Chapter 11 Odds Grow for Calpine
The outlook dimmed Friday for Calpine Corp. as a judge ordered the nation’s largest independent power producer to pay $313 million by Jan. 22 -- a blow that could help push the San Jose company into Bankruptcy Court.
For Calpine, cash-strapped and laden with more $17 billion in debt, Friday’s ruling is only the latest setback to pummel the value of its stock and bonds and threaten its corporate survival.
The onetime Wall Street darling has suffered a series of woes that grew out of Calpine’s aggressive expansion in a weak power market and other management missteps.
On Tuesday, the company ousted Peter Cartwright, Calpine’s founder, chairman, chief executive and president, as well as Chief Financial Officer Robert D. Kelly. Lead director Kenneth T. Derr became chairman and acting CEO at the company, which operates more than 90 power plants and has more than 3,300 employees nationwide. More than a third of the plants are in California, and they would continue to operate even if the company filed for bankruptcy protection.
Given recent events, “most of us believe there’s a filing in the future, and that it’s now a timing issue,” said Jon Kyle Cartwright, director of institutional research at BOSC Inc., a firm that has a “buy” rating on some Calpine bonds.
In a court filing this week, Calpine said the judge’s Nov. 22 ruling that the company had misused $313 million had “severely undermined” its ability to do business. The company asked the court to require a payment of no more than $199 million and grant it 90 days to come up with the money, saying a shorter deadline “could devastate the company and incalculably harm many of its stakeholders.”
Vice Chancellor Leo Strine of Delaware Chancery Court bristled at Calpine’s suggestion that he was to blame for the company’s financial woes.
“I had not known that I was managing Calpine for many years,” Strine said Friday. “For a company with $27 billion in assets to say that a ruling sought from this court would determine their fate is astounding as a business proposition and questionable as a legal proposition.”
Strine reiterated his finding that Calpine improperly spent $313 million in proceeds from a natural gas sale, as bondholders alleged, and ordered the company to pay that amount, plus interest, into an escrow account in 50 days. Bondholders had sought payment by Dec. 9.
Calpine said it would appeal the ruling.
The company’s stock, removed this week from the S&P; 500 index and headed for delisting by the New York Stock Exchange, fell 12 cents Friday to 28 cents a share. It once sold for $56.99 a share.
Calpine bonds sank as well, falling further after the company’s debt rating, already at “junk” levels, was downgraded again by Moody’s Investors Service and Standard & Poor’s.
Still, some analysts saw positive signs Friday, noting that the company at least had proposed partial payment to the bondholders. In addition, Calpine made $45 million in scheduled interest payments late Thursday and offered Friday to buy back $400 million in debt, using money that was earmarked for debt repayment only.
“Management would not do any of those things if they were going to file for bankruptcy imminently,” said Cartwright, the BOSC analyst. But Dot Matthews, senior analyst at CreditSights Inc., said she was more puzzled than reassured by the company’s debt interest payment. She figures Calpine has less than $300 million in unencumbered cash available.
“Their backs are really against the wall,” she said. “It’s highly doubtful that they can come up with the money” called for by Friday’s ruling.
Matthews said the company’s interest payment might be an effort to buy time to prepare its Chapter 11 bankruptcy petition and line up financing to operate afterward.
Calpine’s future looked brighter in the late 1990s, when natural gas was cheap, the country needed more power plants and regulated electricity markets were opening to outsiders.
Calpine’s plan was to build generating plants that would be fired by natural gas and would be more efficient than older plants. The cost savings would let Calpine undercut competitors in what was expected to be a growing wholesale power market.
“That was the bet they made, and it turned out they were wrong,” Matthews said.
California’s 2000-01 energy crisis and the collapse of Enron Corp. in late 2001 damped the nation’s appetite for deregulation. At the same time, a flurry of power-plant building depressed prices.
In recent years, Calpine irritated its bondholders by tying up assets with more debt. Former CFO Kelly acknowledged that nearly all the company’s assets were encumbered.
A steady ascent in natural gas prices, which hit record highs this year, contributed to Calpine’s woes. The company, which consumed so much of the fuel for its plants that it had become the nation’s largest purchaser of natural gas, made things worse when it sold much of its own natural gas production this year. That forced it to buy more fuel on the open market, where sellers increasingly sought collateral and cash payments because of Calpine’s low debt rating.
“Other people adjusted and stopped building gas plants, but they just kept on building,” Matthews said of Calpine. “They kept saying they would make it to 2008,” when power demand was expected to catch up with the country’s supply glut.
The ouster of Cartwright, who walks away with $5.6 million in severance, and Kelly, who was working without an employment contract, was seen as a signal that Calpine’s board wanted a new direction, perhaps toward Bankruptcy Court.
“The market has been reading and imputing certain things from the decision to let those two guys go,” said Chris Ellinghaus, an analyst with Wall Street Access. “People were saying that they might file for bankruptcy before. Now they’re certain of it and that can become a self-fulfilling prophecy.”
Associated Press was used in compiling this report.
