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Ruling Deals Another Blow to Calpine

A Delaware judge says the power producer, which has had a string of losses, improperly used proceeds from an asset sale to buy natural gas.

November 23, 2005|From Reuters and Bloomberg News

A Delaware judge ruled Tuesday that independent power producer Calpine Corp. improperly used proceeds from an asset sale to purchase natural gas to fire its power plants, and he barred the company from using any more of the proceeds for that purpose.

The ruling was another blow for Calpine, which reported losses in eight of the last 11 quarters after a plant-building spree left it with more than $17 billion in debt. The San Jose-based company's losses, combined with surging gas prices, have prompted concern among some analysts that Calpine might be forced to seek bankruptcy protection.

Calpine shares fell more than 20%, down 36 cents to $1.39. The closing price was the lowest for the stock since it was first sold in September 1996.

Calpine said about $400 million in asset sale proceeds could still be used to purchase other natural gas assets or certain secured debt. It did not say, however, whether it would appeal any of the ruling, and Calpine spokeswoman Katherine Potter declined to comment.

Analysts said the ruling could slow Calpine's debt-slashing program.

"While we do not know [Calpine's] contingency plans in light of this adverse ruling and an appeal is possible," said Harris Nesbitt analyst Michael Worms in a note, "in our view, the judge's decision severely limits Calpine's ability to achieve its debt reduction goal over a relatively short time."

But at least one analyst said the ruling probably didn't mean an imminent bankruptcy filing.

"The biggest impact of a negative ruling will be on management credibility, which is already fragile, given a CCC [credit] rating," analyst Jon Cartwright of BOSC Inc. said. The ruling probably won't lead to a bankruptcy filing because Calpine "had about $1 billion in unrestricted cash a few weeks ago," said Cartwright, who has a "buy" rating on the company's debt.

Calpine has been selling underperforming assets in a bid to pay down debt as it tries to recover from the credit crunch that struck the power industry after the collapse of Enron Corp. in 2001.

Vice Chancellor Leo Strine of the Delaware Court of Chancery said a "fitting and reasonably prompt restorative remedy" was in order for $313 million already spent from the proceeds, which came from the sale of Calpine's oil exploration and production assets this year. He asked Calpine and investors to submit arguments by Dec. 1 about returning sale proceeds.

Calpine is at loggerheads with bond trustees Bank of New York and Wilmington Trust Co. over its use of the proceeds from that July sale.

Bank of New York locked much of the sale proceeds out of Calpine's reach in September because some debt holders objected to the company's spending plans. Calpine had argued that its agreements with debt holders gave it complete flexibility to use the proceeds of its asset sales to buy natural gas.

But in his opinion, Strine characterized some of Calpine's arguments as weak. Strine said he deferred ordering an immediate return of the $313 million because bondholders dragged their feet in objecting to the way Calpine used the money.

"The precise relief that should be awarded is a delicate matter with important implications for Calpine and all its constituencies," Strine wrote.

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