Report Won't Halt Decline in Calpine

Calpine's (CPN - commentary - Cramer's Take) operations seem to be faltering, and the third-quarter operating results it released Thursday morning only serve to reinforce this picture.

For the quarter, the California-based power company reported that EBITDA adjusted for noncash items rose 19% to $516.4 million from $433 million in the year-ago period. On the surface, this is an encouraging result as the company's bottom line is growing.

However, this number is inflated by a number of one-time items -- including gains on the sale of assets that have actually created future liabilities -- that need to be excluded in order to get a full picture of the company's core operating results.

After accounting for these one-time items -- which include gains from the sale of assets and debt repurchased at a discount in the open market, among other items -- the company had EBITDA of about $300 million to $350 million. To put this in perspective, Calpine's interest expenses jumped to $381 million from $285 million in the same period last year. So even on a best-case basis, Calpine's core operating activities are not strong enough to cover the financing Calpine has used to carry out its growth plans.

This is not a sustainable business plan.

On a side note, the Calpine story is so complex that the smartest minds on Wall Street are struggling to determine what the company earned after it issued its press release; I have talked to a handful of analysts and traders Thursday morning trying to figure out what the appropriate EBITDA number from recurring operations is. A confusing financial report is often a sign of financial distress.

The company attributed the jump in interest expenses to the lower capitalization of interest expenses in the quarter, as few plants were in active construction, and because of an increase in the average interest rate. This should come as no surprise to anyone who has read the terms of the company's most recent rounds of financing, which have carried interest rates as high as 950 basis points plus LIBOR, or nearly 14%. Calpine has effectively seen its access to reasonably priced capital shut off due to its industry-high leverage ratios and negative interest coverage.

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William Gabrielski is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback; click here to send him an email.

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