Calpine's Sales Mask Debt Woes

In a recent Morningstar report on power producer Calpine (CPN), the research firm said it would consider buying shares if the stock fell to 10 cents a share. As far-fetched as this may seem, given the stock's current quote of $3.35, Morningstar may be more perceptive than the nine Street analysts who currently rate the stock a hold or buy.

Calpine is in the business of providing natural gas-fired power to utilities. These utilities, such as PG&E (PCG), demand more power during peak periods, such as in California right now where high temperatures have led to a surge in air conditioner usage. So the second quarter should have been a decent period for Calpine.

Yet the company lost 51 cents a share in its second quarter, missing Wall Street estimates by 22 cents a share. Calpine, with all of its mass and scale and perfect geographical positioning in the warmest portion of the country at the right time of the year, only managed to operate at 40% of its capacity in the quarter. This yielded $215.1 million in EBITDA, which is not enough to cover its $333.7 million in interest expense for the quarter, let alone the $50 million to $100 million it usually spends just to keep its plants up and running. (Note that the company, which has a history of issuing guidance that it subsequently misses, said it expected to deliver $1.6 billion to $1.7 billion in EBITDA in 2005. At this pace, it will not come close to this forecast.)

In addition, Calpine stated that July utilization had only risen to 51%. Industry watchers, however, would prefer, or even expect, a company of Calpine's stature to have closer to a minimum 60% of its capacity right now. Part of the problem with Calpine's business results is that plant breakdowns held back power generation in the quarter. This raises the interesting question of why the company did not fix its plants. Perhaps it is because Calpine doesn't have the cash to spend on repairs.