Updated from 5:19 p.m. EST

Did a lapse by Standard & Poor's give the market a sneak preview of a critical credit package for cash-strapped power producer Calpine ( CPN)?

An initial S&P press release Monday afternoon implied that Calpine's bankers had agreed to arrange a $1.6 billion loan package for the company with hefty amounts of collateral. The agency said the presence of the collateral had persuaded it to put Calpine's BB-plus rating on "creditwatch" with negative implications.

But in a highly unusual twist, S&P just half an hour later issued another release, this time saying that "no such credit has occurred" and that its rating outlook hadn't changed. Peter Rigby, the S&P analyst for Calpine, said the first press release was published as the result of an editor's error. He added that the release wasn't composed this week, though he declined to say when it was written.

During this time, Calpine made no public comments on the possible loan package; a Calpine spokeswoman declined to say whether the details in the first S&P release were correct.

There is no evidence that the first S&P release was anything but what the agency said it was, a mistake. That said, some observers will inevitably note that the details of the first release were so particular that one might be forgiven for thinking there is indeed a heavily collateralized credit in the works. Perhaps, according to this line of thinking, S&P just jumped the gun.

Rigby said investors shouldn't infer anything from the release. "It was not based on any transaction that we know of," he added. But was it based on discussions for a credit deal between Calpine and its bankers, as opposed to an actual signed deal? When asked that, Rigby replied that Calpine had let the agency know of some of the bank loan options that it was exploring, though he stressed again that he has no idea if Calpine has gotten credit from its bankers or whether any such deal is collateralized.

What It Means

So to accept for a moment the bears' assumptions, let's take a risk and assume such a credit is going to happen. What would it mean? Well, the possible presence of collateral could signal that Calpine's main bankers, the Bank of Nova Scotia, Credit Suisse First Boston and Bank of America, found few takers for unsecured credit when they tried to farm a deal out to other lenders.

The first Standard & Poor's press release said Calpine "plans to pledge all of its 1.7 trillion cubic feet of U.S. and Canadian gas assets as well as its U.K. Saltend power plant" to back the package. The supposed package was to consist of a $1 billion 18-month revolving loan and a $600 million two-year term loan. The text also appeared to add collateral to an existing $400 million corporate revolver that expires in May 2003.

The value of the collateral wasn't given. S&P could have put its junk rating on Calpine's unsecured debt on negative watch because the collateralization moves would effectively leave unsecured debtholders with a claim to fewer assets in a bankruptcy; lower ratings mean higher borrowing costs.

If this credit happens as described, Calpine bulls will be pleased that the company finally got the credit. But bears will point to the stringent collateral measures as a sign that bankers have little faith in the company.

The company's beaten-up stock was down more than 10% for much of Monday's trading, but recovered sharply at the end of the day, perhaps in reaction to reports of the credit line. The stock closed down 28 cents at $6.83.

Filling the Void?

The dive earlier in the day was prompted by news over the weekend that California power regulators were filing complaints with the Federal Energy Regulatory Commission to void long-term power contracts the state signed with producers, including Calpine, when electricity prices were much higher.

At first glance, the dive would seem a little mystifying to anyone who's been following relations between power producers and California. The filing with the FERC was expected, and it's probably coming now because California Gov. Gray Davis is entering a fierce election battle and wants to deflect criticism of his handling of the energy shortage that hit the state in 2000 and 2001. Calpine said more than two months ago that it was in talks with the state to address its long-term contracts.


Power Failure?
Calpine's rise and decline


Moreover, the San Jose, Calif.-based company is adamant that California doesn't have a case. Vice president of regulatory affairs Joe Ronan believes California's filing with FERC is "extremely weak." And it shouldn't hamper ongoing talks aimed at finding a settlement with the state, according to the executive. The filing with FERC "has no effect on our relations with the state and our negotiations," he says.

However, the clash with California could have unnerved Calpine's bankers, who may have feared that renegotiations could hurt near-term cash inflows. After all, about two-thirds of 2002 power sales have already been made through contracts, and a good chunk of that two-thirds is to California. The worry is that the state will play tough and demand concessions that deplete cash flows. That's not going to happen, says Calpine investor relations chief Rick Barazza. He insists that changes in the contracts that have so far been discussed with the state would not affect earnings or cash flows in 2002 and 2003.

Margin Fears

The state's stance may now get tougher. And it's hard see how renegotiations would not damage 2002 and 2003 cash inflows, given how lucrative some deals look for Calpine. The California state auditor's office feels particularly burdened by one Calpine contract that has the state paying $80 million to $90 million a year just to have the right to use a so-called peaker plant, which is a facility that supplies power when demand is high.

In the opinion of the consultants used by the audit office for a study of all long-term contracts, the Calpine peaker contract was "one of the most disadvantageous," says Elaine Howle, the state auditor. (Consultants for this study were LaCapra Associates, a Boston-based energy economics firm, and Pierce Atwood, a law firm based in Portland, Maine.)

Howle says that one of the reasons the audit office thought it demanding was that, after the first year, the annual fee is not based on how much power the state takes. In other words, it could end up paying a lot even if it doesn't take any power. "This is one contract we'd encourage the governor to renegotiate," Howle says.

"She doesn't understand how these contracts work," Calpine's Ronan responds. "This is what the state offered us."

But if the plant isn't used, the fee would carry a lucrative margin for Calpine. Take the fee away, or cut it, and it's not hard to see why people fear the California talks could hurt the company's cash flows.
Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to peavis@thestreet.com.

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.

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