company had competitive and timely access to the capital markets, providing it with suffi-
cient liquidity to meet its current and ongoing capital requirements.
During January 2002 Calpine delayed 34 projects that would have added 15,000 MW to
its capacity. That still left the company with 27 projects planned for 2002. They were expect-
ed to more than double its capacity to 23,000 MW by the end of that year and to increase it
further to 26,000 MW by the end of 2003. Calpine’s President and CEO, Peter Cartwright,
said that the company was working to strengthen its balance sheet with the goal of restoring
its investment-grade rating. If necessary it would take additional steps, such as outsourcing
the operation of blocks of power, arranging sale-and-leasebacks or issuing additional equity.
At this time the company estimated that it would sell about US$250 million of assets during
2002, including oil and gas fields, power sales agreements, and power plants.
In late February 2002 Calpine announced plans to pledge its entire 1.7 trillion cubic feet
of US and Canadian gas assets, and its Saltend power plant in the United Kingdom, to secure
three classes of debt:
- its US$1 billion 18-month revolver;
- its US$600 million two-year term loan; and
- its existing US$400 million revolver expiring in May 2003.
Standard & Poor’s was concerned that this new security added further to the already sub-
stantial assets pledged under the US$3.5 billion construction revolver, which included power
plants under construction. As a result the agency put its ‘BB+’ corporate rating, its ‘BB+’ rat-
ing on Calpine’s existing senior unsecured debt and its ‘B+’ rating on the company’s con-
vertible preferred stock on CreditWatch with negative implications.
In late March Standard & Poor’s downgraded Calpine’s corporate rating to ‘BB’ and its
unsecured debt to ‘B+’. In a conference call to explain the downgrades the agency’s analysts
warned investors that they were unlikely to raise Calpine’s ratings for at least two years
because the company would be handcuffed by rising debt payments and falling electricity
prices. They said that Calpine would probably have to pledge more assets to secure addition-
al loans in the future, and expressed concern about how the company would repay US$3.5
billion unsecured debt coming due in late 2003 and early 2004.
A few days later, in early April, Moody’s downgraded Calpine’s senior unsecured debt
three notches from ‘Ba1’ to ‘B1’, four notches below investment grade. The downgrades
reflected the company’s high leverage, its limited financial flexibility, its substantial ongoing
capital expenditure requirements to complete its reduced build-out programme and concerns
about the company’s liquidity profile.
As a result of the rating downgrades and concern about renegotiated contracts with the
State of California, several wholesale power traders stopped doing business with Calpine. The
company began to go through third parties for some of its power trades, which included sell-
ing large blocks of power for one- to two-year terms. At this point Calpine was reportedly
negotiating the sale of various nonstrategic assets for net proceeds of about US$250 million,
as well as a sale-and-leaseback of 11 California peaker facilities, which was expected to gen-
erate about US$500 million during 2002. A peaker, or peak load plant, is a power plant usu-
ally housing old, low-efficiency stream units; gas turbines; diesels; or pumped-storage
hydroelectric equipment normally used during peak-load periods.The company was also
looking for a joint-venture partner, with a higher credit rating, for its trading and marketing
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