What It MeansSo 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.