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Power generation company Calpine Corp. filed for Chapter 11 late Tuesday. It is the country’s largest bankruptcy this year by assets and the eighth largest in U.S. history. Calpine said in court documents that it has secured a $2 billion debtor-in possession financing from Credit Suisse and Deutsche Bank Securities Inc. The San Jose, Calif.-based company was before Judge Burton R. Lifland in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on Wednesday seeking approval for interim access to $500 million. The builder, owner and operator of power plants cited numerous reasons for its bankruptcy petition and those of 19 affiliates. The final straw for Calpine was the Delaware Supreme Court’s affirmation Dec. 16 of a Court of Chancery ruling on litigation over the company’s use of asset sale proceeds for fuel purchases. According to court documents, without a Chapter 11 filing Calpine would have had to put $313 million plus interest into a collateral account by Jan. 22 to resolve the suit from trustees of first- and second-lien note holders. Calpine also said a rapid expansion from 2001 to 2004 left it with too much debt. The company had negative cash flow after debt service and rent payments for the first nine months of the year. Covenant restrictions on both the debt and equity have prevented the sale of assets that could have raised more cash. The company’s group of natural gas-fired plants, the largest in North America, are running at only 45 percent capacity because of an excess of energy providers in the market. In addition, the cost of natural gas has risen above that of coal, leaving Calpine at a disadvantage to its competitors. Tim O’Brien, portfolio manager of the Evergreen Utility and Telecommunications Fund in Boston, said Calpine had too much debt and a flawed business model. “Combined cycle gas turbines looked great when natural gas was $3 per [million British thermal units]. At $14 per MMBTU they move way out on the dispatch curve and don’t run unless there is absolutely no alternative,” he said. “Now that the company has filed Chapter 11, it should stay in bankruptcy as long as the court and the creditors will allow, piling up cash and waiting for spark spreads [the difference between the cost of fuel and electricity revenue] to recover.” Calpine will probably sell some assets in markets where it lacks critical mass and where spark spreads are likely to recover later rather than sooner, O’Brien added. “Calpine will hold on to the Geysers geothermal plants [in northern California] for dear life since the profitability of those assets will improve dramatically once the current power supply agreements expire in 2007, and they will hold on to the profitable California and [Electric Reliability Council of Texas] assets,” he said. “The plant in Yucatan, Mexico, and the plants located in the SERC/FRCC, SPP and MAP regions are obvious candidates for sale, probably to the local utility and probably for a deeply discounted price.” Jennifer A. Hein, an attorney in the Energy Practice Group of Powell Goldstein in Washington, said the bankruptcy is a milestone of sorts. “This may signal the end of a string of bankruptcy reorganizations in this sector that started with Enron,” she said. “Other players in the industry are now looking to consolidate, given the repeal of the Public Utility Holding Company Act.” Hein noted the reorganization will provide significant opportunities for Calpine. “After Enron’s collapse, Calpine assumed a lot of risk by continuing to build generation using debt financing,” she continued. “Now those creditors will be forced to accept a reduced return, and Calpine will be able to negotiate more favorable contracts with its counterparties. Many of its creditors and counterparties have already been through this process with other energy companies. They know the ropes. I expect the bankruptcy to proceed smoothly and relatively quickly.” The $2 billion DIP would provide working capital, enable fuel purchases and allow continued payroll disbursements and capital expenditures, the company said in court documents. CS and Deutsche Bank Securities were chosen as joint lead arrangers and joint bookrunners after a search that began earlier this month. Calpine contacted five potential lenders including CS and DBSI, but the company also received four unsolicited proposals and financial adviser Miller Buckfire & Co. LLC approached roughly 10 financial institutions. Finally, interim CEO Kenneth Derr explored alternative transactions with five strategic buyers. The facility, agented by CS and Deutsche Bank Trust Co. Americas, consists of a $1 million revolver, a $350 million first-lien term loan and a $650 million second-lien term loan. Up to $300 million of the revolver would be available for letters of credit. All portions of the DIP would be priced using a Eurodollar rate or the higher of the federal funds effective rate plus 50 basis points and the prime rate. Under the former, the interest rate would be the Eurodollar rate plus 225 basis points for the revolver and first-lien term loan and 450 basis points for the second-lien term loan. Under the latter, those rates would be the base rate plus 125 basis points and 350 basis points, respectively. A default would raise the current rates by 200 basis points. The two-year loan has a carve-out of $25 million, an underwriting and arrangement fee of $30 million, an annual administrative fee of $300,000, a letter-of-credit fee of 2.25 percent, a fronting fee of 0.25 percent for each letter of credit, and a commitment fee of between 0.5 percent and 1 percent. In addition, a 2.5 percent ticking fee would apply to an unused $350 million tranche of the second-lien term loan intended to finance a particular transaction. Calpine listed $26.63 billion in assets and $22.54 million in liabilities in its petition. Wilmington Trust Co. is trustee for $641.11 million in first-lien 9.625 percent notes due 2014. Wilmington Trust also is trustee for four series of second-lien notes, and Goldman Sachs Credit Partners LP is agent for a $750 million senior secured term loan. Calpine’s subsidiaries have additional debts. Not surprisingly, Wilmington Trust has the two largest secured claims on a consolidated basis, $1.19 billion and $929.06 million. The company also has two other secured claims among Calpine’s five largest: $699.72 million and $659.75 million. Goldman Sachs has a $746.03 million secured claim. Wilmington Trust also hold the five largest unsecured claims for various note series. The largest of these is $1.44 billion for 8.5 percent notes due 2008. Calpine, which operates 92 power plants and supplies 3.5 percent of the country’s electricity, had Ebitda of $1.65 billion in 2004 on $9.23 billion in revenue. Those earnings fell from $1.8 billion in Ebitda on $8.87 billion in revenue a year earlier. The company, founded in 1984, has roughly 3,300 employees. Richard M. Cieri, Matthew A. Cantor, Edward Sassower and Robert G. Burns of Kirkland & Ellis are debtor counsel. Peter V. Pantaleo of Simpson Thacher & Bartlett represents the DIP agents. Covington & Burling and Thelen Reid & Priest are special counsel. Kurtzman Carson Consultants LLC is notice and claims agent. AP Services LLC is crisis manager, PricewaterhouseCoopers LLP is auditor, KPMG LLP is tax consultant, and PA Consulting Group Inc. will serve as energy industry consultant. Steven B. Levine of Brown Rudnick Berlack Israels represents the ad hoc committee of first-lien noteholders. Alan W. Kornberg, Andrew N. Rosenberg and Elizabeth R. McColm of Paul, Weiss, Rifkind, Wharton & Garrison are counsel to the ad hoc second-lien committee. Cieri did not return a call for comment Wednesday. Claire Poole contributed to this article. Copyright �2005 TDD, LLC. All rights reserved.

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