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Calpine Headed Toward Restructuring; Shake-Up 'Expected, Tragic'

Speculation was rampant Wednesday and bets were on a potential bankruptcy filing under Calpine Corp.'s eventual new top management, following the displacement of the debt-ridden company's CEO/founder Peter Cartwright. In the 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.

He would not speculate on the potential voluntary Chapter 11 bankruptcy filing, but a number of financial analysts did, and one of the major rating agencies, Standard & Poor's Ratings Services (S&P), downgraded Calpine to the lower rungs of below-investment-grade credit.

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 or less this year.

Many observers agreed that the adverse ruling last week in a Delaware court with The Bank of New York over the company's use of part of the proceeds from a natural gas assets sale earlier this year was the proverbial straw that pushed the board to take action.

S&P Tuesday lowered Calpine's credit rating further into the junk, "speculative" category of "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. In a brief discussion Wednesday with NGI he indicated the rating agency cannot speculate about a bankruptcy filing, but certainly any "restructuring," which is assured at this point, would have to include that option.

Worsening the situation, Wolinsky said, was last week'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 is 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 bankruptcy 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 Robert 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 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."

Derr, Calpine's lead director, was 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 Calpine interim CFO.

The next major announcements from the beleaguered merchant power plant developer/operator 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).

Calpine was built to take advantage of a deregulated electricity industry in the United States seemingly with a "build-them-and-they-will-come" philosophy for merchant, natural gas-fired generation plants. But the company'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 and steadily rising natural gas prices 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.

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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