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Calpine Files for Chapter 11 Bankruptcy in New York City Federal Court

With $2 billion in debtor-in-possession (DIP) financing from two major banks, San Jose, CA-based Calpine Corp. as widely expected filed for voluntary Chapter 11 bankruptcy Tuesday in the same federal court in lower Manhattan in which Enron Corp. four years earlier made a similar filing.

The company also announced late Tuesday after normal business hours that "certain of its direct and indirect subsidiaries and affiliates in Canada" intend to file for creditor protection under the Companies' Creditors Arrangement Act (CCAA).

Calpine's board, led by Kenneth Derr, the former Chairman and CEO from Chevron, determined that bankruptcy was unavoidable, a "prudent step and the best way to obtain the financing" needed to keep operating to allow for a possible successful restructuring, the company said.

Deutsche Bank and Credit Suisse First Boston, as joint lead arrangers and joint bookrunners, gave commitments for up to $2 billion of secured DIP financing, including a $1 billion revolving credit facility and $1 billion term loan. After bankruptcy court approval in the Southern District in New York, the financing, along with cash from operations, will be used to keep operating, including paying employees and suppliers, Calpine said.

Calpine said the bankruptcy filing and financing was essential for it to be able to continue operating its fleet of generating plants scattered across 21 U.S. states, and in Canada and Mexico. It said it expects this move to "strengthen its balance sheet, protect its assets and enhance the value of its business," which is staggering under the weight of more than $17 billion in debt and a recent Delaware court order to return $313 million of oil and gas asset sales proceeds to some of its bondholders.

The parent company said that joining in the bankruptcy filing is Calpine Generating Co. LLC, and "many of its other subsidiaries."

In his ninth day as CEO, noted turnaround specialist Robert P. May tried to emphasize that the company expects to maintain normal operations during the restructuring process, noting Calpine plans to keep all of its power plants available for operation. "We intend to move through this restructuring process as quickly as possible to regain our financial health and to take the necessary steps to become a stronger and more competitive energy provider," May said.

"With our new financing we will have additional financial flexibility and sufficient liquidity to meet our obligations going forward," said May, acknowledging that the company will have to change its business model "in light of the ongoing evolution of competitive power markets and our current financial condition." He said efforts to sell off assets and refinance over the past two or three years have not worked "to offset the cost of Calpine's substantial debt."

Calpine hopes that Chapter 11 will give it the breathing room to take advantage of what May called "a strong foundation of high quality assets and a professional and experienced work force."

Along with the filing, Calpine made two other requests of the bankruptcy court, one of which may be controversial in some states where it operates. The "routine" request was for approval to continue paying employees wages, salaries and benefits without interruption, but the second one asked for the court to set aside "certain" of Calpine's contracts, including some power sales agreements in which the price paid to the company for electricity is what Calpine called "significantly below its cost or market prices."

On Monday, California's attorney general petitioned the Federal Energy Regulatory Commission (FERC) to force the company to continue one long-term contract it has with the California Department of Water Resources (DWR), which the AG described as 1,000 MW at the fixed price of $59.50/MWh through 2009.

Calpine said it established a toll-free restructuring information line, (866) 504-6370, for employees, suppliers, customers, investors and other interested parties. And it will post information regularly on its website (www.calpine.com).

The month of December has been an escalating horror story for one of the nation's largest independent electricity generators. In addition to the California AG's FERC filing this week, the Delaware Supreme Court late last Friday rejected the company's request to turn back a lower court ruling in the state regarding the $313 million due bondholders by Jan. 22, 2006 (see Daily GPI, Dec. 20).

Simultaneously, a leading business columnist with the Los Angeles Times, Michael Hiltzik, Monday wrote off the company basically as DOA in bankruptcy.

"Questionable creditworthiness has compounded Calpine's problems," Hiltzik wrote. "Its customers -- primarily utilities -- won't sign contracts for power unless Calpine guarantees the deals by pledging letters of credit or cash collateral; they fear, quite reasonably, that any long-term contracts that provide them power at a decent price would be abrogated in a bankruptcy filing.

"As a result, Calpine can't sell all of its electricity at a profit. In the first nine months of this year, its power plants operated [nationally] at a combined 46% capacity, a disastrously low level. In that period, the company lost $684 million."

While Calpine's new CEO May has still not announced what direction the company will take, speculation following the Delaware court ruling continued to point toward the bankruptcy filing that inevitably came very late Tuesday. On Monday, columnist Hiltzik speculated this could lead to the company's ultimate extinction, and an even more firm return to utility owned and operated power generation in California and elsewhere.

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