UCE also prevails on its claims against Calpine for damages."

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