The market continues to hunt for bright spots at power giant

Calpine

(CPN)

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For the second straight quarter, debt-laden Calpine missed Wall Street estimates as it struggled to break even. But this time around, the company did muster an operating profit -- if only a penny a share -- instead of surprising observers with a quarterly loss. While short of consensus estimates of 3 cents a share, Calpine's second-quarter profit was enough to satisfy investors who were bracing for worse.

"If they were losing 30 cents a quarter, I'd have to sharpen my pencil and check my numbers," said Chris Ellinghaus, an analyst at Williams Capital who owns shares in the company. "But as long as they break even, plus or minus a nickel, I'm comfortable with the story."

The market seemed to share Ellinghaus' attitude. Although the stock dipped slightly at the open, it had bounced 8% to $5.39 by midafternoon. It has been rallying strongly from the $3 level since early this spring.

Major financing deals -- including one of the biggest junk-bond offerings in years -- have helped power the recent spike. In a conference call with analysts Wednesday, Calpine repeatedly stressed the "excellent progress" it has recently made on the financing and liquidity fronts. The company said it has raised billions of dollars in fresh cash to satisfy all major obligations coming due through late 2004. After that, it's looking for a recovery in the power market.

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"While electricity prices may remain low through 2004, we are beginning to see a positive shift in the market," said CEO Peter Cartwright. "The power industry remains a strong long-term business."

But for now, Calpine continues to struggle. Even as second-quarter revenue jumped 27% to $2.2 billion -- as new production ramped up -- the company's net income actually swung into the red. Including a raft of charges, Calpine reported a second-quarter loss of 6 cents per share that reversed a year-ago profit that was triple that amount. The company also lowered its full-year operating profit guidance from 40 cents to between 25 cents and 35 cents a share.

But Ellinghaus, for one, isn't dwelling on quarterly or even full-year earnings right now. For the next year or so, he will be looking at Calpine's earnings primarily as a gauge of whether the company can survive -- and later flourish -- in the challenging power market. He's more optimistic than most. Of the 15 analysts who follow the stock, he is among just one-third who actually recommends buying the shares. And his $16 price target is the highest of the entire group.

In contrast, Goldman Sachs analyst Jonathan Raleigh withdrew his buy recommendation on the stock when it dipped under $3 early this year. Even at that price, he pointed to Calpine as the priciest stock in the sector and cautioned that the company's debt appeared to exceed its net asset value.

Raleigh slashed his full-year earnings projections from 65 cents a share to 40 cents -- which now looks optimistic -- and warned that 2004 would probably be even worse. In the meantime, he fretted over Calpine's heavy debt load.

"As with other

independent power producers, Calpine is over-leveraged," he noted. "With over $17 billion of total leverage, residual equity value appears to be fairly minimal."

Nevertheless, Raleigh ultimately concluded that Calpine would remain "viable" with new financing deals.