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Calpine's Founder, CEO Departs; Court Ruling, New Financial Strategy Loom

Calpine shares lost more than half (71 cents) of their value on Tuesday after the company announced the departure of founder and CEO Peter Cartwright and CFO Robert D. 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 T. Derr has been named chairman and acting CEO. Derr retired from Chevron in 1999 after serving 11 years as its chairman CEO. Eric N. Pryor, executive vice president and deputy CFO, will serve as interim Chief CFO.

The next major announcements from beleaguered merchant power plant developer/operator Calpine Corp. will be the naming of a new CEO or a final ruling from an adverse Delaware court case finding that the company misused the proceeds of recent natural gas asset sales. Those events could happen as early as the end of this week or next, followed quickly by an outline of a new financial strategy for removing the San Jose, CA-based company from its debt quagmire, according to company officials.

A new chief executive officer could be named any day now, and the person could come from within Calpine's existing executive ranks or (more likely) from outside, according to a Calpine spokesperson. Final filings in the Delaware court are due Thursday, so the Vice Chancellor (Judge) Leo E. Strine, Jr. could issue a final ruling on Friday, although more likely it will be next week (see Power Market Today, Nov. 28).

When the new CEO is named by Derr, a conference call will be held, and the company's new financial strategy outlined, the spokesperson said. "I imagine our next news to announce will be from the court in Delaware," the spokesperson said.

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.

Last week, Calpine was directed by a Delaware court to work out a plan to return $313 million in proceeds from asset sales back to The Bank of New York, a collateral trustee and one of the plaintiffs filing the lawsuit in the Delaware Court of Chancery. The court's Strine ruled that using the proceeds for that purpose was "impermissible" under the indenture (or restrictions) attached to first and second lien bonds.

Standard & Poor's Ratings Services (S&P) immediately placed the company's "B-" corporate rating on CreditWatch with negative implications, saying the decision "materially harms the company's weak liquidity profile."

S&P credit analyst Jeffrey Wolinsky said, "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."

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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