Calpine's Shares Plummet on Fears of Possible Credit Downgrade

SAN FRANCISCO – Moody's Investor Service lowered Calpine Corp.'s credit rating to junk status Friday in the latest blow to the rapidly expanding power generator's standing on Wall Street.

The credit rating agency took the action one day after warning that Calpine's rating was in jeopardy. Another major agency, Fitch Inc., foreshadowed a possible rating downgrade Friday by disclosing that it had placed Calpine on its "negative" watch list.

Moody's decision to lower Calpine's rating from "Baaa3" to "Ba1" raised doubts about Calpine's ability to repay $11.6 billion in debt.

The rating setback capped a miserable week for San Jose-based Calpine.

The latest warnings rattled investors who have been fretting about Calpine's finances since an article in last Sunday's New York Times drew parallels between the company and energy trader Enron Corp., which collapsed into bankruptcy earlier this month after acknowledging it had misled Wall Street about its earnings.

Calpine shares fell $2.85, or 18 percent, to close at $13.20 Friday on the New York Stock Exchange. The company's shares have plummeted by 38 percent since the New York Times article was published.

Moody's downgrade makes it more likely Calpine will have to revise an ambitious expansion plan designed to expand the company's power capacity from just under 6,000 megawatts at the end of last year to 70,000 megawatts in 2005.

The company currently operates 69 plants with 12,000 megawatts of capacity and is building another 30 plants that will add another 17,800 megawatts. A megawatt is enough electricity to power roughly 750 homes.

Calpine believes it still has the financial wherewithal to pursue its expansion, spokesman Bill Highlander said. "We think this company is very liquid and very strong," he said.

But Moody's predicted Calpine will be hard-pressed to come up with enough money to continue financing its expansion.

In the near term, Calpine should have $500 million to $600 million in cash as well as a $400 million line of available credit. The company can also borrow $1 billion for construction, Moody's said.

At the same time, Calpine will be under increasing financial pressure as management tries to refinance $878 million in bonds before May while the company's cash flow dwindles because of an anticipated drop in energy prices during the first half of 2002, Moody's said.

Fitch delivered a similar assessment of Calpine's prospects in its Friday warning.

Although Calpine's "operating fundamentals are sound," Fitch expressed concerns about the company's aggressive plan to build dozens of new power plants around the country. The debt-laden expansion "is not consistent with the current market environment," Fitch said.

Another major credit-rating agency, Standard & Poor's, has chosen not to place Calpine on a credit watch. In a statement earlier this week, S&P said Calpine has sufficient liquidity for its power plant construction projects.

The past week's turmoil makes it clear Calpine should scale backs it expansion, said industry analyst Gordon Howald of Credit Lyonnais.

"Calpine is using every possible excuse to explain what is happening to the company," Howald said, "but it needs to take a look at its stock price and what the market is saying and just admit that they made a mistake by trying to expand too fast."