The weakened power industry showed a flicker of new strength on Wednesday.

Two big companies,

Calpine

(CPN)

and

TXU

( TXU), managed to grow third-quarter profits and muscle past Wall Street expectations. Meanwhile, yet another industry player -- former bankruptcy candidate

AES

(AES) - Get Report

-- is reportedly weighing aggressive bets on the sector once again.

But some financial experts seem worried that AES, in particular, is attempting to tackle too much. The debt-laden company, which last month missed third-quarter estimates despite a return to profitability, has issued "an "expression of interest" in buying the largest power station in the Australian state of Victoria. Just last year, the same company -- skating dangerously close to the brink -- was selling some of its own power assets in Australia and pledging to exit the country.

"The reported price

$2.2 billion is roughly double the liquidity level that AES estimated it would reach by year end," Gimme Credit high-yield bond analyst Kimberly Noland noted. "But year-end balance sheet cash of $800 million and revolver availability of $170 million is clearly tempting management to invest in new projects or to restructure old investments that don't generate sufficient return."

In addition to the possible $2.2 billion acquisition, Noland said, AES has already committed to spending $85 million on one restructuring project and may sink up to $300 million in another.

AES investors, who've already scored big on the stock, yawned at the news. The stock -- which has more than tripled in a year -- climbed a nickel to $9.12 on Wednesday morning.

Muted Response

Calpine's earnings release stirred a modest reaction as well.

Shares climbed just 8 cents to $4.83 despite a notable upside earnings surprise. Excluding special items, the giant power producer posted a third-quarter profit of 29 cents a share -- a full nickel better than the consensus estimate, but down sharply from the 51 cents reported last year.

At least one analyst, Maureen Howe of RBC Capital, had been expecting more from the company. Late last month, Howe predicted that Calpine would deliver normalized profits of 31 cents a share -- the highest estimate on the Street -- despite her forecast of reduced spark spreads and higher expenses.

Not only did Calpine miss Howe's target, but the company also sharply reduced its guidance for full-year operating profits. Calpine now expects to generate 2003 core operating profits of 18 cents to 22 cents a share, down from previous guidance of 25 cents to 35 cents a share. On average, Wall Street analysts were looking for a 2003 profit of 24 cents a share prior to the company's update.

Calpine blamed the downward revision on "lower spark spreads expected during the fourth quarter." The company, in fact, already took a hit on spark spreads in the third quarter even though it managed to beat Wall Street profit estimates.

"Operating earnings for the quarter were lower than expected due to low spark spreads brought about by excess capacity in some markets, generally mild weather, high gas prices and a weak economy," Calpine CEO Peter Cartwright stated.

Nevertheless, the company -- which invested heavily in the now-glutted power sector -- continues to look on the bright side.

"Although we anticipated stronger spark spreads during the quarter, we remained profitable due to the strength of our contractual portfolio," Cartwright said. "As energy prices and industrial demand normalize, Calpine will have unparalleled opportunity to leverage our fleet of highly efficient, integrated systems of power plants."

No Applause

Meanwhile, TXU managed to beat third-quarter estimates and keep its tightened 2003 guidance in place.

The Texas-based utility posted third-quarter earnings of $1.01 a share, topping its own raised guidance -- issued just last week -- by a penny. Wall Street expected the company to post third-quarter profits of 93 cents a share, closer to the 90 cents it had originally promised.

The company, which earned 15% less a year ago, said every one of its business units posted gains in the latest period.

"We delivered a solid third quarter because of the improved performance in all segments of our business," TXU CFO Dan Farell said. "TXU's third-quarter results confirmed that the company is executing successfully on its 2003 plan."

TXU went on to say that it's on track to deliver profits of $2 a share for the year. But Deutsche Bank, for one, had hoped for better even though the company itself last week tightened guidance from $2 to $2.10 a share to just $2. The research firm recently reiterated its Street-high 2003 estimate of $2.15 a share.

The market seemed disappointed in TXU as well. Shares of the company slipped 22 cents to $22.54 in late-morning trading.

Despite that slide, TXU reported growing strength in some key areas -- particularly its energy delivery and Australian divisions. The latter segment nearly doubled year-ago profits, taking them up $27 million to $43 million, due to strong customer retention, acquisition gains and increased natural gas sales. Going forward, TXU will continue to rely on the Australian market for strength.

"We remain committed to deliver on our initiatives, which are to deliver on the

2003 plan, strengthen the balance sheet and enhance credit, lower costs and aggressively defend and build upon our leadership positions in Texas and Australia," Farell stated.

Still, some experts appear underwhelmed by the opportunities down south. One industry insider questioned AES' expansion plans, in particular, in a news story this morning.

The company's $2.2 billion offer for Victoria's Loy Yang A power station "does not even cover Loy Yang's debt, so it seems somewhat opportunistic," an unnamed source told

Reuters

. "And how would they fund it? I'm sure they have got quite a restrictive banking covenant in their debt-restructuring deal."

Almost on cue, yet another power company stepped forward Wednesday to report that all is not rosy.

Reliant Energy

(RRI)

announced that it would mothball three power units in the glutted California region. The company said that it failed to attract competitive offers for the 824 megawatts of generation that was up for sale from the Southern California units.

"The minimum prices in the auction were set at Reliant's projected cash costs," the company explained. "Given that no bids were received in the auction process, the decision was made to mothball the units through March 2004."

The company said it will again seek bids on the power units next September. The market, meanwhile, shrugged off the news. Shares of Reliant barely budged, dropping just 3 cents to $5.10, in Wednesday trading.