SAN FRANCISCO — Calpine Corp.'s convoluted descent into bankruptcy, culminating in a Chapter 11 filing late Tuesday night, began when the future still looked bright for the power merchant.
Emboldened by its rapidly rising profits and stock price in 2001, Calpine launched a debt-laden expansion aimed at capitalizing on an apparent power shortage that had turned electricity into a high-priced commodity.
The company, based in San Jose, Calif., doubled in size, leaving it with 3,300 employees and 92 power plants in 21 states and Canada with enough capacity to provide electricity to 28 million homes.
But market conditions have shifted radically during the past four years amid plunging prices for electricity and climbing costs for natural gas — the fuel that Calpine relies upon to run most of its environment-friendly power plants.
As it stands now, Calpine's expansion seems pointless. The company's fleet of power plants has been operating at only 45 percent of capacity, making it difficult to generate enough money to repay debts listed at $22.5 billion in Calpine's bankruptcy filing.
With lenders determined to be repaid, the stage is now set for a tense legal battle over Calpine's $26.6 billion in assets as the company navigates through the ninth largest bankruptcy in U.S. history.
Bankruptcy Judge Burton Lifland ultimately will have the final say on the company's fate as he presides over the case in a New York federal court. The outcome probably won't be determined until 2007 or 2008, bankruptcy experts predicted.
It took three years for a judge to approve the reorganization of another major power company, northern California utility Pacific Gas and Electric Co., whose 2001 bankruptcy filing ranked as the eighth largest in U.S. history.
For its part, Calpine seems determined to renew itself under the leadership of a seasoned troubleshooter, Robert P. May. He was hired just last week to fill a void created when the company ousted its founder, Peter Cartwright, as chief executive.
"We intend to move through this restructuring process as quickly as possible to regain our financial health and to take the necessary steps to become a stronger and more competitive energy provider," May said in statement.
To stay afloat, Calpine has lined up $2 billion in financing from Deutsche Bank AG and Credit Suisse First Boston. The company says it needs at least $500 million to cover its operations and debt through Feb. 8.
But most of Calpine's debt is secured, giving lenders the leverage to challenge management's plans and mount a drive to force a sale of power plants and other assets.
"One of the verities of bankruptcy is that there are always a lot of wild cards in the deck, so you can't really predict what is going to happen," said Bill Zewadski, a Tampa, Fla., attorney who is chairman of the American Bar Association's bankruptcy litigation subcommittee.
The lawyers involved in the case stand to make millions.
Kirkland & Ellis, the law firm representing Calpine, already has been paid $5.5 million during the past month, according to court documents. That figures to be a down payment for the bills ahead. In documents filed Tuesday, Kirkland & Ellis said it expects at least 11 attorneys to work on the case, with compensation rates ranging from $350 to $825 per hour.
A large block of bondholders sought to short-circuit Calpine's reorganization plans even before the first court hearing in the case. Attorneys for the holders of $3.7 billion in Calpine debt filed papers arguing that the company shouldn't be allowed to spend more money "based on the speculative hope that macro-economic conditions in the power industry will one day turn in (Calpine's) favor."
The friction between Calpine's management and bondholders played a pivotal role in the company's bankruptcy filing.
When Calpine and the bondholders couldn't agree on the company's right to withdraw money from an escrow account, the two sides went to Delaware Chancery Court to settle the issue. A judge last month ordered Calpine to repay $312 million to the escrow account by Jan. 22, a decision that represented the company's final financial straw.
Investors are betting Calpine won't recover. The company's shares fell 3 cents to 20 cents during Wednesday's trading in the over-the-counter market. The company's shares are in the process of being delisted from the New York Stock Exchange, yet another reminder of how far Calpine has fallen since 2001.
During that year, Calpine's stock approached $60 per share, giving the company a market value of about $17 billion.
Although the Calpine management didn't recognize it at the time, the seeds of the company's demise were planted in late 2001 when an accounting scandal destroyed Enron Corp., the largest of the power wholesalers that had been parlaying high electricity prices into huge profits.
Enron's stunning collapse prompted lenders to clamp down and impose more stringent restrictions that eventually came back to haunt Calpine. Some bondholders even started to fret that Calpine was headed for trouble toward the end of 2001 — a notion that Cartwright described at that time as "ridiculous."