Calpine said it earned $73 million, or 19 cents a share, vs. $108 million, or 32 cents a share, in the year-ago period.

Analysts polled by Thomson Financial/First Call expected Calpine to earn, on average, 17 cents a share in the most recent quarter.

"The numbers highlight just how difficult industry conditions are," said Morningstar analyst Paul Larson, who is bearish on the merchant energy group Calpine lost 77 cents, or 15.5 percent, to close at $4.20.

"Falling wholesale energy rates precipitated a severe profitability crunch," Larson noted. "Even though the company generated nearly double the megawatt hours of last year and saw its asset base expand 38 percent, revenue only grew 20 percent, and earnings per share fell 40 percent."

Revenue increased to $1.94 billion in the quarter from $1.61 billion a year ago.

Calpine said that a decrease in electricity and gas prices contributed to the weaker second-quarter results. Soft electricity prices were partly offset by Calpine's (CPN: news, chart, profile) volume of long-term contracts.

However, mark-to-market gains dropped significantly. The company already decided to limit its participation in energy trading because of the expenses associated with the credit required to support it.

"On the liquidity front, Calpine raised $2.5 billion through major financings during the first six months of 2002, reduced capital spending, and sold assets," Chairman Peter Cartwright said in a statement. "We also have launched several new initiatives to strengthen Calpine's cash resources and reduce debt."

Calpine will only begin new projects that meet the company's strict investment requirements, have long-term power sales contracts, and offer access to low-cost financing, Cartwright said.

To date, Calpine has 125 power sales contracts with 80 major wholesale and industrial customers. The company has 70 power plants in operation, generating 16,300 megawatts of electricity.

Looking ahead to the second half, Calpine reduced its full year estimate to a range of 80 cents to a $1, down from $1.50. For the third quarter, Calpine expects to earn 40 to 55 cents. In the fourth quarter, the company estimated a per-share profit of 10 to 15 cents.

The previous full-year estimate was based on a strengthening in power prices, which hasn't happened.

"While Calpine is taking steps to improve its liquidity and bankruptcy does not seem imminent, extreme caution is warranted as a result of an ugly environment that threatens to eat away large chunks of shareholder value," Larson said.