January 13, 2006

Calpine Corporation energy contract rejection moved to District Court

By Carol Rosen
Staff Writer

Calpine Corporation and the state of California were saved a trip to New York on Jan. 4 when the U.S, Bankruptcy Court for the southern district of New York in Manhattan ordered a motion to reject energy contracts be moved to U.S. District Court.

Calpine’s 20-acre Metcalf Energy Plant in south San Jose has about 20 employees, and 200 at its downtown headquarters.

When the company filed for Chapter 11-bankruptcy protection on Dec. 20, it also “petitioned the court to reject certain of its contracts, including power sales agreements in which the price paid to Calpine for electricity is significantly below its cost or market prices.”

The petitions were filed in the U.S. Bankruptcy Court for the southern district of New York in Manhattan. According to various news reports, California is paying lower than market prices for power from the financially besieged company.

The bankruptcy court set a hearing date of Jan. 5 to discuss the eight contracts Calpine has that the power generating firm says receive are under current market prices.

State objects
In a countermove, the California Attorney Gen-eral’s office planned to file papers opposing the contract rejections on Friday, Dec. 30. Officials from that office also planned to appear at the Jan. 5 hearing, said spokesperson Tom Dresslar from the Attorney General’s office in late December.

The state opposes the contract rejection for two reasons, according to Dresslar. “The first is that the contract is important to maintain the stability of the electricity supply in California. We don’t need to take a baby step back to reliance on the spot market.

“Second, the price the state is paying is below the current market rate. [If the contracts are rejected] It will cost the state $625 million dollars,” and would mean more money out of the pockets of businesses and individuals, Dresslar added.

“We understand that the state wants to preserve these contracts but like the state, Calpine is doing what it has to do,” Calpine public relations director Kent Robertson said.

“Today’s decision doesn’t address the merits of the contract rejection,” Robertson said Jan. 4 in a prepared statement. “It changes the forum of the hearing to U.S. District Court. We continue to believe that under any standard there is a compelling case for rejection of the contracts and look forward to presenting our case to the District Court.”

In addition, “Calpine’s power plants will continue to operate … to provide … electricity to the power markets we serve,” Robertson said.

Four of those disputed contracts affect Northern California. One, with the state Department of Water Resources, is an agreement for 1,000 megawatts (MW) per day for power generation in Northern California. Another is a contract with Pacific Gas and Electric Company for 115 MW during on peak hours and 55 MW for off peak. The Northern California Power Agency has a contract with Calpine for 20 MW and Strategic Energy a contract for 5 MW.

“Calpine is seeking Bankruptcy Court approval for rejection of certain contracts because we must preserve the value of the Calpine estate and maximize the opportunity for a successful reorganization. This is consistent with our goal of emerging from Chapter 11 as a stronger, more competitive company. Left in place, these contracts would continue to erode the overall value of the Chapter 11 estate,” said Robertson.

Calpine prefers to work with customers and renegotiate the contracts out of court, said Katherine Potter, a Calpine public relations director who reiterated what the firm’s CEO, Robert May, said last week. “The company plans to continue to generate and deliver power until the court determines if a contract may be terminated or rejected.

“To date, nothing has changed in terms of power deliveries associated with those contracts.”

No problems?
The California Independent Systems Operator as yet sees no problems. “We are in contact with Calpine on a frequent basis, and we don’t see anything at this point that will affect the distribution of power, said Gregg Fishman, an ISO spokesman.

The ISO operates the grid that delivers power for both contracted electricity and power that is not tied to contractual obligations. For example, Calpine generates power that PG&E pays for under a contract. Both the generator and the utility submit their plans to the ISO, which places the power in the grid for distribution.

In the other scenario, Calpine generates power that is sold to a spot market as needed and the ISO acts as a middleman creating a transaction between Calpine and a utility company.

Despite reports that ISO officials fear Calpine will renege on its contracts with the state, resulting in brown or black outs, the company for the past two weeks has stated that its “power plants will continue to be available to meet the needs of electricity consumers in all of its service areas.”

“There are no operational changes today in the generating units owned and operated by Calpine,” said Bill Regan, ISO vice president and CFO in a statement on Dec. 21.

“The ISO can state that Calpine was in compliance with our FERC requirements for creditworthiness when it filed for bankruptcy protection. The ISO closely monitors the credit status of all market participants, and will continue to continue work with Calpine as it moves through the Chapter 11 process to enable Calpine to remain in compliance with ISO credit requirements and continue to participate in the ISO markets.

Backing up that statement, Calpine’s Potter said the company will have to go through a series of motions to reject contracts and it will take 20 days for the court to rule on those motions. In the meantime, Calpine will continue to perform under its contracts, she said.

There is sufficient liquidity to operate, she added. Two banks, Deutsche Bank and Credit Suisse First Boston, are providing commitments of up to $2 billion secured debtor-in-possession financing.

The court has approved the immediate use of up to $500 million of its $2 billion DIP financing facility. The court scheduled a hearing for Jan. 25 to consider final approval of the entire $2 billion DIP financing facility.

The financing package contains a $1 billion revolving credit facility and a $1 billion term loan. Once the company receives court approval, the money along with cash from its operations will be used to pay for operating expenses—including employee and supplier obligations—following the bankruptcy filing.

The package offers Calpine “sufficient liquidity” to keep its power plants operating and delivering power on a day-to-day basis, Potter added. “We expect our power plants to remain available for California on commercial and regional market conditions. This is a restructuring not a liquidation,” she emphasized.

The company stressed that “normal operations will continue during the restructuring process. ‘Our plan calls for power plants to remain available for operation to provide reliable supplies of electricity,’” said CEO May in a release.

Quick reversal
“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,” he said. “With our new financing we will have additional financial flexibility and sufficient liquidity to meet our obligations going forward.

“We believe that Calpine needs to change its business model in light of the ongoing evolution of competitive power markets and our current financial condition,” CEO May added. “Although the company has taken numerous steps to reduce its debt and strengthen its balance sheet through asset sales and other means, these actions were not sufficient to offset the cost of Calpine’s substantial debt obligations. “

It was the “asset sales” that got sunk the company into its deeper financial problems most recently. Already somewhat overextended by building new plants, Calpine last summer sold its natural gas reserves for $1.05 billion. It turned around and paid out $312 million of that money for fuel to operate its power plants.

The reserve sale disturbed investors who considered those reserves their Calpine bond collateral. They sued the company to overturn the sale. On Dec. 16, the Delaware Supreme Court agreed with the investors and said the company must repay the $312 million to the bondholder’s fund by Jan. 22.

Recent history
On Nov. 29, Calpine’s board of directors ousted founder, former board chair and CEO Peter Cartwright, along with CFO Robert D. Kelly. Unsubstantiated reports said the ouster occurred when Cartwright and Kelly would not agree to declare bankruptcy. During the week following their ouster, the company’s stock fell 32 percent to $0.85 per share.

The New York Stock Exchange delisted the stock Dec. 5. At that time, the stock was trading at $0.22 listed on the Over the Counter Bulletin Board with the symbol CPNL. On Dec. 29, the stock was trading at $0.21 after falling to a low of $0.18 per share the previous week. The stock at one point in the company’s history traded as high as $56 per share.

“After careful consideration of all available alternatives, Calpine’s Board of Directors determined that a Chapter 11 filing was a necessary and prudent step and the best way to obtain the financing necessary to maintain regular operations, and allow for a successful restructuring,” said May in the release.

“Calpine has a strong foundation in place, with high quality assets and a professional and experienced workforce. Chapter 11 protection will provide us with the ability to address our financial challenges without disrupting our ability to continue to provide reliable power supplies to the markets in which we operate.”

As a routine matter, Calpine asked the Court for authorization to continue paying employee wages and salaries, providing benefits without interruption, and expects the Court to grant that request. The company has about 20 employees working at the Metcalf Energy Plant in south San Jose and about 200 at its downtown headquarters.

During the restructuring process, Calpine will continue to evaluate all opportunities to strengthen its balance sheet and enhance operating cash flow, including asset sales and reductions in operating and overhead costs, according to Potter.

The Chapter 11 filing does not affect the tender offer to purchase up to $400 million of the outstanding 9-5/8 percent First Priority Senior Secured Notes due in 2014 (the “Offer”) that began Dec. 1, pending bankruptcy court approval. As previously announced, the offer was to remain open until midnight, EST on Dec. 29, unless extended or earlier terminated.

Calpine is considered the largest independent power company in the United States. It supplies customers and communities with electricity from natural gas-fired and geothermal power plants. Calpine owns, leases and operates integrated systems of plants in 21 U.S. states and in three Canadian provinces. Its customized products and services include wholesale and retail electricity, gas turbine components and services, energy management and a wide range of power plant engineering, construction and maintenance and operational services. Calpine was founded in 1984.