For Calpine (CPN) , silence is golden.

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Under the Radar: Calpine Could Have Further to Fall

After deeply damaging conference calls

Monday and

Tuesday, the embattled power producer refrained from holding another one Wednesday. And, lo and behold, its stock didn't do at all badly, recovering from a 30% decline in the morning to finish the day up 2.7% at $15.91.

Now, of course, this rip-roaring rally wasn't entirely based on Calpine's decision to keep its execs off the horn. The main drivers were an announcement of debt repurchases and mildly positive comments from the rating agency Standard & Poor's, which, unlike its counterparts Moody's and Fitch, still gives the company a junk rating. Do these two developments put a floor under the stock? Well, let's look at what they really mean.

Why So Little?

The debt repurchase, announced at around 3 p.m. EST, could be seen as something of a publicity stunt. The bonds in question are $1 billion of debentures that convert into stock. Holders can demand early repayment of them April 2002, but the market has fretted that Calpine won't have the cash then to pay them off. As a result, any moves to buy them back now at their discounted price and retire them would, in theory, soothe liquidity concerns and create savings for the San Jose, Calif.-based company.

But Calpine needs to buy back a lot more for this to be a significant positive. Wednesday, the company said it bought back bonds with $122 million of face value. Due to the steep discount, this may actually have cost just $75 million to $80 million. A Calpine spokeswoman says the company would've bought back more bonds if they had been available in the market, and the press release says the company "may purchase additional convertible debentures from time to time in open-market or privately negotiated transactions based upon market and other conditions."

But assuming that it really wants to buy back more of these potentially troublesome bonds now, wouldn't Calpine have been smarter to spend a few days buying back more -- say, $500 million worth -- and not publicizing the move till that sum was repurchased? Retiring half the issue would look fantastic, and it would cost the company no more than $350 million, assuming the discount to face value shrank just slightly. Calpine still would have $400 million of cash in hand, which is roughly what it had at the end of the third quarter. If we don't hear of any more purchases, we will have to wonder whether Calpine was in a position to spend more than the estimated $80 million that it has.

Where to Turn?

S&P's comments Tuesday do help Calpine, but again, perhaps only in the battle for market confidence. Undeniably, the following quote from S&P analyst Jeffrey Wolinsky is a boon: "We believe they have sufficient liquidity to basically continue their ongoing construction program, complete the projects that are in construction, and basically refinance the

convertible debentures that may get put to them in April." (The quote was in a

Dow Jones

newswires report; Wolinsky didn't return a call seeking comment.)

The

Dow Jones

report didn't say whether S&P thought Calpine could, as desired, increase the size of a revolving loan to $1.5 billion from the current $400 million. A Calpine exec said on the Tuesday call that this increase was needed for its trading operations, which, while potentially volatile, have been contributing much to earnings. However, Wolinsky was quoted saying: "The trading operations, we feel, are based around an asset base, not a speculative-type of investment strategy. So we also have comfort in how they're trading their power."

But can we implicitly trust the ratings agencies now? The

Enron

debacle showed that rating agencies' opinions are hard to rely on in a crisis situation. The agencies held off downgrading Enron not because they felt its credit quality was stable, but because they knew a downgrade could finish the company off. In other words, once they became an intrinsic part of Enron's problems, the rating agencies ceased acting as assessors of credit.

Something similar may be brewing with S&P and Calpine. Alternatively, the rating agencies have learned from the Enron episode and have resolved not to play politics again. If that's so and Moody's thinks fundamentals have deteriorated, it wouldn't hesitate to take Calpine's ratings down to junk, which would be far more damaging than an S&P cut.

Those holding the stock no doubt pray that Calpine hasn't planned a call for Thursday.

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.