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Once the catalyst for its heady climb,



aggressive growth strategy is now costing investors dearly.

A bearish analyst on Monday recommended that investors sell Calpine's stock, saying the two-year freefall from $60 could end near zero. Analyst Andre Meade, at Calpine underwriter Lazard, valued the stock at $1.71 -- less than half its current price -- though he stopped short of predicting bankruptcy, a worry that has weighed on almost all the merchant energy stocks in recent months.

"We calculate the value of Calpine as a going concern

but as a company under financial duress," Meade wrote, initiating coverage on the stock.

Meade said he based his analysis on Calpine's "questionable" growth strategy, high power plant construction costs, dismal earnings outlook and future liquidity concerns.

The California company gambled big during the 2000-01 energy crisis, borrowing heavily to build a slew of gas-fired power plants to meet expected power demands, particularly in its home state. But since then, a glut of supply has helped send the price of electricity -- and, in turn, Calpine's stock -- to unexpected lows.

Meade's sell recommendation came as a fresh blow, pushing the stock down 9% to $4.09 in Monday afternoon trading.


Recent insider sales by Calpine's top executive have weighed on the stock as well. Since July, Calpine Chief Executive Peter Cartwright has sold nearly half of his stake in the company after exercising valuable options that were set to expire at the end of the year. The option grants allowed Cartwright to purchase stock at 7 cents a share and immediately sell the stock for millions of dollars in profit.

Cartwright told analysts this summer that he'd prearranged the stock sales early this year, when the price was much higher, in anticipation of exercising 10-year-old options. He still owns 173,862 shares in the company.

Still, investors weren't impressed. "He could forgo a couple of million dollars to show positive support for the stock," said one hedge fund executive.

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In the meantime, even some Calpine bulls acknowledged the stock could slide further before it enjoys a meaningful rebound. But they viewed the company's challenges as manageable and its setbacks as temporary in nature.

They applauded Calpine for acting swiftly -- and essentially sacrificing its investment-grade credit rating in the process -- to address concerns that have since pushed other companies toward bankruptcy. Unlike some of its peers, they said, Calpine wasted no time issuing equity, renegotiating California power contracts and cutting its energy trading business.

"Calpine reacted to this fiasco very early in the cycle," said Jon Cartwright, a senior bond analyst at Raymond James. "It's got virtually all of its problems behind it."

The analyst said Calpine has a "zero chance" of bankruptcy. But he's far less optimistic about some of Calpine's peers.

"In the entire group, Calpine is the only

stock I'd remotely suggest," he said. "This disaster is going to drag on for three to four more years."


Those years could be ugly ones, even for Calpine, based on the new forecast by Meade. For 2002, Meade predicts that Calpine will deliver full-year earnings of only 75 cents a share -- down 60% from $1.85 a share in 2001. He expects a continuous slide through 2004, when annual earnings could bottom at 64 cents a share if the company can refinance its debt and achieve positive free cash flow.

Meade said Calpine will take hard hits to the bottom line, as it begins to expense construction cost interest that it currently capitalizes on its books.

"Given the size of Calpine's construction program, the amount of its interest capitalized and not expensed has been enormous," he said.

Calpine expensed only 31% of its interest in 2001 -- a percentage that's expected to more than double next year.


At the same time, Meade said, Calpine's mark-to-market earnings should diminish as a result of its junk credit rating and ongoing turbulence in the marketplace. Calpine recorded $135 million in unrealized mark-to-market earnings last year. Meanwhile, the company continues to benefit from long-term, above-market power contracts that would be difficult to land today.

"We believe that, if not for these contracts, Calpine's shares would have no value," Meade wrote.

Ultimately, Meade said, Calpine has become the victim of its own ambitious growth.

"Calpine has done more than any other company to end the nation's shortage of generating capacity, acting almost single-handedly in California," he wrote. "Unfortunately, we believe these accomplishments have come at the expense of its shareholders."