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S&P Likes Calpine’s Canadian Natural Gas Trust
Saying it boosts liquidity, Standard & Poor’s Ratings Services gave a thumbs up to San Jose, CA-based Calpine Corp.’s decision last Thursday to create another Canadian natural gas trust surrounding a chunk of its oil/natural gas holdings in Western Canada. S&P said that Calpine expected to receive about $125 million in net proceeds from selling units in the trust, for which it will retain 25% ownership and a right to buy all of the gas at market prices.
S&P said the sale of part of its gas assets in a trust, which carries added tax advantages in Canada, was conceived during the recent $3.8 billion secured financing. Proceeds will allow Calpine, whose balance sheet has suffered for the past 20 months, to use the proceeds to pay down debt, buy more gas assets or invest in additional capital programs. The trust units are considered to be equity, not debt, so Calpine’s current bondholders are not further de-positioned, S&P said.
The one caveat offered by the rating agency is that with the creation of the Calpine Natural Gas Trust (CNG Trust), the company has “unhedged a relatively small portion of its fixed-price gas position, which could lead to some cash flow volatility if the gas quantities are not re-hedged.”
Calpine earlier filed a preliminary prospectus with Canadian provincial securities regulators as an initial step leading to an initial public offering (IPO), Calpine said, adding that the U.S.-based power plant developer/operator intends to keep 25% of the trust units sold. Potentially about 8% or 9% of Calpine’s 1 Tcf overall U.S.-Canadian oil/natural gas holdings would be part of the trust, according to a company spokesperson in San Jose.
“Calpine’s participation in the CNG Trust will allow it to increase its competitiveness in the acquisition and development of additional natural gas reserves in Canada to fuel its power generation portfolio in North America,” Calpine said in its announcement of the trust establishment. “The proceeds generated from CNG Trust will be used for general corporate purposes.”
The establishment of trusts is a common financing mechanism in Canada and carries considerable tax advantages, according to Calpine’s spokesperson. It is established with the equivalent of an IPO, and Calpine, in retaining a 25% interest, will have members of the trust board and be able to influence the operation of the reserves while the parent company get proceeds to help improve its liquidity. Improving Calpine’s liquidity has been part of a company-wide initiative for the past 18 months in the wake of the Enron and wholesale power market meltdowns.
Calpine’s spokesperson said there is no current estimated value of the trust, nor is there a current timetable for how soon it will be put in place, but based on the earlier one Calpine constructed, it should be a matter of a few months.
“CNG Trust intends to acquire select Calpine-owned natural gas and crude oil properties in several natural gas and oil fields throughout Alberta, Canada, including interests in the Markerville, Sylvan Lake and Innistall areas,” Calpine said in its announcement. The average daily net production of the initial properties for the six months ending June 30 was 28 MMcfe/d of natural gas, with proven reserves of 83 Bcfe.
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