Debt-Heavy Calpine Files for Chapter 11

After a years-long struggle to stay afloat despite a suffocating debt load, power producer Calpine Corp. filed for bankruptcy protection late Tuesday.

The San Jose company, which operates 41 plants in California, made the filing in U.S. Bankruptcy Court in New York after it lost a court battle with bondholders that called for Calpine to repay $313 million by Jan. 22. That ruling, among other factors, convinced analysts and others that the company had no choice but to reorganize through a Chapter 11 filing.

Last week, Calpine acknowledged that it was considering filing for bankruptcy but said it was considering other options as well. In a statement Tuesday the company called the move “a necessary and prudent step.�

Calpine said it had secured as much as $2 billion in financing from Deutsche Bank and Credit Suisse First Boston to fund continuing operations while the company reorganizes.

The power producer listed $22.5 billion in debt and assets of $26.6 billion. The amount of assets made the filing the ninth-largest U.S. corporate bankruptcy case, behind the likes of WorldCom Inc. and energy companies such as Enron Corp. and PG&E; Corp.’s Pacific Gas & Electric Co.

“We believe that Calpine needs to change its business model in light of the ongoing evolution of competitive power markets and our current financial condition,� Chief Executive Robert P. May said in the statement. “Although the company has taken numerous steps to reduce its debt and strengthen its balance sheet through asset sales and other means, these actions were not sufficient to offset the cost of Calpine’s substantial debt obligations.�

Although Calpine said it expected its power plants to continue to be available to “meet the needs of electricity customers in all its service areas,� the company also petitioned the Bankruptcy Court for approval to reject some of its contracts, including power agreements under which the company is providing electricity at below-cost or below-market rates.

Calpine has at least one contract with California that fits that description. Under that agreement, the company must supply PG&E; with 1,000 megawatts of power around the clock, at a fixed price, through 2009. PG&E;, the state’s largest utility, has been relying on the contract for more than 10% of its power needs, California Atty. Gen. Bill Lockyer said.

Lockyer and other state officials on Monday tried to prevent Calpine from reneging on the contract by asking federal regulators to intercede in the event Calpine filed for bankruptcy protection and sought to dump the deal. In the filing with the Federal Energy Regulatory Commission, Lockyer said California power customers would have to pay an extra $625 million for electricity if the state lost the Calpine contract and had to buy power on the open market.

Calpine, founded in 1984, seemed to have a bright future in the late 1990s, when natural gas was cheap, the country needed more power plants and coal-fired facilities were falling out of favor because they were inefficient, costly to operate and more polluting than gas.

The company expanded aggressively, and now operates 92 power plants in North America, most of them fueled by natural gas. But energy deregulation, which was to pave the way for independent power sellers such as Calpine, sputtered and energy markets fell apart after Enron collapsed.

A steady ascent in natural gas prices, which have more than doubled this year, contributed to the company’s woes. It needed so much of the fuel that it had become the nation’s largest buyer, an expensive undertaking for a company that was losing money and had mountains of debt.

While Mirant Corp., NRG Energy Inc. and others of its peers stumbled and fell into bankruptcy years ago, Calpine lumbered on. Founder and Chief Executive Peter Cartwright and longtime Chief Financial Officer Robert Kelly, both opposed to filing for Chapter 11, avoided that fate by selling assets to reduce debt and engineering so many financing deals that by this year, every company asset was pledged as collateral.

Calpine ousted Cartwright and Kelly in November and last week named May as CEO. The company has been embroiled in disputes with bondholders who accused the company of misusing $313 million in sale proceeds. A judge Friday ruled that Calpine had to repay those funds, with interest, by Jan. 22.