Calpine again counters recent rumors, says will continue debt reduction

By Paul Deckelman

New York, May 5 - Calpine Corp. on Thursday used the forum of the traditional post-earnings release conference call to once again insist that its debt and liquidity status is acceptable, contrary to recent rumors in the stock and debt markets to the effect that the San Jose, Calif.-based independent power producer was in danger of defaulting on some of its bond obligations, or maybe was maybe even headed for bankruptcy.

Such speculation hammered the company's shares, junk bonds, convertible debt and bank loans in the past month - a tailspin that those obligations only began to pull out of about a week ago, when Calpine pre-released highlights of Thursday's quarterly report in an effort to calm the jittery nerves of investors.

"Over the last three weeks," Calpine's chairman, president and chief operating officer, Peter Cartwright said as he began the call, "Calpine's securities have come under very heavy selling pressure," - as a result, he said of "unfounded rumors" that began circulating after one of its bondholders - Harbert Distressed Investment Master Fund, Ltd., a New York-based hedge fund holder of Calpine Canada Energy Finance II ULC's 8 7/8% notes due 2011 and 8 3/8% notes due 2008 - wrote to the company and to several of its subsidiaries, to express its dismay with the Calpine's recently announced sale of its Saltend Power Generating Facility in Britain. Harbert said that the sale would leave the company unable to fulfill its obligations to the holders of those bonds - an assertion which Calpine has been vehemently denying ever since, responding with its own declarations that Calpine remains in full financial and legal compliance with all covenants.

On Thursday, Cartwright strove to put the matter to rest, once and for all.

"Let me say, unequivocally, that these rumors are all false," he said, adding that the rumors and the subsequent carnage in Calpine's bonds and shares were an "unnecessary distraction" - although, he said, it had not affected the way Calpine does its business.

The executive vice president in charge of Calpine's risk control and energy trading unit, Calpine Energy Services, Paul Posoli, said that, for instance, "our ability to manage our portfolio has not been affected - approximately 99% of our 320 counterparties in the first quarter continue to transact with us."

He said that there had been no material change in the company's obligations to put up collateral - if anything, its collateral levels have actually gone down in the past few weeks. (During the widespread downturn which struck the power generation and energy trading industry earlier in the decade in the wake of the Enron Corp. debacle and subsequently, it has not been unusual for counterparty customers of energy companies perceived to be on shaky financial ground to demand more generous terms, or even collateral, to compensate them for the risk they were taking that a supplier might be unable to fulfill a delivery contract, or they might simply decline to deal the supplier company).

Posoli added that his organization had been managing its portfolio "in a credit-constrained environment for years," and so was little impacted by the rumor-mongering.

"Pretty confident" until rumors struck

Actually, the company's chief financial officer, Robert Kelly, told analysts on the call, "when I look back on the quarter, probably before the letter from the hedge fund, I was feeling pretty confident" - Calpine had pretty much completed construction on several new plants it has been building, "money going out the door was not going out the door any more, we were close to finalizing the liquidity program we had put in place last August," and operating profit trends "were going in the right direction . . . so we were feeling pretty good about the quarter."

Apart from the hedge-fund letter and the resulting market rumors, he declared, "it was a very good quarter for us, and we remain optimistic as we finish our plan in the remainder of 2005."

In the quarter, Calpine reported revenue of $2.212 billion, a 9% increase over $2.032 billion in the year-earlier period, although its net loss of $168.7 million (38 cents a share) represented a deterioration from the prior year's $71.2 million loss (17 cents a share). Calpine cited higher interest costs and higher operating costs associated with new plants coming on line - total capacity was up 21% from a year earlier, to 26,368 megawatts. Spark spreads - the difference between the cost of producing power and what it is sold for, a key electric industry financial metric - increased, on average, to $24.10 per megawatt-hour from $20.65 a year earlier.

Using downturn to buy back bonds

At the end of the quarter, Calpine had a total of $18 billion of debt - but Cartwright said that the company was continuing to work toward its previously stated goal of reducing debt by $1 billion this year. To that end, Calpine announced that in the first quarter and the weeks since then, it had repurchased a total of $174 million principal amount of various series of bonds - some $80.6 million of its 8 5/8% senior notes due 2010 and 8½% senior notes due 2011 repurchased during the quarter, as well as $94.3 million of those kind of bonds and bonds from four other series in a series of transactions since March 31.

Ironically, the sharp drop in Calpine's bonds sparked by the negative market rumors in the wake of the Saltend deal actually helped the company, by creating a favorable environment in which to repurchase debt on the open market.

"With the market rumors and the stock decline, and everything like that, our first reaction was to start hoarding cash to insure that we'll ride this one out, Kelly said in answer to an analyst's query, but then, after finding out from Posoli that there had been no rush by the energy trade counterparties to demand more collateral from Calpine, "we started going back in the market and purchasing bonds."

He said that Calpine had found some "attractive" prices for its 10½% senior notes and 7 5/8% senior notes due 2006, and started buying them back. When those issues started to rebound from their oversold levels, "we moved back out the curve to 2009s, '10s, 11s.

"What we tried to do was reduce the overall indebtedness of the company, yet maintain the liquidity and take advantage of opportunities like the last couple of weeks in the near-term maturities."

Required redemptions coming up

Kelly outlined some mandatory bond repurchases that Calpine will have coming up. He noted that last September, Calpine issued $785 million of first-lien bonds. He said that the amount of bonds Calpine has to buy back will be determined, using a complex formula that includes a pro-forma coverage ratio calculation and the ultimate purchase price of the bonds.

He also mentioned that last October, Calpine had issued $360 million of preferred securities in connection with the Saltend plant now in the process of being sold - the sale which touched off the protest by Harbert Distressed, which snowballed into the slew of negative rumors. Another $260 million of preferred notes were issued in January.

"Any proceeds relating to that offering must be used for capex, or to repurchase the two Calpine Canada Energy Finance ULC bond issues, which have $2.1 billion outstanding," the CFO said. He said that the company is required to repurchase $430 million of the ULC bonds within 365 days of each preferred offering. Should the Saltend sale actually come about as Calpine intends, that $430 million of bonds must be repurchased. In addition any surplus proceeds over $620 million - the sum of the outstanding two preferred issues - must be used within 365 days for either capex, or for further purchases of the ULC bonds.

He further pointed out that the company is still sticking to its goal of redeeming its $403 million of High Tides III 5¾% convertible preferred securities using the proceeds of another similar convertibles issue.

Looking further ahead, Calpine has $1.2 billion of secured debt coming due in 2007 and $2 billion of unsecured issues in 2008. Kelly estimated that with 30,000 MW of power generation in its fleet of more than 90 plants, once new projects being built go on-line, the company's total $11.2 billion secured debt load works out to a ratio of about $373 per kilowatt of generating capacity, slightly above the $350 per kilowatt to which Kelly would like to bring the ratio down. "This is a level that we are very comfortable we can refinance the 2007 maturities [at]," he said.

He also said that Capline "is comfortable" with a debt-to-EBITDA ratio in the area of a 5 times-to-6 times multiple on its $18 billion debt obligation.

Aiming for $15 billion debt

"Over the next couple of years, by the end of 2006, we'd like to reduce that number [$18 billion] by $3 billion, to $15 billion, using a combination of Saltend-type transactions and contracting other activities," Kelly said. "When you review our asset portfolio, I'm confident that you will see that we can achieve these numbers within that timeframe."

Besides transactions like the sale of Saltend, the company is also keeping an eye out for other kinds of deals including the possible sale of some plants to municipal utilities and cooperatives, the monetization of power contracts, or even the sale of surplus turbines and other equipment

Kelly said that the company expects that "a significant amount of any proceeds from these de-levering transactions will be used to repurchase bonds, thus mitigating any refinancing risk in 2008."

Calpine continues to have $27 billion of assets on the books which could be sold or borrowed against, presumably at more favorable rates, in order to reduce the overall debt burden, the CFO said, "and I'm confident we can achieve that number."

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