Calpine Corp., the San Jose, CA-based power plant developer, announced last week that it increased its credit line to $2 billion and has downsized its aggressive natural gas turbine-buying program by up to $3 billion over the next two years. The reaction from Fitch Ratings was to lower the ratings on Calpine’s senior unsecured debt from BB+ to BB and the company’s convertible trust preferred from BB- to B, but also to remove its “watch negative” rating.

Calpine announced that it closed a new, $1.6 billion secured credit facility with eight banks, providing the merchant power plant developer with combined cash borrowings and letters of credit of up to $2 billion. Securing the new credit is tied to the company’s North American natural gas properties, its Saltend power plant in the UK and nine U.S. power plants in which the company has interests — four in operation and the rest under construction. As a result, Fitch said the amount of protection has been reduced for unsecured bondholders, hence its ratings decrease.

In what it called a “significant restructuring” of its gas and steam turbine purchasing program, Calpine reduced its agreements with major turbine-makers, such as GE Power Systems, Siemens Westinghouse, and Toshiba, to defer (81 gas turbines) or cancel (34 gas, 1 steam) orders, resulting in spending decreases by about $1.2 billion this year and $1.8 billion in 2003. The company said it has 127 turbines still on order.

“We’ve been working with all of the turbine manufacturers and have had good cooperation from all of them,” said Peter Cartwright, Calpine’s CEO/founder, who noted that the company is committed to “overkill liquidity” this year with a new cost-cutting program companywide and the “very large, complicated” new credit facility. “This is an important step in our continuing program to strengthen Calpine’s liquidity; we’re committed to building a substantial liquidity cushion.”

In response to Fitch’s downgrade, Calpine CFO Bob Kelly said he was “very, very disappointed” that the rating firm did not wait until after his planned meetings this week with all of the three major rating agencies. “Over the last six months, Calpine has raised over $6 billion,” Kelly said. “This new facility demonstrates our ability to continue to raise capital even in today’s difficult financial and power markets.

“We want to attain an investment-grade credit rating; it is essential in a capital-intensive industry,” Kelly said, noting that the company wants to get its debt-to-equity ratio down to about 65% debt from its current 74%. It could sell some additional stock later in the year to help achieve that, he said, noting that the post-Enron power business is becoming “almost a cash business and you have to be an A or double-B rated company to be in this business.”

In regard to the turbine cancellations, Calpine said it will record a non-cash, pre-tax charge to earnings in the first quarter of this year of approximately $161 million, including financing costs to date.

Given the refinancing and the turbine-buying revisions, current plans would point toward Calpine having about 57,000 MW of total generating capacity in operation by 2005, compared to the aggressive 70,000 MW goal it set last year. Currently, Calpine’s Ron Walter, senior vice president for planning/development, said about 12,000 MW of baseload and peaking plants are in operation, and in excess of 23,000 MW are expected to be operational the end of this year, with about 65% of that output hedged.

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