Bad Math at Calpine Adds Up to Sell

Calpine(CPN) just keeps giving investors more reasons to sell.

The latest drama for the stock came Thursday, when shares of Calpine were halted at 3:15 p.m. EST. Investors were kept on the edges of their chairs until nearly 8 p.m., when Calpine put out a press release explaining the reason for the halt: Turns out the company didn't calculate its third-quarter EBITDA number correctly in its Thursday morning earnings release. Also, Calpine miscalculated its second-quarter EBITDA results as well, leading to a reduction of $106.2 million in reported EBITDA results.

But the overstatement in EBITDA (earnings before interest, taxes, depreciation and amortization) due to the inclusion of one-time gains from asset sales was rather obvious in the original press release, as I pointed out Thursday morning. Calpine now reports the number is actually closer to $380 million, a far cry from the $516 million it first reported. And at $379.6 million, the company is about $1 million shy of its quarterly interest expense of $381 million.

Perhaps these errors shouldn't come as a surprise. Half of Calpine's audit committee left the company in September. And at the end of 2004, Calpine made this statement in its 10-K filing with the SEC:

As of December 31, 2004, the Company did not maintain effective controls over the accounting for income taxes and the determination of current income taxes payable, deferred income tax assets and liabilities and the related income tax provision (benefit) for continuing and discontinued operations.

Wall Street is taking a much more cautious approach to this quarterly report than in the past. Notably, research firm Buckingham lowered its rating Thursday, just three months after calling my original column warning investors off Calpine "erroneous." Some large hedge funds I follow that had been long Calpine's stock at one point are now questioning the company's reporting tactics and its ability to continue as a going concern.