Calpine Financial Error Pushes Shares Down 9%
To the list of the many worries afflicting power producer Calpine Corp., add this: math anxiety.
Calpine is ensnared in lawsuits, burdened with debt and dogged by naysayers. On Friday, one day after the company confessed to making a simple error that boosted a key profit figure, investors sent Calpine shares tumbling 21 cents to $2.09 -- a 9% drop. The downdraft spilled over to Calpine’s bonds, whose losses accelerated after Fitch Ratings lowered its rating on the company’s debt further into junk-bond territory.
It didn’t help that in correcting the mistake, San Jose-based Calpine lowered its third-quarter earnings before interest, taxes, depreciation and amortization, or EBITDA, by 26%. As Calpine Chief Financial Officer Robert Kelly was quick to point out, however, the revision had no effect on net income or cash on hand.
“On top of everything else, they didn’t need that,” said Mike Worms, an analyst at Harris Nesbitt Gerard. “These things happen.... It wasn’t any kind of an Enron thing” in which deliberate accounting shenanigans were used to hide financial problems.
Daniele Seitz, an analyst with Maxcor Financial Inc., called the incident “one of these ‘oops’ stories that you obviously don’t want to happen to you.”
Calpine, which owns power plants in 21 states including California, has been selling assets to reduce debt. High natural gas prices and bondholder disputes have tied up cash and slowed its debt-repayment plans, the company said Thursday as it posted a third-quarter loss of $216.7 million, or 45 cents a share. A year earlier, profit was $141.1 million, or 32 cents.
But shortly after Calpine executives briefed more than 1,000 analysts and investors, the company discovered that it had double-counted a noncash charge on a power-plant sale and that correcting the mistake would lower one earnings measurement.
“Put simply: A mistake was made,” Kelly told analysts Friday in a hastily called mea culpa conference call.
The company notified the New York Stock Exchange, which halted trading in Calpine shares shortly before 3 p.m. Eastern time, an hour before the session’s normal close. The exchange cited “pending news.”
For several hours, investors grew more anxious when they couldn’t get through to the company. Some imagined all kinds of calamities, including bankruptcy, Seitz said.
“This one feels almost good compared to all the things we imagined for two hours,” Seitz said. But “to trip on something so simple ... is embarrassing.”
Calpine’s adjusted EBITDA to $379.6 million, down from the $516.4 million it had reported earlier in the day. EBITDA is viewed as a key indicator of a company’s ability to pay its debt.
Calpine declined to lay blame for the mistake with any one person or group.
Charles Mulford, an accounting professor at the Georgia Institute of Technology, said mistakes like Calpine’s aren’t common, but they happen. The error at Calpine, he noted, was contained in quarterly reports that had not been audited or filed with the Securities and Exchange Commission. Yet, such preliminary reports are standard fodder for stock traders.
“People jump all over these numbers,” Mulford said. “If there’s a lesson for investors, it’s be careful with unaudited numbers.”
