on Thursday obtained an increase in a key credit line, removing the threat of a near-term liquidity crisis but pushing the company's debt to a suffocating level.

The San Jose, Calif.-based power producer, the subject of a

column here Wednesday, said it had increased the size of a corporate credit line to $1.4 billion from $400 million. Amid a violent shakeout in the energy market late last year, fears grew that Calpine would have serious trouble meeting its debt obligations and capital expenditure plans. However, after recently raising $1.2 billion from a convertible bond issue and gaining access to as much as $1.4 billion through the credit line, Calpine bulls can breathe easier.

Another positive for Calpine is that the credit line isn't secured by any of its assets. If it had been attached to collateral, other unsecured debt would've become less attractive. Calpine has a junk rating from both Standard & Poor's and Moody's, which downgraded its debt from investment grade in December.

Among the banks on the corporate credit line were

Bank of Nova Scotia

, which has led other large outstanding Calpine borrowing, as well as

Bank of America

and Bayerische Landesbank Girozentrale. The stock jumped 31 cents to $16.05 on close-to-average volume Thursday; it's down more than 70% from its 52-week high.

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Biting the Arm That Feeds You

While getting the loan counts in Calpine's favor, the company wasn't forthcoming with details about the credit and its debt position. The company declined to disclose the interest rate on the loan. A spokeswoman wouldn't say whether the company had already drawn down the original $400 million facility before the increase. Conditionality isn't clear, either. Of the $1.4 billion, $650 million takes the form of a letter of credit, essentially a credit guarantee from the banks. It's questionable whether Calpine can turn that into ready cash for whatever uses it chooses.

After all this capital markets activity, it'd be no exaggeration to say investors have an Ancient Mariner-like thirst for a fresh balance sheet.

Getting more debt certainly forestalls a liquidity crunch, but it will be an oppressive yoke for the company, particularly if the expected earnings don't materialize. A back-of-the-envelope calculation gives Calpine a debt-to-equity ratio of about 75% at the end of 2001, a number that certainly rules out a return to investment grade and puts huge pressure on the company to get better returns on its assets. But that's tough when power market margins are getting compressed.

Calpine has been a heavy raiser of capital because it needs the funds to pay for an ambitious buildout of natural gas-fired power plants.

At the end of 2001, Calpine appears to have had about $14 billion of debt and leases (this number includes the $1.2 billion convertible issue and assumes that all those funds were raised in 2001). That's quite a leap from the end of the third quarter, when total debt and leases came to about $10.3 billion.

Meanwhile, year-end equity likely totaled $4 billion. Granted, this assumes no retained earnings being added to capital in the fourth quarter, but it also generously treats the $1.1 billion of preferred stock as being sufficiently equitylike to be included. This gives a total capital number of $18 billion. At $14 billion, debt is 78% of the total. Out of fairness, one should adjust that number down by $1 billion because the company raised the convertible cash to pay off bonds that mature in April. That would take the ratio down a smidgen to 76% ($13 billion divided by $17 billion).

A Sadder and Wiser Man

But much capital raising has been done since the end of December. What would the balance sheet look like if Calpine, as is likely, decides to max out its two credit facilities? That would add as much as $2.1 billion to its debt total, taking it to more than $16 billion, or $15 billion if we exclude the $1 billion zero issue.

What does this tell us about the stock? Not especially nice things. First, let's assume that Calpine gets to 30,000 megawatts of capacity. Kindly valuing that at $600,000 per megawatt, and giving Calpine's gas and oil assets a value of $1 billion, would give a total asset value of $19 billion. Subtracting the conservative debt number of $15 billion, as well as the $1.1 billion of preferred stock, we get Calpine's common equity valued at about $3 billion, 40% below its recent market cap.

If things don't go right for Calpine in 2002, consider that the downside for the stock.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.