Updated from 6:49 p.m. EST

Calpine (CPN) talks and the market walks.

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Under the Radar: Calpine Could Have Further to Fall

The fast-growing power producer received a ton of flak Monday for taking no questions on a conference call designed at rebutting a critical article by

The New York Times

. Calpine held another call Tuesday -- with the stated aim of discussing talks to renegotiate power sale contracts with the state of California -- and spent more than three hours responding to a range of issues raised by concerned holders and snarky critics.

But soon after this marathon gabfest got under way, Calpine stock, already down for the day, plummeted after a series of remarks by executives that the market didn't like. It ended the day down 13% at $15.50, a 52-week low.

If Detox had to make a list of why the market biffed Calpine during the call, these would be the reasons:

1. Bank loans and liquidity

. Much time was spent addressing the critical issue of whether Calpine can increase the size of a corporate revolving loan to $1.5 billion from $400 million. The company said it thought it could do this in early January. But Calpine acknowledged on the call that it wants the extra $1.1 billion to support its trading operation. How likely is it that Calpine's bankers will extend this extra credit after seeing the likes of

J.P. Morgan

Chase

and

Citigroup

get so burnt by lending to the giant energy trader

Enron

(ENE)

? Calpine's head of trading, Paul Posoli, said Tuesday that the company's counterparties weren't asking for more collateral. That may be so. But Calpine's head of financing, Robert Kelly, said on the call that the extra $1 billion was needed to provide "credit support" to the company's traders. The trading business is growing as Calpine has more power to sell, but it can be volatile source of income, compared with the core energy sales that Calpine locks in. And critics, including Detox, have argued that the company has recently relied on these gains to meet earnings estimates. With antsy investors calling on the company to conserve capital, it would seem logical for Calpine to ditch plans to raise another $1 billion to expand trading. The fact that they're plowing ahead will only deepen the suspicion that they need to do more to produce earnings.

2. Dilution

. Calpine executives said they would be willing to issue stock at a low price if cash were needed, and if debt couldn't be issued because it would push the leverage ratio above acceptable levels. (Leverage is here defined as debt to total capital, while capital is debt plus equity and equitylike securities.) The executives didn't say an equity issue was imminent or probable. However, the fact that an offering could be done at a low stock price would make it dilutive for existing shareholders. A big negative. To raise $1 billion at Tuesday's stock price, Calpine would have to issue about 65 million shares, equivalent to 20% of its shares outstanding at the end of the third quarter. Notably, Calpine executives said that they probably wouldn't use an equity issue to pay back a $1 billion convertible bond that may need refinancing in April.

3. Natural gas assets

. Calpine said it could, if it had to, raise $1 billion from "monetizing" its natural gas reserves. That would provide the company with cash, but it would put an up-to-date price on the assets that could be well below what Calpine recently paid for them. That might force the company to do a big writedown to equity, which would, in turn, damage leverage ratios. On the call, Calpine executives played down the notion that they may have to do a writedown, saying future gas prices suggest one isn't necessary.

4. Earnings outlook

. Not only did the company say it may have to revise 2002 earnings guidance, but it also showed uncertainty about fourth-quarter 2001 earnings. This looks bad for three reasons. First, it suggests that Calpine has more of its business unhedged than investors have believed, leaving the company vulnerable to the slump in power prices. Second, it will add weight to the argument that a glut of power generation capacity is building. Third, and critically for investors looking for a bottom in Calpine stock, a large cut in the 2002 earnings outlook could make the stock look a lot pricier than it is at multiples based on current Street estimates. Analysts currently expect Calpine to make $2.52 a share in 2002, putting the stock on a bargain-basement

price-earnings ratio of 6 to 1. But if earnings were to be half that, the P/E would obviously double to 12, which would actually be quite expensive for a company that faces liquidity constraints that could force it to jettison its growth strategy. If Calpine continues to struggle to clear its name, a floor for its stock price may be book value, currently $9 a share.

5. Renegotiating California contracts

. Although this was the ostensible subject of the call, too little was said on this issue. The company gave no indication of how much business might be at stake and was reluctant to surmise on how much of a hit it might take from recasting the forward gas purchases made to fuel the power production.

6. Accounting issues remain

. Calpine revealed on the call that it uses it own in-house method to calculate its leverage. This unorthodox method, which adds $700 million paid for a Canadian gas company to equity, makes the company's leverage ratio look lower than it actually is. At one point on the call, a Calpine executive couldn't detail what was added to net income to get to the company's earnings before interest, taxes, depreciation and amortization (EBITDA) number. This is pertinent because SEC Insight, a research firm that reviews internal

Securities and Exchange Commission

documents, said in a report Tuesday that the SEC had talked with Calpine about the way it presents its EBITDA number in its SEC-filed financials.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to

peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.