New Power Play at Calpine

Private-equity titans jockey for a stake in the bankrupt generator.
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Even in bankruptcy,

Calpine

(CPNLQ)

continues to spark intense interest.

About 10 potential investors, including a veritable who's who of private-equity heavyweights, are in the running to take equity stakes in the restructuring power company,

TheStreet.com

has learned.

Calpine, which rang up some $23 billion in debt in acquiring the nation's largest fleet of natural gas-fired plants before faltering into Chapter 11 more than a year ago, has been soliciting bids in an effort to re-emerge by year-end.

Firms asked to submit offers include the Carlyle Group, Kohlberg Kravis Roberts, TPG Capital, the Blackstone Group and Hellman & Friedman. Equity Capital Partners, a private energy investment firm run by former

Goldman Sachs

(GS) - Get Report

executives, also is part of the roster.

According to people familiar with the San Jose, Calif.-based energy company's plans, a winning bidder likely will be selected in the next two weeks. Proposals are said to include outright buyout plans as well as equity investments in a re-emergent Calpine entity.

Calpine spokesman Mel Scott declined to comment, as did Kenneth Buckfire, managing director at the Manhattan-based restructuring firm Miller Buckfire, which represents Calpine. Officials of the private-equity firms either declined to comment or did not return a call for comment.

Proposals will be evaluated with a view toward incorporating them into the company's larger reorganization plan and must gain bankruptcy court approval, one observer says. This person describes the interest in the company as very strong but stresses that a decision could also be made to reject the offers.

Escalating valuations in energy and power-related assets have prompted Calpine to consider outside equity proposals. The thinking is that third-party investors might be willing to provide cheap equity in exchange for ownership. Shares of power producers have been on the rise, driven by February's huge buyout announcement of

TXU

(TXU)

and

Mirant's

(MIR)

plan this week to seek merger partners.

It is unclear which firms submitted bids and which might be still in the mix. KKR and TPG, which are navigating the political terrain of a $44 billion buyout bid for TXU, might be too distracted to jockey for Calpine.

Calpine filed for bankruptcy in December 2005 in the U.S. Bankruptcy Court for the Southern District of New York. The bankruptcy process is turning into a much smoother one than operating ever was for Calpine. It made a practice of loading up on debt to develop added plants even before existing ones were running sufficiently to service its loans.

Founded by Peter Cartwright, Calpine ran into financial troubles along with many independent power producers when Enron collapsed in 2001. But many observers blame Calpine's woes largely on former CFO Bob Kelly, who agitated creditors by layering on debt even as Calpine was on the brink.

Its largest secured creditor, Wilmington Trust, has at least $3.4 billion in secured claims and more than $4.6 billion in unsecured claims, according to court documents.

But although Calpine still has a long way to go as it prepares to submit a proposal of reorganization June 20, the worst may be over.

Calpine has scored $5 billion debtor-in-possession funds that can be converted into bankruptcy exit financing providing by Goldman,

Deutsche Bank

,

JPMorgan

and

Credit Suisse

.

The DIP allows it to provide liens to counterparties to enhance its commodities hedging program, which reduces cash collateral and improves its ability to stabilize future cash flow. The DIP also allowed Calpine to repay $2.5 billion of secured debt by Calpine Generating, one of Calpine's largest operating subsidiaries in Canada.

"We've turned the company from a development company into an operating company," says one official close to Calpine.

Such progress has made Calpine a very attractive target for private-equity investments, which would have an advantage over strategic investors such as

NRG Energy

(NRG) - Get Report

because they can use leverage to increase their investments.