Struggling US power company Calpine became embroiled in a legal dispute with its bondholders in September, the third such clash with investors so far this year. The most recent row centres on Calpine's use of funds from a $1.05 billion sale of gas assets completed in June. Holders of Calpine's first lien notes have persuaded their trustee, The Bank of New York, to withhold the remaining $400 million of proceeds from the sale. Calpine has countered with a lawsuit ordering the release of the funds.
Under the terms of its bond indentures, Calpine was first required to use the proceeds from the sale to tender for its 9.625% first lien notes at par, which the company did, and then only for "designated assets" or further debt reduction. Designated assets include all geothermal and natural gas assets but specifically exclude contracts for the purchase or sale of natural gas and natural gas supplied under such contracts.
Out of a total $785 million first lien notes, holders of only $139 million of bonds elected to take up Calpine's tender offer; they were repaid in June. Calpine has since spent $360 million of the remaining funds on natural gas in storage, funds which the noteholders want returned. The still unnamed noteholders have not yet filed a formal response to Calpine's suit, but they appear to be arguing that natural gas in storage does not qualify as a designated asset.
Calpine's argument is that since the holders of the remaining first lien notes were given the opportunity to be bought out at par in the tender offer and declined the opportunity, "the indenture for the first lien notes affirmatively states that the company may use the remaining gas sale proceeds for "any purpose not otherwise prohibited by this indenture," including reinvestment in natural gas assets".
Kim Noland, high-yield analyst at research firm Gimme Credit, says: "There is clearly a difference between a futures contract to purchase gas and gas currently in the ground, but natural gas in storage falls somewhere in between. We think a court might want to examine the documentation between Calpine and the gas sellers. Calpine may have found a loophole in the indenture and we think it has a good chance of winning a right to use the proceeds, especially as it gave the bondholders a chance to be repaid."
Calpine has requested that the court hears the case by mid-November but unless there is a near-term settlement, analysts say the asset sale proceeds may not be released to Calpine for several months until the litigation and potential appeals are completed. With final rulings in two other cases with its bondholders still pending and disappointing second-quarter earnings, analysts say the outlook for Calpine is difficult.
In April, a suit filed by New York-based Harbert Distressed Investment Master Fund claimed that Calpine was violating the indentures for its Calpine Canada Energy Finance II securities in its use of the proceeds from the $925 million sale of its Saltend plant in the UK. The company staged a partial win in the case when a Nova Scotia judge ruled that Harbert could not require Calpine to use the proceeds to repurchase the bonds; a final ruling is expected by mid-November.
And in July, Harbert Management Corp also filed a suit to give Calpine notice to monitor the price of its 6% convertible securities. If those securities trade 5% below par for five consecutive days, the holders are entitled to put the securities to Calpine at par.
One portfolio manager who has a short position in Calpine debt says: "Calpine really should be bankrupt, but they keep on pulling rabbits out of the hat through asset sales and accessing the capital markets." Calpine needs to reduce its leverage to maintain access to the capital markets so it can refinance its $1.2 billion second lien notes due 2007. Most recently, Calpine issued $300 million in preferred shares due 2011, the proceeds of which will be used to buy back debt.
|Calpine’s dismal second quarter |