It can take just one number to spark questions about a company's accounting. In the case of power producer Calpine ( CPN), that figure is an obscure balance sheet entry for the amount the company is spending to construct plants. Put simply, the $7.2 billion that Calpine had down as an asset for "construction in progress" at the end of September seems too big for the amount of electricity-generation plant it says it's currently building. To Calpine skeptics, the size of this figure could indicate that the company is using its balance sheet as a place to book spending that should run through its income statement as an expense. Companies legitimately place many capital costs on their balance sheet in a process called capitalization, but the accounting method has been widely abused to goose earnings. The most flagrant example in recent times was WorldCom's booking of billions of dollars of operating costs as capital spending. Let's be clear, there is no black-and-white evidence that Calpine is abusing capitalization. And Calpine denies it's keeping operating costs out of its earnings calculations in this way. It adds that the size of the construction asset can be explained by the fact that it contains more items than just partially built electricity plants. Nevertheless, the sheer size of the construction asset does invite closer inspection. That's because Calpine's explanation raises the possibility that it has hard-to-value assets in the $7.2 billion that may be vulnerable to a large writedown that could deplete the company's net worth, or equity. Calpine's $13 billion of debt dwarfs its $3.9 billion in equity, so any reduction in the latter could make it very hard for Calpine to maintain the confidence of creditors. Calpine's stock has plummeted 78% this year as a slump in power prices has hurt profitability and created real fears that the company wouldn't have enough cash to fund its ambitious power plant building program, as well as current spending and debt costs. Confronted by such concerns, Calpine aggressively scaled back its building program, and now expects to have around 30,000 megawatts of power production capacity in place when the plants under construction are completed. Its former goal was 70,000 megawatts, which would've been enough to power 10 cities the size of New York. Thursday, Calpine stock fell 2.7% to $3.63.
In times of financial stress, investors are more likely to closely examine balance sheets for signs of stress. And the figure for Calpine's assets under construction is a useful number to zero in on because it can give a feel for how much capital is being spent in one of the most prolific power-plant buildouts ever undertaken by one company.