• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Judge Rules San Jose, Calif.-Based Utility Improperly Used Funds

Posted on: Thursday, 24 November 2005, 00:00 CST

By Matthai Chakko Kuruvila, San Jose Mercury News, Calif.

Nov. 23--A Delaware judge ruled Tuesday that Calpine improperly used $313 million from the July sale of its oil and natural gas assets, throwing a wrench in the embattled San Jose-based power producer's efforts to cut down its massive debt.

Calpine improperly used the money to buy fuel contracts rather than pay off bondholders, according to Judge Leo Strine of the Delaware Court of Chancery.

The judge deferred making a decision on a remedy until at least next week, but indicated he will order Calpine to refund the spent proceeds. The decision leaves another $400 million locked up by the Bank of New York, pending further word from Strine or a possible resolution between Calpine and bondholders.

The ruling is just the latest blow to Calpine, which is trying to recover from the debt it acquired while becoming the nation's largest independent power producer. The sale of assets -- including gas, oil and power plants -- was intended to cut $3 billion from its $18 billion of debt by the end of 2005.

But Calpine has had trouble finding buyers. Without that cash, and mired in litigation, it was able to reduce its debt by only $1 billion by the end of September.

"This (court) decision clearly makes the financial recovery that much more difficult," said Michael Worms, managing director for New York-based brokerage firm Harris Nesbitt. "It clearly hinders their ability to reduce debt in a significant manner over a short period of time."

Rumors of bankruptcy have plagued the company, occasionally causing its stock price to plunge. After Tuesday's ruling, Calpine's stock plummeted 20 percent to $1.39 per share.

Craig Shere, an analyst with Calyon Securities, predicted in a letter to investors last Friday that an adverse ruling in the Delaware case might place Calpine within "a 50 percent chance of bankruptcy within the next several quarters."

Shere wasn't available for comment Tuesday, but several analysts doubted the ruling would prove lethal for Calpine. The company had $843 million in cash on Sept. 30 -- more than enough to cover the $313 million. If need be, Calpine has plenty of other assets to sell, analysts said. The sale of Calpine's geothermal geysers in Northern California, for example, could fetch over $2 billion.

"I do not believe this is a bankruptcy event," said Jon Kyle Cartwright, director of institutional research at BOSC. But, he added, "there's no way to paint this as a good thing."

As natural gas prices rose over the summer, Calpine believed the market was peaking, so it sold off its reserves to reduce its debt.

But after the sale, Calpine had limited success buying back bonds from so-called "First Lien" bondholders, who have primary rights after the sale of collateral. Most of those bondholders held out for a higher payoff. Judge Strine ruled that Calpine then should have offered to buy out "Second Lien" bond holders or buy new assets.

Then, with hurricanes Katrina and Rita wreaking havoc on Gulf Coast natural gas production and triggering price spikes, Calpine had to purchase natural gas to fuel its power plants.

Because of Calpine's shaky finances, the company's bonds had been trading well below purchase price. But Strine's decision means that the company will be forced to buy back bonds at purchase price, analysts said.

The ruling "took a little bit of the flexibility from Calpine," said Daniele Seitz, vice president of research for Maxcor Financial. "It puts a dent in the company's program of buying back debt."

That was a view shared by others.

"We do not view this ruling as precipitating a bankruptcy filing," Elizabeth Parrella, an analyst with Merrill Lynch, wrote in a letter to investors on Tuesday. "This is clearly not as flexible an outcome as Calpine would like but does not strike us as a disaster."

-----

To see more of the San Jose Mercury News, or to subscribe to the newspaper, go to http://www.mercurynews.com.

Copyright (c) 2005, San Jose Mercury News, Calif.

Distributed by Knight Ridder/Tribune Business News.

For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.

CPN, MER,

Source: San Jose Mercury News

More News in this Category