-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I4AqiTVF3ph8gHLUYy9yIkKEczstYU5v9T27OjgCz0CYcJrc7QDkn4PuUdpO9CHN p7QfoMak3ZvQ9iyusuT6lA== 0000891618-96-001884.txt : 19960823 0000891618-96-001884.hdr.sgml : 19960823 ACCESSION NUMBER: 0000891618-96-001884 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19960822 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALPINE CORP CENTRAL INDEX KEY: 0000916457 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 770031605 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-07497 FILM NUMBER: 96618901 BUSINESS ADDRESS: STREET 1: 50 WEST SAN FERNANDO ST CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089955115 MAIL ADDRESS: STREET 1: 50 W SAN FERNANDO STREET 2: SUITE 500 CITY: SAN JOSE STATE: CA ZIP: 95113 S-1/A 1 FORM S-1 AMEND #1 CALPINE CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1996 REGISTRATION NO. 333-07497 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CALPINE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 4911 77-0212977 (STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
50 WEST SAN FERNANDO STREET SAN JOSE, CA 95113 (408) 995-5115 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ PETER CARTWRIGHT PRESIDENT AND CHIEF EXECUTIVE OFFICER CALPINE CORPORATION 50 WEST SAN FERNANDO STREET SAN JOSE, CA 95113 (408) 995-5115 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOSEPH E. RONAN, JR., ESQ. SCOTT D. LESTER, ESQ. JOSEPH A. COCO, ESQ. GENERAL COUNSEL BROBECK, PHLEGER & HARRISON LLP SKADDEN, ARPS, SLATE, CALPINE CORPORATION ONE MARKET MEAGHER & FLOM 50 WEST SAN FERNANDO STREET SPEAR STREET TOWER 919 THIRD AVENUE SAN JOSE, CA 95113 SAN FRANCISCO, CA 94105 NEW YORK, NY 10022 (408) 995-5115 (415) 442-0900 (212) 735-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form is to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE ==============================================================================================================================
PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3) - -------------------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value........... 20,751,750 shares $21.00 $435,786,750 $150,272 - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Includes 2,706,750 shares of Common Stock which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) of the Securities Act of 1933. (3) Previously paid. ---------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE The Registration Statement contains a Prospectus relating to a public offering in the United States and Canada of an aggregate of 14,436,000 shares of Common Stock, $.001 par value, of the Company (the "U.S. Offering"), together with a separate prospectus cover page relating to a concurrent offering outside the United States and Canada of an aggregate of 3,609,000 shares of Common Stock, $.001 par value, of the Company (the "International Offering"). The complete prospectus for the U.S. Offering follows immediately. Following such prospectus are certain pages of the prospectus for the International Offering as follows: a front cover page (page A-1), table of contents (page A-2), a page to replace a portion of the "Risk Factors" section (page A-3), a page to replace a portion of the "Shares Eligible for Future Sale" section (page A-4), pages containing the "Subscription and Sale" section to replace the "Underwriting" section (pages A-5 through A-8), and a back cover page (page A-9). All other pages of the prospectus for the U.S. Offering are to be used for both the U.S. Offering and the International Offering. Copies of the complete Prospectus for each of the U.S. Offering and the International Offering in the exact forms in which they are to be used after effectiveness will be filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the General Rules and Regulations under the Securities Act of 1933, as amended. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST 22, 1996 LOGO 18,045,000 Shares Calpine Corporation Common Stock ($.001 par value) ------------------ Of the shares of Common Stock, $.001 par value ("Common Stock"), of Calpine Corporation (the "Company" or "Calpine") offered hereby, 5,477,820 shares are being sold by the Company and 12,567,180 shares are being sold by the Selling Stockholder named herein under "Principal and Selling Stockholders." Of the 18,045,000 shares of Common Stock being offered, 14,436,000 shares are initially being offered in the United States and Canada (the "U.S. Shares") by the U.S. Underwriters (the "U.S. Offering") and 3,609,000 shares are initially being concurrently offered outside the United States and Canada (the "International Shares") by the Managers (the "International Offering" and, together with the U.S. Offering, the "Common Stock Offering"). The offering price and underwriting discounts and commissions of the U.S. Offering and the International Offering are identical. Prior to the Common Stock Offering, there has been no public market for the Common Stock. It is anticipated that the initial public offering price will be between $17.00 and $20.00 per share. For information relating to the factors considered in determining the initial public offering price to the public, see "Underwriting." The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "CPN," subject to notice of issuance. ------------------ FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREIN. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions Calpine(1) Stockholder ---------------- ---------------- ---------------- ---------------- Per Share.................... $ $ $ $ Total(2)..................... $ $ $ $
(1) Before deduction of expenses payable by Calpine, estimated at $809,000. (2) The Company has granted the U.S. Underwriters and the Managers an option, exercisable by CS First Boston Corporation for 30 days from the date of this Prospectus, to purchase a maximum of 2,706,750 additional shares to cover over-allotments of shares. If the option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ , Proceeds to Calpine will be $ and Proceeds to Selling Stockholder will be $ . ------------------ The U.S. Shares are offered by the several U.S. Underwriters when, as and if delivered to and accepted by the U.S. Underwriters and subject to their right to reject orders in whole or in part. It is expected that the U.S. Shares will be ready for delivery on or about , 1996, against payment in immediately available funds. CS First Boston Morgan Stanley & Co. Incorporated PaineWebber Incorporated Salomon Brothers Inc The date of this Prospectus is , 1996. 4 IN CONNECTION WITH THE COMMON STOCK OFFERING, CS FIRST BOSTON CORPORATION ON BEHALF OF THE U.S. UNDERWRITERS AND MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THE COMMON STOCK OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those projected in such forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Unless the context indicates otherwise, (i) all references in this Prospectus to the "Company" or "Calpine" include Calpine Corporation and its consolidated subsidiaries, (ii) all references to "Common Stock" refer to the Company's Common Stock, $.001 par value, (iii) all information in this Prospectus relating to the Company's Common Stock assumes no exercise of the Underwriters' over-allotment option, and (iv) all information in this Prospectus assumes the following transactions are completed prior to or concurrent with the consummation of the Common Stock Offering: (1) the reincorporation of the Company in Delaware, (2) the conversion of the Company's outstanding Class B Common Stock into Common Stock and the elimination of the Class A Common Stock and Class B Common Stock, (3) a 5.194-for-1 stock split of the Company's Common Stock, and (4) the conversion of the Company's outstanding Preferred Stock into 2,179,487 shares of Common Stock. THE COMPANY Calpine is engaged in the acquisition, development, ownership and operation of power generation facilities and the sale of electricity and steam in the United States and selected international markets. The Company has interests in 14 power generation facilities and steam fields having an aggregate capacity of 937 megawatts. Upon the completion of the acquisition of the 120 megawatt natural gas-fired Gilroy cogeneration facility (the "Gilroy Facility"), the Company will have interests in 15 power generation facilities and steam fields having an aggregate capacity of 1,057 megawatts. See "Business -- Description of Facilities -- Power Generation Facilities -- Gilroy Facility." Since its inception in 1984, Calpine has developed substantial expertise in all aspects of electric power generation. The Company's vertical integration has resulted in significant growth over the last five years as Calpine has applied its extensive engineering, construction management, operations, fuel management and financing capabilities to successfully implement its acquisition and development program. During the last five years, Calpine has expanded substantially, from $41.2 million of total assets as of December 31, 1991 to $910.3 million of total assets on a pro forma basis as of June 30, 1996. Calpine's revenue on a pro forma basis for 1995 increased to $224.3 million, representing a compound annual growth rate of 55% since 1991. The Company's EBITDA (as defined herein) on a pro forma basis for 1995 increased to $123.8 million. See "Pro Forma Consolidated Financial Data." Calpine's strategy is to capitalize on opportunities in the power market through an ongoing program to acquire, develop, own and operate electric power generation facilities, as well as marketing power and energy services to utilities and other end users. THE MARKET The power generation industry represents the third largest industry in the United States, with an estimated end user market of approximately $207.5 billion of electricity sales and 3 million gigawatt hours of production in 1995. In response to increasing customer demand for access to low cost electricity and enhanced services, new regulatory initiatives are currently being adopted or considered at both state and federal levels to increase competition in the domestic power generation industry. To date, such initiatives are under consideration at the federal level and in approximately thirty states. For example, in April 1996, the Federal Energy Regulatory Commission ("FERC") adopted Order No. 888, opening wholesale power sales to competition and providing for open and fair electric transmission services by public utilities. In addition, the California Public Utilities Commission ("CPUC") has issued an electric industry restructuring decision which envisions commencement of deregulation and implementation of customer choice of electricity supplier by January 1, 1998. Calpine believes that industry trends and such regulatory initiatives will lead to the transformation of the existing market, which is largely characterized by electric utility monopolies selling to a captive customer base, to a more competitive market where end users may purchase electricity from a variety of suppliers, including non-utility generators, power marketers, public utilities and others. The Company believes that these market trends will create substantial opportunities for companies such as Calpine that are low cost power producers and have an integrated power services capability which enables them to produce and sell energy to customers at competitive rates. The Company also believes that these market trends will result in the disposition of power generation facilities by utilities, independent power producers and industrial companies. Utilities such as Pacific Gas & Electric Company ("PG&E") and Southern California Edison Company have announced their intentions to sell power generation facilities totalling approximately 3,150 megawatts and 5,000 megawatts, respectively. The independent power industry, which represents approximately 8% of the installed capacity in the United 3 6 States, or approximately 59,000 megawatts, and has accounted for approximately 50% of all additional capacity in the United States since 1990, is currently undergoing significant consolidation. Many independent producers operating a limited number of power plants are seeking to dispose of such plants in response to competitive pressures, and industrial companies are selling their power plants to redeploy capital in their core businesses. Over 200 independent power plant and portfolio sale transactions have occurred in the past two years. The Company believes that this consolidation will continue in the highly fragmented independent power industry. The power generation industry outside the United States is approximately three times larger than the domestic market, and the demand for electricity is growing rapidly. In 1996, it has been estimated that in excess of 590 gigawatts of new capacity will be required outside the United States over the ensuing ten-year period. In order to satisfy this anticipated increase in demand, many countries have adopted active government programs designed to encourage private investment in power generation facilities. The Company believes that these market trends will create significant opportunities to acquire and develop power generation facilities in such countries. STRATEGY Calpine's objective is to become a leading power company by capitalizing on these emerging opportunities in the domestic and international power markets. The key elements of the Company's strategy are as follows: Expand and diversify domestic portfolio of power projects. In pursuing its growth strategy, the Company intends to focus on opportunities where it is able to capitalize on its extensive management and technical expertise to implement a fully integrated approach to the acquisition, development and operation of power generation facilities. This approach includes design, engineering, procurement, finance, construction management, fuel and resource acquisition, operations and power marketing, which Calpine believes provides it with a competitive advantage. By pursuing this strategy, the Company has significantly expanded and diversified its project portfolio. Since 1993, the Company has completed transactions involving four gas-fired cogeneration facilities and two steam fields. In addition, the acquisition of the Gilroy Facility is expected to be completed during the third quarter of 1996. As a result of these transactions, the Company will have more than doubled its aggregate power generation capacity and substantially diversified its fuel mix since 1993. The Company is also pursuing the development of highly efficient, low cost power plants that seek to take advantage of inefficiencies in the electricity market. The Company intends to sell all or a portion of the power generated by such merchant plants into the competitive market, rather than exclusively through long-term power sales agreements. As part of Calpine's initial effort to develop merchant plants, the Company entered into an agreement with Phillips Petroleum Company to develop a gas-fired cogeneration project with a capacity of 240 megawatts. Under this agreement, approximately 90 megawatts of electricity will be sold to the Phillips Houston Chemical Complex, with the remainder to be sold into the competitive market through Calpine's power marketing activities. The Company expects that this project will represent a prototype for future merchant plant developments. The development of this project is subject to the satisfaction of various conditions, including completion of financing and obtaining required approvals. See "Business -- Development and Future Projects." Enhance the performance and efficiency of existing power projects. The Company continually seeks to maximize the power generation potential of its operating assets and minimize its operating and maintenance expenses and fuel costs. To date, the Company's power generation facilities have operated at an average availability in excess of 97%. The Company believes that achieving and maintaining a low cost of production will be increasingly important to compete effectively in the power generation market. Continue to develop an integrated power marketing capability. The Company has established an integrated power marketing capability, conducted through its wholly owned subsidiary, Calpine Power Services Company ("CPSC"). In 1995, CPSC received approval from the FERC to conduct power marketing activities. The Company believes that a power marketing capability complements its business strategy of providing low cost power generation services. CPSC's power marketing activities will focus on the development of long-term customer service relationships, supported primarily by generating assets that are owned, operated or controlled by Calpine. CPSC will aggregate the Company's own resources, the resources of its customers, power pool resources, and market power supply to provide the customized services demanded by its customers at a competitive price. 4 7 Selectively expand into international markets. Internationally, the Company intends to utilize its geothermal and gas-fired expertise in selected markets of Southeast Asia and Latin America, where demand for power is rapidly growing and private investment is encouraged. In November 1995, the Company made an investment in the Cerro Prieto steam fields, located in Baja California, Mexico. In March 1996, the Company entered into a joint venture agreement to pursue the development of a geothermal resource in Indonesia with an estimated potential capacity in excess of 500 megawatts. Calpine believes that its investments in these projects will effectively position it for future expansion in Southeast Asia and Latin America. BACKGROUND Calpine was founded in 1984 by Peter Cartwright, the Company's President and Chief Executive Officer. Through 1988, the Company provided engineering, management, finance and operating and maintenance services to the emerging independent power production industry. Since 1989, the Company has focused on the acquisition, development, ownership, operation and maintenance of gas-fired and geothermal power generation facilities. Prior to the Common Stock Offering, the Company has been a wholly owned subsidiary of Electrowatt Ltd. ("Electrowatt"), a major utility, industrial products and engineering services company based in Zurich, Switzerland. Electrowatt has advised the Company that its current strategy is to focus its resources on its industrial business. As a result of the Common Stock Offering, Electrowatt will no longer own any interest in the Company and Calpine management will hold stock options representing approximately 11.7% of the Company's Common Stock. Calpine was incorporated under the laws of the State of California in 1984 and will be reincorporated in the State of Delaware prior to the completion of the Common Stock Offering. The principal executive offices of the Company are located at 50 West San Fernando Street, San Jose, California 95113, and its telephone number is (408) 995-5115. RISK FACTORS Prospective investors should carefully consider the information presented in this Prospectus, particularly the matters set forth under the caption "Risk Factors." THE COMMON STOCK OFFERING Of the Common Stock offered hereby, 14,436,000 shares are initially being offered in the United States and Canada by the U.S. Underwriters in the U.S. Offering and 3,609,000 shares are initially being concurrently offered outside the United States and Canada by the Managers in the International Offering. Total Common Stock offered................... 18,045,000 shares By the Company U.S. Offering........................... 4,382,256 shares International Offering.................. 1,095,564 shares Total.............................. 5,477,820 shares By the Selling Stockholder U.S. Offering........................... 10,053,744 shares International Offering.................. 2,513,436 shares Total.............................. 12,567,180 shares Common Stock to be outstanding after the Common Stock Offering.................. 18,045,000 shares(1) Use of proceeds.............................. The net proceeds of the sale of shares of Common Stock by the Company will be used for working capital and general corporate purposes, including the development and acquisition of power generation facilities. See "Use of Proceeds." NYSE trading symbol.......................... CPN
- --------------- (1) Excludes 2,392,026 shares of Common Stock reserved for issuance upon exercise of options previously granted and outstanding as of June 30, 1996 under the Company's Stock Option Program. Of such amount, options to purchase 1,366,696 shares were exercisable as of June 30, 1996. See "Management -- Stock Option Program" and "-- 1996 Stock Incentive Plan." 5 8 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------ -------------------------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- ------------------------ --------- ------------------------- PRO FORMA(1) ACTUAL ------------ ACTUAL PRO FORMA(2) --------- --------- ------------- (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenue.... $39,052 $39,577 $69,915 $94,762 $132,098 $224,261 $50,352 $81,994 $93,068 Cost of revenue.... 25,064 25,921 42,501 52,845 77,388 142,298 30,618 51,319 65,940 Gross profit..... 13,988 13,656 27,414 41,917 54,710 81,963 19,734 30,675 27,128 Project development expenses... 1,067 806 1,280 1,784 3,087 3,087 1,308 1,410 1,410 General and administrative expenses... 3,443 3,924 5,080 7,323 8,937 8,937 3,659 5,874 5,874 Income from operations... 9,478 6,902 21,054 31,772 42,686 69,939 14,767 23,391 19,844 Interest expense.... 1,925 1,225 13,825 23,886 32,154 57,523 15,116 18,665 27,900 Other income, net........ (416) (310) (1,133) (1,988) (1,895) (9,158) (855) (2,777) (5,303) Net income (loss)..... 5,958 3,460 3,754 6,021 7,378 12,810 298 4,423 (1,623) Weighted average shares outstanding(3)... 14,187 14,187 14,476 14,476 Net income (loss) per share(3)... $0.52 $0.90 $0.31 $(0.11) OTHER FINANCIAL DATA: Depreciation and amortization... $ 219 $ 232 $12,540 $21,580 $ 26,896 $42,734 $ 9,882 $15,757 $21,302 EBITDA(4).... $ 4,909 $ 9,898 $42,370 $53,707 $ 69,515 $123,770 $25,440 $41,345 $46,993 SELECTED OPERATING INFORMATION:(5) Power plants: Electricity revenue:(6) Energy... $33,426 $38,325 $37,088 $45,912 $54,886 $80,255 $22,323 $34,362 $36,839 Capacity... $ 7,562 $ 7,707 $ 7,834 $ 7,967 $30,485 $58,116 $ 9,051 $19,774 $28,364 Megawatt hours produced... 392,471 403,274 378,035 447,177 1,033,566 1,859,277 324,059 736,739 860,969 Average energy price per kilowatt hour(7)... 8.517c 9.503c 9.811c 10.267c 5.310c 4.317c 6.889c 4.664c 4.279c Steam fields: Steam revenue: Calpine... $36,173 $33,385 $31,066 $32,631 $39,669 $39,669 $17,639 $15,866 $15,866 Other interest... $ 2,820 $ 2,501 $ 2,143 $ 2,051 -- -- -- -- -- Megawatt hours produced... 2,095,576 2,105,345 2,014,758 2,156,492 2,415,059 2,415,059 1,027,317 1,040,271 1,040,271 Average price per kilowatt hour..... 1.861c 1.705c 1.648c 1.608c 1.643c 1.643c 1.717c 1.525c 1.525c
AS OF JUNE 30, 1996 AS OF DECEMBER 31, ----------------------------------------- ---------------------------------------------------------- PRO PRO FORMA AS 1991 1992 1993 1994 1995 ACTUAL FORMA(2) ADJUSTED(2)(8) ------- ------- -------- -------- -------- -------- --------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........ $ 958 $ 2,160 $ 6,166 $ 22,527 $ 21,810 $ 38,403 $ 14,753 $ 109,583 Property, plant and equipment, net..... 351 424 251,070 335,453 447,751 530,203 655,203 655,203 Total assets......... 41,245 55,370 302,256 421,372 554,531 792,812 910,280 1,005,110 Total liabilities.... 34,624 44,865 288,827 402,723 529,304 713,156 830,624 830,624 Stockholder's equity............. 6,621 10,505 13,429 18,649 25,227 79,656 79,656 174,486 (see footnotes on next page)
6 9 - ------------ (1) The pro forma information presented under statement of operations data and other financial data for the year ended December 31, 1995 gives effect to the following transactions as if such transactions had occurred on January 1, 1995: (i) the acquisition by the Company of the Greenleaf 1 and 2 Facilities (the "Greenleaf Transaction"); (ii) the acquisition by the Company of the lease for the Watsonville Facility (the "Watsonville Transaction"); (iii) the entry by the Company into the agreements in respect of the Cerro Prieto Steam Fields (the "Cerro Prieto Transaction"); (iv) the entry by the Company into a transaction involving a lease for the King City Facility (the "King City Transaction"); (v) the acquisition by the Company of the Gilroy Facility (the "Gilroy Transaction"); (the Greenleaf Transaction, the Watsonville Transaction, the Cerro Prieto Transaction, the King City Transaction and the Gilroy Transaction being collectively referred to as the "Transactions"); (vi) the $50.0 million Preferred Stock investment in Calpine by Electrowatt (the "Preferred Stock Investment") and the application of the proceeds therefrom; and (vii) the sale of the Company's 10 1/2% Senior Notes Due 2006 (the "10 1/2% Senior Notes") and the application of the net proceeds therefrom. The pro forma information presented under selected operating information for the year ended December 31, 1995 gives effect to the Greenleaf Transaction, the Watsonville Transaction, the King City Transaction and the Gilroy Transaction as if such transactions had occurred on January 1, 1995. See "Pro Forma Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Description of Facilities." (2) The pro forma information presented under statement of operations data, other financial data and selected operating information for the six months ended June 30, 1996 gives effect to (i) the King City Transaction, (ii) the Gilroy Transaction and (iii) the sale of the 10 1/2% Senior Notes and the application of the net proceeds therefrom as if such transactions had occurred on January 1, 1996. The pro forma information presented under balance sheet data as of June 30, 1996 gives effect to the Gilroy Transaction as if such transaction had occurred on June 30, 1996. See "Pro Forma Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Description of Facilities." (3) The actual and pro forma weighted average shares outstanding and net income (loss) per share for the year ended December 31, 1995 and the six months ended June 30, 1996 give effect to the issuance of Common Stock upon the conversion of the Company's outstanding Preferred Stock. (4) EBITDA is defined as income from operations plus depreciation, capitalized interest, other income, non-cash charges and cash received from investments in power projects, reduced by the income from unconsolidated investments in power projects. EBITDA is presented not as a measure of operating results but rather as a measure of the Company's ability to service debt. EBITDA should not be construed as an alternative either (i) to income from operations (determined in accordance with generally accepted accounting principles) or (ii) to cash flows from operating activities (determined in accordance with generally accepted accounting principles). (5) For an explanation of such selected operating information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Selected Operating Information." (6) The significant increase in capacity revenue and the accompanying decline in average energy price per kilowatt hour since 1994 reflects the increase in the Company's megawatt hour production as a result of acquisitions of gas-fired cogeneration facilities by the Company. (7) Average energy price per kilowatt hour represents energy revenue divided by the kilowatt hours produced. (8) Adjusted to reflect the sale of the 5,477,820 shares of Common Stock offered by the Company hereby at an assumed initial offering price of $18.50 per share, and the application of the net proceeds therefrom as described in "Use of Proceeds." 7 10 RISK FACTORS Prospective purchasers of the Common Stock should carefully consider the factors set forth below, as well as the other information contained in this Prospectus, in evaluating an investment in the Common Stock. HIGH LEVERAGE The Company is highly leveraged as a result of outstanding indebtedness of the Company and non-recourse debt financing of certain of the Company's subsidiaries incurred to finance the acquisition and development of power generation facilities. As of June 30, 1996, the Company's total consolidated indebtedness was $499.8 million, its total consolidated assets were $792.8 million and its stockholder's equity was $79.7 million. At such date, on a pro forma basis after giving effect to the Gilroy Transaction, the Company's total consolidated indebtedness would have been $615.8 million, its total consolidated assets would have been $910.3 million and its stockholder's equity would have been $79.7 million. See "Capitalization," "Pro Forma Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The ability of the Company to meet its debt service obligations and to repay outstanding indebtedness according to its terms will be dependent primarily upon the performance of the power generation facilities in which the Company has an interest. The Indenture dated May 16, 1996 (the "10 1/2% Indenture") relating to the Company's 10 1/2% Senior Notes and the Indenture dated February 17, 1994 (the "9 1/4% Indenture") relating to the Company's 9 1/4% Senior Notes Due 2004 (the "9 1/4% Senior Notes") (collectively, the "Indentures") contain certain restrictive covenants. Such restrictions will affect, and in many respects will significantly limit or prohibit, among other things, the ability of the Company or its subsidiaries or such other entities, as the case may be, to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with affiliates, create liens, sell assets and engage in mergers and consolidations. The Indentures also contain provisions that require the Company, in the event of certain change of control transactions, to make an offer to purchase the 10 1/2% Senior Notes and the 9 1/4% Senior Notes. The Common Stock Offering will not constitute a change of control transaction under the Indentures. There can be no assurance that the Company will have the financial resources necessary to purchase the 10 1/2% Senior Notes and the 9 1/4% Senior Notes upon a change of control. Such change of control provisions contained in the Indentures may not be waived by the Board of Directors of the Company. The Company believes that, based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, including borrowings under the Company's existing borrowing arrangements, will be adequate to make required payments of principal and interest on the Company's debt, including the 10 1/2% Senior Notes and the 9 1/4% Senior Notes, and to enable the Company to comply with the terms of its debt agreements, although there can be no assurance that this will be the case. If the Company is unable to comply with the terms of its debt agreements and fails to generate sufficient cash flow from operations in the future, the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained, particularly in view of the Company's high levels of debt and the debt incurrence restrictions under existing debt agreements. If cash flow is insufficient and no such refinancing or additional financing is available, the Company may be forced to default on its debt obligations. In the event of a default under the terms of any of the indebtedness of the Company, subject to the terms of such indebtedness, the obligees thereunder would be permitted to accelerate the maturity of such obligations, which could cause defaults under other obligations of the Company. See "-- Possible Unavailability of Financing," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." POSSIBLE UNAVAILABILITY OF FINANCING Each power generation facility acquired or developed by the Company will require substantial capital investment. The Company's ability to arrange financing and the cost of such financing are dependent upon numerous factors, including general economic and capital market conditions, conditions in energy markets, regulatory developments, credit availability from banks or other lenders, investor confidence in the industry 8 11 and the Company, the continued success of the Company's current facilities, and provisions of tax and securities laws that are conducive to raising capital. There can be no assurance that financing for new facilities will be available to the Company on acceptable terms in the future. In addition, there can be no assurance that all required governmental permits and approvals for the Company's new or acquired facilities will be obtained, that the Company will be able to obtain favorable power sales agreements and adequate financing, or that the Company will be successful in the development of power generation facilities in the future. Historically, the Company has been successful in obtaining debt financing for its facilities and has relied on Electrowatt, currently the Company's sole stockholder, to provide funding for a substantial portion of its facility equity commitments. The Company currently has an existing $50.0 million credit facility with Credit Suisse (the "Credit Suisse Credit Facility"), which was arranged for the Company by Electrowatt. In connection with the Common Stock Offering, Electrowatt will sell all of its shares of Common Stock of the Company and, as a result, the Company will no longer be able to rely on Electrowatt for financing. Upon the completion of the Common Stock Offering, the Credit Suisse Credit Facility will terminate. On July 20, 1996, the Company entered into a Commitment Letter with The Bank of Nova Scotia for a $50.0 million three-year revolving credit facility (the "Bank of Nova Scotia Facility"). The Bank of Nova Scotia Facility will become effective upon the completion of the Common Stock Offering, and will contain certain restrictions that will significantly limit or prohibit, among other things, the ability of the Company or its subsidiaries to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with affiliates, create liens, sell assets and engage in mergers and consolidations. See "Management's Discussion and Analysis of Result of Operations and Financial Condition -- Liquidity and Capital Resources." The Company's power generation facilities have been financed using a variety of leveraged financing structures, consisting of corporate debt, non-recourse debt and lease obligations. As of June 30, 1996, on a pro forma basis after giving effect to the Gilroy Transaction, the Company would have had approximately $615.8 million of total consolidated indebtedness, of which approximately 53% would have represented non-recourse subsidiary debt. See "Pro Forma Consolidated Financial Data." Each non-recourse debt and lease obligation is structured to be fully paid out of cash flow provided by the facility or facilities, the assets of which (together with pledges of stock or partnership interests in the entity owning the facility) collateralize such obligations, without any claim against the Company's general corporate funds. Such leveraged financing permits the development of larger facilities, but also increases the risk to the Company that its interest in a particular facility could be impaired or that fluctuations in revenues could adversely affect the Company's ability to meet its lease or debt obligations. The significant debt collateralized by the interests of the Company in each operating facility reduces the liquidity of such assets since any sale or transfer of a facility would be subject both to the lien securing the facility indebtedness and to transfer restrictions in the financing agreements. While the Company intends to utilize non-recourse or lease financing when appropriate, there can be no assurance that market conditions and other factors will permit the same limited equity investment by the Company or the same substantially non-recourse nature of financings for future facilities. In the event of a default under a financing agreement, and assuming the Company or the other equity investors in a facility are unable or choose not to cure such default within applicable cure periods, if any, the lenders or lessors would generally have rights to the facility, any related geothermal resource or natural gas reserves, related contracts and cash flows and all licenses and permits necessary to operate the facility. In the event of foreclosure after such a default, the Company might not retain any interest in such facility. The Company does not believe the existence of non-recourse or lease financing will materially affect its ability to continue to borrow funds in the future in order to finance new facilities. There can be no assurance, however, that the Company will continue to be able to obtain the financing required to develop its power facilities on terms satisfactory to the Company. See "Business -- Description of Facilities." The Company has from time to time guaranteed certain obligations of its subsidiaries and other affiliates. There can be no assurance that, in respect of any financings of facilities in the future, lenders or lessors will not require the Company to guarantee the indebtedness of such future facilities, rendering the Company's general corporate funds vulnerable in the event of a default by such facility or related subsidiary. If the lenders or lessors were to require such guarantees, and the Company were unable to incur indebtedness in respect of such 9 12 guarantees under the restrictions on indebtedness (including guarantees) contained in the Indentures, the Company's ability to fund new facilities could be adversely affected. The Indentures do not limit the ability of the Company's subsidiaries to incur non-recourse or lease financing for investment in new facilities. Calpine Geysers Company, L.P. ("CGC"), a wholly owned subsidiary of Calpine, owns the West Ford Flat Facility, the Bear Canyon Facility, the PG&E Unit 13 and Unit 16 Steam Fields and the SMUDGEO #1 Steam Fields. Calpine Greenleaf Corporation ("Calpine Greenleaf"), a wholly owned subsidiary of Calpine, owns the Greenleaf 1 and 2 Facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" and "Business -- Description of Facilities." The non-recourse facility financing of each of CGC and Calpine Greenleaf is collateralized by all of the assets and properties of each of the facilities and steam fields owned by such subsidiary. In the event of a reduction in revenue derived from one or more of these facilities or steam fields which results in a failure to make any payments on, or if such subsidiary otherwise defaults in its obligations under the terms of, its non-recourse project financing, the lenders would be entitled to foreclose on all of the assets of such subsidiary, including the assets pertaining to each such facility and steam field. RISKS RELATED TO THE DEVELOPMENT AND OPERATION OF GEOTHERMAL ENERGY RESOURCES The development and operation of geothermal energy resources are subject to substantial risks and uncertainties similar to those experienced in the development of oil and gas resources. The successful exploitation of a geothermal energy resource ultimately depends upon the heat content of the extractable fluids, the geology of the reservoir, the total amount of recoverable reserves and operational factors relating to the extraction of fluids, including operating expenses, energy price levels and capital expenditure requirements relating primarily to the drilling of new wells. In connection with the development of a project, the Company estimates the productivity of the geothermal resource and the expected decline in such productivity. The productivity of a geothermal resource may decline more than anticipated, resulting in insufficient recoverable reserves being available for sustained generation of the electrical power capacity desired. An incorrect estimate by the Company or an unexpected decline in productivity could have a material adverse effect on the Company's results of operations. Geothermal reservoirs are highly complex, and, as a result, there exist numerous uncertainties in determining the extent of the reservoirs and the quantity and productivity of the steam reserves. Reservoir engineering is an inexact process of estimating underground accumulations of steam or fluids that cannot be measured in any precise way, and depends significantly on the quantity and accuracy of available data. As a result, the estimates of other reservoir specialists may differ materially from those of the Company. Estimates of reserves are generally revised over time on the basis of the results of drilling, testing and production that occur after the original estimate was prepared. While the Company has extensive experience in the operation and development of geothermal energy resources and in preparing such estimates, there can be no assurance that the Company will be able to successfully manage the development and operation of its geothermal reservoirs or that the Company will accurately estimate the quantity or productivity of its steam reserves. IMPACT OF AVOIDED COST PRICING; ENERGY PRICE FLUCTUATIONS Eight of the existing power plants in which the Company has an interest sell electricity to PG&E under separate long-term power sales agreements. Each of these agreements provides for both capacity payments and energy payments for the term of the agreement. During the initial ten-year period of certain of the agreements, PG&E pays a fixed price for each unit of electrical energy according to schedules set forth in such agreements. The fixed price periods under these power sales agreements expire at various times in 1998 through 2000. After the fixed price periods expire, while the basis for the capacity and capacity bonus payments under these power sales agreements remains the same, the energy payments adjust to PG&E's then prevailing avoided cost of energy, which is determined and published from time to time by the CPUC. The term "avoided cost" refers to the incremental costs that an electric utility would incur to produce or purchase an amount of power equivalent to that purchased from qualifying facilities (as defined under the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA")). The currently prevailing avoided cost of energy is substantially lower than the fixed energy prices under these power sales agreements and is generally expected 10 13 to remain so. While avoided cost does not affect capacity payments under the power sales agreements, in the event that the avoided cost of energy does not increase significantly, the Company's energy revenue under these power sales agreements would be materially reduced at the expiration of the fixed price period. Such reduction could have a material adverse effect on the Company's results of operations. The Company cannot accurately predict the likely level of avoided cost energy prices at the expiration of the fixed price periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" and "Business -- Description of Facilities." Prices paid for the steam delivered by the Company's steam fields are based on a formula that partially reflects the price levels of nuclear and fossil fuels, and, therefore, a reduction in the price levels of such fuels may reduce revenue under the steam sales agreements for the steam fields. See "Business -- Description of Facilities -- Steam Fields." IMPACT OF CURTAILMENT Each of the Company's power and steam sales agreements contains curtailment provisions pursuant to which the purchasers of energy or steam are entitled to reduce the number of hours of energy or amount of steam purchased thereunder. Curtailment provisions are customary in power and steam sales agreements. During 1995, certain of the Company's power generation facilities experienced maximum curtailment primarily as a result of a high degree of precipitation during the period, which resulted in higher levels of energy generation by hydroelectric power facilities that supply electricity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In limited circumstances, energy production from third party geothermal power plants may be curtailed, which would reduce deliveries of steam by the Company under the steam sales agreements. The Company expects maximum curtailment during 1996 under its power sales agreements for certain of its facilities, and there can be no assurance that the Company will not experience curtailment in the future. In the event of such curtailment, the Company's results of operations may be materially adversely affected. See "Business -- Description of Facilities." POWER PROJECT DEVELOPMENT AND ACQUISITION RISKS The development of power generation facilities is subject to substantial risks. In connection with the development of a power generation facility, the Company must generally obtain power and/or steam sales agreements, governmental permits and approvals, fuel supply and transportation agreements, sufficient equity capital and debt financing, electrical transmission agreements, site agreements and construction contracts, and there can be no assurance that the Company will be successful in doing so. In addition, project development is subject to certain environmental, engineering and construction risks relating to cost-overruns, delays and performance. Although the Company may attempt to minimize the financial risks in the development of a project by securing a favorable long-term power sales agreement, entering into power marketing transactions, obtaining all required governmental permits and approvals and arranging adequate financing prior to the commencement of construction, the development of a power project may require the Company to expend significant sums for preliminary engineering, permitting and legal and other expenses before it can be determined whether a project is feasible, economically attractive or financeable. If the Company were unable to complete the development of a facility, it would generally not be able to recover its investment in such a facility. The process for obtaining initial environmental, siting and other governmental permits and approvals is complicated and lengthy, often taking more than one year, and is subject to significant uncertainties. As a result of competition, it may be difficult to obtain a power sales agreement for a proposed project, and the prices offered in new power sales agreements for both electric capacity and energy may be less than the prices in prior agreements. The Company has grown substantially in recent years as a result of acquisitions of interests in power generation facilities and steam fields such as the Transactions. The Company believes that although the domestic power industry is undergoing consolidation and that significant acquisition opportunities are available, the Company is likely to confront significant competition for acquisition opportunities. In addition, there can be no assurance that the Company will continue to identify attractive acquisition opportunities at 11 14 favorable prices or, to the extent that any opportunities are identified, that the Company will be able to consummate such acquisitions. START-UP RISKS The commencement of operation of a newly constructed power plant or steam field involves many risks, including start-up problems, the breakdown or failure of equipment or processes and performance below expected levels of output or efficiency. New plants have no operating history and may employ recently developed and technologically complex equipment. Insurance is maintained to protect against certain of these risks, warranties are generally obtained for limited periods relating to the construction of each project and its equipment in varying degrees, and contractors and equipment suppliers are obligated to meet certain performance levels. Such insurance, warranties or performance guarantees may not be adequate to cover lost revenues or increased expenses and, as a result, a project may be unable to fund principal and interest payments under its financing obligations and may operate at a loss. A default under such a financing obligation could result in the Company losing its interest in such power generation facility or steam field. See "-- Possible Unavailability of Financing." In addition, power sales agreements, which are typically entered into with a utility early in the development phase of a project, often enable the utility to terminate such agreement, or to retain security posted as liquidated damages, in the event that a project fails to achieve commercial operation or certain operating levels by specified dates or fails to make certain specified payments. In the event such a termination right is exercised, a project may not commence generating revenues, the default provisions in a financing agreement may be triggered (rendering such debt immediately due and payable) and the project may be rendered insolvent as a result. GENERAL OPERATING RISKS The Company currently operates all of the power generation facilities in which it has an interest, except for two steam fields. See "Business -- Description of Facilities." The continued operation of power generation facilities and steam fields involves many risks, including the breakdown or failure of power generation equipment, transmission lines, pipelines or other equipment or processes and performance below expected levels of output or efficiency. To date, the Company's power generation facilities have operated at an average availability in excess of 97%, and although from time to time the Company's power generation facilities and steam fields have experienced certain equipment breakdowns or failures, such breakdowns or failures have not had a material adverse effect on the operation of such facilities or on the Company's results of operations. Although the Company's facilities contain certain redundancies and back-up mechanisms, there can be no assurance that any such breakdown or failure would not prevent the affected facility or steam field from performing under applicable power or steam sales agreements. In addition, although insurance is maintained to protect against certain of these operating risks, the proceeds of such insurance may not be adequate to cover lost revenues or increased expenses, and, as a result, the entity owning such power generation facility or steam field may be unable to service principal and interest payments under its financing obligations and may operate at a loss. A default under such a financing obligation could result in the Company losing its interest in such power generation facility or steam field. See "-- Possible Unavailability of Financing." DEPENDENCE ON THIRD PARTIES The nature of the Company's power generation facilities is such that each facility generally relies on one power or steam sales agreement with a single electric utility customer for substantially all, if not all, of such facility's revenue over the life of the project. During 1995, approximately 87% and 9% of the Company's revenue was attributable to revenue received pursuant to power and steam sales agreements with PG&E and Sacramento Municipal Utility District ("SMUD"), respectively. The power and steam sales agreements are generally long-term agreements, covering the sale of electricity or steam for initial terms of 20 or 30 years. However, the loss of any one power or steam sales agreement with any of these utility customers could have a material adverse effect on the Company's results of operations. In addition, any material failure by any utility customer to fulfill its obligations under a power or steam sales agreement could have a material adverse effect on the cash flow available to the Company and, as a result, on the Company's results of operations. During 12 15 1995, an additional 4% of the Company's revenue was attributable to operating and maintenance services performed by the Company for power generation facilities that sell electricity to PG&E. Furthermore, each power generation facility may depend on a single or limited number of entities to purchase thermal energy, or to supply or transport natural gas to such facility. The failure of any one utility customer, steam host, gas supplier or gas transporter to fulfill its contractual obligations could have a material adverse effect on a power project and on the Company's business and results of operations. INTERNATIONAL INVESTMENTS The Company has made an investment in the Cerro Prieto geothermal steam fields located in Mexico and intends to pursue investments primarily in Latin America and Southeast Asia. Such investments are subject to risks and uncertainties relating to the political, social and economic structures of those countries. Risks specifically related to investments in non-United States projects may include risks of fluctuations in currency valuation, currency inconvertibility, expropriation and confiscatory taxation, increased regulation and approval requirements and governmental policies limiting returns to foreign investors. POWER MARKETING BUSINESS It is part of the Company's strategy to continue to develop an integrated nationwide power marketing business to market power generated both by the Company's generation facilities and power generated by third parties. The Company believes that this strategy will enhance the earning potential of its operating assets, generate additional revenue and expand its customer base. However, the power marketing industry is only in its early stages of development, and there are no assurances that the industry will develop in such a way as to permit the Company to achieve these goals. Furthermore, the Company has only recently commenced its power marketing business, and there can be no assurance that its power marketing strategy will be successful or that the Company's goals will be achieved. GOVERNMENT REGULATION The Company's activities are subject to complex and stringent energy, environmental and other governmental laws and regulations. The construction and operation of power generation facilities require numerous permits, approvals and certificates from appropriate federal, state and local governmental agencies, as well as compliance with environmental protection legislation and other regulations. While the Company believes that it has obtained the requisite approvals for its existing operations and that its business is operated in accordance with applicable laws, the Company remains subject to a varied and complex body of laws and regulations that both public officials and private individuals may seek to enforce. There can be no assurance that existing laws and regulations will not be revised or that new laws and regulations will not be adopted or become applicable to the Company that may have a material adverse effect on the Company's business or results of operations, nor can there be any assurance that the Company will be able to obtain all necessary licenses, permits, approvals and certificates for proposed projects or that completed facilities will comply with all applicable permit conditions, statutes or regulations. In addition, regulatory compliance for the construction of new facilities is a costly and time consuming process, and intricate and changing environmental and other regulatory requirements may necessitate substantial expenditures to obtain permits and may create a significant risk of expensive delays or significant loss of value in a project if the project is unable to function as planned due to changing requirements or local opposition. See "Business -- Government Regulation." The Company's operations are subject to the provisions of various energy laws and regulations, including PURPA, the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), and state and local regulations. See "Business -- Government Regulation." PUHCA provides for the extensive regulation of public utility holding companies and their subsidiaries. PURPA provides to qualifying facilities ("QFs") and owners of QFs certain exemptions from certain federal and state regulations, including rate and financial regulations. Under present federal law, the Company is not and will not be subject to regulation as a holding company under PUHCA as long as the power plants in which it has an interest are QFs under PURPA or are subject to 13 16 another exemption. In order to be a QF, a facility must be not more than 50% owned by an electric utility or electric utility holding company. A QF that is a cogeneration facility must produce not only electricity, but also useful thermal energy for use in an industrial or commercial process or heating or cooling applications in certain proportions to the facility's total energy output, and it must meet certain energy efficiency standards. Therefore, loss of a thermal energy customer could jeopardize a cogeneration facility's QF status. All geothermal power plants up to 80 megawatts that meet PURPA's ownership requirements and certain other standards are considered QFs. If one of the power plants in which the Company has an interest were to lose its QF status and not otherwise receive a PUHCA exemption, the project subsidiary or partnership in which the Company has an interest owning or leasing that plant could become a public utility company, which could subject the Company to significant federal, state and local laws, including rate regulation and regulation as a public utility holding company under PUHCA. This loss of QF status, which may be prospective or retroactive, in turn, could cause all of the Company's other power plants to lose QF status because, under FERC regulations, a QF cannot be owned by an electric utility or electric utility holding company. In addition, a loss of QF status could, depending on the power sales agreement, allow the power purchaser to cease taking and paying for electricity or to seek refunds of past amounts paid and thus could cause the loss of some or all contract revenues or otherwise impair the value of a project and could trigger defaults under provisions of the applicable project contracts and financing agreements (rendering such debt immediately due and payable). If a power purchaser ceased taking and paying for electricity or sought to obtain refunds of past amounts paid, there can be no assurance that the costs incurred in connection with the project could be recovered through sales to other purchasers. See "Business -- Government Regulation -- Federal Energy Regulation." Currently, Congress is considering proposed legislation that would amend PURPA by eliminating the requirement that utilities purchase electricity from QFs at avoided costs. The Company does not know whether such legislation will be passed or what form it may take. The Company believes that if any such legislation is passed, it would apply to new projects. As a result, although such legislation may adversely affect the Company's ability to develop new projects, the Company believes it would not affect the Company's existing QFs. There can be no assurance, however, that any legislation passed would not adversely impact the Company's existing projects. Many states are implementing or considering regulatory initiatives designed to increase competition in the domestic power generation industry. In a December 20, 1995 policy decision, the CPUC outlined a new market structure that would provide for a competitive power generation industry and direct access to generation for all consumers within five years. As part of its policy decision, the CPUC indicated that power sales agreements of existing QFs would be honored. The Company cannot predict the final form or timing of the proposed restructuring and the impact, if any, that such restructuring would have on the Company's existing business or results of operations. SEISMIC DISTURBANCES Areas in which the Company operates and is developing many of its geothermal and gas-fired projects are subject to frequent low-level seismic disturbances, and more significant seismic disturbances are possible. While the Company's existing power generation facilities are built to withstand relatively significant levels of seismic disturbances, and the Company believes it maintains adequate insurance protection, there can be no assurance that earthquake, property damage or business interruption insurance will be adequate to cover all potential losses sustained in the event of serious seismic disturbances or that such insurance will continue to be available to the Company on commercially reasonable terms. AVAILABILITY OF NATURAL GAS To date, the Company's fuel acquisition strategy has included various combinations of Company-owned gas reserves, gas prepayment contracts and short-, medium- and long-term supply contracts. In its gas supply arrangements, the Company attempts to match the fuel cost with the fuel component included in the facility's power sales agreements, in order to minimize a project's exposure to fuel price risk. The Company believes that there will be adequate supplies of natural gas available at reasonable prices for each of its facilities when current gas supply agreements expire. There can be no assurance, however, that gas supplies will be available 14 17 for the full term of the facilities' power sales agreements, or that gas prices will not increase significantly. If gas is not available, or if gas prices increase above the fuel component of the facilities' power sales agreements, there could be a material adverse impact on the Company's net revenues. COMPETITION The power generation industry is characterized by intense competition, and the Company encounters competition from utilities, industrial companies and other power producers. In recent years, there has been increasing competition in an effort to obtain new power sales agreements, and this competition has contributed to a reduction in electricity prices. In this regard, many utilities often engage in "competitive bid" solicitations to satisfy new capacity demands. This competition adversely affects the ability of the Company to obtain power sales agreements and the price paid for electricity. There also is increasing competition between electric utilities, particularly in California where the CPUC has launched an initiative designed to give all electric consumers the ability to choose between competing suppliers of electricity. See "Business -- Government Regulation -- State Regulation." This competition has put pressure on electric utilities to lower their costs, including the cost of purchased electricity, and increasing competition in the future will increase this pressure. See "Business -- Competition." DEPENDENCE ON SENIOR MANAGEMENT The Company's success is largely dependent on the skills, experience and efforts of its senior management. The loss of the services of one or more members of the Company's senior management could have a material adverse effect on the Company's business and development. To date, the Company generally has been successful in retaining the services of its senior management. See "Management." ANTI-TAKEOVER PROVISIONS Certain provisions of Delaware law applicable to the Company could have the effect of delaying, deterring or preventing a change in control of the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. In addition, the Company's Certificate of Incorporation and By-laws contain certain provisions that could discourage potential takeover attempts and make more difficult attempts by stockholders to change management. The Company's Board of Directors is classified into three classes of directors serving staggered, three-year terms and has the authority without action by the Company's stockholders to fix the rights and preferences and issue shares of Preferred Stock, and to impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. The Company's Certificate of Incorporation provides that Directors may be removed only by the affirmative vote of the holders of two-thirds of the shares of capital stock of the Company entitled to vote. Any vacancy on the Board of Directors may be filled only by vote of the majority of Directors then in office. Further, the Company's Certificate of Incorporation provides that any "Business Combination" (as therein defined) requires the affirmative vote of the holders of two-thirds of the shares of capital stock of the Company entitled to vote, voting together as a single class. These provisions, and certain other provisions of the Certificate of Incorporation which may have the effect of delaying proposed stockholder actions until the next annual meeting of stockholders, could have the effect of delaying or preventing a tender offer for the Company's Common Stock or other changes of control or management of the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock." NO PRIOR MARKET; STOCK PRICE VOLATILITY; DILUTION Prior to the Common Stock Offering, there has been no public market for the Company's Common Stock. Consequently, the initial public offering price will be determined by negotiations among the Company, the Selling Stockholder and the Representatives of the Underwriters and may not be indicative of the prices that prevail in the public market. There can be no assurance that an active public market for the Common Stock will develop or be sustained after the Common Stock Offering. The trading price of the Company's 15 18 Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of new acquisitions or power projects by the Company or its competitors, general conditions in the independent power production industry, and other events or factors. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Moreover, investors in the Common Stock Offering will incur immediate, substantial book value dilution. See "Dilution" and "Underwriting." QUARTERLY FLUCTUATIONS; SEASONALITY The Company's quarterly operating results have fluctuated in the past and may continue to do so in the future as a result of a number of factors, including but not limited to the timing and size of acquisitions, the completion of development projects, the timing and amount of curtailment, and variations in levels of production. Furthermore, the majority of capacity payments under certain of the Company's power sales agreements are received during the months of May through October. The market price of the Common Stock could be subject to significant fluctuations in response to those variations in quarterly operating results and other factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations and Seasonality." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after the Common Stock Offering could adversely affect the prevailing market price of the Common Stock. Other than the 18,045,000 shares of Common Stock offered hereby, there will be no shares of Common Stock outstanding immediately following the completion of the Common Stock Offering. All of the shares of Common Stock sold in the Common Stock Offering will be freely transferable without registration or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless held by an "affiliate" of the Company (as defined in the Securities Act). As of the date of this Prospectus, options to purchase 2,392,026 shares of Common Stock are outstanding under the Company's Stock Option Program. Of such amount, options to purchase 1,366,696 shares were exercisable, all of which will become eligible for sale 180 days after the date of this Prospectus, upon expiration of certain lock-up agreements with the Underwriters and pursuant to Rule 701, subject in some cases to certain volume and other resale restrictions. Shares issuable upon the exercise of stock options that are currently exercisable will become eligible for sale in the public market beginning on the effective date of a registration statement on Form S-8, which the Company intends to file with the Securities and Exchange Commission (the "Commission") 180 days from the date of this Prospectus. See "Shares Eligible for Future Sale." 16 19 USE OF PROCEEDS The aggregate net proceeds to the Company from the sale of the 5,477,820 shares of Common Stock offered by the Company in the Common Stock Offering (assuming an initial public offering price of $18.50 per share and after deducting underwriting discounts and commissions and estimated offering expenses), are estimated to be approximately $94.8 million ($142.1 million if the Underwriters' over-allotment option is exercised in full). The Company expects to use the net proceeds from the offering for working capital and general corporate purposes, and for the development and acquisition of power generation facilities, including investments in the Pasadena Cogeneration Project and the Indonesian Geothermal Project. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Development and Future Projects." Pending such uses, the Company expects to invest the net proceeds in short-term, interest-bearing securities. DIVIDEND POLICY The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future because it intends to retain its earnings to finance the expansion of its business and for general corporate purposes. In addition, the Company's ability to pay cash dividends is restricted under the Indentures and will be restricted under the Bank of Nova Scotia Facility. Future cash dividends, if any, will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's future operations and earnings, capital requirements, general financial condition, contractual restrictions and such other factors as the Board of Directors may deem relevant. 17 20 CAPITALIZATION The following table sets forth, as of June 30, 1996: (i) the actual consolidated capitalization of the Company; (ii) the pro forma consolidated capitalization of the Company after giving effect to the Gilroy Transaction and the conversion of the Company's outstanding Preferred Stock into Common Stock upon the completion of the Common Stock Offering; and (iii) the pro forma as adjusted consolidated capitalization of the Company after giving effect to the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $18.50 per share and the application of the estimated net proceeds therefrom (after deducting underwriting discounts and commissions). This table should be read in conjunction with "Pro Forma Consolidated Financial Data" and the consolidated financial statements and related notes thereto appearing elsewhere in this Prospectus.
AS OF JUNE 30, 1996 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- (IN THOUSANDS) Short-term debt: Current portion of non-recourse project financing...... $ 27,178 $ 30,288 $ 30,288 ======== ========= ========= Long-term debt: Long-term line of credit............................... -- -- -- Non-recourse long-term project financing, less current portion............................................. $180,974 $ 293,864 $ 293,864 Notes payable.......................................... 6,598 6,598 6,598 Senior notes........................................... 285,000 285,000 285,000 -------- ----------- ----------- Total long-term debt................................ 472,572 585,462 585,462 -------- ----------- ----------- Stockholder's equity: Preferred Stock, $.001 par value: 5,000,000 shares authorized and outstanding; pro forma and pro forma as adjusted, 10,000,000 shares authorized, no shares outstanding......................................... 5 -- -- Common Stock, $.001 par value: 33,760,000 shares authorized, 10,387,693 shares outstanding; pro forma, 33,760,000 shares authorized, 12,567,180 shares outstanding; pro forma as adjusted, 100,000,000 shares authorized, 18,045,000 shares outstanding(1)...................................... 10 13 18 Additional paid-in capital............................. 56,209 56,211 151,036 Retained earnings...................................... 23,463 23,463 23,463 Cumulative translation adjustment...................... (31) (31) (31) -------- ----------- ----------- Total stockholder's equity.......................... 79,656 79,656 174,486 -------- ----------- ----------- Total capitalization.............................. $552,228 $ 665,118 $ 759,948 ======== ========= =========
- ------------ (1) Does not include 2,392,026 shares of Common Stock reserved for issuance upon exercise of options previously granted and outstanding as of June 30, 1996 under the Company's Stock Option Program. See "Management -- Stock Option Program" and "-- 1996 Stock Incentive Plan." 18 21 DILUTION The net tangible book value of the Company as of June 30, 1996 was $69.7 million, or $5.55 per share of Common Stock. Net tangible book value per share is equal to the Company's total assets (excluding deferred financing and offering expenses) less its total liabilities, divided by the total number of outstanding shares of Common Stock. After giving effect to the sale of 5,477,820 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $18.50 per share), and the receipt and application of the net proceeds therefrom, the pro forma net tangible book value of the Company as of June 30, 1996 would have been approximately $164.5 million or $9.12 per share. This represents an immediate dilution of $9.38 per share to new stockholders purchasing shares in the Common Stock Offering. The following table illustrates this per share dilution: Assumed initial public offering price..................... $18.50 Net tangible book value before the Common Stock Offering............................................. $5.55 Increase attributable to new stockholders............... 3.57 ----- Pro forma net tangible book value after the Common Stock Offering................................................ 9.12 ------ Total dilution to new stockholders........................ $ 9.38 ======
The calculations in the table set forth above assume no exercise of the Underwriters' over-allotment option and do not reflect 2,392,026 shares of Common Stock reserved for issuance pursuant to options granted and outstanding as of June 30, 1996 under the Company's Stock Option Program. See "Management -- Stock Option Program" and "-- 1996 Stock Incentive Plan." 19 22 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated financial data set forth below for and as of the five years ended December 31, 1995 have been derived from the audited consolidated financial statements of the Company. The consolidated financial data for the six months ended June 30, 1995 and June 30, 1996 and as of June 30, 1996 are unaudited, but have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments necessary for the fair presentation of the financial position and results of operations for these periods. Consolidated operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire year. The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this Prospectus, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- ------- ------- (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Electricity and steam sales............. -- -- $53,000 $90,295 $127,799 $49,014 $72,030 Service contract revenue................ $29,067 $29,817 16,896 7,221 7,153 3,129 5,434 Income (loss) from unconsolidated investments in power projects......... 9,985 9,760 19 (2,754) (2,854) (1,791) 1,713 Interest income on loans to power projects.............................. -- -- -- -- -- -- 2,817 -------- -------- -------- -------- -------- -------- -------- Total revenue......................... 39,052 39,577 69,915 94,762 132,098 50,352 81,994 Cost of revenue........................... 25,064 25,921 42,501 52,845 77,388 30,618 51,319 -------- -------- -------- -------- -------- -------- -------- Gross profit.............................. 13,988 13,656 27,414 41,917 54,710 19,734 30,675 Project development expenses.............. 1,067 806 1,280 1,784 3,087 1,308 1,410 General and administrative expenses....... 3,443 3,924 5,080 7,323 8,937 3,659 5,874 Compensation expense related to stock options(1).............................. -- 1,224 -- -- -- -- -- Provision for write-off of project development costs(2).................... -- 800 -- 1,038 -- -- -- -------- -------- -------- -------- -------- -------- -------- Income from operations.................... 9,478 6,902 21,054 31,772 42,686 14,767 23,391 Interest expense.......................... 1,925 1,225 13,825 23,886 32,154 15,116 18,665 Other income, net......................... (416) (310) (1,133) (1,988) (1,895) (855) (2,777) -------- -------- -------- -------- -------- -------- -------- Income before provision for income taxes, extraordinary item and cumulative effect of change in accounting principle........................... 7,969 5,987 8,362 9,874 12,427 506 7,503 Provision for income taxes................ 3,149 2,527 4,195 3,853 5,049 208 3,080 -------- -------- -------- -------- -------- -------- -------- Income before extraordinary item and cumulative effect of change in accounting principle................ 4,820 3,460 4,167 6,021 7,378 298 4,423 Extraordinary item: Utilization of net operating loss carryforward.......................... 1,138 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle...... 5,958 3,460 4,167 6,021 7,378 298 4,423 Cumulative effect of adoption of SFAS No. 109..................................... -- -- (413) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income........................ $ 5,958 $ 3,460 $ 3,754 $ 6,021 $ 7,378 $ 298 $ 4,423 ======== ======== ======== ======== ======== ======== ======== Weighted average shares outstanding(3).... 14,187 14,476 ======== ======== Net income per share(3)................... $ 0.52 $ 0.31 ======== ======== OTHER FINANCIAL DATA: Depreciation and amortization........... $ 219 $ 232 $12,540 $21,580 $ 26,896 $ 9,882 $15,757 EBITDA(4)............................... $ 4,909 $ 9,898 $42,370 $53,707 $ 69,515 $25,440 $41,345
(See footnotes on next page) 20 23
AS OF DECEMBER 31, ---------------------------------------------------------- AS OF JUNE 30, 1991 1992 1993 1994 1995 1996 ------- ------- -------- -------- -------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................. $ 958 $ 2,160 $ 6,166 $ 22,527 $ 21,810 $ 38,403 Property, plant and equipment, net......... 351 424 251,070 335,453 447,751 530,203 Total assets............................... 41,245 55,370 302,256 421,372 554,531 792,812 Total liabilities.......................... 34,624 44,865 288,827 402,723 529,304 713,156 Stockholder's equity....................... 6,621 10,505 13,429 18,649 25,227 79,656
- ------------ (1) Represents a non-cash charge for compensation expense associated with the grant of certain options under the Company's Stock Option Program. See "Management -- Stock Option Program." (2) Represents a write-off of certain capitalized project costs. (3) The weighted average shares outstanding and earnings per share for the year ended December 31, 1995 and the six months ended June 30, 1996 give effect to the issuance of Common Stock upon the conversion of the Company's outstanding Preferred Stock. (4) EBITDA is defined as income from operations plus depreciation, capitalized interest, other income, non-cash charges and cash received from investments in power projects, reduced by the income from unconsolidated investments in power projects. EBITDA is presented not as a measure of operating results but rather as a measure of the Company's ability to service debt. EBITDA should not be construed as an alternative either (i) to income from operations (determined in accordance with generally accepted accounting principles) or (ii) to cash flows from operating activities (determined in accordance with generally accepted accounting principles). 21 24 PRO FORMA CONSOLIDATED FINANCIAL DATA The following unaudited pro forma consolidated statement of operations for the year ended December 31, 1995 gives effect to: (i) the Transactions; (ii) the Preferred Stock Investment and the application of the proceeds therefrom; and (iii) the sale of the 10 1/2% Senior Notes and the application of the net proceeds therefrom as if such transactions had occurred on January 1, 1995. The following unaudited pro forma consolidated statement of operations for the six months ended June 30, 1996 gives effect to: (i) the King City Transaction; (ii) the Gilroy Transaction; and (iii) the sale of the 10 1/2% Senior Notes and the application of the net proceeds therefrom, as if such transactions had occurred on January 1, 1996. For further discussion regarding the Transactions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Description of Facilities." The following unaudited pro forma consolidated balance sheet as of June 30, 1996 gives effect to the Gilroy Transaction as if such transaction had occurred on June 30, 1996. The following unaudited pro forma consolidated financial data does not give effect to the Common Stock Offering or the application of the net proceeds therefrom. The pro forma consolidated financial data and accompanying notes should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere in this Prospectus. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable and are described in the notes accompanying the pro forma consolidated financial data. The pro forma consolidated financial data are presented for informational purposes only and do not purport to represent what the Company's results of operations or financial position would actually have been had such transactions in fact occurred at such dates, or to project the Company's results of operations or financial position at any future date or for any future period. In the opinion of management, all adjustments necessary to present fairly such pro forma consolidated financial data have been made. 22 25 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 ---------------------------------------------------------------------- PRO FORMA FOR THE TRANSACTIONS, THE PREFERRED STOCK ADJUSTMENTS FOR THE ADJUSTMENTS INVESTMENT AND THE TRANSACTIONS AND THE FOR THE SALE SALE OF THE PREFERRED STOCK OF THE 10 1/2% 10 1/2% SENIOR ACTUAL INVESTMENT(1) SENIOR NOTES NOTES -------- -------------------- --------------- ------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Electricity and steam sales............. $127,799 $ 89,349 -- $217,148 Service contract revenue................ 7,153 250 -- 7,403 Income (loss) from unconsolidated investments in power projects......... (2,854) -- -- (2,854) Interest income on loans to power projects.............................. -- 2,564 -- 2,564 -------- -------- --------------- ---------- Total revenue......................... 132,098 92,163 -- 224,261 -------- -------- --------------- ---------- Cost of revenue: Plant operating expenses................ 33,162 37,369 -- 70,531 Depreciation and amortization........... 26,264 15,838 -- 42,102 Operating lease expense................. 1,542 11,703 -- 13,245 Service contract expense................ 5,846 -- -- 5,846 Production royalties.................... 10,574 -- -- 10,574 -------- -------- --------------- ---------- Total cost of revenue................. 77,388 64,910 -- 142,298 -------- -------- --------------- ---------- Gross profit.............................. 54,710 27,253 -- 81,963 Project development expenses.............. 3,087 -- -- 3,087 General and administrative expenses....... 8,937 -- -- 8,937 -------- -------- --------------- ---------- Income from operations................ 42,686 27,253 -- 69,939 Interest expense.......................... 32,154 16,193 $ 9,176(2) 57,523 Other income, net......................... (1,895) (7,263) -- (9,158) -------- -------- --------------- ---------- Income before provision for income taxes................................. 12,427 18,323 (9,176) 21,574 Provision for income taxes................ 5,049 7,443 (3,728) 8,764 -------- -------- --------------- ---------- Net income.......................... $ 7,378 $ 10,880 $(5,448) $ 12,810 ========= ================== ============== ================== Net income per share................ $ 0.52 $ 0.90 ========= ================== OTHER FINANCIAL DATA: Depreciation and amortization............. $ 26,896 $ 42,734 EBITDA.................................... $ 69,515 $123,770
See Notes to Pro Forma Consolidated Statements of Operations 23 26 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 ----------------------------------------------------------------------------------------- PRO FORMA FOR THE KING CITY ADJUSTMENTS TRANSACTION, ADJUSTMENTS ADJUSTMENTS FOR THE THE GILROY FOR THE FOR THE SALE OF THE TRANSACTION AND KING CITY GILROY 10 1/2% THE SALE OF THE ACTUAL TRANSACTION(3)(5) TRANSACTION(4)(5) SENIOR NOTES 10 1/2% SENIOR NOTES ------- ------------------- ----------------- ------------- --------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Electricity and steam sales..................... $72,030 $ 1,583 $ 9,491 -- $83,104 Service contract revenue.... 5,434 -- -- -- 5,434 Income (loss) from unconsolidated investments in power projects......... 1,713 -- -- -- 1,713 Interest income on loans to power projects.................. 2,817 -- -- -- 2,817 ------- ------- ------- -------- ------ Total revenue............. 81,994 1,583 9,491 -- 93,068 ------- ------- ------- -------- ------ Cost of revenue: Plant operating expenses.... 22,901 1,669 4,035 -- 28,605 Depreciation and amortization.............. 15,413 2,800 2,745 -- 20,958 Operating lease expense..... 3,239 3,372 -- -- 6,611 Service contract expense.... 4,484 -- -- -- 4,484 Production royalties........ 5,282 -- -- -- 5,282 ------- ------- ------- -------- ------ Total cost of revenue..... 51,319 7,841 6,780 -- 65,940 ------- ------- ------- -------- ------ Gross profit.................. 30,675 (6,258) 2,711 -- 27,128 Project development expenses.................... 1,410 -- -- -- 1,410 General and administrative expenses.................... 5,874 -- -- -- 5,874 ------- ------- ------- -------- ------ Income from operations.... 23,391 (6,258) 2,711 -- 19,844 Interest expense.............. 18,665 1,391 4,585 $ 3,259(6) 27,900 Other income, net............. (2,777) (2,526) -- -- (5,303) ------- ------- ------- -------- ------ Income (loss) before provision for income taxes................... 7,503 (5,123) (1,874) (3,259) (2,753) Provision for (benefit from) income taxes................ 3,080 (2,103) (769) (1,338) (1,130) ------- ------- ------- -------- ------ Net income (loss).... $ 4,423 $(3,020) $(1,105) $(1,921) $(1,623) ======= ======= ======= ======== ====== Net income (loss) per share.............. $ 0.31 $ (0.11) ======= ====== OTHER FINANCIAL DATA: Depreciation and amortization................ $15,757 $21,302 EBITDA........................ $41,345 $46,993
See Notes to Pro Forma Consolidated Statements of Operations 24 27 NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (1) Represents the pro forma results of operations for the facilities involved in the Transactions for the periods during 1995 prior to the completion of the Transactions, as if the Transactions had been completed on January 1, 1995, including: (i) the Greenleaf 1 and 2 Facilities for the period through April 21, 1995; (ii) the Watsonville Facility for the period through June 28, 1995; (iii) the Cerro Prieto Steam Fields for the period through December 14, 1995; (iv) the King City Facility for the period through December 31, 1995; and (v) the Gilroy Facility for the period through December 31, 1995. The information provided for the Cerro Prieto Steam Fields does not include the portion of service contract revenue which is contingent on future results. The pro forma adjustments reflect the historical results of operations of the facilities, as adjusted to give effect to the changes resulting from purchase price allocations and other transaction effects, as applicable. Such adjustments include depreciation and amortization applicable to new asset bases, interest expense amounts applicable to debt instruments outstanding, income tax amounts at the estimated effective rate of approximately 41%, and other adjustments. The following table sets forth adjustments to results of operations for such periods:
GREENLEAF 1 AND 2 WATSONVILLE CERRO PRIETO KING CITY GILROY FACILITIES FACILITY STEAM FIELDS FACILITY FACILITY TOTAL --------- ----------- ------------ --------- -------- ------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenue: Electricity and steam sales.................. $ 5,314 $ 3,978 -- $43,836 $ 36,221 $89,349 Service contract revenue..................... -- -- $ 250 -- -- 250 Income (loss) from unconsolidated investments in power projects.......................... -- -- -- -- -- -- Interest income on loans to power projects... -- -- 2,564 -- -- 2,564 ------- ------ ------ ------- ------- Total revenue.............................. 5,314 3,978 2,814 43,836 36,221 92,163 ------- ------ ------ ------- ------- Cost of revenue: Plant operating expenses..................... 5,954 2,857 -- 14,743 13,815 37,369 Depreciation and amortization................ 1,802 147 -- 8,399 5,490 15,838 Operating lease expense...................... -- 1,586 -- 10,117 -- 11,703 Service contract expense..................... -- -- -- -- -- -- Production royalties......................... -- -- -- -- -- -- ------- ------ ------ ------- ------- Total cost of revenue...................... 7,756 4,590 -- 33,259 19,305 64,910 ------- ------ ------ ------- ------- Gross profit................................... (2,442) (612) 2,814 10,577 16,916 27,253 Project development expenses................... -- -- -- -- -- -- General and administrative expenses............ -- -- -- -- -- -- ------- ------ ------ ------- ------- Income from operations..................... (2,442) (612) 2,814 10,577 16,916 27,253 Interest expense............................... 1,921 -- 932 4,172 9,168 16,193 Other income, net.............................. (105) -- -- (7,158) -- (7,263) ------- ------ ------ ------- ------- Income before provision for income taxes... (4,258) (612) 1,882 13,563 7,748 18,323 Provision (benefit) for income taxes........... (1,730) (249) 765 5,509 3,148 7,443 ------- ------ ------ ------- ------- Net income............................. $(2,528) $ (363) $1,117 $ 8,054 $ 4,600 $10,880 ======= ====== ====== ======= =======
The adjustments reflected in the table set forth above for the Greenleaf 1 and 2 Facilities and the Watsonville Facility are not necessarily indicative of a full year's results. See "Risk Factors -- Quarterly Fluctuations; Seasonality." Other income, net for the King City Facility reflects interest income from amounts contractually invested pursuant to collateral fund requirements. See "Business -- Description of Facilities -- Power Generation Facilities -- King City Facility." (2) Reflects $18.9 million of interest expense related to the 10 1/2% Senior Notes and $540,000 of amortization expense for the costs associated with the sale of the 10 1/2% Senior Notes, reduced by $4.4 million of actual 25 28 interest expense in 1995 as a result of the repayment of the $57 million loan from The Bank of Nova Scotia to Calpine Thermal Company, a wholly-owned subsidiary of the Company (the "$57 Million Bank of Nova Scotia Loan"), $3.4 million of interest expense as a result of the repayment of the $45 million loan from The Bank of Nova Scotia to the Company (the "$45 Million Bank of Nova Scotia Loan") (assuming an interest rate of 7.5%) and $2.4 million of interest expense as a result of the repayment of all amounts outstanding under the Credit Suisse Credit Facility. The $2.4 million represents $704,000 of actual interest expense in 1995 and $1.7 million of assumed interest expense to fund the King City and Cerro Prieto Transactions (assuming an interest rate of 6.0%). (3) Represents the pro forma results of operations for the King City Facility for the period of January 1 through April 30, 1996. Other income, net for the King City Facility reflects interest income from amounts contractually invested pursuant to collateral fund requirements. See "Business -- Description of Facilities -- Power Generation Facilities -- King City Facility." (4) Represents the pro forma results of operations for the Gilroy Facility for the period of January 1 through June 30, 1996. (5) Results for the six months ended June 30, 1996 reflected in the Pro Forma Consolidated Statement of Operations are not necessarily indicative of a full year's results. See "Risk Factors -- Quarterly Fluctuations; Seasonality." (6) Reflects $7.0 million of interest expense related to the 10 1/2% Senior Notes and $201,000 of amortization expense for the costs associated with the sale of the 10 1/2% Senior Notes, reduced by $1.9 million of actual interest expense as a result of the repayment of the $57 Million Bank of Nova Scotia Loan, $1.1 million of interest expense as a result of the repayment of the $45 Million Bank of Nova Scotia Loan (assuming an interest rate of 7.5%) and $973,000 of interest expense as a result of the repayment of all amounts outstanding under the Credit Suisse Credit Facility. The $973,000 represents $707,000 of actual interest expense and $266,000 of assumed interest expense to fund a portion of the King City Transaction (assuming an interest rate of 6.0%). 26 29 PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996 ------------------------------------------- ADJUSTMENTS PRO FORMA FOR THE FOR THE GILROY GILROY ACTUAL TRANSACTION TRANSACTION -------- ------------ ----------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.................................. $ 38,403 $(23,650)(1) $ 14,753 Accounts receivable........................................ 43,227 9,668(2) 52,895 Collateral securities, current portion..................... 9,745 -- 9,745 Other current assets....................................... 13,369 -- 13,369 -------- ------------ ----------------- Total current assets..................................... 104,744 (13,982) 90,762 Property, plant and equipment, net........................... 530,203 125,000(3) 655,203 Investments in power projects................................ 12,693 -- 12,693 Notes receivable............................................. 37,386 -- 37,386 Collateral securities, net of current portion................ 88,669 -- 88,669 Other assets................................................. 19,117 6,450(4) 25,567 -------- ------------ ----------------- Total assets............................................. $792,812 $117,468 $ 910,280 ========= ============= ================== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of non-recourse project financing.......... $ 27,178 $ 3,110(5) $ 30,288 Other current liabilities.................................. 25,680 1,468(6) 27,148 -------- ------------ ----------------- Total current liabilities................................ 52,858 4,578 57,436 Long-term credit facility.................................... -- -- -- Non-recourse long-term project financing, less current portion.................................................... 180,974 112,890(7) 293,864 Notes payable................................................ 6,598 -- 6,598 Senior Notes Due 2004........................................ 105,000 -- 105,000 Senior Notes Due 2006........................................ 180,000 -- 180,000 Deferred lease incentive..................................... 81,495 -- 81,495 Deferred income taxes, net................................... 100,068 -- 100,068 Other liabilities............................................ 6,163 -- 6,163 -------- ------------ ----------------- Total liabilities........................................ 713,156 117,468 830,624 -------- ------------ ----------------- Stockholder's equity: Preferred stock............................................ 50,000 -- 50,000 Common stock............................................... 6,224 -- 6,224 Retained earnings.......................................... 23,463 -- 23,463 Cumulative translation adjustment.......................... (31) -- (31) -------- ------------ ----------------- Total stockholder's equity............................... 79,656 -- 79,656 -------- ------------ ----------------- Total liabilities and stockholder's equity............... $792,812 $117,468 $ 910,280 ========= ============= ==================
See Notes to Pro Forma Consolidated Balance Sheet 27 30 NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (1) Represents the cash required to finance, in part, the Gilroy Transaction. (2) Represents the accounts receivable in the Gilroy Transaction. (3) Represents the property, plant and equipment acquired in the Gilroy Transaction. (4) Includes $3.9 million to fund reserve accounts, $1.9 million of financing costs that are capitalized and written off over the 18 year life of the project financing using the interest method and $700,000 of transaction costs that are capitalized and written off over the life of the Gilroy Facility. (5) Represents the current portion of the non-recourse project financing required to finance, in part, the Gilroy Transaction. (6) Represents the accounts payable in the Gilroy Transaction. (7) Reflects the long-term portion of the non-recourse project financing required to finance, in part, the Gilroy Transaction. 28 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus. GENERAL Calpine is engaged in the acquisition, development, ownership and operation of power generation facilities and the sale of electricity and steam in the United States and selected international markets. The Company has interests in 14 power generation facilities and steam fields having an aggregate capacity of 937 megawatts. Upon the completion of the acquisition of the 120 megawatt Gilroy Facility, the Company will have interests in 15 power generation facilities and steam fields having an aggregate capacity of 1,057 megawatts. See "Business -- Description of Facilities -- Power Generation Facilities -- Gilroy Facility." Since its inception in 1984, Calpine has developed substantial expertise in all aspects of electric power generation. The Company's vertical integration has resulted in significant growth over the last five years as Calpine has applied its extensive engineering, construction management, operations, fuel management and financing capabilities to successfully implement its acquisition and development program. During the last five years, Calpine has expanded substantially, from $41.2 million of total assets as of December 31, 1991 to $910.3 million of total assets on a pro forma basis as of June 30, 1996. Calpine's revenue on a pro forma basis for 1995 increased to $224.3 million, representing a compound annual growth rate of 55% since 1991. The Company's EBITDA on a pro forma basis for 1995 increased to $123.8 million. See "Pro Forma Consolidated Financial Data." On September 9, 1994, the Company acquired Thermal Power Company, which owns a 25% undivided interest in certain steam fields at The Geysers steam fields in northern California (the "Geysers") with a total capacity of 604 megawatts for a purchase price of $66.5 million. In January 1995, the Company purchased the working interest in certain of the geothermal properties at the PG&E Unit 13 and Unit 16 Steam Fields from a third party for a purchase price of $6.75 million. On April 21, 1995, the Company acquired the stock of certain companies that own 100% of the Greenleaf 1 and 2 Facilities, consisting of two 49.5 megawatt natural gas-fired cogeneration facilities, for an adjusted purchase price of $81.5 million. On June 29, 1995, the Company acquired the operating lease for the Watsonville Facility, a 28.5 megawatt natural gas-fired cogeneration facility, for a purchase price of $900,000. On November 17, 1995, the Company entered into a series of agreements to invest up to $20.0 million in the Cerro Prieto Steam Fields. In April 1996, the Company entered into a transaction involving a lease for the 120 megawatt King City Facility, which required an investment of $108.3 million, primarily related to the collateral fund requirements. The Company currently expects to complete the acquisition of the 120 megawatt Gilroy Facility during the third quarter of 1996 for a purchase price of $125.0 million plus certain contingent consideration. See "Business -- Description of Facilities." Each of the power generation facilities produces electricity for sale to a utility. Thermal energy produced by the gas-fired cogeneration facilities is sold to governmental and industrial users, and steam produced by the geothermal steam fields is sold to utility-owned power plants. The electricity, thermal energy and steam generated by these facilities are typically sold pursuant to long-term take-and-pay power or steam sales agreements generally having original terms of 20 or 30 years. Each of the Company's power and steam sales agreements contains curtailment provisions under which the purchasers of energy or steam are entitled to reduce the number of hours of energy or amount of steam purchased thereunder. During 1995, certain of the Company's power generation facilities experienced maximum curtailment primarily as a result of low gas prices and a high degree of precipitation during the period, which resulted in high levels of energy generation by hydroelectric power facilities that supply electricity. The Company expects maximum curtailment during 1996 under its power sales agreements for certain of its facilities. See "Business -- Description of Facilities." Many states are implementing or considering regulatory initiatives designed to increase competition in the domestic power generation industry. In December 1995, the CPUC issued an electric industry restructuring decision which envisions commencement of deregulation and implementation of customer choice of electricity supplier by January 1, 1998. As part of its policy decision, the CPUC indicated that power sales 29 32 agreements of existing QFs would be honored. The Company cannot predict the final form or timing of the proposed restructuring and the impact, if any, that such restructuring would have on the Company's existing business or results of operations. The Company believes that any such restructuring would not have a material effect on its power sales agreements and, accordingly, believes that its existing business and results of operations would not be materially affected, although there can be no assurance in this regard. Electricity and steam sales represents the sale of electricity and geothermal steam from the Company's majority-owned facilities to utilities under the terms and conditions of long-term power and steam sales agreements. Revenue attributable to the West Ford Flat Facility, the Bear Canyon Facility, the Greenleaf 1 and 2 Facilities, the Watsonville Facility, the King City Facility, the Gilroy Facility upon completion of the acquisition, the PG&E Unit 13 and Unit 16 Steam Fields, the Thermal Power Company Steam Fields and the SMUDGEO #1 Steam Fields is included in electricity and steam sales. See "Business -- Description of Facilities." Service contract revenue consists of revenue earned on services performed under operating and maintenance agreements for projects that are not consolidated in the Company's consolidated financial statements. The Company recognizes revenue on these agreements at the time services are performed. Income from unconsolidated investments in power projects represents the Company's share of income from projects that are not consolidated in the Company's consolidated financial statements and, accordingly, are accounted for under the equity method of accounting. The Company's share of income from such projects is calculated according to the Company's equity ownership or in accordance with the terms of the appropriate partnership agreement. The Company's current investments which are accounted for under the equity method consist of the Aidlin Facility, the Agnews Facility and the Sumas Facility. Depreciation and amortization expense for natural gas-fired cogeneration facilities is computed using a straight-line method over the estimated remaining useful life. Depreciation and amortization expense also reflects the amortization of the Company's geothermal power generation facilities and steam fields using the units of production method of depreciation. The Company capitalizes all capital costs related to the operating power plants and steam fields, as well as the cost of drilling wells and estimated future development and de-commissioning costs. These capital costs are then amortized using the units of production method based on current production over the estimated useful life of the geothermal resource. It is reasonably possible that the estimate of useful lives, total units of production or total capital costs to be amortized using the units of production method could differ materially in the near term from the amounts assumed in arriving at current depreciation and amortization expense. Capitalized project costs are costs related to the development or acquisition of new projects which are capitalized upon the execution of a memorandum of understanding or a power sales agreement. Upon the start-up of plant operations or the completion of an acquisition, such costs are generally transferred to property, plant and equipment and amortized over the estimated useful life of the project. As of June 30, 1996, the Company had deferred $2.8 million of development costs associated with projects currently in the development stage. General and administrative expenses include administrative, accounting, finance, legal, human resources, insurance and other expenses incurred in connection with the Company's operations. In addition, general and administrative expenses also include the expenses associated with management of the Company's operating and maintenance agreements and the expenses incurred in the management of the Company's project investments. Provision for income taxes includes income taxes calculated at the effective rate for each applicable period reflecting statutory rates and as adjusted for percentage depletion in excess of basis and other items. SELECTED OPERATING INFORMATION Set forth below is certain selected operating information for the power generation facilities and steam fields, for which results are consolidated in the Company's statements of operations. The information set forth under power plants consists of the results for the West Ford Flat Facility, the Bear Canyon Facility, the 30 33 Greenleaf 1 and 2 Facilities and the Watsonville Facility since their acquisitions on April 21, 1995 and June 29, 1995, respectively, and the King City Facility subsequent to May 2, 1996. The information set forth under steam fields consists of the results for the PG&E Unit 13 and Unit 16 Steam Fields, the SMUDGEO #1 Steam Fields and, for 1994 and 1995, the Thermal Power Company Steam Fields since the acquisition of Thermal Power Company on September 9, 1994. The information provided for the other interest included under steam revenue prior to 1995 represents revenue attributable to a working interest that was held by a third party in the PG&E Unit 13 and Unit 16 Steam Fields. In January 1995, the Company purchased this working interest. Prior to the Company's acquisition of the remaining interest in the West Ford Flat Facility, Bear Canyon Facility, the PG&E Unit 13 and Unit 16 Steam Fields and the SMUDGEO #1 Steam Fields in April 1993, the Company's revenue from these facilities was accounted for under the equity method and, therefore, does not represent the actual revenue of the Company from these facilities for the periods set forth below. See "-- General."
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------- ---------------------------------- 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- 1995 1996 ----------------------- ----------------------- PRO FORMA(1) PRO FORMA(2) ACTUAL ------------ ACTUAL ------------ ------- ------- (DOLLARS IN THOUSANDS) POWER PLANTS: Electricity revenue: Energy........... $33,426 $38,325 $37,088 $45,912 $54,886 $ 80,255 $22,323 $34,362 $36,839 Capacity(3)...... $ 7,562 $ 7,707 $ 7,834 $ 7,967 $30,485 $ 58,116 $ 9,051 $19,774 $28,364 Megawatt hours produced......... 392,471 403,274 378,035 447,177 1,033,566 1,859,277 324,059 736,759 860,969 Average energy price per kilowatt hour(3).......... 8.517c 9.503c 9.811c 10.267c 5.310c 4.317c 6.889c 4.664c 4.279c STEAM FIELDS: Steam revenue: Calpine.......... $36,173 $33,385 $31,066 $32,631 $39,669 $ 39,669 $17,639 $15,866 $15,866 Other interest... $ 2,820 $ 2,501 $ 2,143 $ 2,051 -- -- -- -- -- Megawatt hours produced......... 2,095,576 2,105,345 2,014,758 2,156,492 2,415,059 2,415,059 1,027,317 1,040,271 1,040,271 Average price per kilowatt hour.... 1.861c 1.705c 1.648c 1.608c 1.643c 1.643c 1.717c 1.525c 1.525c
- ------------ (1) Pro forma results for the year ended December 31, 1995 give effect to the Greenleaf Transaction, the Watsonville Transaction, the King City Transaction and the Gilroy Transaction as if such transactions had occurred on January 1, 1995. (2) Pro forma results for the six months ended June 30, 1996 give effect to the King City Transaction and the Gilroy Transaction as if such transactions had occurred on January 1, 1996. (3) Represents energy revenue divided by the kilowatt hours produced. The significant increase in capacity revenue and the accompanying decline in average energy price per kilowatt hours since 1994 reflects the increase in the Company's megawatt hour production as a result of acquisitions of gas-fired cogeneration facilities by the Company. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 Revenue. Revenue increased 63% to $82.0 million for the six months ended June 30, 1996 compared to $50.4 million for the comparable period in 1995. Electricity and steam sales revenue increased 47% to $72.0 million for the six months ended June 30, 1996, compared to $49.0 million for the comparable period in 1995. The increase in electricity and steam sales revenue was primarily attributable to $11.0 million of revenue from the King City Facility, an increase in revenue of $6.0 million from the Greenleaf 1 and 2 Facilities, and $3.9 million of revenue from the Watsonville Facility. The remaining increase in electricity and steam sales revenue of $2.1 million is primarily a result of higher generation and higher prices at other Company power generation facilities and steam fields. Service contract revenue from related parties increased 48% to $4.6 million for the six months ended June 30, 1996 compared to $3.1 million for the same period in 1995, primarily as a result of service revenue earned in connection with overhauls at the Aidlin Facility and the Agnews Facility. Income from unconsolidated investments in power projects increased to $1.7 million for the six months ended June 30, 1996 compared to a loss of $1.8 million for the comparable period in 1995, primarily as a result of $1.9 million of equity income from the Company's investment in the Sumas Facility. This increase is primarily 31 34 attributable to a contractual increase in the energy price under the power sales agreement. Interest income on loans to power projects increased to $2.8 million for the six months ended June 30, 1996 as a result of $1.9 million attributable to the recognition of interest income on loans to the sole shareholder of the general partner in the Sumas Facility, and interest income of $962,000 on loans to Coperlasa related to the Cerro Prieto Steam Fields. Cost of revenue. Cost of revenue increased 68% to $51.3 million for the six months ended June 30, 1996 compared to $30.6 million for the comparable period in 1995. The increase was primarily due to plant operating, depreciation and operating lease expenses attributable to (i) a full six months of operations during 1996 at the Greenleaf 1 and 2 Facilities, which were purchased on April 21, 1995, (ii) a full six months of operations during 1996 at the Watsonville Facility which was acquired on June 29, 1995, and (iii) operations at the King City Facility subsequent to May 2, 1996. The increase in cost of revenue was also due to the increase in service contract expenses as a result of expenses related to the Cerro Prieto Steam Fields, partially offset by lower operating and depreciation expenses at the Company's other existing power generation facilities and steam fields. General and administrative expenses. General and administrative expenses increased 60% to $5.9 million for the six months ended June 30, 1996 compared to $3.7 million for the comparable period in 1995. The increase was primarily due to additional personnel and related expenses necessary to support the Company's expanding operations. Interest expense. Interest expense increased 24% to $18.7 million for the six months ended June 30, 1996 compared to $15.1 million for the comparable period in 1995. The increase was primarily attributable to $2.4 million of interest on the Company's 10 1/2% Senior Notes issued in May 1996 and $1.7 million of interest expense related to the Greenleaf 1 and 2 Facilities acquired in April 1995, offset in part by a $1.5 million decrease in interest expense as a result of repayments of principal on certain indebtedness. Other income, net. Other income, net increased to $2.8 million for the six months ended June 30, 1996 compared to $855,000 for the comparable period in 1995. The increase was primarily due to $1.5 million of interest income on collateral securities purchased in connection with the King City Transaction and to an increase in interest income from the investment of the proceeds of the Preferred Stock Investment and a portion of the proceeds from the sale of the 10 1/2% Senior Notes. Provision for income taxes. The effective rate for the income tax provision was approximately 41% for the six months ended June 30, 1996. The effective rate was based on statutory tax rates. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenue. Revenue increased 39% to $132.1 million in 1995 compared to $94.8 million in 1994, primarily due to a 42% increase in electricity and steam sales to $127.8 million in 1995 compared to $90.3 million in 1994. Such an increase was primarily attributable to the $28.3 million of revenue from the Greenleaf 1 and 2 Facilities, $5.9 million of revenue from the Watsonville Facility, the $5.2 million of additional revenue from the Thermal Power Company Steam Fields as a result of a full year of operation in 1995, and an increase of $3.0 million of revenue from the SMUDGEO #1 Steam Fields attributable to increased production as a result of an extended outage during 1994. Such an increase also reflects a substantial increase in capacity payments for electricity sales from $8.0 million in 1994 to $30.5 million in 1995 as a result of the transactions stated above. This revenue increase was partially offset by a $2.7 million decrease in revenue from the West Ford Flat and Bear Canyon Facilities as a result of curtailments by PG&E due to low gas prices and high levels of precipitation during 1995 as compared to 1994, offset in part by contractual price increases for 1995. Without such curtailment, the West Ford Flat and Bear Canyon Facilities would have generated an additional $5.2 million of revenue in 1995. Revenue for 1995 also reflects curtailment of steam production at the Thermal Power Company Steam Fields as a result of higher precipitation and lower gas prices in 1995, and at the PG&E Unit 13 and Unit 16 Steam Fields as a result of hydro-spill conditions. Without curtailment, the Thermal Power Company Steam Fields and the PG&E Unit 13 and Unit 16 Steam Fields would have generated an additional $5.7 million and $800,000 of revenue during 1995, respectively. Revenue for 1995 and 1994 reflects reversals of $2.7 million and $3.2 million, respectively, of previously deferred revenue. Company revenue from sales of steam were previously calculated considering a future period 32 35 when steam would be delivered without receiving corresponding revenue. See Note 2 of the notes to consolidated financial statements appearing elsewhere in this Prospectus. In May 1994, the Company ceased deferring revenue and recognized $4.0 million of its previously deferred revenue. Based on estimates and analyses performed by the Company, the Company no longer expects that it will be required to make these deliveries to SMUD. Concurrently, $800,000 of the revenue increase was reserved for future construction of gathering systems required for future production of the steam fields, with the offset recorded in property, plant and equipment. In October 1995, PG&E agreed to the termination of the free steam provision with respect to the PG&E Unit 13 Steam Fields. During 1995, the Company took additional measures regarding future capital commitments and other actions which will increase steam production and, based on additional analyses and estimates performed, the Company recognized the remaining $2.7 million of previously deferred revenue. Cost of revenue. Cost of revenue increased 47% to $77.4 million in 1995 compared to $52.8 million in 1994. The increase was due to plant operating, production royalty and depreciation and amortization expenses attributable to (i) a full year of operations at Thermal Power Company, which was purchased on September 9, 1994, (ii) operations at the Greenleaf 1 and 2 Facilities subsequent to April 21, 1995, and (iii) operations at the Watsonville Facility subsequent to June 29, 1995. The increases were partially offset by lower depreciation and production royalty expenses at the West Ford Flat and Bear Canyon Facilities and the PG&E Unit 13 and Unit 16 Steam Fields due to curtailment by PG&E during 1995. Project development expenses. Project development expenses increased to $3.1 million in 1995, compared to $1.8 million in 1994, due to new project development activities. General and administrative expenses. General and administrative expenses were $8.9 million in 1995 compared to $7.3 million in 1994. The increase in 1995 was primarily due to additional personnel and related expenses necessary to support the Company's expanded operations. Interest expense. Interest expense increased to $32.2 million in 1995 from $23.9 million in 1994. Approximately $3.6 million of the increase was attributable to a full year of interest expense incurred on the debt related to the Thermal Power Company acquisition in September 1994 and $4.1 million of interest expense incurred on the debt related to the Greenleaf Transaction in April 1995. In addition, 1995 included a full year of interest expense on the 9 1/4% Senior Notes issued on February 17, 1994. Provision for income taxes. The effective rate for the income tax provision was approximately 41% for 1995 and 39% for 1994. The effective rates were based on statutory tax rates, with minor reductions for depletion in excess of tax basis benefits. Due to curtailment of production during 1995, the allowance for statutory depletion decreased in 1995 from 1994. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Revenue. Revenue increased 36% to $94.8 million in 1994 from $69.9 million in 1993, primarily due to a 70% increase in electricity and steam sales to $90.3 million in 1994 compared to $53.0 million in 1993. Such increases were primarily attributable to the $5.8 million of revenue from the Thermal Power Company Steam Fields, the $5.1 million and $3.0 million of additional revenue from the West Ford Flat and the Bear Canyon Facilities, respectively, as a result of the acquisition of the additional interests in such facilities in 1994, the effects of curtailment at such facilities in 1993 as a result of higher precipitation in 1993 and the sale of $804,000 of electricity to the Northern California Power Agency. These revenue increases were partially offset by a decrease of $3.5 million in electricity and steam sales from the SMUDGEO #1 Steam Fields as a result of a four-month shut-down for major maintenance. In May 1994, the Company recognized approximately $5.9 million of its previously deferred revenue. The revenue was previously deferred when it was expected that steam would have been delivered without receiving corresponding revenue. Based on current estimates and analyses performed by the Company, the Company no longer expects that it will be required to make these deliveries to SMUD. This resulted in a $4.0 million increase in revenue during 1994, while the remaining $1.9 million was treated as a purchase price reduction to property, plant and equipment. Concurrently, $800,000 of the revenue increase was reserved for future 33 36 construction of gathering systems required for future production of the steam fields, with the offset recorded in property, plant and equipment. Service contract revenue decreased 57% to $7.2 million in 1994 compared to $16.9 million in 1993, primarily reflecting the elimination of intercompany revenue for services provided to the power generation facilities and steam fields owned by CGC after the acquisition of the remaining interest in CGC in April 1993. In addition, the decline reflected the higher revenue recognized in 1993 on services associated with the Aidlin Facility overhaul, maintenance at the Agnews Facility, the start-up of the Sumas Facility and the completion of the Sumas construction management project. Unconsolidated investments in power projects contributed a loss of $2.8 million in 1994 compared to income of $19,000 in 1993. The decrease is partially attributable to a full year of operating loss at the Sumas Facility of $2.9 million in 1994, as compared to approximately eight months of operating loss of $1.9 million in 1993. The 1994 Sumas Facility operating loss is attributable to higher interest, depreciation and general and administrative expenses. The decrease from 1993 income from unconsolidated investments in power projects is also attributable to $2.0 million of equity income from CGC recognized prior to the April 1993 acquisition under the equity method of accounting. Cost of revenue. Cost of revenue increased 24% to $52.8 million in 1994 from $42.5 million in 1993. The increase was attributable to higher plant operating, production royalty and depreciation expenses due to a full year of operations at CGC during 1994, and to additional expenses of Thermal Power Company as a result of its acquisition by the Company on September 9, 1994. Service contract expenses decreased by $8.8 million primarily due to the elimination of $6.2 million of operation expenses incurred at CGC after the acquisition of the remaining interest in April 1993, as well as higher 1993 costs incurred in connection with the Aidlin Facility overhaul and higher maintenance expenses at the Agnews Facility. Project development expenses. Project development expenses increased to $1.8 million in 1994 from $1.3 million in 1993 due to increased expenses attributable to new project development activities. General and administrative expenses. General and administrative expenses increased 43% to $7.3 million in 1994 from $5.1 million in 1993 due to additional personnel and related expenses necessary to support the Company's expanded operations. Provision for write-off of project development expenses. The Company established in 1994 a $1.0 million reserve for capitalized project costs associated with the development of projects which the Company has determined may not be consummated. Interest expense. Interest expense increased to $23.9 million in 1994 from $13.8 million in 1993. The Company incurred $8.5 million of interest expense related to the 9 1/4% Senior Notes issued in February 1994. A portion of the proceeds of the 9 1/4% Senior Notes was used to repay all of the $52.6 million then outstanding under the Credit Suisse Credit Facility, and to repay the non-recourse notes payable to Freeport-McMoran Resource Partners, L.P. ("FMRP") plus accrued interest. Interest expense also increased approximately $1.0 million due to a full year of interest expense at higher interest rates related to CGC debt. Additionally, interest expense of $1.3 million was incurred on the new debt related to the Company's acquisition of Thermal Power Company in September 1994. Provision for income taxes. The effective rate for the income tax provision was 39% in 1994 compared to 50% for 1993. The 1994 effective rate reflects a reduction for a depletion in excess of tax basis benefit at Thermal Power Company and CGC. The effective rate for 1993 reflects a provision of $700,000 due to a change in the California state income tax regulations to disallow 50% of net operating loss carryforwards. QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY The Company's quarterly operating results have fluctuated in the past and may continue to do so in the future as a result of a number of factors, including, but not limited to, the timing and size of acquisitions, the completion of development projects, the timing and amount of curtailment and variations in levels of production. Furthermore, the majority of capacity payments under certain of the Company's power sales agreements are received during the months of May through October. The market price of the Common Stock 34 37 could be subject to significant fluctuations in response to those variations in quarterly operating results and other factors. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has obtained cash from its operations, borrowings under the Credit Suisse Credit Facility and other working capital lines, equity contributions from Electrowatt and proceeds from non-recourse project financings and other long-term debt. The Company utilized this cash to fund its operations, service debt obligations, fund the acquisition, development and construction of power generation facilities, finance capital expenditures and meet its other cash and liquidity needs. The following table summarizes the Company's cash flow activities for the periods indicated:
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31, 30, ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- --------- (IN THOUSANDS) Cash flows from: Operating activities........... $ 24,310 $ 34,196 $ 26,653 $ 5,126 $ 5,035 Investing activities........... (27,082) (84,444) (38,497) (23,874) (126,051) Financing activities........... 6,778 66,609 11,127 3,742 137,609 -------- -------- -------- -------- --------- Total....................... $ 4,006 $ 16,361 $ (717) $(15,006) $ 16,593 ======== ======== ======== ======== =========
Operating activities for 1995 consisted of approximately $7.4 million of net income from operations, $25.9 million of depreciation and amortization and a $2.9 million loss from unconsolidated investments in power projects, offset by an $8.5 million net increase in operating assets and liabilities. Operating activities for the six months ended June 30, 1996 consisted of approximately $4.4 million of net income from operations, $15.0 million of depreciation and amortization and $1.7 million in deferred income taxes, offset by $1.7 million of income from unconsolidated investments in power projects and a $14.4 million net increase in operating assets and liabilities. Investing activities used $38.5 million during 1995, primarily due to $17.4 million of capital expenditures, $14.8 million for the acquisition of the Greenleaf 1 and 2 Facilities and a $6.3 million investment in notes receivable. Investing activities used $126.1 million during the six months ended June 30, 1996, primarily due to $11.0 million of capital expenditures and capitalized project costs, $98.4 million for the purchase of collateral securities, a $12.1 million investment in Coperlasa and $4.9 million for deferred transaction costs in connection with the King City Transaction, offset by a $1.1 million decrease in restricted cash requirements. Financing activities provided $11.1 million of cash during 1995. Borrowings in 1995 included $76.0 million of non-recourse project financing and $37.5 million from the Company's lines of credit. Proceeds were primarily used to repay $60.4 million of project debt assumed in the acquisition of the Greenleaf 1 and 2 Facilities, and $15.0 million borrowed from the lines of credit for the acquisition of the Greenleaf 1 and 2 Facilities. In addition, $19.0 million was used to reduce the balance outstanding under non-recourse project financing, and $6.0 million was used to repay short-term borrowings. Financing activities provided $137.6 million of cash during the six months ended June 30, 1996. The Company issued $50.0 million of Preferred Stock to Electrowatt, incurred the $45 Million Bank of Nova Scotia Loan and borrowed an additional $33.8 million under the Credit Suisse Credit Facility and received net proceeds of $175.2 million from the 10 1/2% Senior Notes during the six months ended June 30, 1996. In addition, the Company repaid $46.2 million of bank debt and all of the $53.7 million of borrowings outstanding under the Credit Suisse Credit Facility and $66.6 million of non-recourse project financing. In 1995, working capital decreased $50.5 million and cash and cash equivalents decreased $717,000. The decrease in working capital is primarily due to the reclassification of the $57 Million Bank of Nova Scotia Loan from long-term to current. On May 16, 1996, the Company issued the 10 1/2% Senior Notes, a portion of the net proceeds of which was used to refinance current indebtedness and to repay the $57 Million Bank of 35 38 Nova Scotia Loan. As of June 30, 1996, cash and cash equivalents were $38.4 million and working capital was $51.9 million. For the six months ended June 30, 1996, working capital increased $100.9 million and cash and cash equivalents increased $16.6 million as compared to the twelve months ended December 31, 1995. Working capital at December 31, 1995 included the $57 Million Bank of Nova Scotia Loan. A portion of the net proceeds from the issuance of the 10 1/2% Senior Notes was used to refinance current bank debt and borrowings under the Credit Suisse Credit Facility and to repay the $57 Million Bank of Nova Scotia Loan. Working capital also increased as a result of the investment of the balance of the proceeds from the issuance of the 10 1/2% Senior Notes in short-term marketable securities. The increase in working capital was also due to the proceeds from the issuance of $50.0 million of preferred stock which were invested until May 1, 1996 for the King City Transaction. As a developer, owner and operator of power generation projects, the Company may be required to make long-term commitments and investments of substantial capital for its projects. The Company historically has financed these capital requirements with borrowings under its credit facilities, other lines of credit, non-recourse project financing or long-term debt. At June 30, 1996, the Company had $208.2 million of non-recourse project financing associated with power generating facilities and steam fields at the West Ford Flat Facility, the Bear Canyon Facility, the PG&E Unit 13 and Unit 16 Steam Fields, the SMUDGEO #1 Steam Fields and the Greenleaf 1 and 2 Facilities. As of June 30, 1996, the annual maturities for all non-recourse project debt were $18.1 million for the remainder of 1996, $24.8 million for 1997, $26.0 million for 1998, $18.7 million for 1999, $18.0 million for 2000 and $100.2 million thereafter. The Company currently has the Credit Suisse Credit Facility, which was arranged by Electrowatt and provides for total borrowings of up to $50.0 million, with borrowings bearing interest at either LIBOR or at the Credit Suisse base rate plus a mutually-agreed margin. As of June 30, 1996, the Company had no borrowings outstanding under the Credit Suisse Credit Facility. Upon the completion of the Common Stock Offering, the Credit Suisse Credit Facility will terminate and is expected to be replaced by a comparable facility. On July 20, 1996, the Company entered into a Commitment Letter with The Bank of Nova Scotia for a $50.0 million three-year revolving credit facility. The Bank of Nova Scotia Facility will become effective upon the completion of the Common Stock Offering. The Company currently has outstanding $105.0 million of its 9 1/4% Senior Notes which mature on February 1, 2004 and bear interest at 9 1/4% payable semi-annually on February 1 and August 1 of each year and $180.0 million of its 10 1/2% Senior Notes which mature on May 15, 2006 and bear interest at 10 1/2% payable semi-annually on May 15 and November 15 of each year. Under the provisions of the Indentures, the Company may, under certain circumstances, be limited in its ability to make restricted payments, as defined, which include dividends and certain purchases and investments, incur additional indebtedness and engage in certain transactions. In addition, the Bank of Nova Scotia Facility will contain certain restrictions that will significantly limit or prohibit, among other things, the ability of the Company or its subsidiaries to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with affiliates, create liens, sell assets and engage in mergers and consolidations. The Company has a $1.2 million working capital line with a commercial lender that may be used to fund short-term working capital commitments and letters of credit. At June 30, 1996, the Company had no borrowings under this working capital line and $900,000 of letters of credit outstanding. Borrowings are at prime plus 1%. The Company also had outstanding a non-interest bearing promissory note to Natomas Energy Company in the amount of $6.5 million representing a portion of the September 1994 purchase price of Thermal Power Company. This note, which has been discounted to yield 8% per annum, is due September 9, 1997. The Company intends to continue to seek the use of non-recourse project financing for new projects, where appropriate. The debt agreements of the Company's subsidiaries and other affiliates governing the non-recourse project financing generally restrict their ability to pay dividends, make distributions or otherwise transfer funds to the Company. The dividend restrictions in such agreements generally require that, prior to 36 39 the payment of dividends, distributions or other transfers, the subsidiary or other affiliate must provide for the payment of other obligations, including operating expenses, debt service and reserves. However, the Company does not believe that such restrictions will adversely affect its ability to meet its debt obligations. At June 30, 1996, the Company had commitments for capital expenditures in 1996 totaling $6.5 million related to various projects at its geothermal facilities. The Company intends to fund capital expenditures for the ongoing operation and development of the Company's power generation facilities primarily through the operating cash flow of such facilities. Capital expenditures for 1995 were $17.4 million compared to $7.0 million for 1994, primarily due to the purchase of new equipment and the additional working interest. For the six months ended June 30, 1996, capital expenditures included $4.0 million for the purchase of geothermal leases for the Glass Mountain Project and $2.7 million for the new rotor at the PG&E Unit 13 facility. The Company continues to pursue the acquisition and development of geothermal resources and new power generation projects. The Company expects to commit significant capital during the remainder of 1996 and in future years for the acquisition and development of these projects. The Company's actual capital expenditures may vary significantly during any year. In April 1996, the Company entered into a transaction involving a lease of the King City Facility. The Company financed this transaction with the $45 Million Bank of Nova Scotia Loan, $13.3 million of borrowings under the Credit Suisse Credit Facility (both of which were repaid with a portion of the net proceeds from the sale of the 10 1/2% Senior Notes) and $50.0 million of proceeds from the Preferred Stock Investment by Electrowatt. See "Business -- Description of Facilities -- King City Facility." The Company believes that it will have sufficient liquidity from cash flow from operations, borrowings available from lines of credit and working capital lines to satisfy all obligations under outstanding indebtedness, to finance anticipated capital expenditures and to fund working capital requirements. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This pronouncement requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is to be recognized when the sum of undiscounted cash flows is less than the carrying amount of the asset. Measurement of the loss for assets that the entity expects to hold and use are to be based on the fair market value of the asset. SFAS No. 121 must be adopted for fiscal years beginning in 1996. The Company has adopted SFAS No. 121 effective January 1, 1996, and determined that adoption of this pronouncement had no material impact on the results of operations or financial condition of the Company as of January 1, 1996. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. The disclosure requirements of SFAS No. 123 are effective for the Company's 1996 fiscal year. The Company does not expect the new pronouncement to have an impact on its results of operations since the intrinsic value-based method prescribed by APB Opinion No. 25 and also allowed by SFAS No. 123 will continue to be used by the Company to account for its stock-based compensation plans. 37 40 BUSINESS OVERVIEW Calpine is engaged in the acquisition, development, ownership and operation of power generation facilities and the sale of electricity and steam in the United States and selected international markets. The Company has interests in 14 power generation facilities and steam fields having an aggregate capacity of 937 megawatts. Upon the completion of the acquisition of the 120 megawatt Gilroy Facility, the Company will have interests in 15 power generation facilities and steam fields having an aggregate capacity of 1,057 megawatts. See "-- Description of Facilities -- Power Generation Facilities -- Gilroy Facility." Since its inception in 1984, Calpine has developed substantial expertise in all aspects of electric power generation. The Company's vertical integration has resulted in significant growth over the last five years as Calpine has applied its extensive engineering, construction management, operations, fuel management and financing capabilities to successfully implement its acquisition and development program. During the last five years, Calpine has expanded substantially, from $41.2 million of total assets as of December 31, 1991 to $910.3 million of total assets on a pro forma basis as of June 30, 1996. Calpine's revenue on a pro forma basis for 1995 increased to $224.3 million, representing a compound annual growth rate of 55% since 1991. The Company's EBITDA on a pro forma basis for 1995 increased to $123.8 million. See "Pro Forma Consolidated Financial Data." Calpine's strategy is to capitalize on opportunities in the power market through an ongoing program to acquire, develop, own and operate electric power generation facilities, as well as marketing power and energy services to utilities and other end users. THE MARKET The power generation industry represents the third largest industry in the United States, with an estimated end user market of approximately $207.5 billion of electricity sales and 3.0 million gigawatt hours of production in 1995. In response to increasing customer demand for access to low cost electricity and enhanced services, new regulatory initiatives are currently being adopted or considered at both state and federal levels to increase competition in the domestic power generation industry. To date, such initiatives are under consideration at the federal level and in approximately thirty states. For example, in April 1996, FERC adopted Order No. 888, opening wholesale power sales to competition and providing for open and fair electric transmission services by public utilities. In addition, the CPUC has issued an electric industry restructuring decision which envisions commencement of deregulation and implementation of customer choice of electricity supplier by January 1, 1998. Calpine believes that industry trends and such regulatory initiatives will lead to the transformation of the existing market, which is largely characterized by electric utility monopolies selling to a captive customer base, to a more competitive market where end users may purchase electricity from a variety of suppliers, including non-utility generators, power marketers, public utilities and others. The Company believes that those market trends will create substantial opportunities for companies such as Calpine that are low cost power producers and have an integrated power services capability which enables them to produce and sell energy to customers at competitive rates. The Company also believes that these market trends will result in the disposition of power generation facilities by utilities, independent power producers and industrial companies. Utilities such as PG&E and Southern California Edison Company have announced their intentions to sell power generation facilities totalling approximately 3,150 megawatts and 5,000 megawatts, respectively. The independent power industry, which represents approximately 8% of the installed capacity in the United States, or approximately 59,000 megawatts, and has accounted for approximately 50% of all additional capacity in the United States since 1990, is currently undergoing significant consolidation. Many independent producers operating a limited number of power plants are seeking to dispose of such plants in response to competitive pressures, and industrial companies are selling their power plants to redeploy capital in their core businesses. Over 200 independent power plant and portfolio sale transactions have occurred in the past two years. The Company believes that this consolidation will continue in the highly fragmented independent power industry. The power generation industry outside the United States is approximately three times larger than the domestic market, and the demand for electricity is growing rapidly. In 1996, it has been estimated that in 38 41 excess of 590 gigawatts of new capacity will be required outside the United States over the ensuing ten-year period. In order to satisfy this anticipated increase in demand, many countries have adopted active government programs designed to encourage private investment in power generation facilities. The Company believes that these programs will create significant opportunities to acquire and develop power generation facilities in such countries. STRATEGY Calpine's objective is to become a leading power company by capitalizing on these emerging market opportunities in the domestic and international power markets. The key elements of the Company's strategy are as follows: Expand and diversify its domestic portfolio of power projects. In pursuing its growth strategy, the Company intends to focus on opportunities where it is able to capitalize on its extensive management and technical expertise to implement a fully integrated approach to the acquisition, development and operation of power generation facilities. This approach includes design, engineering, procurement, finance, construction, management, fuel and resource acquisition, operations and power marketing, which Calpine believes provides it with a competitive advantage. By pursuing this strategy, the Company has significantly expanded and diversified its project portfolio. Since 1993, the Company has completed transactions involving four gas-fired cogeneration facilities and two steam fields. In addition, the acquisition of the Gilroy Facility is expected to be completed during the third quarter of 1996. As a result of these transactions, the Company will have more than doubled its aggregate power generation capacity and substantially diversified its fuel mix since 1993. The Company is also pursuing the development of highly efficient, low cost power plants that seek to take advantage of inefficiencies in the electricity market. The Company intends to sell all or a portion of the power generated by such merchant plants into the competitive market, rather than exclusively through long-term power sales agreements. As part of Calpine's initial effort to develop merchant plants, the Company entered into an agreement with Phillips Petroleum Company to develop a gas-fired cogeneration project with a capacity of 240 megawatts. Under this agreement, approximately 90 megawatts of electricity will be sold to the Phillips Houston Chemical Complex, with the remainder to be sold into the competitive market through Calpine's power marketing activities. The Company expects that this project will represent a prototype for future merchant plant developments. The development of this project is subject to the satisfaction of various conditions, including completion of financing and obtaining required approvals. See "-- Development and Future Projects." Enhance the performance and efficiency of existing power projects. The Company continually seeks to maximize the power generation potential of its operating assets and minimize its operating and maintenance expenses and fuel costs. To date, the Company's power generation facilities have operated at an average availability in excess of 97%. The Company believes that achieving and maintaining a low cost of production will be increasingly important to compete effectively in the power generation market. Continue to develop an integrated power marketing capability. The Company has established an integrated power marketing capability, conducted through its wholly owned subsidiary, CPSC. In 1995, CPSC received approval from the FERC to conduct power marketing activities. The Company believes that a power marketing capability complements its business strategy of providing low cost power generation services. CPSC's power marketing activities will focus on the development of long-term customer service relationships, supported primarily by generating assets that are owned, operated or controlled by Calpine. CPSC will aggregate the Company's own resources, the resources of its customers, power pool resources, and market power supply to provide the customized services demanded by its customers at a competitive price. Selectively expand into international markets. Internationally, the Company intends to utilize its geothermal and gas-fired expertise in selected markets of Southeast Asia and Latin America, where demand for power is rapidly growing and private investment is encouraged. In November 1995, the Company made an investment in the Cerro Prieto Steam Fields, located in Baja California, Mexico. In March 1996, the Company entered into a joint venture agreement to pursue the development of a geothermal resource in Indonesia with an estimated potential capacity in excess of 500 megawatts. Calpine believes that its 39 42 investments in these projects will effectively position it for future expansion in Southeast Asia and Latin America. POWER GENERATION TECHNOLOGIES NATURAL GAS-FIRED Natural gas-fired power plants offer significant advantages over power plants utilizing other fuel sources, such as coal, oil and nuclear energy, including readily available supplies of natural gas, currently favorable prices, highly efficient technology, higher availabilities, shorter construction periods and lower capital and operating costs. In addition, natural gas-fired power plants have fewer environmental impacts, including significantly lower emission levels of certain pollutants than power plants utilizing other fossil fuels such as coal and oil. During recent years, natural gas-fired power plants have accounted for a substantial portion of the annual increase in independent power capacity in the United States, and natural gas-fired power generation has become the predominant power generation technology utilized for the production of electricity by new power plants in the United States. Industry analysts have predicted that natural gas will continue to be the dominant fuel for new power generation facilities in the United States for the foreseeable future. LOGO GEOTHERMAL Geothermal energy is a clean, alternative source of power that is produced by utilizing hot water or steam that has been naturally heated by the earth. Geothermal energy is found in areas of the world where heat within the earth's crust is close to the surface. These areas generally coincide with the boundaries of the earth's tectonic plates. Exploitable geothermal reservoirs have three primary defining characteristics: (i) a high heat flow near the surface, (ii) a porous geologic medium where water can circulate to become heated 40 43 and (iii) an impermeable cap rock to prevent dispersion of the heated fluids. Factors that affect the ability to exploit geothermal energy include the ability to drill wells and produce fluids from the porous medium, the temperature and quantity of the fluids and the chemical characteristics of the fluids. In addition, the productive capacity of geothermal wells decreases over time, requiring the drilling of new wells in an effort to maintain production. LOGO Geothermal energy facilities, such as those currently owned and operated by the Company, provide significant advantages over other alternative power generation technologies, such as wind, solar or solid waste/biomass, including lower operating and maintenance costs per kilowatt hour, shorter construction periods and higher plant availability. Geothermal energy also provides a reliable and environmentally preferred source of electricity, emitting significantly lower levels of pollutants than are released from power plants utilizing fossil fuels. As a result of these and other advantages, as well as federal and state tax incentives that have been adopted to encourage the development of geothermal power generation projects, the Company believes that there will continue to be demand for the production of electricity using geothermal energy. The geothermal energy capacity of the United States is located predominantly in the western states in tectonically active regions. Total installed geothermal capacity in the United States was approximately 2,925 megawatts as of the end of 1995, with approximately 2,650 megawatts located in California and 275 megawatts located in Nevada, Utah and Hawaii. The Geysers constitute the world's largest developed geothermal reservoir. The Geysers steam fields have been in commercial production since 1960, and currently are capable of producing an amount of steam sufficient to generate 1,200 megawatts of electricity. DESCRIPTION OF FACILITIES The Company has interests in 14 power generation facilities and steam fields with a current aggregate capacity of approximately 937 megawatts, consisting of six natural gas-fired cogeneration facilities with a total capacity of 402 megawatts, three geothermal power generation facilities (which include a steam field and a power plant) with a total capacity of 67 megawatts and five geothermal steam fields that supply utility power plants with a total current capacity of approximately 468 megawatts. Upon the completion of the acquisition of the Gilroy Facility, the Company will have 15 power generation facilities and steam fields with a current aggregate capacity of approximately 1,057 megawatts, including seven natural gas-fired cogeneration facilities with a total capacity of 522 megawatts. Each of the power generation facilities produces electricity for sale to a 41 44 utility. Thermal energy produced by the gas-fired cogeneration facilities is sold to governmental and industrial users, and steam produced by the geothermal steam fields is sold to utility-owned power plants. The natural gas-fired and geothermal power generation projects in which the Company has an interest produce electricity, thermal energy and steam that are typically sold pursuant to long-term, take-and-pay power or steam sales agreements generally having original terms of 20 or 30 years. Revenue from a power sales agreement usually consists of two components: energy payments and capacity payments. Energy payments are based on a power plant's net electrical output, where payment rates may be determined by a schedule of prices covering a fixed number of years under the power sales agreement, after which payment rates are usually indexed to the fuel costs of the contracting utility or to general inflation indices. Capacity payments are based on a power plant's net electrical output and/or its available capacity. Energy payments are made for each kilowatt hour of energy delivered, while capacity payments, under certain circumstances, are made whether or not any electricity is delivered. The Company is paid for steam supplied by its steam fields on the basis of the amount of electrical energy produced by, or steam delivered to, the contracting utility's power plants. The Company currently provides operating and maintenance services for all power generation facilities in which the Company has an interest, except for the Thermal Power Company Steam Fields and the Cerro Prieto Steam Fields. Such services include the operation of power plants, geothermal steam fields, wells and well pumps, gathering systems and gas pipelines. The Company also supervises maintenance, materials purchasing and inventory control; manages cash flow; trains staff; and prepares operating and maintenance manuals for each power generation facility. As a facility develops an operating history, the Company analyzes its operation and may modify or upgrade equipment or adjust operating procedures or maintenance measures to enhance the facility's reliability or profitability. These services are performed under the terms of an operating and maintenance agreement pursuant to which the Company is generally reimbursed for certain costs, is paid an annual operating fee and may also be paid an incentive fee based on the performance of the facility. The fees payable to the Company are generally subordinated to any lease payments or debt service obligations of non-recourse debt for the project. In order to provide fuel for the gas-fired power generation projects in which the Company has an interest, natural gas reserves are acquired or natural gas is purchased from third parties under supply agreements. The Company structures a gas-fired power facility's fuel supply agreement so that gas costs have a direct relationship to the fuel component of revenue energy payments. Certain power generation facilities in which the Company has an interest have been financed primarily with non-recourse project financing that is structured to be serviced out of the cash flows derived from the sale of electricity, thermal energy and/or steam produced by such facilities and provides that the obligations to pay interest and principal on the loans are secured almost solely by the capital stock or partnership interests, physical assets, contracts and/or cash flow attributable to the entities that own the projects. The lenders under non-recourse project financing generally have no recourse for repayment against the Company or any assets of the Company or any other entity other than foreclosure on pledges of stock or partnership interests and the assets attributable to the entities that own the facilities. Substantially all of the power generation facilities in which the Company has an interest are located on sites which are leased on a long-term basis. The Company currently holds interests in geothermal leaseholds in the Thermal Power Company Steam Fields that produce steam for sale under steam sales agreements and for use in producing electricity from its wholly owned geothermal power generation facilities. See "-- Properties." The continued operation of power generation facilities and steam fields involves many risks, including the breakdown or failure of power generation equipment, transmission lines, pipelines or other equipment or processes and performance below expected levels of output or efficiency. To date, the Company's power generation facilities have operated at an average availability in excess of 97%, and although from time to time the Company's power generation facilities and steam fields have experienced certain equipment breakdowns or failures, such breakdowns or failures have not had a material adverse effect on the operation of such facilities or on the Company's results of operations. Although the Company's facilities contain certain redundancies and back-up mechanisms, there can be no assurance that any such breakdown or failure would not prevent the affected facility or steam field from performing under applicable power and/or steam sales agreements. In 42 45 addition, although insurance is maintained to protect against certain of these operating risks, the proceeds of such insurance may not be adequate to cover lost revenue or increased expenses, and, as a result, the entity owning such power generation facility or steam field may be unable to service principal and interest payments under its financing obligations and may operate at a loss. A default under such a financing obligation could result in the Company losing its interest in such power generation facility or steam field. LOGO Insurance coverage for each power generation facility includes commercial general liability, workers' compensation, employer's liability and property damage coverage which generally contains business interruption insurance covering debt service and continuing expenses for a period ranging from 12 to 18 months. The Company believes that each of the currently operating power generation facilities in which the Company has an interest is exempt from financial and rate regulation as a public utility under federal and state laws. See "-- Government Regulation." 43 46 The table below sets forth certain information regarding the Company's power generation facilities and steam fields currently in operation. POWER GENERATION FACILITIES
COMMENCEMENT TERM OF POWER NAMEPLATE CALPINE CALPINE NET OF POWER GENERATION CAPACITY INTEREST INTEREST COMMERCIAL UTILITY SALES FACILITY TECHNOLOGY (MEGAWATTS)(1) (PERCENTAGE) (MEGAWATTS) OPERATION PURCHASER AGREEMENT - --------------------- ------------ -------------- ---------- ----------- ------------ ------------- --------- Sumas................ Gas-Fired 125 75%(2) 93.8 1993 Puget Sound 2013 Cogeneration Power & Light King City............ Gas-Fired 120 100% 120 1989 Pacific Gas & 2019 Cogeneration Electric Gilroy(3)............ Gas-Fired 120 100% 120 1988 Pacific Gas & 2018 Cogeneration Electric Greenleaf 1.......... Gas-Fired 49.5 100% 49.5 1989 Pacific Gas & 2019 Cogeneration Electric Greenleaf 2.......... Gas-Fired 49.5 100% 49.5 1989 Pacific Gas & 2019 Cogeneration Electric Agnews............... Gas-Fired 29 20% 5.8 1990 Pacific Gas & 2021 Cogeneration Electric Watsonville.......... Gas-Fired 28.5 100% 28.5 1990 Pacific Gas & 2009 Cogeneration Electric West Ford Flat....... Geothermal 27 100% 27 1988 Pacific Gas & 2008 Electric Bear Canyon.......... Geothermal 20 100% 20 1988 Pacific Gas & 2008 Electric Aidlin............... Geothermal 20 5% 1 1989 Pacific Gas & 2009 Electric
STEAM FIELDS
APPROXIMATE CALPINE CALPINE NET COMMENCEMENT CAPACITY INTEREST INTEREST OF COMMERCIAL UTILITY ESTIMATED STEAM FIELD (MEGAWATTS)(4) (PERCENTAGE) (MEGAWATTS) OPERATION PURCHASER LIFE(5) - ------------------------------ ------------- ---------- ---------- ------------- ---------------- --------- Thermal Power Company......... 151 100% 151 1960 Pacific Gas 2018 & Electric PG&E Unit 13.................. 100 100% 100 1980 Pacific Gas 2018 & Electric PG&E Unit 16.................. 78 100% 78 1985 Pacific Gas 2018 & Electric SMUDGEO #1.................... 59 100% 59 1983 Sacramento 2018 Municipal Utility District Cerro Prieto.................. 80 100%(6) 80 1973 Comision 2000(7) Federal de Electricidad
- ------------ (1) Nameplate capacity may not represent the actual output for a facility at any particular time. (2) See "-- Power Generation Facilities -- Sumas Facility" for a description of the Company's interest in the Sumas partnership and current sales of power by the Sumas Facility. (3) The Company expects to complete the acquisition of the Gilroy Facility during the third quarter of 1996. (4) Capacity is expected to gradually diminish as the production of the related steam fields declines. See "-- Steam Fields." (5) Other than for the Cerro Prieto Steam Fields, the steam sales agreements remain in effect so long as steam is produced in commercial quantities. There can be no assurance that the estimated life shown accurately predicts actual productive capacity of the steam fields. See "-- Steam Fields." (6) See "-- Steam Fields -- Cerro Prieto Steam Fields" for a description of the Company's interest in and current sales of steam by the Cerro Prieto Steam Fields. (7) Represents the actual termination of the steam sales agreement. See "-- Steam Fields -- Cerro Prieto Steam Fields." 44 47 POWER GENERATION FACILITIES Sumas Facility The Sumas cogeneration facility (the "Sumas Facility") is a 125 megawatt natural gas-fired, combined cycle cogeneration facility located in Sumas, Washington, near the Canadian border. In 1991, the Company and Sumas Energy, Inc. ("SEI") formed Sumas Cogeneration Company, L.P. ("Sumas") for the purpose of developing, constructing, owning and operating the Sumas Facility. The Company is the sole limited partner in Sumas and SEI is the general partner. The Company currently holds a 50% interest in Sumas and SEI holds the other 50% interest. At the time the Company receives a 24.5% pre-tax rate of return on its partnership investment in Sumas, the Company's interest will be reduced to 11.33% and SEI's interest will increase to 88.67%. Further, the Company receives an additional 25% of the cash flow of the Sumas Facility to repay principal and interest on $11.5 million of loans to the sole shareholder of SEI. A $1.5 million loan bears interest at 20% and matures in 2003 and a $10.0 million loan bearing interest at 16.25% and matures in 2004. The Sumas Facility commenced commercial operation in April 1993. The Company managed the engineering, procurement and construction of the power plant and related facilities of the Sumas Facility, including the gas pipeline. The Sumas Facility was constructed by a Washington joint venture formed by Industrial Power Corporation and Haskell Corporation. The Sumas Facility is comprised of an MS 7001EA combined cycle gas turbine manufactured by General Electric Company ("General Electric"), a Vogt heat recovery steam generator, a General Electric steam turbine and a 3.5 mile gas pipeline. Since start-up in April 1993, the Sumas Facility has operated at an average availability of approximately 96.5%. The Sumas Facility's $135.0 million construction and gas reserves acquisition cost was financed through $120.0 million of construction and term loan financing provided to Sumas and ENCO Gas, Ltd. ("ENCO"), a wholly owned Canadian subsidiary of Sumas, by The Prudential Insurance Company of America ("Prudential") and Credit Suisse. The credit facilities originally included term loans of $70.0 million at a combined fixed interest rate of 10.28% per annum and variable rate loans of $50.0 million currently based on LIBOR, which are amortized over a 15-year period. Electrical energy generated by the Sumas Facility is sold to Puget Sound Power & Light Company ("Puget") under the terms of a 20-year power sales agreement terminating in 2013. Under the power sales agreement, Puget has agreed to purchase an annual average of 123 megawatts of electrical energy. The power sales agreement provides for the sale of electrical energy at a total price equal to the sum of (i) a fixed price component and (ii) a variable price component multiplied by an escalation factor for the year in which the energy is delivered. The schedule of annual fixed average energy prices (expressed in cents per kilowatt hour) in effect through 2013 under the Sumas power sales agreement is as follows:
FIXED FIXED FIXED ENERGY ENERGY ENERGY YEAR PRICE YEAR PRICE YEAR PRICE - -------------------- ------ -------------------- ------ -------------------- ------ 1996................ 3.19c 1997................ 3.38c 1998................ 3.64c 1999................ 3.98c 2000................ 4.23c 2001................ 6.23c 2002................ 6.11c 2003................ 6.22c 2004................ 6.33c 2005................ 6.45c 2006................ 6.57c 2007................ 5.23c 2008................ 5.31c 2009................ 5.40c 2010................ 5.49c 2011................ 5.58c 2012................ 5.58c 2013................ 5.58c
The variable price component is set according to a scheduled rate set forth in the agreement, which in 1995 was .97c per kilowatt hour, and escalates annually by a factor equal to the U.S. Gross National Product Implicit Price Deflator. For 1995, the average price paid by Puget under the power sales agreement was 2.954c per kilowatt hour. Pursuant to the power sales agreement, Puget may displace the production of the Sumas Facility when the cost of Puget's replacement power is less than the Sumas Facility's incremental power generation costs. Thirty-five percent of the savings to Puget under this displacement provision are shared with 45 48 the Sumas Facility. In 1995, the Sumas Facility's net profit was increased by $278,000 as a result of the displacement provision. The Company currently estimates a similar level of displacement in 1996 as that experienced in 1995. In addition to the sale of electricity to Puget, pursuant to a long-term steam supply and dry kiln lease agreement, the Sumas Facility produces and sells approximately 23,000 pounds per hour of low pressure steam to an adjacent lumber-drying facility owned by Sumas, which has been leased to and is operated by Socco, Inc. ("Socco"), an SEI affiliate. It is necessary to continue to operate the dry kiln facility in order to maintain the Sumas Facility's QF status. See "-- Government Regulation." In connection with the development of the Sumas Facility, Canadian natural gas reserves located primarily in northeastern British Columbia, Canada were acquired by Sumas through its wholly owned subsidiary, ENCO. The gas reserves owned by ENCO totalled 138 billion cubic feet as of January 1, 1996. Firm transportation is contracted for on the Westcoast Energy Inc. pipeline. Gas is delivered to Huntington, British Columbia where it is transferred into Sumas' own pipeline for transportation to the plant. ENCO is currently supplying approximately 12,000 million British thermal units per day ("mmbtu/day") to the Sumas Facility. The remaining 13,000 mmbtu/day requirement is being supplied under a one-year contract with West Coast Gas Services, Inc. The Company believes that the gas reserves owned by ENCO and the availability of supplemental gas supplies are sufficient to fuel the Sumas Facility through the year 2013. The Company operates and maintains the Sumas Facility under an operating and maintenance agreement pursuant to which the Company is reimbursed for certain costs and is entitled to a fixed annual fee and an incentive payment based on project performance. This agreement has an initial term of ten years expiring in April 2003 and provides for extensions. The Sumas Facility is located on 13.5 acres located in Sumas, Washington, which are leased from the Port of Bellingham under the terms of a 23.5-year lease expiring in 2014, subject to renewal. The lease provides for rental payments according to a fixed schedule. During 1995, the Sumas Facility generated approximately 1,026,000,000 kilowatt hours of electrical energy and approximately $31.5 million of total revenue. In 1995, the Company recognized a loss of approximately $3.0 million in accordance with the terms of the Sumas partnership agreement, and recorded revenue of $2.0 million for services performed under the operating and maintenance agreement. King City Facility The King City cogeneration facility (the "King City Facility") is a 120 megawatt natural gas-fired combined cycle facility located in King City, California. In April 1996, the Company entered into a long-term operating lease for this facility with BAF Energy, A California Limited Partnership ("BAF"). Under the terms of the operating lease, Calpine makes semi-annual lease payments to BAF, a portion of which is supported by a $100.7 million collateral fund, owned by the Company. The collateral consists of a portfolio of investment grade and U.S. Treasury Securities that will mature serially in amounts equal to a portion of the lease payments. The Company financed the collateral fund and other transaction costs with the $45 Million Bank of Nova Scotia Loan and $13.3 million of borrowings under the Credit Suisse Credit Facility (both of which were repaid with a portion of the net proceeds from the sale of the 10 1/2% Senior Notes), as well as $50.0 million of proceeds from the Preferred Stock Investment by Electrowatt. The power plant consists of a General Electric Frame 7 Model EA combustion turbine generator, a Nooter/Eriksen heat recovery steam generator, an ASEA Brown Boveri ("ABB") steam turbine generator and two Nebraska Boiler auxiliary boilers. The King City Facility commenced commercial operation in 1989 and has operated at an average availability of approximately 97%. 46 49 Electricity generated by the King City Facility is sold to PG&E under a 30-year power sales agreement terminating in 2019. The power sales agreement contains payment provisions for capacity and energy. The power sales agreement provides for a firm capacity payment of $184 per kilowatt year for 111 megawatts for the term of the agreement so long as the King City Facility delivers 80% of the firm capacity during designated periods of the year. Additional capacity payments are received for as-delivered capacity in excess of 111 megawatts delivered during peak and partial peak hours. The following schedule sets forth the as-delivered capacity prices per kilowatt year:
AS-DELIVERED YEAR CAPACITY PRICE ---------------------------------------------------- -------------- 1996................................................ $176 1997................................................ $188 1998................................................ $188
Thereafter, the payment for as-delivered capacity will be the greater of $188 per kilowatt year or PG&E's then current as-delivered capacity rate. Through 1998, payments for electrical energy produced are based on 100% of PG&E's avoided cost of energy for the period of January 1 through April 30, and 80% at avoided cost and 20% at fixed prices for the period of May 1 through December 31. The schedule of fixed average energy prices (expressed in cents per kilowatt hour) in effect through 1998 under the King City Facility power sales agreement is as follows:
ENERGY YEAR PRICE -------------------------------------------------------- ------ 1996.................................................... 12.24c 1997.................................................... 13.14c 1998.................................................... 13.14c
Thereafter, PG&E is required to pay for electrical energy actually delivered at prices equal to PG&E's then avoided cost of energy (as determined by the CPUC). PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. Through April 28, 1999, the power sales agreement allows for dispatchable operation which gives PG&E the right to curtail the number of hours per year that the King City Facility operates. PG&E has an option to extend its curtailment rights for two additional one-year terms. If PG&E exercises the curtailment extension option, it will be required to pay an additional .7c per kilowatt hour for all energy delivered from the King City Facility. In addition to the sale of electricity to PG&E, the King City Facility produces and sells thermal energy to a thermal host, Basic Vegetable Products, Inc. ("BVP"), an affiliate of BAF, under a long-term contract coterminous with the power sales agreement. It is necessary to continue to operate the host facility in order to maintain the King City Facility's QF status. See "-- Government Regulation." The BVP facility was built in 1957 and processes between 30% and 40% of the dehydrated onion and garlic production in the United States. Natural gas for the King City Facility is supplied pursuant to a contract with Chevron U.S.A. Inc. ("Chevron") expiring June 30, 1997. Natural gas is transported under a firm transportation agreement, expiring June 30, 1997, via a dedicated 38-mile pipeline owned and operated by PG&E. The Company believes that upon expiration of these agreements that it will be able to obtain sufficient quantities and firm transportation of natural gas to operate the King City Facility for the remaining term of the power sales agreement. Fee title to the premises is owned by Basic American, Inc., who has leased the premises to an affiliate of BAF for a term equivalent to the term of the power sales agreement for the King City Facility. The Company is subleasing the premises, together with certain easements, from such affiliate of BAF pursuant to a ground sublease for approximately 15 acres. 47 50 Gilroy Facility In May 1996, the Company signed a letter of intent with McCormick & Company, Inc. and Gilroy Energy Company to acquire the Gilroy cogeneration facility (the "Gilroy Facility"), a 120 megawatt gas-fired, cogeneration power plant owned by Gilroy Energy Company located in Gilroy, California. The Company has negotiated the terms of the definitive asset purchase agreement and is currently in the process of completing such agreement, and expects to complete the acquisition during the third quarter of 1996. Pursuant to such agreement, the Company will purchase the Gilroy Facility for a purchase price of $125.0 million plus certain contingent consideration. Completion of such acquisition is subject to certain conditions. There can be no assurance that such conditions will be met, or that the Company will be successful in completing the acquisition or the financing thereof. The Company has arranged to finance the acquisition of the Gilroy Facility utilizing, in part, an 18-year non-recourse project loan of $116.0 million provided by Banque Nationale de Paris (the "BNP Loan"). The BNP Loan will include floating and fixed interest rate tranches. The power plant consists of a General Electric Frame 7 Model EA combustion turbine generator, an AEG-KANIS (ABB) steam turbine, a Henry Vogt heat recovery steam generator, two auxiliary boilers and an inlet chiller using a Henry Vogt ice machine. The Gilroy Facility commenced commercial operation in March 1988 and has operated at an average availability of approximately 98.5%. Electricity generated by the Gilroy Facility is sold to PG&E under an original 30-year power sales agreement terminating in 2018. The power sales agreement contains payment provisions for capacity and energy. The power sales agreement provides for a firm capacity payment of $172 per kilowatt year for 120 megawatts for the term of the agreement so long as the Gilroy Facility delivers 80% of the firm capacity during designated periods of the year. Additional capacity payments are received for as-delivered capacity in excess of 120 megawatts delivered. The following schedule sets forth the as-delivered capacity prices per kilowatt year:
AS-DELIVERED YEAR CAPACITY PRICE -------------------------------------------------------- -------------- 1996.................................................... $176 1997.................................................... $188
Thereafter, the payment for as-delivered capacity will be the greater of $188 per kilowatt year or PG&E's then current as-delivered capacity rate. In addition, the power sales agreement provides for payments for electrical energy actually delivered during the period of dispatchable operation at a price equal to PG&E's avoided cost of energy excluding adders (as determined by the CPUC). Thereafter, during the period of baseload operation, PG&E is required to pay for electrical energy actually delivered at prices equal to PG&E's then avoided cost of energy. PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. In addition to the sale of electricity to PG&E, the Gilroy Facility produces and sells thermal energy to a thermal host, Gilroy Foods, Inc. ("Gilroy Foods"), under a long-term contract that is coterminous with the power sales agreement. Gilroy Foods is a recognized leader in the production of dehydrated onions and garlic. It is anticipated that, simultaneously with the acquisition by the Company of the Gilroy Facility, Gilroy Foods will be acquired by ConAgra, Inc., an international food company with 1995 revenues of approximately $24.1 billion. It is necessary to continue to operate the host facility in order to maintain the Gilroy Facility's QF status. See "-- Government Regulation." Natural gas for the Gilroy Facility is supplied pursuant to a contract with Amoco Energy Trading Corporation ("Amoco") expiring July 31, 1997. The Company believes that upon expiration of this fuel supply agreement, it will be able to obtain a sufficient quantity of natural gas to operate the Gilroy Facility for the remaining term of the power sales agreement. Natural gas is transported under a firm transportation agreement, expiring July 1, 1997, via a dedicated 300-yard pipeline owned and maintained by PG&E. 48 51 The Gilroy Facility is located on approximately five acres of land which will be leased to the Company by Gilroy Foods. The lease term runs concurrent with the term of the power sales agreement. Greenleaf 1 and 2 Facilities On April 21, 1995, Calpine completed the acquisition of the Greenleaf 1 and 2 cogeneration facilities (the "Greenleaf 1 and 2 Facilities") from Radnor Power Corporation, an affiliate of LFC Financial Corporation ("LFC"), for an adjusted purchase price of $81.5 million. On June 30, 1995, Calpine refinanced the existing debt on the Greenleaf 1 and 2 Facilities by borrowing $76.0 million from Sumitomo Bank. The non-recourse project financing with Sumitomo Bank is divided into two tranches, a $60.0 million fixed rate loan facility which bears interest on the unpaid principal at a fixed rate of 7.415% per annum with amortization of principal based on a fixed schedule through June 30, 2005, and a $16.0 million floating rate loan facility which bears interest based on LIBOR plus an applicable margin (6.5% as of December 31, 1995) with the amortization of principal based on a fixed schedule through December 31, 2010. The Greenleaf 1 and 2 Facilities have a combined natural gas requirement of approximately 22,000 mmbtu/day. The Company, through its wholly owned subsidiary Calpine Fuels Corporation ("Calpine Fuels"), entered into a gas supply agreement with Montis Niger, Inc. ("MNI"), an affiliate of LFC, which owns and operates a local gas field that is connected to the facilities. Calpine Fuels is committed to purchasing all gas produced by MNI under this agreement which terminates in December 2019. The quantity of gas produced by MNI varies and is currently less than the facilities' full requirements. As a result, Calpine Fuels has supplemented the MNI gas supply with a short-term contract with Coastal Gas Marketing Company, which expires on September 30, 1996. This gas is delivered over PG&E's intrastate pipeline which is directly connected to each facility. The Greenleaf 1 and 2 Facilities have interruptible transportation agreements with PG&E, expiring in June 1997. The Company believes that it will be able to obtain a sufficient quantity of natural gas to operate the Greenleaf 1 and 2 Facilities for the remaining term of the power sales agreement. Greenleaf 1 Facility. The Greenleaf 1 cogeneration facility (the "Greenleaf 1 Facility") is a 49.5 megawatt natural gas-fired cogeneration facility located near Yuba City, California. The Greenleaf 1 Facility includes an LM5000 gas turbine manufactured by General Electric, a Vogt heat recovery steam generator and a condensing General Electric steam turbine. The Greenleaf 1 Facility commenced commercial operation in March 1989. Since its acquisition by the Company in April 1995, the power plant has operated at an average availability of approximately 94.4%. Electricity generated by the Greenleaf 1 Facility is sold to PG&E under a 30-year power sales agreement terminating in 2019 which contains payment provisions for capacity and energy. The power sales agreement provides for a firm capacity payment of $184 per kilowatt year for 49.2 megawatts for the term of the agreement, so long as the Greenleaf 1 Facility delivers 80% of its firm capacity during certain designated periods of the year, and an as-delivered capacity payment for an additional .3 megawatts of capacity. The following schedule sets forth the as-delivered capacity prices per kilowatt year through 1997 under the Greenleaf 1 Facility power sales agreement:
AS-DELIVERED YEAR CAPACITY PRICE ---------------------------------------------------- -------------- 1996................................................ $176 1997................................................ $188
Thereafter, the payment for as-delivered capacity will be the greater of $188 per kilowatt year or PG&E's then current as-delivered capacity rate. In addition, the power sales agreement provides for payments for up to 49.5 megawatts of electrical energy actually delivered at a price equal to PG&E's avoided cost of energy (as determined by the CPUC). PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. 49 52 In accordance with the power sales agreement, PG&E is entitled to curtail the Greenleaf 1 Facility during hydro-spill periods, or during periods of negative avoided costs. During 1995, the Greenleaf 1 Facility did not experience curtailment, and the Company does not expect to experience curtailment at such facility during 1996. PG&E may also interrupt or reduce deliveries if necessary to repair its system or because of system emergencies, forced outages, force majeure and compliance with prudent electrical practices. In addition to the sale of electricity to PG&E, the Greenleaf 1 Facility sells thermal energy, in the form of hot exhaust to dry wood waste, to a thermal host which is owned and operated by the Company. It is necessary to continue to operate the host facility in order to maintain the Greenleaf 1 Facility's QF status. See "-- Government Regulation." The Greenleaf 1 Facility is located on 77 acres owned by the Company near the rural area of Yuba City, California. From April 21, 1995 through December 31, 1995, the Greenleaf 1 Facility generated approximately 258,921,000 kilowatt hours of electric energy for sale to PG&E and approximately $13.9 million in revenue. Greenleaf 2 Facility. The Greenleaf 2 cogeneration facility (the "Greenleaf 2 Facility") is a 49.5 megawatt natural gas-fired cogeneration facility located near Yuba City, California. The Greenleaf 2 Facility includes a STIG LM5000 gas turbine manufactured by General Electric and a Deltak heat recovery steam generator. The Greenleaf 2 Facility commenced commercial operation in December 1989. Since its acquisition by the Company in April 1995, the power plant has operated at an average availability of approximately 95%. Electricity generated by the Greenleaf 2 Facility is sold to PG&E under a 30-year power sales agreement terminating in 2019 which includes payment provisions for capacity and energy. The power sales agreement provides for a firm capacity payment of $184 per kilowatt year for 49.2 megawatts for the term of the agreement, so long as the Greenleaf 2 Facility delivers 80% of its firm capacity during certain designated periods of the year, and an as-delivered capacity payment for an additional .3 megawatts of capacity. The following schedule sets forth the as-delivered capacity prices per kilowatt year through 1997 under the Greenleaf 2 Facility power sales agreement:
AS-DELIVERED YEAR CAPACITY PRICE ---------------------------------------------------- -------------- 1996................................................ $176 1997................................................ $188
Thereafter, the payment for as-delivered capacity will be the greater of $188 per kilowatt year or PG&E's then current as-delivered capacity rate. In addition, the power sales agreement provides for payments for up to 49.5 megawatts of electrical energy actually delivered at a price equal to PG&E's avoided cost of energy (as determined by the CPUC). PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. In accordance with the power sales agreement, PG&E is entitled to curtail the Greenleaf 2 Facility during hydro-spill periods or during any period of negative avoided costs. During 1995, the Greenleaf 2 Facility did not experience curtailment, and the Company does not expect to experience curtailment at such facility during 1996. PG&E may also interrupt or reduce deliveries if necessary to repair its system or because of system emergencies, forced outages, force majeure and compliance with prudent electrical practices. In addition to the sale of electricity to PG&E, the Greenleaf 2 Facility sells thermal energy to Sunsweet Growers, Inc. ("Sunsweet") pursuant to a 30-year contract. Sunsweet is the largest producer of dried fruit in the United States. It is necessary to continue to operate the host facility in order to maintain the status of the Greenleaf 2 Facility as a QF. See "-- Government Regulation." The Greenleaf 2 Facility is located on 2.5 acres of land under a lease from Sunsweet, which runs concurrent with the power sales agreement. 50 53 From April 21, 1995 through December 31, 1995, the Greenleaf 2 Facility generated approximately 276,038,000 kilowatt hours of electric energy for sale to PG&E and approximately $14.5 million of revenue. Agnews Facility The Agnews cogeneration facility (the "Agnews Facility") is a 29 megawatt natural gas-fired combined cycle cogeneration facility located on the East Campus of the state-owned Agnews Developmental Center in San Jose, California. Calpine holds a 20% ownership interest in GATX Calpine-Agnews, Inc., which is the sole stockholder of O.L.S. Energy-Agnews, Inc. ("O.L.S. Energy-Agnews"). O.L.S. Energy-Agnews leases the Agnews Facility under a sale leaseback arrangement. The other stockholder of GATX Calpine-Agnews, Inc. is GATX Capital Corporation ("GATX"), which has an 80% ownership interest. In connection with the sale leaseback arrangement, Calpine has agreed to reimburse GATX for its proportionate share of certain payments that may be made by GATX with respect to the Agnews Facility. The Company and GATX managed the development and financing of the Agnews Facility, which commenced commercial operations in December 1990. The Company managed the engineering, construction and start-up of the Agnews Facility. The construction work was performed by Power Systems Engineering, Inc. under a turnkey contract. The power plant consists of an LM2500 aeroderivative gas turbine manufactured by General Electric, a Deltak unfired heat recovery steam generator and a Shin Nippon steam turbine-generator. Since start-up, the Agnews Facility has operated at an average availability of approximately 96.5%. The total cost of the Agnews Facility was approximately $39 million. The construction financing was provided by Credit Suisse in the amount of $28.0 million. After the commencement of commercial operation, the facility was sold to Nynex Credit Corporation under a sale leaseback arrangement with O.L.S. Energy-Agnews. Under the sale leaseback, O.L.S. Energy-Agnews has entered into a 22-year lease, commencing March 1991, providing for the payment of a fixed base rental, renewal options and a purchase option at fair market value at the termination of the lease. Electricity generated by the Agnews Facility is sold to PG&E under a 30-year power sales agreement terminating in 2021 which contains payment provisions for capacity and energy. The power sales agreement provides for a payment of $196 per kilowatt year for 24 megawatts of firm capacity for the term of the agreement, so long as the Agnews Facility delivers at least 80% of its firm capacity of 24 megawatts during certain designated periods of the year, and an as-delivered capacity payment for an additional 4 megawatts of capacity. The following schedule sets forth the as-delivered capacity prices per kilowatt year through 1998 under the Agnews Facility power sales agreement:
AS-DELIVERED YEAR CAPACITY PRICE ---------------------------------------------------- -------------- 1996................................................ $176 1997................................................ $188 1998................................................ $188
Thereafter, the payment for as-delivered capacity will be at the greater of $188 per kilowatt year or PG&E's then current as-delivered capacity rate. In addition, the power sales agreement provides for payments for up to 32 megawatts of electrical energy actually delivered at a price equal to (i) through 1998, the product of PG&E's fixed incremental energy rate and PG&E's utility electric generation gas cost, and (ii) thereafter, PG&E's avoided cost of energy (as determined by the CPUC). PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. Under certain circumstances, PG&E may curtail energy deliveries for up to 1,000 off-peak hours per year. During 1995, PG&E curtailed the energy purchased under the power sales agreement by 1,000 hours. The Company currently expects the maximum amount of curtailment allowed under the agreement during 1996. 51 54 In addition to the sale of electricity to PG&E, the Agnews Facility produces and sells electricity and approximately 7,000 pounds per hour of steam to the Agnews Developmental Center pursuant to a 30-year energy service agreement. The energy service agreement provides that the State of California will purchase from the Agnews Facility all of its requirements for steam (up to a specified maximum) and for electricity (which has historically been less than one megawatt per year) for the East Campus of the Agnews Developmental Center for the term of the agreement. Steam sales are priced at the cost of production for the Agnews Developmental Center. Electricity sales are priced at the rates that would otherwise be paid to PG&E by the Agnews Developmental Center. The State of California is required to utilize the minimum amount of steam required to maintain the Agnews Facility's QF status. See "-- Government Regulation." The supply of natural gas for the Agnews Facility is currently provided under a full requirements fuel supply agreement between O.L.S. Energy-Agnews and Amoco Energy Trading Corporation ("Amoco") which expires June 30, 1997. The Company believes that, upon expiration of this fuel supply agreement, it will be able to obtain a sufficient quantity of natural gas to operate the Agnews Facility for the remaining term of the power sales agreement. Intrastate transportation is provided under a firm gas transportation agreement with PG&E expiring in June 1997. The Agnews Facility is operated by the Company under an operating and maintenance agreement pursuant to which the Company is reimbursed for certain costs and is entitled to a fixed annual fee and an incentive payment based on performance. This agreement has an initial term of six years expiring on December 31, 1996 and may be automatically renewed for an additional six-year term, provided certain performance standards are met, and thereafter upon mutually agreeable terms. The Company expects the contract will be renewed on December 31, 1996. The Agnews Facility is located on 1.4 acres of land leased from the Agnews Development Center under the terms of a 30-year lease that expires in 2021. This lease provides for rental payments to the State of California on a fixed payment basis until January 1, 1999, and thereafter based on the gross revenues derived from sales of electricity by the Agnews Facility, as well as a purchase option at fair market value. During 1995, the Agnews Facility generated approximately 225,683,000 kilowatt hours of electrical energy and total revenue of $10.8 million. In 1995, the Company recognized a loss of approximately $82,000 as a result of the Company's 20% ownership interest and recorded revenue of $1.5 million for services performed under the operating and maintenance agreement. Watsonville Facility The Watsonville cogeneration facility (the "Watsonville Facility") is a 28.5 megawatt natural gas-fired combined cycle cogeneration facility located in Watsonville, California. On June 29, 1995, the Company acquired the operating lease for this facility for $900,000 from Ford Motor Credit Company. Under the terms of the lease, rent is payable each month from July through December. The lease terminates on December 29, 2009. The Watsonville Facility commenced commercial operation in May 1990. The power plant consists of a General Electric LM2500 gas turbine, a Deltak heat recovery steam generator and a Shin Nippon steam turbine. Since its acquisition by the Company in June 1995, the power plant has operated at an average availability of approximately 96.5%. Electricity generated by the Watsonville Facility is sold to PG&E under a 20-year power sales agreement terminating in 2009 which contains payment provisions for capacity and energy. The power sales agreement provides for a payment of $178 per kilowatt year for 20.9 megawatts of firm capacity for the term of the agreement, so long as the Watsonville Facility delivers at least 80% of its firm capacity of 20.9 megawatts during certain designated periods of the year, and an as-delivered capacity payment for an additional 7.6 megawatts of capacity. In addition, the power sales agreement provides for payments for up to 28.5 megawatts of electrical energy actually delivered. Through April of 2000, 1% of energy will be sold under the fixed energy price schedule set forth below, and 99% of the energy will be sold at PG&E's avoided cost of energy. The following schedule sets forth the fixed average energy prices (expressed in cents per kilowatt 52 55 hour) and the as-delivered capacity prices per kilowatt year through 2000 for energy deliveries under the Watsonville Facility power sales agreement:
ENERGY AS-DELIVERED YEAR PRICE CAPACITY PRICE -------------------------------------------- ------- -------------- 1996........................................ 12.24c $176 1997........................................ 13.14c $188 1998........................................ 13.90c $188 1999........................................ 13.90c $188 2000........................................ 13.90c $188
Thereafter, PG&E will pay for energy delivered at prices equal to PG&E's avoided cost of energy (as determined by the CPUC), and will pay for as-delivered capacity at the greater of $188 per kilowatt year or PG&E's then current as-delivered capacity rate. PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. Under certain circumstances, PG&E may curtail energy deliveries for a block of up to 400 hours between January 1 and April 15 and an additional 900 off-peak hours from October 1 though April 30. From June 29, 1995 through December 31, 1995, PG&E curtailed energy purchases of 212 hours under the power sales agreement. In addition to the sale of electricity to PG&E, during 1995 the Watsonville Facility produced and sold steam to two thermal hosts, Norcal Frozen Foods, Inc. ("Norcal") and Farmers Processing, both food processors. In August 1995, Norcal sold its facility to a subsidiary of Dean Foods ("Dean Foods"), which closed the facility on February 9, 1996. The lessor of the Watsonville Facility has constructed a water distillation facility on the site of the Watsonville Facility to replace the Dean Foods food processing facility. This facility commenced operations in August 1996 and is operated by the Company. It is necessary to continue to operate the host facilities in order to maintain the Watsonville Facility's QF status. See "-- Government Regulation." Amoco is the supplier of natural gas to the Watsonville Facility. The Company has negotiated a contract with Amoco, which it expects to execute by September 1, 1996 and which will be effective through June 30, 1997. In the interim, the Company has executed a series of monthly contracts with Amoco. PG&E provides firm gas transportation to the Watsonville Facility under a contract expiring June 30, 1997. The Company believes that upon expiration of this fuel supply agreement, it will be able to obtain a sufficient quantity of natural gas to operate the Watsonville Facility for the remaining term of the power sales agreement. The Watsonville Facility is located on 1.8 acres of land leased from Dean Foods under the terms of a 30-year lease expiring in 2010. For the period from June 29, 1995 to December 31, 1995, the Watsonville Facility generated approximately 117,147,000 kilowatt hours of electrical energy for sale to PG&E and approximately $5.9 million in revenue. West Ford Flat Facility The West Ford Flat geothermal facility (the "West Ford Flat Facility") consists of a 27 megawatt geothermal power plant and associated steam fields located in the eastern portion of The Geysers area of northern California. The West Ford Flat Facility includes a power plant consisting of two turbines manufactured by Mitsubishi Heavy Industries, Inc. with rotors remanufactured by ABB Industries, Inc., two generators manufactured by Electric Machinery, Inc., and seven production wells and steam leases. The West Ford Flat Facility commenced commercial operation in December 1988. Since start-up, the West Ford Flat Facility has operated at an average availability of approximately 98%. 53 56 Electricity generated by the West Ford Flat Facility is sold to PG&E under a 20-year power sales agreement terminating in 2008 which contains payment provisions for capacity and energy. The power sales agreement provides for a firm capacity payment of $167 per kilowatt year for 27 megawatts of firm capacity for the term of the agreement, so long as the West Ford Flat Facility delivers 80% of its firm capacity during certain designated periods of the year. In addition, the power sales agreement provides for energy payments for electricity actually delivered based on a fixed price derived from a scheduled forecast of energy prices over the initial ten-year term of the agreement ending December 1998. The schedule of fixed average energy prices (expressed in cents per kilowatt hour) in effect through 1998 under the West Ford Flat Facility power sales agreement is as follows:
ENERGY YEAR PRICE -------------------------------------------------------- ------ 1996.................................................... 12.89c 1997.................................................... 13.83c 1998.................................................... 13.83c
Thereafter, PG&E is required to pay for electrical energy actually delivered at prices equal to PG&E's avoided cost of energy (as determined by the CPUC). PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. The Company cannot accurately predict the avoided cost of energy prices that will be in effect at the expiration of the fixed price period under this agreement. Under certain circumstances, PG&E may curtail energy deliveries for up to 1,000 off-peak hours per year. During 1995, PG&E curtailed the energy purchased under this agreement by 1,000 hours. In the event of any such curtailment, the Company's results of operations may be materially adversely affected. The Company currently expects the maximum amount of curtailment allowed under the agreement during 1996. The Company believes that the geothermal reserves that supply energy for use by the West Ford Flat Facility will be sufficient to operate at full capacity for the entire term of the power sales agreement due principally to high reservoir pressures, low projected decline rates, limited development in adjacent areas and the substantial productive acreage dedicated to the West Ford Flat Facility. The West Ford Flat Facility is located on 267 acres of leased land located in The Geysers. For a description of the leases covering the properties located in The Geysers, see "-- Properties." During 1995, the West Ford Flat Facility generated approximately 216,614,000 kilowatt hours of electrical energy for sale to PG&E and approximately $29.4 million of revenue. Bear Canyon Facility The Bear Canyon facility (the "Bear Canyon Facility") consists of a 20 megawatt geothermal power plant and associated steam fields located in the eastern portion of The Geysers area of northern California, two miles south of the West Ford Flat Facility. The Bear Canyon Facility includes a power plant consisting of two turbine generators manufactured by Mitsubishi Heavy Industries, Inc. with rotors remanufactured by ABB Industries, Inc., as well as eight production wells, an injection well and steam reserves. The Bear Canyon Facility commenced commercial operation in October 1988. Since start-up, the Bear Canyon Facility has operated at an average availability of approximately 98.4%. Electricity generated by the Bear Canyon Facility is sold to PG&E under two 10 megawatt, 20-year power sales agreements terminating in 2008 which contain payment provisions for capacity and energy. One of the power sales agreements provides for a firm capacity payment of $156 per kilowatt year on four megawatts for the term of the agreement, so long as the Bear Canyon Facility delivers 80% of its firm capacity during certain designated periods of the year, and an as-delivered capacity payment for the additional six megawatts of capacity. The other agreement provides for an as-delivered capacity payment for the entire 10 megawatts. Both agreements provide for energy payments for electricity actually delivered based on a fixed price basis 54 57 through the initial ten-year term of the agreement ending September 1998. The following schedule sets forth the fixed average energy prices (expressed in cents per kilowatt hour) and the as-delivered capacity prices per kilowatt year through 1998 for energy deliveries under the Bear Canyon Facility power sales agreements:
ENERGY AS-DELIVERED YEAR PRICE CAPACITY PRICE -------------------------------------------- ------- -------------- 1996........................................ 12.89c $176 1997........................................ 13.83c $188 1998........................................ 13.83c $188
Thereafter, PG&E will pay for energy delivered at prices equal to PG&E's avoided cost of energy (as determined by the CPUC), and will pay for as-delivered capacity at the greater of $188 per kilowatt year or PG&E's then current as-delivered capacity rate. PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. The Company cannot accurately predict the avoided cost of energy prices that will be in effect at the expiration of the fixed price period under this agreement. Under certain circumstances, PG&E may curtail energy deliveries for up to 1,000 off-peak hours per year. During 1995, PG&E curtailed the energy purchased under this agreement by 1,000 hours. In the event of any such curtailment, the Company's results of operations may be materially adversely affected. The Company currently expects the maximum amount of curtailment allowed under the agreement during 1996. The Company believes that the geothermal reserves for the Bear Canyon Facility will be sufficient to operate at full capacity for substantially all of the remaining term of the power sales agreements due principally to high reservoir pressures, low projected decline rates, limited development in adjacent areas and the substantial productive acreage dedicated to the Bear Canyon Facility. The Bear Canyon Facility is located on 284 acres of land located in The Geysers covered by two leases, one with the State of California and the other with a private landowner. For a description of the leases covering the properties located at The Geysers, see "-- Properties." During 1995, the Bear Canyon Facility generated approximately 164,847,000 kilowatt hours of electrical energy and approximately $21.8 million of revenue. Aidlin Facility The Aidlin geothermal facility (the "Aidlin Facility") consists of a 20 megawatt geothermal power plant and associated steam fields located in the western portion of The Geysers area of northern California. The Company holds an indirect 5% ownership interest in the Aidlin Facility. The Company's ownership interest is held in the form of a 10% general partnership interest in a limited partnership (the "Aidlin Partnership"), which in turn owns a 50% ownership interest, as both a limited and general partner, in Geothermal Energy Partners Ltd. ("GEP"), a limited partnership which is the owner of the Aidlin Facility. MetLife Capital Corporation owns the remaining 90% interest in the Aidlin Partnership as a limited partner. The remaining 50% of GEP is owned by subsidiaries of Mission Energy Company and Sumitomo Corporation. The Aidlin Facility commenced commercial operation in May 1989. The Aidlin Facility includes a power plant consisting of two turbine generators manufactured by Fuji Electric and ABB Industries, Inc., as well as seven production wells and two injection wells. Since start-up, the Aidlin Facility has operated at an average availability of approximately 99%. The construction of the Aidlin Facility was financed with a $59.4 million term loan provided by Prudential, which bears interest at a fixed rate of 10.48% per annum and matures on June 30, 2008 according to a specified amortization schedule. Electricity generated by the Aidlin Facility is sold to PG&E under two 10 megawatt, 20-year power sales agreements terminating in 2009 which contain payment provisions for capacity and energy. The power sales 55 58 agreements provide for an aggregate firm capacity payment for 17 megawatts of $167 per kilowatt year for the term of the agreements, so long as the Aidlin Facility delivers 80% of its capacity during certain designated periods of the year. In addition, the Aidlin Facility power sales agreements provide for energy payments for 20 megawatts based on a schedule of fixed energy prices (expressed in cents per kilowatt hour) in effect through 1999 as follows:
ENERGY YEAR PRICE -------------------------------------------------------- ------ 1996.................................................... 12.89c 1997.................................................... 13.83c 1998.................................................... 13.83c 1999.................................................... 13.83c
Thereafter, PG&E is required to pay for electrical energy actually delivered at prices equal to PG&E's avoided cost of energy (as determined by the CPUC). PG&E's avoided cost of energy varies from month to month and has ranged from an annual average of 1.84c to 2.96c per kilowatt hour since 1992. During 1995, PG&E's avoided cost of energy averaged approximately 1.84c per kilowatt hour. The Company cannot accurately predict the avoided cost of energy that will be in effect at the expiration of the fixed price period under this agreement. Under certain circumstances, PG&E may curtail energy deliveries for up to 1,000 off-peak hours per year. During 1995, PG&E curtailed the energy purchased under this agreement by 1,000 hours. The Company currently expects the maximum amount of curtailment under the agreement in 1996. The output of the Aidlin Facility is expected to decline over the remaining life of the facility unless additional reserves are developed on existing or adjacent leases and enhanced water injection projects are successful in reducing field declines. See "Risk Factors -- Risks Related to the Development and Operation of Geothermal Energy Resources." The Aidlin Facility is operated and maintained by the Company under an operating and maintenance agreement pursuant to which the Company is reimbursed for certain costs and is entitled to an incentive payment based on project performance. This agreement expires on December 31, 1999. The Aidlin Facility is located on 713.8 acres of land located in The Geysers, which is leased by GEP from a private landowner. The lease will remain in force so long as geothermal steam is produced in commercial quantities. During 1995, the Aidlin Facility generated approximately 174,087,000 kilowatt hours of electrical energy and revenue of $21.7 million. In 1995, the Company recognized revenue of approximately $277,000 as a result of the Company's 5% ownership interest and $3.5 million for services performed under the operating and maintenance agreement. STEAM FIELDS Thermal Power Company Steam Fields The Company acquired Thermal Power Company on September 9, 1994 for a purchase price of $66.5 million. Thermal Power Company owns a 25% undivided interest in certain geothermal steam fields located at The Geysers in northern California (the "Thermal Power Company Steam Fields"). Union Oil Company of California ("Union Oil") owns the remaining 75% interest in the steam fields and operates and maintains the steam fields. The Thermal Power Company Steam Fields include the leasehold rights to 13,908 acres of steam fields which supply steam to 12 PG&E power plants located in The Geysers and include 247 production wells, 19 injection wells and 52 miles of steam-transporting pipeline. See "-- Properties." The 12 plants have a nameplate capacity of 978 megawatts and currently have the capability to operate at 604 megawatts providing the Company with an effective interest in 151 megawatts. The steam fields commenced commercial operation in 1960. 56 59 The Thermal Power Company Steam Fields produce steam for sale to PG&E under a long-term steam sales agreement. Under this steam sales agreement, the Company is paid on the basis of the amount of electricity produced by the power plants to which steam is supplied. PG&E is obligated to use its best efforts to operate its power plants to maintain monthly and annual steam field capacity. The price paid for steam under the steam sales agreement is determined according to a formula that consists of the average of three indices multiplied by a fixed price of 1.65c per kilowatt hour. The indices used are the Producer Price Index for Crude Petroleum, the Producer Price Index for Natural Gas and the Consumer Price Index ("CPI"). The price of steam under the steam sales agreement in 1995 was 1.647c per kilowatt hour. In addition, the Company receives a monthly fee for effluent disposal and maintenance. During 1995, such monthly fee was $144,000 per month. In March 1996, the Company and Union Oil Company of California ("Union Oil") entered into an alternative pricing agreement with PG&E for any steam produced in excess of 40% of average field capacity as defined in the steam sales contract. The alternative pricing strategy is effective through December 31, 2000. Under the alternative pricing agreement, PG&E has the option to purchase a portion of the steam that PG&E would likely curtail under the existing steam sales agreement. The price for this portion of steam will be set by the Company and Union Oil with the intent that it be at competitive market prices. The Company and Union Oil will solely determine the price and duration of these alternative prices. The steam sales agreement with PG&E also provides for offset payments, which constitute a remedy for insufficient steam. Under the steam sales agreement, the Company is required to pay PG&E for the unamortized costs, including site clean-up, removal and abandonment costs, of power plants that are installed but are unused as a result of steam supply deficiency. The offset payments are calculated based upon a fixed amortization schedule for all power plants, which may be adjusted for future capital expenditures, and upon the steam fields' capacity in megawatts. In accordance with the steam sales agreement, the Company makes offset payments at a reduced rate until total offsets calculated since July 1, 1991 equal $15 million. Accordingly, the Company's share of offsets in 1995 was $757,000. In approximately 1999, when total offsets may exceed $15 million in accordance with the agreement, the Company's share of offset payments to PG&E would be approximately 2 1/2 times their current rate (as calculated at the current steam field capacity). In accordance with the steam sales agreement, PG&E may curtail the power plants which receive steam in order to produce energy from lower cost sources. PG&E is contractually obligated to operate all of the power plants at a minimum of 40% of the field capacity during any given year, and at 25% of the field capacity in any given month. During 1995, the Thermal Power Company Steam Fields experienced extensive curtailment of steam production due to low gas prices and abundant hydro power. The Company receives a monthly fee for PG&E's right to curtail its power plants. Such fee was $12,800 per month during 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The steam sales agreement with PG&E terminates two years after the closing of the last operating power plant. In addition, PG&E may terminate the contract earlier with a one-year written notice. If PG&E terminates in accordance with the steam sales agreement, the Company will provide capacity maintenance services for five years after the termination date, and will retain a right of first refusal to purchase the PG&E facilities at PG&E's unamortized cost. Alternatively, the Company may terminate the agreement with a two-year written notice to PG&E. If the Company terminates, PG&E has the right to take assignment of the Thermal Power Company Steam Fields' facilities on the date of termination. In that case, the Company would continue to pay offset payments for three years following the date of termination. Under the steam sales agreement, PG&E may retire older power plants upon a minimum of six-months' notice. The Company is unable to predict PG&E's schedule for the retirement of such power plants, which may change from time to time. If steam is abandoned (i.e., cannot be transported to the remaining plants), the abandoned steam may be delivered for use to other PG&E power plants, subject to existing contract conditions, or to other customers upon closure of a PG&E power plant. The Thermal Power Company Steam Fields currently supply steam sufficient to operate the PG&E power plants at approximately 60% of their combined nameplate capacity. This percentage reflects a decline in productivity since the commencement of operations. While it is not possible to accurately predict long-term 57 60 steam field productivity, the Company has estimated that the current annual rate of decline in steam field productivity of the Thermal Power Company Steam Fields was approximately 9% until 1995, during which year extensive curtailment interrupted the decline trend. The Company expects steam field productivity to continue to decline in the future. The Company plans to work with Union Oil and PG&E to partially offset the expected rate of decline by the development of water injection projects and power plant improvements. During 1995, the PG&E power plants produced 2,688,176,000 kilowatt hours of electrical energy of which the Company's 25% share is 672,044,000 kilowatt hours for approximately $11.0 million of revenue. PG&E Unit 13 and Unit 16 Steam Fields The Company holds the leasehold rights to 1,631 acres of steam fields (the "PG&E Unit 13 and Unit 16 Steam Fields") that supply steam to PG&E's Unit 13 power plant (the "Unit 13") and PG&E's Unit 16 power plant (the "Unit 16"), all of which are located in The Geysers. See "-- Properties." Unit 13 and Unit 16 have nameplate capacities of 134 and 113 megawatts, respectively, and currently operate at outputs of approximately 100 and 78 megawatts, respectively. The PG&E Unit 13 Steam Field includes 956 acres, 30 production wells, two injection wells and five miles of pipeline, and commenced commercial operations in May 1980. The PG&E Unit 16 Steam Field includes 675 acres, 19 producing wells, two injection wells, and three miles of pipeline, and commenced commercial operation in October 1985. The PG&E Unit 13 and Unit 16 Steam Fields produce steam for sale to PG&E under long-term steam sales agreements. Under the steam sales agreements with PG&E, the Company is paid for steam on the basis of the amount of electricity produced by Unit 13 and Unit 16. The price paid for steam under the PG&E Unit 13 and Unit 16 Steam Fields agreements is determined according to a formula that is essentially a weighted average of PG&E's fossil (oil and gas) fuel price and PG&E's nuclear fuel price. The price of steam for 1995 was 1.207c per kilowatt hour. The price for 1996 is expected to be approximately .995c. The Company receives an additional .05c per kilowatt hour from PG&E for the disposal of liquid effluents produced at Unit 13 and Unit 16. During conditions of hydro-spill, PG&E may curtail energy deliveries from Unit 13 and Unit 16 which would reduce deliveries of steam under this agreement. Curtailments are primarily the result of a higher degree of precipitation during the period, which results in higher levels of energy generation by hydroelectric power facilities that supply electricity for sale by PG&E. In the event of any such curtailment, the Company's results of operations may be materially adversely affected. PG&E curtailed approximately 64,000,000 kilowatt hours under the steam sales agreement during 1995. The Company currently expects approximately the same amount of curtailment under the agreement during 1996 that was experienced in 1995. The steam sales agreement with PG&E continues in effect for as long as either Unit 13 or Unit 16 remains in commercial operation, which depends on maintaining the productive capacity of the respective steam fields. However, PG&E may terminate the agreement if the quantity, quality or purity of the steam is such that the operation of Unit 13 or Unit 16 becomes economically impractical. The Company currently estimates that the productive capacity of the PG&E Unit 13 and Unit 16 Steam Fields is approximately 22 years. However, no assurance can be given that the operation of either Unit 13 or Unit 16 will not become economically impractical at any time during these periods. The Company is required to supply a sufficient quantity of steam of specified quality to Unit 16. If an insufficient quantity of steam is delivered, the Company may be subject to penalty provisions, including suspension of PG&E's obligation to pay for steam delivered. Specifically, if the Company fails to deliver to Unit 16 in any calendar month a sufficient quantity of steam adequate to operate the power plant at or above a capacity factor of 50%, no payment shall be made for steam delivered to such Unit during such month until the cost of that Unit has been completely amortized by PG&E. In order to increase the efficiency of Unit 13 by approximately 20%, the Company agreed to purchase new rotors for approximately $10 million. In exchange, PG&E agreed to amend the steam sales agreement to remove the penalty provision for a failure to deliver a sufficient quantity of steam to Unit 13 and to require 58 61 PG&E to operate at variable pressure operations which will optimize production at the PG&E Unit 13 and Unit 16 Steam Fields. The PG&E Unit 13 and Unit 16 Steam Fields currently supply steam sufficient to operate Unit 13 and Unit 16 at approximately 72% of their combined nameplate capacities. This percentage reflects a decline in the productivity of the PG&E Unit 13 and Unit 16 Steam Fields since the commencement of operations of Unit 13 and Unit 16. While it is not possible to accurately predict long-term steam field productivity, the Company has estimated that the annual rate of decline in steam field productivity of the PG&E Unit 13 and Unit 16 Steam Fields was approximately 10% until curtailment of neighboring plants and Unit 13 and Unit 16 in 1995 reduced the decline to zero. The Company expects steam field productivity to continue to decline in the future, but at decreasing annual rates of decline. The Company considered these declines in steam field productivity in developing its original projections for the PG&E Unit 13 and Unit 16 Steam Fields at the time the Company acquired its initial interest in 1990. The Company plans to partially offset the expected rate of decline by implementing enhanced water injection and power plant improvements. During 1995, the PG&E Unit 13 and Unit 16 Steam Fields produced sufficient steam to permit Unit 13 and Unit 16 to produce approximately 1,296,900,000 kilowatt hours of electrical energy and approximately $16.3 million of revenue. SMUDGEO #1 Steam Fields The Company holds the leasehold rights to 394 acres of steam fields that supply steam to the power plant for SMUD SMUDGEO #1 steam fields (the "SMUDGEO #1 Steam Fields"). See "-- Properties." The SMUD power plant has a nameplate capacity of 72 megawatts and currently operates at an output of 59 megawatts. The SMUDGEO #1 Steam Fields include 19 producing wells, one injection well and two miles of pipeline. Commercial operation of the SMUD power plant commenced in October 1983. The steam sales agreement with SMUD provides that SMUD will pay for steam based upon the quantity of steam delivered to the SMUD power plant. The current price paid for steam delivered under the steam sales agreement is $1.746 per thousand pounds of steam, which is adjusted semi-annually based on changes in the Gross National Product Implicit Price Deflator Index and Producers Price Index for Fuels, Related Products and Power. SMUD may suspend payments for steam in any month if the Company is unable to deliver 50% of the steam requirement until the cost of the plant and related facilities have been completely amortized by the value of such steam delivered to the plant. Based on current estimates and analyses performed by the Company, the Company does not expect SMUD to suspend payments for steam under this provision. The Company receives an additional .15c per kilowatt hour from SMUD for the disposal of liquid effluents produced at the SMUDGEO #1 Steam Fields. The steam sales agreement with SMUD continues until the expiration or termination of the geothermal lease covering the SMUDGEO #1 Steam Fields, which continues for so long as steam is produced in commercial quantities. The Company and SMUD each have the right to terminate the agreement if their respective operations become economically impractical. In the event that SMUD exercises its right to terminate, the Company will have no further obligation to deliver steam to the power plants. The SMUDGEO #1 Steam Fields currently supply steam sufficient to operate the SMUD power plant at approximately 82% of its nameplate capacity. This percentage reflects a decline in the productivity of the SMUDGEO #1 Steam Fields since commencement of operations. Although the SMUDGEO #1 Steam Fields increased in productivity in 1995 due to curtailment of neighboring plants, the Company expects the SMUDGEO #1 Steam Fields' productivity to decline in the future. During 1995, the SMUDGEO #1 Steam Fields produced approximately 6,600,835 thousand pounds of steam and approximately $12.3 million of revenue. Cerro Prieto Steam Fields On November 17, 1995, the Company entered into a series of agreements with Constructora y Perforadora Latina, S.A. de C.V. ("Coperlasa") and certain of Coperlasa's creditors pursuant to which the 59 62 Company has agreed to invest up to $20 million in the Cerro Prieto steam fields (the "Cerro Prieto Steam Fields") located in Baja California, Mexico. The Cerro Prieto Steam Fields provide geothermal steam to three geothermal power plants owned and operated by Comision Federal de Electricidad, the Mexican national utility ("CFE"). The Company's investment consists of a loan of up to $18.5 million and a $1.5 million payment for an option to purchase a 29% equity interest in Coperlasa for $1.5 million, which payment was made in December 14, 1995. This option expires in May 1997. The $18.5 million loan was made in installments throughout 1996, which provided capital to Coperlasa to fund the drilling of new wells and the repair of existing wells to meet its performance under its agreement with CFE. The loan matures in November 1999 and bears interest at an effective rate of 18.8% per annum. Repayment of this loan will be interest only for the first 18 months. Thereafter, 100% of the cash flow generated from the sale of steam less operating expenses and capital expenditures will be used to pay principal and interest on the loan. The Company's loan is senior to the existing debt at Coperlasa. Pursuant to a technical services agreement, the Company receives fees for its technical services provided to Coperlasa. In addition, if the Company is successful in assisting Coperlasa in producing steam at a lower cost, the Company will receive 30% of the savings. The Cerro Prieto Steam Fields are located near the city of Mexicali, Baja California, at the border of Baja California and the State of California. The Cerro Prieto geothermal resource, which has been commercially produced by CFE since 1973, provides approximately 70% of Baja California's electricity requirements since this region is not connected to the Mexican national power grid. The steam sales agreement between Coperlasa and CFE was entered into in May 1991. Under this agreement, CFE pays for steam delivered up to 1,600 tons per hour plus 10%. Payments for the steam delivered are made in Mexican pesos and are adjusted by a formula that accounts for the increases in inflation in Mexico and the United States as well as for the devaluation of the peso against the U.S. dollar. This agreement has a termination date of October 2000. While the Company believes that Coperlasa is in an advantageous position to renegotiate or bid for the right to supply steam over a longer term, there can be no assurance that the steam sales agreement will be extended beyond its current termination date. DEVELOPMENT AND FUTURE PROJECTS The Company is continually engaged in the evaluation of various opportunities for the development and acquisition of additional power generation facilities. However, there is no assurance the Company will be successful in the acquisition or development of power generation projects in the future. See "Risk Factors -- Project Development Risks." PASADENA COGENERATION PROJECT Calpine was selected by Phillips Petroleum Company ("Phillips") to negotiate for the development of a 240 megawatt gas-fired cogeneration project at the Phillips Houston Chemical Complex ("HCC") located in Pasadena, Texas (the "Pasadena Cogeneration Project"). In July 1995 and March 1996, the Company entered into Energy Project Development Agreements with Phillips pursuant to which the Company and Phillips propose to enter into 20-year agreements for the purchase and sale of all of the HCC's steam and electricity requirements of approximately 90 megawatts. It is anticipated that the remainder of available electricity output will be sold into the competitive market through Calpine's power marketing activities. Pursuant to the Energy Project Development Agreements, the Company has agreed to make $3.5 million of capital expenditures on the Pasadena Cogeneration Project during 1996. In addition, the Company has provided a $3.0 million letter of credit to Phillips to secure the performance under the Energy Project Development Agreement. On August 2, 1996, the Company entered into a commitment letter with ING Capital Corporation to provide $100.0 million of non-recourse project financing for the Pasadena Cogeneration Project. The Company expects to complete financing and commence construction in September 1996, with commercial operation scheduled to begin in August 1998. However, there can be no assurances that the Company will be successful in completing either the agreements with Phillips or any additional power sales agreements or that the anticipated schedule for financing and construction will be met. 60 63 GLASS MOUNTAIN GEOTHERMAL PROJECT Calpine is pursuing the development of a geothermal power project at Glass Mountain, which is located in northern California about 25 miles south of the Oregon border (the "Glass Mountain Project"). Glass Mountain is believed to be the largest undeveloped geothermal resource in the United States. In area, the resource is larger than The Geysers, where approximately 1,200 megawatts of capacity is operating. The Company believes that Glass Mountain has an estimated potential in excess of 1,000 megawatts. In August 1994, the Company entered into a partnership with Trans-Pacific Geothermal Glass Mountain, Ltd. ("TGC") to construct and operate a 30 megawatt project at Glass Mountain. TGC had previously signed a memorandum of understanding ("MOU") with Bonneville Power Administration ("BPA") and the Springfield, Oregon Utility Board ("SUB") to develop the project at Vale, Oregon. BPA and SUB consented on August 25, 1994 to the assignment of the MOU to the Calpine partnership and the relocation of the project to Glass Mountain. The memorandum of understanding contemplates execution of a 45-year power purchase agreement subject to satisfaction of certain conditions precedent and includes an option for an additional 100 megawatts. Subject to the execution of the power purchase agreement with BPA, the Company plans to begin construction of an initial 45 megawatt phase of the Glass Mountain Project in 1998. The Company is in the process of preparing an Environmental Impact Statement and commercial operation is planned for 2000. There can be no assurances, however, that the Company and BPA will enter into a definitive agreement, that this project will be completed on this schedule, if at all, or that commercial operation of this project will be successful. In March 1996, the Company completed the acquisition of certain Glass Mountain geothermal leases previously held by FMRP. As a result, the Company currently holds an interest in approximately 29,000 acres of federal geothermal leases at Glass Mountain. See "-- Properties." COSO GEOTHERMAL PROJECT In January 1992, the Company was selected by the Los Angeles Department of Water and Power (the "Department") to negotiate for the development of up to 150 megawatts of electric generating capacity utilizing geothermal energy from the Department's Coso geothermal leaseholds. Data from four deep exploration wells and a number of shallow, temperature gradient wells indicate that a productive area could exist with a capacity to support 200 megawatts or more. The resource is on land leased by the Department from the United States Bureau of Land Management ("BLM"), which is subleased to the Company. The Company entered into definitive agreements with the Department in 1995 which granted the Company the right to develop the Department's Coso geothermal leaseholds located in Inyo County, California and to produce steam or electricity for sale to third parties. In addition, the agreements include an amended power sales agreement with the Department which grants the Department an option to purchase up to 150 megawatts of electricity from the geothermal resource. The ordinance approving the agreements has been passed by the Los Angeles City Council and approved by the Mayor. In January 1996, certain litigation was filed against the Department seeking to compel the Department to submit the agreements entered into with the Company to a public bidding procedure in accordance with the Charter of the City of Los Angeles. In August 1996, the court ruled that certain of the rights granted by the Department in the agreements, including the right to produce steam or electricity for sale to third parties, were void and were required to be submitted to such a public bidding procedure. The Company is unable to predict the impact of such ruling on the agreements and the development of the Department's Coso geothermal leaseholds. NAVAJO SOUTH COAL PROJECT Calpine, BHP Minerals International Inc. and BHP Power Inc. have entered into a memorandum of understanding to assess the development of the Navajo South Project, a 1,700 megawatt coal-fired power generation facility in the Four Corners area of New Mexico. It is anticipated that this new power plant will 61 64 provide electricity to the west and southwest United States markets. BHP Minerals International Inc. is the owner and operator of three coal mines in the Four Corners area of New Mexico. One of these, the Navajo Mine, is located on the Navajo Reservation. BLACK HILLS COAL PROJECT Calpine and Black Hills Corporation have entered into a joint venture agreement to assess the development of the WYGEN Project, an 80 megawatt coal-fired power generation facility located in northeastern Wyoming. It is anticipated that this new power plant will provide electricity to the western United States markets, with a commercial operation date expected in 1999. Black Hills Corporation, the parent of Black Hills Power & Light Company, is a public utility located in South Dakota. INDONESIAN GEOTHERMAL PROJECT Calpine plans to develop geothermal facilities in the Lampung Province of Indonesia, located in southern Sumatra. The geothermal resource at Ulubelu is estimated to have potential capacity in excess of 500 megawatts. The Company anticipates that the facility would sell electricity to Perusahaan Umum Listrik Negara ("PLN"), the state-owned electric company. The first phase of the project is expected to be 110 megawatts. The Company's joint venture partner will be PT. Dharmasatrya Arthasentosa ("DATRA"), a company with interests in coal mining and other ventures. The Company expects that it will be the project's managing partner, with responsibility for the design, construction and operation of the power plant. The ownership structure, as planned, will be a joint venture with DATRA in which the Company would be the managing partner and hold at least a 50% equity interest, and as much as 85% of the project. DATRA would hold up to 50% of the project. In March 1996, the Company and DATRA entered into a joint venture agreement to develop Ulubelu. The Company and DATRA are negotiating with the National Resource Agency Pertamina ("Pertamina"), regarding resource development. Deep test well drilling and flow tests by Pertamina are planned during 1996 and 1997 at Ulubelu. Commercial operation is anticipated in 2001 for the initial phase of the project. There can be no assurances, however, that this transaction will be consummated on these terms, if at all, that the proposed timetable will be met or that commercial operation of these resources will be feasible. GOVERNMENT REGULATION The Company is subject to complex and stringent energy, environmental and other governmental laws and regulations at the federal, state and local levels in connection with the development, ownership and operation of its energy generation facilities. Federal laws and regulations govern transactions by electrical and gas utility companies, the types of fuel which may be utilized by an electric generating plant, the type of energy which may be produced by such a plant and the ownership of a plant. State utility regulatory commissions must approve the rates and, in some instances, other terms and conditions under which public utilities purchase electric power from independent producers and sell retail electric power. Under certain circumstances where specific exemptions are otherwise unavailable, state utility regulatory commissions may have broad jurisdiction over non-utility electric power plants. Energy producing projects also are subject to federal, state and local laws and administrative regulations which govern the emissions and other substances produced, discharged or disposed of by a plant and the geographical location, zoning, land use and operation of a plant. Applicable federal environmental laws typically have both state and local enforcement and implementation provisions. These environmental laws and regulations generally require that a wide variety of permits and other approvals be obtained before the commencement of construction or operation of an energy- producing facility and that the facility then operate in compliance with such permits and approvals. 62 65 FEDERAL ENERGY REGULATION PURPA The enactment in 1978 of PURPA and the adoption of regulations thereunder by FERC provided incentives for the development of cogeneration facilities and small power production facilities (those utilizing renewable fuels and having a capacity of less than 80 megawatts). A domestic electricity generating project must be a QF under FERC regulations in order to take advantage of certain rate and regulatory incentives provided by PURPA. PURPA exempts owners of QFs from PUHCA, and exempts QFs from most provisions of the Federal Power Act (the "FPA") and, except under certain limited circumstances, state laws concerning rate or financial regulation. These exemptions are important to the Company and its competitors. The Company believes that each of the electricity generating projects in which the Company owns an interest currently meets the requirements under PURPA necessary for QF status. Most of the projects which the Company is currently planning or developing are also expected to be QFs. PURPA provides two primary benefits to QFs. First, QFs generally are relieved of compliance with extensive federal, state and local regulations that control the financial structure of an electric generating plant and the prices and terms on which electricity may be sold by the plant. Second, FERC's regulations promulgated under PURPA require that electric utilities purchase electricity generated by QFs at a price based on the purchasing utility's "avoided cost," and that the utility sell back-up power to the QF on a non- discriminatory basis. The term "avoided cost" is defined as the incremental cost to an electric utility of electric energy or capacity, or both, which, but for the purchase from QFs, such utility would generate for itself or purchase from another source. FERC regulations also permit QFs and utilities to negotiate agreements for utility purchases of power at rates lower than the utility's avoided costs. Due to increasing competition for utility contracts, the current practice is for most power sales agreements to be awarded at a rate below avoided cost. While public utilities are not explicitly required by PURPA to enter into long-term power sales agreements, PURPA helped to create a regulatory environment in which it has been common for long-term agreements to be negotiated. In order to be a QF, a cogeneration facility must produce not only electricity, but also useful thermal energy for use in an industrial or commercial process for heating or cooling applications in certain proportions to the facility's total energy output and must meet certain energy efficiency standards. Finally, a QF (including a geothermal or hydroelectric QF or other qualifying small power producer) must not be controlled or more than 50% owned by an electric utility or by most electric utility holding companies, or a subsidiary of such a utility or holding company or any combination thereof. The Company endeavors to develop its projects, monitor compliance by the projects with applicable regulations and choose its customers in a manner which minimizes the risks of any project losing its QF status. Certain factors necessary to maintain QF status are, however, subject to the risk of events outside the Company's control. For example, loss of a thermal energy customer or failure of a thermal energy customer to take required amounts of thermal energy from a cogeneration facility that is a QF could cause the facility to fail requirements regarding the level of useful thermal energy output. Upon the occurrence of such an event, the Company would seek to replace the thermal energy customer or find another use for the thermal energy which meets PURPA's requirements, but no assurance can be given that this would be possible. If one of the projects in which the Company has an interest should lose its status as a QF, the project would no longer be entitled to the exemptions from PUHCA and the FPA. This could trigger certain rights of termination under the power sales agreement, could subject the project to rate regulation as a public utility under the FPA and state law and could result in the Company inadvertently becoming a public utility holding company by owning more than 10% of the voting securities of, or controlling, a facility that would no longer be exempt from PUHCA. This could cause all of the Company's remaining projects to lose their qualifying status, because QFs may not be controlled or more than 50% owned by such public utility holding companies. Loss of QF status may also trigger defaults under covenants to maintain QF status in the projects' power sales agreements, steam sales agreements and financing agreements and result in termination, penalties or 63 66 acceleration of indebtedness under such agreements such that loss of status may be on a retroactive or a prospective basis. If a project were to lose its QF status, the Company could attempt to avoid holding company status (and thereby protect the QF status of its other projects) on a prospective basis by restructuring the project, by changing its voting interest in the entity owning the non-qualifying project to nonvoting or limited partnership interests and selling the voting interest to an individual or company which could tolerate the lack of exemption from PUHCA, or by otherwise restructuring ownership of the project so as not to become a holding company. These actions, however, would require approval of the Securities and Exchange Commission ("SEC") or a no-action letter from the SEC, and would result in a loss of control over the non-qualifying project, could result in a reduced financial interest therein and might result in a modification of the Company's operation and maintenance agreement relating to such project. A reduced financial interest could result in a gain or loss on the sale of the interest in such project, the removal of the affiliate through which the ownership interest is held from the consolidated income tax group or the consolidated financial statements of the Company, or a change in the results of operations of the Company. Loss of QF status on a retroactive basis could lead to, among other things, fines and penalties being levied against the Company and its subsidiaries and claims by utilities for refund of payments previously made. Under the Energy Policy Act of 1992, if a project can be qualified as an exempt wholesale generator ("EWG"), it will be exempt from PUHCA even if it does not qualify as a QF. Therefore, another response to the loss or potential loss of QF status would be to apply to have the project qualified as an EWG. However, assuming this changed status would be permissible under the terms of the applicable power sales agreement, rate approval from FERC and approval of the utility would be required. In addition, the project would be required to cease selling electricity to any retail customers (such as the thermal energy customer) and could become subject to state regulation of sales of thermal energy. See "-- Public Utility Holding Company Regulation." Currently, Congress is considering proposed legislation that would amend PURPA by eliminating the requirement that utilities purchase electricity from QFs at avoided costs. The Company does not know whether such legislation will be passed or what form it may take. The Company believes that if any such legislation is passed, it would apply to new projects. As a result, although such legislation may adversely affect the Company's ability to develop new projects, the Company believes it would not affect the Company's existing QFs. There can be no assurance, however, that any legislation passed would not adversely impact the Company's existing projects. Public Utility Holding Company Regulation Under PUHCA, any corporation, partnership or other legal entity which owns or controls 10% or more of the outstanding voting securities of a "public utility company" or a company which is a "holding company" for a public utility company is subject to registration with the SEC and regulation under PUHCA, unless eligible for an exemption. A holding company of a public utility company that is subject to registration is required by PUHCA to limit its utility operations to a single integrated utility system and to divest any other operations not functionally related to the operation of that utility system. Approval by the SEC is required for nearly all important financial and business dealings of the holding company. Under PURPA, most QFs are not public utility companies under PUHCA. The Energy Policy Act of 1992, among other things, amends PUHCA to allow EWGs, under certain circumstances, to own and operate non-QFs without subjecting those producers to registration or regulation under PUHCA. The expected effect of such amendments would be to enhance the development of non-QFs which do not have to meet the fuel, production and ownership requirements of PURPA. The Company believes that the amendments could benefit the Company by expanding its ability to own and operate facilities that do not qualify for QF status, but may also result in increased competition by allowing utilities to develop such facilities which are not subject to the constraints of PUHCA. 64 67 Federal Natural Gas Transportation Regulation The Company has an ownership interest in and operates six natural gas-fired cogeneration projects. The cost of natural gas is ordinarily the largest expense (other than debt costs) of a project and is critical to the project's economics. The risks associated with using natural gas can include the need to arrange transportation of the gas from great distances, including obtaining removal, export and import authority if the gas is transported from Canada; the possibility of interruption of the gas supply or transportation (depending on the quality of the gas reserves purchased or dedicated to the project, the financial and operating strength of the gas supplier, and whether firm or non-firm transportation is purchased); and obligations to take a minimum quantity of gas and pay for it (i.e., take-and-pay obligations). Pursuant to the Natural Gas Act, FERC has jurisdiction over the transportation and storage of natural gas in interstate commerce. With respect to most transactions that do not involve the construction of pipeline facilities, regulatory authorization can be obtained on a self-implementing basis. However, pipeline rates for such services are subject to continuing FERC oversight. Order No. 636, issued by FERC in April 1992, mandates the restructuring of interstate natural gas pipeline sales and transportation services and will result in changes in the terms and conditions under which interstate pipelines will provide transportation services, as well as the rates pipelines may charge for such services. The restructuring required by the rule includes: (i) the separation (unbundling) of a pipeline's sales and transportation services, (ii) the implementation of a straight fixed-variable rate design methodology under which all of a pipeline's fixed costs are recovered through its reservation charge, (iii) the implementation of a capacity releasing mechanism under which holders of firm transportation capacity on pipelines can release that capacity for resale by the pipeline, and (iv) the opportunity for pipelines to recover 100% of their prudently incurred costs (transition costs) associated with implementing the restructuring mandated by the rule. Pipelines were required to file tariff sheets implementing Order No. 636 by December 31, 1992. FERC affirmed the major components of Order No. 636 in Order Nos. 636A and B issued in August and November 1992. The restructuring required by the rule became effective in late 1993. STATE REGULATION State public utility commissions ("PUCs") have broad authority to regulate both the rates charged by and financial activities of electric utilities, and to promulgate regulations implementing PURPA. Since a power sales contract will become a part of a utility's cost structure (and therefore is generally reflected in its retail rates), power sales contracts with independents are potentially under the regulatory purview of PUCs, particularly the process by which the utility has entered into the power sales contracts. If a PUC has approved of the process by which a utility secures its power supply, a PUC generally will be inclined to allow a utility to "pass through" the expenses associated with an independent power contract to the utility's retail customers. However, a regulatory commission may disallow the full reimbursement to a utility for the purchase of electricity from QFs. In addition, retail sales of electricity or thermal energy by an independent power producer may be subject to PUC regulation, depending on state law. Independent power producers which are not QFs under PURPA are considered to be public utilities in many states and are subject to broad regulation by PUCs ranging from the requirement of certificates of public convenience and necessity to regulation of organizational, accounting, financial and other corporate matters. In addition, states may assert jurisdiction over the siting and construction of facilities not qualifying as QFs (as well as QFs), and over the issuance of securities and the sale or other transfer of assets by these facilities (but not QFs). CPUC and the California Assembly Joint Legislative Committee on Lowering the Cost of Electric Services commenced proceedings and hearings related to the restructure of the California electric services industry in 1994. The proceedings and hearings were initiated as a result of the CPUC Order Instituting Rulemaking and Order Instituting Investigation on the Commission Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation, issued by the CPUC on April 20, 1994. The FERC, as authorized under the Energy Policy Act of 1992, is also holding hearings on policy issues related to a more competitive electric services industry. 65 68 On December 20, 1995, the CPUC issued an electric industry restructuring decision which envisions commencement of deregulation and implementation of customer choice beginning January 1, 1998, with all consumers participating by 2003. Because restructuring the California electric industry requires participation and oversight by the FERC, the CPUC seeks to build a consensus involving the California Legislature, the Governor, public and municipal utilities, and customers. This consensus would be reflected in filings for approval by the FERC and provides a cooperative spirit whereby both agencies would move forward to implement the new market structure no later than January 1, 1998. The decision provides for phased-in customer choice, development of a non-discriminatory market structure, recovery of utilities stranded costs, sanctity of existing contracts and continuation of existing public policy programs including the promotion of fuel diversity through a renewable energy purchase requirement. On February 5, 1996, the CPUC issued a proposed procedural plan that facilitates the transition of the electric generation market to competition by January 1, 1998. This electric restructuring "roadmap" focuses on the multiple and interrelated tasks that must be accomplished and sets forth the process to achieve the necessary procedural milestones that must be completed in order to meet the implementation goal. In addition to the significant opportunity provided for power producers such as Calpine resulting from the implementation of direct access, the decision recognizes the sanctity of existing QF contracts. The decision recognizes that horizontal market power concerns will likely require investor owned utilities to divest themselves of a substantial portion of their generating assets and requires the utilities to file with the Commission a plan for voluntary divestiture of up to 50% of their fossil generating assets. The decision to commit to the establishment of a restructuring policy maintains California's resource diversity provided by existing renewal resources (including geothermal) and encourages development of new renewable resources. The continued resource diversity would be provided by a renewable portfolio standard which establishes that a renewable purchase requirement be placed on providers of electricity and creates a system of tradeable credits for meeting the purchase requirement. State PUCs also have jurisdiction over the transportation of natural gas by local distribution companies ("LDCs"). Each state's regulatory laws are somewhat different; however, all generally require the LDC to obtain approval from the PUC for the construction of facilities and transportation services if the LDC's generally applicable tariffs do not cover the proposed transaction. LDC rates are usually subject to continuing PUC oversight. REGULATION OF CANADIAN GAS The Canadian natural gas industry is subject to extensive regulation by governmental authorities. At the federal level, a party exporting gas from Canada must obtain an export license from the Canadian National Energy Board ("NEB"). The NEB also regulates Canadian pipeline transportation rates and the construction of pipeline facilities. Gas producers also must obtain a removal permit or license from provincial authorities before natural gas may be removed from the province, and provincial authorities may regulate intraprovincial pipeline and gathering systems. In addition, a party importing natural gas into the United States first must obtain an import authorization from the U.S. Department of Energy. ENVIRONMENTAL REGULATIONS The exploration for and development of geothermal resources and the construction and operation of power projects are subject to extensive federal, state and local laws and regulations adopted for the protection of the environment and to regulate land use. The laws and regulations applicable to the Company primarily involve the discharge of emissions into the water and air and the use of water, but can also include wetlands preservation, endangered species, waste disposal and noise regulations. These laws and regulations in many cases require a lengthy and complex process of obtaining licenses, permits and approvals from federal, state and local agencies. Noncompliance with environmental laws and regulations can result in the imposition of civil or criminal fines or penalties. In some instances, environmental laws also may impose clean-up or other remedial 66 69 obligations in the event of a release of pollutants or contaminants into the environment. The following federal laws are among the more significant environmental laws as they apply to the Company. In most cases, analogous state laws also exist that may impose similar, and in some cases more stringent, requirements on the Company as those discussed below. Clean Air Act The Federal Clean Air Act of 1970 (the "Clean Air Act") provides for the regulation, largely through state implementation of federal requirements, of emissions of air pollutants from certain facilities and operations. As originally enacted, the Clean Air Act sets guidelines for emissions standards for major pollutants (i.e., sulfur dioxide and nitrogen oxide) from newly built sources. In late 1990, Congress passed the Clean Air Act Amendments (the "1990 Amendments"). The 1990 Amendments attempt to reduce emissions from existing sources, particularly previously exempted older power plants. The Company believes that all of the Company's operating plants are in compliance with federal performance standards mandated for such plants under the Clean Air Act and the 1990 Amendments. With respect to its Aidlin geothermal plant and one of its steam field pipelines, the Company's operations have, in certain instances, necessitated variances under applicable California air pollution control laws. However, the Company believes that it is in material compliance with such laws with respect to such facilities. Clean Water Act The Federal Clean Water Act (the "Clean Water Act") establishes rules regulating the discharge of pollutants into waters of the United States. The Company is required to obtain a wastewater and stormwater discharge permit for wastewater and runoff, respectively, from certain of the Company's facilities. The Company believes that, with respect to its geothermal operations, it is exempt from newly-promulgated federal stormwater requirements. The Company believes that it is in material compliance with applicable discharge requirements under the Clean Water Act. Resource Conservation and Recovery Act The Resource Conservation and Recovery Act ("RCRA") regulates the generation, treatment, storage, handling, transportation and disposal of solid and hazardous waste. The Company believes that it is exempt from solid waste requirements under RCRA. However, particularly with respect to its solid waste disposal practices at the power generation facilities and steam fields located at The Geysers, the Company is subject to certain solid waste requirements under applicable California laws. The Company believes that its operations are in material compliance with such laws. Comprehensive Environmental Response, Compensation, and Liability Act The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), requires cleanup of sites from which there has been a release or threatened release of hazardous substances and authorizes the United States Environmental Protection Agency ("EPA") to take any necessary response action at Superfund sites, including ordering potentially responsible parties ("PRPs") liable for the release to take or pay for such actions. PRPs are broadly defined under CERCLA to include past and present owners and operators of, as well as generators of wastes sent to, a site. As of the present time, the Company is not subject to liability for any Superfund matters. However, the Company generates certain wastes, including hazardous wastes, and sends certain of its wastes to third-party waste disposal sites. As a result, there can be no assurance that the Company will not incur liability under CERCLA in the future. COMPETITION The Company competes with independent power producers, including affiliates of utilities, in obtaining long-term agreements to sell electric power to utilities. In addition, utilities may elect to expand or create generating capacity through their own direct investments in new plants. Over the past decade, obtaining a power sales agreement with a utility has become an increasingly more difficult, expensive and competitive process. In the past few years, more contracts have been awarded through some form of competitive bidding. Increased competition also has lowered profit margins of successful projects. The Company believes that the 67 70 power marketing business represents an opportunity to take advantage of growing competition in the electric power industry. The Company also believes that the power marketing business will be highly competitive. The demand for power in the United States traditionally has been met by utilities constructing large-scale electric generating plants under rate-based regulation. The enactment of PURPA in 1978 spawned the growth of the independent power industry, which expanded rapidly in the 1980s. The initial independent power producers were an entrepreneurial group of cogenerators and small power producers who recognized the potential business opportunities offered by PURPA. This initial group of independents was later joined by larger, better capitalized companies, such as subsidiaries of fuel supply companies, engineering companies, equipment manufacturers and affiliates of other industrial companies. In addition, a number of regulated utilities have created subsidiaries (known as utility affiliates) that compete with independent power producers. Some independent power producers specialize in market "niches," such as a specific technology or fuel (e.g., gas-fired cogeneration, geothermal, hydroelectric, refuse-to-energy, wind, solar, coal and wood), or a specific region of the country where they believe they have a market advantage. The Company presently conducts its operations primarily in the United States and concentrates on gas-fired and geothermal cogeneration plants. The Company is the second largest producer of geothermal energy in the United States. Although the Company is an established leader in the geothermal power industry and has been rapidly growing, most of the Company's competitors have significantly greater capital, financial and operational resources than the Company. Recent amendments to PUHCA made by the Energy Policy Act of 1992 are likely to increase the number of competitors in the independent power industry by reducing certain restrictions currently applicable to certain projects that are not QFs under PURPA. However, the recent amendments also should make it simpler for the Company to develop new projects itself, for example, by enabling the Company to develop large, gas-fired generation projects without the necessity of locating its projects in the vicinity of a steam host or otherwise finding a steam host to accept the useful thermal output required of a cogeneration facility under PURPA. EMPLOYEES As of July 31, 1996, the Company employed 235 people. None of the Company's employees are covered by collective bargaining agreements, and the Company has never experienced a work stoppage, strike or labor dispute. The Company considers relations with its employees to be good. PROPERTIES The Company's principal executive office is located in San Jose, California under a lease that expires in June 2001. The Company also maintains a regional office in Santa Rosa, California under a lease that expires in 1999. The Company, through its ownership of CGC and Thermal Power Company, has leasehold interests in 111 leases comprising 27,287 acres of federal, state and private geothermal resource lands in The Geysers area in northern California. These leases comprise its West Ford Flat Facility, Bear Canyon Facility, PG&E Unit 13 and Unit 16 Steam Fields, SMUDGEO #1 Steam Fields and Thermal Power Company's 25% undivided interest in the Thermal Power Company Steam Fields which are operated by Union Oil. The Company has subleasehold interests in three leases comprising 6,825 acres of federal geothermal resource lands in the Coso area in central California. In the Glass Mountain and Medicine Lake areas in northern California, the Company holds leasehold interests in 23 leases comprising approximately 29,000 acres of federal geothermal resource lands. In general, under the leases, the Company has the exclusive right to drill for, produce and sell geothermal resources from these properties and the right to use the surface for all related purposes. Each lease requires the payment of annual rent until commercial quantities of geothermal resources are established. After such time, the leases require the payment of minimum advance royalties or other payments until production commences, at which time production royalties are payable. Such royalties and other payments are payable to landowners, state and federal agencies and others, and vary widely as to the particular lease. The leases are generally for 68 71 initial terms varying from 10 to 20 years or for so long as geothermal resources are produced and sold. Certain of the leases contain drilling or other exploratory work requirements. In certain cases, if a requirement is not fulfilled, the lease may be terminated and in other cases additional payments may be required. The Company believes that its leases are valid and that it has complied with all the requirements and conditions material to their continued effectiveness. A number of the Company's leases for undeveloped properties may expire in any given year. Before leases expire, the Company performs geological evaluations in an effort to determine the resource potential of the underlying properties. No assurance can be given that the Company will decide to renew any expiring leases. The Company, through its ownership of the Greenleaf 1 Facility, owns 77 acres in Sutter County, California. See "-- Description of Facilities" for a description of the other material properties leased or owned by the projects in which the Company has ownership interests. The Company believes that its properties are adequate for its current operations. LEGAL PROCEEDINGS The Company, together with over 100 other parties, was named as a defendant in the second amended complaint in an action brought in August 1993 by the bankruptcy trustee for Bonneville Pacific Corporation ("Bonneville"), captioned Roger G. Segal, as the Chapter 11 Trustee for Bonneville Pacific Corporation v. Portland General Corporation, et al., in the United States District Court for the District of Utah (the "Court"). This complaint alleges that, in conjunction with top executives of Bonneville and with the alleged assistance of the other 100 defendants, the Company engaged in a broad conspiracy and fraud. The complaint has been amended a number of times. The Company has answered each version of the complaint by denying all claims. In August 1994, the Company successfully moved for an order severing the trustee's claims against the Company from the claims against the other defendants. Although the case involves over 25 separate financial transactions entered into by Bonneville, the severed case concerns the Company in respect of only one of these transactions. In 1988, the Company invested $2.0 million in a partnership formed with Bonneville to develop four hydroelectric projects in the State of Hawaii. The projects were not successfully developed by the partnership and, subsequent to Bonneville's Chapter 11 filing, the Company filed a claim as a creditor against Bonneville's bankruptcy estate. The trustee alleges that the investment was actually a loan and was designed to inflate Bonneville's earnings. The trustee initially alleged that Calpine is one of many defendants in this case responsible for Bonneville's "deepening insolvency" and the amount of damages attributable to the Company based on the $2.0 million partnership investment was alleged to be $577.2 million. Based upon statements made by the Court and the trustee in July 1996, the Company believes that the maximum compensatory damages which the trustee may seek will not exceed $5 million. There can be no assurance, however, of the actual amount of damages to be sought by the trustee. The Company believes the claims against it are without merit and will continue to defend the action vigorously. The Company further believes that the resolution of this matter will not have a material adverse effect on its financial position or results of operations. In connection with the Company's unsuccessful attempt to acquire O'Brien Environmental Energy, Inc. ("O'Brien") in 1995 through the U.S. Bankruptcy Court proceedings, the Company incurred approximately $3.6 million of third-party expenses, all of which have been capitalized by the Company. Pursuant to the terms of a contract with O'Brien, the Company is seeking the reimbursement of such expenses and a $2.0 million break-up fee, each of which is subject to the approval of the Bankruptcy Court. On June 6, 1996, the Bankruptcy Court ruled that the Company had the right to seek reimbursement of its fees and expenses and scheduled an evidentiary hearing to begin on August 28, 1996 to determine the amount to be awarded. Although the Company believes it will be awarded all or a substantial part of the fees and expenses which it is seeking, there can be no assurance as to the ultimate resolution of this claim. The Company is involved in various other claims and legal actions arising out of the normal course of business. Management does not expect that the outcome of these cases will have a material adverse effect on the Company's financial position or results of operations. 69 72 MANAGEMENT BOARD OF DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to each person who is a Director, a nominee for Director or an executive officer of the Company.
NAME AGE POSITION ------------------------------------------ ---- --------------------------------------------- Peter Cartwright.......................... 66 President, Chief Executive Officer, Director and Chairman of the Board Nominee Pierre Krafft............................. 66 Chairman of the Board Hans-Peter Aebi........................... 48 Director Rudolf Boesch............................. 59 Director Ann B. Curtis............................. 45 Senior Vice President and Director Nominee George J. Stathakis....................... 66 Director Nominee Rodney M. Boucher......................... 53 Senior Vice President Lynn A. Kerby............................. 58 Senior Vice President Kenneth J. Kerr........................... 52 Senior Vice President Peter W. Camp............................. 57 Vice President Robert D. Kelly........................... 38 Vice President Larry R. Krumland......................... 56 Vice President Alicia N. Noyola.......................... 46 Vice President John P. Rocchio........................... 58 Vice President Ron A. Walter............................. 47 Vice President
Set forth below is certain information with respect to each current Director, nominee for Director and executive officer of the Company. Upon completion of the Common Stock Offering, Mr. Krafft, Mr. Aebi and Mr. Boesch will resign from the Board of Directors of the Company and Ms. Curtis and Mr. Stathakis will be appointed to fill two of the vacancies. Accordingly, following the Common Stock Offering, the Board of Directors will be comprised of Mr. Cartwright, Ms. Curtis and Mr. Stathakis and Mr. Cartwright will serve as Chairman of the Board. The Company is actively seeking to add up to four additional independent Directors who are not directors, officers or employees of the Company, Electrowatt or an affiliate of Electrowatt. The Company anticipates that at least one additional independent Director will be appointed within six months of the completion of the Common Stock Offering. Peter Cartwright founded the Company in 1984 and has since served as a Director and as the Company's President and Chief Executive Officer. Mr. Cartwright will become Chairman of the Board of Directors of the Company effective upon completion of the Common Stock Offering. From 1979 to 1984, Mr. Cartwright was Vice President and General Manager of Gibbs & Hill, Inc.'s Western Regional Office, an office which he established. Gibbs & Hill, Inc. is an architect-engineering firm which specializes in power engineering projects. From 1960 to 1979, Mr. Cartwright worked for General Electric's Nuclear Energy Division. His responsibilities included plant construction, project management and new business development. He served on the Board of Directors of nuclear fuel manufacturing companies in Germany, Italy and Japan. Mr. Cartwright was responsible for General Electric's technology development and licensing programs in Europe and Japan. Mr. Cartwright obtained a Master of Science Degree in Civil Engineering from Columbia University in 1953 and a Bachelor of Science Degree in Geological Engineering from Princeton University in 1952. Mr. Cartwright is a Professional Engineer licensed in the states of New York and California. Pierre Krafft has been the Company's Chairman of the Board since March 1991. Mr. Krafft served as Executive Vice President of Electrowatt from 1971 until his retirement in April 1995. He also serves as a director of several electric utility companies in Switzerland, Germany and France and as Chairman of the Swiss National Committee of the World Energy Council. Mr. Krafft obtained a Master of Science Degree in Electrical Engineering from the Georgia Institute of Technology in 1956 and an undergraduate degree in Electrical Engineering from the Federal Institute of Technology in 1953. 70 73 Hans-Peter Aebi has been a Director of the Company since June 1994. Mr. Aebi has served as the President of Elektrizitats-Gesellschaft Laufenburg AG, Executive Vice President of the Electric Power Operations Division and a member of Electrowatt's executive management since October 1994. He was also named Executive Vice President for Landis & Gyr AG in March 1996. He served as the Senior Vice President of the Energy Division of Electrowatt from 1993 to 1994. Mr. Aebi's prior experience includes 14 years with an Electrowatt affiliate, CKW, in various capacities including Executive Vice President from 1991 to 1992, and as the First Vice President from 1988 to 1990. Mr. Aebi obtained a Master of Science Degree in Engineering from the Federal Institute of Technology in 1972. Rudolf Boesch has been a Director of the Company since its inception in 1984. Dr. Boesch serves as a member of the Executive Committee of Electrowatt, and as Executive Vice President of Electrowatt's Services Division. His prior experience with Electrowatt includes over ten years in the areas of marketing and sales and technical development. Dr. Boesch obtained a Ph.D. in Physics from the Federal Institute of Technology in 1965. Ann B. Curtis has served as the Company's Senior Vice President since September 1992 and has been employed by the Company since its inception in 1984. Ms. Curtis will become a Director of the Company effective upon the completion of the Common Stock Offering. She is responsible for the Company's financial and administrative functions, including the functions of general counsel, corporate and project finance, accounting, human resources, public relations and investor relations. Ms. Curtis also serves as Corporate Secretary for the Company, and serves as an officer of each of the Company's subsidiaries. Ms. Curtis also represents the Company on partnership management committees. From the Company's inception in 1984 through 1992, she served as the Company's Vice President for Management and Financial Services. Prior to joining Calpine, Ms. Curtis was Manager of Administration for Gibbs & Hill, Inc. George J. Stathakis has been a Senior Advisor to the Company since 1994 and will be a Director of the Company effective upon completion of the Common Stock Offering. Mr. Stathakis has been providing financial, business and management advisory services to numerous international investment banks since 1985. He also served as Chairman of the Board and Chief Executive Officer of Ramtron International Corporation, an advanced technology semiconductor company, from 1990 to 1994. From 1986 to 1989, he served as Chairman of the Board and Chief Executive Officer of International Capital Corporation, a subsidiary of American Express. Prior to 1986, Mr. Stathakis served thirty-two years with General Electric Corporation in various management and executive positions. During his service with General Electric Corporation, Mr. Stathakis founded the General Electric Trading Company and was appointed its first President and Chief Executive Officer. Mr. Stathakis obtained a Bachelor of Science Degree in Engineering from the University of California at Berkeley in 1952 and a Master of Science Degree in Engineering from the University of California at Berkeley in 1953. Rodney M. Boucher joined the Company in June 1995 as Senior Vice President, and as President and Chief Executive Officer of the Company's subsidiary, Calpine Power Services Company. He is responsible for the purchase, sale and marketing of electric power, as well as the restructuring of contract, transmission and generation rights. Prior to joining the Company, Mr. Boucher served as Chief Operating Officer of Citizens Power & Light Company from 1992 to 1995 and as Senior Vice President of Citizens Lehman Power L.P., in Boston, Massachusetts from 1994 to 1995. Prior to joining Citizens he served as President for Electrical Interconnections-International from 1991 to 1992. Mr. Boucher also served as Vice President and Chief Information Officer with PacifiCorp from 1984 to 1991, and held various other positions with PacifiCorp since 1975. Mr. Boucher holds a Master of Science Degree in Power Systems from Rensselaer Polytechnic Institute and a Bachelor of Science Degree in Electrical Engineering from Oregon State University. Lynn A. Kerby joined the Company in January 1991 and served as Vice President of Operations through January 1993, at which time he became a Senior Vice President for the Company. Prior to joining the Company, Mr. Kerby served as Senior Vice President-Operations of Guy F. Atkinson Company, an engineering and construction company, from 1989 to 1990, and served in various other positions within Guy F. Atkinson since 1961. Mr. Kerby served on Calpine's Board of Directors from 1984 to 1988 as a Guy F. Atkinson representative. He obtained a Bachelor of Science Degree in Civil Engineering and Business from the University of Idaho in 1961. Mr. Kerby holds a Class A Contractors License in the states of California, Arizona and Hawaii. 71 74 Kenneth J. Kerr joined the Company in March 1996 as Senior Vice President-International. Prior to joining the Company, he served as Senior Vice President-Commercial Development for Magma Power Company from 1993 to 1995. From 1989 to 1993 he served as Business Vice President-Plastics, Pacific Area with The Dow Chemical Company. From 1966 to 1989, he served in various marketing and management positions also with The Dow Chemical Company. Mr. Kerr obtained a Bachelor of Science Degree in Chemical Engineering from the University of Delaware in 1966. Peter W. Camp joined the Company in November 1993 and served as Director of Project Development through January 1995, at which time he became a Vice President of Project Development. From 1992 to 1993 he served as a full-time consultant with the Company. From 1988 to 1992, he served as President for Altran Corporation, a nuclear waste technology company. From 1975 to 1987, Mr. Camp worked for General Electric Company as General Manager, Nuclear Fuel Marketing and Projects Department, and as Manager, Nuclear Energy Strategic Planning. He obtained a Master of Business Administration Degree from Stanford University in 1970 and a Bachelor of Science Degree in Mechanical Engineering from Yale University in 1962. Robert D. Kelly has served as the Company's Vice President, Finance since 1994. Mr. Kelly's responsibilities include all project and corporate finance activities. From 1991 to 1992, Mr. Kelly served as Project Finance Manager, and from 1992 to 1994, he served as Director-Project Finance for the Company. Prior to joining the Company, he was the Marketing Manager of Westinghouse Credit Corporation from 1990 to 1991. From 1989 to 1990, Mr. Kelly was Vice President of Lloyds Bank PLC. From 1982 to 1989, Mr. Kelly was employed in various positions with The Bank of Nova Scotia. He obtained a Master of Business Administration Degree from Dalhousie University, Canada in 1980 and a Bachelor of Commerce Degree from Memorial University, Canada, in 1979. Larry R. Krumland has served as the Company's Vice President of Asset Management since January 1993. From 1990 to 1993, Mr. Krumland served as Director-Asset Management. From 1984 to 1990, Mr. Krumland served as Manager-Geothermal Development. Prior to joining the Company, he served as Director of Sales and Manager of Geothermal Projects for Gibbs & Hill, Inc. Mr. Krumland obtained a Master of Business Administration Degree in Business Economics and Finance from the University of California, Los Angeles in 1972; a Master of Science Degree in Engineering, Energy Systems, from the University of California, Los Angeles in 1967; and a Bachelor of Science Degree in Mechanical Engineering from the University of California at Berkeley in 1964. Alicia N. Noyola joined the Company in March 1991 and served as a full-time consultant through March 1992, at which time she became employed by the Company as Special Counsel. Ms. Noyola became a Vice President of Project Development in January 1993. From 1987 to 1991, Ms. Noyola was a partner in the San Francisco, California-based law firm Thelen, Marrin, Johnson and Bridges, where she concentrated on commercial and corporate finance. Ms. Noyola obtained a Juris Doctor Degree in 1973 from Hastings College of the Law, University of California and obtained a Bachelor of Arts Degree in Architecture in 1970 from the University of California, Berkeley. John P. Rocchio joined the Company at inception in 1984 as Vice President of Project Development. Prior to joining the Company, he served as Manager of Business Development for Gibbs & Hill, Inc. from 1979 to 1984. Prior to 1979, Mr. Rocchio served for 17 years with General Electric in various positions, including Manager International Sales for the Nuclear Energy Group from 1970 to 1979 and various engineering and marketing positions from 1962 to 1979. He obtained a Bachelor of Science Degree in Marine Engineering from the U.S. Merchant Marine Academy in 1959. Ron A. Walter has served as the Company's Vice President of Project Development since July 1990. From 1984 to 1990, Mr. Walter served as the Company's Manager-Geothermal Projects. Prior to joining the Company, he served as Director of Sales-Geothermal for the San Jose-based architect-engineering firm, Gibbs & Hill, Inc. from 1983 to 1984 and Senior Engineer from 1982 to 1983. From 1981 to 1982 he served as Project Manager Geothermal Projects with Rogers Engineering Co. and from 1972 to 1981 he served in engineering and management positions with Batelle Northwest Laboratories. Mr. Walter obtained a Master of Science Degree in Mechanical Engineering from Oregon State University in 1976 and a Bachelor of Science Degree in Mechanical Engineering from the University of Nebraska in 1971. 72 75 CLASSIFIED BOARD OF DIRECTORS The Company's Amended and Restated By-laws, which will become effective upon the completion of the Common Stock Offering, will provide that the number of directors shall be between three and nine, with the actual number of directors to be established from time to time by resolution of the Board of Directors. Following the Common Stock Offering, the Company's Board of Directors will be divided into three classes, designated Class I, Class II and Class III, with each class having a three-year term. Initially, Mr. Stathakis will serve in Class I, Ms. Curtis will serve in Class II and Mr. Cartwright will serve in Class III. The initial Directors in each class will hold office for terms of one year, two years and three years, respectively. Thereafter each class will serve a three-year term. The Company's Directors are elected by the stockholders at the annual meeting of stockholders and will serve until their successors are elected and qualified, or until their earlier resignation or removal. Additional Directors will be designated to serve as Class I, Class II or Class III Directors upon their appointment to the Board of Directors following the Common Stock Offering. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors will establish an Audit Committee and a Compensation Committee upon completion of the Common Stock Offering. The Audit Committee will review internal auditing procedures, the adequacy of internal controls and the results and scope of the audit and other services provided by the Company's independent auditors. The Compensation Committee will administer salaries, incentives and other forms of compensation for officers and other employees of the Company, as well as the incentive compensation and benefit plans of the Company. Initially, Mr. Stathakis will serve as the sole Director on the Audit Committee and the Compensation Committee. Thereafter, the Board of Directors will designate one or more additional non-employee Directors to serve on the Audit Committee and the Compensation Committee upon appointment to the Board of Directors. DIRECTOR COMPENSATION Directors currently do not receive any compensation or other services as members of the Board of Directors. The Company has determined that, following the completion of the Common Stock Offering, non-employee Directors will receive an annual fee of $25,000 and will be reimbursed for expenses incurred in attending meetings of the Board of Directors or any committee thereof. The chairman of the Compensation Committee and the chairman of the Audit Committee will receive an additional annual fee of $5,000. In addition, Directors will be eligible to participate in the Company's 1996 Stock Incentive Plan. See "-- 1996 Stock Incentive Plan." 73 76 EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation earned, paid or awarded for services rendered to the Company in all capacities during each of the three years ended December 31, 1995 to the Company's Chief Executive Officer and each of the five other most highly compensated executive officers of the Company serving in that capacity as of December 31, 1995. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ---------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1) - ------------------------------------- ---- -------- -------- ------------ --------------- Peter 1995 $341,000 $255,750 178,668 $21,420 Cartwright........................... 1994 300,000 292,500 155,815 11,934 President and Chief Executive 1993 220,055 176,000 -- 7,722 Officer Lynn A. 1995 195,000 72,000 53,600 4,815 Kerby................................ 1994 180,000 72,000 38,954 4,275 Senior Vice President 1993 173,250 90,000 41,551 4,228 Ann B. 1995 160,000 60,000 53,600 877 Curtis............................... 1994 130,000 75,000 38,954 694 Senior Vice President 1993 122,500 70,000 -- 648 Alicia N. 1995 140,000 45,000 13,400 1,288 Noyola............................... 1994 133,875 40,162 -- 1,134 Vice President 1993 124,417 40,000 31,163 660 Ron A. 1995 135,000 45,000 13,400 1,235 Walter............................... 1994 120,000 40,000 -- 1,027 Vice President 1993 112,500 30,000 -- 587 Robert D. 1995 126,684 42,000 22,334 436 Kelly................................ 1994 115,208 60,000 31,163 389 Vice President 1993 103,347 50,000 23,372 343
- ------------ (1) Represents the taxable value of an employer-sponsored life insurance policy. The amount is calculated based on the age of the employee and the life insurance coverage in excess of $50,000. EMPLOYMENT AGREEMENTS, CONSULTING AGREEMENT AND CHANGE OF CONTROL ARRANGEMENTS The Company has entered into employment agreements with Mr. Peter Cartwright, Mr. Lynn Kerby, Ms. Ann Curtis, Mr. Ron Walter and Mr. Robert Kelly. Each of the employment agreements expires during 1999 unless earlier terminated or subsequently extended. The employment agreements provide for the payment of a base salary, subject to periodic adjustment by the Board of Directors, and provide for annual bonuses and participation in all benefit and equity plans. The employment agreements also provide for other employee benefits such as life insurance and health care, in addition to certain disability and death benefits. Severance benefits, including the acceleration of outstanding options, are also payable upon an involuntary termination or a termination following a change of control in the Company. Severance benefits would not be payable in the event that termination was for cause. On December 1, 1994, the Company entered into a Consulting Agreement with Mr. George J. Stathakis, a Director nominee. The Consulting Agreement was amended and restated effective June 3, 1996. Pursuant to the Consulting Agreement, Mr. Stathakis has been retained to provide, among other things, advice to the Company with regard to domestic and international business, to identify project investment opportunities, and to provide advisory support to the Company's management in identifying potential buyers for, and negotiating the sale of, Electrowatt's equity interest in the Company. The Consulting Agreement provides for a monthly retainer of $5,000. In addition, for services rendered in connection with the Common Stock Offering, the Company will pay Mr. Stathakis $250,000 plus 0.25% of all payments received by Electrowatt in excess of $200 million. The Consulting Agreement terminates on January 1, 1997 unless otherwise earlier terminated or extended by mutual agreement of the parties. 74 77 Should the Company be acquired by merger or asset sale, then all outstanding options held by the Chief Executive Officer and the other executive officers under the Company's Stock Option Program or the 1996 Stock Incentive Plan will automatically accelerate and vest in full, except to the extent those options are to be assumed by the successor corporation. In addition, the Compensation Committee as Plan Administrator of the 1996 Stock Incentive Plan will have the authority to provide for the accelerated vesting of the shares of Common Stock subject to outstanding options held by the Chief Executive Officer or any other executive officer or any unvested shares of Common Stock subject to direct issuances held by such individual, in connection with the termination of that individual's employment following: (i) a merger or asset sale in which these options are assumed or are assigned or (ii) certain hostile changes in control of the Company. However, certain executive officers have existing employment agreements that provide for the acceleration of their options upon a termination of their employment following certain changes in control or ownership of the Company. STOCK OPTION PROGRAM The following table sets forth certain information concerning grants of stock options during the fiscal year ended December 31, 1995 to each of the executive officers named in the Summary Compensation Table above. The table also sets forth hypothetical gains or "option spreads" for the options at the end of their respective ten-year terms. These gains are based on the assumed rates of annual compound stock price appreciation of 5% and 10% from the date the option was granted over the full option term. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE ------------------------------------------------------------- VALUE AT ASSUMED PERCENTAGE OF ANNUAL RATES OF TOTAL OPTIONS STOCK GRANTED TO PRICE APPRECIATION OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(4) GRANTED IN FISCAL PRICE PER EXPIRATION -------------------- NAME (NO. OF SHARES)(2) YEAR(3) SHARE DATE 5% 10% - ------------------------ ------------------ ------------- ----------- ---------- -------- --------- Peter Cartwright........ 178,668 40% $4.91 1/1/05 $551,704 $1,398,126 Lynn A. Kerby........... 53,600 12 4.91 1/1/05 165,510 419,435 Ann B. Curtis........... 53,600 12 4.91 1/1/05 165,510 419,435 Alicia N. Noyola........ 13,400 3 4.91 1/1/05 41,377 104,859 Ron A. Walter........... 13,400 3 4.91 1/1/05 41,377 104,859 Robert D. Kelly......... 22,334 5 4.91 1/1/05 68,965 174,770
- ------------ (1) The exercise price may be paid in cash, in shares of the Company's Common Stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares, together with any federal and state income tax liability incurred by the optionee in connection with such exercise. The Compensation Committee of the Board of Directors, as the Plan Administrator of the Company's 1996 Stock Incentive Plan, will have the discretionary authority to reprice the options through the cancellation of those options and the grant of replacement options with an exercise price based on the fair market value of the option shares on the grant date. (2) Each option set forth in the table above was granted on January 1, 1995 and has a maximum term of ten years measured from the grant date, subject to earlier termination upon the executive officer's termination of service with the Company. Each option is immediately exercisable, but the underlying shares are subject to repurchase by the Company at the original exercise price paid per share should the executive officer's service with the Company cease prior to vesting in such shares. The Company's repurchase right will lapse with respect to, and the executive officer will vest in, four equal annual installments over the four-year period of service measured from the grant date. The Company's right to repurchase with respect to the option shares will terminate immediately upon an acquisition of the Company by merger or asset sale if the options are not assumed by the successor corporation. (3) The Company granted options to purchase 446,930 shares of Common Stock during the year ended December 31, 1995. (4) The 5% and 10% assumed annual rates of compound stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or a projection by the Company of future stock prices. In addition to the options described above, in March 1996 the Board of Directors granted options to purchase shares of Common Stock under the Company's Stock Option Program to the following individuals in the designated amounts; Mr. Cartwright, an option for 181,785 shares; Mr. Kerby, an option for 41,551 shares; Ms. Curtis, an option for 51,938 shares; Ms. Noyola, an option for 20,775 shares; Mr. Walter, an option for 20,775 shares; and Mr. Kelly, an option for 36,357 shares. The exercise price for each option is $8.57 per 75 78 share. Each option has a maximum term of ten (10) years measured from the date of grant, subject to earlier termination in the event of the optionee's cessation of service with the Company. The Company's right of repurchase will lapse with respect to, and the optionee will vest in, the option shares in a series of four equal annual installments over the four-year period of service measured from January 1, 1996. The Company's right to repurchase with respect to the option shares will terminate immediately upon an acquisition of the Company by merger or asset sale if the options are not assumed by the successor corporation. No executive officer named in the Summary Compensation Table above exercised stock options during the year ended December 31, 1995. The following table sets forth certain information concerning the number of shares subject to exercisable and unexercisable stock options held by the executive officers named in the Summary Compensation Table above as of December 31, 1995. Also reported are values for "in-the-money" options that represent the positive spread between the respective exercise prices of outstanding stock options and the fair market value of the Company's Common Stock. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE- AT DECEMBER 31, 1995 (NO. OF MONEY OPTIONS AT OPTIONS) DECEMBER 31, 1995(1) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------- ----------- ------------- ----------- ------------- Peter Cartwright....................... 597,292 256,576 $11,049,902 $ 4,746,656 Lynn A. Kerby.......................... 50,640 83,465 936,840 1,544,103 Ann B. Curtis.......................... 144,129 73,077 2,666,387 1,351,925 Alicia N. Noyola....................... 23,372 21,191 432,382 392,034 Ron A. Walter.......................... 114,265 13,400 2,113,903 247,900 Robert D. Kelly........................ 33,111 43,758 612,554 809,523
- --------------- (1) For purposes of the computation of the value of unexercised in-the-money options at December 31, 1995, the table above assumes that the value of the underlying shares is the initial public offering price of the shares offered hereby, which is assumed to be $18.50 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION For 1995, the members of the Board of Directors, other than Mr. Cartwright, acted as the Compensation Committee for the purposes of establishing the compensation for Mr. Cartwright, the Company's President and Chief Executive Officer. All decisions regarding the compensation of the Company's other executive officers were made by Mr. Cartwright. Upon the consummation of the Common Stock Offering, there will be established a Compensation Committee of the Board of Directors. Following the Common Stock Offering, no member of the Compensation Committee of the Board of Directors of the Company will serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. 1996 STOCK INCENTIVE PLAN The Company's 1996 Stock Incentive Plan (the "1996 Plan") is intended to serve as the successor equity incentive program to the Company's Stock Option Program (the "Predecessor Plan"). See "-- Stock Option Program." The 1996 Plan became effective on July 17, 1996 upon adoption by the Board of Directors and was subsequently approved by the Company's stockholder on July 17, 1996. The Company has initially authorized 4,041,858 shares of Common Stock for issuance under the 1996 Plan. This initial share reserve is comprised of (i) the 2,596,923 shares which remained available for issuance under the Predecessor Plan, including the 2,392,026 shares subject to outstanding options thereunder, plus (ii) an additional increase of 1,444,935 shares. In addition, the share reserve will automatically be increased on the first trading day of January each calendar year, beginning in January 1997, by a number of shares equal to one percent (1%) of the number of shares of Common Stock outstanding on the last trading day of the immediately preceding calendar year. 76 79 However, in no event may any one participant in the 1996 Plan receive option grants or direct stock issuances for more than 500,000 shares in the aggregate per calendar year. Outstanding options under the Predecessor Plan will be incorporated into the 1996 Plan upon the consummation of the Common Stock Offering, and no further option grants will be made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms, unless the Plan Administrator elects to extend one or more features of the 1996 Plan to those options. However, except as otherwise noted below, the outstanding options under the Predecessor Plan contain substantially the same terms and conditions summarized below for the Discretionary Option Grant Program in effect under the 1996 Plan. The 1996 Plan is divided into five separate components: (i) the Discretionary Option Grant Program under which eligible individuals in the Company's employ or service (including officers and other employees, non-employee Board members and independent consultants) may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 85% of their fair market value on the grant date, (ii) the Stock Issuance Program under which such individuals may, in the Plan Administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at a price not less than 100% of their fair market value at the time of issuance or as a bonus tied to the performance of services, (iii) the Salary Investment Option Grant Program under which executive officers and other highly compensated employees may elect to apply a portion of their base salary to the acquisition of special stock option grants, (iv) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee Directors to purchase shares of Common Stock at an exercise price equal to 100% of their fair market value on the grant date and (v) the Director Fee Option Grant Program pursuant to which the non-employee Directors may apply a portion of the annual retainer fee, if any, otherwise payable to them in cash each year to the acquisition of special stock option grants. The Discretionary Option Grant, Stock Issuance and Salary Investment Option Grant Programs will be administered by the Compensation Committee. The Compensation Committee as Plan Administrator will have complete discretion to determine which eligible individuals are to receive option grants or stock issuances, the time or times when such option grants or stock issuance are to be made, the number of shares subject to each such grant or issuance, the vesting schedule to be in effect for the option grant or stock issuance, the maximum term for which any granted option is to remain outstanding and the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, except that all options granted under the Salary Investment Option Grant Program will be non-statutory stock options. The administration of the Automatic Option Grant and Director Fee Option Grant Programs will be self-executing in accordance with the express provisions of each such program. The exercise price for the shares of Common Stock subject to option grants made under the 1996 Plan may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the Plan Administrator may provide financing to one or more optionees in the exercise of their outstanding options by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise. In the event that the Company is acquired by merger or asset sale, each outstanding option under the Discretionary Option Grant Program which is not to be assumed by the successor corporation will automatically accelerate in full, and all unvested shares under the Stock Issuance Program will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation. The Plan Administrator will have the authority under the Discretionary Option Grant and Stock Issuance Programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will automatically vest in the event the individual's service is terminated, whether involuntarily or through a resignation for good reason, within a specified period (not to exceed 18 months) following (i) a merger or asset sale in which those options are assumed or (ii) a hostile change in control of the Company effected by a successful tender offer for more than 50% of the outstanding 77 80 voting stock or by proxy contest for the election of Directors. Options currently outstanding under the Predecessor Plan will accelerate upon an acquisition of the Company by merger or asset sale, unless those options are assumed by the acquiring entity. However, such options under the Predecessor Plan are not subject to acceleration upon the termination of the optionee's service following an acquisition in which those options are assumed or following a hostile change in control, except to the extent provided in any employment contract or severance agreement in effect between the optionee and the Company. Stock appreciation rights may be issued in tandem with option grants made under the Discretionary Option Grant Program. The holders of such rights will have the opportunity to elect between the exercise of their outstanding stock options for shares of Common Stock or the surrender of those options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. There are currently no outstanding stock appreciation rights under the Predecessor Plan. The Plan Administrator has the authority to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. In the event the Plan Administrator elects to activate the Salary Investment Option Grant Program for one or more calendar years, each executive officer and other highly compensated employee of the Company selected for participation may elect, prior to the start of the calendar year, to reduce his or her base salary for that calendar year by a specified dollar amount not less than $10,000 nor more than $50,000. If such election is approved by the Plan Administrator, the officer will be granted, on or before the last trading day in January in the calendar year for which the salary reduction is to be in effect, a non-statutory option to purchase that number of shares of Common Stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of Common Stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the total spread on the option shares at the time of grant will be equal to the amount of salary invested in that option. The option will vest in a series of 12 equal monthly installments over the calendar year for which the salary reduction is in effect and will be subject to full and immediate vesting upon certain changes in the ownership or control of the Company. Under the Automatic Option Grant Program, each individual who is serving as a non-employee Director on the date the Underwriting Agreement for the Common Stock Offering is executed will receive at that time a stock option for 10,000 shares of Common Stock, provided that individual has not previously received an option grant from the Company in connection with his or her service on the Board of Directors. Each individual who becomes a non-employee Director after such date will receive an option grant for 10,000 shares of Common Stock at the time of his or her commencement of service on the Board of Directors, provided such individual has not otherwise been in the prior employment of the Company. In addition, at each Annual Stockholders Meeting, beginning with the 1997 Annual Stockholders Meeting, each individual who is to continue to serve as a non-employee Director will receive an option grant to purchase 1,500 shares of Common Stock, whether or not such individual has been in the prior employment of the Company or has previously received a stock option grant from the Company. Each automatic grant will have an exercise price equal to the fair market value per share of Common Stock on the grant date and will have a maximum term of 10 years, subject to earlier termination following the optionee's cessation of service on the Board of Directors. Each automatic option will be immediately exercisable; however, any shares purchased upon exercise of the option will be subject to repurchase, at the option exercise price paid per share, should the optionee's service as a non-employee Director cease prior to vesting in the shares. The 10,000-share grant will vest in four successive equal annual installments over the optionee's period of service on the Board of Directors measured from the grant date. Each annual 1,500-share grant will vest upon the optionee's completion of one year of service on the Board of Directors measured from 78 81 the grant date. However, each outstanding option will immediately vest upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Director. Should the Director Fee Option Grant Program be activated in the future, each non-employee Director would have the opportunity to apply all or a portion of his or her annual retainer fee otherwise payable in cash to the acquisition of a below-market option grant. The option grant would automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the shares of Common Stock on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of Common Stock on the grant date. As a result, the total spread on the option (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the portion of the retainer fee invested in that option. The option will become exercisable for the option shares in a series of installments over the optionee's period of service on the Board of Directors as follows: one half of the option shares will become exercisable upon the optionee's completion of six months of service on the Board of Directors during the calendar year of the option grant and the balance will become exercisable in six successive equal monthly installments upon his or her completion of each additional month of service on the Board of Directors in such calendar year. However, the option will become immediately exercisable for all the option shares upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Director. The Board of Directors may amend or modify the 1996 Plan at any time. The 1996 Plan will terminate on July 16, 2006, unless sooner terminated by the Board of Directors. EMPLOYEE STOCK PURCHASE PLAN The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on July 17, 1996. The Purchase Plan is designed to allow eligible employees of the Company and participating subsidiaries to purchase shares of Common Stock, at semi-annual intervals, through their periodic payroll deductions under the Purchase Plan, and a reserve of 275,000 shares of Common Stock has been established for this purpose. The Purchase Plan will be implemented in a series of successive offering periods, each with a maximum duration of 24 months. However, the initial offering period will begin on the day the Underwriting Agreement is executed in connection with the Common Stock Offering and will end on the last business day in August 1998. Individuals who are eligible employees on the start date of any offering period may enter the Purchase Plan on that start date or on any subsequent semi-annual entry date (March 1 or September 1 each year). Individuals who become eligible employees after the start date of the offering period may join the Purchase Plan on any subsequent semi-annual entry date within that period. Payroll deductions may not exceed 15% of the participant's cash compensation for each semi-annual period of participation, and the accumulated payroll deductions will be applied to the purchase of shares on the participant's behalf on each semi-annual purchase date (February 28 and August 31 each year, with the first such purchase date to occur on February 28, 1997) at a purchase price per share not less than eighty-five percent (85%) of the lower of (i) the fair market value of the Common Stock on the participant's entry date into the offering period or (ii) the fair market value on the semi-annual purchase date. In no event, however, may any participant purchase more than 300 shares on any one semi-annual purchase date. Should the fair market value of the Common Stock on any semi-annual purchase date be less than the fair market value of the Common Stock on the first day of the offering period, then the current offering period will automatically end and a new 24-month offering period will begin, based on the lower fair market value. 79 82 LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that a director of a corporation will not be personally liable for monetary damages for breach of such individual's fiduciary duties as a director except for liability (i) for any breach of such director's duty of loyalty to the corporation, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which a director derives an improper personal benefit. The Company's Bylaws provide that the Company will indemnify its directors and may indemnify its officers, employees and other agents to the full extent permitted by law. The Company believes that indemnification under its Bylaws covers at least negligence and gross negligence on the part of an indemnified party and permits the Company to advance expenses incurred by an indemnified party in connection with the defense of any action or proceeding arising out of such party's status or service as a director, officer, employee or other agent of the Company upon an undertaking by such party to repay such advances if it is ultimately determined that such party is not entitled to indemnification. The Company has entered into separate indemnification agreements with each of its directors and officers. These agreements require the Company, among other things, to indemnify such director or officer against expenses (including attorneys' fees), judgments, fines and settlements (collectively, "Liabilities") paid by such individual in connection with any action, suit or proceeding arising out of such individual's status or service as a director or officer of the Company (other than Liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest) and to advance expenses incurred by such individual in connection with any proceeding against such individual with respect to which such individual may be entitled to indemnification by the Company. The Company believes that its Certificate of Incorporation and Bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. At present the Company is not aware of any pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. CERTAIN TRANSACTIONS CS Holding, a Swiss corporation, holds approximately 44.9% of the outstanding shares of Electrowatt, which indirectly holds all of the outstanding capital stock of the Company. CS Holding also holds (i) approximately 100% of the outstanding shares of Credit Suisse and (ii) approximately 69.3% of the outstanding common stock of CS First Boston, Inc., which holds all of the outstanding common stock of CS First Boston Corporation. CS First Boston Corporation was one of the underwriters of the Company's 9 1/4% Senior Notes issued in February 1994 and was one of the placement agents in the sale of the 10 1/2% Senior Notes in May 1996. CS First Boston Corporation is acting as an Underwriter in the Common Stock Offering. In January 1990, O.L.S. Energy-Agnews entered into a credit agreement with Credit Suisse providing for a $28 million loan to finance the construction of the Agnews Facility. The Company holds a 20% interest in O.L.S. Energy-Agnews. The loan is collateralized by all of the assets of the Agnews Facility and bears interest on the unpaid principal balance based on LIBOR plus a margin rate varying between .50% and 1.50%. After commencement of commercial operation of the Agnews Facility, the Facility was sold to Nynex Credit Corporation under a sale leaseback arrangement with O.L.S. Energy-Agnews and Credit Suisse. Under the sale leaseback, O.L.S. Energy-Agnews entered into a 22-year lease, commencing February 1991, providing for the payment of a fixed base rental, as well as renewal options and a purchase option at the termination of the lease. As of December 31, 1995, O.L.S. Energy-Agnews's outstanding obligation of its sale leaseback arrangement was $37.6 million. In September 1990, the Company obtained a $25.3 million Credit Facility from Credit Suisse. In April 1993, the Credit Suisse Credit Facility was amended to increase the amount of credit available to the 80 83 Company to $54.0 million. The Credit Suisse Credit Facility is unsecured and bears interest on the amounts outstanding from time to time, if any, at LIBOR plus .50% per annum. During 1994, the Company completed a $105.0 million public debt offering of the 9 1/4% Senior Notes. A portion of the net proceeds were used to repay $52.6 million indebtedness outstanding under the Credit Suisse Credit Facility. On April 21, 1995, the Company entered into the Credit Suisse Credit Facility providing for advances of $50.0 million. On April 29, 1996, the amount of advances available under the Credit Suisse Credit Facility was increased to $58.0 million. A portion of the proceeds of the sale of the 10 1/2% Senior Notes was used to repay outstanding borrowings under the Credit Suisse Credit Facility of approximately $53.7 million on May 16, 1996. The amount of advances available under the Credit Suisse Credit Facility was subsequently reduced to $50.0 million. Upon the completion of the Common Stock Offering, the Credit Suisse Credit Facility will terminate. In January 1992, Sumas and its wholly owned subsidiary, ENCO, entered into loan agreements with Prudential and Credit Suisse providing for a $120.0 million loan to finance the construction of the Sumas Facility and acquisition of associated gas reserves. See "Business -- Description of Facilities -- Power Generation Facilities -- Sumas Facility." As of December 31, 1995, the outstanding indebtedness of Sumas and ENCO under the term loan was $119.0 million. In January 1995, the Company and Electrowatt entered into a management services agreement, which replaced a prior similar agreement, under which Electrowatt agreed to provide the Company with advisory services in connection with the construction, financing, acquisition and development of power projects, as well as any other advisory services as may be required by the company in connection with the operation of the Company. The Company has agreed to pay Electrowatt $200,000 per year for all services rendered under the management services agreement. Pursuant to this agreement, $200,000 was paid in 1995. Upon the completion of the Common Stock Offering, the management services agreement will terminate. In 1995, the Company paid $106,000 to Electrowatt pursuant to a guarantee fee agreement whereby Electrowatt agreed to guarantee the payment when due of any and all indebtedness of the Company to Credit Suisse in accordance with the terms and conditions of the Credit Suisse Credit Facility. Under the guarantee fee agreement, the Company has agreed to pay to Electrowatt an annual fee equal to 1% of the average outstanding balance of the Company's indebtedness to Credit Suisse during each quarter as compensation for all services rendered under the guarantee fee agreement. Upon the completion of the Common Stock Offering, the guarantee fee agreement will terminate. In June 1995, Calpine repaid $57.5 million of non-recourse financing to Credit Suisse which was outstanding indebtedness related to the Greenleaf 1 and 2 Facilities at the time of the acquisition of such facilities. In December 1994, the Company entered into a Consulting Agreement with Mr. Stathakis, a Director nominee, which was amended and restated effective June 3, 1996. See "Management--Employment Agreements, Consulting Agreement and Change of Control Agreements." In March 1996, Electrowatt invested $50.0 million in the Company in the form of shares of Preferred Stock, all of which will be converted into shares of Common Stock upon the completion of the Common Stock Offering. The Company believes that all transactions between the Company and its officers, Directors, principal shareholders and affiliates have been and will be on terms no less favorable to the Company than could be obtained from unaffiliated parties. 81 84 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of June 30, 1996 and as adjusted to reflect the Common Stock Offering by: (i) each person known by the Company to be the beneficial owner of more than five percent of the outstanding shares of the Company's Common Stock, (ii) each Director and nominee for Director of the Company, (iii) each executive officer of the Company listed in the Summary Compensation Table, (iv) Electrowatt (the "Selling Stockholder"), and (v) all executive officers and Directors and nominees for Director of the Company as a group.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO THE AFTER THE COMMON STOCK COMMON STOCK OFFERING(1) OFFERING(1) NAME AND ADDRESS ----------------------- NUMBER OF SHARES ---------------------- OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED(2) NUMBER PERCENT - -------------------------------- ---------- ------- ---------------- --------- ------- Electrowatt Ltd.(2)............. 12,567,180 100%(2) 12,567,180 -- -- Pierre Krafft................... -- -- -- -- -- Hans-Peter Aebi................. -- -- -- -- -- Rudolf Boesch................... -- -- -- -- -- Peter Cartwright(3)............. 641,959 4.9% -- 641,959 3.4% Ann B. Curtis(3)................ 157,529 1.2% -- 157,529 * George J. Stathakis............. -- -- -- -- -- Lynn A. Kerby(3)................ 74,428 * -- 74,428 * Ron A. Walter(3)................ 117,615 * -- 117,615 * Alicia N. Noyola(3)............. 34,513 * -- 34,513 * Robert D. Kelly(3).............. 44,537 * -- 44,537 * All executive officers and Directors and nominees for Director as a group (15 persons)(3)................... 1,366,696 9.8% -- 1,366,696 7.0%
- ------------ * Less than one percent (1) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Electrowatt's address is: Bellerivestrasse 36, P.O. Box CH-8022, Zurich, Switzerland. (3) Represents shares of the Company's Common Stock issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days after June 30, 1996. 82 85 DESCRIPTION OF CAPITAL STOCK Upon the closing of the Common Stock Offering, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, $.001 par value, and 10,000,000 shares of Preferred Stock, $.001 par value. The following summary is qualified in its entirety by the provisions of the Certificate of Incorporation and Bylaws of the Company that will be in effect upon the completion of the Common Stock Offering, forms of which have been filed as exhibits to the Registration Statement of which this Prospectus constitutes a part. COMMON STOCK There will be 18,045,000 shares of Common Stock outstanding upon the completion of the Common Stock Offering. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior liquidation rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock to be outstanding upon the completion of the Common Stock Offering will be fully paid and non-assessable. PREFERRED STOCK The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company, or could delay or prevent a transaction that might otherwise give stockholders of the Company an opportunity to realize a premium over the then prevailing market price of the Common Stock. There will be no shares of Preferred Stock outstanding upon the completion of the Common Stock Offering. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Certificate of Incorporation and Bylaws The Company's Certificate of Incorporation and Bylaws provide that the Company's Board of Directors is classified into three classes of Directors serving staggered, three-year terms. The Certificate of Incorporation also provides that Directors may be removed only by the affirmative vote of the holders of two-thirds of the shares of capital stock of the Company entitled to vote. Any vacancy on the Board of Directors may be filled only by vote of the majority of Directors then in office. Further, the Certificate of Incorporation provides that any "Business Combination" (as therein defined) requires the affirmative vote of the holders of two-thirds of the shares of capital stock of the Company entitled to vote, voting together as a single class. The Certificate of Incorporation also provides that all stockholder actions must be effected at a duly called meeting and not by a consent in writing. The Bylaws provide that the Company's stockholders may call a special meeting of stockholders only upon a request of stockholders owning at least 50% of the Company's capital stock. These provisions of the Certificate of Incorporation and Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company. These provisions are designed to reduce the 83 86 vulnerability of the Company to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for the Company's shares and, as a consequence, they also may inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in the management of the Company. See "Risk Factors -- Anti-Takeover Provisions" and "Management -- Classified Board of Directors." Delaware Anti-Takeover Statute The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is First Chicago Trust Company of New York. Its address is 525 Washington Boulevard, Jersey City, New Jersey 07310 and its telephone number is (201) 222-4114. LISTING The Common Stock has been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the trading symbol "CPN". 84 87 SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of the Common Stock Offering, the Company will have 18,045,000 shares of Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option and assuming no exercise of outstanding options). All of the shares sold in the Common Stock Offering will be freely tradeable without restriction or further registration under the Securities Act, except that any shares purchased by "affiliates" of the Company, as that term is defined under the Securities Act ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES Shares of Common Stock not freely tradeable without restriction or further registration under the Securities Act are deemed "restricted" under Rule 144 of the Securities Act. The number of shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act and lock-up agreements under which the holders of such shares have agreed with the Underwriters not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of CS First Boston. The Company intends to register with the Commission on a registration statement on Form S-8, 180 days following the date of this Prospectus, a total of 4,041,858 shares of Common Stock issuable pursuant to the Company's 1996 Plan, including the 2,392,026 shares of Common Stock subject to outstanding options previously granted under the Predecessor Plan. Upon the effectiveness of such registration statement, the shares issuable upon the exercise of outstanding options or otherwise under the 1996 Plan will become freely tradeable upon issuance thereof, subject to the restrictions on Affiliates under the Securities Act. In general, under Rule 144 of the Securities Act as currently in effect, beginning 90 days after the Common Stock Offering, a person (or persons whose shares are aggregated) who has beneficially owned "restricted" shares for at least two years, including a person who may be deemed an Affiliate of the Company, is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of 1% of the then-outstanding shares of Common Stock of the Company (approximately 180,450 shares after giving effect to the Common Stock Offering) or the average weekly trading volume of the Common Stock on the New York Stock Exchange during the four calendar weeks preceding such sale. Sales under Rule 144 are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not an Affiliate of the Company at any time during the ninety days preceding a sale, and who has beneficially owned shares for at least three years, would be entitled to sell such shares immediately following the Common Stock Offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144 of the Securities Act pursuant to Rule 144(k). However, the transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144(k) prior to effecting a transfer of such shares. Prior to the Common Stock Offering, there has been no public market for the Common Stock of the Company and no predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional Common Stock will have on the market price of the Common Stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. OPTIONS As of the date of this Prospectus, options to purchase a total of 2,392,026 shares of Common Stock are outstanding under the Company's 1996 Plan. Of such amount, options to purchase 1,366,696 shares are exercisable, all of which will become eligible for sale 180 days after the date of this Prospectus upon expiration of certain lock-up agreements with the Underwriters and pursuant to Rule 701, subject in some cases to certain volume and other resale restrictions. Rule 701 under the Securities Act provides that shares of Common Stock acquired on the exercise of outstanding options may be resold (i) by persons other than Affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of 85 88 Rule 144 and (ii) by Affiliates, beginning 90 days after the date of this Prospectus, subject to all provisions of Rule 144 except its two-year minimum holding period. LOCK-UP AGREEMENTS All holders of options to purchase shares of Common Stock have agreed with the Underwriters that they will not, without the prior written consent of CS First Boston, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them or any shares issuable upon exercise of stock options for a period of 180 days from the date of this Prospectus. See "Underwriting." CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of an investment in Common Stock by a holder that, for United States federal income tax purposes, is not a "United States person" (a "Non-U.S. Holder"). For purposes of this discussion, a "United States person" means a citizen or resident (as defined for United States federal income and estate tax purposes, as the case may be) of the United States, a corporation or partnership created or organized in the United States or under the laws of the United States or of any State thereof or an estate or trust whose income is includible in gross income for United States federal income tax purposes regardless of its source. The discussion is based on the United States Internal Revenue Code of 1986, as amended (the "Code"). Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly retroactively, and is for general information only. The discussion does not address aspects of United States federal taxation other than income and estate taxation and does not address all aspects of United States federal income and estate taxation. The discussion does not consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN COMMON STOCK. DIVIDENDS Dividends paid to a Non-U.S. Holder will generally be subject to withholding of United States federal income tax at a rate equal to 30% of the gross amount of the distribution (or at a lower rate prescribed by an applicable tax treaty) unless the dividends are effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder, in which case the dividends generally will not be subject to withholding (if the Non-U.S. Holder files certain forms with the payor of the dividend) and generally will be subject to the United States federal income tax on net income that applies to United States persons generally (and, in the case of corporate holders, effectively connected dividends may also, under certain circumstances, be subject to the branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty). An applicable income tax treaty may, however, change these rules. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country are presumed under current interpretation of existing Treasury regulations to be paid to a resident of that country. Treasury regulations proposed to be effective for payments made after December 31, 1997, which have not been finally adopted, however, would require Non-U.S. Holders to file certain new forms to obtain the benefit of any applicable tax treaty providing for a lower rate of withholding tax on dividends. Such forms would contain the holder's name and address and certain other information. The gross amount of a distribution with respect to Common stock will be treated as a dividend to the extent of the Company's current and accumulated earnings and profits as determined for U.S. federal income tax purposes. In the event that such a distribution exceeds the amount of the Company's earnings and profits, it will be treated first as a non-taxable return of capital to the extent of the Non-U.S. Holder's basis in Common Stock (but not below zero), and thereafter as capital gain. A Non-U.S. Holder will have to file a refund claim to obtain a refund of tax withheld on distributions in excess of the dividend portion of any distribution. 86 89 GAIN ON DISPOSITION A Non-U.S. Holder generally will not be subject to United States federal income tax on gain recognized upon a sale or other disposition of shares of Common Stock unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder, (ii) the Non-U.S. Holder is an individual who has a tax home (as specifically defined under the United States federal income tax laws) in the United States (or maintains an office or other fixed place of business in the United States to which the gain from the sale of the stock is attributable), holds the shares of Common Stock as a capital asset, and is present in the United States for 183 days or more in the taxable year of the disposition or (iii) except as discussed below, the Company is or has been a "United States real property holding corporation" ("USRPHC") within the meaning of section 897(c)(2) of the Code at any time within the shorter of the five year period preceding such disposition or such holder's holding period. Gain that is (or is treated as being) effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder will be subject to the United States federal income tax on net income that applies to United States persons generally (and, with respect to corporate holders and under certain circumstances, the branch profits tax) but will not be subject to withholding. If the Company is a USRPHC, a Non-U.S. Holder may be subject to taxation under certain provisions of the Codes enacted pursuant to the Foreign Investors Real Property Tax Act ("FIRPTA"). The determination of whether the Company is a USRPHC depends in part upon unresolved issues of what constitutes real property for purposes of the FIRPTA provisions and upon difficult and uncertain questions of valuation. If the Company were or were to become a USRPHC, gains realized upon a disposition of Common Stock by a Non-U.S. Holder that is not deemed to own more than 5% of the Common Stock would not be subject to tax under the FIRPTA provisions provided that the Common Stock is "regularly traded" on an established securities market. Since the Common Stock will trade on the New York Stock Exchange, the Company believes the Common Stock will be "regularly traded" on an established securities market. Non-U.S. Holders should consult applicable treaties, which may provide for different rules (including possibly the exemption of certain capital gains from tax). FEDERAL ESTATE TAXES Common stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for United States federal estate tax purposes) of the United States at the time of death will be includible in the individual's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Such individual's estate may be subject to the United States federal estate tax on the property includible in the estate for United States federal estate tax purposes. BACKUP WITHHOLDING AND INFORMATION REPORTING The Company or its designated paying agent (the "payor") must report annually to the Internal Revenue Service (the "Service") and to each Non-U.S. Holder the amount of dividends paid to, and the tax, if any, withheld with respect to, such holder. That information may also be made available to the tax authorities of the country in which the Non-U.S. Holder resides. United States federal backup withholding (imposed at a 31% rate on certain payments to nonexempt persons) and information reporting with respect to such withholding will generally not apply to dividends paid to a Non-U.S. Holder that are otherwise subject to withholding or taxed as effectively connected income as described above under "Dividends." The backup withholding and information reporting requirements also apply to the payment of gross proceeds to a Non-U.S. Holder upon the disposition of Common Stock by or through a United States office of a United States or foreign broker, unless the holder certifies to the broker under penalties of perjury as to its name, address, and status as a Non-U.S. Holder or the holder otherwise establishes an exemption. Information reporting requirements (but not backup withholding if the payor does not have actual knowledge that the payee is a United States person) will apply to a payment of the proceeds of a disposition of Common 87 90 Stock by or through a foreign office of (i) a United States broker, (ii) a foreign broker 50% or more of whose gross income for certain periods is effectively connected with the conduct of a trade or business in the United States or (iii) a foreign broker that is a "controlled foreign corporation" for United States federal income tax purposes, unless the broker has documentary evidence in its records that the holder is a Non-U.S. Holder and certain other conditions are met, or the holder otherwise establishes an exemption. Neither backup withholding nor information reporting will generally apply to a payment of the proceeds of a disposition of Common Stock by or through a foreign office of a foreign broker not subject to the preceding sentence. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded (or credited against the Non-U.S. Holder's United States federal income tax liability, if any), provided that the required information is furnished to the Service. These information reporting and backup withholding rules are under review by the United States Treasury and their application to the Common Stock could be changed by future regulations. The Service recently issued proposed Treasury regulations concerning the withholding of tax and reporting for certain amounts paid to non-resident individuals and foreign corporations. The proposed Treasury regulations, if adopted in their present form, would be effective for payments made after December 31, 1997. Prospective investors should consult their tax advisors concerning the potential adoption of such proposed Treasury regulations and the potential effect on their ownership of the Common Stock. 88 91 UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated , 1996 (the "U.S. Underwriting Agreement"), the underwriters named below (the "U.S. Underwriters"), for whom CS First Boston Corporation, Morgan Stanley & Co. Incorporated, PaineWebber Incorporated and Salomon Brothers Inc are acting as representatives (the "Representatives"), have severally but not jointly agreed to purchase from Calpine and the Selling Stockholder the following respective number of U.S. Shares:
NUMBER OF UNDERWRITER U.S. SHARES ----------------------------------------------------------------- ----------- CS First Boston Corporation...................................... Morgan Stanley & Co. Incorporated................................ PaineWebber Incorporated......................................... Salomon Brothers Inc ............................................ ----------- Total.................................................. 14,436,000 =========
The U.S. Underwriting Agreement provides that the obligations of the U.S. Underwriters are subject to certain conditions precedent and that the U.S. Underwriters will be obligated to purchase all of the U.S. Shares offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The U.S. Underwriting Agreement provides that, in the event of a default by a U.S. Underwriter, in certain circumstances the purchase commitments of non-defaulting U.S. Underwriters may be increased or the U.S. Underwriting Agreement may be terminated. Calpine has entered into a Subscription Agreement (the "Subscription Agreement") with the Managers of the International Offering (the "Managers" and, together with the U.S. Underwriters, the "Underwriters") providing for the concurrent offer and sale of the International Shares outside the United States and Canada. The closing of the U.S. Offering is a condition to the closing of the International Offering and vice versa. Calpine has granted to the U.S. Underwriters and the Managers an option, exercisable by CS First Boston Corporation, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to 2,706,750 additional shares at the initial public offering price, less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the shares of Common Stock offered hereby. To the extent that this option to purchase is exercised, each U.S. Underwriter and each Manager will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares being sold to the U.S. Underwriters and the Managers as the number of U.S. Shares set forth next to such U.S. Underwriter's name in the preceding table and as the number set forth next to such Manager's name in the corresponding table in the Prospectus relating to the International Offering bears to the sum of the total number of shares of Common Stock in such tables. Calpine has been advised by the Representatives that the U.S. Underwriters propose to offer the U.S. Shares in the United States and Canada to the public initially at the public offering price set forth on the cover page of this Prospectus and, through the Representatives, to certain dealers at such price less a concession of $ per share, and the U.S. Underwriters and such dealers may allow a discount of $ per share on sales to certain other dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the Representatives. The public offering price, the aggregate underwriting discounts and commissions per share and per share concession and discount to dealers for the U.S. Offering and the concurrent International Offering will be identical. Pursuant to an Agreement between the U.S. Underwriters and Managers (the "Intersyndicate Agreement") relating to the Common Stock Offering, changes in the public offering price, concession and discount to dealers will be made only upon the mutual agreement of CS First Boston Corporation, as 89 92 representative of the U.S. Underwriters, and CS First Boston Limited ("CSFBL"), on behalf of the Managers. Pursuant to the Intersyndicate Agreement, each of the U.S. Underwriters has agreed that, as part of the distribution of the U.S. Shares and subject to certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute any prospectus relating to the Common Stock to any person outside the United States or Canada or to any other dealer who does not so agree. Each of the Managers has agreed or will agree that, as part of the distribution of the International Shares and subject to certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute any prospectus relating to the Common Stock in the United States or Canada or to any other dealer who does not so agree. The foregoing limitations do not apply to stabilization transactions or to transactions between the U.S. Underwriters and the Managers pursuant to the Intersyndicate Agreement. As used herein, "United States" means the United States of America (including the States and District of Columbia), its territories, possessions and other areas subject to its jurisdiction, "Canada" means Canada, its provinces, territories, possessions and other areas subject to its jurisdiction, and an offer or sale shall be in the United States or Canada if it is made to (i) any individual resident in the United States or Canada or (ii) any corporation, partnership, pension, profit-sharing or other trust or other entity (including any such entity acting as an investment adviser with discretionary authority) whose office most directly involved with the purchase is located in the United States or Canada. Pursuant to the Intersyndicate Agreement, sales may be made between the U.S. Underwriters and the Managers of such number of shares of Common Stock as may be mutually agreed upon. The price of any shares so sold will be the public offering price, less such amount as may be mutually agreed upon by CS First Boston Corporation, as representative of the U.S. Underwriters, and CSFBL, on behalf of the Managers, but not exceeding the selling concession applicable to such shares. To the extent there are sales between the U.S. Underwriters and the Managers pursuant to the Intersyndicate Agreement, the number of shares of Common Stock initially available for sale by the U.S. Underwriters or by the Managers may be more or less than the amount appearing on the cover page of the Prospectus. Neither the U.S. Underwriters nor the Managers are obligated to purchase from the other any unsold shares of Common Stock. Calpine has agreed that it will not offer, sell, contract to sell, announce its intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any additional shares of its Common Stock or securities convertible into or exchangeable or exercisable for any shares of its Common Stock without the prior written consent of CS First Boston Corporation for a period of 180 days after the date of this Prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof. In addition, all holders of options to purchase shares of Common Stock have agreed that they will not, without the prior written consent of CS First Boston Corporation, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them or any shares issuable upon exercise of stock options for a period of 180 days after the date of this Prospectus. Calpine has agreed to indemnify the U.S. Underwriters and the Managers against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the U.S. Underwriters and the Managers may be required to make in respect thereof. CS First Boston Corporation, one of the Underwriters, is an affiliate of the Company. The Common Stock Offering therefore is being conducted in accordance with the applicable provisions of Rule 2720 to the Conduct Rules of the National Association of Securities Dealers, Inc. Rule 2720 requires that the initial public offering price of the Common Stock not be higher than that recommended by a "qualified independent underwriter" meeting certain standards. Accordingly, PaineWebber Incorporated is assuming the responsibilities of acting as the qualified independent underwriter in pricing the Common Stock Offering and conducting due diligence. The initial public offering price of the Common Stock set forth on the cover page of this Prospectus is no higher than the price recommended by PaineWebber Incorporated. In connection with the Common Stock Offering, PaineWebber Incorporated in its role as qualified independent underwriter has performed due diligence investigations and reviewed and participated in the 90 93 preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. In addition, the Underwriters may not confirm sales to any discretionary account without the prior specific written approval of the customer. The decision made by CS First Boston Corporation and CSFBL to underwrite the Common Stock Offering was made independently of the Company, CS Holding and Electrowatt. The net proceeds from the Common Stock Offering will not be applied for the benefit of CS First Boston Corporation or CSFBL. CS First Boston Corporation and CSFBL will not receive any benefit from the Common Stock Offering other than their respective portion of the underwriting discounts and commissions. The Common Stock has been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol "CPN." In connection with the listing of the Common Stock on the New York Stock Exchange, the Underwriters have undertaken to sell round lots of 100 shares or more to a minimum of 2,000 beneficial holders. Prior to the Common Stock Offering, there has been no public market for the shares of Common Stock offered hereby. The initial public offering price for the shares was determined by negotiations among the Company, the Selling Stockholder and CS First Boston Corporation, as one of the Representatives of the U.S. Underwriters, and by CSFBL, on behalf of the Managers, and does not necessarily reflect the secondary market prices for the Common Stock following the initial offering hereby. Among the principal factors considered in determining the initial public offering price were prevailing economic prospects, the sales, earnings and financial and operating performance of the Company in recent periods, the future prospects of the Company, market valuations of companies in related businesses and the history and prospects for the industries in which the Company competes. Additionally, consideration has been given to the general condition of the securities markets, the market for new issues of securities and the demand for securities of comparable companies. In the ordinary course of their business, CS First Boston Corporation and certain of the other Underwriters and their affiliates have engaged and may in the future engage in investment banking transactions with Calpine, including the provision of certain advisory services to Calpine. CS Holding, a Swiss corporation, holds approximately 44.9% of the outstanding shares of Electrowatt, which indirectly holds all of the outstanding capital stock of the Company. CS Holding also holds (i) approximately 100% of the outstanding shares of Credit Suisse and (ii) approximately 69.3% of the outstanding common stock of CS First Boston, Inc., which holds all of the outstanding common stock of CS First Boston Corporation and of CSFBL. CS First Boston Corporation was one of the Underwriters in connection with the public offering of the Company's 9 1/4% Senior Notes in February 1994, one of the placement agents in connection with the sale of the 10 1/2% Senior Notes in May 1996 and is one of the Representatives of the U.S. Underwriters in the U.S. Offering, and CSFBL is one of the Managers in the International Offering. See "Certain Transactions." 91 94 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Common Stock in Canada is being made only on a private placement basis exempt from the requirement that the Company prepare and file a prospectus with the securities regulatory authorities in each province where trades of Common Stock are effected. Accordingly, any resale of the Common Stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Common Stock. REPRESENTATIONS OF PURCHASERS Each purchaser of Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Common Stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION AND ENFORCEMENT The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of Common Stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Common Stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only one such report must be filed in respect of Common Stock acquired on the same date and under the same prospectus exemption. LEGAL MATTERS The validity of the Common Stock will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, San Francisco, California and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, New York, New York. 92 95 EXPERTS The consolidated financial statements and schedules of the Company as of December 31, 1995 and 1994 and for the three years ended December 31, 1995, 1994 and 1993, the financial statements of Calpine Geysers Company, L.P. for the period ended April 18, 1993 and the financial statements of BAF Energy, A California Limited Partnership as of October 31, 1995 and 1994 and for the three years ended October 31, 1995, 1994 and 1993 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon authority of said firm as experts in giving said reports. In the reports for the Company, that firm states that with respect to Sumas Cogeneration Company, L.P., its opinion is based on the reports of other independent public accountants, namely Moss Adams LLP. The consolidated financial statements of Sumas Cogeneration Company, L.P. and Subsidiary as of December 31, 1995 and 1994 and for the three years ended December 31, 1995, 1994 and 1993 appearing in this Prospectus have been audited by Moss Adams LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon authority of said firm as experts in giving said reports. The combined financial statements of LFC No. 38 Corp. and Portsmouth Leasing Corporation and Subsidiaries and the consolidated financial statements of LFC No. 60 Corp. and Subsidiary as of December 31, 1994 and 1993 and for the years then ended appearing in this Prospectus have been audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon authority of said firm as experts in giving said reports. The financial statements of Gilroy Energy Company, a wholly owned subsidiary of Gilroy Foods, Inc. which in turn is a wholly owned subsidiary of McCormick & Company, Inc., at November 30, 1995 and 1994, and for each of the two years in the period ended November 30, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files periodic reports and other information with the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof, as well as the periodic reports and other information filed by the Company with the Commission, which may be inspected and copied at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois, at the prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission and the address of such site is http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 93 96 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- CALPINE CORPORATION Report of Independent Public Accountants.............................................. F-3 Consolidated Balance Sheets, December 31, 1995 and 1994............................... F-4 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993................................................................................ F-5 Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1995, 1994 and 1993....................................................................... F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................................................................................ F-7 Notes to Consolidated Financial Statements for the Years Ended December 31, 1995, 1994 and 1993............................................................................ F-8 Condensed Consolidated Balance Sheets, June 30, 1996 (unaudited) and December 31, 1995................................................................................ F-30 Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1996 and 1995 (unaudited)................................................................ F-31 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 (unaudited)................................................................ F-32 Notes to Condensed Consolidated Financial Statements for the Six Months Ended June 30, 1996 and 1995 (unaudited)........................................................... F-33 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY Report of Independent Public Accountants.............................................. F-38 Consolidated Balance Sheets, December 31, 1995 and 1994............................... F-39 Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993................................................................................ F-40 Consolidated Statement of Changes in Partners' Deficit for the Years Ended December 31, 1995, 1994 and 1993............................................................. F-41 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................................................................................ F-42 Notes to Consolidated Financial Statements for the Years Ended December 31, 1995, 1994 and 1993............................................................................ F-43 CALPINE GEYSERS COMPANY, L.P. Report of Independent Public Accountants.............................................. F-52 Statement of Operations for the Period from January 1, 1993 to April 18, 1993......... F-53
Statement of Cash Flows for the Period from January 1, 1993 to April 18, 1993......... F-54 Notes to Financial Statements for the Period from January 1, 1993 to April 18, 1993... F-55 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES Report of Independent Accountants..................................................... F-60 Combined Balance Sheets, December 31, 1994 and 1993................................... F-61 Combined Statement of Operations for the Years Ended December 31, 1994 and 1993....... F-62 Combined Statements of Changes in Shareholder's Deficiency for the Years Ended December 31, 1994 and 1993.......................................................... F-63 Combined Statements of Cash Flows for the Years Ended December 31, 1994 and 1993...... F-64 Notes to Combined Financial Statements for the Years Ended December 31, 1994 and 1993................................................................................ F-65 LFC NO. 60 CORP. AND SUBSIDIARY Report of Independent Accountants..................................................... F-69 Consolidated Balance Sheets, December 31, 1994 and 1993............................... F-70 Consolidated Statements of Operations for the Years Ended December 31, 1994 and 1993................................................................................ F-71 Consolidated Statements of Changes in Shareholder's Deficiency for the Years Ended December 31, 1994 and 1993.......................................................... F-72 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994 and 1993................................................................................ F-73 Notes to Consolidated Financial Statements for the Years Ended December 31, 1994 and 1993................................................................................ F-74
F-1 97
PAGE ---- BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP Report of Independent Public Accountants.............................................. F-77 Balance Sheets, October 31, 1995 and 1994............................................. F-78 Statements of Income for the Years Ended October 31, 1995, 1994 and 1993.............. F-79 Statements of Partners' Equity for the Years Ended October 31, 1995, 1994 and 1993.... F-80 Statements of Cash Flows for the Years Ended October 31, 1995, 1994 and 1993.......... F-81 Notes to Financial Statements for the Years Ended October 31, 1995, 1994 and 1993..... F-82 Condensed Balance Sheets as of January 31, 1996 (unaudited) and October 31, 1995...... F-86 Condensed Statements of Income for the Three Months Ended January 31, 1996 and 1995 (unaudited)......................................................................... F-87 Condensed Statements of Cash Flows for the Three Months Ended January 31, 1996 and 1995 (unaudited).................................................................... F-88 Notes to Condensed Financial Statements as of January 31, 1996........................ F-89 GILROY ENERGY COMPANY Report of Independent Auditors........................................................ F-91 Balance Sheets, November 30, 1995 and 1994 and May 31, 1996 (unaudited)............... F-92 Statements of Income for the Years Ended November 30, 1995 and 1994 and for the Six Months Ended May 31, 1996 and 1995 (unaudited)...................................... F-93 Statement of Shareholder's Equity for the Years Ended November 30, 1995 and 1994 and for the Six Months Ended May 31, 1996 (unaudited)................................... F-94 Statements of Cash Flows for the Years Ended November 30, 1995 and 1994 and for the Six Months Ended May 31, 1996 and 1995 (unaudited).................................. F-95 Notes to Financial Statements for the Years Ended November 30, 1995 and 1994 and for the Six Months Ended May 31, 1996 and 1995 (unaudited).............................. F-96
F-2 98 After the reincorporation and the effectiveness of the stock split discussed in Note 26 of the Calpine Corporation consolidated financial statements, we expect to be in a position to render the following report. ARTHUR ANDERSEN LLP San Jose, California March 15, 1996 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of Calpine Corporation: We have audited the accompanying consolidated balance sheets of Calpine Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Sumas Cogeneration Company, L.P. (Sumas), the investment in which is reflected in the accompanying financial statements using the equity method of accounting. The investment in Sumas represents approximately 1% and 2% of the Company's total assets at December 31, 1995 and 1994, respectively. The Company has recorded a loss of $3.0 million, $2.9 million and $1.9 million representing its share of the net loss of Sumas for the years ended December 31, 1995, 1994 and 1993, respectively. The financial statements of Sumas were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Sumas, is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Calpine Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California March 15, 1996 (except with respect to the matter discussed in Note 26, as to which the date is , 1996) F-3 99 CALPINE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
1995 1994 -------- -------- ASSETS Current assets Cash and cash equivalents..................................................... $ 21,810 $ 22,527 Accounts receivable from related parties....................................................... 2,177 1,864 from others................................................................ 17,947 12,723 Acquisition project receivables............................................... 8,805 -- Prepaid expenses and other current assets..................................... 5,491 4,256 -------- -------- Total current assets.................................................. 56,230 41,370 Property, plant and equipment, net.............................................. 447,751 335,453 Investments in power projects................................................... 8,218 11,114 Capitalized project costs....................................................... 1,123 645 Notes receivable from related parties........................................... 19,391 16,882 Notes receivable from Coperlasa................................................. 6,394 -- Restricted cash................................................................. 9,627 10,813 Deferred charges and other assets............................................... 5,797 5,095 -------- -------- Total assets.......................................................... $554,531 $421,372 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Current non-recourse project financing........................................ $ 84,708 $ 22,800 Notes payable to bank and short-term borrowings............................... 1,177 4,500 Accounts payable.............................................................. 6,876 1,869 Accrued payroll and related expenses.......................................... 2,789 2,624 Accrued interest payable...................................................... 7,050 5,622 Other accrued expenses........................................................ 2,657 2,517 -------- -------- Total current liabilities............................................. 105,257 39,932 Long-term line of credit........................................................ 19,851 -- Non-recourse long-term project financing, less current portion.................. 190,642 196,806 Notes payable................................................................... 6,348 5,296 Senior Notes Due 2004........................................................... 105,000 105,000 Deferred income taxes, net...................................................... 97,621 50,928 Deferred revenue................................................................ 4,585 4,761 -------- -------- Total liabilities..................................................... 529,304 402,723 -------- -------- Commitments and contingencies (Note 25) Stockholder's equity Common stock, authorized 33,760 shares, issued and outstanding -- 10,388 shares in 1995 and 1994.............................. 10 10 Additional paid-in capital.................................................... 6,214 6,214 Retained earnings............................................................. 19,034 12,456 Cumulative translation adjustment............................................. (31) (31) -------- -------- Total stockholder's equity............................................ 25,227 18,649 -------- -------- Total liabilities and stockholder's equity............................ $554,531 $421,372 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 100 CALPINE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 -------- -------- -------- Revenue Electricity and steam sales.............................. $127,799 $ 90,295 $ 53,000 Service contract revenue from related parties............ 7,153 7,221 16,896 Income (loss) from unconsolidated investments in power projects.............................................. (2,854) (2,754) 19 -------- ------- ------- Total revenue.................................... 132,098 94,762 69,915 -------- ------- ------- Cost of revenue Plant operating expenses................................. 33,162 14,944 9,078 Depreciation............................................. 26,264 21,202 12,272 Production royalties..................................... 10,574 11,153 6,814 Operating lease expense.................................. 1,542 -- -- Service contract expenses................................ 5,846 5,546 14,337 -------- ------- ------- Total cost of revenue............................ 77,388 52,845 42,501 -------- ------- ------- Gross profit............................................... 54,710 41,917 27,414 Project development expenses............................. 3,087 1,784 1,280 General and administrative expenses...................... 8,937 7,323 5,080 Provision for write-off of project development costs..... -- 1,038 -- -------- ------- ------- Income from operations........................... 42,686 31,772 21,054 Other (income) expense Interest expense Related party......................................... 1,663 375 2,613 Other................................................. 30,491 23,511 11,212 Other income, net........................................ (1,895) (1,988) (1,133) -------- ------- ------- Income before provision for income taxes and cumulative effect of change in accounting principle........................................... 12,427 9,874 8,362 Provision for income taxes............................... 5,049 3,853 4,195 -------- ------- ------- Income before cumulative effect of change in accounting principle................................ 7,378 6,021 4,167 Cumulative effect of adoption of SFAS No. 109............ -- -- (413) -------- ------- ------- Net income....................................... $ 7,378 $ 6,021 $ 3,754 ======== ======= ======= As adjusted earnings per share assuming conversion of preferred stock: 14,187 As adjusted weighted average shares outstanding.......... ======== $ 0.52 Net income per share..................................... ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 101 CALPINE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
COMMON STOCK ADDITIONAL CUMULATIVE --------------- PAID-IN RETAINED TRANSLATION SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL ------ ------ ---------- -------- ---------- ------- Balance, December 31, 1992....................... 10,388 $ 10 $6,214 $ 4,281 $ -- $10,505 Dividend ($0.08 per share)..................... -- -- -- (800 ) -- (800) Net income..................................... -- -- -- 3,754 -- 3,754 Cumulative translation adjustment.............. -- -- -- -- (31) (31) ----- --- ------- ---- ------- Balance, December 31, 1993....................... 10,388 10 6,214 7,235 (31) 13,428 Dividend ($0.08 per share)..................... -- -- -- (800 ) -- (800) Net income..................................... -- -- -- 6,021 -- 6,021 ----- --- ------- ---- ------- Balance, December 31, 1994....................... 10,388 10 6,214 12,456 (31) 18,649 Dividend ($0.08 per share)..................... -- -- -- (800 ) -- (800) Net income..................................... -- -- -- 7,378 -- 7,378 ----- --- ------- ---- ------- Balance, December 31, 1995....................... 10,388 $ 10 $6,214 $19,034 $(31) $25,227 ===== === ======= ==== =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 102 CALPLNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
1995 1994 1993 -------- ------- ------- Cash flows from operating activities Net income................................................. $ 7,378 $ 6,021 $ 3,754 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net...................... 25,931 20,342 11,318 Deferred income taxes, net.............................. (1,027) 3,180 4,619 (Income) loss from unconsolidated investments in power projects.............................................. 2,854 2,754 (19) Distributions from investments in power projects........ -- -- 7,352 Provision for write-off of project development costs.... -- 1,038 -- Change in operating assets and liabilities: Accounts receivable................................... (3,354) (2,578) (615) Acquisition project receivables....................... (8,805) -- -- Other current assets.................................. (737) 79 (956) Accounts payable and accrued expenses................. 6,847 6,218 (3,040) Deferred revenue...................................... (2,434) (2,858) 1,897 -------- -------- -------- Net cash provided by operating activities.......... 26,653 34,196 24,310 -------- -------- -------- Cash flows from investing activities Acquisition of property, plant and equipment............... (17,434) (7,023) (8,445) Acquisition of Greenleaf, net of cash on hand.............. (14,830) -- -- Investment in Watsonville, net of cash on hand............. 494 -- -- Acquisition of TPC, net of cash on hand.................... -- (62,770) -- Acquisition of CGC, net of CGC cash on hand................ -- -- (20,296) Increase in notes receivable............................... (6,348) (13,556) -- Investments in power projects.............................. -- (118) (627) Capitalized project costs.................................. (1,258) (175) (952) Decrease (increase) in restricted cash..................... 1,186 (900) 2,968 Other, net................................................. (307) 98 270 -------- -------- -------- Net cash used in investing activities.............. (38,497) (84,444) (27,082) -------- -------- -------- Cash flows from financing activities Payment of dividends....................................... (800) (800) (800) Borrowings from line of credit............................. 34,851 -- 23,000 Repayments of line of credit............................... (15,000) (52,595) (5,873) Borrowings from non-recourse project financing............. 76,026 60,000 -- Repayments of non-recourse project financing............... (79,388) (12,735) (8,800) Short-term borrowings...................................... 2,683 4,500 -- Repayments of short-term borrowings........................ (6,006) -- -- Senior Notes Due 2004...................................... -- 105,000 -- Financing costs............................................ (1,239) (3,921) (749) Repayment of note payable to shareholder................... -- (1,200) -- Proceeds from note payable................................. -- 5,167 -- Repayment of notes payable -- FMRP......................... -- (36,807) -- -------- -------- -------- Net cash provided by financing activities.......... 11,127 66,609 6,778 -------- -------- -------- Net increase (decrease) in cash and cash equivalents......... (717) 16,361 4,006 Cash and cash equivalents, beginning of period............... 22,527 6,166 2,160 -------- -------- -------- Cash and cash equivalents, end of period..................... $ 21,810 $22,527 $ 6,166 ======== ======== ======== Supplementary information -- cash paid during the year for: Interest................................................... $ 32,162 $19,890 $15,084 Income taxes............................................... 4,294 683 13
The accompanying notes are an integral part of these consolidated financial statements. F-7 103 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ORGANIZATION AND OPERATIONS OF THE COMPANY Calpine Corporation (Calpine) and subsidiaries (collectively, the Company) are engaged in the development, acquisition, ownership and operation of power generation facilities in the United States. The Company has ownership interests in and operates geothermal steam fields, geothermal power generation facilities, and natural gas-fired cogeneration facilities in Northern California and Washington. Each of the generation facilities produces electricity for sale to utilities. Thermal energy produced by the gas-fired cogeneration facilities is sold to governmental and industrial users, and steam produced by the geothermal steam fields is sold to utility-owned power plants. For the year ended December 31, 1995, primarily all electricity and steam sales revenue from consolidated subsidiaries was derived from sales to two customers in Northern California (see Note 24), of which 73% related to geothermal activities. Founded in 1984, the Company is wholly owned by Electrowatt Services, Inc., which is wholly owned by Electrowatt Ltd. (Electrowatt), a Swiss company. The Company has expertise in the areas of engineering, finance, construction and plant operations and maintenance. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of Calpine Corporation and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. During 1993, the Company acquired the remaining interests in Calpine Geysers Company, L.P. (CGC) (see Note 3). Prior to the acquisition, the Company recognized its share of the net income of CGC under the equity method of accounting. During 1994, the Company formed Calpine Thermal Power, Inc. (Calpine Thermal) and Calpine Siskiyou Geothermal Partners, L.P. (see Notes 4 and 7, respectively). Calpine Thermal acquired Thermal Power Company (TPC) during 1994. During 1995, the Company formed Calpine Greenleaf Corporation (Calpine Greenleaf), Calpine Monterey Cogeneration, Inc. (CMCI) and Calpine Vapor, Inc. (Calpine Vapor). Calpine Greenleaf indirectly acquired two operating gas-fired cogeneration plants (see Note 5) and CMCI acquired an operating lease for a gas-fired cogeneration facility (see Note 6). Calpine Vapor made loans to fund construction of new geothermal wells in Mexico (see Note 8). Accounting for Jointly Owned Geothermal Properties -- The Company uses the proportionate consolidation method to account for TPC's 25% interest in jointly owned geothermal properties. TPC has a steam sales agreement with Pacific Gas and Electric Company (PG&E) pursuant to which the steam derived from its interest in the properties is sold. See Note 4 for further information regarding TPC. Use of Estimates in Preparation of Financial Statements -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates with regard to these financial statements relate to future development costs and total productive resources of the geothermal facilities (see Property, Plant and Equipment and Note 4), the estimated "free steam" liability (see Revenue Recognition and Deferred Revenue), receivables which the Company believes to be collectible (see Note 10), and the realization of deferred income taxes (see Note 19). Revenue Recognition and Deferred Revenue -- Revenue from electricity and steam sales is recognized upon transmission to the customer. Revenues from contracts entered into or acquired since May 21, 1992 are recognized at the lesser of amounts billable under the contract or amounts recognizable at an average rate over the term of the contract. The Company's power sales agreements related to CGC were entered into prior to F-8 104 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) May 1992. Had the Company applied this principle, the revenues of the Company recorded for the years ended December 31, 1995 and 1994, and for the period from April 19, 1993 to December 31, 1993, would have been approximately $12.6 million, $11.9 million and $6.5 million less, respectively. CGC revenues from sales of steam were calculated considering a future period when steam would be delivered without receiving corresponding revenue. The estimated "free steam" obligation was recorded at an average rate over future steam production as deferred revenue in 1993. As of December 31, 1993, the Company had deferred revenue of $8.6 million. During 1994, based on estimates and analyses performed, the Company determined that these deliveries would no longer be required for a customer. In May 1994, the Company reversed approximately $5.9 million of its deferred revenue liability. This reversal was recorded as a $1.9 million purchase price reduction to property, plant and equipment, with the remaining $4.0 million as an increase in revenue. Concurrently, $800,000 of the revenue increase was reserved for future construction of gathering systems required for future production of the steam fields, with the offset recorded in property, plant and equipment. In October 1994, PG&E agreed to the termination of the free steam provision for one of the geothermal steam fields. During 1995, CGC took additional measures regarding future capital commitments and other actions which will increase steam production and, based on additional analyses and estimates performed, the Company recognized the remaining $2.7 million of previously deferred revenue. The Company performs operations and maintenance services for projects in which it has an interest. Revenue from investees is recognized on these contracts when the services are performed. Revenue from consolidated subsidiaries are eliminated in consolidation. Cash and Cash Equivalents -- The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amount of these instruments approximates fair value because of their short maturity. Restricted Cash -- The Company is required to maintain cash balances that are restricted by provisions of its debt agreements and by regulatory agencies. The Company's debt agreements specify restrictions based on debt service payments and drilling costs for the following year. Regulatory agencies require cash to be restricted to ensure that funds will be available to restore property to its original condition. Restricted cash is invested in accounts earning market rates; therefore, their carrying value approximates fair value. Such cash is excluded from cash and cash equivalents for the purposes of the statements of cash flows. Concentration of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts/notes receivable. The Company's cash accounts are held by five major financial institutions. The Company's accounts/notes receivable are concentrated within entities engaged in the energy industry, mainly within the United States, some of which are related parties. Certain of the Company's notes receivable are with a company in Mexico (see Note 8). Property, Plant and Equipment -- Property, plant and equipment are stated at cost less accumulated depreciation and amortization. The Company capitalizes costs incurred in connection with the development of geothermal properties, including costs of drilling wells and overhead directly related to development activities, together with the costs of production equipment, the related facilities and the operating power plants. Geothermal properties include the value attributable to the geothermal resources of CGC and all of the property, plant and equipment of Calpine Thermal. Proceeds from the sale of geothermal properties are applied against capitalized costs, with no gain or loss recognized. Geothermal costs, including an estimate of future development costs to be incurred and the estimated costs to dismantle, are amortized by the units of production method based on the estimated total productive output over the estimated useful lives of the related steam fields. Depreciation of the buildings and roads is F-9 105 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) computed using the straight-line method over their estimated useful lives. It is reasonably possible that the estimate of useful lives, total units of production or total capital costs to be amortized using the units of production method could differ materially in the near term from the amounts assumed in arriving at current depreciation expense. These estimates are affected by such factors as the ability of the Company to continue selling steam and electricity to customers at estimated prices, changes in prices of alternative sources of energy such as hydro-generation and gas, and changes in the regulatory environment. Gas-fired power production facilities include the cogeneration plants and related equipment and are stated at cost. Depreciation is recorded utilizing the straight-line method over the estimated original useful life of up to thirty years. Depreciation of office equipment is provided on the straight-line method over useful lives of three to five years. Amortization of leasehold improvements is provided based on the straight-line method over the lesser of the useful life of the asset or the life of the lease. When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts, and the resulting gains or losses are included in the results of operations. As of December 31, 1995 and 1994, the components of property, plant and equipment are (in thousands):
1995 1994 -------- -------- Geothermal properties.......................................... $216,042 $209,243 Buildings...................................................... 147,532 29,149 Machinery and equipment........................................ 50,826 47,125 Wells and well pads............................................ 44,706 43,982 Steam gathering and control systems............................ 28,363 28,296 Roads.......................................................... 7,384 7,384 Miscellaneous assets........................................... 2,425 1,694 -------- -------- 497,278 366,873 Less accumulated depreciation and amortization................. 60,511 34,020 -------- -------- 436,767 332,853 Land........................................................... 754 413 Construction in progress....................................... 10,230 2,187 -------- -------- Property, plant and equipment, net........................... $447,751 $335,453 ======== ========
Investments in Power Projects -- The Company accounts for its unconsolidated investments in power projects under the equity method. The Company's share of income from these investments is calculated according to the Company's equity ownership or in accordance with the terms of the appropriate partnership agreement (see Note 11). Capitalized Project Costs -- The Company capitalizes project development costs upon the execution of a memorandum of understanding or a letter of intent for a power or steam sales agreement. These costs include professional services, salaries, permits and other costs directly related to the development of a new project. Outside services and other third-party costs are capitalized for acquisition projects. Upon the start-up of plant operations or the completion of an acquisition, these costs are generally transferred to property, plant and equipment and amortized over the estimated useful life of the project. Capitalized project costs are charged to expense when the Company determines that the project will not be consummated or is impaired. As Adjusted Earnings Per Share -- Net income per share is computed using weighted average shares outstanding, which includes the net additional number of shares which would be issuable upon the exercise of outstanding stock options, assuming that the Company used the proceeds received to purchase additional shares at an assumed public offering price. Net income per share also gives effect, even if antidilutive, to common equivalent shares from preferred stock that will automatically convert upon the closing of the F-10 106 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's initial public offering (using the as-if-converted method). If the offering contemplated by the Company is consummated, all of the convertible preferred stock outstanding as of the closing date will automatically be converted into shares of common stock based on the shares of convertible preferred stock outstanding at June 30, 1996. Reclassifications -- Prior years' amounts in the consolidated financial statements have been reclassified where necessary to conform to the 1995 presentation. 3. CALPINE GEYSERS COMPANY, L.P. CGC, an indirect wholly owned subsidiary of the Company, is the owner of two operating geothermal power plants and their respective steam fields, Bear Canyon and West Ford Flat, and three geothermal steam fields, which provide steam to PG&E's Unit 13 and Unit 16 power plants and to Sacramento Municipal Utility District's (SMUD) geothermal power plant. The power plants and steam fields are located in The Geysers area of Northern California. Electricity from CGC's two operating geothermal power plants is sold to PG&E under 20-year agreements. Under the terms of the agreements which began in 1989, CGC is paid for energy delivered based upon a fixed price which escalates annually through December 1998, and upon PG&E's full short-run avoided operating costs for the subsequent ten years. CGC also receives capacity payments from PG&E. Under certain circumstances, if CGC is unable to deliver firm capacity, then CGC may owe PG&E certain minimum damages as specified in the agreements. Under the steam sales agreements with PG&E and SMUD, the price paid for the steam is determined annually and semiannually, respectively, based on contract price formulas and steam delivery terms. Under the PG&E Unit 16 and the SMUD agreements, if the quantity of steam delivered is less than 50% of the units' capacities, then neither PG&E nor SMUD is required to make payment for steam delivered during such month until the cost of the affected power plant has been completely amortized (see Note 2). Further, both PG&E and SMUD can terminate their agreements with written notice under conditions specified in the agreement if further operation of the plants becomes uneconomical. In the event that CGC terminates the agreements, PG&E or SMUD may require CGC to assign them all rights, title and interest to the wells, lands and related facilities. In consideration for such an assignment to SMUD, SMUD shall reimburse CGC for its original costs net of depreciation for any associated materials or facilities. Prior to April 19, 1993 the Company owned a minority interest in CGC and recognized its share of CGC's net income under the equity method. On April 19, 1993, the Company acquired Freeport-McMoRan Resource Partners, L.P.'s (FMRP) interest in CGC for $23.0 million in cash and non-recourse notes payable to FMRP totaling $40.5 million. On February 17, 1994, the Company exercised its option to prepay the notes utilizing a discount rate of 10% by paying $36.9 million including interest in full satisfaction of its obligations under the FMRP notes. The difference between the original carrying amount of the notes and the prepayment was recorded as an adjustment to the purchase price. 4. CALPINE THERMAL POWER, INC. On September 9, 1994, Calpine Thermal acquired the outstanding capital stock of TPC from Natomas Energy Company (Natomas), a wholly owned subsidiary of Maxus Energy Company, pursuant to a Stock Purchase Agreement dated June 27, 1994. Under the terms of the Stock Purchase Agreement, Calpine Thermal acquired the stock of TPC for a total purchase price of $66.5 million, consisting of a $60.0 million cash payment and the issuance by Calpine of a non-interest bearing promissory note to Natomas in the amount of $6.5 million (discounted to $5.2 million), which is due September 9, 1997. At or subsequent to the closing of the acquisition, Calpine received payments of $3.0 million from Natomas, which represented cash from TPC's operations for the period from July 1, 1994 to September 8, 1994. These payments were treated as purchase price adjustments. The Company funded the cash portion of the purchase price in the acquisition F-11 107 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through a two-year non-recourse secured financing provided by The Bank of Nova Scotia pursuant to a Credit Agreement dated September 9, 1994 (see Note 16). Calpine Thermal owns a 25% undivided interest in certain producing geothermal steam fields located at The Geysers area of Northern California. Union Oil Company of California, a wholly owned subsidiary of Unocal Corporation, owns the remaining 75% interest in the steam fields, which deliver geothermal steam to twelve operating plants owned by PG&E. The steam fields currently provide the twelve operating plants with sufficient steam to generate approximately 604 megawatts of electricity. Steam from Calpine Thermal's steam field is sold to PG&E under a steam sales agreement. In addition, Calpine Thermal receives a monthly capacity maintenance fee, which provides for effluent disposal costs and facilities support costs, and a monthly fee for PG&E's right to curtail its power plants. The steam price, capacity maintenance and curtailment fees are adjusted annually. Calpine Thermal is required to compensate PG&E for the unused capacity of its geothermal power plants due to insufficient field capacities of its steam supply (offset payment). In accordance with the steam sales agreement, PG&E may curtail the power plants which receive steam from the Union Oil/Calpine Thermal Steam Fields in order to produce energy from lower cost sources. However, PG&E is constrained by its contractual obligation to operate all the power plants at a minimum of 40% of the field capacity during any given year. During 1995, Calpine Thermal experienced extensive curtailments of steam production due to low gas prices and abundant hydro power. In March 1995, PG&E notified Union Oil and TPC of its plan to accelerate the retirement of the geothermal power plants to which steam is supplied. Calpine Thermal had considered plant retirements in its analysis leading to the acquisition of TPC in September 1994. Calpine Thermal had no assurance that PG&E would follow the accelerated schedule which was not in accordance with the terms and conditions of the steam sales agreement, and, with Union Oil, entered into intensive discussions with PG&E regarding alternatives. As a result of those discussions, the March 1995 accelerated closure schedule has been reevaluated in accordance with expected steam supply projections, curtailment levels, and actual contract terms and conditions to result in estimates of future project output and revised closure schedules. Closure schedules will continue to be modified throughout the life of the power sales agreement to be consistent with actual production levels based on competitive energy prices and weather. On August 9, 1995, the Company, Union Oil and PG&E executed a letter agreement on alternative steam pricing for the calendar year 1995. Under this agreement, all steam delivered up to 40% of field capacity remained at the original contract rate, and all other steam was sold at a 33% reduction to the contract rate, thus lowering the cost to PG&E and enhancing production and revenue from The Geysers to Union Oil and Calpine Thermal. On February 1, 1996, the Company and Union Oil entered into an alternative steam pricing agreement with PG&E for the month of February 1996, which was subsequently extended through at least March 15, 1996. The parties to this agreement are currently in the process of negotiating a longer term alternative pricing agreement. The Company is unable to predict the sales and prices that may result from such an alternative pricing program. The steam sales agreement between Calpine Thermal and PG&E terminates two years after the closing of the last PG&E operating unit. PG&E may terminate the agreement upon a one-year written notice to Calpine Thermal. In the event the agreement is terminated by PG&E, Calpine Thermal has the right to purchase PG&E's facilities at PG&E's unamortized cost. Calpine Thermal will provide capacity maintenance services for five years after termination by PG&E or closure of the last PG&E operating unit. Alternatively, Calpine Thermal may terminate the agreement upon two years written notice to PG&E. PG&E has the right to take assignment of Calpine Thermal's facilities on the date of termination. In such a case, Calpine Thermal would generally continue to pay offset payments for 36 months following the date of termination. F-12 108 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. CALPINE GREENLEAF CORPORATION On April 21, 1995, Calpine Greenleaf acquired the outstanding capital stock of Portsmouth Leasing Corporation, LFC No. 38 Corp. and LFC No. 60 Corp. (collectively, the Acquired Companies) from Radnor Power Corporation (Radnor) for $80.5 million pursuant to a Share Purchase Agreement dated March 30, 1995. The Acquired Companies own 100% of the assets of two 49.5 megawatt natural gas-fired cogeneration facilities (collectively, the Greenleaf facilities), Greenleaf Unit One and Greenleaf Unit Two, located in Yuba City in Northern California. The Greenleaf facilities burn natural gas in the cogeneration of electrical and thermal energy. The Greenleaf facilities produce electrical power for sale to PG&E pursuant to two long-term power sales agreements that provide for electricity payments over an original thirty-year period (expiring in 2019) at prices equal to PG&E's full short-run avoided operating costs, adjusted annually. In addition, the Company receives firm capacity payments through 2019 for up to 49.2 megawatts on each unit and as-delivered capacity on excess deliveries. PG&E, at its discretion, may curtail purchases of electricity from the Greenleaf facilities due to hydro-spill or uneconomic cost conditions. The thermal energy generated is used by thermal hosts adjacent to the Greenleaf facilities. The Greenleaf facilities are qualifying facilities, as defined by the Public Utility Regulatory Policies Act of 1978, as amended (PURPA). Natural gas for the Greenleaf facilities is supplied by Montis Niger, Inc. (MNI) pursuant to a long-term gas purchase agreement, and by Chevron USA Production Company (Chevron). MNI is a wholly owned subsidiary of LFC Financial Corporation, the parent company of Radnor. See Note 25 for further information regarding these agreements. The acquisition was accounted for as a purchase and the purchase price has been allocated to the acquired assets and liabilities based on the estimated fair values of the acquired assets and liabilities as shown below. The allocation may be adjusted as additional information becomes available (in thousands): Current assets.................................................... $ 6,572 Property, plant and equipment..................................... 120,752 -------- Total assets.................................................... 127,324 -------- Current liabilities............................................... (944) Deferred income taxes, net........................................ (45,844) -------- Total liabilities............................................... (46,788) -------- Net purchase price................................................ $ 80,536 ========
The purchase price included a cash payment of $20.3 million and the assumption of project debt totalling $60.2 million. The final purchase price, which is to be adjusted after the determination of the final net working capital amount, was determined upon an arms-length transaction between Calpine and Radnor. The parties are currently in dispute regarding certain provisions of the Share Purchase Agreement, and the outcome of the dispute may affect the purchase price. The $20.3 million cash payment was funded by borrowings from the Credit Suisse lines of credit described in Note 13 below. The $60.2 million debt assumed by the Company in the acquisition of the Greenleaf facilities consisted of $57.6 million of non-recourse long-term project financing payable to Credit Suisse and $2.6 million of installment payments to individuals. On June 30, 1995, the Company refinanced the Greenleaf project by borrowing $76.0 million from banks (described in Note 16 below). Net proceeds of $74.9 million were used to repay $57.5 million of Credit Suisse debt including interest, and $2.9 million of installment and premium payments to individuals. The remaining $14.5 million of net proceeds and $500,000 of internal funds were used to repay the Credit Suisse line of credit borrowings related to the Greenleaf project. F-13 109 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro forma consolidated results for the Company as if the Greenleaf acquisition had been consummated on January 1, 1995 and as if the Greenleaf and TPC acquisitions had been consummated on January 1, 1994, respectively, are (in thousands, except per share amounts):
YEAR ENDED ----------------------------- DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ (UNAUDITED) Revenue.................................................... $137,412 $143,137 Net income................................................. $ 4,868 $ 11,708 Earnings per share (assuming stock split and conversion of preferred stock; see Note 2)............................. $ 0.34
The pro forma information does not purport to be indicative of results that actually would have occurred had the acquisition been made on the dates indicated or of results which may occur in the future. Also in connection with the Greenleaf acquisition, the Company borrowed $1.9 million on April 21, 1995 against an uncommitted demand loan facility with The Bank of Nova Scotia to finance the prepayment for natural gas to be delivered to the Greenleaf facilities from MNI (see Note 13 for further information). 6. CALPINE MONTEREY COGENERATION, INC. On June 29, 1995, CMCI acquired a 14.5 year operating lease (through December 2009) for a 28.5 megawatt natural gas-fired cogeneration power plant located in Watsonville in Northern California. The Company acquired the operating lease from Ford Motor Credit Company, acting through its agent, USL Capital Corporation, for $900,000. The Watsonville plant sells electricity to PG&E under the terms of a 20-year power sales agreement, generally at prices equal to PG&E's full short-run avoided operating costs. Basic and contingent lease rental payments are described in Note 25. As a cogenerator, the plant provides steam to two local food processing plants, and is a qualifying facility as defined by PURPA. The Company also provides project and fuels management services. In connection with this acquisition, the Company obtained a $5.0 million uncommitted line of credit with The Bank of Nova Scotia for letters of credit. On December 31, 1995, the Company had $2.9 million of letters of credit outstanding (see Note 13 for further information). 7. CALPINE SISKIYOU GEOTHERMAL PARTNERS, L.P. On August 24, 1994, the Company formed a partnership with Trans-Pacific Geothermal Glass Mountain, Ltd. (TGGM), an affiliate of Trans-Pacific Geothermal Corporation of Oakland, California, and is planning to build a geothermal power generation facility. The power generation facility will be located at Glass Mountain in Northern California near the Oregon border. The partnership is consolidated as the Company owns a controlling interest. 8. CALPINE VAPOR, INC. In November 1995, Calpine Vapor entered into agreements with Constructora y Perforadora Latina, S.A. de C.V. (Coperlasa) and certain Mexican bank lenders to Coperlasa in connection with a geothermal steam production contract at the Cerro Prieto geothermal resource in Baja California, Mexico. The resource currently produces electricity from geothermal power plants owned and operated by Comision Federal de Electricidad (CFE), Mexico's national utility. The steam field contract is between Coperlasa and CFE. Calpine will loan up to $18.5 million to Coperlasa, and will receive fees for technical services provided to the project. At December 31, 1995, notes receivable (see Note 12) totaled $4.9 million. In February 1996, the Company loaned an additional $3.4 million to Coperlasa. F-14 110 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1995, Calpine Vapor also paid $1.5 million for an option to purchase an equity interest in Coperlasa. The option expires in May 1997 and is being amortized over the estimated repayment period of the Coperlasa loan (through the year 1999) using the interest method, as the Company views the option as a loan acquisition fee. The unamortized balance of the option is also included in notes receivable from Coperlasa. 9. ACCOUNTS RECEIVABLE The Company has both billed and unbilled receivables. The components of accounts receivable as of December 31, 1995 and 1994 are as follows (in thousands):
1995 1994 ------- ------- Billed........................................................... $18,341 $13,809 Unbilled......................................................... 525 768 Other............................................................ 1,258 10 ------- ------- $20,124 $14,587 ======= =======
Other accounts receivable consist primarily of disputed amounts related to the Greenleaf facilities purchase price (see Note 5). Accounts receivable from related parties at December 31, 1995 and 1994 include the following (in thousands):
1995 1994 ------ ------ O.L.S. Energy-Agnews, Inc.......................................... $ 806 $ 538 Geothermal Energy Partners, Ltd.................................... 462 793 Sumas Cogeneration Company, L.P.................................... 908 528 Electrowatt and subsidiaries....................................... 1 5 ------ ------ $2,177 $1,864 ====== ======
10. ACQUISITION PROJECT RECEIVABLES On October 17, 1995, in connection with the Company's unsuccessful bid to acquire O'Brien Environmental Energy, Inc. (OEE) through the U.S. Bankruptcy Court -- District of New Jersey proceedings, the Company purchased accounts receivable of $1.9 million, and two notes receivable totaling $3.7 million. The remaining balance of $3.2 million represents capitalized project acquisition costs. The recovery of these costs is subject to approval by the U.S. Bankruptcy Court in 1996. The Company purchased $1.9 million of accounts receivable from two cogeneration facilities owned by subsidiaries of OEE. Payments are made to the Company based on cash availability for each project. In February 1996, the Company received approximately $1.1 million against these receivables. The Company currently expects repayment of the balance of these accounts receivable during 1996. The Company purchased for $900,000 from Stewart & Stevenson, Inc. (S&S) a 90% participation interest in a $1.0 million note issued by OEE (the O'Brien Note). Calpine and S&S entered into an agreement in February 1996 whereby S&S assigned 100% of its interest in the O'Brien Note to Calpine, without any additional consideration. Interest accrues at approximately 5% after January 20, 1996. The Company currently expects repayment of the note receivable during 1996. The Company entered into a purchase agreement for all of S&S's rights and obligations in a Subordinated Loan Agreement dated March 11, 1994 between S&S and O'Brien (Newark) Cogeneration, Inc. (O'Brien Newark), the Subordinated Note relating thereto and any related documents and agreements. The purchase price was $2.8 million and the notes bear interest at prime plus 2.0%. The Company receives F-15 111 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $80,000 per month until the note is fully amortized. As of December 31, 1995, $2.7 million of principal was receivable bearing interest at 10.5%. Through February 1996, the Company received $160,000 in payment of this note. The Company currently expects repayment of the note receivable upon restructuring of O'Brien Newark debt during 1996. 11. INVESTMENTS IN POWER PROJECTS As of December 31, 1995, 1994 and 1993, the Company had unconsolidated investments in power projects which are accounted for under the equity method. Financial information related to these investments is as follows (in thousands):
SUMAS O.L.S. GEOTHERMAL COGENERATION ENERGY- ENERGY COMPANY, AGNEWS, PARTNERS, 1995 L.P.(A) INC. LTD. ---------------------------------------- ------------ ------- ---------- Operating revenue....................... $ 31,526 $10,779 $ 21,676 Net income (loss)....................... (6,098) (483) 5,538 Assets.................................. 122,802 40,330 76,017 Liabilities............................. 123,377 39,034 51,439 Company's percentage ownership.......... (b) 20% 5% Equity investments in power projects.... 5,763 314 1,229 Project development costs............... 912 -- -- -------- ------- ------- Total investments in power projects..... $ 6,675 $ 314 $ 1,229 Company's share of net income (loss).... (3,049) (82) 277 -------- ------- -------
SUMAS O.L.S. GEOTHERMAL COGENERATION ENERGY- ENERGY COMPANY, AGNEWS, PARTNERS, 1994 L.P.(A) INC. LTD. ---------------------------------------- ------------ ------- ---------- Operating revenue....................... $ 32,060 $11,985 $ 21,721 Net income (loss)....................... (5,777) (415) 5,548 Assets.................................. 130,148 42,596 77,081 Liabilities............................. 124,625 40,864 58,041 Company's percentage ownership.......... (b) 20% 5% Equity investments in power projects.... 8,812 396 952 Project development costs............... 946 8 -- -------- ------- ------- Total investments in power projects..... $ 9,758 $ 404 $ 952 Company's share of net income (loss).... (2,888) (143) 277 -------- ------- -------
F-16 112 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMAS O.L.S. GEOTHERMAL CALPINE COGENERATION ENERGY- ENERGY GEYSERS COMPANY, AGNEWS, PARTNERS, COMPANY, 1993 L.P.(A) INC. LTD. L.P.(C) ---------------------------------------- ------------ ------- ---------- ------- Operating revenue....................... $ 23,671 $12,485 $ 18,451 $20,759 Net income (loss)....................... (3,739) (931) 1,090 2,689 Assets.................................. 134,579 44,249 74,994 -- Liabilities............................. 123,279 42,249 61,503 -- Company's percentage ownership.......... (b) 20% 5% -- Equity investments in power projects.... 11,700 515 674 -- Project development costs............... 981 17 7 -- -------- ------- ------- ------- Total investments in power projects..... $ 12,681 $ 532 $ 681 $ -- Company's share of net income (loss).... (1,870) (127) 55 1,961 -------- ------- ------- -------
- --------------- (a) Commercial operations commenced April 1993 and dry kiln operations commenced in May 1993. (b) Distributions will be made out of operating income after certain required deposits are made and certain minimum balances are met. After receiving certain preferential distributions, the Company will have a 50% interest in the profits and losses of Sumas until earning a 24.5% pre-tax cumulative return on its investment, at which time the Company's interest in Sumas will be reduced to 11.33%. (c) 1993 CGC information is for the period from January 1, 1993 to April 19, 1993, the date of the acquisition. Subsequent to April 19, 1993, the operating results of CGC are included in the accounts of the Company. Sumas Cogeneration Company, L.P. -- Sumas Cogeneration Company, L P. (Sumas) is a Delaware limited partnership formed between Sumas Energy, Inc. (SEI), a Washington State Subchapter S corporation, and Whatcom Cogeneration Partners, L.P. (Whatcom), a wholly owned partnership of the Company. SEI is the general partner and Whatcom is the limited partner. Sumas has a wholly owned Canadian subsidiary, ENCO Gas, Ltd. (ENCO), which is incorporated in New Brunswick, Canada. Sumas is the owner and operator of a power generation facility (the Generation Facility) in Sumas, Washington. The Generation Facility is a natural gas-fired combined cycle electrical generation plant with a production capacity of approximately 125 megawatts. In connection with the Generation Facility, there is a lumber dry kiln facility and a 3.5 mile private natural gas pipeline. ENCO acquired, developed and is operating a portfolio of proven natural gas reserves in British Columbia and Alberta, Canada to provide a dedicated fuel supply for the Generation Facility. Sumas produces and sells electrical energy to Puget Sound Power & Light Company (Puget) under a 20-year agreement for approximately 110 megawatts of power, which was subsequently increased to an average 123 megawatts in 1994. Sumas leases the dry kiln facility and sells steam to Socco, Inc. (Socco), a custom lumber drying operation owned by an affiliated individual. Under the kiln lease and steam sale agreements with Socco, both of which are for 20 years, the Generating Facility is a qualifying facility as defined by PURPA. Construction financing was provided through a $95.2 million construction and term loan agreement with The Prudential Insurance Company of America (Prudential) and Credit Suisse, an affiliate of the Company. In addition, ENCO has a $24.8 million loan agreement with Prudential and Credit Suisse. On May 25, 1993, the entire $120.0 million was converted to a term loan. Sumas established and funded all reserve accounts as required under the terms of the loan agreements with Prudential and Credit Suisse. In addition to its interest stated above, the Company has been contracted by Sumas to provide operations and maintenance services. For these services, the Company receives a fixed fee of $1.1 million per year F-17 113 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) adjusted annually based on the Consumer Price Index, an annual base fee of $150,000 per year also adjusted based on the Consumer Price Index and certain other reimbursable expenses. In addition, the Company is entitled to an annual performance bonus of up to $400,000 based upon the achievement of certain performance levels. This arrangement will expire upon the date Whatcom receives its 24.5% pre-tax return or 10 years, subject to renewal terms, whichever is later. The Company recorded revenue of approximately $2.0 million, $1.9 million and $1.4 million associated with this arrangement during the years ended December 31, 1995, 1994 and 1993, respectively. The Company has also provided construction management services to the Sumas project. The Company recorded revenue of approximately $72,300 and $934,000 related to construction management services during the years ended December 31, 1994 and 1993, respectively. The Company defers the profit on these contracts, to the extent of their ultimate ownership percentage, and amortizes it over the life of the project. Calpine Geysers Company, L.P. -- In addition to its interest as stated above, the Company had been contracted by CGC to provide operations and maintenance services at cost plus overhead and fees. The Company recorded revenue of approximately $6.8 million associated with this service agreement and for other services provided to CGC for the period from January 1, 1993 to April 19, 1993. O.L.S. Energy-Agnews, Inc. -- The Company has a 20% interest in O.L.S. Energy-Agnews, Inc., a joint venture with GATX Capital Corporation, which owns and operates a 29 megawatt gas-fired combined-cycle cogeneration facility at the State-owned Agnews Developmental Center (Center) in San Jose, California. The cogeneration plant, which commenced operations in December 1990, provides the Center with all of its thermal and electric requirements. Excess electricity is sold to PG&E under a Standard Offer No. 4 contract. The Company's original investment was $1.8 million. In addition to its interest as stated above, the Company has been contracted by the joint venture to provide operations and maintenance services at cost plus overhead and fees, as specified. The Company recorded revenue of $1.5 million, $1.4 million and $2.3 million associated with this service agreement and for other services provided to the joint venture for the years ended December 31, 1995, 1994 and 1993, respectively. In January 1990, O.L.S Energy-Agnews, Inc. entered into a credit agreement with Credit Suisse providing for a $28.0 million loan. The loan is secured by all of the assets of the Agnews Facility and bears interest on the unpaid principal balance based on the London Interbank Offered Rate (LIBOR) plus a margin rate varying between 0.05% and 1.5% Geothermal Energy Partners, Ltd. -- During 1989, the Company acquired a 5% interest in Geothermal Energy Partners Ltd. (GEP). GEP was established in 1988 to develop, finance and construct a 20 megawatt geothermal power production facility located in The Geysers area of Northern California. The facility began operations on June 6, 1989. In addition to its interest as stated above, the Company has been contracted by GEP to provide operations and maintenance services at cost plus overhead and fees, as specified. The Company recorded revenue of $3.5 million, $3.7 million and $4.5 million associated with this service agreement to GEP for the years ended December 31, 1995, 1994 and 1993, respectively. The Company accounts for its investment in GEP under the equity methods because control of the project is deemed to be shared under the terms of the partnership agreement and the Company has significant influence over the operation of the venture. 12. NOTES RECEIVABLE On May 25, 1993, in accordance with certain provisions of the Sumas partnership agreement, the Company was entitled to receive a distribution of $1.5 million. In addition, in accordance with provisions of F-18 114 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Sumas partnership agreement, SEI was required to make a capital contribution of $1.5 million. In order to meet SEI's $1.5 million capital contribution requirement, the Company loaned $1.5 million to the sole shareholder of SEI, who in turn loaned the funds to SEI, who in turn contributed the capital to Sumas. The loan bears interest at 20% and is secured by a security interest in the loan between SEI and its sole shareholder. The Company will receive payments of 50% of SEI's cash distributions from Sumas. The payments will first reduce any accrued and unpaid interest and then reduce the principal balance. On May 25, 2003, all unpaid principal and interest is due. The Company is deferring the recognition of interest income from this note until Sumas generates net income. On March 15, 1994, the Company completed a $10.0 million loan to the sole shareholder of SEI, the Company's partner in Sumas. The loan matures in 10 years and bears interest at 16.25%. The loan is secured by a pledge to Calpine of the partner's interest in Sumas. In order to provide for the payment of principal and interest on the loan, an additional 25% of the cash flow generated by Sumas, estimated to begin in 1996, has been assigned to Calpine. The Company is deferring the recognition of interest income from this note until Sumas generates net income. On August 25, 1994, the Company entered into a loan agreement providing for loans up to $4.8 million to TGGM (see Note 7). The loan bears interest at 10% and has a maturity date which is based on certain future events. Based on current forecasts, the maturity date will be in the year 2022. The loan is secured by a pledge to Calpine of the partner's interest in the project. The Company is deferring the recognition of income from this note until the Glass Mountain project generates sufficient income to support collectibility of interest earned. As of December 31, 1995, $3.8 million was outstanding. As of December 31, 1995, Calpine Vapor had notes receivable of $4.9 million and unamortized loan acquisition fees of $1.5 million from Coperlasa (see Note 8). Interest accrues on the $4.9 million of outstanding notes receivable at approximately 18.8% and is due semi-annually. Principal payments in six equal installments are due beginning in May 1997 through November 1999. In January 1996, the Company loaned an additional $3.4 million to Coperlasa. The fair value of the notes receivable approximates its carrying value since the loan was entered into near the end of 1995. 13. REVOLVING CREDIT FACILITY AND LINES OF CREDIT At December 31, 1995, the line of credit with Credit Suisse (whose parent company owns approximately 44.9% of Electrowatt) provided for advances of $50.0 million. Interest may be paid at either LIBOR or the Credit Suisse base rate, plus applicable margins in both cases. At December 31, 1995, the Company had $19.9 million of borrowings outstanding, bearing interest at LIBOR plus 0.5% (6.4% at December 31, 1995). At the Company's discretion, the debt outstanding can be held for various maturity periods of up to six months. Interest is paid on the last day of each interest period for such loans, but not less often than quarterly, based on the principal amount outstanding during the period. No stated amortization exists for this indebtedness. From January 1 to March 13, 1996, the Company borrowed an additional $8.8 million and issued a letter of credit for $3.0 million to fund an additional loan to Coperlasa (see Note 8) and other developmental project and working capital requirements. No borrowings were outstanding at December 31, 1994. The credit agreement specifies that the Company maintain certain covenants with which the Company was in compliance. At December 31, 1995, the Company had three loan facilities with available borrowings totaling $10.2 million. Borrowings and letters of credit outstanding were $1.2 million and $3.8 million as of December 31, 1995, respectively, with interest payable at variable interest rates based on bank base rates, LIBOR or prime plus applicable margins in all cases (approximately 7.6% at December 31, 1995 on borrowings). At December 31, 1994, no borrowings and $900,000 of letters of credit were outstanding on these facilities. The credit agreements specify that the Company maintain certain covenants with which the Company was in compliance. F-19 115 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. WORKING CAPITAL LOAN The Company has a $5.0 million working capital loan agreement with a bank providing for advances and letters of credit. The aggregate unpaid principal of the working capital loan is payable in full at least once a year, with the final payment of principal, interest and fees due June 30, 1998. Interest on borrowings accrues at the option of the Company at either a base rate, LIBOR, or a certificate of deposit rate (plus applicable margins in all cases) over the term of the loan. No borrowings were outstanding at December 31, 1995. At December 31, 1994, $4.5 million was outstanding under the working capital agreement, with interest at 7.625%. The Company had letters of credit outstanding of $459,000 at December 31, 1995 and 1994. Outstanding letters of credit bear interest at 0.625% payable quarterly. 15. NOTE PAYABLE TO STOCKHOLDER On December 31, 1991, the Company declared a dividend of $1.2 million to its parent company, Electrowatt Services, Inc. On the same date, the Company issued a note payable to Electrowatt Services, Inc. for $1.2 million. Interest was paid quarterly at a rate of 4.25%, which approximated market. The note was paid on June 30, 1994, the maturity date. 16. NON-RECOURSE PROJECT FINANCING The components of non-recourse project financing as of December 31, 1995 and 1994 are (in thousands):
1995 1994 -------- -------- Senior-term loans Fixed rate portion............................................. $ 99,400 $116,800 Variable rate portion.......................................... 20,000 20,000 Premium on debt................................................ 2,959 4,341 -------- -------- Total senior-term loans................................ 122,359 141,141 Junior-term loans................................................ 19,965 19,965 Notes payable to banks........................................... 133,026 58,500 -------- -------- Total long-term debt................................... 275,350 219,606 Less current portion................................... 84,708 22,800 -------- -------- Long-term debt, less current portion................... $190,642 $196,806 ======== ========
Senior-Term Loans -- Principal and interest are payable in quarterly installments at variable amounts with the final payment of principal, interest and fees due June 30, 2002. A portion of the senior-term loans bears interest fixed at 9.93% (see discussion on swap agreement below) with the remainder accruing interest at LIBOR plus 0.75% to 1.25% (6.69% and 7.25% at December 31, 1995 and 1994, respectively) over the term of the loan, collateralized by all of CGC's assets and the Company's interest in CGC. In connection with the acquisition of CGC's assets in 1993, the Company recorded a premium on the fixed rate portion of the senior-term loans reflecting the fixed rate in excess of market. The premium is amortized over the life of the fixed rate portion of the loan using the interest method, and the unamortized balance is included in long-term debt outstanding. On January 2, 1996, $5.4 million of principal was repaid, and $2.5 million of interest calculated through January 1, 1996 was paid. Junior-Term Loans -- Principal and interest are payable in quarterly installments at variable amounts beginning September 30, 2002 with the final payment of principal, interest and fees due June 30, 2005; interest accrues at LIBOR plus 1.5% to 2.75% (7.69% and 8.5% at December 31, 1995 and 1994, respectively) over the term of the loan, collateralized by all of CGC's assets and the Company's interest in CGC. F-20 116 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company entered into two interest rate swap agreements to minimize the impact of changes in interest rates on a portion of its senior-term loans. These agreements, with a commercial bank and a financing company, effectively fix the interest on this portion at 9.93%. The Company records the fixed rate interest as interest expense. At December 31, 1995, the swap agreements were applicable to debt with a principal balance total of $99.4 million. The interest rate swap agreements mature through December 31, 2000. The premium on debt was recorded in conjunction with the acquisition as discussed above. The premium effectively adjusts the recognized interest rate on the fixed-rate debt to 7.05% per annum. The floating interest rate associated with this portion of the senior-term loans was LIBOR plus 1.0% (6.99%) at December 31, 1995 and LIBOR plus 0.75% (7.25%) at December 31, 1994. The Company is exposed to credit risk in the event of non- performance by the other parties to the agreements. Notes Payable to Banks -- On September 9, 1994, the Company entered into a two-year agreement with The Bank of Nova Scotia to finance the acquisition of TPC. As of December 31, 1995, the Company had $57.0 million of non-recourse project financing outstanding under this agreement. This indebtedness is secured by TPC's interest in The Geysers steam field assets. Among other restrictions, TPC is required to maintain an interest coverage ratio of at least 2.5 to 1.0, and to maintain a loan to value ratio (as defined) of no more than 0.7 to 1.0. At the Company's discretion, the debt outstanding can be held for various maturity periods of at least 30 days up to the final maturity date, September 9, 1996. The entire outstanding balance bears interest at variable rates currently based on LIBOR plus 1% (averaging 6.9% as of December 31, 1995). Interest is paid on each maturity date, but not less often than quarterly, based on the principal amount outstanding during the period. No stated principal amortization exists for this indebtedness. The Company may elect to repay principal at any time. All unpaid principal is due and payable on September 9, 1996. The Company currently intends to refinance the $57.0 million of debt before September 9, 1996. On June 26, 1995, the Company entered into an agreement with Sumitomo Bank to finance the acquisition of the Greenleaf facilities. Of the $76.0 million debt outstanding at December 31, 1995, $60.0 million bears interest fixed at 7.4%, with the remaining floating rate portion accruing interest at LIBOR plus an applicable margin (6.5% as of December 31, 1995). This debt is secured by all of the assets of Greenleaf Unit One and Greenleaf Unit Two. Interest on the floating rate portion may be at Sumitomo's base rate plus an applicable margin or at LIBOR plus an applicable margin. Interest on base rate loans is paid at the end of each calendar quarter, and interest on LIBOR based loans is paid on each maturity date, but not less often than quarterly, based on the principal amount outstanding during the period. At the Company's discretion, the LIBOR based loans may be held for various maturity periods of at least 1 month up to 12 months. The $76.0 million debt will be repaid quarterly, with a final maturity date of December 31, 2010. The annual principal maturities of the non-recourse long-term debt outstanding at December 31, 1995 are as follows (in thousands): 1996.............................................................. $ 84,708 1997.............................................................. 24,772 1998.............................................................. 25,993 1999.............................................................. 18,733 2000.............................................................. 17,991 Thereafter........................................................ 100,194 -------- 272,391 Unamortized premium on fixed portion of senior loan............... 2,959 -------- Total................................................... $275,350 ========
The carrying value of $99.4 million and $116.8 million of the senior-term loan as of December 31, 1995 and 1994, respectively, has an effective rate of 9.93% under the Company's interest rate swap agreements F-21 117 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7.05% after consideration of the debt premium). Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of the debt as of December 31, 1995 and 1994 is approximately $107.3 million and $120.0 million, respectively. The carrying value of the remaining $20.0 million of the senior and the $20.0 million junior-term loans and the long-term notes payable to banks approximates the debt's fair market value as the rates are variable and based on the current LIBOR rate. The non-recourse long-term debt is held by subsidiaries of Calpine. The debt agreements of the Company's subsidiaries and other affiliates governing the non-recourse project financing generally restrict their ability to pay dividends, make distributions or otherwise transfer funds to the Company. The dividend restrictions in such agreements generally require that, prior to the payment of dividends, distributions or other transfers, the subsidiary or other affiliate must provide for the payment of other obligations, including operating expenses, debt service and reserves. 17. LONG-TERM NOTES PAYABLE At December 31, 1995, the Company had a non-interest bearing promissory note for $6.5 million payable to Natomas Energy Company, a wholly owned subsidiary of Maxus Energy Company. This note has been discounted to yield 8.0% per annum, due September 9, 1997. The carrying amount of $5.7 million at December 31, 1995 approximates fair market value. In January 1995, the Company purchased the working interest covering certain properties in its geothermal properties at CGC from Santa Fe Geothermal, Inc. The purchase price included $6.0 million cash, and a $750,000 non-interest bearing note discounted to yield 9% per annum and due on December 26, 1997. The Company may repay all or any part of the note at any time without penalty. The carrying value of $627,000 of the discounted non-interest bearing note at December 31, 1995 approximates fair market value. 18. SENIOR NOTES DUE 2004 On February 17, 1994, the Company completed a $105.0 million public debt offering of 9 1/4% Senior Notes Due 2004 (Senior Notes). The net proceeds of $100.9 million were used to repay all of the indebtedness outstanding under the Company's existing line of credit, and to repay the non-recourse notes payable to FMRP plus accrued interest (see Note 3). The remaining proceeds were used for general corporate purposes, including the loan to the sole shareholder of SEI discussed in Note 12. The transaction costs of $4.1 million incurred in connection with the public debt offering were recorded as a deferred charge and are amortized over the ten-year life of the Senior Notes using the interest method. The Senior Notes will mature on February 1, 2004 and bear interest at 9 1/4% payable semiannually on February 1 and August 1 of each year, commencing August 1, 1994, to holders of record. Based on the traded yield to maturity, the approximate fair market value of the Senior Notes was $97.0 million as of December 31, 1995. The agreement specifies that the Company maintain certain covenants with which the Company was in compliance. Under provisions of the indenture applicable to the Senior Notes, the Company may, under certain circumstances, be limited in its ability to make restricted payments, as defined, which include dividends and certain purchases and investments, incur additional indebtedness and engage in certain transactions. 19. PROVISION FOR INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard No. 109 Accounting for Income Taxes (SFAS No. 109) and recorded $413,000 as the cumulative effect of adoption in the accompanying financial statements. SFAS No. 109 requires that the Company follow the liability method of accounting for income taxes whereby deferred income taxes are recognized for the tax consequences of F-22 118 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) "temporary differences" to the extent they are not reduced by net operating loss and tax credit carryforwards by applying enacted statutory rates. The components of the deferred tax liability as of December 31, 1995 and 1994 are (in thousands):
1995 1994 --------- -------- Deferred state income taxes................................... $ 256 $ 1,389 Expenses deductible in a future period........................ 1,865 1,536 Net operating loss and credit carryforwards................... 19,797 15,566 Other differences............................................. 2,034 1,129 --------- -------- Deferred tax asset, before valuation allowance.............. 23,952 19,620 Valuation allowance........................................... (749) (749) --------- -------- Deferred tax asset.......................................... 23,203 18,871 --------- -------- Property differences.......................................... (116,763) (66,552) Difference in taxable income and income from investments recorded on the equity method............................... (2,311) (2,119) Other differences............................................. (1,750) (1,128) --------- -------- Deferred tax liabilities.................................... (120,824) (69,799) --------- -------- Net deferred tax liability............................... $ (97,621) $(50,928) ========= ========
The net operating loss and credit carryforwards consist of Federal and State net operating loss carryforwards which expire 2005 through 2010 and 1999, respectively, and Federal and State alternative minimum tax credit carryforwards which can be carried forward indefinitely. During 1991, the State of California suspended the usage of net operating loss carryforwards available to reduce taxable income for 1992 and 1991. In September 1993, the State of California removed the suspension on utilization of net operating loss carryforwards, although they can only be carried forward five years. Fifty percent of the State net operating loss carryforwards are available to reduce future taxable income. During 1993, the Company increased the tax provision by approximately $700,000 as a result of the change in the California State Tax regulations. At December 31, 1995, Federal and State net operating loss carryforwards were approximately $41.8 million and $7.2 million, respectively. At December 31, 1995 the State net operating losses have been fully reserved for in the valuation allowance due to the limited carryforward period allowed by the State of California. At December 31, 1995, Federal and State alternative minimum tax carryforwards were approximately $3.2 million and $1.6 million, respectively. Realization of the deferred tax assets and federal net operating loss carryforwards is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized based on estimates of future taxable income. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. F-23 119 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes for the years ended December 31, 1995, 1994 and 1993 consists of the following (in thousands):
1995 1994 1993 ------ ------ ------ Current Federal................................................ $3,085 $ 96 $ -- State.................................................. 1,163 365 11 Deferred Federal, excluding items listed below.................. 816 2,546 2,581 Adjustment in federal tax rate...................... -- -- 88 State, excluding items listed below.................... (15) 547 1,250 Utilization of net operating loss carryforwards..... -- -- (192) Increase in valuation allowance..................... -- 299 457 ------ ------ ------ Total provision................................ $5,049 $3,853 $4,195 ====== ====== ======
The Company's effective rate for income taxes for the years ended December 31, 1995, 1994 and 1993 differs from the U.S. statutory rate for the same periods due to state income taxes, depletion allowances and the limitation on use of state net operating loss carryforwards discussed above, as reflected in the following reconciliation.
1995 1994 1993 ---- ---- ---- U.S. statutory tax rate........................................ 35.0% 35.0% 35.0% State income tax, net of Federal benefit....................... 6.0 6.0 8.1 Depletion allowance............................................ (0.3) (8.6) -- Adjustment to deferred for change in tax rates................. -- -- 1.0 Utilization of state net operating loss carryforward........... -- -- (2.3) Other, net..................................................... (0.1) (1.2) 2.9 Increase in valuation allowance................................ -- 7.8 5.5 ---- ---- ---- Effective income tax rate................................. 40.6% 39.0% 50.2% ==== ==== ====
20. RETIREMENT SAVINGS PLAN The Company has a defined contribution savings plan under Section 401(a) and 501(a) of the Internal Revenue Code. The plan provides for tax deferred salary deductions and after-tax employee contributions. Employees automatically become participants on the first quarterly entry date after completion of three months of service. Contributions include employee salary deferral contributions and a 3% employer profit-sharing contribution. Employer profit-sharing contributions in 1995, 1994 and 1993 totaled $350,000, $311,000 and $293,000, respectively. 21. COMMON STOCK Prior to the merger and the stock split discussed in Note 26, the Company had Class A and Class B common stock. Each class of common stock fully participated in any dividends declared. Although Class A shareholders were precluded from receiving stock dividends of Class B common stock, Class B shares were convertible into Class A shares on a share-for-share basis at the option of the holder. Each share of Class A common stock was entitled to one vote per share, and each share of Class B common stock was entitled to ten votes per share -- see Note 26. F-24 120 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. STOCK OPTION PROGRAM The Company adopted a Stock Option Program effective December 31, 1992. Under the plan, the Board of Directors may grant non-qualified stock options to officers and other senior employees of the Company, not to exceed 35 participants, to purchase Class A common stock of the Company. The plan is administered by a committee of the Board of Directors. The committee determines the timing of awards, individuals to be granted awards, the number of options to be awarded, and the price, term, vesting schedule and other conditions of the options. The Company has reserved a total of 2,596,923 Class A common shares for issuance under the plan. Options outstanding to officers and other senior employees are:
GRANT OPTIONS PER EXPIRATION DATE OUTSTANDING SHARE DATE -------------------------------------------- ----------- ----- ----------------- December 31, 1992........................... 934,893 $ .50 December 31, 2002 April 1, 1993............................... 179,188 $1.85 April 1, 2003 October 1, 1994............................. 296,049 $4.57 October 1, 2004 January 1, 1995............................. 418,364 $4.91 January 1, 2005 June 16, 1995............................... 25,969 $4.91 June 16, 2005 ------- 1,854,463 =======
The options were granted at fair value as determined by the Board of Directors based, in part or in whole, on the most recent applicable independent appraisal. The options granted on December 31, 1992 were fully exercisable on the date of grant. The options granted in 1993 and 1994 were vested 25% at the date of issuance with the balance vesting equally over a three-year period. The options granted on January 1, 1995 vest equally over a four-year period beginning on January 1, 1996. The options granted on June 16, 1995 vest 50% on June 16, 1997 and 50% on June 16, 1999. The number of options exercisable at December 31, 1995 totaled 1,217,308. No options have been exercised to date. 23. RELATED PARTY TRANSACTIONS In January 1995, the Company and Electrowatt entered into a management services agreement whereby Electrowatt agreed to provide the Company with advisory services in connection with the construction, financing, acquisition and development of power projects, as well as any other advisory services as may be required by the Company in connection with the operation of the Company. The Company currently pays Electrowatt $200,000 per year for all services rendered under the management services agreement. The management services agreement terminates in January 1998. During 1995, 1994 and 1993, the Company paid $106,000, $69,000 and $474,000, respectively, to Electrowatt pursuant to a guarantee fee agreement whereby Electrowatt agreed to guarantee the payment, when due, of any and all indebtedness of the Company to Credit Suisse in accordance with the terms and conditions of the line of credit. Under the guarantee fee agreement, the Company has agreed to pay to Electrowatt an annual fee equal to 1% of the average outstanding balance of the Company's indebtedness to Credit Suisse during each quarter as compensation for all services rendered under the guarantee fee agreement. The guarantee fee agreement terminates in January 1998. 24. SIGNIFICANT CUSTOMERS The Company's electricity and steam sales revenue is primarily from two sources -- PG&E and SMUD. During 1994, the Company entered into a three-year agreement to sell 5 megawatts of electricity to Northern California Power Agency (NCPA). The Company terminated this agreement on December 31, 1994. F-25 121 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues earned from these sources for the years ended December 31, 1995 and 1994 and for the period from April 19, 1993 to December 31, 1993 were (in thousands):
1995 1994 1993 -------- ------- ------- PG&E................................................. $112,522 $77,010 $45,819 SMUD................................................. 12,345 9,296 9,014 NCPA................................................. -- 804 -- Other................................................ 173 -- -- -------- ------- ------- 125,040 87,110 54,833 Revenues recognized (deferred) (see Note 2).......... 2,759 3,185 (1,833) -------- ------- ------- Total electricity and steam sales.................... $127,799 $90,295 $53,000 ======== ======= =======
See Note 25 regarding CPUC Restructuring. 25. COMMITMENTS AND CONTINGENCIES Capital Projects -- The Company has 1996 commitments for capital expenditures totaling $6.8 million related to various projects at its geothermal facilities. In March 1996, the Company entered into an energy development agreement with Phillips Petroleum Company to develop, construct, own and operate a 240 megawatt gas-fired cogeneration facility at Phillips Houston Chemical Complex in Pasadena, Texas. The initial permitting process is underway, with construction of the facility planned to begin in late 1996 and to be completed in 1998. The Company is currently evaluating options to finance the construction of this facility. The Company issued a $3.0 million letter of credit and has a 1996 capital commitment of $3.0 million in connection with this facility. In a separate transaction, as of March 15, 1996, the Company was negotiating the potential acquisition of an operating lease for a 120 megawatt gas-fired cogeneration facility located in Northern California. Royalties and Leases -- The Company is committed under several geothermal leases and right-of-way, easement and surface agreements. The geothermal leases generally provide for royalties based on production revenue, with reductions for property taxes paid, and the right-of-way, easement and surface agreements are based on flat rates and are not material. Under the terms of certain geothermal leases, royalties accrue at rates ranging from 7% to 12.5% of steam and effluent revenue. Certain properties also have net profits and overriding royalty interests ranging from approximately 1.45% to 28%, which are in addition to the land royalties. Most lease agreements contain clauses providing for minimum lease payments to lessors if production temporarily ceases or if production falls below a specified level. The Company also has working interest agreements with third parties providing for the sharing of approximately 25% to 30% of drilling and other well costs, various percentages of other operating costs and 25% to 30% of revenues on specified wells. F-26 122 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Expenses under these agreements for the years ended December 31, 1995 and 1994 and for the period from April 19,1993 to December 31, 1993, are (in thousands):
1995 1994 1993 ------- ------- ------ Production royalties................................... $10,574 $11,153 $6,814 Lease payments......................................... $ 225 $ 252 $ 172
Natural Gas Purchases -- Natural gas for the Greenleaf facilities is supplied by MNI pursuant to a long-term gas purchase agreement. Under the terms of the gas purchase agreement, MNI may nominate on a monthly basis to provide firm gas deliveries from certain specified wells. If MNI is unable to deliver the nominated quantity of gas from its reserves, MNI must purchase and deliver sufficient gas at no additional cost to the Company. The Company is committed to purchase gas at the forecasted weighted average incremental cost per decatherm of gas procured by PG&E at the California border, adjusted annually to actual cost. The fuel purchase agreement may be terminated by the Company under specified contract conditions, or upon disbursement of contract suspension payments. The Company is committed to purchase and receive natural gas from Chevron in an amount sufficient to satisfy the requirements of the Greenleaf facilities, in excess of the nominated quantity supplied by MNI. If MNI supplies less than the nominated quantity, Chevron shall supply the volumes of natural gas constituting the difference between the volumes of gas delivered by MNI and the nominated volumes (make-up gas). Chevron will have the option to be the exclusive provider of make-up gas if Chevron agrees to sell at a price less than or equal to 100% of the average gas rate at the burner tip for utility electric generation as posted by PG&E for the month of delivery. If MNI supplies volumes of gas greater than its nomination, Chevron will reduce its deliveries in a corresponding amount. The gas supply agreement is effective through June 30, 1996, continuing month to month thereafter unless either party terminates the agreement upon sixty days written notice. Watsonville Operating Lease -- The Company is committed under an operating lease (through December 2009) for a 28.5 megawatt natural gas-fired cogeneration power plant located in Watsonville, California (see Note 6). Under the terms of the lease, basic and contingent rents are payable each month during the period from July through December. As of December 31, 1995, future basic rent payments are $2.9 million for each year from 1996 to 2000, and $27.3 million thereafter through December 2009. Contingent rent payments are based on the net of revenues less all operating expenses, fees, reserve requirements, basic rent and supplemental rent payments. Of the remaining balance, 60% is payable to the lessor and 40% is payable to the Company. Office and Equipment Leases -- The Company leases its corporate office, Santa Rosa office facilities and certain office equipment under noncancellable operating leases expiring through 2000. Future minimum lease payments under these leases are (in thousands): 1996................................................................ $ 899 1997................................................................ 905 1998................................................................ 907 1999................................................................ 776 2000................................................................ 745 thereafter.......................................................... 286 ----- Total future minimum lease commitments.............................. $4,518 =====
Lease payments are subject to adjustment for the Company's pro rata portion of annual increases or decreases in building operating costs. In 1995, 1994 and 1993, rent expense for noncancellable operating leases amounted to $733,000, $663,000 and $636,000, respectively. F-27 123 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CPUC Restructuring -- Electricity and steam sales agreements with PG&E are regulated by the California Public Utilities Commission (CPUC). In December 1995, the CPUC proposed the transition of the electric generation market to a competitive market beginning January 1, 1998, with all consumers participating by 2003. The proposed restructuring provides for phased-in customer choice, development of non-discriminatory market structure, recovery of utilities' stranded costs, sanctity of existing contracts, and continuation of existing public policy programs including the promotion of fuel diversity through a renewable energy purchase requirement. As the proposed restructuring has widespread impact and the market structure requires the participation and oversight of the Federal Energy Regulatory Commission (FERC), the CPUC will seek to build a California consensus involving the legislature, the Governor, public and municipal utilities, and customers. The consensus would then be placed before the FERC so that both the CPUC and FERC would implement the new market structure no later than January 1, 1998. There can be no assurance that the proposed restructuring will be enacted in substantially the same form as discussed above. The Company is unable to predict the ultimate outcome of the restructuring. Litigation -- The Company, together with over 100 other parties, was named as a defendant in the second amended complaint in an action brought in August 1993 by the bankruptcy trustee for Bonneville Pacific Corporation (Bonneville), captioned Roger G. Segal, as the Chapter 11 Trustee for Bonneville Pacific Corporation v. Portland General Corporation, et al., in the United States District Court for the District of Utah. This complaint alleges that, in conjunction with top executives of Bonneville and with the alleged assistance of the other 100 defendants, the Company engaged in a broad conspiracy and fraud. The complaint has been amended a number of times. The Company has answered each version of the complaint by denying all claims and is in the process of conducting discovery. In August 1994, the Company successfully moved for an order severing the trustee's claim against the Company from the claims against the other defendants. Although the case involves over 25 separate financial transactions entered into by Bonneville, the severed case concerns the Company in respect of only one of these transactions. In 1988, the Company invested $2.0 million in a partnership formed with Bonneville to develop four hydroelectric projects in the State of Hawaii. The projects were not successfully developed by the partnership, and, subsequent to Bonneville's Chapter 11 filing, the Company filed a claim as a creditor against Bonneville's bankruptcy estate. The trustee alleges that the equity investment was actually a "sham" loan designed to inflate Bonneville's earnings. The trustee further alleges that Calpine is one of many defendants in this case responsible for Bonneville's insolvency and the amount of damages attributable to the Company based on the $2.0 million partnership investment is alleged to be $577.2 million. The trustee is seeking to hold each of the other defendants liable for a portion, all or, in certain cases, more than this amount. The Company expects the matter will be set for trial in 1996. The Company believes the claims against it are without merit and will continue to defend the action vigorously. The Company further believes that the resolution of this matter will not have a material adverse effect on its financial position or results of operations. ENCO terminated protracted contract negotiations with two Canadian natural gas suppliers in January 1995. One of the suppliers notified ENCO it considered a draft contract to be effective although it had not been executed by ENCO. The supplier indicated it may pursue legal action if ENCO would not execute the contract. As of March 15, 1996, no legal action has been served on ENCO. Management believes if legal action is commenced, ENCO has significant defenses and believes such action will not result in any material adverse impact to the Company's financial condition or results of operations. The Company is involved in various other claims and legal actions arising out of the normal course of business. Management does not expect that the outcome of these cases will have a material adverse effect on the Company's financial position or results of operations. F-28 124 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 26. SUBSEQUENT EVENT In July 1996, the Company's Board of Directors authorized the reincorporation of the Company into Delaware in connection with the Company's initial public equity offering. Also, the Board of Directors approved a stock split at a ratio of approximately 5.194 to 1. The accompanying financial statements reflect the reincorporation and the stock split as if such transactions had been effective for all periods. F-29 125 CALPINE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
AS ADJUSTED JUNE 30, 1996 STOCKHOLDER'S EQUITY ASSUMING CONVERSION OF PREFERRED STOCK (NOTE DECEMBER 31, 12) 1995 JUNE 30, ------------- ------------ 1996 (UNAUDITED) -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................ $ 38,403 $ 21,810 Accounts receivable.................................. 38,691 20,124 Acquisition project receivables...................... 4,536 8,805 Collateral securities, current portion............... 9,745 -- Prepaid expenses..................................... 6,978 3,447 Inventory............................................ 3,444 1,377 Other current assets................................. 2,947 677 -------- Total current assets......................... 104,744 56,230 Property, plant and equipment, net..................... 530,203 447,751 Investments in power projects.......................... 12,693 8,218 Collateral securities, net of current portion.......... 88,669 -- Notes receivable from related parties.................. 20,894 19,391 Notes receivable from Coperlasa........................ 16,492 6,094 Restricted cash........................................ 8,477 9,627 Deferred charges and other assets...................... 10,640 7,220 -------- Total assets................................. $792,812 $554,531 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current non-recourse long-term project financing..... $ 27,178 $ 84,708 Notes payable to bank and short-term borrowings...... -- 1,177 Accounts payable..................................... 9,530 6,876 Accrued payroll and related expenses................. 2,336 2,789 Accrued interest payable............................. 8,693 7,050 Other accrued expenses............................... 5,121 2,657 -------- Total current liabilities.................... 52,858 105,257 Long-term line of credit............................... -- 19,851 Non-recourse long-term project financing, less current portion.............................................. 180,974 190,642 Notes payable.......................................... 6,598 6,348 Senior Notes........................................... 285,000 105,000 Deferred income taxes, net............................. 100,068 97,621 Deferred lease incentive............................... 81,495 -- Other liabilities...................................... 6,163 4,585 -------- Total liabilities............................ 713,156 529,304 -------- Stockholder's equity Preferred stock...................................... 5 -- -- Common stock......................................... 10 18 10 Additional paid-in capital........................... 56,209 56,206 6,214 Retained earnings.................................... 23,432 23,432 19,003 -------- -------- Total stockholder's equity................... 79,656 79,656 25,227 -------- -------- Total liabilities and stockholder's equity... $792,812 $ 792,812 $554,531 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-30 126 CALPINE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------- 1996 1995 -------- -------- Revenue: Electricity and steam sales........................................ $ 72,030 $ 49,014 Service contract revenue from related parties...................... 4,616 3,129 Service revenue from others........................................ 818 -- Income (loss) from unconsolidated investments in power projects.... 1,713 (1,791) Interest income on loans to power projects......................... 2,817 -- -------- -------- Total revenue.............................................. 81,994 50,352 -------- -------- Cost of revenue: Plant operating expenses, depreciation, operating lease expense and production royalties............................................ 46,835 28,344 Service contract expenses and other................................ 4,484 2,274 -------- -------- Total cost of revenue...................................... 51,319 30,618 -------- -------- Gross profit......................................................... 30,675 19,734 Project development expenses......................................... 1,410 1,308 General and administrative expenses.................................. 5,874 3,659 -------- -------- Income from operations..................................... 23,391 14,767 Other (income) expense: Interest expense................................................... 18,665 15,116 Other income, net.................................................. (2,777) (855) -------- -------- Income before provision for income taxes................... 7,503 506 Provision for income taxes........................................... 3,080 208 -------- -------- Net income................................................. $ 4,423 $ 298 ======== ======== As adjusted earnings per share assuming conversion of preferred stock: 14,476 As adjusted weighted average shares outstanding.................... ======== $ 0.31 Net income per share............................................... ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-31 127 CALPINE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------- 1996 1995 --------- -------- Net cash provided by operating activities............................. $ 5,035 $ 5,126 --------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment........................ (8,061) (9,324) Investment in Greenleaf, net of cash on hand........................ -- (16,958) Investment in Watsonville, net of cash on hand...................... -- 494 Investment in King City, net of cash on hand........................ (4,877) -- Investment in King City collateral securities....................... (98,414) -- Investments in power projects and capitalized costs................. (2,983) (579) Loans to Coperlasa.................................................. (12,104) -- Increase in notes receivable from related party..................... (250) (250) Decrease in restricted cash......................................... 1,150 2,766 Other, net.......................................................... (512) (23) --------- -------- Net cash used in investing activities............................ (126,051) (23,874) --------- -------- Cash flows from financing activities: Proceeds from issuance of Senior Notes Due 2006..................... 180,000 -- Proceeds from issuance of preferred stock........................... 50,000 -- Borrowings from line of credit...................................... 33,800 20,851 Repayment of line of credit......................................... (53,651) (15,000) Borrowing from Bank................................................. 45,000 -- Repayments to Bank.................................................. (46,177) -- Borrowings of non-recourse project financing........................ -- 77,925 Repayment of non-recourse project financing......................... (66,600) (73,988) Repayment of working capital loan................................... -- (4,500) Financing costs..................................................... (4,763) (1,546) --------- -------- Net cash provided by (used for) financing activities............. 137,609 3,742 --------- -------- Net increase (decrease) in cash and cash equivalents.................. 16,593 (15,006) Cash and cash equivalents, beginning of period........................ 21,810 22,527 --------- -------- Cash and cash equivalents, end of period.............................. $ 38,403 $ 7,521 ========= ======== Supplementary information: Cash paid during the period for: Interest......................................................... $ 16,517 $ 17,530 Income taxes..................................................... $ 955 $ 125
The accompanying notes are an integral part of these consolidated financial statements. F-32 128 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 1. ORGANIZATION AND OPERATION OF THE COMPANY Calpine Corporation (Calpine) and subsidiaries (collectively, the Company) are engaged in the development, acquisition, ownership and operation of power generation facilities in the United States. The Company has ownership interests in or operates geothermal steam fields, geothermal power generation facilities, and natural gas-fired cogeneration facilities in Northern California, Washington and Mexico. Each of the generation facilities produces electricity for sale to utilities. Thermal energy produced by the gas-fired cogeneration facilities is sold to governmental and industrial users, and steam produced by the geothermal steam fields is sold to utility-owned power plants. Founded in 1984, the Company is wholly owned by Electrowatt Services, Inc., which is wholly owned by Electrowatt Ltd (Electrowatt), a Swiss company. The Company has expertise in the areas of engineering, finance, construction and plant operations and maintenance. In July 1996, the Company filed a registration statement with the United States Securities and Exchange Commission relating to the initial public offering of shares of the Company's Common Stock. In the offering, the Company will sell newly issued shares of Common Stock and Electrowatt will sell shares of Common Stock representing its entire ownership interest in Calpine. If the offering is completed, Electrowatt will no longer own any interest in the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Interim Presentation The accompanying interim condensed consolidated financial statements of the Company have been prepared by the Company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the condensed consolidated financial statements include all and only normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's annual report on Form 10-K for the year ended December 31, 1995. The results for interim periods are not necessarily indicative of the results for the entire year. As Adjusted Earnings Per Share and As Adjusted Stockholder's Equity Net income per share is computed using weighted average shares outstanding, which includes the net additional number of shares which would be issuable upon the exercise of outstanding stock options, assuming that the Company used the proceeds received to purchase additional shares at an assumed public offering price. Net income per share also gives effect, even if antidilutive, to common equivalent shares from preferred stock that will automatically convert upon the closing of the Company's initial public offering (using the as-if-converted method). If the offering contemplated by the Company is consummated, all of the convertible preferred stock outstanding as of the closing date will automatically be converted into shares of common stock based on the shares of convertible preferred stock outstanding at June 30, 1996. Unaudited as adjusted stockholder's equity at June 30, 1996, as adjusted for the conversion of preferred stock, is disclosed on the balance sheet. Impact of Recent Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets F-33 129 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to be Disposed Of. This pronouncement requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is to be recognized when the sum of undiscounted cash flows is less than the carrying amount of the asset. Measurement of the loss for assets that the entity expects to hold and use are to be based on the fair market value of the asset. SFAS No. 121 must be adopted for fiscal years beginning in 1996. The Company adopted SFAS No. 121 effective January 1, 1996, and determined that adoption of this pronouncement had no material impact on the results of operations or financial condition as of January 1, 1996. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock Based Compensation. The disclosure requirements of SFAS No. 123 are effective for the Company's 1996 fiscal year. The new pronouncement did not have an impact on its results of operations since the intrinsic value-based method prescribed by Accounting Principles Board Opinion No. 25 and also allowed by SFAS No. 123 will continue to be used by the Company to account for its stock-based compensation plans. 3. ACCOUNTS RECEIVABLE The Company has both billed and unbilled receivables. The components of accounts receivable as of June 30, 1996 and December 31, 1995 are as follows (in thousands):
DECEMBER 31, 1995 JUNE 30, ------------ 1996 ----------- (UNAUDITED) Projects: Billed............................................ $37,622 $ 18,341 Unbilled.......................................... 845 525 Other............................................. 224 1,258 ------- ------- $38,691 $ 20,124 ======= =======
Other accounts receivable consist primarily of disputed amounts related to the Greenleaf facilities purchase price. In May 1996, the Company reclassified such accounts receivable to property, plant and equipment as an adjustment to the purchase price of the Greenleaf facilities (see Note 6). Accounts receivable from related parties as of June 30, 1996 and December 31, 1995 are comprised of the following (in thousands):
DECEMBER 31, 1995 JUNE 30, ------------ 1996 ----------- (UNAUDITED) O.L.S. Energy-Agnews, Inc. ......................... $ 589 $ 806 Geothermal Energy Partners, Ltd. ................... 979 462 Sumas Cogeneration Company, L.P. ................... 1,206 908 Electrowatt and subsidiaries........................ 2 1 ------- ------- $ 2,776 $ 2,177 ======= =======
F-34 130 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVESTMENTS IN POWER PROJECTS The Company has unconsolidated investments in power projects which are accounted for under the equity method. Unaudited financial information for the six months ended June 30, 1996 and 1995 related to these investments is as follows (in thousands):
1996 1995 ----------------------------------- ---------------------------------- SUMAS O.L.S. GEOTHERMAL SUMAS O.L.S. GEOTHERMAL COGENERATION ENERGY- ENERGY COGENERATION ENERGY- ENERGY COMPANY, AGNEWS, PARTNERS, COMPANY, AGNEWS, PARTNERS, L.P. INC. LTD. L.P. INC. LTD. ------------ ------- ---------- ------------ ------ ---------- Revenue........................................ $ 21,561 $4,604 $9,576 $ 15,265 $4,612 $9,847 Operating expenses............................. 12,752 4,349 6,219 13,530 4,300 5,064 ------- ------ ------ ------ ------ ------ Income (loss) from operations.................. 8,809 255 3,357 1,735 312 4,783 Other expenses, net............................ 5,098 1,040 2,444 5,283 1,034 2,865 ------- ------ ------ ------ ------ ------ Net income (loss).......................... $ 3,711 $ (785 ) $ 913 $ (3,548) $(722 ) $1,918 ======= ====== ====== ====== ====== ====== Company's share of net income (loss)........... $ 1,855 $ (179 ) $ 37 $ (1,774) $(130 ) $ 113 ======= ====== ====== ====== ====== ======
5. THERMAL POWER COMPANY In March 1996, Thermal Power Company (TPC) a wholly owned subsidiary of the company, and Union Oil Company of California (Union Oil) entered into an alternative pricing agreement with Pacific Gas and Electric Company (PG&E) for any steam produced in excess of 40% of average field capacity. The alternative pricing strategy is effective through December 31, 2000. Under the agreement, PG&E would purchase a portion of the steam that PG&E would likely curtail under TPC's existing steam sales agreement. The price for this portion of steam will be set by TPC and Union Oil with the intent that it be at competitive market prices. TPC and Union Oil will solely determine the price and duration of these alternative price offers. 6. GREENLEAF TRANSACTION In April 1995, the Company purchased the capital stock of the companies which owned 100% of the assets of two 49.5 megawatt natural gas-fired cogeneration facilities (collectively, the Greenleaf facilities) located in Yuba City in Northern California. The initial purchase price included a cash payment of $20.3 million and the assumption of project debt totalling $60.2 million. In April 1996, the Company finalized the purchase price in accordance with the Share Purchase Agreement dated March 30, 1995. The acquisition was accounted for as a purchase and the purchase price has been allocated to the acquired assets and liabilities based on the estimated fair values of the acquired assets and liabilities as shown below. The adjusted allocation of the purchase price is as follows (in thousands): Current assets.................................................... $ 6,572 Property, plant and equipment..................................... 122,545 -------- Total assets................................................. 129,117 -------- Current liabilities............................................... (1,079) Deferred income taxes, net........................................ (46,580) -------- Total liabilities............................................ (47,659) -------- Net purchase price................................................ $ 81,458 ========
F-35 131 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. KING CITY TRANSACTION In April 1996, the Company entered into a long-term operating lease with BAF Energy, A California Limited Partnership (BAF), for a 120 megawatt natural gas-fired combined cycle facility located in King City, California. The facility generates electricity for sale to PG&E pursuant to a long-term power sales agreement through 2019. Natural gas for the facility is supplied by Chevron USA Inc. pursuant to a contract which expires June 30, 1997. Under the terms of the operating lease, the Company makes semi-annual lease payments to BAF on each February 15 and August 15, a portion of which is supported by a $98.4 million collateral fund owned by the Company. The collateral fund consists of a portfolio of investment grade and U.S. Treasury Securities that will mature serially in amounts equal to a portion of the lease payments. The collateral fund securities are accounted for as held-to-maturity investments under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. As of June 30, 1996, future rent payments are $11.8 million for the remainder of 1996, $24.4 million for 1997, $23.8 million for 1998, $19.4 million for 1999, $20.1 million for 2000 and $204.1 million thereafter. The Company has recorded the value of the above-market pricing provided in the power sales agreement (PSA) as an asset which is included in property, plant and equipment, since the Company has, in substance, assumed the rights of the PSA. The Company has also recorded a deferred lease incentive equal to the value of the above-market payments to be received. The asset and liability are being amortized over the life of the power sales agreement and lease, respectively. The Company financed the collateral fund and other transaction costs with $50.0 million of proceeds from the issuance of preferred stock to Electrowatt by Calpine (see Note 10) and other short-term borrowings, which included $13.3 million of borrowings under the Credit Suisse Credit Facility (see Note 8) below and a $45.0 million loan from The Bank of Nova Scotia. The Company repaid the short-term borrowings from a portion of the net proceeds of the Senior Notes Due 2006 issued in May 1996 (see Note 9). 8. LINES OF CREDIT At June 30, 1996, the Company had borrowings under its $50.0 million Credit Facility with Credit Suisse (whose parent company owns 44.9% of Electrowatt) and had a letter of credit outstanding thereunder for $3,025,000. Borrowings under the Credit Facility bear interest at the London Interbank Offered Rate (LIBOR) plus 0.5%. Interest is paid on the last day of each interest period for such loan, but not less often than quarterly, based on the principal amount outstanding during the period. No stated principal amortization exists for this indebtedness. Upon completion of the Company's proposed initial public offering, the Credit Facility will terminate and is expected to be replaced by a comparable facility. On July 20, 1996, the Company entered into a commitment letter with The Bank of Nova Scotia to provide a $50 million three-year Revolving Credit Facility. Such Revolving Credit Facility will become effective upon the completion of the Company's initial public offering. 9. SENIOR NOTES DUE 2006 On May 16, 1996, the Company issued $180.0 million aggregate principal amount of 10 1/2% Senior Notes Due 2006. The net proceeds of $175.2 million were used to repay $53.7 million of borrowings under the Credit Suisse Credit Facility, $57.0 million of non-recourse project financing, and $45.0 million of borrowing from The Bank of Nova Scotia. The remaining $19.5 million was available for general corporate purposes. Transaction costs of $4.8 million incurred in connection with the public debt offering were recorded as a F-36 132 CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred charge and are amortized over the ten-year life of the Senior Notes Due 2006 using the straight line method. The Senior Notes Due 2006 will mature on May 15, 2006. The Company has no sinking fund or mandatory redemption obligations with respect to the Senior Notes Due 2006. Interest is payable semi-annually on May 15 and November 15 of each year while the Senior Notes Due 2006 are outstanding, commencing on November 15, 1996. 10. PREFERRED STOCK The Company has 5,000,000 authorized shares of Series A Preferred Stock, all of which were issued on March 21, 1996 and outstanding as of June 30, 1996. All of the shares of Series A Preferred Stock are held by Electrowatt. The shares of Series A Preferred Stock are not publicly traded. No dividends are payable on the Series A Preferred Stock. The Series A Preferred Stock contains provisions regarding liquidation and conversion rights. Upon the consummation of the Company's proposed initial public offering, the Series A Preferred Stock will be converted into Common Stock and sold to the public in the offering. 11. CONTINGENCIES The Company, together with over 100 other parties, was named as a defendant in the second amended complaint in an action brought in August 1993 by the bankruptcy trustee for Bonneville Pacific Corporation (Bonneville), captioned Roger G. Segal, as the Chapter 11 Trustee for Bonneville Pacific Corporation v. Portland General Corporation, et al., in the United States District Court for the District of Utah (the "Court"). This complaint alleges that, in conjunction with top executives of Bonneville and with the alleged assistance of the other 100 defendants, the Company engaged in a broad conspiracy and fraud. The complaint has been amended a number of times. The Company has answered each version of the complaint by denying all claims and is in the process of conducting discovery. In August 1994, the Company successfully moved for an order severing the trustee's claim against the Company from the claims against the other defendants. Although the case involves over 25 separate financial transactions entered into by Bonneville, the severed case concerns the Company in respect of only one of these transactions. In 1988, the Company invested $2.0 million in a partnership formed with Bonneville to develop four hydroelectric projects in the State of Hawaii. The projects were not successfully developed by the partnership, and, subsequent to Bonneville's Chapter 11 filing, the Company filed a claim as a creditor against Bonneville's bankruptcy estate. The trustee alleges that the equity investment was actually a "sham" loan designed to inflate Bonneville's earnings. The trustee initially alleged that Calpine is one of many defendants in this case responsible for Bonneville's "deepening insolvency" and the amount of damages attributable to the Company based on the $2.0 million partnership investment was alleged to be $577.2 million. Based upon statements made by the Court and the trustee in July 1996, the Company believes that the maximum compensatory damages which the trustee may seek will not exceed $5 million. There can be no assurance, however, of the actual amount of damages to be sought by the Trustee. The Company believes the claims against it are without merit and will continue to defend the action vigorously. The Company further believes that the resolution of this matter will not have a material adverse effect on its financial position or results of operations. The Company is involved in various other claims and legal actions arising out of the normal course of business. Management does not expect that the outcome of these cases will have a material adverse effect on the Company's financial position or results of operations. 12. SUBSEQUENT EVENT In July 1996, the Company's Board of Directors authorized the reincorporation of the Company into Delaware in connection with the Company's initial public equity offering. Also, the Board of Directors approved a stock split at a ratio of approximately 5.194 to 1. The accompanying financial statements reflect the reincorporation and the stock split as if such transactions had been effective for all periods. F-37 133 INDEPENDENT AUDITOR'S REPORT To the Partners Sumas Cogeneration Company, L.P. and Subsidiary We have audited the accompanying consolidated balance sheet of Sumas Cogeneration Company, L.P. and Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in partners' deficit, and cash flows for each of the three years ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sumas Cogeneration Company, L.P. and Subsidiary as of December 31, 1995 and 1994 and the results of their operations and cash flows for each of the three years ended December 31, 1995, in conformity with generally accepted accounting principles. MOSS ADAMS LLP Everett, Washington January 19, 1996 F-38 134 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- 1995 1994 ------------ ------------ ASSETS Current assets Cash and cash equivalents..................................... $ 199,169 $ 353,936 Current portion of restricted cash and cash equivalents....... 2,937,884 6,409,185 Accounts receivable........................................... 3,090,213 4,108,206 Prepaid expenses.............................................. 222,828 232,325 ------------ ------------ Total current assets....................................... 6,450,094 11,103,652 Restricted cash and cash equivalents, net of current portion.... 8,017,758 7,454,923 Property, plant and equipment, at cost, net..................... 95,589,737 97,039,459 Other assets.................................................... 12,744,480 14,550,228 ------------ ------------ $122,802,069 $130,148,262 ============ ============ LIABILITIES AND PARTNERS' DEFICIT Current liabilities Accounts payable and accrued liabilities...................... $ 2,051,178 $ 3,651,799 Current portion of related party payables Calpine Corporation........................................ 4,864 41,871 National Energy Systems Company............................ 1,861 1,430 Current portion of long-term debt............................. 2,000,000 400,000 ------------ ------------ Total current liabilities.................................. 4,057,903 4,095,100 Related party payable -- Calpine Corporation, net of current portion....................................................... 908,679 446,624 Long-term debt, net of current portion.......................... 117,000,003 119,000,002 Future removal and site restoration costs....................... 502,600 309,600 Deferred income taxes........................................... 907,800 773,800 Commitments and contingency (Notes 6 and 8) Partners' (deficit) equity...................................... (574,916) 5,523,136 ------------ ------------ $122,802,069 $130,148,262 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-39 135 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1994 1993 ------------ ------------ ----------- Revenues Power sales......................................... $ 30,603,018 $ 29,206,469 $19,525,098 Natural gas sales, net.............................. 893,690 2,832,668 2,104,407 Other............................................... 29,146 20,490 116,895 ------------ ------------ ----------- Total revenues.............................. 31,525,854 32,059,627 21,746,400 ------------ ------------ ----------- Costs and expenses Operating and production costs...................... 18,493,245 19,032,754 11,779,505 Depletion, depreciation and amortization............ 6,965,496 6,715,156 4,986,300 General and administrative.......................... 1,400,129 1,412,326 1,563,509 ------------ ------------ ----------- Total costs and expenses.................... 26,858,870 27,160,236 18,329,314 ------------ ------------ ----------- Income from operations................................ 4,666,984 4,899,391 3,417,086 ------------ ------------ ----------- Other income (expense) Interest income..................................... 490,071 436,741 250,675 Interest expense.................................... (11,006,056) (10,172,959) (6,707,183) Other expense....................................... (60,664) (359,000) -- ------------ ------------ ----------- Total other expense......................... (10,576,649) (10,095,218) (6,456,508) ------------ ------------ ----------- Loss before provision for income taxes................ (5,909,665) (5,195,827) (3,039,422) Provision for income taxes............................ (188,387) (581,190) (337,431) ------------ ------------ ----------- Net loss.............................................. $ (6,098,052) $ (5,777,017) $(3,376,853) ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-40 136 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Partners' equity, December 31, 1992............................................. $14,688,436 Capital contributions........................................................... 1,500,000 Capital distributions........................................................... (1,500,000) Net loss........................................................................ (3,376,853) Cumulative foreign exchange translation adjustment.............................. (11,430) ----------- Partners' equity, December 31, 1993............................................. 11,300,153 Net loss........................................................................ (5,777,017) ----------- Partners' equity, December 31, 1994............................................. 5,523,136 Net loss........................................................................ (6,098,052) ----------- Partners' deficit, December 31, 1995............................................ $ (574,916) ===========
The accompanying notes are an integral part of these consolidated financial statements. F-41 137 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Cash flows from operating activities Net loss.......................................... $(6,098,052) $(5,777,017) $(3,376,853) Adjustments to reconcile net loss to net cash from operating activities Depletion, depreciation and amortization....... 6,965,496 6,715,156 4,986,300 Deferred income taxes.......................... 134,000 532,400 241,400 Changes in operating assets and liabilities Accounts receivable.......................... 1,017,993 (1,254,639) (2,064,616) Prepaid expenses............................. 9,497 (30,342) 203,904 Accounts payable and accrued liabilities..... (1,407,621) 1,081,431 1,168,892 Related party payables....................... 425,479 132,296 -- ----------- ----------- ----------- Net cash from operating activities........ 1,046,792 1,399,285 1,159,027 ----------- ----------- ----------- Cash flows from investing activities Decrease (increase) in restricted cash and cash equivalents.................................... 2,908,466 2,922,819 (13,286,927) Acquisition of property, plant and equipment...... (3,710,025) (3,690,399) (16,558,101) Other assets...................................... -- (167,483) (5,700,537) Accounts payable and accrued liabilities.......... -- -- (3,847,743) ----------- ----------- ----------- Net cash from investing activities........ (801,559) (935,063) (39,393,308) ----------- ----------- ----------- Cash flows from financing activities Proceeds from long-term debt...................... -- -- 38,710,000 Repayment of long-term debt....................... (400,000) (400,025) (199,973) Capital contributions............................. -- -- 1,500,000 Capital distributions............................. -- -- (1,500,000) Payments to related parties....................... -- -- (864,890) ----------- ----------- ----------- Net cash from financing activities........ (400,000) (400,025) 37,645,137 ----------- ----------- ----------- Effect of exchange rate changes on cash............. -- -- (11,430) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents....................................... (154,767) 64,197 (600,574) Cash and cash equivalents, beginning of year........ 353,936 289,739 890,313 ----------- ----------- ----------- Cash and cash equivalents, end of year.............. $ 199,169 $ 353,936 $ 289,739 =========== =========== =========== Supplementary disclosure of cash flow information Cash paid for interest during the year............ $11,006,056 $10,172,959 $ 8,868,183 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-42 138 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) GENERAL -- Sumas Cogeneration Company, L.P. (the Partnership) is a Delaware limited partnership formed on August 28, 1991 between Sumas Energy, Inc. (SEI), the general partner which currently holds a 50% interest in the profits and losses of the Partnership and Whatcom Cogeneration Partners, L.P. (Whatcom), the sole limited partner which holds the remaining 50% Partnership interest. Whatcom is owned through affiliated companies by Calpine Corporation (Calpine). The Partnership has a wholly owned Canadian subsidiary, ENCO Gas, Ltd. (ENCO), which is incorporated in New Brunswick, Canada. The consolidated financial statements include the accounts of the Partnership and ENCO (collectively, the Company). All intercompany profits, transactions and balances have been eliminated in consolidation. Prior to the commencement of commercial operation as discussed below, the Partnership was considered to be a development stage company in the process of developing, constructing and owning an electrical generation facility (the Generation Facility) in Sumas, Washington. The Generation Facility is a natural gas-fired combined cycle electrical generation plant which has a nameplate capacity of approximately 125 megawatts. Commercial operation of the Generation Facility commenced on April 16, 1993. In addition, the Generation Facility includes a lumber dry kiln facility and a 3.5 mile private natural gas pipeline. The lumber dry kiln commenced commercial operation in May 1993. ENCO has acquired and is operating and developing a portfolio of proven natural gas reserves in British Columbia and Alberta, Canada which provide a dedicated fuel supply for the Generation Facility (collectively, the Project). ENCO produces and supplies natural gas production to the Generation Facility, with incidental off-sales to third parties. The Generation Facility also receives a portion of its fuel under contracts with third parties. The Partnership produces and sells its entire electricity capacity to Puget Sound Power & Light Company (Puget) under a 20-year electricity sales contract. Under the electricity sales contract, the Partnership is required to be certified as a qualifying cogeneration facility as established by the Public Utility Regulatory Policy Act of 1978, as amended, and as administered by the Federal Energy Regulatory Commission. The Generation Facility produced and sold megawatt hours of electricity to Puget as follows:
YEAR ENDED DECEMBER 31, MEGAWATTS REVENUE ---------------------------------------------------- --------- ----------- 1995................................................ 1,026,000 $30,603,000 1994................................................ 1,000,400 $29,206,000 1993................................................ 696,400 $19,525,000
The Partnership leases a kiln facility and sells steam under a 20-year agreement for the purchase and sale of steam and lease of the kiln (Note 6) to Socco, Inc. (Socco), a custom lumber drying operation owned by an affiliate of the Partnership. Steam use requirements under the agreement with Socco were established to maintain the qualifying cogeneration facility status of the Generation Facility. (b) THE PARTNERSHIP -- SEI assigned all its rights, title, and interest in the Project, including the Puget contract, to the Partnership in exchange for its Partnership interest. SEI and Whatcom are both currently entitled to a 50% interest in the profits and losses of the Partnership, after the payment of certain preferential distributions to Whatcom of approximately $6,239,000 and $5,619,000 at December 31, 1995 and 1994, respectively, and to SEI of approximately $441,000 and $363,000 at December 31, 1995 and 1994, respectively. A portion of these preferential distributions compound at 20% per annum. After Whatcom has received cumulative distributions representing a fixed rate of return of 24.5% on its equity investment, F-43 139 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exclusive of the preferential distributions referred to above, SEI's share of operating distributions will increase to 88.67% and Whatcom's share of operating distributions will decrease to 11.33%. (c) DISTRIBUTIONS -- Distributions of operating cash flows are permitted quarterly after required deposits are made and minimum cash balances are met, and subject to certain other restrictions. During 1995 and 1994, there were no distributions of operating cash flow. In 1993 Whatcom received a distribution of $1,500,000, reducing its equity investment in the Partnership. Whatcom loaned the sole shareholder of SEI $1,500,000, and the sole shareholder of SEI loaned $1,500,000 to SEI. SEI then contributed $1,500,000 in additional equity to the Partnership. (d) REVENUE RECOGNITION -- Revenue from the sale of electricity is recognized based on kilowatt hours generated and delivered to Puget at contractual rates. Revenue from the sale of natural gas is recognized based on volumes delivered to customers at contractual delivery points and rates. The costs associated with the generation of electricity and the delivery of gas, including operating and maintenance costs, gas transportation and royalties, are recognized in the same period in which the related revenue is earned and recorded. (e) GAS ACQUISITION AND DEVELOPMENT COSTS -- ENCO follows the full cost method of accounting for gas acquisition and development expenditures, wherein all costs related to the development of gas reserves in Canada are initially capitalized. Costs capitalized include land acquisition costs, geological and geophysical expenditures, rentals on undeveloped properties, cost of drilling productive and nonproductive wells, and well equipment. Gains or losses are not recognized upon disposition or abandonment of natural gas properties unless a disposition or abandonment would significantly alter the relationship between capitalized costs and proven reserves. All capitalized costs of gas properties, including the estimated future costs to develop proven reserves, are depleted using the unit-of-production method based on estimated proven gas reserves as determined by independent engineers. ENCO has not assigned any value to its investment in unproven gas properties and, accordingly, no costs have been excluded from capitalized costs subject to depletion. Costs subject to depletion under the full cost method include estimated future costs of dismantlement and abandonments of $3,748,000 in 1995, $3,630,000 in 1994 and $3,026,400 in 1993. This includes the cost of production equipment removal and environmental cleanup based upon current regulations and economic circumstances. The provisions for future removal and site restoration costs of $193,000 in 1995, $169,000 in 1994 and $110,000 in 1993, are included in depletion expense. Capitalized costs are subject to a ceiling test which limits such costs to the aggregate of the net present value of the estimated future cash flows from the related proven gas reserves. The ceiling test calculation is made by estimating the future net cash flows, based on current economic operating conditions, plus the lower of cost or fair market value of unproven reserves, and discounting those cash flows at an annual rate of 10%. (f) JOINT VENTURE ACCOUNTING -- Substantially all of ENCO's natural gas production activities are conducted jointly with others and, accordingly, these consolidated financial statements reflect only ENCO's proportionate interest in such activities. (g) FOREIGN EXCHANGE GAINS AND LOSSES -- During 1995 and 1994, foreign exchange gains and losses as a result of translating Canadian dollar transactions and Canadian dollar denominated cash, accounts receivable and accounts payable transactions are recognized in the statement of operations. During 1993, ENCO's functional currency was Canadian dollars. As a result, translation adjustments were reported separately and accumulated as separate components of partners' equity. (h) CASH AND CASH EQUIVALENTS -- For purposes of the statement of cash flows, cash and cash equivalents consist of cash and short-term investments in highly liquid instruments such as certificates of deposit, money F-44 140 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) market accounts and U.S. treasury bills with an original maturity of three months or less, excluding restricted cash and cash equivalents. (i) CONCENTRATION OF CREDIT RISK -- Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and short-term investments in highly liquid instruments such as certificates of deposit, money market accounts and U.S. treasury bills with maturities of three months or less, and accounts receivable. The Company's cash and cash equivalents are primarily held with two financial institutions. Accounts receivable are primarily due from Puget. (j) DEPRECIATION -- The Company provides for depreciation of property, plant and equipment using the straight-line method over estimated useful lives which range from 7 to 40 years for plant and equipment and 3 to 7 years for furniture and fixtures. (k) AMORTIZATION OF OTHER ASSETS -- The Company provides for amortization of other assets using the straight-line method as follows: Organization, start-up and development costs..................... 5-30 years Financing costs.................................................. 15 years Gas contract costs............................................... 20 years
(l) INCOME TAXES -- Profits or losses of the Partnership are passed directly to the partners for income tax purposes. ENCO is subject to Canadian income taxes and accounts for income taxes on the liability method. The liability method recognizes the amount of tax payable at the date of the consolidated financial statements as a result of all events that have been recognized in the consolidated financial statements, as measured by currently enacted tax laws and rates. Deferred income taxes are provided for temporary differences in recognition of revenues and expenses for financial and income tax reporting purposes. (m) USE OF ESTIMATES -- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 -- PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ----------------------------- 1995 1994 ------------ ------------ Land and land improvements.............................. $ 381,071 $ 381,071 Plant and equipment..................................... 84,061,359 82,759,005 Acquisition of gas properties, including development thereon............................................... 25,030,165 22,815,964 Furniture and fixtures.................................. 195,914 188,444 ------------ ------------ 109,668,509 106,144,484 Less accumulated depreciation and depletion............. 14,078,772 9,105,025 ------------ ------------ $ 95,589,737 $ 97,039,459 ============ ============
Depreciation expense was $3,316,748 in 1995, $3,069,446 in 1994 and $2,133,711 in 1993. Depletion expense was $1,843,000 in 1995, $1,671,000 in 1994 and $1,332,000 in 1993. F-45 141 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- OTHER ASSETS
DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- Organization, start-up and development costs.............. $ 6,165,574 $ 7,487,943 Financing costs........................................... 4,254,719 4,598,746 Gas contract costs........................................ 2,324,187 2,463,539 ----------- ----------- $12,744,480 $14,550,228 =========== ===========
NOTE 4 -- LONG-TERM DEBT The Partnership and ENCO have loan agreements with The Prudential Insurance Company of America (Prudential) and Credit Suisse (collectively, the Lenders). Credit Suisse is an affiliate of Whatcom. At December 31, 1995 and 1994, amounts outstanding under the term loan agreements, by entity, were as follows:
DECEMBER 31, ----------------------------- 1995 1994 ------------ ------------ Sumas Cogeneration Company, L.P......................... $ 94,367,003 $ 94,684,202 ENCO Gas, Ltd........................................... 24,633,000 24,715,800 ------------ ------------ 119,000,003 119,400,002 Less current portion.................................... 2,000,000 400,000 ------------ ------------ $117,000,003 $119,000,002 ============ ============
Scheduled annual principal payments under the loan agreements as of December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT --------------------------------------------------------------- ------------ 1996........................................................... $ 2,000,000 1997........................................................... 3,600,000 1998........................................................... 4,200,000 1999........................................................... 5,400,000 2000........................................................... 7,200,000 Thereafter..................................................... 96,600,003 ------------ $119,000,003 ============
The Partnership's loan is comprised of a fixed rate loan in the original amount of $55,510,000 and a variable rate loan in the original amount of $39,650,000. Interest is payable quarterly on the fixed rate loan at a rate of 10.35%. Interest on the variable rate loan is payable quarterly at either the London Interbank Offered Rate (LIBOR), certificate of deposit rate or Credit Suisse's base rate, plus an applicable margin which ranges from 2.25% prior to Loan Conversion to .875% after Loan Conversion as stated in the loan agreement. During the year ended December 31, 1995, interest rates on the variable rate loan ranged from 7.47% to 7.76%. The loans mature in May 2008. ENCO's loan is comprised of a fixed rate loan in the original amount of $14,490,000 and a variable rate loan in the original amount of $10,350,000. Interest is payable quarterly on the fixed rate loan at a rate of 9.99%. Interest on the variable rate loan is payable quarterly at either the LIBOR, certificate of deposit rate or Credit Suisse's base rate, plus an applicable margin as stated in the loan agreement. During the year ended F-46 142 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1995, interest rates on the variable rate loan ranged from 7.47% to 7.76%. The loans mature in May 2008. The Partnership pays Prudential an agency fee of $50,000 per year, adjusted annually by an inflation index, until the loan matures. The Partnership pays Credit Suisse an agency fee of $40,000 per year, adjusted annually by an inflation index, until the loan matures. The loans are collateralized by substantially all the Company's assets and interests in the Project. Additionally, the Company's rights under all contractual agreements are assigned as collateral. The Partnership and ENCO loans are cross-collateralized and contain cross-default provisions. Under the terms of the loan agreements and the deposit and disbursement agreements with the Lenders, the Partnership is required to establish and fund certain accounts held by Credit Suisse and Royal Trust as security agents. The accounts require specified minimum deposits and funding levels to meet current and future operating, maintenance and capital costs, and to provide certain other reserves for payment of principal, interest and other contingencies. These accounts are presented as restricted cash and cash equivalents and include cash, certificates of deposit, money market accounts and U.S. treasury bills, all with maturities of 3 months or less. The current portion of restricted cash and cash equivalents is based on the amount of current liabilities for obligations which may be funded from the restricted accounts. The balance of restricted cash and cash equivalents has been classified as a noncurrent asset. During 1993, the Company incurred and paid $8,868,183 of interest, including $6,707,183, which was charged to operations and $2,161,000, which was capitalized. NOTE 5 -- INCOME TAXES The provision for income taxes represents Canadian taxes which consist of the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Current Federal large corporation tax.................... $ 34,625 $ 31,314 $ 45,262 British Columbia capital taxes................... 19,762 17,476 50,769 -------- -------- -------- 54,387 48,790 96,031 Deferred........................................... 135,400 178,400 241,400 -------- -------- -------- 189,787 227,190 337,431 Utilization of loss carryforwards for Canadian income tax purposes..................................... 47,700 259,000 -- Reduction of (increase in) Canadian loss carryforwards due to foreign exchange and other adjustments.... (49,100) 95,000 -- -------- -------- -------- $188,387 $581,190 $337,431 ======== ======== ========
F-47 143 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The principal sources of temporary differences resulting in deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- Deferred tax asset Canadian net operating loss carryforwards................. $ (840,900) $ (829,400) Deferred tax liabilities Acquisition and development costs of gas deducted for tax purposes in excess of amounts deducted for financial reporting purposes..................................... 1,748,700 1,603,200 ---------- ---------- Net deferred tax liability........................ $ 907,800 $ 773,800 ========== ==========
The provision for income taxes differs from the Canadian statutory rate principally due to the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Canadian statutory rate............................ 44.62% 44.34% 44.3% Income taxes based on statutory rate............... $(33,852) $ 82,909 $165,100 Capital taxes, net of deductible portion........... 47,028 36,678 75,587 Non-deductible provincial royalties, net of resource allowance............................... 95,671 39,836 50,267 Depletion on gas properties with no tax basis...... 44,641 38,420 41,778 Other foreign exchange adjustments................. 36,299 29,347 4,699 -------- -------- -------- $189,787 $227,190 $337,431 ======== ======== ========
As of December 31, 1995, ENCO has non-capital loss carryforwards of approximately $1,885,000 which may be applied against taxable income of future periods which expire as follows: 1999............................................................. $1,625,000 2000............................................................. $ 260,000
NOTE 6 -- RELATED PARTY TRANSACTIONS AND COMMITMENTS (a) ADMINISTRATIVE SERVICES -- As managing partner of the Partnership, SEI receives a fee of $250,000 per year from June 1993 through December 1995 and $300,000 per year for periods after December 1995. The fee is subject to annual adjustment based upon an inflation index. Approximately $258,000 in 1995, $253,000 in 1994 and $151,000 in 1993 was paid to SEI under this agreement. (b) OPERATING AND MAINTENANCE SERVICES -- The Partnership has an operating and maintenance agreement with a related party to operate, repair and maintain the Project. For these services, the Partnership pays a fixed fee of $1,140,000 per year adjustable based on the Consumer Price Index, an annual base fee of $150,000 per year also adjustable based on the Consumer Price Index, and certain other reimbursable expenses as defined in the agreement. In addition, the agreement provides for an annual performance bonus of up to $400,000, adjustable based on the Consumer Price Index, based on the achievement of certain annual performance levels. Payment of the performance bonus is subordinated to the payment of operating expenses, debt service and required deposits, and minimum balances under the loan agreements, and deposit and disbursement agreements. Accordingly, the performance bonuses earned in 1995 and 1994 are included as a non-current liability in the consolidated balance sheet. This agreement expires on the date Whatcom receives its 24.5% cumulative return or the tenth anniversary of the Project completion date, subject to renewal terms. F-48 144 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Approximately $2,031,000 in 1995, $1,946,000 in 1994 and $1,260,000 in 1993 was earned under this agreement. (c) THERMAL ENERGY AND KILN LEASE -- The Partnership has a 20-year thermal energy and kiln lease agreement with Socco. Under this agreement, Socco leases the premises and the kiln and purchases certain amounts of thermal energy delivered to dry lumber. Income recorded from Socco was approximately $19,000 in 1995, $61,000 in 1994 and $6,000 in 1993. (d) CONSULTING SERVICES -- ENCO has an agreement with National Energy Systems Company (NESCO), an affiliate of SEI, to provide consulting services for $8,000 per month, adjustable based upon an inflation index. The agreement automatically renews for one-year periods unless written notice of termination is served by either party. Approximately $100,000 in 1995, $101,000 in 1994 and $96,000 in 1993 was paid under this agreement (e) FUEL SUPPLY AND PURCHASE AGREEMENTS -- The Partnership has a fixed price natural gas sale and purchase agreement with ENCO. The agreement requires ENCO to deliver up to a maximum daily contract quantity of 12,000 MMBtu's of natural gas per day which may be increased to 24,000 MMBtu's in accordance with the agreement. The Partnership paid ENCO $2.26 per delivered MMBtu through October 1995 and pays $2.43 per delivered MMBtu through 1996. Prices under the agreement then escalate at an annual rate of 7.5% until October 31, 2000, and at 4% per annum thereafter. Partnership payments to ENCO under the agreement are eliminated in consolidation. The agreement expires on the twentieth anniversary of the date of commercial operation. The Partnership has a gas supply agreement with Westcoast Gas Services, Inc. (WGSI) to provide the Partnership with quantities of firm gas. Commencing April 1, 1993, WGSI must provide the Partnership with quantities of gas ranging from 10,000 MMBtu's per day up to 12,900 MMBtu's per day at a firm price, as provided under the agreement. The agreement is expected to terminate on October 31, 1996. The Partnership and ENCO have a gas management agreement with WGSI. WGSI is paid a gas management fee for each MMBtu of gas delivered to the Generation Facility. The gas management fee is adjusted annually based on the British Columbia Consumer Price Index. The gas management agreement expires October 31, 2008 unless terminated earlier as provided for in the agreement. ENCO is committed to the utilization of pipeline capacity on the Westcoast Energy Inc. System. These firm capacity commitments are predominantly under one-year renewable contracts. Firm capacity has been accepted at an annual cost of approximately $2,569,000 in 1995, $2,776,000 in 1994 and $1,347,000 in 1993. As collateral for the obligations of the Company under the gas supply and gas management agreements with WGSI, the Partnership secured an irrevocable standby letter of credit with Credit Suisse in favor of WGSI. As of December 31, 1995 and 1994, the letter of credit had a face amount of $2,500,000 and the Partnership had a cash deposit of $2,500,000 held in a restricted money market account as collateral for the letter of credit. As of December 31, 1995 and 1994, $2,500,000 held in a restricted money market account is included in the current portion of restricted cash and cash equivalents. In January 1996, the letter of credit was reduced in accordance with its terms to a face amount of $500,000. (f) UTILITY SERVICES -- The Partnership entered into an agreement for utility services with the City of Sumas, Washington. The City of Sumas has agreed to provide a guaranteed annual supply of water at its wholesale rate charged to external association customers. Should the Partnership fail to purchase the daily average minimum of 550 gallons per minute from the City of Sumas during the first 10 years of commercial operation, except for uncontrollable forces or reasonable and necessary shutdowns, the Partnership shall make up the lost revenue to the City of Sumas in accordance with the agreement. F-49 145 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Partnership entered into an agreement for waste water disposal with the City of Bellingham, Washington. The City of Bellingham has agreed to accept up to 70,000 gallons of waste water daily at a rate of one cent per gallon. The agreement expires on December 31, 1998. (g) LEASE COMMITMENTS -- In December 1990, the Partnership entered into a 23.5-year land lease which may be renewed for five consecutive five-year periods. Rental expense was approximately $48,400 in 1995 and 1994, and $45,300 in 1993. In April 1992, ENCO signed an operating lease for office space which expires in March 1997. Monthly rental expense is approximately $1,700. Rental expense was approximately $17,700 in 1995, $17,000 in 1994 and $16,000 in 1993. Future minimum land and office lease commitments as of December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT ----------------------------------------------------------------- ---------- 1996............................................................. $ 66,800 1997............................................................. 51,000 1998............................................................. 49,300 1999............................................................. 49,300 2000............................................................. 52,500 Thereafter....................................................... 868,200 ---------- $1,137,100 ==========
(h) PROJECT MANAGEMENT SERVICES -- NESCO entered into a project management agreement with the Partnership for which it received $45,000 per month through June 1993. Approximately $264,000 was paid to NESCO in 1993, under this agreement. (i) CONSTRUCTION MANAGEMENT SERVICES -- Calpine entered into a construction management agreement with the Partnership for which it received $40,000 per month through June 1993. Approximately $235,000 was paid to Calpine in 1993, under this agreement. (j) PARTNER LOAN -- In March 1994, the sole shareholder of SEI borrowed $10,000,000 from Calpine. The loan bears interest at 16.25%, compounded quarterly, and is collateralized by a subordinated assignment in SEI's interest in the Partnership and a subordinated pledge of SEI's stock. The loan requires payments of interest and principal to be made from 50% of SEI's cash distributions from the Partnership, less amounts due to Whatcom under a previous note made in connection with Loan Conversion (Note 1). On March 15, 2004, all unpaid principal and interest on the loan is due. NOTE 7 -- FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount of all cash and cash equivalents reported in the consolidated balance sheet is estimated by the Company to approximate their fair value. The Company is not able to estimate the fair value of its long-term debt with a carrying amount of $119,000,003 at December 31, 1995. There is no ability to assess current market interest rates of similar borrowing arrangements for similar projects because the terms of each such financing arrangement is the result of substantial negotiations among several parties. F-50 146 SUMAS COGENERATION COMPANY, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- CONTINGENCY ENCO terminated protracted contract negotiations with two Canadian natural gas suppliers in January 1995. One of the suppliers notified ENCO it considered a draft contract to be effective although it had not been executed by ENCO. The supplier indicated it may pursue legal action if ENCO would not execute the contract. As of January 19, 1996, no legal action has been served on ENCO. Management believes if legal action is commenced, it has significant defenses and believes such action will not result in any material adverse impact to the Company's financial condition or results of operations. F-51 147 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Calpine Geysers Company, L.P.: We have audited the accompanying statements of operations and cash flows for the period from January 1, 1993 to April 18, 1993 of Calpine Geysers Company, L.P., a Delaware limited partnership. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Calpine Geysers Company, L.P. for the period from January 1, 1993 through April 18, 1993 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California March 18, 1994 F-52 148 CALPINE GEYSERS COMPANY, L.P. STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1993 TO APRIL 18, 1993 Revenue from power contracts.................................................... $20,759,116 ----------- Costs and expenses: Production royalties.......................................................... 3,150,076 Operating expenses............................................................ 4,893,878 Depreciation and amortization................................................. 5,153,239 General and administrative.................................................... 787,005 ----------- Total costs and expenses.............................................. 13,984,198 ----------- Income from operations................................................ 6,774,918 Other (income) expense Interest expense.............................................................. 4,794,952 Other income.................................................................. (193,179) ----------- Net income............................................................ $ 2,173,145 ===========
The accompanying notes are an integral part of these financial statements. F-53 149 CALPINE GEYSERS COMPANY, L.P. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1993 TO APRIL 18, 1993 Cash flows from operating activities: Net income................................................................... $ 2,173,145 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................. 5,153,239 Amortization of deferred costs............................................ 146,277 Changes in operating assets and liabilities: Accounts receivable..................................................... 2,157,353 Supplies inventory...................................................... 81,061 Prepaid expenses........................................................ 837,841 Accounts payable and accrued liabilities................................ 2,634,254 Deferred revenue........................................................ 395,100 Payment on note payable................................................. (543,778) ------------ Net cash provided by operating activities............................ 13,034,492 ------------ Cash flows from investing activities: Acquisition of property, plant and equipment................................. (3,401,378) Increase in restricted cash requirements..................................... (12,862) ------------ Net cash used for investing activities............................... (3,414,240) ------------ Cash flows from financing activities: Repayment of debt............................................................ (2,200,000) Partner distributions........................................................ (7,416,018) ------------ Net cash used for financing activities............................... (9,616,018) ------------ Net increase in cash and cash equivalents...................................... 4,234 Cash and cash equivalents at beginning of period............................... 2,700,135 ------------ Cash and cash equivalents at end of period..................................... $ 2,704,369 ============ Supplementary information: Cash paid during the period for interest..................................... $ 3,914,710 ============
The accompanying notes are an integral part of these financial statements. F-54 150 CALPINE GEYSERS COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1993 TO APRIL 18, 1993 1. BUSINESS AND FORMATION OF THE PARTNERSHIP Business Calpine Geysers Company, L.P. ("CGC"), a Delaware limited partnership, was formed on April 5, 1990. CGC is the owner of two operating geothermal power plants and their respective steam fields, and three geothermal steam fields located in The Geysers area of northern California. Electricity and steam generated by CGC is sold to two utilities under long-term power sales contracts (see Note 9). Formation of the Partnership CGC was formed by Sonoma Geothermal Partners, L.P. ("SGP"), wholly owned by Calpine Corporation ("Calpine"), and Freeport-McMoRan Resource Partners, Limited Partnership ("FMRP") for the purpose of acquiring from FMRP the assets constituting the geothermal business described above. On July 2, 1990, FMRP contributed an undivided 15.93 percent interest in the existing assets and geothermal business and $1,178,567 in cash for financing costs. SGP contributed $22,165,718 in cash, including financing and closing costs of $2,008,000. Concurrent with the formation of CGC, an agreement was entered into between CGC and FMRP to purchase the remaining undivided 84.07 percent interest in the existing assets and geothermal business for $227.0 million in cash plus the assumption of the liabilities, not including existing project debt. The amount was funded by SGP's contribution and a new nonrecourse credit arrangement with a consortium of banks (see Note 5). Under the CGC partnership agreement, profits are allocated first to SGP to the extent necessary to achieve a target return, as defined. Thereafter, profits are allocated 22.5 percent to SGP and 77.5 percent to FMRP. Upon liquidation, equity is allocated first to SGP to the extent necessary to achieve a target return as defined; second, equity is allocated to achieve the target capital account ratios (22.5 percent to SGP and 77.5 percent to FMRP); and third, equity is allocated 22.5 percent to SGP and 77.5 percent to FMRP. Cash distributions are allocated 99 percent to SGP and 1 percent to FMRP until the target return is reached. Distributions made during the period from January 1, 1993 to April 18, 1993 were $7,352,017 to SGP and $64,001 to FMRP. Acquisition of FMRP Interest in CGC On April 19, 1993, Calpine purchased all of FMRP's interest in CGC for $59.8 million, terminating the partnership with FMRP. The purchase price includes a $23.0 million cash payment by Calpine and a $36.8 million note payable to FMRP. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents CGC's cash, cash equivalents and restricted cash are primarily held by one major international financial institution. CGC considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of these instruments approximates fair value because of their short maturity. F-55 151 CALPINE GEYSERS COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Restricted Cash CGC is required to maintain cash balances that are restricted by provisions of its debt agreements and by regulatory agencies. CGC's debt agreements specify restrictions based on debt service payments and drilling costs for the following year. Regulatory agencies require cash to be restricted to ensure that funds will be available to restore property to its original condition. Restricted cash is invested in accounts earning market rates. Therefore, their carrying value approximates fair value. Supplies Inventory Supplies are valued at the lower of cost or market. Cost for large replacement parts is determined using the specific identification method. For the remaining supplies, cost is determined using the weighted average cost method. Property, Plant and Equipment CGC uses the full cost method of accounting for costs incurred in connection with the exploration and development of geothermal properties. All such costs, including geological and geophysical expenses, costs of drilling productive, nonproductive and reinjection wells and overhead directly related to development activities, together with the costs of production equipment, the related facilities and the operating power plants, are capitalized. Geothermal costs, including an estimate of future development costs to be incurred and the estimated costs to dismantle, are amortized by the units of production method based on the estimated total productive output over the estimated useful lives of the related steam fields. Depreciation of the buildings and roads is computed using the straight line method over the estimated remaining useful lives of the buildings and roads. Proceeds from the sale of assets are applied against capitalized costs, with no gain or loss recognized. Deferred Costs Deferred costs consist of financing costs, a commitment fee and Partnership closing costs. These costs are amortized over the following periods: Financing costs................................................. 15 years Partnership closing costs....................................... 5 to 7 years
Revenue Recognition Revenues from sales of electricity are recognized as service is delivered. Revenues from sales of steam are calculated considering a future period when steam will be delivered without receiving corresponding revenue. This free steam is being recorded at an average rate over future steam production as deferred revenue. A recent accounting principle requires companies to recognize revenue on power sales agreements entered into after May 1992 using the lower of the actual cash received or the average rate measured on a cumulative basis. CGC's power sales agreements were entered into prior to May 1992. Had CGC applied this principle, the revenues CGC recorded for the period from January 1, 1993 to April 18, 1993 would have been approximately $488,000 less. Income Taxes Income taxes are the responsibility of the individual partners; therefore, there is no provision for Federal and state income taxes in the financial statements. F-56 152 CALPINE GEYSERS COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. WORKING CAPITAL LOAN CGC has a working capital agreement with a bank providing for advances not to exceed $5.0 million less any outstanding letters of credit. The aggregate unpaid principal of the working capital loan is payable in full at least once a year commencing in 1991, with the final payment of principal, interest and fees due June 30, 1995; interest accrues at the London Interbank Offered Rate (LIBOR) plus .625 percent over the term of the loan. 4. NOTE PAYABLE During 1992, CGC entered into a note payable with a financing company for $543,778. The note bears interest at 3.79 percent annually and was repaid in two installments in January and April 1993. 5. LONG-TERM DEBT CGC has a $200.0 million ($176.8 million outstanding at April 18, 1993) loan agreement with a bank, the components of which are as follows: Senior term loans: $156.8 million outstanding at April 18, 1993 with principal and interest payable in quarterly installments at variable amounts beginning September 30, 1990 and the final payment of principal, interest and fees due June 30, 2002; interest on $136.8 million is fixed at 9.93 percent with the remainder accruing at LIBOR plus .75 percent to 1.25 percent over the term of the loan; collateralized by all of CGC's assets and the partners' interest. Junior term loans: $20.0 million outstanding at April 18, 1993 with principal and interest payable in quarterly installments at variable amounts beginning September 30, 2002 and the final payment of principal, interest and fees due June 30, 2005; interest accrues at LIBOR plus 1.5 percent to 2.75 percent over the term of the loan; the loan is collateralized by all of CGC's assets and the partners' interest. The annual principal maturities of the long-term debt outstanding at April 18, 1993 are as follows: 1993........................................................... $ 8,800,000 1994........................................................... 16,000,000 1995........................................................... 18,000,000 1996........................................................... 21,000,000 1997........................................................... 22,000,000 Thereafter..................................................... 91,000,000 ------------ $176,800,000 ============
The senior and junior term loan agreements contain a number of covenants. Two of these covenants require that CGC maintain restricted cash balances as defined in the agreements, and that CGC maintain certain insurance coverages. During the period from January 1, 1993 to April 18, 1993, CGC did not meet the insurance covenant and has obtained a waiver for this violation. The carrying value of the $136.8 million portion of the senior term notes has an effective rate of 9.93 percent under CGC's interest rate swap agreements (see Note 6). Based on the borrowing rates currently available to CGC for bank loans with similar terms and maturities, the fair value of the debt as of April 18, 1993 is approximately $150.2 million. The carrying value of the remaining $20.0 million of the senior and the $20.0 million junior term loans approximates the debt's fair market value as the rates are variable and are based on current LIBOR. F-57 153 CALPINE GEYSERS COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. INTEREST RATE SWAP AGREEMENTS: CGC entered into two interest rate swap agreements to minimize the impact of changes in interest rates by effectively fixing its interest rate at 9.93 percent on a portion of its senior term note. The interest rate swap agreements mature through December 31, 2000. CGC is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. 7. COMMITMENTS AND CONTINGENCIES Royalties and Leases CGC is committed under several geothermal and right of way leases. The geothermal leases generally provide for royalties based on production revenue, with reductions for property taxes paid and the right of way leases are based on flat rates and are not material. Under the terms of certain geothermal land leases, royalties accrue at rates ranging from 7 percent to 12.5 percent of electricity, steam and effluent revenue, net of property taxes. Certain properties also have net profits and overriding royalty interests ranging from approximately 1.7 percent to 23.5 percent, which are in addition to the land lease royalties. CGC also has a working interest agreement with a third party providing for the sharing of approximately 30 percent of drilling and other well costs, various percentages of other operating costs and 30 percent of revenues on specified wells of Unit 13 and Unit 16. Most lease agreements contain clauses providing for minimum lease payments to leaseholders if production temporarily ceases or if production falls below a specified level. Expenses under these agreements for the period from January 1, 1993 to April 18, 1993 are as follows: Production royalties............................................. $3,150,076 Lease payments................................................... 119,081
Litigation CGC is a party to lawsuits and claims arising out of the normal course of business, principally related to royalty interests on geothermal property sites. Management believes that the outcome of these claims and lawsuits will not have a material adverse effect on CGC's financial position and results of operations. 8. RELATED PARTY TRANSACTIONS The power plants and steam fields of CGC are operated by Calpine Operating Plant Services, Inc. ("COPS"), wholly owned by Calpine Corporation, under an Operating and Maintenance Agreement. Under the agreement, COPS is obligated to perform all operation and maintenance services in connection with the business, including operation, repair and maintenance of the power plants and steam fields, arranging for new well drilling, providing administrative and billing services, and performing technical analyses and contract administration. For performance of these services, COPS is reimbursed for its direct costs plus a general and administrative recovery rate of 12 percent for direct labor costs, 10 percent for specific costs, and 5 percent for capital expenditures up to $5.0 million per year, then 2 percent for additional capital expenditures. In addition, the contract also includes an annual operating fee of $1.0 million, escalating in relation to the Consumer Price Index. During the period from January 1, 1993 to April 18, 1993, total charges under the Operating and Maintenance Agreement amounted to approximately $7.1 million, including approximately $3.7 million for capital expenditures. F-58 154 CALPINE GEYSERS COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Calpine also charges CGC directly for expenses in connection with its duties as general partner, and for technical and administrative services. During the period from January 1, 1993 to April 18, 1993, charges amounted to approximately $185,000. FMRP has a royalty interest in one of the properties in production. During the period from January 1, 1993 to April 18, 1993, production royalty expense related to FMRP amounted to approximately $397,000. 9. SIGNIFICANT CUSTOMERS AND SUMMARY OF OPERATIONS: CGC's revenue is derived primarily from two sources -- Pacific Gas and Electric ("PG&E") and Sacramento Municipal Utility District ("SMUD"). Revenue for the period from January 1, 1993 to April 18, 1993 is as follows: PG&E............................................................ $17,323,683 SMUD............................................................ 3,830,533 ----------- 21,154,216 Less revenues deferred.......................................... (395,100) ----------- Total................................................. $20,759,116 ===========
Operating Geothermal Power Plants Electricity from CGC's two operating geothermal power plants, Bear Canyon and West Ford Flat, is sold to PG&E under the terms of twenty-year contracts which began in 1989. Under the terms of the contracts, CGC is paid for energy delivered based upon a fixed price which escalates annually for the first ten years of the contract and upon PG&E's full short-run avoided operating costs for the second ten years. CGC also receives capacity payments from PG&E. Under certain circumstances, if CGC is unable to deliver firm capacity, then CGC may owe PG&E certain minimum damages, as specified in the contracts. Geothermal Steam Fields Steam from CGC's three geothermal steam fields is sold to PG&E and SMUD under contracts. PG&E is obligated to operate the plants (Unit 13 and Unit 16) as close to full capacity and as continuously as possible. SMUD is obligated to make its best effort to continuously accept steam generated by the plant, except during outages. Under the terms of the PG&E contract, the price paid for steam is adjusted annually based upon prices paid by PG&E for fossil fuels (oil and natural gas) and nuclear fuel. Under the terms of the SMUD contract, the price paid for steam is adjusted bi-annually based upon inflation and price indices reflecting the economy and the cost of fuel. The contracts with both PG&E and SMUD also provide that CGC receive an additional amount per mwh of net output as compensation for the cost of disposing of liquid effluents, primarily steam condensate. In the event the quantity of steam delivered at any of the plants is less than 50 percent of the units rated capacity during any given month, PG&E or SMUD is not required to pay for steam delivered during such month until the cost of the power plants has been completely amortized. The contracts may be terminated upon written notice under conditions specified in the contract if further operation of the plants becomes uneconomical. In the event that the contract is terminated by CGC, and if requested by either PG&E or SMUD, CGC must assign to PG&E (Unit 13 and Unit 16) or SMUD (SMUDGEO #1) all rights, title and interest to the wells, lands and related facilities. F-59 155 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholder of LFC No. 38 Corp. and Portsmouth Leasing Corporation: We have audited the accompanying combined balance sheets of LFC No. 38 Corp. and Portsmouth Leasing Corporation and Subsidiaries as of December 31, 1994 and 1993, and the related combined statements of operations, changes in shareholder's deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of LFC No. 38 Corp. and Portsmouth Leasing Corporation and Subsidiaries as of December 31, 1994 and 1993, and the combined results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 4 to the financial statements, the Companies changed their method of accounting for income taxes in 1993. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 3, 1995, except as to the information presented in Note 7 for which the date is March 30, 1995 F-60 156 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES COMBINED BALANCE SHEETS
DECEMBER 31, --------------------------- 1994 1993 ----------- ----------- ASSETS Current assets Cash and equivalents............................................ $ 2,986,606 $ 3,911,692 Accounts receivable............................................. 1,888,467 1,774,335 Other current assets............................................ 74,729 145,754 ----------- ----------- Total current assets.................................... 4,949,802 5,831,781 Power production facility, less accumulated depreciation of $6,086,660 and $5,057,568, respectively......................... 24,228,646 25,239,115 Project development rights, less accumulated amortization of $1,093,026 and $915,778, respectively........................... 4,287,918 4,465,166 Deferred costs, less accumulated amortization of $1,335,381 and $1,215,708, respectively........................................ 712,224 831,898 Land.............................................................. 340,938 340,938 ----------- ----------- Total assets............................................ $34,519,528 $36,708,898 =========== =========== LIABILITIES AND SHAREHOLDER'S DEFICIENCY Current liabilities Accounts payable and accrued liabilities........................ $ 1,372,360 $ 1,606,528 Accrued interest payable........................................ 136,294 245,135 Notes payable................................................... 1,819,071 1,633,676 Due to affiliates............................................... 224,413 555,185 ----------- ----------- Total current liabilities............................... 3,552,138 4,040,524 Notes payable..................................................... 26,767,423 28,553,740 Liability for major maintenance................................... 1,850,728 1,266,518 Deferred income taxes............................................. 9,233,673 8,613,266 ----------- ----------- Total liabilities....................................... 41,403,962 42,474,048 ----------- ----------- Shareholder's deficiency Common stock $1 par value, 2,000 shares authorized, 2,000 shares issued.......................................... 2,000 2,000 Capital in excess of par value.................................. 1,279 1,279 Accumulated deficit............................................. (565,743) (1,668,429) ----------- ----------- (562,464) (1,665,150) Advances to affiliates.......................................... (6,321,970) (4,100,000) ----------- ----------- Total shareholder's deficiency.......................... (6,884,434) (5,765,150) ----------- ----------- Total liabilities and shareholder's deficiency.......... $34,519,528 $36,708,898 =========== ===========
See Accompanying Notes to Combined Financial Statements F-61 157 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------- 1994 1993 ----------- ----------- Revenues Power sales....................................................... $17,431,700 $18,134,824 Interest income................................................... 234,154 89,318 ----------- ----------- 17,665,854 18,224,142 ----------- ----------- Expenses Operating costs................................................... 12,702,761 9,271,110 Depreciation and amortization..................................... 1,338,734 1,515,297 Interest expense.................................................. 1,738,152 1,740,675 ----------- ----------- 15,779,647 12,527,082 ----------- ----------- Income before income taxes.......................................... 1,886,207 5,697,060 Income tax provision................................................ 783,521 2,307,233 ----------- ----------- Income before cumulative effect of change in accounting principle... 1,102,686 3,389,827 Cumulative effect of change in accounting for income taxes.......... -- (5,108,294) ----------- ----------- Net income (loss)......................................... $ 1,102,686 $(1,718,467) =========== ===========
See Accompanying Notes to Combined Financial Statements F-62 158 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIENCY (FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993)
RETAINED CAPITAL IN EARNINGS SHAREHOLDER'S COMMON EXCESS OF (ACCUMULATED ADVANCES TO EQUITY STOCK PAR VALUE DEFICIT) AFFILIATES (DEFICIENCY) ------ ---------- ------------ ----------- ------------- Balance, December 31, 1992............. $2,000 $1,279 $ 50,038 -- $ 53,317 Advance to affiliates.................. -- -- -- $(4,100,000) (4,100,000) Net loss............................... -- -- (1,718,467) -- (1,718,467) ------ ------ --------- ---------- ---------- Balance, December 31, 1993............. 2,000 1,279 (1,668,429) (4,100,000) (5,765,150) Advance to affiliates.................. -- -- -- (2,221,970) (2,221,970) Net income............................. -- -- 1,102,686 -- 1,102,686 ------ ------ --------- ---------- ---------- Balance, December 31, 1994............. $2,000 $1,279 $ (565,743) $(6,321,970) $ (6,884,434) ====== ====== ========= ========== ==========
See Accompanying Notes to Combined Financial Statements F-63 159 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------- 1994 1993 ----------- ----------- Cash flows from operating activities Net income (loss)............................................... $ 1,102,686 $(1,718,467) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization................................ 1,338,734 1,515,297 Provision for major maintenance.............................. 584,210 710,872 Payments for major maintenance............................... -- (814,244) Cumulative effect of change in accounting for income taxes... -- 5,108,294 Deferred income taxes........................................ 620,408 2,306,433 Changes in operating assets and liabilities Accounts receivable........................................ (114,132) 476,265 Due to affiliates.......................................... (330,771) (161,838) Accounts payable and accrued liabilities................... (234,169) (1,862,005) Other current assets....................................... 71,025 (20,955) Accrued interest payable................................... (108,842) (23,990) ----------- ----------- Net cash provided by operating activities....................... 2,929,149 5,515,662 ----------- ----------- Cash flows used in investing activities Investment in power production facility......................... (31,343) (10,433) ----------- ----------- Cash flows used in financing activities Repayment of financing.......................................... (1,600,922) (1,416,935) Advances to affiliates.......................................... (2,221,970) (4,100,000) ----------- ----------- Net cash used in financing activities........................... (3,822,892) (5,516,935) ----------- ----------- Net decrease in cash and equivalents.............................. (925,086) (11,706) Cash and equivalents -- beginning of period....................... 3,911,692 3,923,398 ----------- ----------- Cash and equivalents -- end of period............................. $ 2,986,606 $ 3,911,692 =========== ===========
See Accompanying Notes to Combined Financial Statements F-64 160 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 -- THE PARTNERSHIP AND THE PROJECT LFC No. 38 Corp. (the "Limited Partner"), a Delaware corporation, is the sole Limited Partner and Greenleaf Unit One Associates, Inc. (the "General Partner"), a California corporation, is the sole General Partner (collectively the "Partners") of Greenleaf Unit One Associates, L.P. (the "Partnership"), a California Limited Partnership. Portsmouth Leasing Corporation ("Portsmouth"), a Delaware corporation, is the sole owner of the General Partner. Portsmouth and the Partners are wholly owned subsidiaries of Radnor Energy Partners, L.P. ("L.P."). L.P. is, in turn, a majority-owned subsidiary of LFC Financial Corp ("Financial"). The combined financial statements include the accounts of the Partners, the Partnership, and Portsmouth (collectively the "Company") after elimination of all material intercompany balances and transactions. The Partnership owns and operates a 49.5 megawatt natural gas fired cogeneration facility located in Yuba City, California (the "Project"). The facility, which was completed in March 1989, produces electrical power which it sells to Pacific Gas and Electric Company ("PG&E") pursuant to a power purchase agreement that provides for electricity and capacity payments over a thirty-year period. The exhaust gas generated by the Project is used to dry wood chips. The wood drying facility is operated by Wood Fuel Processing, Inc. ("WFP") pursuant to a processing facilities agreement. The agreement provides that WFP will pay certain royalties to the Partnership in the future based on the profitability of the wood drying operation. Operations and maintenance of the Project is performed by Stockmar Energy Inc., which does business as LFC Power Systems Corporation ("Power Systems"), an affiliate. Power Systems is a wholly owned subsidiary of LFC Energy Corporation ("Energy"), which, in turn, is a majority-owned subsidiary of Financial. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Power Production Facility -- The power production facility, which was constructed by Power Systems, includes the cogeneration plant (including the wood drying facility) and the related equipment and is stated at cost. Depreciation is recorded utilizing the straight-line method over the estimated useful life of the Project of thirty years. Upon disposition, the cost and related accumulated depreciation of equipment removed from the accounts and the resulting gain (loss) is included in gains (losses) on equipment sales for the period. Project Development Rights -- The Project development rights include all of the essential contracts, agreements, permits, licenses and other agreements which were required to construct and operate the Project, as well as the preliminary design of the Project, the power purchase agreement, the FERC certification and other contracts and agreements. These Project development rights are being amortized by the Partnership over a thirty-year period. Deferred Costs -- Deferred costs include lender, legal, and other professional fees incurred in connection with the acquisition and construction of the Project and pre-operating expenses which were capitalized. Capitalized fees are amortized over their estimated useful lives and pre-operating expenses are amortized over sixty months. Major Maintenance -- Major maintenance costs are accrued ratably over the scheduled maintenance period and are included in operating costs. Costs anticipated to be incurred within the next twelve months are classified as a current liability. Income Taxes -- Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 -- "Accounting For Income Taxes" ("SFAS109"). SFAS109 requires the recognition of deferred income tax liabilities and assets for the future tax consequences of transactions that have been recognized for financial reporting or income tax purposes and includes a requirement for adjustment of deferred tax balances for tax rate changes. The Company joins with L.P. and affiliated companies in the filing of a consolidated U.S. federal income tax return. The Company's policy is to provide for federal and state F-65 161 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) income taxes on a separate return basis. In addition, the Company has a tax sharing arrangement with L.P. that provides to the extent that net operating loss or investment tax credit carryforwards are not utilized by the Company on a separate return basis, but are utilized in the consolidated tax return of L.P., the Company will receive a portion of these tax benefits. These payments will be classified as capital in excess of par value. Statements of Cash Flows -- The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. Net cash provided by operating activities includes cash payments for interest of $1,846,993 and $1,764,666 in 1994 and 1993, respectively. NOTE 3 -- NOTES PAYABLE Notes payable at December 31, 1994 and 1993 consist of the following:
1994 1993 ----------- ----------- Note payable -- Bank...................................... $25,996,000 $27,507,000 Note payable -- Individuals............................... 2,590,494 2,680,416 ----------- ----------- Total........................................... 28,586,494 30,187,416 Less current portion...................................... 1,819,071 1,633,676 ----------- ----------- Noncurrent portion........................................ $26,767,423 $28,553,740 =========== ===========
The Partnership's note payable is payable pursuant to a credit agreement with the New York branch of Credit Suisse ("Credit Suisse") and is collateralized by substantially all of the Partnership's assets. The credit agreement contains certain restrictive covenants including the maintenance of certain debt service coverage ratios, working capital requirements, and limitations on distributions. In addition, all cash and equivalents are maintained in accounts at Credit Suisse. The loan bears interest at variable rates or fixed rates at the option of the Partnership. The effective interest rate on the loan was 8.05% at December 31, 1994. The loan is being repaid over ten years, commencing in 1990, in level quarterly debt service payments on a fourteen-year amortization schedule with a balloon payment at the end of the tenth year. The note payable-individuals is payable pursuant to a sale/purchase agreement with the former owners of the General Partner. The loan bears interest at a fixed rate of 8.25%. The loan is scheduled to be repaid in twenty (20) annual installments plus interest, with each payment being based upon 1.59% of power sales. If the obligation is repaid prior to maturity, the Company must continue the payments as defined until the payment period ends, 2010. The required principal payments by year are as follows: 1995....................................................... $ 1,819,071 1996....................................................... 2,016,092 1997....................................................... 2,231,533 1998....................................................... 2,529,127 1999....................................................... 2,794,776 2000....................................................... 16,092,618 Thereafter................................................. 1,103,277 ----------- Total............................................ $28,586,494 ===========
F-66 162 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- INCOME TAXES Effective January 1, 1993, the Company adopted SFAS109, which requires the liability method of accounting for income taxes. The cumulative effect of the change in method of accounting for income taxes of $5,108,294 was reported in the 1993 statement of operations and as an increase in the net deferred tax liability at January 1, 1993. The income tax provision is comprised of the following:
1994 1993 -------- ---------- Current State...................................................... $ 26,944 $ 800 Federal.................................................... 136,169 -- Deferred State...................................................... 175,417 529,827 Federal.................................................... 444,991 1,776,606 -------- ---------- Total $783,521 $2,307,233 ======== ==========
The provision for income taxes as a percentage of income before income tax can be reconciled to the federal statutory rate as follows:
1994 1993 ---- ---- Federal statutory tax rate............................................. 34% 34% State tax, net of federal benefit...................................... 6% 6% Other.................................................................. 2% -- -- - --- Provision for income taxes............................................. 42% 40% === ===
The net deferred tax liability (determined in accordance with SFAS109) consists of:
DECEMBER 31, --------------------------- 1994 1993 ----------- ----------- Deferred tax liabilities: Accumulated depreciation................................ $10,872,804 $11,353,409 ----------- ----------- Deferred tax assets: Liability for major maintenance......................... 742,845 508,355 Investment tax credit carryforward...................... 821,862 1,254,862 Net operating loss carryforward......................... 74,424 976,926 ----------- ----------- 1,639,131 2,740,143 ----------- ----------- Net deferred tax liability................................ $ 9,233,673 $ 8,613,266 =========== ===========
As of December 31, 1994, the Company had, on a separate company basis, a state net operating loss carryforward of $800,260 which expires in 1996 through 1999 and investment tax credit carryforwards of $821,862 which expires in 2003. NOTE 5 -- RELATED PARTIES AND OPERATING COSTS The Partnership incurred operating costs through Power Systems of $1,976,599 and $1,910,189 in 1994 and 1993, respectively. The Partnership's 1994 and 1993 operating costs include $3,264,328 and $2,680,216, respectively, for the purchase of natural gas from affiliates. Affiliates also provided gathering, transportation and fuel management services at a cost of $2,328,028 and $725,000 to the Partnership in 1994 and 1993, F-67 163 LFC NO. 38 CORP. AND PORTSMOUTH LEASING CORPORATION AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) respectively. The Partnership incurred $1,307,649 and $104,114 in 1994 and 1993, respectively, for management services provided by L.P. NOTE 6 -- COMMON STOCK The combined common stock of the Company as of December 31, 1994 and 1993 consists of the following:
CAPITAL SHARES IN AUTHORIZED $1 PAR EXCESS OF AND ISSUED VALUE PAR VALUE ---------- ------ --------- LFC No. 38 Corp....................................... 1,000 $1,000 -- Portsmouth Leasing Corporation........................ 1,000 1,000 $ 1,279 ----- ------ ------ Total....................................... 2,000 $2,000 $ 1,279 ===== ====== ======
NOTE 7 -- SUBSEQUENT EVENTS On March 30, 1995, Financial entered into a stock purchase agreement to sell the stock of the Company to Calpine Corporation. The transaction is scheduled to close by April 28, 1995. No effect of the proposed sale has been recognized in the accompanying financial statements. F-68 164 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholder of LFC No. 60 Corp.: We have audited the accompanying consolidated balance sheets of LFC No. 60 Corp. and Subsidiary as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in shareholder's deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LFC No. 60 Corp. and Subsidiary as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 4 to the financial statements, the Company changed its method of accounting for income taxes in 1993. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 3, 1995, except as to the information presented in Note 6 for which the date is March 30, 1995 F-69 165 LFC NO. 60 CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1994 1993 ----------- ----------- ASSETS Current assets Cash and equivalents............................................ $ 2,088,588 $ 2,491,825 Accounts receivable, net of allowance for doubtful accounts of $200,000 in 1993............................................. 2,076,594 1,967,998 Due from affiliates............................................. 776,253 -- Prepaid assets.................................................. 513,954 266,690 ----------- ----------- Total current assets.................................... 5,455,389 4,726,513 Power production facility, less accumulated depreciation of $5,430,948 and $4,339,447, respectively......................... 26,636,147 27,711,561 Project development rights, less accumulated amortization of $330,417 and $265,417, respectively............................. 1,619,583 1,684,583 Deferred costs, less accumulated amortization of $1,410,676 and $1,148,992, respectively........................................ 580,706 842,390 ----------- ----------- Total assets............................................ $34,291,825 $34,965,047 =========== =========== LIABILITIES AND SHAREHOLDER'S DEFICIENCY Current liabilities Accounts payable and accrued liabilities........................ $ 1,785,800 $ 882,746 Due to affiliates............................................... -- 634,451 Accrued interest payable........................................ 13,972 131,200 Note payable.................................................... 600,000 600,000 Liability for major maintenance................................. -- 969,996 ----------- ----------- Total current liabilities............................... 2,399,772 3,218,393 Note payable...................................................... 31,600,000 32,200,000 Liability for major maintenance................................... 1,737,908 1,273,328 Deferred income taxes............................................. 6,368,319 5,764,303 ----------- ----------- Total liabilities....................................... 42,105,999 42,456,024 ----------- ----------- Shareholder's deficiency Common stock $1 par value, authorized, issued and outstanding -- 1,000 shares................................................. 1,000 1,000 Capital in excess of par value.................................. 1,199,000 1,199,000 Deficit......................................................... (395,931) (1,290,977) ----------- ----------- 804,069 (90,977) Advances to affiliates.......................................... (8,618,243) (7,400,000) ----------- ----------- Total shareholder's deficiency.......................... (7,814,174) (7,490,977) ----------- ----------- Total liabilities and shareholder's deficiency.......... $34,291,825 $34,965,047 =========== ===========
See Accompanying Notes to Consolidated Financial Statements F-70 166 LFC NO. 60 CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------- 1994 1993 ----------- ----------- Revenues Power sales..................................................... $18,495,832 $19,223,155 Steam sales..................................................... 61,780 62,496 Interest income................................................. 155,715 68,247 ----------- ----------- 18,713,327 19,353,898 ----------- ----------- Expenses Operating costs................................................. 13,961,525 12,620,397 Depreciation and amortization................................... 1,418,185 1,436,668 Interest expense................................................ 1,773,839 1,702,354 ----------- ----------- 17,153,549 15,759,419 ----------- ----------- Income before income taxes........................................ 1,559,778 3,594,479 Income tax provision.............................................. (664,732) (1,616,815) ----------- ----------- Income before cumulative effect of change in accounting principle....................................................... 895,046 1,977,664 Cumulative effect of change in accounting for income taxes........ -- (2,773,609) ----------- ----------- Net income (loss)................................................. $ 895,046 $ (795,945) =========== ===========
See Accompanying Notes to Consolidated Financial Statements F-71 167 LFC NO. 60 CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIENCY (FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993)
CAPITAL IN COMMON EXCESS OF ADVANCES TO STOCK PAR VALUE DEFICIT AFFILIATES TOTAL ------ ---------- ----------- ----------- ----------- Balance December 31, 1992.... $1,000 $1,199,000 $ (495,032) $(3,600,000) $(2,895,032) Net loss..................... -- -- (795,945) -- (795,945) Advance to affiliates........ -- -- -- (3,800,000) (3,800,000) ------ ---------- ----------- ----------- ----------- Balance December 31, 1993.... 1,000 1,199,000 (1,290,977) (7,400,000) (7,490,977) Net income................... -- -- 895,046 -- 895,046 Advance to affiliates........ -- -- -- (1,218,243) (1,218,243) ------ ---------- ----------- ----------- ----------- Balance, December 31, 1994... $1,000 $1,199,000 $ (395,931) $(8,618,243) $(7,814,174) ====== ========= ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements F-72 168 LFC NO. 60 CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, --------------------------- 1994 1993 ----------- ----------- Cash flows from operating expenses Net income (loss)............................................... $ 895,046 $ (795,945) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization................................ 1,418,185 1,436,668 Provision for major maintenance.............................. 331,134 818,329 Payments for major maintenance............................... (836,550) -- Provision for doubtful accounts.............................. -- 200,000 Cumulative effect of change in accounting principle.......... -- 2,773,609 Deferred income tax provision................................ 604,016 1,364,083 Changes in operating assets and liabilities Accounts receivable........................................ (108,595) 41,995 Due from affiliates........................................ (1,410,704) (112,443) Accounts payable and accrued liabilities................... 903,054 (1,184,769) Prepaid assets............................................. (247,264) (19,510) Accrued interest payable................................... (117,228) (20,866) ----------- ----------- Net cash provided by operating activities....................... 1,431,094 4,501,151 ----------- ----------- Cash flows used in investing activities Investment in power production facility......................... (16,088) (21,968) ----------- ----------- Cash flows used in financing activities Repayment of financing.......................................... (600,000) (600,000) Advances to affiliates.......................................... (1,218,243) (3,800,000) ----------- ----------- Net cash used in financing activities........................... (1,818,243) (4,400,000) ----------- ----------- Net increase (decrease) in cash and equivalents................... (403,237) 79,183 Cash and equivalents -- beginning of period....................... 2,491,825 2,412,642 ----------- ----------- Cash and equivalents -- end of period............................. $ 2,088,588 $ 2,491,825 =========== ===========
See Accompanying Notes to Consolidated Financial Statements F-73 169 LFC NO. 60 CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND THE PROJECT LFC No. 60 Corp., a Delaware corporation, is a wholly-owned subsidiary of Radnor Energy Partners, L.P. ("L.P."). L.P. is, in turn, a majority-owned subsidiary of LFC Financial Corp ("Financial"). LFC No. 60 Corp. owns 100% of the Greenleaf Unit Two Associates, Inc. ("GUTA"). The consolidated financial statements include the accounts of LFC No. 60 Corp. and GUTA (the "Company") after elimination of all material intercompany balances and transactions. GUTA is a California corporation which owns and operates a 49.5 megawatt natural gas fired cogeneration plant located in Yuba City, California (the "Project"). The facility, which was completed in December 1989, produces electrical power which it sells to Pacific Gas and Electric Company ("PG&E") pursuant to a power purchase agreement that provides for electricity and capacity payments over a thirty year period. The steam produced by the Project is sold to Sunsweet Growers, Inc. under a long-term steam purchase agreement. Operations and maintenance of the Project is performed by Stockmar Energy Inc., which does business as LFC Power Systems Corporation ("Power Systems"), an affiliate. Power Systems is a wholly-owned subsidiary of LFC Energy Corporation ("Energy"), which, in turn, is a majority-owned subsidiary of Financial. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Power Production Facility -- The power production facility, which was constructed by Power Systems, includes the cogeneration plant and the related equipment and is stated at cost. Depreciation is recorded utilizing the straight-line method over the estimated useful life of the Project of thirty years. Upon disposition, the cost and related accumulated depreciation of equipment is removed from the accounts and the resulting gain (loss) is included in gains (losses) on equipment sales for the period. Project Development Rights -- The Project development rights include all of the essential contracts, agreements, permits, licenses and other agreements which were required to construct and operate the Project as well as the preliminary design of the Project, the power purchase agreement, the FERC certification and other contracts and agreements. These Project development rights are being amortized by the Company over a thirty-year period. Deferred Costs -- Deferred costs include lender, legal, and other professional fees incurred in connection with the acquisition and construction of the Project and pre-operating expenses which were capitalized. Capitalized fees are amortized over their estimated useful lives and pre-operating expenses are amortized over sixty months. Major Maintenance -- Major maintenance costs are accrued ratably over the scheduled maintenance period and are included in operating costs. Costs anticipated to be incurred within the next twelve months are classified as a current liability. Income Taxes -- Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 -- "Accounting For Income Taxes" ("SFAS 109"). SFAS109 requires the recognition of deferred income tax liabilities and assets for the future tax consequences of transactions that have been recognized for financial reporting or income tax purposes and includes a requirement for adjustment of deferred tax balances for tax rate changes. The Company joins with L.P. and affiliated companies in the filing of a consolidated U.S. federal income tax return. The Company's policy is to provide for federal and state income taxes on a separate return basis. In addition, the Company has a tax sharing arrangement with L.P. that provides to the extent that net operating loss or investment tax credit carryforwards are not utilized by the Company on a separate return basis, but are utilized in the consolidated tax return of L.P., the Company will receive a portion of these tax benefits. These payments will be classified as capital in excess of par value. F-74 170 LFC NO. 60 CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Statements of Cash Flows -- The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. Net cash provided by operating activities includes cash payments for interest of $1,891,067 and $1,723,220 in 1994 and 1993, respectively. NOTE 3 -- NOTE PAYABLE The Company's note payable is payable pursuant to a credit agreement with the New York branch of Credit Suisse ("Credit Suisse") and is collateralized by substantially all of the Company's assets. The credit agreement contains certain restrictive covenants including the maintenance of certain debt service coverage ratios, working capital requirements, and limitations on distributions. In addition, all cash and equivalents are maintained in accounts at Credit Suisse. The note bears interest at variable or fixed rates at the option of the Company. The effective interest rate on the note was 7.81% at December 31, 1994. The note is being repaid in quarterly payments through 2005. The required principal payments by year are as follows: 1995....................................................... $ 600,000 1996....................................................... 600,000 1997....................................................... 600,000 1998....................................................... 2,000,000 1999....................................................... 2,500,000 Thereafter................................................. 25,900,000 ----------- Total................................................. $32,200,000 ===========
NOTE 4 -- INCOME TAXES Effective January 1, 1993, the Company adopted SFAS 109, which requires the liability method of accounting for income taxes. The cumulative effect of the change in method of accounting for income taxes of $2,773,609 was reported in the 1993 statement of operations and as an increase in the net deferred tax liability at January 1, 1993. The income tax provision is comprised of the following:
1994 1993 -------- ---------- Deferred Federal.................................................... $490,009 $1,293,236 State...................................................... 114,007 70,847 Current -- State............................................. 60,716 252,732 -------- ---------- Total.............................................. $664,732 $1,616,815 ======== ==========
The provision for income taxes as a percentage of income before income taxes can be reconciled to the federal statutory rate as follows:
1994 1993 ---- ---- Federal statutory tax rate............................................. 34% 34% State Tax.............................................................. 8% 6% Other.................................................................. 1% 5% -- -- Provision for income taxes........................................... 43% 45% == ==
F-75 171 LFC NO. 60 CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net deferred tax liability (determined in accordance with SFAS109) consists of:
DECEMBER 31, ------------------------- 1994 1993 ---------- ---------- Deferred tax liabilities: Accumulated depreciation.................................. $9,123,465 $8,509,818 ---------- ---------- Deferred tax assets: Liability for major maintenance........................... 713,324 922,858 Investment tax credit carryforward........................ 1,333,448 1,333,448 Net operating loss carryforward........................... 708,374 418,977 Other..................................................... -- 70,232 ---------- ---------- 2,755,146 2,745,515 ---------- ---------- Net deferred tax liability.................................. $6,368,319 $5,764,303 ========== ==========
As of December 31, 1994, the Company had a tax net operating loss carry forward determined on a separate company basis of $2,023,928 which expires in 2007 through 2009. As of December 31, 1994, the Company had ITC carryforwards determined on a separate company basis of $1,333,448 which expire in 2004. NOTE 5 -- RELATED PARTIES AND OPERATING COSTS The Company incurred operating costs of $1,610,780 and $2,330,001 through Power Systems in 1994 and 1993, respectively. The Company's 1994 and 1993 operating costs include $1,088,550 and $1,421,558, respectively, for the purchase of natural gas from affiliates. Affiliates provided gathering, transportation and fuel management services at a cost of $2,181,758 and $400,000 in 1994 and 1993, respectively. The Company incurred $1,307,465 and $104,106 in 1994 and 1993, respectively, for management services provided by L.P. NOTE 6 -- SUBSEQUENT EVENT On March 30, 1995, Financial entered into a stock purchase agreement to sell the stock of the Company and certain affiliates to Calpine Corporation. The transaction is scheduled to close by April 28, 1995. No effect of the proposed sale has been recognized in the accompanying financial statements. F-76 172 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the General Partner of BAF Energy, A California Limited Partnership: We have audited the accompanying balance sheets of BAF Energy, A California Limited Partnership, as of October 31, 1995 and 1994, and the related statements of income, partners' equity and cash flows for each of the three years ended October 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BAF Energy, A California Limited Partnership, as of October 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years ended October 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. As explained in Note 1 to the financial statements, effective November 1, 1994, the Company changed its method of accounting for investments. As discussed in Note 8 to the financial statements, subsequent to October 31, 1995, the Partnership signed a letter agreement with a third party to lease substantially all of its property, plant and equipment and assign all related contracts to a third party. ARTHUR ANDERSEN LLP San Francisco, California December 6, 1995 F-77 173 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP BALANCE SHEETS OCTOBER 31, 1995 AND 1994
1995 1994 ------------ ------------ ASSETS Current assets: Cash and cash equivalents..................................... $ 3,757,921 $ 5,363,057 Available for sale securities................................. 1,919,184 -- Restricted available-for-sale securities...................... 7,241,305 12,332,244 Accounts receivable -- trade.................................. 10,916,919 5,277,413 Supplies inventory............................................ 2,153,129 2,060,935 Prepaid insurance............................................. 288,383 251,375 ------------ ------------ Total current assets.................................. 26,276,841 25,285,024 ------------ ------------ Property, plant and equipment................................... 100,258,434 100,210,960 Accumulated depreciation and amortization..................... (24,387,912) (20,854,389) ------------ ------------ 75,870,522 79,356,571 ------------ ------------ Total assets.......................................... $102,147,363 $104,641,595 ============ ============ LIABILITIES AND PARTNERS' EQUITY Current liabilities Accounts payable.............................................. $ 1,598,177 $ 2,824,110 Interest payable.............................................. 1,309,566 1,396,495 Payable to affiliate.......................................... 166,569 615,881 Current portion of long-term liabilities...................... 5,444,386 5,283,785 ------------ ------------ Total current liabilities............................. 8,518,698 10,120,271 ------------ ------------ Long-term liabilities........................................... 66,804,704 71,157,714 ------------ ------------ Commitments and contingencies (Note 6) Partners' equity: Contributed equity............................................ 9,901,600 9,901,600 Undistributed earnings........................................ 16,922,361 13,462,010 ------------ ------------ Total partners' equity................................ 26,823,961 23,363,610 ------------ ------------ Total liabilities and partners' equity................ $102,147,363 $104,641,595 ============ ============
The accompanying notes are an integral part of these statements. F-78 174 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF INCOME FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
1995 1994 1993 ----------- ----------- ----------- Operating Revenues.................................. $43,835,619 $47,955,622 $49,738,504 Operating Expenses: Fuel.............................................. 9,193,490 14,079,684 16,449,118 Depreciation and amortization..................... 3,578,572 3,575,442 3,576,710 Labor, supplies and other......................... 6,614,543 6,959,891 6,343,755 ----------- ----------- ----------- Total operating expenses.................. 19,386,605 24,615,017 26,369,583 ----------- ----------- ----------- Operating income.......................... 24,449,014 23,340,605 23,368,921 ----------- ----------- ----------- Other Income and Expense: Interest income and other......................... 955,299 477,666 448,961 General and administrative........................ (773,610) (784,401) (653,373) Interest expense.................................. (8,165,273) (8,654,453) (9,091,695) ----------- ----------- ----------- Total other income and expense............ (7,983,584) (8,961,188) (9,296,107) ----------- ----------- ----------- Partnership Income.................................. $16,465,430 $14,379,417 $14,072,814 =========== =========== ===========
The accompanying notes are an integral part of these statements. F-79 175 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
GENERAL LIMITED UNREALIZED TOTAL PARTNERS' PARTNERS' UNDISTRIBUTED LOSSES ON PARTNERS' EQUITY EQUITY EARNINGS SECURITIES EQUITY --------- ---------- ------------- ----------- ------------ Balance, October 31, 1992.......... $ 100 $9,901,500 $ 13,509,779 $ -- $ 23,411,379 Net income....................... -- -- 14,072,814 -- 14,072,814 Cash distributions............... -- -- (15,000,000) -- (15,000,000) ---- ---------- ------------ ------- ---- Balance, October 31, 1993.......... 100 9,901,500 12,582,593 -- 22,484,193 Net income....................... -- -- 14,379,417 -- 14,379,417 Cash distributions............... -- -- (13,500,000) -- (13,500,000) ---- ---------- ------------ ------- ---- Balance, October 31, 1994.......... 100 9,901,500 13,462,010 -- 23,363,610 Net income....................... -- -- 16,465,430 -- 16,465,430 Cash distributions............... -- -- (13,000,000) -- (13,000,000) Change in unrealized losses on available-for-sale securities.................... -- -- -- (5,079) (5,079) ---- ---------- ------------ ------- ---- Balance, October 31, 1995.......... $ 100 $9,901,500 $ 16,927,440 $ (5,079) $ 26,823,961 ==== ========== ============ ======= ====
The accompanying notes are an integral part of these statements. F-80 176 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------ ------------ ------------ Cash flows from operating activities: Partnership income............................. $ 16,465,430 $ 14,379,417 $ 14,072,814 Adjustments to reconcile partnership income to net cash provided from operating activities -- Depreciation and amortization............. 3,578,572 3,575,442 3,576,710 Realized (gains) losses on sales of available-for-sale securities, net..... (465) 10,189 (22,701) Change in operating assets & liabilities -- Accounts receivable -- trade........... (5,639,506) 7,560,768 (6,403,581) Supplies inventory..................... (92,194) (301,309) (11,406) Prepaid insurance...................... (37,008) (69,663) 4,270 Accounts payable....................... (1,225,933) (1,375,739) 1,516,130 Interest payable....................... (86,929) (77,740) (69,540) Payable to affiliate................... (449,312) 463,194 (1,130,695) Other, net............................. (45,049) -- -- ---------- ---------- ---------- Net cash provided by operating activities........................ 12,467,606 24,164,559 11,532,001 ---------- ---------- ---------- Cash flows from investing activities: Purchases of available-for-sale securities..... (34,628,300) (25,334,642) (16,319,709) Proceeds from sales and maturities of available-for-sale securities............... 37,795,441 20,232,824 20,074,603 Additions to property, plant and equipment, net......................................... (47,474) (21,066) (131,924) ---------- ---------- ---------- Net cash provided by (used in) investing activities.............. 3,119,667 (5,122,884) 3,622,970 ---------- ---------- ---------- Cash flows from financing activities: Reductions of long-term liabilities, net....... (4,192,409) (3,587,576) (3,250,397) Cash distributions to partners................. (13,000,000) (13,500,000) (15,000,000) ---------- ---------- ---------- Net cash used in financing activities........................ (17,192,409) (17,087,576) (18,250,397) ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents.................................... (1,605,136) 1,954,099 (3,095,426) Cash and cash equivalents, beginning of year..... 5,363,057 3,408,958 6,504,384 ---------- ---------- ---------- Cash and cash equivalents, end of year........... $ 3,757,921 $ 5,363,057 $ 3,408,958 ========== ========== ========== Supplemental disclosure of noncash investing and financing activities Unrealized holding losses, net, on available-for-sale securities, recorded as additions to undistributed earnings......... $ (5,079) $ -- $ --
The accompanying notes are an integral part of these statements. F-81 177 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization Basic American, Inc. (BAI) formed BAF Energy, A California Limited Partnership (BAF Energy or the Partnership) on March 25, 1986, for the purpose of developing, constructing and operating a cogeneration facility. The term of the Partnership is through December 2020 unless terminated earlier in accordance with the Partnership Agreement. The facility produces and sells electricity and steam. On December 6, 1995, the Partnership signed a letter agreement with a third party to lease substantially all of the Partnership's property, plant and equipment and to assign all related contracts. The third party lessee will operate the cogeneration facility through April, 2019 (see Note 8). BAF Energy, Inc. (BEI) is the general partner of the Partnership and has an ownership interest of 1 percent. BEI is a wholly owned subsidiary of Basic Vegetable Products, Inc. (BVP). BVP is a wholly owned subsidiary of BAI. As of October 31, 1995, BAI also owned approximately 51 percent of the Limited Partnership units of BAF Energy then outstanding. Distributions and profit and loss are allocated 99 percent to the limited partners, based on their proportionate share of limited partnership units, and 1 percent to the general partner. Reclassifications Certain reclassifications have been made to the 1994 and 1993 financial statements to be consistent with the current year presentation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on deposit with banks, money market funds, and commercial paper. Cash paid for interest during the years ended October 31, 1995, 1994 and 1993 was $8,252,202, $8,732,052 and $9,161,241, respectively. Available-for-Sale Securities Effective November 1, 1994, the Partnership adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). The Partnership has classified its investments as available-for-sale securities and as restricted available-for-sale securities and has recorded all securities holdings at fair value. Unrealized gains and losses are reported as a separate component of partners' equity until realized. Premiums and discounts are amortized over the life of the related security as an adjustment to interest income using the effective interest method. Interest income is recognized when earned. Realized gains and losses on securities transactions are included in net income and are derived using the specific identification method for determining the cost of securities sold. Prior to the November 1, 1994 adoption of SFAS 115, the Partnership's short-term investments were included in cash and short-term investments and were valued at the lower of aggregate cost or market. Such securities have been reclassified as available-for-sale securities to conform with SFAS 115 presentation requirements. The effect of adopting SFAS 115 was to recognize net unrealized holding losses of $32,599 as a decrease in partners' equity as of November 1, 1994. At October 31, 1995, net unrealized holding losses were $5,079. Restricted securities are required under the term loans described in Note 4. F-82 178 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property, plant and equipment are computed on a straight-line method principally over the following estimated useful lives:
YEARS -------- Buildings and improvements.......................................... 30 Machinery and equipment............................................. 5 to 30
Major Maintenance Accruals The Partnership accrues for the estimated future costs of major overhauls and equipment replacement based upon engineering studies. Income Taxes Federal and state income tax regulations provide that no income taxes are levied on a partnership. Instead, each partners' share of partnership profit or loss is reported on his or her separate income tax return. Accordingly, no partnership income taxes are provided for in the accompanying financial statements. (2) AVAILABLE-FOR-SALE SECURITIES As of October 31, 1995, the amortized cost and estimated fair values of the Partnership's investments in tax-exempt municipal securities are summarized as follows:
RESTRICTED AVAILABLE- AVAILABLE- FOR-SALE FOR-SALE SECURITIES SECURITIES TOTAL ---------- ---------- ---------- Amortized cost......................... $1,919,184 $7,246,384 $9,165,568 Gross unrealized losses................ -- (5,079) (5,079) ---------- ---------- ---------- Estimated fair value................... $1,919,184 $7,241,305 $9,160,489 ========== ========== ==========
The amortized cost and estimated fair value of tax-exempt municipal securities by contractual maturity are shown below.
AMORTIZED ESTIMATED DUE IN FISCAL YEAR ENDING OCTOBER 31, COST FAIR VALUE ---------------------------------------------------- ---------- ---------- 1996................................................ $2,137,292 $2,134,000 1997-2000........................................... 7,028,276 7,026,489 ---------- ---------- Total..................................... $9,165,568 $9,160,489 ========== ==========
Proceeds from sales of investments for the year ended October 31, 1995 are as follow: Gross proceeds.................................................. $26,099,037 Gross gains..................................................... $ 4,404 Gross losses.................................................... $ 3,939
F-83 179 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment and accumulated depreciation and amortization consist of:
1995 1994 ------------ ------------ Cost Buildings and improvements............................ $ 1,410,873 $ 1,313,304 Machinery and equipment............................... 98,847,561 98,897,656 ------------ ------------ 100,258,434 100,210,960 Accumulated depreciation and amortization............... (24,387,912) (20,854,389) ------------ ------------ $ 75,870,522 $ 79,356,571 ============ ============
On December 6, 1995, the Partnership signed a letter agreement with a third party to lease substantially all of the Partnership's property, plant and equipment (see Note 8). (4) LONG-TERM LIABILITIES Long-term liabilities are summarized as follows:
1995 1994 ----------- ----------- Term loan at 10.88%, due in equal installments through March 2004, non-recourse to the Partnership, secured by the facility and associated contracts................... $60,514,066 $64,678,085 Term loan at 15.65%, due in equal installments through March 2004, with recourse to BEI, secured by the facility and associated contracts....................... 8,137,159 8,575,025 Major maintenance accruals................................ 3,597,865 3,188,389 ----------- ----------- 72,249,090 76,441,499 Less -- Current maturities................................ 5,444,386 5,283,785 ----------- ----------- $66,804,704 $71,157,714 =========== ===========
Annual Maturities, Annual maturities of long-term liabilities at October 31, 1995 are summarized as follows:
YEAR ENDING OCTOBER 31, AMOUNT ---------------------------------------------------------------- ----------- 1996............................................................ $ 5,444,386 1997............................................................ 6,121,107 1998............................................................ 6,716,700 1999............................................................ 7,224,887 2000............................................................ 10,541,918 Thereafter...................................................... 36,200,092 ----------- $72,249,090 ===========
(5) RELATED PARTY TRANSACTIONS The Partnership Agreement requires that the Partnership pay BEI a monthly administrative fee. This fee amounted to $146,596, $139,613 and $132,966 for the years ended October 31, 1995, 1994 and 1993, respectively. F-84 180 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Partnership has entered into a ground lease with a remaining term of 23 years with BAI for the land on which the facility is located. The lease includes options to extend the lease term up to an additional 30 years. Rent was $146,572, $139,593 and $132,946 for the years ended October 31, 1995, 1994 and 1993, respectively. Rents will escalate at the rate of 5% each year. In fiscal 1996, this lease will be assigned to a third party lessee pursuant to a letter agreement discussed at Note 8. The Partnership negotiated a steam sales contract with a remaining term of 23 years with Basic Vegetable Products, LP (BVP, LP). The General Partner of BVP, LP is BVP. Under the contract, the Partnership supplies steam to BVP, LP's King City, California food processing plant. Revenues recorded under the contract totaled $669,341, $840,959 and $1,068,141 in 1995, 1994 and 1993, respectively. In fiscal 1996, this contract will also be assigned (see Note 8). (6) COMMITMENTS AND CONTINGENCIES Facilities The Partnership executed an Operations and Maintenance (O & M) Agreement with Bechtel North American Power Corporation (Bechtel) in which Bechtel is required to operate and maintain the facility for a term of five years from May 1989. The Partnership reimburses Bechtel for all costs incurred in the performance of the service. O & M expenses paid totaled $3,665,168, $3,884,943 and $4,556,321 in 1995, 1994 and 1993, respectively, including a payment of base fees of $275,000, $387,456 and $500,000 per year, respectively, and a payment of earned fees of $380,000, $306,803 and $902,430 per year, respectively. The agreement also provided for a "high performance" bonus fee dependent on meeting certain performance standards. In April 1994, the O & M Agreement was renegotiated and extended through October 1998. The renegotiated terms include payment of base fees of $275,000 and elimination of the high performance bonus fee. The bonus paid in 1994 and 1995 totaled $3,107 and $175,327, respectively. In connection with the anticipated transaction described at Note 8, the Partnership will sever its O & M Agreement with Bechtel. The severance payment will be made with funds directly contributed by the third party lessee. Financing Calcorp Group, Inc. (CGI), a limited partner, has a put option to sell its 23 percent investment in the Partnership back to the Partnership at fair market value in certain circumstances. The put is subject to a subordination agreement with the Partnership's lenders. CGI has entered into a technical support agreement with the Partnership, wherein CGI is reimbursed for services rendered based upon time and expenses incurred. (7) REVENUE RECOGNITION BEI has an exclusive Power Purchase Agreement with Pacific Gas and Electric (PG&E) under which PG&E pays capacity payments, as defined in the agreement, and purchases all available energy, except for amounts sold to BVP, LP (see Note 5). The Partnership receives substantially all of its capacity payments from PG&E during May through October, and receives payment for energy sales to PG&E during May through January. In fiscal 1996, this agreement will be assigned to a third party lessee pursuant to a letter agreement discussed at Note 8. (8) SIGNIFICANT LEASE TRANSACTION On December 6, 1995, BAF Energy signed a letter agreement with a third party to enter into a 23-year lease of the cogeneration property, plant and equipment and to assign all related contracts. Under the terms of the lease, the lessee will assume all rights and responsibilities related to the ground lease (see Note 5), the BVP, LP steam sales contract (see Note 5), and the PG&E Power Purchase Agreement (see Note 7). BAF Energy expects to sign the lease in early 1996. F-85 181 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP CONDENSED BALANCE SHEETS
OCTOBER 31, 1995 JANUARY 31, ------------- 1996 ----------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents..................................... $ 2,211,511 $ 3,757,921 Available for sale securities................................. -- 1,919,184 Restricted available-for-sale securities...................... 10,953,152 7,241,305 Accounts receivable -- trade.................................. 2,703,251 10,916,919 Supplies inventory............................................ 2,128,361 2,153,129 Prepaid insurance............................................. 144,633 288,383 ------------ ------------ Total current assets.................................. 18,140,908 26,276,841 ------------ ------------ Property, Plant and Equipment................................... 100,258,434 100,258,434 Accumulated depreciation and amortization..................... (25,280,413) (24,387,912) ------------ ------------ 74,978,021 75,870,522 ------------ ------------ $93,118,929 $ 102,147,363 ============ ============ LIABILITIES AND PARTNERS' EQUITY Current Liabilities: Accounts payable.............................................. $ 811,919 $ 1,598,177 Interest payable.............................................. 3,273,915 1,309,566 Payable to affiliate.......................................... 38,428 166,569 Current portion of long-term liabilities...................... 5,546,361 5,444,386 ------------ ------------ Total current liabilities............................. 9,670,623 8,518,698 ------------ ------------ Long-Term Liabilities........................................... 66,702,729 66,804,704 ------------ ------------ Commitments and Contingencies................................... -- -- Partners' Equity: Contributed equity............................................ 9,901,600 9,901,600 Undistributed earnings........................................ 6,843,977 16,922,361 ------------ ------------ Total partners' equity................................ 16,745,577 26,823,961 ------------ ------------ $93,118,929 $ 102,147,363 ============ ============
The accompanying notes are an integral part of these statements. F-86 182 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, --------------------------- 1996 1995 ----------- ----------- OPERATING REVENUES................................................ $ 4,957,368 $ 7,941,577 OPERATING EXPENSES: Fuel............................................................ 1,479,116 3,408,912 Depreciation and amortization................................... 892,500 1,072,028 Labor, supplies and other....................................... 1,066,580 1,431,321 ----------- ----------- Total operating expenses................................ 3,438,196 5,912,261 ----------- ----------- Operating income...................................... 1,519,172 2,029,316 ----------- ----------- OTHER INCOME AND EXPENSE: Interest income and other....................................... 154,073 130,313 General and administrative...................................... (290,763) (201,340) Interest expense................................................ (1,965,945) (2,094,761) ----------- ----------- Total other income and expense.......................... (2,102,635) (2,165,788) ----------- ----------- PARTNERSHIP LOSS.................................................. $ (583,463) $ (136,472) =========== ===========
The accompanying notes are an integral part of these statements. F-87 183 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, ----------------------------- 1996 1995 ------------ ------------ Net Cash Provided by Operating Activities....................... $ 9,779,417 $ 2,298,789 ------------ ------------ Cash Flows from Investing Activities: Purchases of available-for-sale securities.................... (25,170,795) (12,290,102) Proceeds from sales and redemptions of available-for-sale securities................................................. 23,344,968 12,841,335 Additions to property, plant and equipment, net............... -- (20,189) ------------ ------------ Net cash (used in) provided by investing activities... (1,825,827) 531,044 ------------ ------------ Cash Flows From Financing Activities: Increase in long-term liabilities, net........................ -- 307,110 Cash distributions to partners................................ (9,500,000) (8,500,000) ------------ ------------ Net cash used in financing activities................. (9,500,000) (8,192,890) ------------ ------------ Net Decrease in Cash and Cash Equivalents....................... (1,546,410) (5,363,057) Cash and Cash Equivalents, beginning of period.................. 3,757,921 5,363,057 ------------ ------------ Cash and Cash Equivalents, end of period........................ $ 2,211,511 $ -- ============ ============ Supplementary Information: Unrealized holding gains/losses, net, on available-for-sale securities, recorded as additions to undistributed earnings................................................... $ 5,079 $ -- Cash paid during the period for interest...................... $ -- $ --
The accompanying notes are an integral part of these statements. F-88 184 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP NOTES TO CONDENSED FINANCIAL STATEMENTS JANUARY 31, 1996 (UNAUDITED) (1) GENERAL Organization BAF Energy, A California Limited Partnership (BAF Energy or the Partnership) was founded in 1986 and is engaged in the development, construction and operation of a cogeneration facility. The term of the Partnership is through December 2020 unless terminated earlier in accordance with the Partnership Agreement. The facility produces and sells electricity and steam. BAF Energy, Inc. (BEI) is the general partner of the Partnership and has an ownership interest of 1 percent. BEI is a wholly owned subsidiary of Basic Vegetable Products, Inc. (BVP). BVP is a wholly owned subsidiary of Basic American, Inc. (BAI). As of January 31, 1996, BAI also owned approximately 51 percent of the limited partnership units of BAF Energy then outstanding. Distributions and profit and loss are allocated 99 percent to the limited partners, based on their proportionate share of limited partnership units, and 1 percent to the general partner. Basis of Interim Presentation The accompanying interim condensed financial statements of the Partnership have been prepared by the Partnership, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the condensed consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the audited financial statements of the Partnership for the year ended October 31, 1995. Consistent with the operating schedule of the cogeneration facility, the Partnership receives a majority of its operating revenue between May and September. Therefore, the results of operations for the three months ended January 31, 1996 and 1995 are not indicative of the results for the entire year. (2) RELATED PARTY TRANSACTIONS The Partnership Agreement requires that the Partnership pay BEI a monthly administrative fee. This fee amounted to $37,558 and $35,770 for the quarters ended January 31, 1996 and 1995, respectively. The Partnership has entered into a ground lease with BAI for the land on which the facility is located. Rent was $37,554 and $35,764 for the quarters ended January 31, 1996 and 1995, respectively. The Partnership negotiated a steam sales contract with Basic Vegetable Products, LP (BVP, LP). The General Partner of BVP, LP is BVP. Under the contract, the Partnership supplies steam to BVP, LP's food processing plant. Revenues recorded under the contract totaled $38,333 and $55,788 for the quarters ended January 31, 1996 and 1995, respectively. (3) PARTNERS' EQUITY: The Partnership made distributions of $9,500,000 and $8,500,000 for the quarters ended January 31, 1996 and 1995, respectively. F-89 185 BAF ENERGY, A CALIFORNIA LIMITED PARTNERSHIP NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) JANUARY 31, 1996 (UNAUDITED) (4) SIGNIFICANT LEASE TRANSACTION: In April 1996, the Partnership signed an agreement with a third party to enter into a 23-year lease of the cogeneration property, plant and equipment and to assign all related contracts. Under the terms of the lease, the lessee will assume all rights and responsibilities related to the ground lease with BAI (see Note 2), the BVP, LP steam sales contract (see Note 2) and a Pacific Gas & Electric (PG&E) Power Purchase Agreement. The ground lease has a remaining term of 23 years with BAI for the land on which the facility is located. This lease includes options to extend the lease term up to an additional 30 years. The BVP, LP steam sales contract has a remaining term of 23 years. The PG&E Power Purchase Agreement states that PG&E pays capacity payments, as defined in the agreement, and purchases all available energy, except for amounts sold to BVP, LP. F-90 186 REPORT OF INDEPENDENT AUDITORS The Shareholder Gilroy Energy Company We have audited the accompanying balance sheets of Gilroy Energy Company (the Company), a wholly owned subsidiary of Gilroy Foods, Inc. which in turn is a wholly owned subsidiary of McCormick & Company, Inc., as of November 30, 1995 and 1994 and the related statements of income, shareholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gilroy Energy Company at November 30, 1995 and 1994 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Baltimore, Maryland July 18, 1996 F-91 187 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
NOVEMBER 30 --------------------- 1995 1994 MAY 31, -------- -------- 1996 ----------- (UNAUDITED) Current assets: Accounts receivable..................................... $ 4,428 $ 1,615 $ 1,503 Prepaid expenses........................................ 462 725 776 -------- -------- -------- Total current assets............................ 4,890 2,340 2,279 Property and equipment, at cost: Buildings............................................... 2,720 2,720 2,720 Machinery and equipment................................. 93,421 93,349 93,098 Furniture and fixtures.................................. 64 64 62 Software................................................ 65 65 58 -------- -------- -------- 96,270 96,198 95,938 Less accumulated depreciation and amortization............ 39,202 36,712 31,701 -------- -------- -------- 57,068 59,486 64,237 Due from parent and affiliates............................ 64,780 69,422 61,522 -------- -------- -------- Total assets.............................................. $ 126,738 $131,248 $128,038 ======== ======== ======== LIABILITIES Current liabilities: Bank overdraft.......................................... -- $ 58 $ 618 Accounts payable........................................ $ 1,653 2,678 1,767 Accrued interest........................................ 3,093 3,238 3,363 Other liabilities....................................... 336 993 241 Current portion of long-term debt....................... 2,848 2,468 2,152 -------- -------- -------- Total current liabilities....................... 7,930 9,435 8,141 Long-term debt, due after one year........................ 50,120 52,968 55,436 Other liabilities......................................... 399 49 1,083 -------- -------- -------- 50,519 53,017 56,519 Shareholder's equity: Common stock, no par value: Authorized shares -- 10,000 Issued and outstanding shares -- 1,000............... 10 10 10 Additional paid-in capital.............................. 16,946 16,946 16,946 Retained earnings....................................... 51,333 51,840 46,422 -------- -------- -------- Total shareholder's equity...................... 68,289 68,796 63,378 -------- -------- -------- Total liabilities and shareholder's equity................ $ 126,738 $131,248 $128,038 ======== ======== ========
See accompanying notes. F-92 188 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED MAY 31, NOVEMBER 30, ---------------- ------------------- 1996 1995 1995 1994 ------ ------- ------- ------- (UNAUDITED) Net revenues: Electricity revenue................................ $9,306 $11,158 $35,132 $40,037 Steam revenue from Gilroy Foods, Inc............... 185 260 1,089 1,367 ------ ------- ------- ------- 9,491 11,418 36,221 41,404 Cost of sales........................................ 6,525 8,125 18,825 23,766 ------ ------- ------- ------- Gross margin......................................... 2,966 3,293 17,396 17,638 Operating expenses; Selling, general and administrative................ 720 946 1,888 1,885 ------ ------- ------- ------- Operating income..................................... 2,246 2,347 15,508 15,753 Interest expense..................................... 3,093 3,237 6,477 6,731 ------ ------- ------- ------- (Loss) Income before income taxes.................... (847) (890) 9,031 9,022 Provision for income tax (benefit) expense........... (340) (356) 3,613 3,622 ------ ------- ------- ------- Net (loss) income.................................... $ (507) $ (534) $ 5,418 $ 5,400 ====== ======= ======= =======
See accompanying notes. F-93 189 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) STATEMENT OF SHAREHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ----------------- PAID-IN RETAINED SHAREHOLDER'S SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ---------- -------- ------------- Balance at November 30, 1993............. 1,000 $ 10 $ 16,946 $ 41,022 $57,978 Net income............................... -- -- -- 5,400 5,400 ------ ------ ---------- -------- ------------- Balance at November 30, 1994............. 1,000 10 16,946 46,422 63,378 Net income............................... -- -- -- 5,418 5,418 ------ ------ ---------- -------- ------------- Balance at November 30, 1995............. 1,000 10 16,946 51,840 68,796 Net (loss) (unaudited)................... -- -- -- (507) (507) ------ ------ ---------- -------- ------------- Balance at May 31, 1996 (unaudited)............................ 1,000 $ 10 $ 16,946 $ 51,333 $68,289 ===== ====== ======= ======= ==========
See accompanying notes. F-94 190 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED MAY 31, NOVEMBER 30, ------------------- ------------------- 1996 1995 1995 1994 ------- ------- ------- ------- (UNAUDITED) OPERATING ACTIVITIES: Net income (loss)................................. $ (507) $ (534) $ 5,418 $ 5,400 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization.................. 2,490 2,482 5,011 4,880 Changes in operating assets and liabilities: Accounts receivable.......................... (2,813) (3,577) (113) 51 Prepaid expenses............................. 263 325 52 49 Accounts payable............................. (1,025) (360) 912 (1,221) Accrued expenses and other liabilities....... (452) (644) (408) 364 ------- ------- ------- ------- Net cash (used in) provided by operating activities........................................ (2,044) (2,308) 10,872 9,523 ------- ------- ------- ------- INVESTING ACTIVITIES: Due from parent and affiliates...................... 4,642 5,071 (7,900) (4,610) Purchase of property and equipment.................. (72) (117) (260) (3,376) ------- ------- ------- ------- Net cash provided by (used in) investing activities........................................ 4,570 4,954 (8,160) (7,986) ------- ------- ------- ------- FINANCING ACTIVITIES: Principal payments on long-term debt................ (2,468) (2,152) (2,152) (2,152) ------- ------- ------- ------- Net cash (used in) financing activities............. (2,468) (2,152) (2,152) (2,152) ------- ------- ------- ------- Net decrease (increase) in bank overdraft........... 58 494 560 (615) Bank overdraft at beginning of period............... (58) (618) (618) (3) ------- ------- ------- ------- Bank overdraft at end of period..................... $ -- $ (124) $ (58) $ (618) ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid....................................... $ 3,238 $ 3,359 $ 6,602 $ 6,602
See accompanying notes. F-95 191 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Gilroy Energy Company (the Company) was incorporated in the State of California in July 1984. The Company is a wholly owned subsidiary of Gilroy Foods, Inc. which in turn is a wholly owned subsidiary of McCormick & Company, Inc. (McCormick). The Company runs a cogeneration facility in Gilroy, California which uses natural gas and steam turbine engines to generate steam for sale to Gilroy Foods, Inc. and electricity for sale to Pacific Gas and Electric Company. Sales to Pacific Gas and Electric Company represented approximately 97% of total revenues for each of the years ended November 30, 1995 and 1994 and 98% for the six months ended May 31, 1996 and 1995. Approximately 80% of the Company's net revenues are recognized during the months of May through October of each year. As such, the results of operations for the six month periods ended May 31, 1996 and 1995 are not indicative of the results of operations that may be realized for the full year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Bank Overdrafts The Company maintains a zero balance bank account. Amounts sufficient to cover checks presented to the bank are deposited into the account by McCormick & Company, Inc. The bank overdrafts represent checks that have been written but have not cleared the bank as of the balance sheet date. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, ranging from five to forty years. In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of " (FAS 121). FAS 121 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. The Company will be required to adopt FAS 121 in its 1997 fiscal year. Management does not believe that the initial adoption of FAS 121 will have a significant impact on the Company. Repairs and Maintenance The cogeneration plant requires a periodic shutdown for major overhauls of its primary components every several years. The Company's policy is to accrue the anticipated cost of these overhauls during the operating periods prior to the scheduled overhaul dates. The amounts and period of accruals for overhaul costs are revised annually based on management's estimate of time remaining before the next scheduled overhaul and the estimated cost of the overhaul. Repairs and maintenance expenditures that are not a part of major overhauls or do not extend the useful life of the related equipment are charged to expense when incurred. F-96 192 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) Due from Parent and Affiliates The due from parent and affiliates included in the balance sheet represents a net balance as the result of various transactions between the Company and Gilroy Foods, Inc. and McCormick & Company, Inc. There are no terms of settlement, or interest charges associated with the account balance. The balance is primarily the result of the Company's participation in McCormick's central cash management program, wherein all the Company's cash receipts are remitted to McCormick and all cash disbursements are funded by McCormick. Other transactions include steam sales to Gilroy Foods, Inc., the Company's estimated income tax payable or receivable resulting from the current and prior years estimated provisions, and miscellaneous other administrative expenses incurred by Gilroy Foods, Inc. or McCormick & Company, Inc. on behalf of the Company. An analysis of transactions in the due from parent and affiliates balance for the six months ended May 31, 1996 and 1995 (unaudited) and each of the two years in the period ended November 30, 1995 follows:
SIX MONTHS ENDED YEARS ENDED MAY 31, NOVEMBER 30, ------------------- ------------------- 1996 1995 1995 1994 ------- ------- ------- ------- (UNAUDITED) Balance in due from parent and affiliates at beginning of period............................... $69,422 $61,522 $61,522 $56,912 Net cash remitted (from) to Gilroy Foods, Inc. or McCormick......................................... (4,616) (5,578) 10,671 7,729 Net intercompany sales.............................. 196 275 1,146 1,438 Net intercompany purchases for cost of sales........ (532) (3) (218) (6) Net intercompany purchases for selling, general and administrative expenses........................... (30) (121) (87) (929) Benefit (provision) for income taxes................ 340 356 (3,612) (3,622) ------- ------- ------- ------- Balance in due from parent and affiliated at end of period............................................ $64,780 $56,451 $69,422 $61,522 ======= ======= ======= ======= Average balance during the period................... $66,384 $58,373 $61,811 $56,828 ======= ======= ======= =======
Gilroy Foods, Inc. provides certain administrative services to the Company including the services of the President of Gilroy Energy Company, Inc., accounting, and other administrative services. It is the policy of Gilroy Foods, Inc. to charge these expenses and all other central operating costs on the basis of direct usage. In the opinion of management, no other costs of Gilroy Foods, Inc. should be allocated to the Company. McCormick provides various administrative services to the Company including legal assistance and treasury services. McCormick does not charge the Company for these services. In the opinion of management, the cost of the services rendered by McCormick in these areas during each of the two years ended November 30, 1995 and 1994 and the six months ended May 31, 1996 and 1995 are nominal. Concentration of Credit Risk The Company sells electricity to Pacific Gas and Electric Company under a long-term contract. All accounts receivable at May 31, 1996 (unaudited) and November 30, 1995 and 1994 are due from this customer. No collateral is required for accounts receivable. Management believes that no reserves are required for potential credit losses at May 31, 1996 and November 30, 1995 and 1994. F-97 193 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) Sources of Supply The Company purchases natural gas for the operation of the cogeneration facility under a supply contract with one supplier. The supply contract requires the Company to purchase substantially all of its natural gas needs from the supplier at a price based on the market value determined in accordance with the contract through July 31, 1997. Management believes that in the event that this supplier is not able to meet its obligations under the contract, alternative sources of supply for natural gas are readily available at comparable prices. 2. LONG-TERM DEBT The Company's outstanding indebtedness is as follows:
NOVEMBER 30, ------------------- 1995 1994 MAY 31, ------- ------- 1996 ----------- (UNAUDITED) Note payable in annual installments through $52,968 $55,436 $57,588 2006 with interest at 11.68% per annum.... Less current portion........................ 2,848 2,468 2,152 ------- ------- ------- $50,120 $52,968 $55,436 ======= ======= =======
The note payable requires the maintenance of a $5,000 maintenance fund and a $10,000 debt service fund. The note holder has agreed to accept a guarantee of up to $15,000 by McCormick & Company, Inc. in lieu of establishing these funds. The terms of the note payable require the Company to comply with certain nonfinancial covenants. Management believes that the Company was in compliance with all applicable covenants at November 30, 1995 and 1994. The note payable is secured by the cogeneration facility. The note payable agreement provides for the payment of a prepayment penalty in the event of early retirement. The amount of the prepayment penalty approximates the present value of the differential between current market interest rates and the stated rate over the remaining life of the debt as defined by the agreement. Aggregate maturities of long-term debt over the next five fiscal years ending November 30 and thereafter are as follows: 1996....................................................... $ 2,468 1997....................................................... 2,848 1998....................................................... 3,101 1999....................................................... 3,481 2000....................................................... 3,797 Thereafter................................................. 39,741 ------- $55,436 =======
3. INCOME TAXES The Company is included in the consolidated federal and state income tax returns of McCormick. McCormick does not have a formal tax sharing arrangement with its subsidiaries. The income tax provisions included in the statements of income has been provided under the liability method assuming that Gilroy Energy Company had prepared separate income tax returns for the years ended November 30, 1995 and 1994 and the six months ended May 31, 1996 and 1995 (unaudited). Any income taxes receivable or payable as a F-98 194 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) result of the income tax provisions, including any deferred amounts due or payable resulting from the current or prior years provisions are included in due from parent and affiliates. The (benefit) provision for income taxes is summarized as follows:
SIX MONTHS ENDED YEARS ENDED MAY 31, NOVEMBER 30, --------------- ------------------- 1996 1995 1995 1994 ----- ----- ------- ------- (UNAUDITED) Current: Federal.............................. $(288) $(303) $ 3,877 $ 4,061 State................................ (52) (53) 1,169 1,225 ----- ----- ------- ------- (340) (356) 5,046 5,286 ----- ----- ------- ------- Deferred: Federal.............................. -- -- (1,095) (1,278) State................................ -- -- (338) (386) ----- ----- ------- ------- -- -- (1,433) (1,664) ----- ----- ------- ------- $(340) $(356) $ 3,613 $ 3,622 ===== ===== ======= =======
The reconciliation between income tax computed at the United States federal statutory rate and income taxes actually provided follows:
SIX MONTHS ENDED MAY 31, YEARS ENDED NOVEMBER 30, ------------------------------- ------------------------------- 1996 1995 1995 1994 ------------- ------------- ------------- ------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % ------ ---- ------ ---- ------ ---- ------ ---- (UNAUDITED) Tax at federal rate....... $ (288) 34.0% $ (303) 34.0% $3,071 34.0% 3,067 34.0% State income taxes, net of federal benefit......... (52) 6.1% (53) 6.0% 542 6.0% 555 6.1% ------ ------ ------ Actual income taxes (benefit) provided...... $ (340) 40.1% $ (356) 40.0% $3,613 40.0% $3,622 40.1% ====== ====== ======
The temporary differences that give rise to significant portions of the deferred tax assets and liabilities that have been netted in due from parent and affiliates consist of the following:
NOVEMBER 30, ------------------- 1995 1994 ------- ------- Temporary differences resulting in deferred tax assets: Repairs and maintenance expenditures................... $ 986 $ 1,082 ------- ------- Temporary differences resulting in deferred tax liabilities: Depreciation........................................... 50,897 54,587 Prepaid expenses....................................... 810 758 Other.................................................. 357 357 ------- ------- 52,064 55,702 ------- ------- $51,078 $54,620 ======= =======
No valuation allowance is provided for deferred tax assets. F-99 195 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) 4. RELATED PARTY TRANSACTIONS The Company sells substantially all of the steam, which is a byproduct of the cogeneration process to Gilroy Foods, Inc. During the years ended November 30, 1995 and 1994, the amount of revenue recognized by the Company from steam sales to Gilroy Foods, Inc. was $1,089 and $1,367, respectively. During the six months ended May 31, 1996 and 1995, the amount of revenue recognized by the Company from steam sales to Gilroy Foods, Inc. was $185 and $261, respectively. Gilroy Foods, Inc. provides certain accounting and administrative services to Gilroy Energy Company, Inc. A portion of the cost of these services is billed directly to Gilroy Energy Company, Inc. The Company leases the land where the cogeneration facility is located under an operating lease with Gilroy Foods, Inc. The lease agreement runs through 2018 and provides for minimum annual rental payments with provisions for the escalation of costs every three years based on the average increase in the Consumer Price Index. The future minimum lease payments under this lease, excluding any future increases, are as follows: 1996.................................................................................. $ 40 1997.................................................................................. 40 1998.................................................................................. 40 1999.................................................................................. 40 2000.................................................................................. 40 2001 through 2018..................................................................... 715 ---- $915 ====
Rent expense recognized under this lease was $38 and $37 in the years ended November 30, 1995 and 1994, respectively, and $20 and $19 in the six months ended May 31, 1996 and 1995, respectively. 5. COMMITMENTS AND CONTINGENCIES The Company has an agreement with the Pacific Gas and Electric Company (PG&E) to sell all electricity generated by the cogeneration facility to PG&E. The agreement establishes the methodology used to calculate the purchase price of the electricity, establishes the operating hours of the cogeneration facility, and provides for the payment to the Company of additional capacity payments if certain operating targets as defined are achieved. The current provisions of this agreement extend through December 31, 1998. Subsequent to December 31, 1998 and continuing through the expiration of the base agreement on December 31, 2017, the pricing and operating provisions of the agreement will be established by negotiation between PG&E and Gilroy Energy Company. The Company has an agreement with Gilroy Foods, Inc. whereby Gilroy Foods, Inc. has agreed to purchase substantially all of the steam produced by the Company. The terms of the agreement, which extends through 2017, provide for the establishment of the purchase price for steam based on the current cost of alternative sources of energy available to Gilroy Foods, Inc. The Company has an operating and maintenance agreement with an outside party for the daily operation and maintenance of the cogeneration facility. This agreement, which extends through November 1996, provides for all operating and routine maintenance of the cogeneration facility at direct costs plus a minimum annual fee of $100,000. The contract also provides for the payment of bonuses, as defined, if certain operating targets are met. F-100 196 GILROY ENERGY COMPANY (A WHOLLY OWNED SUBSIDIARY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) 6. FAIR VALUE The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Accounts receivable, due from parent and affiliates, bank overdrafts, current portion of long-term debt, accounts payable, and accrued liabilities -- The amounts reported in the balance sheet approximate fair value. Long-term debt. The fair value of long-term debt, based on a discounted cash flow analysis using current interest rates for debt with similar characteristics and maturities is as follows:
NOVEMBER 30 --------------------------------------------- 1995 1994 FAIR CARRYING FAIR CARRYING VALUE VALUE VALUE VALUE ------- -------- ------- -------- Long-term debt............................ $68,100 $ 52,968 $63,000 $ 55,436
7. SUBSEQUENT EVENT In May 1996, McCormick & Company, Inc. announced its intention to sell the assets and liabilities, excluding the due from parent and affiliates, the current portion of long-term debt and the long-term debt of the Company to Calpine Corporation. At the time of the closing of the sale, McCormick & Company, Inc. will assume the due from parent and affiliates and will be required to retire the current portion of the long-term debt and the long-term debt. In addition to all remaining assets and liabilities of Gilroy Energy Company, Calpine Corporation will assume all rights and obligations under the following agreements to which Gilroy Energy Company is currently a party: - Long-term contract to sell electricity to Pacific Gas and Electric Company. - Natural gas supply contract through July 31, 1997. - Lease for the land with Gilroy Foods, Inc. upon which the cogeneration facility is located. - Steam sale contract with Gilroy Foods, Inc. Upon closing of the sale, the management contract with the current operator of the cogeneration facility will be terminated by McCormick & Company, Inc. It is currently anticipated that the closing date for the sale of the applicable assets and liabilities of Gilroy Energy Company to Calpine Corporation will take place in the third quarter of 1996. F-101 197 (Domestic Inside Front Cover) Graphics: Sumas 125 mw Gas-fired Facility (Illustration of Facility) King City 120 mw Gas-fired Facility (Illustration of Facility) Calpine Logo 198 ALTERNATE PAGE A-2 (International Inside Front Cover) Graphics: Sumas 125 mw Gas-fired Facility (Illustration of Facility) Calpine Logo 199 (Inside Back Cover) Graphics: Cerro Prieto 80 mw Geothermal Steam Field (Illustration of Steam Field) The Power of Innovation West Ford Flat 27 mw Geothermal Facility (Illustration of Facility) Calpine Logo 200 - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 Use of Proceeds....................... 17 Dividend Policy....................... 17 Capitalization........................ 18 Dilution.............................. 19 Selected Consolidated Financial Data................................ 20 Pro Forma Consolidated Financial Data................................ 22 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 29 Business.............................. 38 Management............................ 70 Certain Transactions.................. 80 Principal and Selling Stockholders.... 82 Description of Capital Stock.......... 83 Shares Eligible for Future Sale....... 85 Certain United States Federal Tax Consequences to Non-U.S. Holders.... 86 Underwriting.......................... 89 Notice to Canadian Residents.......... 92 Legal Matters......................... 92 Experts............................... 93 Available Information................. 93 Consolidated Financial Statements..... F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ LOGO 18,045,000 Shares Common Stock PROSPECTUS CS First Boston Morgan Stanley & Co. Incorporated PaineWebber Incorporated Salomon Brothers Inc ------------------------------------------------------ 201 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. ALTERNATE PAGE A-1 SUBJECT TO COMPLETION, DATED AUGUST 22, 1996 18,045,000 Shares Calpine Corporation Common Stock ($.001 par value) ------------------ Of the shares of Common Stock, $.001 par value ("Common Stock"), of Calpine Corporation (the "Company" or "Calpine") offered hereby, 5,477,820 shares are being sold by the Company and 12,567,180 shares are being sold by the Selling Stockholder named herein under "Principal and Selling Stockholders." Of the 18,045,000 shares of Common Stock being offered, 3,609,000 shares are initially being offered outside the United States and Canada (the "International Shares") by the Managers (the "International Offering") and 14,436,000 shares are initially being concurrently offered in the United States and Canada (the "U.S. Shares") by the U.S. Underwriters (the "U.S. Offering" and, together with the International Offering, the "Common Stock Offering"). The offering price and underwriting discounts and commissions of the International Offering and the U.S. Offering are identical. Prior to the Common Stock Offering, there has been no public market for the Common Stock. It is anticipated that the initial public offering price will be between $17.00 and $20.00 per share. For information relating to the factors considered in determining the initial public offering price to the public, see "Subscription and Sale." The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "CPN," subject to notice of issuance. ------------------ FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREIN. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions Calpine(1) Stockholder ---------------------------------------------------------------- Per Share.............................. $ $ $ $ Total(2)............................... $ $ $ $
(1) Before deduction of expenses payable by Calpine, estimated at $809,000. (2) The Company has granted the Managers and the U.S. Underwriters an option, exercisable by CS First Boston Corporation for 30 days from the date of this Prospectus, to purchase a maximum of 2,706,750 additional shares to cover over-allotments of shares. If the option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ , Proceeds to Calpine will be $ and Proceeds to Selling Stockholder will be $ . The International Shares are offered by the several Managers when, as and if delivered to and accepted by the Managers and subject to their right to reject orders in whole or in part. It is expected that the International Shares will be ready for delivery on or about , 1996, against payment in immediately available funds. CS First Boston Morgan Stanley & Co. International PaineWebber International Salomon Brothers International The date of this Prospectus is , 1996. LOGO 202 ALTERNATE PAGE A-2 NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOLLARS. IN CONNECTION WITH THE COMMON STOCK OFFERING, CS FIRST BOSTON CORPORATION ON BEHALF OF THE U.S. UNDERWRITERS AND MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THE COMMON STOCK OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................ 3 Risk Factors.............................. 8 Use of Proceeds........................... 17 Dividend Policy........................... 17 Capitalization............................ 18 Dilution.................................. 19 Selected Consolidated Financial Data...... 20 Pro Forma Consolidated Financial Data..... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 29 Business.................................. 38 Management................................ 70 PAGE ---- Certain Transactions...................... 80 Principal and Selling Stockholders........ 82 Description of Capital Stock.............. 83 Shares Eligible for Future Sale........... 85 Certain United States Federal Tax Consequences to Non-U.S. Holders........ 86 Subscription and Sale..................... 89 Notice to Canadian Residents.............. 92 Legal Matters............................. 92 Experts................................... 93 Available Information..................... 93 Consolidated Financial Statements......... F-1
A-2 203 ALTERNATE PAGE A-3 Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of new acquisitions or power projects by the Company or its competitors, general conditions in the independent power production industry, and other events or factors. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Moreover, investors in the Common Stock Offering will incur immediate, substantial book value dilution. See "Dilution" and "Subscription and Sale." QUARTERLY FLUCTUATIONS; SEASONALITY The Company's quarterly operating results have fluctuated in the past and may continue to do so in the future as a result of a number of factors, including but not limited to the timing and size of acquisitions, the completion of development projects, the timing and amount of curtailment, and variations in levels of production. Furthermore, the majority of capacity payments under certain of the Company's power sales agreements are received during the months of May through October. The market price of the Common Stock could be subject to significant fluctuations in response to those variations in quarterly operating results and other factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations and Seasonality." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after the Common Stock Offering could adversely affect the prevailing market price of the Common Stock. Other than the 18,045,000 shares of Common Stock offered hereby, there will be no shares of Common Stock outstanding immediately following the completion of the Common Stock Offering. All of the shares of Common Stock sold in the Common Stock Offering will be freely transferable without registration or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless held by an "affiliate" of the Company (as defined in the Securities Act). As of the date of this Prospectus, options to purchase 2,392,026 shares of Common Stock are outstanding under the Company's Stock Option Program. Of such amount, options to purchase 1,366,696 shares were exercisable, all of which will become eligible for sale 180 days after the date of this Prospectus, upon expiration of certain lock-up agreements with the Underwriters and pursuant to Rule 701, subject in some cases to certain volume and other resale restrictions. Shares issuable upon the exercise of stock options that are currently exercisable will become eligible for sale in the public market beginning on the effective date of a registration statement on Form S-8, which the Company intends to file with the Securities and Exchange Commission (the "Commission") 180 days from the date of this Prospectus. See "Shares Eligible for Future Sale." A-3 204 ALTERNATE PAGE A-4 Rule 144 and (ii) by Affiliates, beginning 90 days after the date of this Prospectus, subject to all provisions of Rule 144 except its two-year minimum holding period. LOCK-UP AGREEMENTS All holders of options to purchase shares of Common Stock have agreed with the Underwriters that they will not, without the prior written consent of CS First Boston, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them or any shares issuable upon exercise of stock options for a period of 180 days from the date of this Prospectus. See "Subscription and Sale." CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of an investment in Common Stock by a holder that, for United States federal income tax purposes, is not a "United States person" (a "Non-U.S. Holder"). For purposes of this discussion, a "United States person" means a citizen or resident (as defined for United States federal income and estate tax purposes, as the case may be) of the United States, a corporation or partnership created or organized in the United States or under the laws of the United States or of any State thereof or an estate or trust whose income is includible in gross income for United States federal income tax purposes regardless of its source. The discussion is based on the United States Internal Revenue Code of 1986, as amended (the "Code"). Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly retroactively, and is for general information only. The discussion does not address aspects of United States federal taxation other than income and estate taxation and does not address all aspects of United States federal income and estate taxation. The discussion does not consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN COMMON STOCK. DIVIDENDS Dividends paid to a Non-U.S. Holder will generally be subject to withholding of United States federal income tax at a rate equal to 30% of the gross amount of the distribution (or at a lower rate prescribed by an applicable tax treaty) unless the dividends are effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder, in which case the dividends generally will not be subject to withholding (if the Non-U.S. Holder files certain forms with the payor of the dividend) and generally will be subject to the United States federal income tax on net income that applies to United States persons generally (and, in the case of corporate holders, effectively connected dividends may also, under certain circumstances, be subject to the branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty). An applicable income tax treaty may, however, change these rules. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country are presumed under current interpretation of existing Treasury regulations to be paid to a resident of that country. Treasury regulations proposed to be effective for payments made after December 31, 1997, which have not been finally adopted, however, would require Non-U.S. Holders to file certain new forms to obtain the benefit of any applicable tax treaty providing for a lower rate of withholding tax on dividends. Such forms would contain the holder's name and address and certain other information. The gross amount of a distribution with respect to Common stock will be treated as a dividend to the extent of the Company's current and accumulated earnings and profits as determined for U.S. federal income tax purposes. In the event that such a distribution exceeds the amount of the Company's earnings and profits, it will be treated first as a non-taxable return of capital to the extent of the Non-U.S. Holder's basis in Common Stock (but not below zero), and thereafter as capital gain. A Non-U.S. Holder will have to file a refund claim to obtain a refund of tax withheld on distributions in excess of the dividend portion of any distribution. A-4 205 ALTERNATE PAGE A-5 SUBSCRIPTION AND SALE The institutions named below (the "Managers") have, pursuant to a Subscription Agreement dated , 1996 (the "Subscription Agreement"), severally and not jointly, agreed with Calpine and the Selling Stockholder to subscribe and pay for the following respective numbers of International Shares as set forth opposite their names:
NUMBER OF MANAGER INTERNATIONAL SHARES - -------------------------------------------------------------------------- -------------------- CS First Boston Limited................................................... Morgan Stanley & Co. International Limited................................ PaineWebber International (U.K.) Limited.................................. Salomon Brothers International Limited.................................... -------------------- Total........................................................... 3,609,000 ==============
The Subscription Agreement provides that the obligations of the Managers are subject to certain conditions precedent and the Managers will be obligated to purchase all of the International Shares offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Subscription Agreement provides that, in the event of a default by a Manager, in certain circumstances the purchase commitments of the non-defaulting managers may be increased or the Subscription Agreement may be terminated. Calpine has entered into an Underwriting Agreement (the "Underwriting Agreement") with the U.S. Underwriters of the U.S. Offering (the "U.S. Underwriters" and, together with the Managers, the "Underwriters") providing for the concurrent offer and sale of the U.S. Shares in the United States and Canada. The closing of the U.S. Offering is a condition to the closing of the International Offering and vice versa. Calpine has granted to the Managers and the U.S. Underwriters an option, exercisable by CS First Boston Corporation, expiring at the close of business on the 30th day after the date of this Prospectus to purchase up to 2,706,750 additional shares at the initial public offering price, less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the shares of Common Stock offered hereby. To the extent that this option to purchase is exercised, each Manager and each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares being sold to the Managers and the U.S. Underwriters as the number of International Shares set forth next to such Manager's name in the preceding table and as the number set forth next to such U.S. Underwriter's name in the corresponding table in the Prospectus relating to the U.S. Offering bears to the sum of the total number of shares of Common Stock in such tables. Calpine has been advised by CS First Boston Limited, on behalf of the Managers, that the Managers propose to offer the International Shares outside the United States and Canada initially at the public offering price set forth on the cover page of this Prospectus and, through the Managers, to certain dealers at such price less a commission of $ per share and that the Managers and such dealers may reallow a commission of $ per share on sales to certain other dealers. After the initial public offering, the public offering price and commission and reallowances may be changed by the Managers. A-5 206 ALTERNATE PAGE A-6 The offering price and the aggregate underwriting discounts and commissions per share and per share commission and re-allowance to dealers for the International Offering and the concurrent U.S. Offering will be identical. Pursuant to an Agreement between the U.S. Underwriters and Managers (the "Intersyndicate Agreement") relating to the Common Stock Offering, changes in the offering price, the aggregate underwriting discounts and commissions per share and per share commission and reallowance to dealers will be made only upon the mutual agreement of CS First Boston Limited, on behalf of the Managers, and CS First Boston Corporation, on behalf of the U.S. Underwriters. Pursuant to the Intersyndicate Agreement, each of the Managers has agreed that, as part of the distribution of International Shares and subject to certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute any prospectus relating to the Common Stock in the United States or Canada or to any other dealer who does not so agree. Each of the U.S. Underwriters has agreed that, as part of the distribution of the U.S. Shares and subject to certain exceptions, it has not offered or sold and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute any prospectus relating to the Common Stock to any person outside the United States and Canada or to any other dealer who does not so agree. The foregoing limitations do not apply to stabilization transactions or to transactions between the Managers and the U.S. Underwriters pursuant to the Intersyndicate Agreement. As used herein, "United States" means the United States of America (including the State and the District of Columbia), its territories, possessions and other areas subject to its jurisdiction. "Canada" means Canada, its provinces, territories, possessions and other areas subject to its jurisdiction, and an offer or sale shall be in the United States or Canada if it is made to (i) any individual resident in the United States or Canada or (ii) any corporation, partnership, pension, profit-sharing or other trust or other entity (including any such entity acting as an investment adviser with discretionary authority) whose office most directly involved with the purchase is located in the United States or Canada. Pursuant to the Intersyndicate Agreement, sales may be made between the Managers and the U.S. Underwriters of such number of shares of Common Stock as may be mutually agreed upon. The price of any shares so sold will be the public offering price less such amount agreed upon by CS First Boston Limited, on behalf of the Managers, and CS First Boston Corporation, as representative of the U.S. Underwriters, but not exceeding the selling concession applicable to such shares. To the extent there are sales between the Managers and the U.S. Underwriters pursuant to the Intersyndicate Agreement, the number of shares of Common Stock initially available for sale by the Managers or by the U.S. Underwriters may be more or less than the amount appearing on the cover page of this Prospectus. Neither the Managers nor the U.S. Underwriters are obligated to purchase from the other any unsold shares of Common Stock. Each of the Managers and the U.S. Underwriters severally represents and agrees that: (i) it has not offered or sold and, prior to the date six months after the date of issue of the Common Stock will not offer or sell, any Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Public Offers of Securities Regulations 1995 and the Financial Services Act 1986 with respect to anything done by it in relation to the Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document in connection with the issue or sale of the Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. A-6 207 ALTERNATE PAGE A-7 Calpine has agreed that it will not offer, sell, contract to sell, announce its intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any additional shares of its Common Stock or securities convertible into or exchangeable or exercisable for any shares of its Common Stock without the prior written consent of CS First Boston Corporation for a period of 180 days after the date of this Prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof. In addition, all holders of options to purchase shares of Common Stock have agreed that they will not, without the prior written consent of CS First Boston Corporation, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them or any shares issuable upon exercise of stock options for a period of 180 days after the date of this Prospectus. Calpine has agreed to indemnify the Managers and the U.S. Underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the Managers and the U.S. Underwriters may be required to make in respect thereof. CS First Boston Corporation, one of the U.S. Underwriters, is an affiliate of the Company. The Common Stock Offering therefore is being conducted in accordance with the applicable provisions of Rule 2720 to the Conduct Rules of the National Association of Securities Dealers, Inc. Rule 2720 requires that the initial public offering price of the Common Stock not be higher than that recommended by a "qualified independent underwriter" meeting certain standards. Accordingly, PaineWebber Incorporated is assuming the responsibilities of acting as the qualified independent underwriter in pricing the Common Stock Offering and conducting due diligence. The initial public offering price of the Common Stock set forth on the cover page of this Prospectus is no higher than the price recommended by PaineWebber Incorporated. In connection with the Common Stock Offering, PaineWebber Incorporated in its role as qualified independent underwriter has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. In addition, the Underwriters may not confirm sales to any discretionary account without the prior specific written approval of the customer. The decision made by CS First Boston Corporation and CS First Boston Limited to underwrite the Common Stock Offering was made independently of the Company, CS Holding and Electrowatt. The net proceeds from the Common Stock Offering will not be applied for the benefit of CS First Boston Corporation or CS First Boston Limited. CS First Boston Corporation and CS First Boston Limited will not receive any benefit from the Common Stock Offering other than their respective portion of the underwriting discounts and commissions. The Common Stock has been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol "CPN." In connection with the listing of the Common Stock on the New York Stock Exchange, the Underwriters have undertaken to sell round lots of 100 shares or more to a minimum of 2,000 beneficial holders. Prior to the Common Stock Offering, there has been no public market for the shares of Common Stock offered hereby. The initial public offering price for the shares was determined by negotiations among the Company, the Selling Stockholder and CS First Boston Corporation, as one of the Representatives of the U.S. Underwriters, and by CS First Boston Limited, on behalf of the Managers, and does not necessarily reflect the secondary market prices for the Common Stock following the initial offering hereby. Among the principal factors considered in determining the initial public offering price were prevailing economic prospects, the sales, earnings and financial and operating performance of the Company in recent periods, the future prospects of the Company, market valuations of companies in related businesses and the history and prospects for the industries in which the Company competes. Additionally, consideration has been given to the general condition of the securities markets, the market for new issues of securities and the demand for securities of comparable companies. In the ordinary course of their business, CS First Boston Corporation and certain of the other Underwriters and their affiliates have engaged in and may in the future engage in investment banking A-7 208 ALTERNATE PAGE A-8 transactions with Calpine, including the provision of certain advisory services to Calpine. CS Holding, a Swiss corporation, holds approximately 44.9% of the outstanding shares of Electrowatt, which indirectly holds all of the outstanding capital stock of the Company. CS Holding also holds (i) approximately 100% of the outstanding shares of Credit Suisse and (ii) approximately 69.3% of the outstanding common stock of CS First Boston, Inc., which holds all of the outstanding common stock of CS First Boston Corporation and of CSFBL. CS First Boston Corporation was one of the Underwriters in connection with the public offering of the Company's 9 1/4% Senior Notes in February 1994, one of the placement agents in connection with the sale of the 10 1/2% Senior Notes in May 1996 and is one of the Representatives of the U.S. Underwriters in the U.S. Offering, and CSFBL is one of the Managers in the International Offering. See "Certain Transactions." A-8 209 ALTERNATE PAGE A-9 - --------------------------------------------- --------------------------------------------- - --------------------------------------------- ---------------------------------------------
A-9 210 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee, the NASD filing fee and the NYSE listing application fee. SEC registration fee...................................................... $150,272 NASD filing fee........................................................... 30,500 NYSE listing application fee.............................................. 93,200 Transfer Agent fees and expenses.......................................... 10,000 Printing and engraving expenses........................................... 125,000 Legal fees and expenses................................................... 175,000 Blue Sky fees and expenses................................................ 25,500 Accounting fees and expenses.............................................. 175,000 Miscellaneous............................................................. 24,528 -------- Total........................................................... $809,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article X of the Registrant's Bylaws provides for mandatory indemnification of its directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. The Registrant's Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to the Company and its stockholders. This provision in the Certificate of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into Indemnification Agreements with its officers and directors, a form of which is attached as Exhibits 10.11 and 10.12 hereto and incorporated herein by reference. The Indemnification Agreements provide the Registrant's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is also made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On March 21, 1996, the Company issued and sold 5,000,000 shares of its Series A Preferred Stock to Electrowatt Ltd for an aggregate purchase price of $50.0 million pursuant to Section 4(2) under the Securities Act of 1933, as amended. On May 16, 1996, the Company issued and sold $180,000,000 aggregate principal amount of 10 1/2% Senior Notes Due 2006 to certain institutional and accredited investors pursuant to Rule 144A under the Securities Act of 1933, as amended. II-1 211 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ---------- --------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 1.2* Form of Subscription Agreement. 3.1 Amended and Restated Articles of Incorporation of Calpine Corporation, a California corporation.(k) 3.2* Form of Amended and Restated Certificate of Incorporation of Calpine Corporation, a Delaware corporation, to be filed prior to the consummation of the offering made pursuant to this Registration Statement. 3.3 Amended and Restated Bylaws of Calpine Corporation, a California corporation.(a) 3.4* Form of Amended and Restated Bylaws of Calpine Corporation, a Delaware corporation, to be adopted prior to the consummation of the offering made pursuant to this Registration Statement. 4.1 Indenture dated as of February 17, 1994 between the Company and Shawmut Bank of Connecticut, National Association, as Trustee, including form of Notes.(a) 4.2 Indenture dated as of May 16, 1996 between the Company and Fleet National Bank, as Trustee, including form of Notes.(l) 4.3** Specimen Common Stock Certificate. 4.4* Form of Agreement and Plan of Merger Between Calpine Corporation, a Delaware corporation, and Calpine Corporation, a California corporation. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 Financing Agreements 10.1.1 Term and Working Capital Loan Agreement, dated as of June 1, 1990, between Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), and Deutsche Bank AG, New York Branch.(a) 10.1.2 First Amendment to Term and Working Capital Loan Agreement, dated as of June 29, 1990, between Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), and Deutsche Bank AG, New York Branch.(a) 10.1.3 Second Amendment to Term and Working Capital Loan Agreement, dated as of December 1, 1990, between Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), and Deutsche Bank AG, New York Branch.(a) 10.1.4 Third Amendment to Term and Working Capital Loan Agreement, dated as of June 26, 1992, between Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), Deutsche Bank AG, New York Branch, National Westminster Bank PLC, Union Bank of Switzerland, New York Branch, and The Prudential Insurance Company of America.(a) 10.1.5 Fourth Amendment to Term and Working Capital Loan Agreement, dated as of April 1, 1993, between Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), Deutsche Bank AG, New York Branch, National Westminster Bank PLC, Union Bank of Switzerland, New York Branch, and The Prudential Insurance Company of America.(a) 10.1.6 Construction and Term Loan Agreement, dated as of January 30, 1992, between Sumas Cogeneration Company, L.P., The Prudential Insurance Company of America, and Credit Suisse, New York Branch.(a) 10.1.7 Amendment No. 1 to Construction and Term Loan Agreement, dated as of May 24, 1993, between Sumas Cogeneration Company, L.P., The Prudential Insurance Company of America, and Credit Suisse, New York Branch.(a) 10.1.8 Credit Agreement-Construction Loan and Term Loan Facility, dated as of January 10, 1990, between Credit Suisse and O.L.S. Energy-Agnews.(a) 10.1.9 Amendment No. 1 to Credit Agreement-Construction Loan and Term Loan Facility, dated as of December 5, 1990, between Credit Suisse and O.L.S. Energy-Agnews.(a)
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EXHIBIT NUMBER DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.1.10 Participation Agreement, dated as of December 1, 1990, between O.L.S. Energy-Agnews, Nynex Credit Company, Credit Suisse, Meridian Trust Company of California, and GATX Capital Corporation.(a) 10.1.11 Facility Lease Agreement, dated as of December 1, 1990, between Meridian Trust Company of California and O.L.S. Energy-Agnews.(a) 10.1.12 Project Revenues Agreement, dated as of December 1, 1990, between O.L.S. Energy-Agnews, Meridian Trust Company of California and Credit Suisse.(a) 10.1.13 Credit Agreement, dated as of September 9, 1994, between Calpine Thermal Power, Inc., Thermal Power Company and The Bank of Nova Scotia.(b) 10.1.14 Project Credit Agreement, dated as of June 30, 1995, between Calpine Greenleaf Corporation, Greenleaf Unit One Associates, Greenleaf Unit Two Associates, Inc. and The Sumitomo Bank, Limited.(g) 10.1.15 Lease dated as of April 24, 1996 between BAF Energy A California Limited Partnership, Lessor, and Calpine King City Cogen, LLC, Lessee.(j) 10.2 Purchase Agreements 10.2.1 Purchase Agreement, dated as of April 1, 1993, between Sonoma Geothermal Partners, L.P., Healdsburg Energy Company, L.P., and Freeport-McMoRan Resource Partners, Limited Partnership.(a) 10.2.2 Stock Purchase Agreement, dated as of June 27, 1994, between Maxus International Energy Company, Natomas Energy Company, Calpine Corporation and Calpine Thermal Power, Inc. and amendment thereto dated July 28, 1994.(b) 10.2.3 Share Purchase Agreement dated March 30, 1995 between Calpine Corporation, Calpine Greenleaf Corporation, Radnor Power Corp. and LFC Financial Corp.(e) 10.3 Power Sales Agreements 10.3.1 Long-Term Energy and Capacity Power Purchase Agreement relating to the Bear Canyon Facility, dated November 30, 1984, between Pacific Gas & Electric and Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), Amendment dated October 17, 1985, Second Amendment dated October 19, 1988, and related documents.(a) 10.3.2 Long-Term Energy and Capacity Power Purchase Agreement relating to the Bear Canyon Facility, dated November 29, 1984, between Pacific Gas & Electric and Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), and Modification dated November 29, 1984, Amendment dated October 17, 1985, Second Amendment dated October 19, 1988, and related documents.(a) 10.3.3 Long-Term Energy and Capacity Power Purchase Agreement relating to the West Ford Flat Facility, dated November 13, 1984, between Pacific Gas & Electric and Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), and amendments dated May 18, 1987, June 22, 1987, July 3, 1987 and January 21, 1988, and related documents.(a) 10.3.4 Agreement for Firm Power Purchase, dated as of February 24, 1989, between Puget Sound Power & Light Company and Sumas Energy, Inc. and amendment thereto dated September 30, 1991.(a) 10.3.5 Long-Term Energy and Capacity Power Purchase Agreement, dated April 16, 1985, between O.L.S. Energy-Agnews and Pacific Gas & Electric Company and amendment thereto dated February 24, 1989.(a) 10.3.6 Long-Term Energy and Capacity Power Purchase Agreement, dated November 15, 1984, between Geothermal Energy Partners, Ltd., and Pacific Gas & Electric Company and related documents.(a) 10.3.7 Long-Term Energy and Capacity Power Purchase Agreement, dated November 15, 1984, between Geothermal Energy Partners, Ltd., and Pacific Gas & Electric Company (see Exhibit 10.3.6 for related documents).(a)
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EXHIBIT NUMBER DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.3.8 Long-Term Energy and Capacity Power Purchase Agreement, dated December 12, 1984, between Greenleaf Unit One Associates, Inc. and Pacific Gas and Electric Company.(f) 10.3.9 Long-Term Energy and Capacity Power Purchase Agreement, dated December 12, 1984, between Greenleaf Unit Two Associates, Inc. and Pacific Gas and Electric Company.(f) 10.4 Steam Sales Agreements 10.4.1 Geothermal Steam Sales Agreement, dated July 19, 1979, between Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), and Sacramento Municipal Utility District and related documents.(a) 10.4.2 Agreement for the Sale and Purchase of Geothermal Steam, dated March 23, 1973, between Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), and Pacific Gas & Electric Company and related letter dated May 18, 1987.(a) 10.4.3 Thermal Energy and Kiln Lease Agreement, dated as of January 16, 1992, between Sumas Cogeneration Company, L.P., and Socco, Inc. and amendment thereto dated May 24, 1993.(a) 10.4.4 Amended and Restated Energy Service Agreement, dated as of December 1, 1990, between the State of California and O.L.S. Energy-Agnews.(a) 10.4.5 Agreement for the Sale of Geothermal Steam, dated as of July 28, 1992, between Thermal Power Company and Pacific Gas & Electric Company.(c) 10.4.6 Amendment to the Agreement for the Sale of Geothermal Steam, dated as of August 9, 1995, between Union Oil Company of California, NEC Acquisition Company, Thermal Power Company, and Pacific Gas and Electric Company.(h) 10.5 Service Agreements 10.5.1 Operation and Maintenance Agreement, dated as of April 5, 1990, between Calpine Operating Plant Services, Inc. (formerly Calpine-Geysers Plant Services, Inc.), and Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.).(a) 10.5.2 Amended and Restated Operating and Maintenance Agreement, dated as of January 24, 1992, between Calpine Operating Plant Services, Inc. and Sumas Cogeneration Company, L.P.(a) 10.5.3 Amended and Restated Operation and Maintenance Agreement, dated as of December 31, 1990, between O.L.S. Energy-Agnews and Calpine Operating Plant Services, Inc. (formerly Calpine Cogen-Agnews, Inc.).(a) 10.5.4 Operating and Maintenance Agreement, dated as of January 1, 1995, between Calpine Corporation and Geothermal Energy Partners, Ltd.(h) 10.5.5 Amended and Restated Operating Agreement for the Geysers, dated as of December 1, 1993, by and between Magma-Thermal Power Project, a joint venture composed of NEC Acquisition Company and Thermal Power Company, and Union Oil Company of California.(c) 10.6 Gas Supply Agreements 10.6.1 Gas Sale and Purchase Agreement, dated as of December 23, 1991, between ENCO Gas, Ltd. and Sumas Cogeneration Company, L.P.(a) 10.6.2 Gas Management Agreement, dated as of December 23, 1991, between Canadian Hydrocarbons Marketing Inc., ENCO Gas, Ltd. and Sumas Cogeneration Company, L.P.(a) 10.6.4 Natural Gas Sales Agreement, dated as of November 1, 1993, between O.L.S. Energy-Agnews, Inc. and Amoco Energy Trading Corporation.(a) 10.6.5 Natural Gas Service Agreement, dated November 1, 1993, between Pacific Gas & Electric Company and O.L.S. Energy-Agnews, Inc.(a) 10.7 Agreements Regarding Real Property 10.7.1 Office Lease, dated March 15, 1991, between 50 West San Fernando Associates, L.P., and Calpine Corporation.(a) 10.7.2 First Amendment to Office Lease, dated April 30, 1992, between 50 West San Fernando Associates, L.P. and Calpine Corporation.(a)
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EXHIBIT NUMBER DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.7.3 Geothermal Resources Lease CA 1862, dated July 25, 1974, between the United States Bureau of Land Management and Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.).(a) 10.7.4 Geothermal Resources Lease PRC 5206.2, dated December 14, 1976, between the State of California and Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.).(a) 10.7.5 First Amendment to Geothermal Resources Lease PRC 5206.2, dated April 20, 1994, between the State of California and Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.).(a) 10.7.6 Industrial Park Lease Agreement, dated December 18, 1990, between Port of Bellingham and Sumas Energy, Inc.(a) 10.7.7 First Amendment to Industrial Park Lease Agreement, dated as of July 16, 1991, between Port of Bellingham, Sumas Energy, Inc., and Sumas Cogeneration Company, L.P.(a) 10.7.8 Second Amendment to Industrial Park Lease Agreement, dated as of December 17, 1991 between Port of Bellingham and Sumas Cogeneration Company, L.P.(a) 10.7.9 Amended and Restated Cogeneration Lease, dated as of December 1, 1990, between the State of California and O.L.S. Energy-Agnews.(a) 10.8 General 10.8.1 Limited Partnership Agreement of Sumas Cogeneration Company, L.P., dated as of August 28, 1991, between Sumas Energy, Inc. and Whatcom Cogeneration Partners, L.P.(a) 10.8.2 First Amendment to Limited Partnership Agreement of Sumas Cogeneration Company, L.P., dated as of January 30, 1992, between Whatcom Cogeneration Partners, L.P., and Sumas Energy, Inc.(a) 10.8.3 Second Amendment to Limited Partnership Agreement of Sumas Cogeneration Company, L.P., dated as of May 24, 1993, between Whatcom Cogeneration Partners, L.P., and Sumas Energy, Inc.(a) 10.8.4 Second Amended and Restated Shareholders' Agreement, dated as of October 22, 1993, among GATX Capital Corporation, Calpine Agnews, Inc., JGS-Agnews, Inc., and GATX/Calpine-Agnews, Inc.(a) 10.8.5 Amended and Restated Reimbursement Agreement, dated October 22, 1993, between GATX Capital Corporation, Calpine Agnews, Inc., JGS-Agnews, Inc., GATX/Calpine-Agnews, Inc., and O.L.S. Energy-Agnews, Inc.(a) 10.8.6 Amended and Restated Limited Partnership Agreement of Geothermal Energy Partners Ltd., L.P., dated as of May 19, 1989, between Western Geothermal Company, L.P., Sonoma Geothermal Company, L.P., and Cloverdale Geothermal Partners, L.P.(a) 10.8.7 Assignment and Security Agreement, dated as of January 10, 1990, between O.L.S. Energy-Agnews and Credit Suisse.(a) 10.8.8 Pledge Agreement, dated as of January 10, 1990, between GATX/Calpine-Agnews, Inc., and Credit Suisse.(a) 10.8.9 Equity Support Agreement, dated as of January 10, 1990, between Calpine Corporation and Credit Suisse.(a) 10.8.10 Assignment and Security Agreement, dated as of December 1, 1990, between O.L.S. Energy-Agnews and Meridian Trust Company of California.(a) 10.8.11 Calpine Subordination Agreement, dated as of April 1, 1993, between Freeport-McMoRan Resource Partners, L.P., Calpine Corporation, Sonoma Geothermal Partners, L.P., Calpine Sonoma, Inc., Healdsburg Energy Company, L.P., and Calpine Geysers Company, L.P. (formerly Santa Rosa Energy Company, L.P.).(a)
II-5 215
EXHIBIT NUMBER DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.8.12 First Amended and Restated Limited Partner Pledge and Security Agreement, dated as of April 1, 1993, between Sonoma Geothermal Partners, L.P., Healdsburg Energy Company, L.P., Calpine Geysers Company, L.P. (formerly Santa Rosa Geothermal Company, L.P.), Freeport-McMoRan Resource Partners, L.P., and Meridian Trust Company of California.(a) 10.8.13 Management Services Agreement, dated January 1, 1995, between Calpine Corporation and Electrowatt Ltd.(k) 10.8.14 Revolving Credit Facility Letter Agreements, dated April 21, 1995, between Calpine Corporation and Credit Suisse, and between Calpine Greenleaf Corporation and Credit Suisse.(g) 10.8.15 Letter regarding Credit Facility, dated April 7, 1993, from Electrowatt Ltd. to Credit Suisse.(a) 10.8.16 Promissory Grid Note, dated April 29, 1996, between Calpine Corporation and Credit Suisse.(k) 10.8.17 Guarantee Fee Agreement, dated January 1, 1995, between Calpine Corporation and Electrowatt Ltd.(g) 10.8.18 Registration Rights Agreement dated as of May 16, 1996 between the Company, Morgan Stanley & Co. Incorporated, CS First Boston, Goldman Sachs & Co. and Scotia Capital Markets (USA) Inc.(l) 10.8.19* Commitment Letter between The Bank of Nova Scotia and Calpine Corporation. 10.9.1 Calpine Corporation Stock Option Program and forms of agreements thereunder.(a) 10.9.2* Calpine Corporation 1996 Stock Incentive Plan and forms of agreements thereunder. 10.9.3* Calpine Corporation Employee Stock Purchase Plan and forms of agreements thereunder. 10.10.1* Amended and Restated Employment Agreement between Calpine Corporation and Mr. Peter Cartwright. 10.10.2* Senior Vice President Employment Agreement between the Company and Ms. Ann B. Curtis. 10.10.3* Senior Vice President Employment Agreement between the Company and Mr. Lynn A. Kerby. 10.10.4* Vice President Employment Agreement between the Company and Mr. Ron A. Walter. 10.10.5* Vice President Employment Agreement between the Company and Mr. Robert D. Kelly. 10.10.6* First Amended and Restated Consulting Contract between Calpine Corporation and Mr. George J. Stathakis. 10.11* Form of Indemnification Agreement for directors and officers. 21.1* Subsidiaries of the Company. 23.1* Consent of Brobeck, Phleger & Harrison LLP (contained in the opinion filed as Exhibit 5). 23.2* Independent Public Accountants' Consent of Arthur Andersen LLP. 23.3* Independent Public Accountants' Consent of Moss Adams LLP. 23.4* Independent Accountants' Consent of Coopers & Lybrand L.L.P. 23.5* Independent Public Accountants' Consent of Ernst & Young LLP. 24.1*** Power of Attorney.
- --------------- * Filed herewith. ** To be filed by Amendment. *** Previously filed (a) Incorporated by reference to Registrant's Registration Statement on Form S-1 (Registration Statement No. 33-73160). (b) Incorporated by reference to Registrant's Current Report on Form 8-K dated September 9, 1994 and filed on September 26, 1994. (c) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q dated September 30, 1994 and filed on November 14, 1994. (d) Incorporated by reference to Registrant's Annual Report on Form 10-K dated December 31, 1994 and filed on March 29, 1995. II-6 216 (e) Incorporated by reference to Registrant's Current Report on Form 8-K dated April 21, 1995 and filed on May 5, 1995. (f) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q dated March 31, 1995 and filed on May 12, 1995. (g) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q dated June 30, 1995 and filed on August 14, 1995. (h) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q dated September 30, 1995 and filed on November 14, 1995. (i) Incorporated by reference to Registrant's Annual Report on Form 10-K dated December 31, 1995 and filed on March 29, 1996. (j) Incorporated by reference to Registrant's Current Report on Form 8-K dated May 1, 1996 and filed on May 14, 1996. (k) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q dated March 31, 1996 and filed on May 15, 1996. (l) Incorporated by reference to Registrant's Registration Statement on Form S-4 (Registration Statement No. 333-6259). FINANCIAL STATEMENT SCHEDULES Schedule I -- Condensed Financial Information of Registrant Schedule II -- Valuation and Qualifying Accounts and Reserves Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the notes thereto. ITEM 22. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 217 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN JOSE, CALIFORNIA, ON THE 21ST DAY OF AUGUST, 1996. CALPINE CORPORATION By: /s/ PETER CARTWRIGHT ------------------------------------ Peter Cartwright President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ---------------------------------------- ----------------------------------- --------------- /s/ PETER CARTWRIGHT President and Chief Executive August 21, 1996 - ---------------------------------------- Officer, Director (principal Peter Cartwright executive officer) Director and - ---------------------------------------- Chairman of the Board Pierre Krafft Director August 21, 1996 * - ---------------------------------------- Hans-Peter Aebi Director August 21, 1996 * - ---------------------------------------- Rudolf Boesch /s/ ANN B. Senior Vice President August 21, 1996 CURTIS (principal financial officer) - ---------------------------------------- Ann B. Curtis /s/ GLORIA S. Corporate Controller August 21, 1996 GEE (principal accounting officer) - ---------------------------------------- Gloria S. Gee *By: /s/ PETER CARTWRIGHT - ---------------------------------------- Peter Cartwright Attorney-in-Fact *By: /s/ ANN B. CURTIS - ---------------------------------------- Ann B. Curtis Attorney-in-Fact
II-8 218 After the reincorporation and the effectiveness of the stock split discussed in Note 6 to Schedule I, we expect to be in a position to render the following report. ARTHUR ANDERSEN LLP San Jose, California March 15, 1996 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Calpine Corporation and subsidiaries included in this Registration Statement and have issued our report thereon dated March 15, 1996. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statement schedules are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California March 15, 1996 (except with respect to the matter discussed in Note 6 to Schedule I, as to which the date is , 1996) S-1 219 CALPINE CORPORATION SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS DECEMBER 31, 1995 AND 1994 ASSETS
1995 1994 ------------ ------------ Current assets: Cash and cash equivalents..................................... $ (1,970,526) $ 5,514,002 Accounts receivable........................................... 6,304,594 2,196,912 Acquisition project receivables............................... 8,805,186 -- Intercompany receivables...................................... 38,360,583 57,696,201 Other current assets.......................................... 270,806 189,526 ------------ ------------ Total current assets....................................... 51,770,643 65,596,641 Property, plant and equipment, net.............................. 724,359 554,582 Investments in power projects................................... 82,610,719 44,913,432 Notes receivable from related parties........................... 19,090,286 23,953,294 Notes receivable from Coperlasa................................. 6,394,462 -- Deferred charges................................................ 3,390,677 3,807,425 Other assets.................................................... 197,144 74,900 ------------ ------------ Total assets............................................... $164,178,290 $138,900,274 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable.............................................. $ 2,667,808 $ 777,637 Accrued payroll and related expenses.......................... 2,582,194 2,417,302 Accrued interest payable...................................... 4,051,785 4,046,875 Other accrued expenses........................................ 2,704,257 964,312 ------------ ------------ Total current liabilities.................................. 12,006,044 8,206,126 Long-term line of credit........................................ 14,000,000 -- Senior Notes Due 2004........................................... 105,000,000 105,000,000 Deferred income taxes........................................... 7,877,537 6,976,950 Deferred revenue................................................ 67,925 67,925 ------------ ------------ Total liabilities.......................................... 138,951,506 120,251,001 ------------ ------------ Stockholder's equity: Common stock.................................................. 10,000 10,000 Additional paid-in capital.................................... 6,214,000 6,214,000 Retained earnings............................................. 19,002,784 12,425,273 ------------ ------------ Total stockholder's equity................................. 25,226,784 18,649,273 ------------ ------------ Total liabilities and stockholder's equity................. $164,178,290 $138,900,274 ============ ============
The accompanying notes are an integral part of these condensed financial statements. S-2 220 CALPINE CORPORATION SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ----------- ----------- ----------- Revenue: Service contract revenue from related parties... $28,733,399 $22,929,897 $ 2,373,319 Income from unconsolidated investments in power projects..................................... 32,397,392 23,711,895 15,450,720 ----------- ----------- ----------- Total revenue................................ 61,130,791 46,641,792 17,824,039 Cost of revenue: Service contract expenses....................... 27,433,069 19,161,445 1,914,375 ----------- ----------- ----------- Gross profit...................................... 33,697,722 27,480,347 15,909,664 Project development expenses...................... 3,087,316 2,822,459 1,280,125 General and administrative expenses............... 8,081,458 6,867,520 4,808,139 ----------- ----------- ----------- Income from operations....................... 22,528,948 17,790,368 9,821,400 Other (income) expense: Interest expense................................ 10,479,144 9,207,381 2,613,212 Other income, net............................... (377,276) (1,290,739) (1,153,797) Income before provision for income taxes and cumulative effect of change in accounting principle.................................. 12,427,080 9,873,726 8,361,985 Provision for income taxes........................ 5,049,568 3,853,115 4,194,733 ----------- ----------- ----------- Income before cumulative effect of change in accounting principle....................... 7,377,512 6,020,611 4,167,252 Cumulative effect of adoption of SFAS No. 109..... -- -- (413,410) ----------- ----------- ----------- Net income................................... $ 7,377,512 $ 6,020,611 $ 3,753,842 ========== ========== ========== As adjusted earnings per share assuming conversion of preferred stock: As adjusted weighted average shares outstanding.................................. 14,187,433 ========== Net income per share............................ $ 0.52 ==========
The accompanying notes are an integral part of these condensed financial statements. S-3 221 CALPINE CORPORATION SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------ ------------ ------------ Net cash used in operating activities................ $ (8,874,945) $(44,753,732) $ (84,812) ------------ ------------ ------------ Cash flows from investing activities: Acquisitions of property, plant and equipment...... (367,711) (299,961) (73,292) Investments in power projects...................... (1,262,000) (175,352) (882,730) Decrease (increase) in notes receivable............ (10,336,640) 3,294,727 (15,576,775) Other, net......................................... (122,244) 97,838 (85,478) ------------ ------------ ------------ Net cash provided by (used in) investing activities................................. (12,088,595) 2,917,252 (16,618,275) ------------ ------------ ------------ Cash flows from financing activities: Payment of dividends............................... (800,000) (800,000) (800,000) Borrowings under line of credit.................... 14,000,000 -- 23,000,000 Repayment of borrowings under line of credit....... -- (52,595,000) (5,872,500) Proceeds from Senior Notes Due 2004................ -- 105,000,000 -- Costs associated with future financing............. 279,012 (3,419,003) (748,993) Repayment of note payable to shareholder........... -- (1,200,000) -- ------------ ------------ ------------ Net cash provided by financing activities..... 13,479,012 46,985,997 15,578,507 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents........................................ (7,484,528) 5,149,517 (1,124,580) Cash and cash equivalents, beginning of period....... 5,514,002 364,485 1,489,065 ------------ ------------ ------------ Cash and cash equivalents, end of period............. $ (1,970,526) $ 5,514,002 $ 364,485 ============ ============ ============ Supplementary information: Cash paid during the period for: Interest........................................ $ 9,945,443 $ 4,917,773 $ 2,120,637 Income taxes.................................... $ 4,293,725 $ 683,364 $ 12,800
The accompanying notes are an integral part of these condensed financial statements. S-4 222 CALPINE CORPORATION SELECTED NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ORGANIZATION AND OPERATION OF CALPINE Calpine Corporation (Calpine) is engaged in the development, acquisition, ownership and operation of power generation facilities in the United States. Calpine has ownership interests in and operates geothermal power generation facilities and steam fields and natural gas-fired cogeneration facilities through subsidiaries and investees. Founded in 1984 as a supplier of engineering and management services, Calpine is wholly-owned by Electrowatt Services, Inc., which is wholly-owned by Electrowatt Ltd (Electrowatt), a Swiss company. Calpine brings expertise in the area of engineering, finance, construction and plant operations and maintenance. For the purposes of these registrant-only financial statements, Calpine's wholly-owned subsidiaries are accounted for under the equity method and are included in investments in power projects in the accompanying balance sheets. In 1994, Calpine assumed the operations and maintenance agreements for the projects in which Calpine has an interest. Prior to 1994, a wholly-owned subsidiary, Calpine Operating Plant Services, Inc. (COPS) performed these services. In 1993, COPS recorded service contract revenue from related parties of $15.6 million and service contract expenses of $13.4 million pursuant to these agreements. As Adjusted Earnings Per Share Net income per share is computed using weighted average shares outstanding, which includes the net additional number of shares which would be issuable upon the exercise of outstanding stock options, assuming that the Company used the proceeds received to purchase additional shares at an assumed public offering price. Net income per share also gives effect, even if antidilutive, to common equivalent shares from preferred stock that will automatically convert upon the closing of the Company's initial public offering (using the as-if-converted method). If the offering contemplated by the Company is consummated, all of the convertible preferred stock outstanding as of the closing date will automatically be converted into shares of common stock based on the shares of convertible preferred stock outstanding at June 30, 1996. 2. LINES OF CREDIT AND REVOLVING CREDIT FACILITY At December 31, 1995, the line of credit with Credit Suisse (whose parent company owns approximately 44.2% of Electrowatt) provided for advances of $50.0 million. Interest may be paid at either LIBOR or the Credit Suisse base rate, plus applicable margins in both cases. At December 31, 1995, Calpine had $19.9 million of borrowings outstanding, bearing interest at LIBOR plus 0.5% (6.4% at December 31, 1995). At Calpine's discretion, the debt outstanding can be held for various maturity periods of up to six months. Interest is paid on the last day of each interest period for such loans, but not less often than quarterly, based on the principal amount outstanding during the period. No stated amortization exists for this indebtedness. From January 1 to March 13, 1996, Calpine borrowed an additional $8.8 million and issued a letter of credit for $3.0 million for working capital requirements, other development projects and to fund Calpine Vapor, Inc. (Calpine Vapor), a subsidiary of Calpine. Calpine Vapor made loans for construction of new geothermal wells in Mexico. No borrowings were outstanding at December 31, 1994. The credit agreement specifies that Calpine maintain certain covenants with which Calpine was in compliance. At December 31, 1995, Calpine had three loan facilities with available borrowings totaling $10.2 million. Borrowings and letters of credit outstanding were $1.2 million and $3.8 million as of December 31, 1995, respectively, with interest payable at variable interest rates based on bank base rates, LIBOR or prime plus applicable margins in all cases (approximately 7.6% at December 31, 1995 on borrowings). At December 31, S-5 223 CALPINE CORPORATION SELECTED NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) 1994, no borrowings and $900,000 of letters of credit were outstanding on these facilities. The credit agreements specify that Calpine maintain certain covenants with which Calpine was in compliance. 3. NOTE PAYABLE TO STOCKHOLDER On December 31, 1991, Calpine declared a dividend of $1.2 million to its parent company, Electrowatt Services, Inc. On the same date, Calpine issued a note payable to Electrowatt Services, Inc. for $1.2 million. Interest was paid quarterly at a rate of 4.25%, which approximated market. The note was paid on June 30, 1994, the maturity date. 4. SENIOR NOTES DUE 2004 On February 17, 1994, Calpine completed a $105.0 million public debt offering of 9 1/4% Senior Notes Due 2004 (Senior Notes). The net proceeds of $100.9 million were used to repay all of the indebtedness outstanding under Calpine's existing line of credit, and to repay subsidiaries' non-recourse notes payable to Freeport-McMoRan Resource Partners, L.P. (FMRP) plus accrued interest. The remaining proceeds were used for general corporate purposes including a loan to the sole shareholder of Sumas Energy, Inc., the partner in one of Calpine's power projects. The transaction costs of $4.1 million incurred in connection with the public debt offering have been recorded as a deferred charge and are amortized over the ten-year life of the Senior Notes using the interest method. The Senior Notes will mature on February 1, 2004 and bear interest at 9 1/4% payable semiannually on February 1 and August 1 of each year, commencing August 1, 1994, to holders of record. Based on the traded yield to maturity, the approximate fair market value of the Senior Notes was $97.0 million as of December 31, 1995. Under provisions of the indenture applicable to the Senior Notes, Calpine may, under certain circumstances be limited in its ability to make restricted payments, as defined, which include dividends and certain purchases and investments, incur additional indebtedness and engage in certain transactions. 5. COMMITMENTS AND CONTINGENCIES Capital Projects Calpine has 1996 commitments for capital expenditures totaling $6.8 million related to various projects at its geothermal facilities. In March 1996, Calpine entered into an energy agreement with Phillips Petroleum Company to develop, construct, own and operate a 240 megawatt gas-fired cogeneration facility at Phillips Houston Chemical Complex in Pasadena, Texas. The initial permitting process is underway, with construction of the facility planned to begin in late 1996 and to be completed in 1998. Calpine is currently evaluating options to finance the construction of this facility. Calpine issued a $3.0 million letter of credit and has a 1996 capital commitment of $3.0 million in connection with this facility. In a separate transaction, as of March 15, 1996, Calpine was negotiating the potential acquisition of an operating lease for a 120 megawatt gas-fired cogeneration facility located in Northern California. S-6 224 CALPINE CORPORATION SELECTED NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) Office and Equipment Leases Calpine leases its corporate office, Santa Rosa office facilities and certain office equipment under noncancellable operating leases expiring through 2000. Future minimum lease payments under these leases are (in thousands): 1996........................................................ $ 899 1997........................................................ 905 1998........................................................ 907 1999........................................................ 776 2000........................................................ 745 thereafter.................................................. 286 ------ Total future minimum lease commitments...................... $4,518 ======
Lease payments are subject to adjustment for Calpine's pro rata portion of annual increases or decreases in building operating costs. In 1995, 1994 and 1993, rent expense for noncancellable operating leases amounted to $733,000, $663,000 and $636,000, respectively. S-7 225 CALPINE CORPORATION SELECTED NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) CPUC Restructuring Electricity and steam sales agreements with PG&E are regulated by the California Public Utilities Commission (CPUC). In December 1995, the CPUC proposed the transition of the electric generation market to a competitive market beginning January 1, 1998, with all consumers participating by 2003. The proposed restructuring provides for phased-in customer choice, development of non-discriminatory market structure, recovery of utilities' stranded costs, sanctity of existing contracts, and continuation of existing public policy programs including the promotion of fuel diversity through a renewable energy purchase requirement. As the proposed restructuring has widespread impact and the market structure requires the participation and oversight of the Federal Energy Regulatory Commission (FERC), the CPUC will seek to build a California consensus involving the legislature, the Governor, public and municipal utilities, and customers. The consensus would then be placed before the FERC so that both the CPUC and FERC would implement the new market structure no later than January 1, 1998. There can be no assurance that the proposed restructuring will be enacted in substantially the same form as discussed above. Calpine is unable to predict the ultimate outcome of the restructuring. Litigation Calpine, together with over 100 other parties, was named as a defendant in the second amended complaint in an action brought in August 1993 by the bankruptcy trustee for Bonneville Pacific Corporation (Bonneville), captioned Roger G. Segal, as the Chapter 11 Trustee for Bonneville Pacific Corporation v. Portland General Corporation, et al., in the United States District Court for the District of Utah. This complaint alleges that, in conjunction with top executives of Bonneville and with the alleged assistance of the other 100 defendants, Calpine engaged in a broad conspiracy and fraud. The complaint has been amended a number of times. Calpine has answered each version of the complaint by denying all claims and is in the process of conducting discovery. In August 1994 Calpine successfully moved for an order severing the trustee's claim against Calpine from the claims against the other defendants. Although the case involves over 25 separate financial transactions entered into by Bonneville, the severed case concerns Calpine in respect of only one of these transactions. In 1988, Calpine invested $2.0 million in a partnership formed with Bonneville to develop four hydroelectric projects in the State of Hawaii. The projects were not successfully developed by the partnership, and, subsequent to Bonneville's Chapter 11 filing, Calpine filed a claim as a creditor against Bonneville's bankruptcy estate. The trustee alleges that the equity investment was actually a "sham" loan designed to inflate Bonneville's earnings. The trustee further alleges that Calpine is one of many defendants in this case responsible for Bonneville's insolvency and the amount of damages attributable to Calpine based on the $2.0 million partnership investment is alleged to be $577.2 million. The trustee is seeking to hold each of the other defendants liable for a portion, all or, in certain cases, more than this amount. Calpine expects the matter will be set for trial in 1996. Calpine believes the claims against it are without merit and will continue to defend the action vigorously. Calpine further believes that the resolution of this matter will not have a material adverse effect on its financial position or results of operations. Calpine is involved in various other claims and legal actions arising out of the normal course of business. Management does not expect that the outcome of these cases will have a material adverse effect on Calpine's financial position or results of operations. 6. SUBSEQUENT EVENT In July 1996, the Company's Board of Directors authorized the reincorporation of the Company into Delaware in connection with the Company's initial public equity offering. Also, the Board of Directors approved a stock split at a ratio of approximately 5.194 to 1. The accompanying financial statements reflect the reincorporation and the stock split as if such transactions had been effective for all periods. S-8 226 CALPINE CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, 1995
ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------- ------------ ---------- ---------- ---------- ---------- Reserve for capitalized costs.... $ 1,838 $ -- $ -- $ -- $ 1,838(1) ========= ======== ======== ======== ======== Allowance for uncollectible accounts....................... $ 238 $ -- $ -- $ -- $ 238 ========= ======== ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1994
ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------- ------------ ---------- ---------- ---------- ---------- Reserve for capitalized costs.... $ 800 $ 1,038 $ -- $ -- $ 1,838(1) ========= ======== ======== ======== ======== Allowance for uncollectible accounts....................... -- 238 $ -- $ -- $ 238 ========= ======== ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1993
ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------- ------------ ---------- ---------- ---------- ---------- Reserve for capitalized costs.... $ 800 $ -- $ -- $ -- $ 800(1) ========= ======== ======== ======== ========
- ------------------------ (1) Provision for write-off of project development expenses. S-9 227 APPENDIX -- CALPINE GRAPHIC IMAGES GRAPHIC (Inside Front Cover) Upper Photo--Sumas 125 mw Gas-fired Facility Lower Photo--King City 120 mw Gas-fired Facility GRAPHIC (Inside Back Cover) Upper Photo--Cerro Prieto 80 mw Geothermal Steam Field Lower Photo--West Ford Flat 27 mw Geothermal Facility GRAPHIC (page 43) CALPINE CORPORATION 1 - Calpine Corporation Headquarters San Jose, California 2 - Calpine Corporation Geothermal Office Santa Rosa, California 3 - Aidlin 20 mw Geothermal Facility 4 - Agnews 29 mw Cogeneration Facility 5 - Bear Canyon 20 mw Geothermal Facility 6 - Black Hills 80 mw Coal Project 7 - Cerro Prieto 80 mw Steam Fields 8 - Coso 150 mw Geothermal Project 9 - Gilroy 120 mw Cogeneration Facility 10 - Glass Mountain 145 mw Geothermal Project 11 - Greenleaf 1 49.5 mw Cogeneration Facility 12 - Greenleaf 2 49.5 mw Cogeneration Facility 13 - King City 120 mw Cogeneration Facility 14 - Navajo South 1,700 mw Coal Project 15 - Pasadena 240 mw Cogeneration Facility 16 - PG&E Unit 13 Steam Fields 17 - PG&E Unit 16 Steam Fields 18 - SMUDGEO #1 Steam Fields 19 - Sumas 125 mw Cogeneration Facility 20 - Thermal Power Company Steam Fields 21 - Watsonville 28.5 mw Cogeneration Facility 22 - West Ford Flat 27 mw Geothermal Facility Map of western and southwestern United States indicating: Corporate Headquarters Corporate Geothermal Office Operating Facility Steam Fields Future Projects Graphic (page 40) Illustration of a Combined Cycle Power Plant Graphic (page 41) Illustration of a Geothermal Power Plant EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 18,045,000 SHARES CALPINE CORPORATION COMMON STOCK, $.001 PAR VALUE UNDERWRITING AGREEMENT SEPTEMBER , 1996 CS FIRST BOSTON CORPORATION MORGAN STANLEY & CO. INCORPORATED PAINEWEBBER INCORPORATED SALOMON BROTHERS INC As Representatives of the Several Underwriters c/o CS First Boston Corporation Park Avenue Plaza New York, N.Y. 10055 Dear Sirs: 1. Introductory. Calpine Corporation, a Delaware corporation ("Company"), proposes to issue and sell 4,382,256 shares of its Common Stock, $.001 par value ("Securities"), and Electrowatt, Ltd. ("Selling Stockholder") proposes to sell 10,053,744 outstanding shares of the Securities (such shares of Securities being hereinafter referred to as the "U.S. Firm Securities") to the several Underwriters named in Schedule A hereto (the "Underwriters"). It is understood that the Company and the Selling Stockholder are concurrently entering into a Subscription Agreement, dated the date hereof ("Subscription Agreement"), with CS First Boston Limited ("CSFBL"), Morgan Stanley & Co. International Limited, PaineWebber International (U.K.) Limited, Salomon Brothers International Limited, and the other managers named therein ("Managers") relating to the concurrent offering and sale of 1,095,564 shares of Securities by the Company and 2,513,436 shares of Securities by the Selling Stockholder ("International Firm Securities") outside the United States and Canada ("International Offering"). In addition, as set forth below, the Company proposes to issue and sell (i) to the Underwriters, at the option of the Underwriters, an aggregate of not more than 2,165,400 additional shares of Securities ("U.S. Optional Securities") and (ii) to the Managers, at the option of the Managers, an aggregate of not more than 541,350 additional shares of Securities ("International Optional Securities"). The U.S. Firm Securities and the U.S. Optional Securities are hereinafter called the "U.S. Securities"; the International Firm Securities and the International Optional Securities are hereinafter called the "International Securities"; the U.S. Firm Securities and the International Firm Securities are hereinafter called the "Firm Securities"; the U.S. Optional Securities and the International Optional Securities are hereinafter called the "Optional Securities". The U.S. Securities and the International Securities are collectively referred to as the "Offered Securities". To provide for the coordination of their activities, the Underwriters and the Managers have entered into an Agreement Between U.S. Underwriters and Managers which permits them, among other things, to sell the Offered Securities to each other for purposes of resale. The Company and the Selling Stockholder hereby agree with the several Underwriters as follows: 2. Representations and Warranties of the Company and the Selling Stockholder. (a) The Company represents and warrants to, and agrees with, the several Underwriters that: (i) A registration statement (No. 333-07497) relating to the Offered Securities, including a form of prospectus relating to the U.S. Securities and a form of prospectus relating to the International Securities 2 being offered in the International Offering, has been filed with the Securities and Exchange Commission ("Commission") and either (A) has been declared effective under the Securities Act of 1933 ("Act") and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If such registration statement (the "initial registration statement") has been declared effective, either (A) an additional registration statement (the "additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (B) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement". The Initial Registration Statement and the Additional Registration Statement are hereinafter referred to collectively as the "Registration Statements" and individually as a "Registration Statement". The form of prospectus relating to the U.S. Securities and the form of prospectus relating to the International Securities, each as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in the Registration Statement, are hereinafter referred to as the "U.S. Prospectus" and the "International Prospectus", respectively, and collectively as the "Prospectuses". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial 2 3 Registration Statement conformed in all respects to the requirements of the Act and the rules and regulations of the Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of each of the Prospectuses pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectuses are included, each Registration Statement and each of the Prospectuses will conform, in all respects to the requirements of the Act and the Rules and Regulations, and none of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement will conform in all respects to the requirements of the Act and the Rules and Regulations, (B) none of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or either of the Prospectuses based upon written information furnished to the Company by any Underwriter through the Representatives or by any Manager through CSFBL specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(c). (iii) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectuses; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification. (iv) Each subsidiary of the Company (x) other than those subsidiaries specified in clause (y) of this subparagraph has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectuses or (y) that is not a corporation is a limited partnership, has been duly formed and is validly existing as a limited partnership in good standing under the laws of the jurisdiction of its formation, and has full power and authority to own its properties and conduct its business as described in the Prospectuses; each subsidiary of the Company is duly qualified to do business as a foreign corporation or limited partnership, as the case may be, in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; except as set forth on Schedule B hereto the capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects; and, except as set forth on Schedule C hereto, the Company is not a general partner in any partnership. (v) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement and the Subscription Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectuses; and the stockholders of the Company have no preemptive rights with respect to the Securities. 3 4 (vi) Except as disclosed in the Prospectuses, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter or Manager for a brokerage commission, finder's fee or other like payment. (vii) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (viii) The Offered Securities have been approved for listing on the New York Stock Exchange subject to notice of issuance. (ix) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement or the Subscription Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws. (x) The execution, delivery and performance of this Agreement and the Subscription Agreement, and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement and the Subscription Agreement, respectively. (xi) This Agreement and the Subscription Agreement have been duly authorized, executed and delivered by the Company. (xii) Except as disclosed in the Prospectuses, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectuses, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (xiii) The Company and its subsidiaries possess adequate certificates, authorities, licenses or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them as described in the Prospectuses and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority, license or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its subsidiaries taken as a whole. (xiv) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that might have a material adverse effect on the Company and its subsidiaries taken as a whole. (xv) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently employed by them, and have not received any 4 5 notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its subsidiaries taken as a whole. (xvi) The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (xvii) In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (xviii) Except as disclosed in the Prospectuses, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement or the Subscription Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (xix) The financial statements included in each Registration Statement and the Prospectuses present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis; the schedules included in each Registration Statement present fairly the information required to be stated therein; and the assumptions used in preparing the pro forma financial statements included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (xx) Except as disclosed in the Prospectuses, since the date of the latest audited financial statements included in the Prospectuses there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectuses, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (xxi) Neither the Company nor any of its subsidiaries is (i) subject to regulation as a "holding company" or a "Subsidiary company" of a holding company or a "public utility company" under Section 2(a) of the Public Utility Holding Company Act of 1935 ("PUHCA"), (ii) subject to regulation under the Federal Power Act, as amended ("FPA"), other than as contemplated by 18 C.F.R. 5 6 sec. 292.601(c) or (iii) subject to any state law or regulation with respect to rates or the financial or organizational regulation of electric utilities, other than as contemplated by 18 C.F.R. sec. 292.602(c). (xxii) Each of the power generation projects in which the Company or its subsidiaries has an interest which is subject to the requirements under the Public Utility Regulatory Policies Act of 1978, as amended (16 U.S.C. sec. 796, et seq.), and the regulations of the Federal Energy Regulatory Commission promulgated thereunder, as amended from time to time, necessary to be a "qualifying cogeneration facility" and/or a "qualifying small power production facility" meets such requirements. (xxiii) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectuses, will not be an "investment company" as defined in the Investment Company Act of 1940. (xxiv) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes and the Company agrees to comply with such Section if prior to the completion of the distribution of the Offered Securities it commences doing such business. (b) The Selling Stockholder represents and warrants to, and agrees with, the several Underwriters that: (i) The Selling Stockholder has and on each Closing Date hereinafter mentioned will have valid and unencumbered title to the Offered Securities to be delivered by the Selling Stockholder on such Closing Date and full right, power and authority to enter into this Agreement and the Subscription Agreement and to sell, assign, transfer and deliver the Offered Securities to be delivered by the Selling Stockholder on such Closing Date hereunder; this Agreement and the Subscription Agreement have been duly authorized, executed and delivered by the Selling Stockholder; and upon the delivery of and payment for the Offered Securities on each Closing Date hereunder, the several Underwriters will acquire valid and unencumbered title to the Offered Securities to be delivered by the Selling Stockholder on such Closing Date. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectuses will conform in all respects to the requirements of the Act and the Rules and Regulations, and (B) none of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectuses based upon written information furnished to the Company by any Underwriter through the Representatives specifically for 6 7 use therein, it being understood and agreed that the only such information is that described as such in Section 7(c). 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholder agree, severally and not jointly, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholder, at a purchase price of US$ per share, the number of U.S. Firm Securities set forth below the caption "Company" or "Selling Stockholder", as the case may be, and opposite the name of such Underwriter in Schedule A hereto. The Company and the Selling Stockholder will deliver the U.S. Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price by wire transfer in Federal (same day) funds by official check or checks or wire transfer to accounts previously designated to CSFBC by the Company and the Selling Stockholder at a bank or banks acceptable to CSFBC to the order of (x) the Company in the case of 4,382,256 shares of U.S. Firm Securities and (y) the Selling Stockholder in the case of 10,053,744 shares of U.S. Firm Securities, at the office of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022, at A.M., New York time, on , 1996, or at such other time not later than seven full business days thereafter as CS First Boston Corporation ("CSFBC") and the Company determine, such time being herein referred to as the "First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the U.S. Offering and the International Offering. The certificates for the U.S. Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at the above office of Skadden, Arps, Slate, Meagher & Flom, at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company from time to time not more than 30 days subsequent to the date of the Prospectuses, the Underwriters may purchase all or less than all of the U.S. Optional Securities at the purchase price per Security to be paid for the U.S. Firm Securities. The U.S. Optional Securities to be purchased by the Underwriters on any Optional Closing Date shall be in the same proportion to all the Optional Securities to be purchased by the Underwriters and the Managers on such Optional Closing Date as the U.S. Firm Securities bear to all the Firm Securities. The Company agrees to sell to the Underwriters such U.S. Optional Securities and the Underwriters agree, severally and not jointly, to purchase such U.S. Optional Securities. Such U.S. Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of shares of U.S. Firm Securities set forth opposite such Underwriter's name bears to the total number of shares of U.S. Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the U.S. Firm Securities. No Optional Securities shall be sold or delivered unless the U.S. Firm Securities and the International Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC on behalf of the Underwriters and the Managers to the Company. It is understood that CSFBC is authorized to make payment for and accept delivery of such Optional Securities on behalf of the Underwriters and Managers pursuant to the terms of CSFBC's instructions to the Company. Each time for the delivery of and payment for the U.S. Optional Securities, being herein referred to as an "Optional Closing Date", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CSFBC but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the U.S. Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by official check or checks or wire transfer to an account previously designated to CSFBC by the Company at a bank acceptable to CSFBC to the order of the Company, at the office of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022. The 7 8 certificates for the U.S. Optional Securities will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the above office of Skadden, Arps, Slate, Meagher & Flom, at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the U.S. Securities for sale to the public as set forth in the U.S. Prospectus. 5. Certain Agreements of the Company and the Selling Stockholder. The Company agrees with the several Underwriters and the Selling Stockholder that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file each of the Prospectuses with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time either Prospectus is printed and distributed to any Underwriter or Manager, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or either of the related prospectuses or the Initial Registration Statement, the Additional Registration Statement (if any) or either of the Prospectuses and will not effect such amendment or supplementation without CSFBC's prior consent; and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or either of the Prospectuses and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter, Manager or dealer, any event occurs as a result of which either or both of the Prospectuses as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend either or both of the Prospectuses to comply with the Act, the Company will promptly notify CSFBC of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, 8 9 except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of the Registration Statement (five of which will be signed and will include all exhibits), each preliminary prospectus relating to the U.S. Securities, and, so long as delivery of a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the U.S. Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC requests. The U.S. Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other such documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions in the United States as CSFBC designates and will continue such qualifications in effect so long as required for the distribution. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of CSFBC, except grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances of Securities pursuant to the exercise of such options or the exercise of any other employee stock options outstanding on the date hereof. The Company and the Selling Stockholder agree with the several Underwriters that the Company and the Selling Stockholder will pay all expenses incident to the performance of the obligations of the Company and the Selling Stockholder, as the case may be, under this Agreement, and will jointly and severally reimburse the Underwriters (if and to the extent incurred by them) for any filing fees and other expenses (including fees and disbursements of counsel) incurred by them in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions in the United States as CSFBC designates and the printing of memoranda relating thereto, for any fees charged by investment rating agencies for the rating of the Offered Securities, for the filing fee of the National Association of Securities Dealers, Inc. relating to the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities, for any transfer taxes on the sale by the Selling Stockholder of the Offered Securities to the Underwriters and for expenses incurred in distributing preliminary prospectuses and the Prospectuses (including any amendments and supplements thereto) to the Underwriters. The Selling Stockholder agrees to deliver to CSFBC, attention: Investment Banking Department -- Transactions Advisory Group on or prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-8 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the U.S. Firm Securities on the First Closing Date and the U.S. Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and 9 10 warranties on the part of the Company and the Selling Stockholder herein, to the accuracy of the statements of Company and Selling Stockholder officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholder of their obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of Arthur Andersen LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectuses; or (C) for the period from the closing date of the latest income statement included in the Prospectuses to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year in consolidated revenues or net operating income or in the total or per share amounts of consolidated net income; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectuses disclose have occurred or may occur or which are described in such letter; (iv) on the basis of their review of the unaudited pro forma financial statements included in the Registration Statement and inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that the unaudited pro forma financial statements included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements under the Act; and 10 11 (v) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectuses" shall mean the prospectuses included in the Registration Statements. (b) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), from each of Coopers & Lybrand L.L.P., Moss Adams LLP and Ernst & Young LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company or its subsidiaries subject to the internal controls of the Company's or such subsidiaries' accounting systems or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. (c) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time either Prospectus is printed and distributed to any Underwriter or Manager, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, each of the Prospectuses shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission. (d) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company or its subsidiaries which, in the judgment of a majority in interest of the Underwriters including the Representatives, is material and 11 12 adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the U.S. Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or New York authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters including the Representatives, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the U.S. Securities. (e) The Representatives shall have received an opinion, dated such Closing Date, of Brobeck Phleger & Harrison LLP, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectuses; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease property or the conduct of its business requires such qualification; (ii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Securities of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectuses; and the stockholders of the Company have no preemptive rights with respect to the Securities; (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (iv) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement or the Subscription Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws; (vi) The execution, delivery and performance of this Agreement and the Subscription Agreement and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the 12 13 Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement and the Subscription Agreement, respectively; (vii) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, each of the Prospectuses either were filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or were included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and each of the Prospectuses, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that either of the Prospectuses or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; the descriptions in the Registration Statements and the Prospectuses of contracts and agreements under "Certain Transactions" and "Description of Capital Stock" and of statutes, legal and governmental proceedings are accurate and fairly present the information required to be shown; and after due inquiry such counsel does not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectuses which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectuses or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statement or the Prospectuses; and (viii) This Agreement and the Subscription Agreement have been duly authorized, executed and delivered by the Company. (f) The Representatives shall have received an opinion, dated such Closing Date, of Joseph E. Ronan, Jr., General Counsel of the Company, to the effect that: (i) Each subsidiary of the Company (x) other than those subsidiaries specified in clause (y) of this Section 6(f)(i) has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and has corporate power and authority to own its property and to conduct its business as described in the Prospectuses or (y) that is not a corporation is a limited partnership, has been duly formed and is validly existing as a limited partnership in good standing under the laws of the jurisdiction of its formation, and has full power and authority to own its property and to conduct its business as described in the Prospectuses; and, in either case, is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification; (ii) The Company and each of its subsidiaries possess adequate certificates, authorities, licenses or permits issued by appropriate governmental agencies or bodies necessary to conduct the business as now operated by them as described in the Prospectuses and such counsel is not aware of the receipt of any notice of proceedings relating to the revocation or modification of any such certificate, authority, license or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its subsidiaries, taken as a whole; 13 14 (iii) The descriptions in the Registration Statements and the Prospectuses of contracts and agreements of the Company and its subsidiaries and affiliates under "Business -- Description of Facilities -- Power Generation Facilities" and of statutes, legal and governmental proceedings are accurate and fairly present the information required to be shown; (iv) Such counsel is of the opinion that the Company and each subsidiary of the Company (i) is in compliance with any and all applicable Environmental Laws, (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company; and (v) Neither the Company nor any of its subsidiaries is (i) subject to regulation as a "holding company" or a "Subsidiary company" of a holding company or an "affiliate" of a Subsidiary or holding company or a "public utility company" under Section 2(a) of PUHCA, (ii) subject to regulation under the FPA, other than as contemplated by 18 C.F.R. sec. 292.601(c) or (iii) subject to any state law or regulation with respect to the rates or the financial or organizational regulation of electric utilities, other than as contemplated by 18 C.F.R. sec. 292.602(c). (g) The Representatives shall have received an opinion, dated such Closing Date, of [Brobeck Phleger & Harrison LLP], counsel for the Selling Stockholder, to the effect that: (i) The Selling Stockholder had valid and unencumbered title to the Offered Securities delivered by the Selling Stockholder on such Closing Date and had full right, power and authority to sell, assign, transfer and deliver the Offered Securities delivered by the Selling Stockholder on such Closing Date hereunder; and the several Underwriters have acquired valid and unencumbered title to the Offered Securities purchased by them from the Selling Stockholder on such Closing Date hereunder; (ii) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Selling Stockholder for the consummation of the transactions contemplated by this Agreement or the Subscription Agreement in connection with the sale of the Offered Securities sold by the Selling Stockholder, except such as have been obtained and made under the Act and such as may be required under state securities laws; (iii) The execution, delivery and performance of this Agreement and the Subscription Agreement and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Selling Stockholder or any of its properties or any agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the properties of the Selling Stockholder is subject or the charter or bylaws of the Selling Stockholder; and (iv) This Agreement and the Subscription Agreement have been duly authorized, executed and delivered by the Selling Stockholder. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate laws of the State of Delaware, upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the Underwriters, in which case (i) the opinion of such other counsel shall also be addressed to the Underwriters and (ii) the opinion of Brobeck, Phleger & Harrison LLP shall state that, in their opinion, they and the Underwriters are justified in relying on such counsel's opinion. 14 15 (h) The Representatives shall have received from Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectuses and other related matters as the Representatives may require, and the Selling Stockholder and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (i) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice-President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time either Prospectus was printed and distributed to any Underwriter or Manager; and, subsequent to the date of the most recent financial statements in the Prospectuses, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectuses or as described in such certificate. (j) The Representatives shall have received a letter, dated such Closing Date, of Arthur Andersen LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than five days prior to such Closing Date for the purposes of this subsection. (k) The Representatives shall have received a letter, dated such Closing Date, from each of Coopers & Lybrand L.L.P., Moss Adams LLP and Ernst & Young LLP which meets the requirements of subsection (b) of this Section, except that the specified date referred to in such subsection will be a date not more than five days prior to such Closing Date for the purposes of this subsection. (l) The Underwriters shall have received "lock-up" letters, dated on or prior to the First Closing Date, which letters shall be in the form of Schedule D hereto, from each holder of options to purchase Securities outstanding on the date of this Agreement. (m) The Underwriters shall have received certificates, dated the First Closing Date, of two executive officers of the Selling Stockholder in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Selling Stockholder in this Agreement are true and correct and the Selling Stockholder has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the First Closing Date. (n) On such Closing Date, the Managers shall have purchased the International Firm Securities or the International Optional Securities, as the case may be, pursuant to the Subscription Agreement. The Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, either of the Prospectuses, or any amendment or 15 16 supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only information furnished by any Underwriter consists of the information described as such in subsection (c) below. (b) The Selling Stockholder will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectuses, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Selling Stockholder will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by an Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below and provided further, however, that the liability of the Selling Stockholder pursuant to this Section 7 is limited to the amount of the net proceeds of the offering of the U.S. Firm Securities (after deducting the underwriting discount but before deducting expenses) received by the Selling Stockholder. (c) Each Underwriter will severally and not jointly indemnify and hold harmless the Company and the Selling Stockholder against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, either of the Prospectuses, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company and the Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of (i) the following information in the U.S. Prospectus furnished on behalf of each Underwriter: the last paragraph at the bottom of the cover page concerning the terms of the offering by the Underwriters, the legends concerning over-allotments and stabilizing and passive market making on the inside front cover page, the concession and reallowance figures appearing in the fifth paragraph under the caption "Underwriting" and the statements contained in the twelfth paragraph under the caption "Underwriting"; and (ii) the following information in the U.S. Prospectus furnished on behalf of CSFBC: the material relationship disclosure appearing in the eleventh and fifteenth paragraphs under the caption "Underwriting". 16 17 (d) Promptly after receipt by an indemnified party under this Section or Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a), (b) or (c) above or Section 9, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a), (b) or (c) above or Section 9. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section or Section 9, as the case may be, for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. (e) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other from the offering of the U.S. Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholder on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the U.S. Securities (before deducting expenses) received by the Company and the Selling Stockholder bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholder or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Stockholder under this Section and Section 9 shall be in addition to any liability which the Company and the Selling Stockholder may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any 17 18 Underwriter or the QIU (as hereinunder defined) within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase U.S. Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of U.S. Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of U.S. Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company and the Selling Stockholder for the purchase of such U.S. Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the U.S. Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares U.S. Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of U.S. Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC and the Company and the Selling Stockholder for the purchase of such U.S. Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company or the Selling Stockholder, except as provided in Section 10 (provided that if such default occurs with respect to U.S. Optional Securities after the First Closing Date, this Agreement will not terminate as to the U.S. Firm Securities or any U.S. Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Qualified Independent Underwriter. The Company and the Selling Stockholder hereby confirm that at their request PaineWebber Incorporated has without compensation acted as "qualified independent underwriter" (in such capacity, the "QIU") within the meaning of Rule 2720(b)(15)(A) through (b)(15)(G) of the Conduct Rules of the National Association of Securities Dealers, Inc. in connection with the offering of the Offered Securities. The Company and the Selling Stockholder will indemnify and hold harmless the QIU against any losses, claims, damages or liabilities, joint or several, to which the QIU may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the QIU's acting (or alleged failing to act) as such "qualified independent underwriter" and will reimburse the QIU for any legal or other expenses reasonably incurred by the QIU in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. 10. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Selling Stockholder, of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Selling Stockholder, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the U.S. Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the U.S. Securities by the Underwriters is not consummated, the Company and the Selling Stockholder shall remain responsible for the expenses to be paid or reimbursed by them pursuant to Section 5 and the respective obligations of the Company, the Selling Stockholders and the Underwriters pursuant to Section 7 and the obligations of the Company and the Selling Stockholder pursuant to Section 9 shall remain in effect, and if any U.S. Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the U.S. Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(d), the Company and the Selling Stockholder will reimburse 18 19 the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the U.S. Securities. 11. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives c/o CS First Boston Corporation, Park Avenue Plaza, New York, N.Y. 10055, Attention: Investment Banking Department -- Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at Calpine Corporation, 50 West San Fernando Street, San Jose, California 95113, Attention: General Counsel, or if sent to the Selling Stockholder, will be mailed, delivered or telegraphed and confirmed to it at Electrowalt Ltd., Bellerivestrasse 36, P.O. Box CH-8022, Zurich, Switzerland, Attention: Rudolf Boesch; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 12. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 13. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 15. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws. The Company and the Selling Stockholder hereby submit to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. The Selling Stockholder irrevocably appoints [ ] as its authorized agent in the Borough of Manhattan in the City of New York upon which process may be served in any such suit or proceeding, and agrees that service of process upon such agent, and written notice of said service to the Selling Stockholder by the person serving the same to the address provided in Section 11 shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Selling Stockholder further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Agreement. The obligation of the Selling Stockholder in respect of any sum due to any Underwriter shall, notwithstanding any judgment in a currency other than United States dollars, not be discharged until the first business day, following receipt by such Underwriter of any sum adjudged to be so due in such other currency, on which (and only to the extent that) such Underwriter may in accordance with normal banking procedures purchase United States dollars with such other currency; if the United States dollars so purchased are less than the sum originally due to such Underwriter hereunder, the Selling Stockholder agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such Underwriter against such loss. If the United States dollars so purchased are greater than the sum originally due to such Underwriter hereunder, such Underwriter agrees to pay the Selling Stockholder an amount equal to the excess of the dollars so purchased over the sum originally due to such Underwriter hereunder. 19 20 If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company and to the Selling Stockholder one of the counterparts hereof, whereupon it will become a binding agreement among the Selling Stockholder, the Company and the several Underwriters in accordance with its terms. Very truly yours, Electrowatt Ltd. By: -------------------------------------- Name: Title: Calpine Corporation By: -------------------------------------- Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CS FIRST BOSTON CORPORATION MORGAN STANLEY & CO. INCORPORATED PAINEWEBBER INCORPORATED SALOMON BROTHERS INC Acting on behalf of themselves and as the Repre- sentatives of the several Underwriters. ByCS FIRST BOSTON CORPORATION By --------------------------------------------- Name: Title: 20 21 SCHEDULE A
NUMBER OF U.S. FIRM SECURITIES TO BE SOLD BY: ----------------------- TOTAL NUMBER OF U.S. SELLING FIRM SECURITIES UNDERWRITER COMPANY STOCKHOLDER TO BE PURCHASED - --------------------------------------------------- --------- ----------- -------------------- CS First Boston Corporation........................ Morgan Stanley & Co. Incorporated.................. PaineWebber Incorporated........................... Salomon Brothers Inc............................... ------- ------- ------- Total.................................... 4,382,256 10,053,744 14,436,000 ======= ======= =======
21 22 SCHEDULE B
NAME OF SUBSIDIARY % OF OUTSTANDING SECURITIES PLEDGED PLEDGE - --------------------------------------- --------------------------------------- ----------
23 SCHEDULE C GENERAL PARTNERSHIP INTERESTS 24 SCHEDULE D FORM OF LOCK-UP LETTER September , 1996 CALPINE CORPORATION 50 West San Fernando Street San Jose, California 95113 CS FIRST BOSTON CORPORATION MORGAN STANLEY & CO. INCORPORATED PAINEWEBBER INCORPORATED SALOMON BROTHERS INC. As Representatives of the Several Underwriters c/o CS First Boston Corporation Park Avenue Plaza New York, N.Y. 10055 CS FIRST BOSTON LIMITED MORGAN STANLEY & CO. INTERNATIONAL LIMITED PAINEWEBBER INTERNATIONAL (U.K.) LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED As Representatives of the Several Managers c/o CS First Boston Limited One Cabot Square London, England E14 4OJ Dear Sirs: As an inducement to the Underwriters (as defined below) and Managers (as defined below) to execute the Underwriting Agreement, dated September , 1996 ("Underwriting Agreement"), among Calpine Corporation (the "Company"), the selling stockholder named therein (the "Selling Stockholder") and CS First Boston Corporation, Morgan Stanley & Co. Incorporated, PaineWebber Incorporated, Salomon Brothers Inc. and the other underwriters listed in Schedule A thereto (the "Underwriters") and the Subscription Agreement, dated September , 1996 ("Subscription Agreement"), among the Company, the Selling Stockholder and CS First Boston Limited, Morgan Stanley & Co. International Limited, PaineWebber International (U.K.) Limited, Salomon Brothers International Limited, and the other managers named therein (the "Managers"), as the case may be, pursuant to which an offering will be made that is intended to result in the establishment of a public market for the common stock, no par value (the "Securities"), of the Company, the undersigned hereby agrees that, for a period of 180 days after the initial public offering (the "Commencement Date") of the Securities pursuant to the Underwriting Agreement and the Subscription Agreement to which you are or expect to become parties, the undersigned will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of Securities beneficially owned by the undersigned or issuable upon exercise of options beneficially owned by the undersigned or any securities convertible into or exchangeable or exercisable for any shares of Securities, or publicly disclose the intention to make any such offer, sale, pledge or disposal without the prior written consent of CS First Boston Corporation. In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of shares of Securities if such transfer would constitute a violation or breach of this Agreement. 25 This Agreement shall be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. This agreement shall lapse and become null and void if the Commencement Date shall not have occurred on or before October , 1996. Very truly yours, Name: EX-1.2 3 SUBSCRIPTION AGREEMENT 1 EXHIBIT 1.2 18,045,000 SHARES CALPINE CORPORATION COMMON STOCK, $.001 PAR VALUE SUBSCRIPTION AGREEMENT LONDON, ENGLAND SEPTEMBER , 1996 CS FIRST BOSTON LIMITED MORGAN STANLEY & CO. INTERNATIONAL LIMITED PAINEWEBBER INTERNATIONAL (U.K.) LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED As Representatives of the Several Managers c/o CS First Boston Limited ("CSFBL") One Cabot Square London, England B14 40J Dear Sirs: 1. Introductory. Calpine Corporation, a Delaware corporation ("Company"), proposes to issue and sell 1,095,564 shares of its Common Stock, $.001 par value ("Securities"), and Electrowatt, Ltd. ("Selling Stockholder") proposes to sell 2,513,436 outstanding shares of the Securities (such shares of Securities being hereinafter referred to as the "International Firm Securities") to the several Managers named in Schedule A hereto (the "Managers"). It is understood that the Company and the Selling Stockholder are concurrently entering into an Underwriting Agreement, dated the date hereof ("Underwriting Agreement"), with certain United States underwriters listed in Schedule A thereto (the "U.S. Underwriters"), for whom CS First Boston Corporation ("CFSBC"), Morgan Stanley & Co. Incorporated, PaineWebber Incorporated and Salomon Brothers Inc. are acting as representatives (the "U.S. Representatives") relating to the concurrent offering and sale of 4,382,256 shares of Securities by the Company and 10,053,744 shares of Securities by the Selling Stockholder ("U.S. Firm Securities") in the United States and Canada ("U.S. Offering"). In addition, as set forth below, the Company proposes to issue and sell (i) to the U.S. Underwriters, at the option of the U.S. Underwriters, an aggregate of not more than 2,165,400 additional shares of Securities ("U.S. Optional Securities") and (ii) to the Managers, at the option of the Managers, an aggregate of not more than 541,350 additional shares of Securities ("International Optional Securities"). The U.S. Firm Securities and the U.S. Optional Securities are hereinafter called the "U.S. Securities"; the International Firm Securities and the International Optional Securities are hereinafter called the "International Securities"; the U.S. Firm Securities and the International Firm Securities are hereinafter called the "Firm Securities"; the U.S. Optional Securities and the International Optional Securities are hereinafter called the "Optional Securities". The U.S. Securities and the International Securities are collectively referred to as the "Offered Securities". To provide for the coordination of their activities, the U.S. Underwriters and the Managers have entered into an Agreement Between U.S. Underwriters and Managers which permits them, among other things, to sell the Offered Securities to each other for purposes of resale. The Company and the Selling Stockholder hereby agree with the several Managers as follows: 2. Representations and Warranties of the Company and the Selling Stockholder. (a) The Company represents and warrants to, and agrees with, the several Managers that: (i) A registration statement (No. 333-07497) relating to the Offered Securities, including a form of prospectus relating to the U.S. Securities and a form of prospectus relating to the International Securities 2 being offered in the International Offering, has been filed with the Securities and Exchange Commission ("Commission") and either (A) has been declared effective under the Securities Act of 1933 ("Act") and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If such registration statement (the "initial registration statement") has been declared effective, either (A) an additional registration statement (the "additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (B) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the CSFBL that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the CSFBL that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised CSFBL that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement". The Initial Registration Statement and the Additional Registration Statement are hereinafter referred to collectively as the "Registration Statements" and individually as a "Registration Statement". The form of prospectus relating to the U.S. Securities and the form of prospectus relating to the International Securities, each as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in the Registration Statement, are hereinafter referred to as the "U.S. Prospectus" and the "International Prospectus", respectively, and collectively as the "Prospectuses". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial 2 3 Registration Statement conformed in all respects to the requirements of the Act and the rules and regulations of the Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of each of the Prospectuses pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectuses are included, each Registration Statement and each of the Prospectuses will conform, in all respects to the requirements of the Act and the Rules and Regulations, and none of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement will conform in all respects to the requirements of the Act and the Rules and Regulations, (B) none of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or either of the Prospectuses based upon written information furnished to the Company by any Manager through CSFBL or by any U.S. Underwriter through the U.S. Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(c). (iii) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectuses; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification. (iv) Each subsidiary of the Company (x) other than those subsidiaries specified in clause (y) of this subparagraph has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectuses or (y) that is not a corporation is a limited partnership, has been duly formed and is validly existing as a limited partnership in good standing under the laws of the jurisdiction of its formation, and has full power and authority to own its properties and conduct its business as described in the Prospectuses; each subsidiary of the Company is duly qualified to do business as a foreign corporation or limited partnership, as the case may be, in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects; and the Company is not a general partner in any partnership. (v) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement and the Underwriting Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectuses; and the stockholders of the Company have no preemptive rights with respect to the Securities. 3 4 (vi) Except as disclosed in the Prospectuses, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Manager or U.S. Underwriter for a brokerage commission, finder's fee or other like payment. (vii) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (viii) The Offered Securities have been approved for listing on the New York Stock Exchange subject to notice of issuance. (ix) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement or the Underwriting Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws. (x) The execution, delivery and performance of this Agreement and the Underwriting Agreement, and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement and the Underwriting Agreement, respectively. (xi) This Agreement and the Underwriting Agreement have been duly authorized, executed and delivered by the Company. (xii) Except as disclosed in the Prospectuses, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectuses, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (xiii) The Company and its subsidiaries possess adequate certificates, authorities, licenses or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them as described in the Prospectuses and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority, license or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its subsidiaries taken as a whole. (xiv) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that might have a material adverse effect on the Company and its subsidiaries taken as a whole. (xv) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently employed by them, and have not received any 4 5 notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its subsidiaries taken as a whole. (xvi) The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (xvii) In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (xviii) Except as disclosed in the Prospectuses, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement or the Underwriting Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (xix) The financial statements included in each Registration Statement and the Prospectuses present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis; the schedules included in each Registration Statement present fairly the information required to be stated therein; and the assumptions used in preparing the pro forma financial statements included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (xx) Except as disclosed in the Prospectuses, since the date of the latest audited financial statements included in the Prospectuses there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectuses, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (xxi) Neither the Company nor any of its subsidiaries is (i) subject to regulation as a "holding company" or a "Subsidiary company" of a holding company or a "public utility company" under Section 2(a) of the Public Utility Holding Company Act of 1935 ("PUHCA"), (ii) subject to regulation under the Federal Power Act, as amended ("FPA"), other than as contemplated by 18 C.F.R. 5 6 sec. 292.601(c) or (iii) subject to any state law or regulation with respect to rates or the financial or organizational regulation of electric utilities, other than as contemplated by 18 C.F.R. sec. 292.602(c). (xxii) Each of the power generation projects in which the Company or its subsidiaries has an interest which is subject to the requirements under the Public Utility Regulatory Policies Act of 1978, as amended (16 U.S.C. sec. 796, et seq.), and the regulations of the Federal Energy Regulatory Commission promulgated thereunder, as amended from time to time, necessary to be a "qualifying cogeneration facility" and/or a "qualifying small power production facility" meets such requirements. (xxiii) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectuses, will not be an "investment company" as defined in the Investment Company Act of 1940. (xxiv) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes and the Company agrees to comply with such Section if prior to the completion of the distribution of the Offered Securities it commences doing such business. (b) The Selling Stockholder represents and warrants to, and agrees with, the several Managers that: (i) The Selling Stockholder has and on each Closing Date hereinafter mentioned will have valid and unencumbered title to the Offered Securities to be delivered by the Selling Stockholder on such Closing Date and full right, power and authority to enter into this Agreement and the Underwriting Agreement and to sell, assign, transfer and deliver the Offered Securities to be delivered by the Selling Stockholder on such Closing Date hereunder; this Agreement and the Underwriting Agreement have been duly authorized, executed and delivered by the Selling Stockholder; and upon the delivery of and payment for the Offered Securities on each Closing Date hereunder, the several Managers will acquire valid and unencumbered title to the Offered Securities to be delivered by the Selling Stockholder on such Closing Date. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectuses will conform in all respects to the requirements of the Act and the Rules and Regulations, and (B) none of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectuses based upon written information furnished to the Company by any Manager through CSFBL specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(c). 6 7 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholder agree, severally and not jointly, to sell to each Manager, and each Manager agrees, severally and not jointly, to purchase from the Company and the Selling Stockholder, at a purchase price of US$ per share, the number of International Firm Securities set forth below the caption "Company" or "Selling Stockholder", as the case may be, and opposite the name of such Manager in Schedule A hereto. The Company and the Selling Stockholder will deliver the International Firm Securities to CFSBL for the accounts of the Managers, against payment of the purchase price by wire transfer in Federal (same day) funds by official check or checks or wire transfer to accounts previously designated to CFSBL by the Company and the Selling Stockholder at a bank or banks acceptable to CFSBL to the order of (x) the Company in the case of 1,095,564 shares of International Firm Securities and (y) the Selling Stockholder in the case of 2,513,436 shares of International Firm Securities, at the office of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022, at A.M., New York time, on , 1996, or at such other time not later than seven full business days thereafter as CFSBL and the Company determine, such time being herein referred to as the "First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the U.S. Offering and the International Offering. The certificates for the International Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CFSBL requests and will be made available for checking and packaging at the above office of Skadden, Arps, Slate, Meagher & Flom, at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company from time to time not more than 30 days subsequent to the date of the Prospectuses, the Managers may purchase all or less than all of the International Optional Securities at the purchase price per Security to be paid for the International Firm Securities. The International Optional Securities to be purchased by the Managers on any Optional Closing Date shall be in the same proportion to all the Optional Securities to be purchased by the Managers and U.S. Underwriters on such Optional Closing Date as the International Firm Securities bear to all the Firm Securities. The Company agrees to sell to the Managers such International Optional Securities and the Managers agree, severally and not jointly, to purchase such International Optional Securities. Such International Optional Securities shall be purchased for the account of each Manager in the same proportion as the number of shares of International Firm Securities set forth opposite such Managers's name bears to the total number of shares of International Firm Securities (subject to adjustment by CSFBL to eliminate fractions) and may be purchased by the Managers only for the purpose of covering over-allotments made in connection with the sale of the International Firm Securities. No Optional Securities shall be sold or delivered unless the International Firm Securities and the U.S. Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBL on behalf of the Managers and the U.S. Underwriters to the Company. It is understood that CSFBL is authorized to make payment for and accept delivery of such Optional Securities on behalf of the Managers and U.S. Underwriters pursuant to the terms of CSFBC's instructions to the Company. Each time for the delivery of and payment for the International Optional Securities, being herein referred to as an "Optional Closing Date", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CSFBC but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the International Optional Securities being purchased on each Optional Closing Date to CSFBLfor the accounts of the several Managers, against payment of the purchase price therefor in Federal (same day) funds by official check or checks or wire transfer to an account previously designated to CSFBLby the Company at a bank acceptable to CSFBLto the order of the Company, at the office of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022. The 7 8 certificates for the International Optional Securities will be in definitive form, in such denominations and registered in such names as CSFBL requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the above office of Skadden, Arps, Slate, Meagher & Flom, at a reasonable time in advance of such Optional Closing Date. The Company will pay to the Managers as aggregate compensation for their commitments hereunder and for their services in connection with the purchase of the International Securities and the management of the offering thereof, if the sale and delivery of the International Securities to the Managers provided herein is consummated, an amount equal to U.S. $ per International Security purchased, which may be divided among the Managers in such proportions as they may determine. Such payment will be made on the First Closing Date in the case of the International Firm Securities and on each Optional Closing Date in the case of the International Optional Securities sold to the Manager on such Closing Date, in each case by way of deduction by the Managers of said amount from the purchase price for the International Securities referred to above. 4. Offering by Managers. It is understood that the several Managers propose to offer the International Securities for sale to the public as set forth in the International Prospectus. In connection with the distribution of the International Securities, the Managers, through a stabilizing manager, may over-allot or effect transactions on any exchange, in any over-the-counter market or otherwise which stabilize or maintain the market prices of the International Securities at levels other than those which might otherwise prevail, but in such event and in relation thereto, the Managers will act for themselves and not as agents of the Company, and any loss resulting from over-allotment and stabilization will be borne, and any profit arising therefrom will be beneficially retained, by the Managers. Such stabilizing, if commenced, may be discontinued at any time. 5. Certain Agreements of the Company and the Selling Stockholder. The Company agrees with the several Managers and the Selling Stockholder that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file each of the Prospectuses with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBL, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBL promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time either Prospectus is printed and distributed to any Manager or U.S. Underwriter, or will make such filing at such later date as shall have been consented to by CSFBL. (b) The Company will advise CSFBL promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or either of the related prospectuses or the Initial Registration Statement, the Additional Registration Statement (if any) or either of the Prospectuses and will not effect such amendment or supplementation without CSFBL's prior consent; and the Company will also advise CSFBL promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or either of the Prospectuses and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. 8 9 (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any U.S. Underwriter, Manager or dealer, any event occurs as a result of which either or both of the Prospectuses as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend either or both of the Prospectuses to comply with the Act, the Company will promptly notify CSFBL of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBL's consent to, nor the Managers' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Managers copies of the Registration Statement (five of which will be signed and will include all exhibits), each preliminary prospectus relating to the International Securities, and, until completion of the distribution of the International Securities as determined by CSFBL, the International Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBL requests. The International Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other such documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Managers all such documents. (f) No action has been or, prior to the completion of the distribution of the Offered Securities, will be taken by the Company in any jurisdiction outside the United States and Canada that would permit a public offering of the Offered Securities, or possession or distribution of the International Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus issued in connection with the offering of the Offered Securities, or any other offering material, in any country or jurisdiction where action for that purpose is required. (g) During the period of five years hereafter, the Company will furnish to CSFBL and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to CSFBL (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBL may reasonably request. (h) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of CSFBC, except grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances of Securities pursuant to the exercise of such options or the exercise of any other employee stock options outstanding on the date hereof. The Company and the Selling Stockholder agree with the several Managers that the Company and the Selling Stockholder will pay all expenses incident to the performance of the obligations of the Company and the Selling Stockholder, as the case may be, under this Agreement, and will jointly and severally reimburse 9 10 the Managers (if and to the extent incurred by them), for any fees charged by investment rating agencies for the rating of the Offered Securities, for the filing fee of the National Association of Securities Dealers, Inc. relating to the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectuses (including any amendments and supplements thereto) to the Managers. The Selling Stockholder agrees to deliver to CSFBC, attention: Investment Banking Department -- Transactions Advisory Group on or prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 6. Conditions of the Obligations of the Managers. The obligations of the several Managers to purchase and pay for the International Firm Securities on the First Closing Date and the International Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholder herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholder of their obligations hereunder and to the following additional conditions precedent: (a) The Managers shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of Arthur Andersen LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectuses; or 10 11 (C) for the period from the closing date of the latest income statement included in the Prospectuses to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year in consolidated revenues or net operating income or in the total or per share amounts of consolidated net income; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectuses disclose have occurred or may occur or which are described in such letter; (iv) on the basis of their review of the unaudited pro forma financial statements included in the Registration Statement and inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that the unaudited pro forma financial statements included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements under the Act; and (v) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectuses" shall mean the prospectuses included in the Registration Statements. (b) The Managers shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), from each of Coopers & Lybrand L.L.P. and Moss Adams LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company or its subsidiaries subject to the internal controls of the Company's or such subsidiaries' accounting systems or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. (c) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBL. If the 11 12 Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time either Prospectus is printed and distributed to any Manager or U.S. Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBL. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, each of the Prospectuses shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Managers, shall be contemplated by the Commission. (d) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (A) a change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the judgment of CSFBL, be likely to prejudice materially the success of the proposed issue, sale or distribution of the International Securities, whether in the primary market or in respect of dealings in the secondary market, or (B)(i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company or its subsidiaries which, in the judgment of CSFBL is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the International Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or New York authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by the United States Congress or any other substantial national or international calamity or emergency if, in the judgment of CSFBL, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the International Securities. (e) The Managers shall have received an opinion, dated such Closing Date, of Brobeck Phleger & Harrison LLP, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectuses; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease property or the conduct of its business requires such qualification; (ii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Securities of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectuses; and the stockholders of the Company have no preemptive rights with respect to the Securities; (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; 12 13 (iv) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement or the Underwriting Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws; (vi) The execution, delivery and performance of this Agreement and the Underwriting Agreement and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement and the Underwriting Agreement, respectively; (vii) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, each of the Prospectuses either were filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or were included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and each of the Prospectuses, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that either of the Prospectuses or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; the descriptions in the Registration Statements and the Prospectuses of contracts and agreements under "Certain Transactions" and " " and of statutes, legal and governmental proceedings are accurate and fairly present the information required to be shown; and after due inquiry such counsel does not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectuses which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectuses or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statement or the Prospectuses; and (viii) This Agreement and the Underwriting Agreement have been duly authorized, executed and delivered by the Company. 13 14 (f) The Managers shall have received an opinion, dated such Closing Date, of Joseph E. Ronan, Jr., General Counsel of the Company, to the effect that: (i) Each subsidiary of the Company (x) other than those subsidiaries specified in clause (y) of this Section 6(f)(i) has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and has corporate power and authority to own its property and to conduct its business as described in the Prospectuses or (y) that is not a corporation is a limited partnership, has been duly formed and is validly existing as a limited partnership in good standing under the laws of the jurisdiction of its formation, and has full power and authority to own its property and to conduct its business as described in the Prospectuses; and, in either case, is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification; (ii) The Company and each of its subsidiaries possess adequate certificates, authorities, licenses or permits issued by appropriate governmental agencies or bodies necessary to conduct the business as now operated by them as described in the Prospectuses and such counsel is not aware of the receipt of any notice of proceedings relating to the revocation or modification of any such certificate, authority, license or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its subsidiaries, taken as a whole; (iii) The descriptions in the Registration Statements and the Prospectuses of contracts and agreements of the Company and its subsidiaries and affiliates under "Business -- Description of Facilities -- Power Generation Facilities" and of statutes, legal and governmental proceedings are accurate and fairly present the information required to be shown; (iv) Such counsel is of the opinion that the Company and each subsidiary of the Company (i) is in compliance with any and all applicable Environmental Laws, (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company; and (v) Neither the Company nor any of its subsidiaries is (i) subject to regulation as a "holding company" or a "Subsidiary company" of a holding company or an "affiliate" of a Subsidiary or holding company or a "public utility company" under Section 2(a) of PUHCA, (ii) subject to regulation under the FPA, other than as contemplated by 18 C.F.R. sec. 292.601(c) or (iii) subject to any state law or regulation with respect to the rates or the financial or organizational regulation of electric utilities, other than as contemplated by 18 C.F.R. sec. 292.602(c). (g) The Managers shall have received an opinion, dated such Closing Date, of [Brobeck Phleger & Harrison LLP], counsel for the Selling Stockholder, to the effect that: (i) The Selling Stockholder had valid and unencumbered title to the Offered Securities delivered by the Selling Stockholder on such Closing Date and had full right, power and authority to sell, assign, transfer and deliver the Offered Securities delivered by the Selling Stockholder on such Closing Date hereunder; and the several Managers have acquired valid and unencumbered title to the Offered Securities purchased by them from the Selling Stockholder on such Closing Date hereunder; (ii) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Selling Stockholder for the consummation of the transactions contemplated by this Agreement or the Underwriting Agreement in connection with the sale of the Offered Securities sold by the Selling Stockholder, except such as have been obtained and made under the Act and such as may be required under state securities laws; 14 15 (iii) The execution, delivery and performance of this Agreement and the Underwriting Agreement and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Selling Stockholder or any of its properties or any agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the properties of the Selling Stockholder is subject or the charter or bylaws of the Selling Stockholder; and (iv) This Agreement and the Underwriting Agreement have been duly authorized, executed and delivered by the Selling Stockholder. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate law of the State of Delaware, upon opinions of other counsel, who shall be counsel reasonably satisfactory to counsel for the Managers, in which case (i) the opinion of such other counsel shall also be addressed to the Managers and (ii) the opinion of Brobeck Phleger & Harrison LLP shall state that in their opinion, they and the Managers are justified in relying on such other counsel's opinion. (h) The Managers shall have received from Skadden, Arps, Slate, Meagher & Flom, counsel for the Managers, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectuses and other related matters as the Representatives may require, and the Selling Stockholder and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (i) The Managers shall have received a certificate, dated such Closing Date, of the President or any Vice-President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time either Prospectus was printed and distributed to any Manager or U.S. Undewriter; and, subsequent to the date of the most recent financial statements in the Prospectuses, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectuses or as described in such certificate. (j) The Managers shall have received a letter, dated such Closing Date, of Arthur Andersen LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than five days prior to such Closing Date for the purposes of this subsection. (k) The Managers shall have received a letter, dated such Closing Date, from each of Coopers & Lybrand L.L.P. and Moss Adams LLP which meets the requirements of subsection (b) of this Section, except that the specified date referred to in such subsection will be a date not more than five days prior to such Closing Date for the purposes of this subsection. (l) The Managers shall have received "lock-up" letters, dated on or prior to the First Closing Date, which letters shall be in the form of Schedule D hereto, from each holder of options to purchase Securities outstanding on the date of this Agreement. 15 16 (m) The Managers shall have received a certificate, dated the First Closing Date, of two executive officers of the Selling Stockholder in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representatives and warranties of the Selling Stockholder in this Agreement are true and correct; and the Selling Stockholder has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the First Closing Date. (n) On such Closing Date, the Managers shall have purchased the International Firm Securities or the International Optional Securities, as the case may be, pursuant to the Subscription Agreement. The Company will furnish the Managers with such conformed copies of such opinions, certificates, letters and documents as the Managers reasonably request. CSFBL may in its sole discretion waive on behalf of the Managers compliance with any conditions to the obligations of the Managers hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Manager against any losses, claims, damages or liabilities, joint or several, to which such Manager may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, either of the Prospectuses, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Manager for any legal or other expenses reasonably incurred by such Manager in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Manager through CSFBL specifically for use therein, it being understood and agreed that the only information furnished by any Manager consists of the information described as such in subsection (c) below. (b) The Selling Stockholder will indemnify and hold harmless each Manager against any losses, claims, damages or liabilities, joint or several, to which such Manager may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectuses, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Manager for any legal or other expenses reasonably incurred by such Manager in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Selling Stockholder will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by a Manager through CSFBL specifically for use therein, it being understood and agreed that the only such information furnished by any Manager consists of the information described as such in subsection (c) below; and provided further, however, that the liability of the Selling Stockholder pursuant to this Section 7 is limited to the amount of the net proceeds of the offering of the International Firm Securities (after deducting the underwriting discount but before deducting expenses) received by the Selling Stockholder. (c) Each Manager will severally and not jointly indemnify and hold harmless the Company and the Selling Stockholder against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any 16 17 material fact contained in any Registration Statement, either of the Prospectuses, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Manager through CSFBL specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company and the Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Manager consists of (i) the following information in the International Prospectus furnished on behalf of each Manager: the last paragraph at the bottom of the cover page concerning the terms of the offering by the Manager, the legends concerning over-allotments and stabilizing and passive market making on the inside front cover page, the concession and reallowance figures appearing in the fifth paragraph under the caption "Subscription and Sale" and the statements contained in the twelfth paragraph under the caption "Subscription and Sale"; and (ii) the following information in the U.S. Prospectus furnished on behalf of CSFBL: the material relationship disclosure appearing in the twelfth and sixteenth paragraphs under the caption "Underwriting". (d) Promptly after receipt by an indemnified party under this Section or Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a), (b) or (c) above or Section 9, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a), (b) or (c) above or Section 9. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section or Section 9, as the case may be, for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. (e) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholder on the one hand and the Managers on the other from the offering of the International Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholder on the one hand and the Managers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholder on the one hand and the Managers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the International Securities (before deducting expenses) received by the Company and the Selling Stockholder bear to the total underwriting discounts and commissions received by the Managers. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission 17 18 or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholder or the Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), no Manager shall be required to contribute any amount in excess of the amount by which the total price at which the International Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Manager has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Managers' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Stockholder under this Section and Section 9 shall be in addition to any liability which the Company and the Selling Stockholder may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Manager or the QIU (as hereinunder defined) within the meaning of the Act; and the obligations of the Managers under this Section shall be in addition to any liability which the respective Managers may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Managers. If any Manager or Managers default in their obligations to purchase International Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of International Securities that such defaulting Manager or Managers agreed but failed to purchase does not exceed 10% of the total number of shares of International Securities that the Managers are obligated to purchase on such Closing Date, CSFBL may make arrangements satisfactory to the Company and the Selling Stockholder for the purchase of such International Securities by other persons, including any of the Managers, but if no such arrangements are made by such Closing Date, the nondefaulting Managers shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the International Securities that such defaulting Manager agreed but failed to purchase on such Closing Date. If any Manager or Managers so default and the aggregate number of shares International Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of International Securities that the Managers are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBL and the Company and the Selling Stockholder for the purchase of such International Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Manager or the Company or the Selling Stockholder, except as provided in Section 10 (provided that if such default occurs with respect to International Optional Securities after the First Closing Date, this Agreement will not terminate as to the International Firm Securities or any International Optional Securities purchased prior to such termination). As used in this Agreement, the term "Manager" includes any person substituted for a Manager under this Section. Nothing herein will relieve a defaulting Manager from liability for its default. 9. Qualified Independent Underwriter. The Company and the Selling Stockholder hereby confirm that at their request [ ] has without compensation acted as "qualified independent underwriter" (in such capacity, the "QIU") within the meaning of Schedule E to the By-Laws of the National Association of Securities Dealers, Inc. in connection with the offering of the Offered Securities. The Company and the Selling Stockholder will indemnify and hold harmless the QIU against any losses, claims, damages or liabilities, joint or several, to which the QIU may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the QIU's acting (or alleged failing to act) as such "qualified independent underwriter" and will reimburse the QIU for 18 19 any legal or other expenses reasonably incurred by the QIU in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. 10. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Selling Stockholder, of the Company or its officers and of the several Managers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Manager, the Selling Stockholder, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the International Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the International Securities by the Managers is not consummated, the Company and the Selling Stockholder shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company, and the Managers pursuant to Section 7 and the obligations of the Company and the Selling Stockholder pursuant to Section 9 shall remain in effect, and if any International Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the International Securities by the Managers is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(d), the Company will reimburse the Managers for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the International Securities. 11. Notices. All communications hereunder will be in writing and, if sent to the Managers, will be mailed, delivered or telegraphed and confirmed to CSFBL at One Cabot Square, London E14 4QJ England, Attention: Company Secretary, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at Calpine Corporation, 50 West San Fernando Street, San Jose, California 95113, Attention: General Counsel, or if sent to the Selling Stockholder, will be mailed, delivered or telegraphed and confirmed to it at________, Attention: ________; provided, however, that any notice to a Manager pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Manager. 12. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 13. Representation of Managers. CSFBL will act for the several Managers in connection with this financing, and any action under this Agreement taken by CSFBL will be binding upon all the Managers. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 15. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws. The Company and the Selling Stockholder hereby submit to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. The Selling Stockholder irrevocably appoints [ ] as its authorized agent in the Borough of Manhattan in the City of New York upon which process may be served in any such suit or proceeding, and agrees that service of process upon such agent, and written notice of said service to the Selling Stockholder by the person serving the same to the address provided in Section 11 shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Selling Stockholder further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Agreement. The obligation of the Selling Stockholder in respect of any sum due to any shall, notwithstanding any judgment in a currency other than United States dollars, not be discharged until the first business day, following receipt by such Manager of any sum adjudged to be so due in such other currency, on which (and 19 20 only to the extent that) such Manager may in accordance with normal banking procedures purchase United States dollars with such other currency; if the United States dollars so purchased are less than the sum originally due to such Manager hereunder, the Selling Stockholder agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such Manager against such loss. If the United States dollars so purchased are greater than the sum originally due to such Manager hereunder, such Manager agrees to pay the Selling Stockholder an amount equal to the excess of the dollars so purchased over the sum originally due to such Manager hereunder. If the foregoing is in accordance with the Managers' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement among the Selling Stockholder, the Company and the several Managers in accordance with its terms. Very truly yours, Electrowatt Ltd. By: -------------------------------------- Name: Title: Calpine Corporation By: -------------------------------------- Name: Title: The foregoing Subscription Agreement is hereby confirmed and accepted as of the date first above written. CS FIRST BOSTON LIMITED MORGAN STANLEY & CO. INTERNATIONAL LIMITED PAINEWEBBER INTERNATIONAL (U.K.) LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED BY CS FIRST BOSTON LIMITED, their duly authorized attorney-in-fact. By ---------------------------------------------- Name: Title: 20 21 SCHEDULE A
TOTAL NUMBER OF INTERNATIONAL FIRM SECURITIES TO BE PURCHASED ------------------------ NUMBER OF INTERNATIONAL FIRM SECURITIES TO BE SOLD BY: ------------------------ SELLING MANAGER COMPANY STOCKHOLDER - ---------------------------------------------- ---------- ----------- CS First Boston International Limited......... Morgan Stanley & Co. International Limited.... PaineWebber International (U.K.) Limited...... Salomon Brothers International Limited........ ------- ------- ------- Total............................... 1,095,564 2,513,436 3,609,000 ======= ======= =======
21 22 SCHEDULE B
NAME OF SUBSIDIARY % OF OUTSTANDING SECURITIES PLEDGED PLEDGE - --------------------------------------- --------------------------------------- ----------
23 SCHEDULE C GENERAL PARTNERSHIP INTERESTS 24 SCHEDULE D FORM OF LOCK-UP LETTER September , 1996 CALPINE CORPORATION 50 West San Fernando Street San Jose, California 95113 CS FIRST BOSTON CORPORATION MORGAN STANLEY & CO. INCORPORATED PAINEWEBBER INCORPORATED SALOMON BROTHERS INC. As Representatives of the Several Underwriters c/o CS First Boston Corporation Park Avenue Plaza New York, N.Y. 10055 CS FIRST BOSTON LIMITED MORGAN STANLEY & CO. INTERNATIONAL LIMITED PAINEWEBBER INTERNATIONAL (U.K.) LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED As Representatives of the Several Managers c/o CS First Boston Limited One Cabot Square London, England E14 4OJ Dear Sirs: As an inducement to the Underwriters (as defined below) and Managers (as defined below) to execute the Underwriting Agreement, dated September , 1996 ("Underwriting Agreement"), among Calpine Corporation (the "Company"), the selling stockholder named therein (the "Selling Stockholder") and CS First Boston Corporation, Morgan Stanley & Co. Incorporated, PaineWebber Incorporated, Salomon Brothers Inc. and the other underwriters listed in Schedule A thereto (the "Underwriters") and the Subscription Agreement, dated September , 1996 ("Subscription Agreement"), among the Company, the Selling Stockholder and CS First Boston Limited, Morgan Stanley & Co. International Limited, PaineWebber International (U.K.) Limited, Salomon Brothers International Limited, and the other managers named therein (the "Managers"), as the case may be, pursuant to which an offering will be made that is intended to result in the establishment of a public market for the common stock, no par value (the "Securities"), of the Company, the undersigned hereby agrees that, for a period of 180 days after the initial public offering (the "Commencement Date") of the Securities pursuant to the Underwriting Agreement and the Subscription Agreement to which you are or expect to become parties, the undersigned will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of Securities beneficially owned by the undersigned or issuable upon exercise of options beneficially owned by the undersigned or any securities convertible into or exchangeable or exercisable for any shares of Securities, or publicly disclose the intention to make any such offer, sale, pledge or disposal without the prior written consent of CS First Boston Corporation. In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of shares of Securities if such transfer would constitute a violation or breach of this Agreement. 25 This Agreement shall be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. This agreement shall lapse and become null and void if the Commencement Date shall not have occurred on or before October , 1996. Very truly yours, Name: EX-3.2 4 AMEND/RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CALPINE CORPORATION FIRST. The name of the corporation is Calpine Corporation (the "Corporation"). SECOND. The address of its registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. (a) The Corporation is authorized to issue 110,000,000 shares of capital stock, $.001 par value. The shares shall be divided into two classes, designated as follows:
Designation of Class Number of Shares -------------------- ---------------- Common Stock 100,000,000 Preferred Stock 10,000,000 ----------- Total 110,000,000
(b) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is expressly authorized, in the resolution or resolutions providing for the issuance of any wholly unissued series of Preferred Stock, to fix, state and express the powers, rights, designations, preferences, qualifications, limitations and restrictions thereof, including without limitation: the rate of dividends upon which and the times at which dividends on shares of such series shall be payable and the preference, if any, which such dividends shall have relative to dividends on shares of any other class or classes or any other series of stock of the Corporation; whether such dividends shall be cumulative or noncumulative, and if cumulative, the date or dates from which dividends on shares of such series shall be cumulative; the voting rights, if any, to be provided for shares of such series; the rights, if any, which the holders of shares of such series shall have in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; the rights, if any, which the holders of shares of such series shall have to convert such shares into or exchange such shares for shares of stock of the Corporation, and the terms and conditions, including price and rate of exchange of such conversion or exchange; the redemption rights (including sinking fund provisions), if any, for shares of such series; and such other powers, rights, designations, preferences, qualifications, limitations and restrictions as the Board of Directors may desire to so fix. The Board of Directors is also expressly authorized to fix the number of shares constituting such series and to increase or decrease the number of shares of any series prior to the issuance of shares of that series and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not to decrease such number below the number 1. 2 of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is authorized to make, alter or repeal any or all of the Bylaws of the Corporation; provided, however, that any Bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of Directors shall require the affirmative vote of a majority of the total number of Directors which the Corporation would have if there were no vacancies. In addition, new Bylaws may be adopted or the Bylaws may be amended or repealed by the affirmative vote of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article FIFTH. SIXTH. (a) Any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing of such stockholders. (b) Special meetings of stockholders of the Corporation may be called only (i) by the Chairman of the Board of Directors, or (ii) by the Chairman or the Secretary at the written request of a majority of the total number of Directors which the Corporation would have if there were no vacancies upon not fewer than 10 nor more than 60 days' written notice. Any request for a special meeting of stockholders shall be sent to the Chairman and the Secretary and shall state the purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock may be called in the manner and for the purposes provided in the resolutions of the Board of Directors providing for the issue of such stock. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice of meeting. (c) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article SIXTH. SEVENTH. (a) The number of Directors which shall constitute the whole Board of Directors of this corporation shall be as specified in the Bylaws of this corporation, subject to this Article SEVENTH. (b) The Directors shall be classified with respect to the time for which they severally hold office into three classes designated Class I, Class II and Class III, as nearly equal in 2. 3 number as possible, as shall be provided in the manner specified in the Bylaws of the Corporation. Each Director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the Director was elected; provided, however, that each initial Director in Class I shall hold office until the annual meeting of stockholders in 1997, each initial Director in Class II shall hold office until the annual meeting of stockholders in 1998 and each initial Director in Class III shall hold office until the annual meeting of stockholders in 1999. Notwithstanding the foregoing provisions of this Article SEVENTH, each Director shall serve until his successor is duly elected and qualified or until such Director's death, resignation or removal. (c) In the event of any increase or decrease in the authorized number of Directors, (i) each Director then serving as such shall nevertheless continue as a Director of the class of which such Director is a member until the expiration of his current term, or his early resignation, removal from office or death and (ii) the newly created or eliminated directorship resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of Directors so as to maintain such classes as nearly equally as possible. (d) Any Director or the entire Board of Directors may be removed by the affirmative vote of the holders of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. (e) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article SEVENTH. EIGHTH. (a) 1. In addition to any affirmative vote required by law, any Business Combination (as hereinafter defined) shall require the affirmative vote of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class (for purposes of this Article EIGHTH, the "Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified by law or in any agreement with any national securities exchange or otherwise. 2. The term "Business Combination" as used in this Article EIGHTH shall mean any transaction which is referred to in any one or more of the following clauses (A) through (E): (A) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) or Associate (as hereinafter defined) of an Interested Stockholder; or 3. 4 (B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with, or proposed by or on behalf of, any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary constituting not less than five percent of the total assets of the Corporation, as reported in the consolidated balance sheet of the Corporation as of the end of the most recent quarter with respect to which such balance sheet has been prepared; or (C) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to, or proposed by or on behalf of, any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) constituting not less than five percent of the total assets of the Corporation, as reported in the consolidated balance sheet of the Corporation as of the end of the most recent quarter with respect to which such balance sheet has been prepared; or (D) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation, or any spin-off or split-up of any kind of the Corporation or any Subsidiary, proposed by or on behalf of an Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (E) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the percentage of the outstanding shares of (i) any class of equity securities of the Corporation or any Subsidiary or (ii) any class of securities of the Corporation or any Subsidiary convertible into equity securities of the Corporation or any Subsidiary, represented by securities of such class which are directly or indirectly owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder. (b) The provisions of section (a) of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if such Business Combination has been approved by two-thirds of the whole Board of Directors. (c) For the purposes of this Article EIGHTH: 1. A "person" shall mean any individual, firm, corporation or other entity. 2. "Interested Stockholder" shall mean, in respect of any Business Combination, any person (other than the Corporation or any Subsidiary) who or which, as of the 4. 5 record date for the determination of stockholders entitled to notice of and to vote on such Business Combination, or immediately prior to the consummation of any such transaction (A) is or was, at any time within two years prior thereto, the beneficial owner, directly or indirectly, of 15% or more of the then outstanding Voting Shares, or (B) is an Affiliate or Associate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of 15% or more of the then outstanding Voting Shares, or (C) is an assignee of or has otherwise succeeded to any shares of capital stock of the Corporation which were at any time within two years prior thereto beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction, or series of transactions, not involving a public offering within the meaning of the Securities Act of 1933, as amended. 3. A "person" shall be the "beneficial owner" of any Voting Shares (A) which such person or any of its Affiliates and Associates (as hereinafter defined) beneficially own, directly or indirectly, or (B) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (C) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purposes of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation. 4. The outstanding Voting Shares shall include shares deemed owned through application of paragraph 3 above but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. 5. "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of adoption of this Certificate of Incorporation (the "Exchange Act"). 5. 6 6. "Subsidiary" shall mean any corporation of which a majority of any class of equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Exchange Act) is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph 2 of this section (c) the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (d) A majority of the directors shall have the power and duty to determine for the purposes of this Article EIGHTH on the basis of information known to them, (1) whether a person is an Interested Stockholder, (2) the number of Voting Shares beneficially owned by any person, (3) whether a person is an Affiliate or Associate of another, (4) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in paragraph 3 of section (c) or (5) whether the assets subject to any Business Combination or the consideration received for the issuance or transfer of securities by the Corporation or any Subsidiary constitutes not less than five percent of the total assets of the Corporation. (e) Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. (f) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 66-2/3% of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article EIGHTH. NINTH. This Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. TENTH. A Director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware or (iv) for any transaction from which the Director derived any improper personal benefit. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation's stockholders, further reductions in the liability of a corporation's directors for breach of fiduciary duty, then a Director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware as so amended. Any repeal or modification of the foregoing provisions of this Article NINTH by the stockholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification. This corporation is authorized to indemnify the directors and officers of the corporation to the fullest extent permissible under Delaware law. 6. EX-3.4 5 BYLAWS OF CALPINE CORPORATION 1 Exhibit 3.4 BYLAWS OF CALPINE CORPORATION (A Delaware corporation) 2 TABLE OF CONTENTS
Page ARTICLE I - OFFICES.................................................................................... 1 Section 1. Registered Office.......................................................... 1 Section 2. Other Offices.............................................................. 1 ARTICLE II - CORPORATE SEAL............................................................................ 1 Section 3. Corporate Seal.............................................................. 1 ARTICLE III - MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS............................................... 1 Section 4. Place of Meetings........................................................... 1 Section 5. Annual Meeting.............................................................. 2 Section 6. Postponement of Annual Meeting.............................................. 2 Section 7. Special Meetings............................................................ 2 Section 8. Notice of Meetings.......................................................... 2 Section 9. Manner of Giving Notice..................................................... 3 Section 10. Quorum and Transaction of Business.......................................... 3 Section 11. Adjournment and Notice of Adjourned Meetings................................ 5 Section 12. Waiver of Notice, Consent to Meeting or Approval of Minutes.............................................................................. 5 Section 13. Action by Written Consent Without a Meeting................................. 6 Section 14. Voting...................................................................... 6 Section 15. Persons Entitled to Vote or Consent......................................... 6 Section 16. Proxies..................................................................... 6 Section 17. Inspectors of Election...................................................... 7 ARTICLE IV - BOARD OF DIRECTORS........................................................................ 7 Section 18. Powers...................................................................... 7 Section 19. Number of Directors......................................................... 7 Section 20. Election Of Directors, Term, Qualifications................................. 7 Section 21. Resignations................................................................ 8 Section 22. Removal..................................................................... 8 Section 23. Vacancies................................................................... 9 Section 24. Regular Meetings............................................................ 9 Section 25. Participation by Telephone.................................................. 9 Section 26. Special Meetings............................................................ 9 Section 27. Notice of Meetings.......................................................... 9 Section 28. Place of Meetings........................................................... 10 Section 29. Action by Written Consent Without a Meeting................................. 10
i. 3
Section 30. Quorum and Transaction of Business.......................................... 10 Section 31. Adjournment................................................................. 10 Section 32. Organization................................................................ 10 Section 33. Compensation................................................................ 10 Section 34. Committees.................................................................. 11 ARTICLE V - OFFICERS................................................................................... 11 Section 35. Officers.................................................................... 11 Section 36. Appointment................................................................. 11 Section 37. Inability to Act............................................................ 12 Section 38. Resignation................................................................. 12 Section 40. Vacancies................................................................... 12 Section 41. Chairman of the Board....................................................... 12 Section 42. President................................................................... 13 Section 43. Vice Presidents............................................................. 13 Section 44. Secretary and Assistant Secretary........................................... 13 Section 45. Chief Financial Officer..................................................... 14 Section 46. Compensation................................................................ 15 ARTICLE VI - CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS........................................ 15 Section 47. Execution of Contracts and Other Instruments................................ 15 Section 48. Loans....................................................................... 15 Section 49. Bank Accounts............................................................... 15 Section 50. Checks, Drafts, Etc......................................................... 16 ARTICLE VII - CERTIFICATES FOR STOCK AND THEIR TRANSFER................................................ 16 Section 51. Certificate for Stock....................................................... 16 Section 52. Transfer on the Books....................................................... 17 Section 53. Lost, Destroyed and Stolen Certificates..................................... 17 Section 54. Issuance, Transfer and Registration of Shares............................... 17 ARTICLE VIII - INSPECTION OF CORPORATE RECORDS......................................................... 18 Section 55. Inspection by Directors..................................................... 18 Section 56. Inspection by Stockholders.................................................. 18 Section 57. Written Form................................................................ 18 ARTICLE IX - MISCELLANEOUS............................................................................. 19 Section 58. Fiscal Year................................................................. 19 Section 59. Annual Report............................................................... 19 Section 60. Record Date................................................................. 19 Section 61. Bylaw Amendments............................................................ 20 Section 62. Construction and Definition................................................. 20 Section 63. Registered Stockholders..................................................... 20
ii. 4
Section 64. Dividends................................................................... 20 ARTICLE X - INDEMNIFICATION............................................................................ 21 Section 65. Indemnification of Directors, Officers, Employees And Other Agents...................................................................... 21 ARTICLE XI - LOANS OF OFFICERS AND OTHERS.............................................................. 22 Section 67. Certain Corporate Loans and Guaranties...................................... 22
iii. 5 BYLAWS OF CALPINE CORPORATION (A Delaware Corporation) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. Additional offices of the corporation shall be located at such place or places, within or outside the State of Delaware, as the Board of Directors may from time to time authorize or the business of the corporation may require. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." If and when a seal is adopted by the Board of Directors, such seal may be used by causing it or a facsimile thereof to be engraved, lithographed, printed, stamped, impressed upon or affixed to any contract, conveyance, certificate for stock or other instrument executed by the corporation. ARTICLE III MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS SECTION 4. PLACE OF MEETINGS. All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 1. 6 SECTION 5. ANNUAL MEETING. Annual meetings of stockholders, commencing with the year 1997, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such annual meeting, directors shall be elected and any other business may be transacted which may properly come before the meeting. SECTION 6. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the President shall each have authority to hold at an earlier date and/or time, or to postpone to a later date and/or time, the annual meeting of stockholders. SECTION 7. SPECIAL MEETINGS. (a) Special meetings of the stockholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board of Directors or the President, or otherwise as specified in the Certificate of Incorporation. (b) Upon written request to the Chairman of the Board of Directors, the President, any vice president or the Secretary of the corporation by any person or persons (other than the Board of Directors) entitled to call a special meeting of the stockholders, such officer forthwith shall cause notice to be given to the stockholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, such time to be not less than 10 nor more than 60 days after receipt of such request. If such notice is not given within 20 days after receipt of such request, the person or persons calling the meeting may give notice thereof in the manner provided by law or in these bylaws. Nothing contained in this Section 7 shall be construed as limiting, fixing or affecting the time or date when a meeting of stockholders called by action of the Board of Directors may be held. SECTION 8. NOTICE OF MEETINGS. Except as otherwise may be required by law and subject to subsection 7(b) above, written notice of each meeting of stockholders shall be given to each stockholder entitled to vote at that meeting (see Section 15 below), by the Secretary, assistant secretary or other person charged with that duty, not less than 10 nor more than 60 days before such meeting. Notice of any meeting of stockholders shall state the date, place and hour of the meeting and, (a) in the case of a special meeting, the general nature of the business to be transacted; (b) in the case of an annual meeting, the general nature of matters which the Board of Directors, at the time the notice is given, intends to present for action by the stockholders; and 2. 7 (c) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the notice to be presented by management for election. At a special meeting, notice of which has been given in accordance with this Section, action may not be taken with respect to business the general nature of which has not been stated in such notice. At an annual meeting, action may be taken with respect to business stated in the notice of such meeting and any other business as may properly come before the meeting. SECTION 9. MANNER OF GIVING NOTICE. Notice of any meeting of stockholders shall be given either personally or by first-class mail, telegraphic or other written communication, addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that stockholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a stockholder at the address of that stockholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at that address, all future notices shall be deemed to have been duly given without further mailing if these shall be available to the stockholder on written demand by the stockholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of mailing of any notice or report in accordance with the provisions of this Section 9, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice. SECTION 10. QUORUM AND TRANSACTION OF BUSINESS. (a) At any meeting of the stockholders, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the stockholders, unless the vote of a greater number or voting by classes is required by law or by the Certificate of Incorporation, and except as provided in subsection (c) below. (b) At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (1) pursuant to the corporation's notice of meeting, (2) by or at the direction of the Board of Directors or (3) by any stockholder of the 3. 8 corporation who is a stockholder of record at the time of giving of the notice provided for in this Bylaw, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Bylaw. For business to be properly brought before any meeting by a stockholder pursuant to clause (3) of this Section 10(b), the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 20 days nor more than 60 days prior to the date of the meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (c) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf of the proposal is made and (d) any material interest of such stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 10(b). The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by this Section 10(b), and if such person should so determine, such person shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 10(b), a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 10(b). (c) The stockholders present at a duly called or held meeting of the stockholders at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (d) In the absence of a quorum, no business other than adjournment may be transacted, except as described in subsection (c) above. SECTION 11. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of shares represented at such meeting either in person or by proxy and entitled to vote at such meeting. 4. 9 In the event any meeting is adjourned, it shall not be necessary to give notice of the time and place of such adjourned meeting pursuant to Sections 8 and 9 of these bylaws; provided that if any of the following three events occur, such notice must be given: (1) announcement of the adjourned meeting's time and place is not made at the original meeting which it continues or (2) such meeting is adjourned for more than 30 days from the date set for the original meeting or (3) after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 12. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES. (a) Subject to subsection (b) of this Section, the transactions of any meeting of stockholders, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote but not present in person or by proxy signs a written waiver of notice or a consent to holding of the meeting or an approval of the minutes thereof. (b) A waiver of notice, consent to the holding of a meeting or approval of the minutes thereof need not specify the business to be transacted or transacted at nor the purpose of the meeting. (c) All waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (d) A person's attendance at a meeting shall constitute waiver of notice of and presence at such meeting, except when such person objects at the beginning of the meeting to transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters which are required by law or these bylaws to be in such notice (including those matters described in subsection (d) of Section 8 of these bylaws), but are not so included if such person expressly objects to consideration of such matter or matters at any time during the meeting. SECTION 13. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Effective upon the closing of the corporation's initial public offering of securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, the stockholders of the Corporation may not take 5. 10 action by written consent without a meeting but must take any such actions at a duly called annual or special meeting. SECTION 14. VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 15 of these bylaws. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. Any stockholder may vote part of such stockholder's shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares such stockholder is entitled to vote. SECTION 15. PERSONS ENTITLED TO VOTE OR CONSENT. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 16. PROXIES. Every person entitled to vote or execute consents may do so either in person or by one or more agents authorized to act by a written proxy executed by the person or such person's duly authorized agent and filed with the Secretary of the corporation; provided that no such proxy shall be valid after the expiration of three years from the date of its execution, unless the proxy provides for a longer period. The manner of execution, suspension, revocation, exercise and effect of proxies is governed by law. SECTION 17. INSPECTORS OF ELECTION. Before any meeting of stockholders, the Board of Directors may appoint any persons, other than nominees for office, to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the majority of shares represented in person or proxy shall determine whether one or three inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the 6. 11 chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots, or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. ARTICLE IV BOARD OF DIRECTORS SECTION 18. POWERS. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. SECTION 19. NUMBER OF DIRECTORS. The authorized number of directors of this corporation shall be not less than a minimum of [FIVE] nor more than a maximum of [NINE], and the number presently authorized is [FIVE]. The exact number of directors shall be set within these limits from time to time by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders. No reduction in the number of directors shall remove any director prior to the expiration of such director's term of office. SECTION 20. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors shall be elected at each annual meeting of stockholders, in accordance with the Certificate of Incorporation, to hold office until the next annual meeting. Each director elected shall hold office until his or her successor is elected and qualified, or until his death, resignation or removal. Nominations for election to the Board of Directors must be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of thecorporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors of the corporation, must be preceded by notification in writing received by the Secretary of the corporation not less than twenty (20) days nor more than 60 days prior to any meeting of stockholders called for the election of directors. Such notification shall contain the written consent of each proposed nominee to serve as a director if so elected and the following information as to each proposed nominee and as to each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee: 7. 12 (a) the name, age, residence, address, and business address of each proposed nominee and of each such person; (b) the principal occupation or employment, the name, type of business and address of the corporation or other organization in which such employment is carried on of each proposed nominee and of each such person; (c) the amount of stock of the corporation owned beneficially, either directly or indirectly, by each proposed nominee and each such person; and (d) a description of any arrangement or understanding of each proposed nominee and of each such person with each other or any other person regarding future employment or any future transaction to which the corporation will or may be a party. The presiding officer of the meeting shall have the authority to determine and declare to the meeting that a nomination not preceded by notification made in accordance with the foregoing procedure shall be disregarded. SECTION 21. RESIGNATIONS. Any director of the corporation may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation specifies effectiveness at a future time, a successor may be elected pursuant to Section 23 of these bylaws to take office on the date that the resignation becomes effective. SECTION 22. REMOVAL. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of a majority of the outstanding shares entitled to vote on such removal. SECTION 23. VACANCIES. A vacancy or vacancies on the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or upon increase in the authorized number of directors or if stockholders fail to elect the full authorized number of directors at an annual meeting of stockholders or if, for whatever reason, there are fewer directors on the Board of Directors, than the full number authorized. Such vacancy or vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified or until his earlier resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute. SECTION 24. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times, places and dates as fixed in these bylaws or by the Board of Directors; 8. 13 provided, however, that if the date for such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. Regular meetings of the Board of Directors held pursuant to this Section 24 may be held without notice. SECTION 25. PARTICIPATION BY TELEPHONE. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting. SECTION 26. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called by the Chairman of the Board or the President or any vice president or the Secretary of the corporation or any two directors. SECTION 27. NOTICE OF MEETINGS. Notice of the date, time and place of all meetings of the Board of Directors, other than regular meetings held pursuant to Section 24 above shall be delivered personally, orally or in writing, or by telephone, telegraph or facsimile to each director, at least 48 hours before the meeting, or sent in writing to each director by first-class mail, charges prepaid, at least four days before the meeting. Such notice may be given by the Secretary of the corporation or by the person or persons who called a meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice of such meeting, or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement such director's lack of notice. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 28. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the state which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, designated in the bylaws or by resolution of the Board of Directors. SECTION 29. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. SECTION 30. QUORUM AND TRANSACTION OF BUSINESS. A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the authorized number of directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the law, the Certificate of Incorporation or these bylaws specifically require a greater number. A meeting at which a quorum 9. 14 is initially present may continue to transact business, notwithstanding withdrawal of directors, if any action taken is approved by at least a majority of the number of directors constituting a quorum for such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting, as provided in Section 31 of these bylaws. SECTION 31. ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the directors present. If the meeting is adjourned for more than 24 hours, notice of such adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. SECTION 32. ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. If there is no Chairman of the Board or if the Chairman is not present, a Chairman chosen by a majority of the directors present shall act as chairman. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting. SECTION 33. COMPENSATION. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 34. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a 10. 15 dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE V OFFICERS SECTION 35. OFFICERS. The officers of the corporation shall be a President, Treasurer and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. SECTION 36. APPOINTMENT. All officers shall be chosen and appointed by the Board of Directors. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a President, a Treasurer, and a Secretary and may choose Vice Presidents. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. SECTION 37. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation or of any person authorized by these bylaws to act in such officer's place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select, for such period of time as the Board of Directors deems necessary. SECTION 38. RESIGNATION. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. SECTION 39. REMOVAL. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in 11. 16 the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. Any officer may be removed from office at any time, with or without cause, but subject to the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of removal has been duly delegated, or, with regard to any officer who has been appointed by the chief executive officer pursuant to Section 36 above, by the chief executive officer or any other officer upon whom such power of removal may be conferred by the Board of Directors. SECTION 40. VACANCIES. A vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article of the bylaws for initial appointment to such office. SECTION 41. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He/she shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. SECTION 42. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the business and affairs of the corporation, subject to the control of the Board of Directors. The President may sign and execute, in the name of the corporation, any instrument authorized by the Board of Directors, except when the signing and execution thereof shall have been expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the corporation. The President shall have all the general powers and duties of management usually vested in the president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by the Board of Directors or these bylaws. The President shall have discretion to prescribe the duties of other officers and employees of the corporation in a manner not inconsistent with the provisions of these bylaws and the directions of the Board of Directors. SECTION 43. VICE PRESIDENTS. In the absence or disability of the President, in the event of a vacancy in the office of President, or in the event such officer refuses to act, the Vice President shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the President. If at any such time the corporation has more than one vice president, the duties and powers of the President shall pass to each vice president in order of such vice president's rank as fixed by the Board of Directors or, if the vice presidents are not so ranked, to the vice president designated by the Board of Directors. The vice presidents shall have such other powers and perform such other duties as may be prescribed for them from time to 12. 17 time by the Board of Directors or pursuant to Sections 35 and 36 of these bylaws or otherwise pursuant to these bylaws. SECTION 44. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall: (a) Keep, or cause to be kept, minutes of all meetings of the corporation's stockholders, Board of Directors, and committees of the Board of Directors, if any. Such minutes shall be kept in written form. (b) Keep, or cause to be kept, at the principal executive office of the corporation, or at the office of its transfer agent or registrar, if any, a record of the corporation's stockholders, showing the names and addresses of all stockholders, and the number and classes of shares held by each. Such records shall be kept in written form or any other form capable of being converted into written form. (c) Keep, or cause to be kept, at the principal executive office of the corporation. (d) Give, or cause to be given, notice of all meetings of stockholders, directors and committees of the Board of Directors, as required by law or by these bylaws. (e) Keep the seal of the corporation, if any, in safe custody. (f) Exercise such powers and perform such duties as are usually vested in the office of secretary of a corporation, and exercise such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or these bylaws. If any assistant secretaries are appointed, the assistant secretary, or one of the assistant secretaries in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant secretary designated by the Board of Directors, in the absence or disability of the Secretary or in the event of such officer's refusal to act or if a vacancy exists in the office of Secretary, shall perform the duties and exercise the powers of the Secretary and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 45. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall: (a) Be responsible for all functions and duties of the treasurer of the corporation. (b) Keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account for the corporation. 13. 18 (c) Receive or be responsible for receipt of all monies due and payable to the corporation from any source whatsoever; have charge and custody of, and be responsible for, all monies and other valuables of the corporation and be responsible for deposit of all such monies in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (d) Disburse or be responsible for the disbursement of the funds of the corporation as may be ordered by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (e) Render to the chief executive officer and the Board of Directors a statement of the financial condition of the corporation if called upon to do so. (f) Exercise such powers and perform such duties as are usually vested in the office of chief financial officer of a corporation, and exercise such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. If any assistant financial officer is appointed, the assistant financial officer, or one of the assistant financial officers, if there are more than one, in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant financial officer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 46. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation. ARTICLE VI CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS SECTION 47. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as these bylaws may otherwise provide, the Board of Directors or its duly appointed and authorized committee may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. Except as so authorized or otherwise expressly provided in these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. 14. 19 SECTION 48. LOANS. No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors or its duly appointed and authorized committee. When so authorized by the Board of Directors or such committee, any officer or agent of the corporation may effect loans and advances at any time for the corporation from any bank, trust company, or other institution, or from any firms, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks, securities and other property, real or personal, at any time held by the corporation, and to that end endorse, assign and deliver the same as security for the payment of any and all loans, advances, indebtedness, and liabilities of the corporation. Such authorization may be general or confined to specific instances. SECTION 49. BANK ACCOUNTS. The Board of Directors or its duly appointed and authorized committee from time to time may authorize the opening and keeping of general and/or special bank accounts with such banks, trust companies, or other depositaries as may be selected by the Board of Directors, its duly appointed and authorized committee or by any officer or officers, agent or agents, of the corporation to whom such power may be delegated from time to time by the Board of Directors. The Board of Directors or its duly appointed and authorized committee may make such rules and regulations with respect to said bank accounts, not inconsistent with the provisions of these bylaws, as are deemed advisable. SECTION 50. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors or its duly appointed and authorized committee. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositaries may be made, without counter-signature by the President or any vice president or the Chief Financial Officer or any assistant financial officer or by any other officer or agent of the corporation to whom the Board of Directors or its duly appointed and authorized committee, by resolution, shall have delegated such power or by hand-stamped impression in the name of the corporation. ARTICLE VII CERTIFICATES FOR STOCK AND THEIR TRANSFER SECTION 51. CERTIFICATE FOR STOCK. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant financial officer or by the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer 15. 20 agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. In the event that the corporation shall issue any shares as only partly paid, the certificate issued to represent such partly paid shares shall have stated thereon the total consideration to be paid for such shares and the amount paid thereon. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 52. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent (if any) of the corporation of a certificate for shares of the corporation duly endorsed, with reasonable assurance that the endorsement is genuine and effective, or accompanied by proper evidence of succession, assignment or authority to transfer and upon compliance with applicable federal and state securities laws and if the corporation has no statutory duty to inquire into adverse claims or has discharged any such duty and if any applicable law relating to the collection of taxes has been complied with, it shall be the duty of the corporation, by its Secretary or transfer agent, to cancel the old certificate, to issue a new certificate to the person entitled thereto and to record the transaction on the books of the corporation. SECTION 53. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any certificate for shares of the corporation alleged to have been lost, destroyed or stolen shall notify the corporation by making a written affidavit or affirmation of such fact. Upon receipt of said affidavit or affirmation the Board of Directors, or its duly appointed and authorized committee or any officer or officers authorized by the Board so to do, may order the issuance of a new certificate for shares in the place of any certificate previously issued by the corporation and which is alleged to have been lost, destroyed or stolen. However, the Board of Directors or such authorized committee, officer or officers may require the owner of the allegedly lost, destroyed or stolen certificate, or such owner's legal representative, to give the corporation a bond or other adequate security sufficient to indemnify the corporation and its transfer agent and/or registrar, if any, against any claim that may be made against it or them on account of such allegedly lost, destroyed or stolen certificate or the replacement thereof. Said bond or other security shall be in such amount, on such terms and conditions and, in the case of a bond, with such surety or sureties as may be acceptable to the Board of Directors or to its 16. 21 duly appointed and authorized committee or any officer or officers authorized by the Board of Directors to determine the sufficiency thereof. The requirement of a bond or other security may be waived in particular cases at the discretion of the Board of Directors or its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors so to do. SECTION 54. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of Directors may make such rules and regulations, not inconsistent with law or with these bylaws, as it may deem advisable concerning the issuance, transfer and registration of certificates for shares of the capital stock of the corporation. The Board of Directors may appoint a transfer agent or registrar of transfers, or both, and may require all certificates for shares of the corporation to bear the signature of either or both. ARTICLE VIII INSPECTION OF CORPORATE RECORDS SECTION 55. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind of the corporation and any of its subsidiaries and to inspect the physical properties of the corporation and any of its subsidiaries. Such inspection may be made by the director in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. SECTION 56. INSPECTION BY STOCKHOLDERS. (a) INSPECTION OF CORPORATE RECORDS. Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at is registered office in the State of Delaware or at its principal place of business. (b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall be kept as provided in Section 44 of these bylaws and shall be open to inspection by the stockholders at all reasonable times during office hours. A current copy of these bylaws shall be furnished to any stockholder upon written request. SECTION 57. WRITTEN FORM. If any record subject to inspection pursuant to Section 56 above is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. 17. 22 ARTICLE IX MISCELLANEOUS SECTION 58. FISCAL YEAR. Unless otherwise freed by resolution of the Board of Directors, the fiscal year of the corporation shall end on the 31st day of December in each calendar year. SECTION 59. ANNUAL REPORT. (a) Subject to the provisions of Section 59(b) below, the Board of Directors shall cause an annual report to be sent to each stockholder of the corporation in the manner provided in Section 9 of these bylaws not later than 120 days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. Such report shall be sent to stockholders at least 15 (or, if sent by third-class mail, 35) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. SECTION 60. RECORD DATE. The Board of Directors may fix a time in the future as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of shares or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action or event for the purpose of which it is fixed. If no record date is fixed, the provisions of Section 15 of these bylaws shall apply with respect to notice of meetings, votes, and consents and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolutions relating thereto, or the 60th day prior to the date of such other action or event, whichever is later. Only stockholders of record at the close of business on the record date shall be entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Certificate of Incorporation, by agreement or by law. 18. 23 SECTION 61. BYLAW AMENDMENTS. Except as otherwise provided by law or Section 19 of these bylaws, these bylaws may be amended or repealed by the Board of Directors or by the affirmative vote of a majority of the outstanding shares entitled to vote, including, if applicable, the affirmative vote of a majority of the outstanding shares of each class or series entitled by law or the Certificate of Incorporation to vote as a class or series on the amendment or repeal or adoption of any bylaw or bylaws; provided, however, after issuance of shares, a bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa may only be adopted by approval of the outstanding shares as provided herein. SECTION 62. CONSTRUCTION AND DEFINITION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions contained in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may" is permissive. SECTION 63. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 64. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INDEMNIFICATION SECTION 65. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall, to the fullest extent authorized under the laws of the State of Delaware, as those laws may be amended and supplemented from time to time, indemnify any director made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of being a director of the corporation or a predecessor corporation or, at the corporation's request, a director or officer of another corporation; provided, 19. 24 however, that the corporation shall indemnify any such agent in connection with a proceeding initiated by such agent only if such proceeding was authorized by the Board of Directors of the corporation. The indemnification provided for in this Section 65 shall: (i) not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) continue as to a person who has ceased to be a director, and (iii) inure to the benefit of the heirs, executors and administrators of such a person. The corporation's obligation to provide indemnification under this Section 65 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person. Expenses incurred by a director of the corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a director of the corporation (or was serving at the corporation's request as a director or officer of another corporation) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized by relevant sections of the General Corporation Law of Delaware. Notwithstanding the foregoing, the corporation shall not be required to advance such expenses to an agent who is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors of the corporation which alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent's fiduciary or contractual obligations to the corporation or any other willful and deliberate breach in bad faith of such agent's duty to the corporation or its stockholders. The foregoing provisions of this Section 65 shall be deemed to be a contract between the corporation and each director who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The Board of Directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a director, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an officer, employee or agent of the corporation. To assure indemnification under this Section 65 of all directors, officers, employees and agents who are determined by the corporation or otherwise to be or to have been "fiduciaries" of any employee benefit plan of the corporation which may exist from time to time, Section 145 of the General Corporation Law of Delaware shall, for the purposes of this Section 65, be interpreted as follows: an "other enterprise" shall be deemed to include such an employee benefit plan, including without limitation, any plan of the corporation which is governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time; the corporation 20. 25 shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed "fines." ARTICLE XI LOANS OF OFFICERS AND OTHERS SECTION 66. CERTAIN CORPORATE LOANS AND GUARANTIES. If the corporation has outstanding shares held of record by 100 or more persons on the date of approval by the Board of Directors, the corporation may make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or any subsidiary, whether or not a director of the corporation or its parent or any subsidiary, or adopt an employee benefit plan or plans authorizing such loans or guaranties, upon the approval of the Board of Directors alone, by a vote sufficient without counting the vote of any interested director or directors, if the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation. Notwithstanding the foregoing, the corporation shall have the power to make loans permitted by the Delaware General Corporation Law. 21. 26 CERTIFICATE OF SECRETARY I hereby certify that: I am the duly elected and acting Secretary of Calpine Corporation, a Delaware corporation (the "Company"); and Attached hereto is a complete and accurate copy of the Bylaws of the Company as duly adopted by the Board of Directors by Unanimous Written Consent dated July ___, 1996 and said Bylaws are presently in effect. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the Company this ___ th day of July, 1996. ----------------------------------- Ann B. Curtis, Secretary 22. EX-4.4 6 FORM OF AGREEMENT & PLAN OF MERGER 1 Exhibit 4.4 AGREEMENT AND PLAN OF MERGER OF CALPINE CORPORATION, INC., A DELAWARE CORPORATION AND CALPINE CORPORATION, A CALIFORNIA CORPORATION THIS AGREEMENT AND PLAN OF MERGER dated as of this ____ day of _________, 1996 (the "Agreement"), is between Calpine Corporation, a Delaware corporation ("Calpine Delaware") (formerly "Electrowatt Services Inc."), and Calpine Corporation, a California corporation ("Calpine California"). Calpine Delaware and Calpine California are sometimes referred to herein as the "Constituent Corporations." R E C I T A L S A. Calpine Delaware is a corporation duly organized and existing under the laws of the State of Delaware and has a total authorized capital stock of 1,500 shares of Common Stock, par value $1.00 per share. As of the date hereof, and before giving effect to the transactions contemplated hereby, 1,035 shares of Common Stock of Calpine Delaware were issued and outstanding, all of which were held by Electrowatt Ltd. ("Electrowatt"). No other securities of Calpine Delaware are outstanding as of the date hereof. B. Calpine California is a corporation duly organized and existing under the laws of the State of California and has an authorized capital stock of 11,500,000 shares. The number of shares of Preferred Stock authorized to be issued is 5,000,000, par value $.01 per share, of which 5,000,000 shares have been designated Series A Preferred Stock (the "Series A Preferred Stock"). The number of shares of Common Stock, par value $.01 per share, authorized to be issued is 6,500,000,000 shares, of which 3,500,000 shares have been designated Class A Common Stock and 3,000,000 shares have been designated Class B Common Stock. As of the date hereof, and before giving effect to the transactions contemplated hereby, 5,000,000 shares of Series A Preferred Stock were issued and outstanding, all of which were held by Calpine Delaware, no shares of Class A Common Stock were issued and outstanding, and 2,000,000 shares of Class B Common Stock were issued and outstanding, all of which were held by Calpine Delaware. In addition, as of the date hereof, there are stock options outstanding entitling the holders thereof to purchase an aggregate of 500,000 shares of Class A Common Stock upon the terms and conditions thereof. C. The Board of Directors of Calpine California has determined that, for the purpose of effecting the reincorporation of Calpine California in the State of Delaware, it is advisable and in the best interests of Calpine California that Calpine California merge with and into Calpine Delaware upon the terms and conditions herein provided. 2 D. The respective Boards of Directors and shareholders of Calpine Delaware and Calpine California have approved this Agreement. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, Calpine Delaware and Calpine California hereby agree, subject to the terms and conditions hereinafter set forth, as follows: I. MERGER 1.1 Merger. In accordance with the provisions of this Agreement, the General Corporation Law of the State of Delaware and the General Corporation Law of the State of California, Calpine California shall be merged with and into Calpine Delaware (the "Merger"), the separate existence of Calpine California shall cease and Calpine Delaware shall be the surviving corporation in the Merger. Calpine Delaware is herein sometimes referred to as the "Surviving Corporation." The name of the Surviving Corporation shall be "Calpine Corporation". 1.2 Filing and Effectiveness. The Merger shall become effective when the following actions shall have been completed: (a) This Agreement and the Merger shall have been adopted and approved by the sole shareholder of Calpine California and the sole stockholder of Calpine Delaware in accordance with the requirements of the General Corporation Law of the State of California and the General Corporation Law of the State of Delaware, respectively; (b) All of the conditions precedent to the consummation of the Merger specified in this Agreement shall have been satisfied or duly waived by the party entitled to satisfaction thereof; (c) An executed Certificate of Merger or an executed counterpart of this Agreement meeting the requirements of the General Corporation Law of the State of Delaware shall have been filed with the Secretary of State of the State of Delaware; and (d) An executed counterpart of the Certificate of Merger, an executed counterpart of this Agreement or any other document filed with the Secretary of State of the State of Delaware pursuant to section (c) above, shall have been filed with the Secretary of State of the State of California. The date and time when the Merger shall become effective, as aforesaid, is herein called the "Effective Date of the Merger." 1.3 Effect of the Merger. Upon the Effective Date of the Merger, the separate existence of Calpine California shall cease and Calpine Delaware, as the Surviving Corporation, 2. 3 (i) shall continue to possess all of its assets, rights, powers and property as constituted immediately prior to the Effective Date of the Merger, (ii) shall be subject to all actions previously taken by Calpine Delaware's and Calpine California's Board of Directors, (iii) shall succeed, without other transfer, to all of the assets, rights, powers and property of Calpine California in the manner more fully set forth in Section 259 of the General Corporation Law of the State of Delaware, (iv) shall continue to be subject to all of the debts, liabilities and obligations of Calpine Delaware as constituted immediately prior to the Effective Date of the Merger, and (v) shall succeed, without other transfer, to all of the debts, liabilities and obligations of Calpine California in the same manner as if Calpine Delaware had itself incurred them, all as more fully provided under the applicable provisions of the General Corporation Law of the State of Delaware and the General Corporation Law of the State of California. II. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS 2.1 Certificate of Incorporation. The Amended and Restated Certificate of Incorporation of Calpine Delaware shall be as set forth as Exhibit A to this Agreement as of the Effective Date of the Merger, and shall continue in full force and effect as the Certificate of Incorporation of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. Such Amended and Restated Certificate of Incorporation shall be filed with the Secretary of State of the State of Delaware in accordance with applicable law as a part of the Merger. 2.2 Bylaws. The Bylaws of Calpine Delaware shall be as set forth as Exhibit B to this Agreement as of the Effective Date of the Merger, and shall continue in full force and effect as the Bylaws of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.3 Directors and Officers. The directors and officers of Calpine California immediately prior to the Effective Date of the Merger shall be the directors and officers of the Surviving Corporation until their successors shall have been duly elected and qualified or until as otherwise provided by law, the Certificate of Incorporation of the Surviving Corporation or the Bylaws of the Surviving Corporation. III. MANNER OF CONVERSION OF STOCK 3.1 Calpine California Common Shares. Upon the Effective Date of the Merger, each one share of Calpine California Class B Common Stock, par value $.01 per share, issued and outstanding immediately prior thereto, by virtue of the Merger and without any action by the Constituent Corporations, the holder of such shares or any other person, shall be converted into and exchanged for 5.1938465 fully paid and nonassessable shares of Common Stock, $.001 par value, of the Surviving Corporation. No fractional shares of the Surviving Corporation Common Stock shall be issued in exchange for Calpine California Class B Common Stock. 3. 4 3.2 Calpine California Preferred Shares. Upon the Effective Date of the Merger, each one share of Calpine California Series A Preferred Stock, par value $.01 per share, issued and outstanding immediately prior thereto, by virtue of the Merger and without any action by the Constituent Corporations, the holder of such shares or any other person, shall be converted into and exchanged for 4.358974 fully paid and nonassessable shares of Common Stock, $.001 par value, of the Surviving Corporation. No fractional shares of the Surviving Corporation Common Stock shall be issued in exchange for shares of Calpine California Series A Preferred Stock. 3.3 Calpine California 1992 Stock Option Program. (a) Upon the Effective Date of the Merger, the Surviving Corporation shall assume the obligations of Calpine California under its 1992 Stock Option Program, its 1996 Stock Incentive Plan, its 1996 Employee Stock Purchase Plan and those non-statutory stock options granted pursuant to certain written compensation agreements (collectively, the "Plans"). Each outstanding and unexercised option to purchase Calpine California Common Stock (an "Option") under the Plans shall become, on the basis of 5.1938465 shares of the Surviving Corporation's Common Stock for each one share of Calpine California Common Stock issuable pursuant to any such option, an option to purchase the Surviving Corporation's Common Stock on the same terms and conditions and at an exercise price reflecting the 5.1938465-for-one conversion ratio described above. (b) 5.1938465 shares of the Surviving Corporation's Common Stock shall be reserved for issuance upon the exercise of options for each one share of Calpine California Common Stock so reserved immediately prior to the Effective Date of the Merger. Accordingly, no "additional benefits" (within the meaning of Section 424(a)(2) of the Internal Revenue Code of 1986, as amended) shall be accorded to the optionees pursuant to the assumption of their options. 3.4 Calpine Delaware Common Stock. Upon the Effective Date of the Merger, each share of Common Stock, par value $1.00 per share, of Calpine Delaware issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by Calpine Delaware, the holder of such shares or any other person, be cancelled and returned to the status of authorized but unissued shares. 3.5 Exchange of Certificates. After the Effective Date of the Merger, each holder of an outstanding certificate representing shares of Calpine California Common Stock or Preferred Stock may be asked to surrender the same for cancellation to Calpine Delaware, and each such holder shall be entitled to receive in exchange therefor a certificate or certificates representing the number of shares of the Surviving Corporation's Common Stock into which the surrendered shares were converted as herein provided. Until so surrendered, each outstanding certificate theretofore representing shares of Calpine California Common Stock or Preferred Stock shall be deemed for all purposes to represent the number of shares of the Surviving Corporation's Common Stock into which such shares of Calpine California Common Stock or Preferred Stock, as the case may be, were converted in the Merger. 4. 5 The registered owner on the books and records of the Surviving Corporation or the Exchange Agent of any such outstanding certificate shall, until such certificate shall have been surrendered for transfer or conversion or otherwise accounted for to the Surviving Corporation, have and be entitled to exercise any voting and other rights with respect to and to receive dividends and other distributions upon the shares of Common Stock of the Surviving Corporation represented by such outstanding certificate as provided above. Each certificate representing Common Stock of the Surviving Corporation so issued in the Merger shall bear the same legends, if any, with respect to the restrictions on transferability as the certificates of Calpine California so converted and given in exchange therefore, unless otherwise determined by the Board of Directors of the Surviving Corporation in compliance with applicable laws, or other such additional legends as agreed upon by the holder and the Surviving Corporation. If any certificate for shares of Calpine Delaware stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it shall be a condition of issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer, that such transfer otherwise be proper and comply with applicable securities laws and that the person requesting such transfer pay to Calpine Delaware any transfer or other taxes payable by reason of issuance of such new certificate in a name other than that of the registered holder of the certificate surrendered or establish to the satisfaction of Calpine Delaware that such tax has been paid or is not payable. IV. GENERAL 4.1 Covenants of Calpine Delaware. Calpine Delaware covenants and agrees that it will, on or before the Effective Date of the Merger: (a) File any and all documents with the California Franchise Tax Board necessary for the assumption by Calpine Delaware of all of the franchise tax liabilities of Calpine California. (b) Take such other actions as may be required by the General Corporation Law of the State of California. 4.2 Further Assurances. From time to time, as and when required by Calpine Delaware or by its successors or assigns, there shall be executed and delivered on behalf of Calpine California such deeds and other instruments, and there shall be taken or caused to be taken by it such further and other actions as shall be appropriate or necessary in order to vest or perfect in or conform of record or otherwise by Calpine Delaware the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of Calpine California and otherwise to carry out the purposes of this Agreement, and the officers and directors of Calpine Delaware are fully authorized in the name and on behalf of Calpine California or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 5. 6 4.3 Abandonment. At any time before the Effective Date of the Merger, this Agreement may be terminated and the Merger may be abandoned for any reason whatsoever by the Board of Directors of either Calpine California or of Calpine Delaware, or of both, notwithstanding the approval of this Agreement by the shareholder of Calpine California. 4.4 Amendment. The Boards of Directors of the Constituent Corporations may amend this Agreement at any time prior to the filing of this Agreement (or certificate in lieu thereof) with the Secretary of State of the State of Delaware, provided that an amendment made subsequent to the adoption of this Agreement by the stockholder or shareholders of either Constituent Corporation shall not: (1) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of any class or series thereof of such Constituent Corporation, (2) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger or (3) alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any class or series of capital stock of any Constituent Corporation. 4.5 Registered Office. The registered office of the Surviving Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, and The Corporation Trust Company is the registered agent of the Surviving Corporation at such address. 4.6 Agreement. Executed copies of this Agreement will be on file at the principal place of business of the Surviving Corporation at 50 West San Fernando Street, San Jose, California 95113, and copies thereof will be furnished to any stockholder or shareholder of either Constituent Corporation, upon request and without cost. 4.7 Governing Law. This Agreement shall in all respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of Delaware and, so far as applicable, the merger provisions of the General Corporation Law of the State of California. 4.8 Counterparts. In order to facilitate the filing and recording of this Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 6. 7 IN WITNESS WHEREOF, this Agreement having first been approved by the resolutions of the Board of Directors of Calpine Corporation, a Delaware corporation, and Calpine Corporation, a California corporation, is hereby executed on behalf of each of such two corporations and attested by their respective officers thereunto duly authorized. CALPINE CORPORATION, a California corporation By:______________________________________ Peter Cartwright President and Chief Executive Officer ATTEST: _______________________________________ Ann B. Curtis Senior Vice President and Secretary CALPINE CORPORATION, a Delaware corporation (formerly Electrowatt Services Inc.) By:______________________________________ Peter Cartwright President and Chief Executive Officer ATTEST: _______________________________________ Ann B. Curtis Senior Vice President and Secretary 7. 8 EXHIBIT A Amended and Restated Certificate of Incorporation of Calpine Delaware 9 EXHIBIT B Amended and Restated Bylaws of Calpine Delaware EX-5.1 7 OPINION OF BROBECK, PHLEGER & HARRISON LLP 1 EXHIBIT 5.1 August 21, 1996 Calpine Corporation 50 West San Fernando Street San Jose, California 95113 Ladies and Gentlemen: We have acted as counsel to Calpine Corporation, a Delaware corporation (the "Company"), in connection with its registration of 5,477,820 shares of Common Stock proposed to be issued by the Company and 12,567,180 to be sold by the stockholder of the Company, plus an over-allotment of 2,706,750 shares offered by the Company (the "Shares"), all as described in the Company's Registration Statement on Form S-1 (No. 333-07497), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Registration Statement"). The Shares are to be sold pursuant to an Underwriting Agreement to be entered into between the Company and CS First Boston Corporation, Morgan Stanley & Co. Incorporated, PaineWebber Incorporated and Salomon Brothers Inc, as representatives of the several underwriters named in such Underwriting Agreement (the "Underwriting Agreement"), and a Subscription Agreement to be entered into between the Company and CS First Boston Limited, Morgan Stanley & Co. International Limited, PaineWebber International (U.K.) Limited and Salomon Brothers International Limited, as representatives of the several international managers named in such Subscription Agreement (the "Subscription Agreement"). In connection with this opinion, we have (i) examined and relied upon the Registration Statement and related Prospectus, the Company's Amended and Restated Certificate of Incorporation that the Company intends to file with the Secretary of State of the State of Delaware on or prior to consummation of the offering, the Company's Amended and Restated Bylaws and the originals or copies certified to our satisfaction of such records, documents, certificates, memorandum or other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below and (ii) assumed that the Shares will be sold by the underwriters and the managers at a price established by the Pricing Committee of the Board of Directors of the Company. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares have been duly authorized, and, when sold and issued by the Company in accordance with the terms of the Underwriting Agreement and the Subscription Agreement, will be validly issued, fully paid and nonassessable. We consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus which is part of the Registration Statement. It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect. Very truly yours, BROBECK, PHLEGER & HARRISON LLP EX-10.8.19 8 COMMITMENT LETTER BANK OF NOVA SCOTIA/CALPINE 1 Exhibit 10.8.19 [The Bank of Nova Scotia Letterhead] CONFIDENTIAL ------------ July 19, 1996 Calpine Corporation 50 West San Fernando St. San Jose, California 95113 Attention: Mr. Robert Kelly, V.P.-Finance CALPINE CORPORATION Commitment Letter --------------------- Dear Sirs: You have informed us of your desire to establish a three year revolving facility to be established concurrently with your planned initial public offering in September 1996 and to replace your existing line of credit with Credit Suisse. We understand that you are interested in obtaining $50,000,000 of commitments for the new facility (the "Revolving Facility"). The Bank of Nova Scotia ("Scotiabank") is pleased to commit (i) to provide up to $50,000,0000 of the Revolving Facility; (ii) to use reasonable commercial efforts to form a syndicate of other financial institutions (together with Scotiabank, the "Lenders") that will participate in the Revolving Facility and (iii) to act as administrative agent (the "Agent") for such syndicate of Lenders. Our commitments hereunder are subject to (a) the terms and conditions set forth herein and in the term sheet annexed hereto as Annex I (the "Term Sheet"), (b) there being no facts, events or circumstances, now existing or hereafter arising, which come to our attention and which, in our good faith determination, materially adversely affect your business, assets, financial condition, operations or prospects, in which event we reserve the right to either terminate our commitments hereunder (and thereafter have no other or further obligations hereunder or in connection with the Revolving Facility) or to propose alternative financing amounts or structures that assure adequate protection for Scotiabank, and (c) a satisfactory prescreening of prospective invitees, which will be limited to existing Calpine relationship banks, as provided by Calpine. You agree to actively assist us, in all commercially reasonable respects with the syndication of the Revolving Facility, which assistance will require, among other things, that you provide all information we deem to be reasonably necessary to successfully complete the syndication, including all of the information prepared by you or on your behalf related to your assets, financial condition, operations and prospects, as we may deem to be reasonably necessary. In addition you agree to make certain members of your management, as well as and to the best of your ability, your consultants and advisors, available during regular business hours to answer questions regarding the Revolving Facility, to review and assist in the preparation of the syndication memorandum relating to the Revolving Facility, to meet with prospective lenders and to use your best efforts to ensure that our syndication efforts benefit from your lending relationships. 2 By your signature below you hereby indemnify and hold harmless Scotiabank, each other Lender committing to participate in the Revolving Facility, and each of their affiliates, directors, officers, agents and employees as set forth in Paragraphs (ii) and (iii) of the section entitled "Miscellaneous" of the Term Sheet (which paragraphs are herein incorporated by reference), whether or not definite credit documentation (collectively, the "Credit Documentation") is ultimately executed and delivered or the transactions contemplated hereby are consummated. This commitment letter and Term Sheet is delivered to you with the understanding that neither it, the Term Sheet, the confidential fee letter dated the date hereof (the "Fee Letter"), nor the substance hereof or thereof shall be disclosed to any third party without our prior written consent, except those in confidential relationship to you, such as legal counsel or accountants, or as required by law or any court or governmental agency (and in each such event of permitted disclosure you agree promptly to inform us). This commitment letter and Term Sheet constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. THIS COMMITMENT LETTER AND THE TERM SHEET SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK. BOTH OF THE UNDERSIGNED PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF OR IN CONNECTION WITH THIS COMMITMENT LETTER, THEIR TERM SHEET AND ANY OTHER COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF EITHER OF THE UNDERSIGNED PARTIES IN CONNECTION HEREWITH OR THEREWITH. IN NO EVENT SHALL ANY PARTY TO THIS COMMITMENT LETTER BE LIABLE FOR CONSEQUENTIAL DAMAGES. If you agree with the foregoing, please sign and return to us the enclosed copy of this commitment letter and the Fee Letter no later than 5:00 p.m., San Francisco time, on July 22, 1996. Our commitment will terminate at such time unless (a) an executed copy of this commitment letter and the Fee Letter, each signed by you, has been delivered to us, and (b) you have made all payments required to be paid hereunder and thereunder; provided however, that, any term or provision hereof to the contrary notwithstanding (i) the two immediately preceding paragraphs shall survive any termination of our commitment pursuant to this paragraph, and (ii) our commitment hereunder will terminate at 5:00 p.m., San Francisco time, on September 30, 1996, unless, on or prior to such time, definitive Credit Documentation satisfactory to us and our counsel has been executed and delivered by you and us (with the date of such execution and delivery being referred to as the "Closing Date"). Very truly yours, THE BANK OF NOVA SCOTIA By: /s/ Eric Knight ----------------------------- Title: Relationship Manager Agreed to and Accepted this 20 day of July, 1996 CALPINE CORPORATION By: /s/ Robert D. Kelly ---------------------- Title: Vice President 3 ANNEX I TERM SHEET CALPINE CORPORATION - ------------------------------------------------------------------------------- (Unless otherwise defined, terms used in this Term Sheet shall have the meanings ascribed thereto in the commitment letter dated July 19, 1996 (the "Commitment Letter"), to which this Term Sheet is annexed) I. PARTIES BORROWER Calpine Corporation, which is a holding company currently organized under the laws of California but to be reorganized and incorporated under the laws of Delaware ("Calpine" or the "Borrower") prior to the Closing Date. Subject to Lenders' approval, Calpine subsidiaries can be co-borrowers under the Revolving Facility provided all obligations under the Revolving Facility are also joint and several obligations of Calpine. AGENT The Bank of Nova Scotia ("Scotiabank" or the "Agent"). LENDERS Scotiabank and a group of financial institutions (collectively, the "Lenders") as may be acceptable to Scotiabank and the Borrower. II. THE REVOLVING FACILITY REVOLVING FACILITY A maximum amount of $50,000,000 in senior DESCRIPTION financing will be provided to the Borrower, (the "Revolving Facility Commitment") under which commitments to lend will be provided to the Borrower in the form of a revolving loan facility (the "Revolving Facility"). The Revolving Facility will be made available to the Borrower pursuant to which (i) revolving credit loans ("Revolving Loans") may be borrowed, prepaid and reborrowed; and (ii) letters of credit ("Letters of Credit") may be issued, reimbursed and re-issued, in each case from time to time prior to the Commitment Termination Date; provided that no letter of credit may have a maturity that exceeds one year. LETTER OF CREDIT Outstanding Letters of Credit and related AVAILABILITY reimbursement obligations may not exceed $25,000,000 LETTER OF CREDIT ISSUING Scotiabank BANK USE OF PROCEEDS The Revolving Facility will be used by the Borrower to refinance the existing $50mm line of credit provided by Credit Suisse for working capital and other general corporate purposes, including, subject to certain conditions, acquisition bridge financing. COMMITMENT Three years from the Closing Date of the TERMINATION DATE Revolving Facility (the "Commitment Termination Date"). The Commitment Termination Data will reduce to two years from the Closing Date if Calpine receives less than $90mm in net proceeds from the initial public offering. CLOSING DATE The date on which: i) all required documentation related to the Revolving Facility is duly executed to the satisfaction of the Borrower and Lenders; and ii) all Conditions Precedent to closing have been met (the "Closing Date"). The Closing Date is expected to occur on or before September 15, 1996, but in any event no later than September 30, 1996. SECURITY Unsecured. To the extent that the approved subsidiary borrowers utilize the Revolving Facility as acquisition financing for power project, equipment and similar purposes, the Lenders will receive a first priority security interest (if available) in all acquired assets including the stock of any entity acquired with Revolving Loans and pledge of stock of the intermediate holding company created by the Borrower for such acquisition. The pledged security will be released upon repayment in full of all Revolving Loans used to fund the acquisition. - 1 - 4 INTEREST RATES At the Borrower's option, the Revolving Loans will bear interest at either Scotiabank's Alternative Base Rate ("Base Rate Loans") or Scotiabank's reserve adjusted LIBO rate ("LIBO Rate Loans") plus the interest margins set forth in Appendix I. INTEREST PAYMENT DATES Interest periods for LIBO rate loans shall be, at the Borrower's option, one, three or six months. Interest on LIBO rate loans shall be payable on the last business day of the applicable interest period for such loans or, if earlier, the 90th day following the commencement of such interest period. Interest on Base Rate Loans shall be payable quarterly in arrears. LETTER OF CREDIT A fee equivalent to the amount of the Applicable FEES AND PAYMENT LIBO Rate Margin in Appendix I will accrue on DATES the daily average undrawn portion of all outstanding Letters of Credit, payable quarterly in advance. LETTER OF CREDIT ISSUING 15 bps per annum on the amount of the Letter of FEE Credit, payable quarterly in advance. COMMITMENT FEE Commencing on the Closing Date, a non-refundable fee in the applicable amount set forth in Appendix I per annum will accrue on the daily average undrawn portion of the committed amount of the Revolving Facility, payable quarterly in arrears and on the Commitment Termination Date of the Revolving Facility. AGENT'S FEES As defined in the confidential Fee Letter dated as of July 16, 1996 OPTIONAL PREPAYMENTS Outstanding Loans are voluntarily payable without penalty; provided, however, that LIBO rate breakage costs, if any, shall be for the account of Borrower. MANDATORY PREPAYMENTS Customary for the type of transaction proposed and others to be reasonably specified by Scotiabank. REPRESENTATIONS Customary for the type of transaction proposed AND WARRANTIES and others to be reasonably specified by Scotiabank. CONDITIONS PRECEDENT Customary for the type of transaction proposed TO CLOSING and others to be reasonably specified by Scotiabank, including, without limitation, the following: i) Execution and delivery of satisfactory credit, and other related documentation embodying the structure, terms and conditions contained herein and other terms and conditions as may be negotiated. ii) There shall not have occurred any material adverse change in the status of the Borrower or any of its subsidiaries (including projects) since Dec. 31, 1995. iii) Receipt of closing certificates, opinions of counsel, etc. customary for the type of transaction proposed. iv) Cancellation of the existing $50mm line of credit provided by Credit Suisse. CONDITIONS PRECEDENT Customary for the type of transaction proposed TO INITIAL FUNDING and others to be reasonably specified by Scotiabank, including without limitation, the following. i) Borrower shall have completed an initial public offering and received net proceeds in the amount of at least $75 million. ii) There shall not have occurred any material adverse change in the status of the Borrower or any of its subsidiaries (including the power projects) since Dec. 31, 1995. - 2 - 5 CONDITION PRECEDENT A CFCR (as defined in Financial Covenants, FOR EACH NEW DRAWING paragraph (iv)) of at least 1.7x for the most recent four quarters will be required for each new drawing (excluding rollovers & letter of credit renewals of existing outstandings or issuances) under the Revolving Facility. New drawing availability under the Revolving Facility will be granted when the CFCR returns to 1.7x or higher based on a monthly test calculated on a rolling twelve-month basis. AFFIRMATIVE COVENANTS Customary for the type of transaction proposed and others to be reasonably specified by Scotiabank. NEGATIVE COVENANTS Customary for the type of transaction proposed and others to be reasonably specified by Scotiabank, including, without limitation, the following: i) Restriction on mergers, consolidations and similar combinations, including, but not limited to, Subsidiaries having a direct interest in a power generating facility may not merge with Subsidiaries that have a direct or indirect interest in any other power generating facility or other business; ii) Limitation on the incurrence of liens, guarantees, commitments to invest or other encumbrances. iii) Restriction on the making of dividends or similar distributions; iv) Restrictions on the incurrence of additional debt and contingent liabilities; v) Restrictions on the sale of assets or similar transfers. vi) Restrictions on additional investments, including, but not limited to, restrictions on the Borrower's and subsidiaries' investments in unrelated businesses and restrictions on investments in subsidiaries that are in default. FINANCIAL COVENANTS Customary for the type of transaction proposed and others to be reasonably specified by Scotiabank, including without limitation, the following: i) Maintenance of a minimum tangible net worth ("TNW") of $150 million. The minimum TNW will increase quarterly by an amount equal to 50% of net income for the previous quarter plus 100% of the proceeds of net equity issuance (post-IPO). ii) Maintenance of a minimum consolidated interest coverage ratio (Consolidated EBITDA/Consolidated Interest Expense) of 1.75 to 1, calculated quarterly and based on the previous four quarters. iii) Maintenance of a maximum leverage ratio (Total Debt (incl. contingent liabilities)/Total Debt plus TNW) of 85%. iv) Maintenance of a minimum consolidating Calpine Corporation Cash Flow Coverage Ratio ("CFCR") of 1.6 to 1. The CFCR is defined as Calpine's consolidating Cash Flow Available for Debt Service (to be defined) divided by Calpine's consolidating Interest Expense. The CFCR will be calculated quarterly based on the previous four quarters. v) Other financial covenants as the Agent may reasonably request. EVENTS OF DEFAULT Customary for the type of transaction proposed and others to be reasonably specified by Scotiabank and its legal counsel, including, without limitation, the following: i) Cross-default to all other indebtedness (including the Sr. Notes) of the Borrower and subsidiaries individually or in the aggregate totalling $2 million or more. ii) Change of ownership or control (to be defined). - 3 - 6 MISCELLANEOUS Customary provisions to be included, together with others to be reasonably specified by Scotiabank including, without limitation, the following: i) The Borrower will undertake all reasonable efforts to assist the Agent in the successful syndication of the Revolving Facility. ii) Customary indemnification of Scotiabank and each of the Lenders and each of their respective affiliates, directors, officers, agents and employees (collectively, the "Indemnified Parties") from and against any losses, claims, damages, liabilities or other expenses which arise out of or in connection with the Revolving Facility, including those which may arise from or in connection with any action, suit or proceeding (whether or not any Indemnified Party is a party or is subject thereto). iii) The Borrower will pay all of Scotiabank's reasonable fees and other out-of-pocket expenses (including the reasonable fees and out-of-pocket expenses of Scotiabank's legal counsel, Mayer, Brown & Platt) arising out of or in connection with the Revolving Facility. iv) Customary indemnity and capital adequacy, increased cost, and tax provisions. v) The Lenders will be permitted to assign and participate Loans, notes, Letters of Credit and commitments with consent of Borrower, such consent not to be unreasonably withheld. vi) Waiver or jury trial. vii) New York governing law. This Term Sheet is intended as an outline only and does not purport to summarize all the conditions, covenants, representations, warranties and other provisions which would be contained in the definitive Credit Documentation. Scotiabank's commitment will be subject to negotiation and execution of definitive Credit Documentation in form and substance satisfactory to Scotiabank and its Counsel. - 4 - EX-10.9.2 9 1996 STOCK INCENTIVE PLAN 1 EXHIBIT 10.9.2 CALPINE CORPORATION 1996 STOCK INCENTIVE PLAN ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1996 Stock Incentive Plan is intended to promote the interests of Calpine Corporation, a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into five separate equity programs: - the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, - the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants, - the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), - the Automatic Option Grant Program under which eligible non- employee Board members shall automatically receive option grants at periodic intervals to purchase shares of Common Stock, and - the Director Fee Option Grant Program under which non- employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special option grant. 2 B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. Prior to the Section 12 Registration Date, the Discretionary Option Grant and Stock Issuance Programs shall be administered by the Board. Beginning with the Section 12 Registration Date, the Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and shall have sole and exclusive authority to administer the Salary Investment Option Grant Program with respect to all eligible individuals. B. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. The members of the Secondary Committee may be Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary). C. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. D. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs under its jurisdiction or any option or stock issuance thereunder. E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary 2. 3 Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. F. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of that program, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs. IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares. D. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. E. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals serving as non-employee 3. 4 Board members on the Underwriting Date who have not previously received a stock option grant from the Corporation, (ii) those individuals who first become non-employee Board members after the Underwriting Date, whether through appointment by the Board or election by the Corporation's stockholders, and (iii) those individuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non-employee Board member. F. All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 4,041,858 shares. Such authorized share reserve is comprised of (i) the number of shares which remain available for issuance, as of the Plan Effective Date, under the Predecessor Plan as last approved by the Corporation's stockholders, including the shares subject to the outstanding options to be incorporated into the Plan and the additional shares which would otherwise be available for future grant, plus (ii) an additional increase of 1,444,935 shares authorized by the Board but subject to stockholder approval prior to the Section 12 Registration Date. B. The number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first trading day of each calendar year during the term of the Plan, beginning with the 1997 calendar year, by an amount equal to one percent (1%) of the shares of Common Stock outstanding on the last trading day of the immediately preceding calendar year. No Incentive Options may be granted on the basis of the additional shares of Common Stock resulting from such annual increases. C. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year, beginning with the 1996 calendar year. D. Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plan) shall be available for subsequent issuance under the Plan to the extent those options expire or terminate for any reason prior to exercise in full. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation, at the original issue price paid per share, 4. 5 pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. E. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under this Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan and (v) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 5. 6 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Six and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by 6. 7 the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or 7. 8 (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. 8. 9 B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such 9. 10 Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year. E. The Plan Administrator shall have full power and authority to grant options under the Discretionary Option Grant Program which will automatically accelerate in the event the Optionee's Service subsequently terminates by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed or replaced and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full. F. The Plan Administrator shall have full power and authority to grant options under the Discretionary Option Grant Program which will automatically accelerate in the event the Optionee's Service subsequently terminates by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control. Each option so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full. 10. 11 G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. H. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option 11. 12 surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Common Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested under each surrendered option (or surrendered portion thereof) over (B) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date. (iii) Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. (iv) The balance of the option (if any) shall remaining outstanding and exercisable in accordance with the documents evidencing such option. 12. 13 ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM I. OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for those calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete discretion to determine whether to approve the filed authorization in whole or in part. To the extent the Primary Committee approves the authorization, the individual who filed that authorization shall be granted an option under the Salary Investment Grant Program on or before the last trading day in January for the calendar year for which the salary reduction is to be in effect. All grants under the Salary Investment Option Grant Program shall be at the sole discretion of the Primary Committee. II. OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): 13. 14 X = A / (B x 66-2/3%), where X is the number of option shares, A is the dollar amount of the approved reduction in the Optionee's base salary for the calendar year, and B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)- year period measured from the date of the Optionee's cessation of Service. However, the option shall, immediately upon the Optionee's cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable 14. 15 for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully- vested shares of Common Stock. The option shall remain so exercisable until the earlier or (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)- year period measured from the date of the Optionee's cessation of Service. C. The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 15. 16 ARTICLE FOUR STOCK ISSUANCE PROGRAM I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. PURCHASE PRICE. 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. VESTING PROVISIONS. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, 16. 17 (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. 17. 18 II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the Corporation's outstanding repurchase/cancellation rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase/cancellation rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase/cancellation rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase/cancellation rights are assigned to the successor corporation (or parent thereof). C. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase/cancellation rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 18. 19 ARTICLE FIVE AUTOMATIC OPTION GRANT PROGRAM I. OPTION TERMS A. GRANT DATES. Option grants shall be made on the dates specified below: 1. Each individual serving as a non-employee Board member on the Underwriting Date shall automatically be granted at that time a Non-Statutory Option to purchase 10,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary and has not previously received a stock option grant from the Corporation. 2. Each individual who is first elected or appointed as a non- employee Board member at any time after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 10,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary. 3. On the date of each Annual Stockholders Meeting held after the Underwriting Date, each individual who is to continue to serve as an Eligible Director, whether or not that individual is standing for re-election to the Board at that particular Annual Meeting, shall automatically be granted a Non-Statutory Option to purchase 1,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 1,000- share option grants any one Eligible Director may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who have otherwise received a stock option grant from the Corporation prior to the Underwriting Date shall be eligible to receive one or more such annual option grants over their period of continued Board service. B. EXERCISE PRICE. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 19. 20 C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date. D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each initial 10,000-share grant shall vest, and the Corporation's repurchase right shall lapse, in a series of four (4) successive equal annual installments upon the Optionee's completion of each year of Board service over the four (4)-year period measured from the option grant date. Each annual 1,000-share grant shall vest, and the Corporation's repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the automatic grant date. E. TERMINATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully- vested shares of Common Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be 20. 21 outstanding to the extent the option is not otherwise at that time exercisable for vested shares. II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE- OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. 21. 22 E. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 22. 23 ARTICLE SIX DIRECTOR FEE OPTION GRANT PROGRAM I. OPTION GRANTS Each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to the first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable. II. OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, A is the portion of the annual retainer fee subject to the non- employee Board member's election, and 23. 24 B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable for fifty percent (50%) of the option shares upon the Optionee's completion of six (6) months of Board service in the calendar year for which his or her election under this Director Fee Option Grant Program is in effect, and the balance of the option shares shall become exercisable in a series of six (6) successive equal monthly installments upon the Optionee's completion of each additional month of Board service during that calendar year. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)- year period measured from the date of such cessation of Board service. Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Board service. 24. 25 III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully- vested shares of Common Stock. The option shall remain so exercisable until the earlier or (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)- year period measured from the date of the Optionee's cessation of Service. C. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 25. 26 ARTICLE SEVEN MISCELLANEOUS I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non- Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 26. 27 III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective immediately upon the Plan Effective Date. However, the Salary Investment Option Grant Program shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant or Automatic Option Grant Program at any time on or after the Plan Effective Date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants or direct stock issuances shall be made under the Predecessor Plan after the Section 12 Registration Date. All options outstanding under the Predecessor Plan on the Section 12 Registration Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions. D. The Plan shall terminate upon the earliest of (i) July 16, 2006, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such plan termination, all outstanding option grants and unvested stock issuances shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations. 27. 28 B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 28. 29 APPENDIX The following definitions shall be in effect under the Plan: A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under the Plan. B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATE TRANSACTION shall mean either of the following stockholder- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or A-1. 30 (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean Calpine Corporation, a Delaware corporation, and its successors. H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option grant in effect for non-employee Board members under Article Six of the Plan. I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan. J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One. K. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. L. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question, as such price is reported on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. A-2. 31 (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement. (iv) For purposes of any option grants made prior to the Underwriting Date, the Fair Market Value shall be determined by the Plan Administrator, after taking into account such factors as it deems appropriate. N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. O. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. P. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the A-3. 32 dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. T. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program. U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. X. PLAN shall mean the Corporation's 1996 Stock Incentive Plan, as set forth in this document. Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. Z. PLAN EFFECTIVE DATE shall mean July 17, 1996, the date on which the Plan was adopted by the Board. A-4. 33 AA. PREDECESSOR PLAN shall mean the Corporation's pre-existing Stock Option Plan in effect immediately prior to the Plan Effective Date hereunder. AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program with respect to all eligible individuals. AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment grant program in effect under the Plan. AD. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common Stock is first registered under Section 12(g) of Section 16 of the 1934 Act. AF. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. AG. SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan. AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A-5. 34 AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. AM. TAXES shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). AO. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. AP. UNDERWRITING DATE shall mean the date on which the Underwriting Agreement is executed and priced in connection with an initial public offering of the Common Stock. A-6. 35 CALPINE CORPORATION NOTICE OF GRANT OF STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of Calpine Corporation (the "Corporation"): Optionee: ----------------------------------------------- Grant Date: --------------------------------------------- Vesting Commencement Date: ------------------------------- Exercise Price: $ per share ------------------------------- Number of Option Shares: shares --------------------------- Expiration Date: ----------------------------------------- Type of Option: Incentive Stock Option ----- Non-Statutory Stock Option ----- Exercise Schedule: The Option shall become exercisable with respect to twenty five percent (25%) of the Option Shares upon Optionee's completion of one (1) year of Service measured from the Vesting Commencement Date and shall become exercisable for the balance of the Option Shares in thirty-six (36) successive equal monthly installments upon Optionee's completion of each additional month of Service over the thirty-six (36) month period measured from the first anniversary of the Vesting Commencement Date. In no event shall the Option become exercisable for any additional Option Shares after Optionee's cessation of Service. Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the Calpine Corporation 1996 Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation's principal offices. 36 No Employment or Service Contract. Nothing in this Notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason, with or without cause. Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Stock Option Agreement. DATED: , 199 ------------------------------------- -- CALPINE CORPORATION By: ----------------------- Title: ----------------------- OPTIONEE ------------------- Address: ------------------- ATTACHMENTS EXHIBIT A - STOCK OPTION AGREEMENT EXHIBIT B - PLAN SUMMARY AND PROSPECTUS 2. 37 EXHIBIT A STOCK OPTION AGREEMENT 38 EXHIBIT B PLAN SUMMARY AND PROSPECTUS 39 CALPINE CORPORATION STOCK OPTION AGREEMENT RECITALS A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation's grant of an option to Optionee. C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6. 3. LIMITED TRANSFERABILITY. If this option is designated an Incentive Option in the Grant Notice, then this option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. However, if this option is designated a Non-Statutory Option in the Grant Notice, then this option may, in connection with the Optionee's estate plan, be assigned in whole or in part during Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established for the exclusive benefit of one or more such family members. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. 40 4. DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6. 5. CESSATION OF SERVICE. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable: (i) Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability or Misconduct) while this option is outstanding, then Optionee shall have a period of three (3) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. (ii) If Optionee dies while this option is outstanding, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of descent and distribution shall have the right to exercise this option. Such right shall lapse, and this option shall cease to be outstanding, upon the earlier of (A) the expiration of the twelve (12)- month period measured from the date of Optionee's death or (B) the Expiration Date. (iii) Should Optionee cease Service by reason of Permanent Disability while this option is outstanding, then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date. (iv) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee's cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. However, this option shall, immediately upon Optionee's cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares in which Optionee is not otherwise at that time vested or for which this option is not otherwise at that time exercisable. 2. 41 (v) Should Optionee's Service be terminated for Misconduct, then this option shall terminate immediately and cease to remain outstanding. 6. SPECIAL ACCELERATION OF OPTION. (a) This option, to the extent outstanding at the time of a Corporate Transaction but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for any or all of those Option Shares as fully-vested shares of Common Stock. No such acceleration of this option, however, shall occur if and to the extent: (i) this option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof) or (ii) this option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested Option Shares at the time of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such shares) and provides for subsequent pay-out in accordance with the same option exercise/vesting schedule set forth in the Grant Notice. The determination of option comparability under clause (i) shall be made by the Plan Administrator, and such determination shall be final, binding and conclusive. (b) Immediately following the Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction. (c) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. (d) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 3. 42 7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 8. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares. 9. MANNER OF EXERCISING OPTION. (a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions: (i) Execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is exercised. (ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms: (A) cash or check made payable to the Corporation; (B) a promissory note payable to the Corporation, but only to the extent authorized by the Plan Administrator in accordance with Paragraph 13; (C) shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or (D) to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable written instructions (I) to a Corporation-designated brokerage firm to effect the immediate 4. 43 sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise. (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option. (iv) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. (b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. (c) In no event may this option be exercised for any fractional shares. 10. COMPLIANCE WITH LAWS AND REGULATIONS. (a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. (b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the 5. 44 Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 12. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 13. FINANCING. The Plan Administrator may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a full-recourse promissory note payable to the Corporation. The terms of any such promissory note (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. 14. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 15. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 16. EXCESS SHARES. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without stockholder approval be issued under the Plan, then this option shall be void with respect to those excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan. 6. 45 17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event this option is designated an Incentive Option in the Grant Notice, the following terms and conditions shall also apply to the grant: - This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares: (A) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (B) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Permanent Disability. - No installment under this option shall qualify for favorable tax treatment as an Incentive Option if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which such installment first becomes exercisable hereunder would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or any other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year, this option shall nevertheless become exercisable for the excess shares in such calendar year as a Non-Statutory Option. - Should the exercisability of this option be accelerated upon a Corporate Transaction, then this option shall qualify for favorable tax treatment as an Incentive Option only to the extent the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option first becomes exercisable in the calendar year in which the Corporate Transaction occurs does not, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should the applicable One Hundred Thousand Dollar ($100,000) limitation be exceeded in the calendar year of such Corporate Transaction, the option may nevertheless be exercised for the excess shares in such calendar year as a Non-Statutory Option. 7. 46 - Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. 18. LEAVE OF ABSENCE. The following provisions shall apply upon the Optionee's commencement of an authorized leave of absence: (a) The exercise schedule in effect under the Grant Notice shall be frozen as of the first day of the authorized leave, and this option shall not become exercisable for any additional installments of the Option Shares during the period Optionee remains on such leave. (b) Should Optionee resume active Employee status within sixty (60) days after the start date of the authorized leave, Optionee shall, for purposes of the exercise schedule set forth in the Grant Notice, receive Service credit for the entire period of such leave. If Optionee does not resume active Employee status within such sixty (60)-day period, then no Service credit shall be given for the period of such leave. (c) If the option is designated as an Incentive Option in the Grant Notice, then the following additional provision shall apply: - If the leave of absence continues for more than three (3) months, then this option shall automatically convert to a Non-Statutory Option under the Federal tax laws at the end of such three (3)-month period, unless the Optionee's reemployment rights are guaranteed by statute or by written agreement. Following any such conversion of the option, all subsequent exercises of such option, whether effected before or after Optionee's return to active Employee status, shall result in an immediate taxable event, and the Corporation shall be required to collect from Optionee the Federal, state and local income and employment withholding taxes applicable to such exercise. (d) In no event shall this option become exercisable for any additional Option Shares or otherwise remain outstanding if Optionee does not resume Employee status prior to the Expiration Date of the option term. 8. 47 EXHIBIT I NOTICE OF EXERCISE I hereby notify Calpine Corporation (the "Corporation") that I elect to purchase shares of the Corporation's Common Stock (the ---------- "Purchased Shares") at the option exercise price of $ per share (the ----- "Exercise Price") pursuant to that certain option (the "Option") granted to me under the Corporation's 1996 Stock Incentive Plan on , 199 . ------------ Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price. , 199 - ---------------- -- Date --------------------------------- Optionee Address: --------------------------------- Print name in exact manner it is to appear on the --------------------------------- stock certificate: --------------------------------- Address to which certificate is to be sent, if different from address above: --------------------------------- --------------------------------- --------------------------------- Social Security Number: --------------------------------- Employee Number: --------------------------------- 48 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Option Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. CODE shall mean the Internal Revenue Code of 1986, as amended. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following stockholder- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean Calpine Corporation, a Delaware corporation. G. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. H. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement. I. EXERCISE PRICE shall mean the exercise price per share as specified in the Grant Notice. J. EXPIRATION DATE shall mean the date on which the option expires as specified in the Grant Notice. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: A-1. 49 (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. L. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice. M. GRANT NOTICE shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. N. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. O. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other individual in the Service of the Corporation (or any Parent or Subsidiary). P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. A-2. 50 Q. NOTICE OF EXERCISE shall mean the notice of exercise in the form attached hereto as Exhibit I. R. OPTION SHARES shall mean the number of shares of Common Stock subject to the option as specified in the Grant Notice. S. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice. T. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. U. PERMANENT DISABILITY shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. V. PLAN shall mean the Corporation's 1996 Stock Incentive Plan. W. PLAN ADMINISTRATOR shall mean either the Board or a committee of the Board acting in its administrative capacity under the Plan. X. SERVICE shall mean the Optionee's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor. Y. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange. Z. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A-3. 51 ADDENDUM TO STOCK OPTION AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement dated 2~ (the "Option Agreement") by and between Calpine Corporation (the "Corporation") and 1~ ("Optionee") evidencing the stock option (the "Option") granted on such date to Optionee under the terms of the Corporation's 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement. INVOLUNTARY TERMINATION FOLLOWING CORPORATE TRANSACTION 1. To the extent the Option is, in connection with a Corporate Transaction, to be assumed or replaced with a comparable option in accordance with Paragraph 6 of the Option Agreement, the Option shall not accelerate upon the occurrence of that Corporate Transaction, and the Option shall accordingly continue, over Optionee's period of Service after the Corporate Transaction, to become exercisable for the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee's Service within twelve (12) months following such Corporate Transaction, the Option (or any replacement grant), to the extent outstanding at the time but not otherwise fully exercisable, shall automatically accelerate so that the Option shall become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares. The Option shall remain so exercisable until the earlier of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the date of the Involuntary Termination. 2. For purposes of this Addendum, an INVOLUNTARY TERMINATION shall mean the termination of Optionee's Service by reason of: (i) Optionee's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) Optionee's voluntary resignation following (A) a change in Optionee's position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee's level of responsibility, (B) a reduction in Optionee's level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or 52 (C) a relocation of Optionee's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee's consent. 3. The provisions of Paragraph 1 of this Addendum shall govern the period for which the Option is to remain exercisable following the Involuntary Termination of Optionee's Service within twelve (12) months after the Corporate Transaction and shall supersede any provisions to the contrary in Paragraph 5 of the Option Agreement. IN WITNESS WHEREOF, Calpine Corporation has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below. CALPINE CORPORATION By: --------------------------------- Title: --------------------------------- -------------------------------------- 1~, OPTIONEE EFFECTIVE DATE: , 199 ------------------ -- 2. 53 ADDENDUM TO STOCK OPTION AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement dated 2~ (the "Option Agreement") by and between Calpine Corporation (the "Corporation") and 1~ ("Optionee") evidencing the stock option (the "Option") granted on such date to Optionee under the terms of the Corporation's 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement. INVOLUNTARY TERMINATION FOLLOWING CHANGE IN CONTROL 1. The Option shall not accelerate upon the occurrence of a Change in Control, and the Option shall, over Optionee's period of Service following such Change in Control, continue to become exercisable for the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee's Service within twelve (12) months following the Change in Control, the Option, to the extent outstanding at the time but not otherwise fully exercisable, shall automatically accelerate so that the Option shall become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares. The Option shall remain so exercisable until the earlier of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the date of the Involuntary Termination. 2. For purposes of this Addendum, a CHANGE IN CONTROL shall be deemed to occur in the event of a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be 54 comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. 3. For purposes of this Addendum, an INVOLUNTARY TERMINATION shall mean the termination of Optionee's Service by reason of: (i) Optionee's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) Optionee's voluntary resignation following (A) a change in Optionee's position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee's level of responsibility, (B) a reduction in Optionee's level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Optionee's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee's consent. 4. The provisions of Paragraph 1 of this Addendum shall govern the period for which the Option is to remain exercisable following the Involuntary Termination of Optionee's Service within twelve (12) months after the Change in Control and shall supersede any provisions to the contrary in Paragraph 5 of the Option Agreement. IN WITNESS WHEREOF, Calpine Corporation has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below. CALPINE CORPORATION By: ------------------------------- Title: ------------------------------- -------------------------------------- 1~, OPTIONEE EFFECTIVE DATE: , 199 ----------------------------- -- 2. 55 ADDENDUM TO STOCK OPTION AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement dated 2~ (the "Option Agreement") by and between Calpine Corporation (the "Corporation") and 1~ ("Optionee") evidencing the stock option (the "Option") granted on such date to Optionee under the terms of the Corporation's 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement. LIMITED STOCK APPRECIATION RIGHT 1. Optionee is hereby granted a limited stock appreciation right exercisable upon the following terms and conditions: - Optionee shall have the unconditional right (exercisable at any time during the thirty (30)-day period immediately following a Hostile Take-Over) to surrender the Option to the Corporation, to the extent the Option is at the time exercisable for vested shares of Common Stock. In return for the surrendered Option, Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested under the surrendered Option (or surrendered portion) over (B) the aggregate Exercise Price payable for such shares. - To exercise this limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Corporation with written notice of the option surrender in which there is specified the number of Option Shares as to which the Option is being surrendered. Such notice must be accompanied by the return of Optionee's copy of the Option Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) business days following such delivery date, and neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. Upon receipt of such cash distribution, the Option shall be cancelled with respect to the Option Shares for which the Option has been surrendered, and Optionee shall cease to have any further right to acquire those Option Shares under the Option Agreement. The Option shall, however, remain outstanding and exercisable for the balance of the Option Shares (if any) in accordance with the terms of the Option Agreement, and the Corporation shall issue a new stock option agreement (substantially in the same form of the surrendered Option Agreement) for those remaining Option Shares. 56 - In no event may this limited stock appreciation right be exercised when there is not a positive spread between the Fair Market Value of the Option Shares and the aggregate Exercise Price payable for such shares. This limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the option term and may not be assigned or transferred by Optionee. 2. For purposes of this Addendum, the following definitions shall be in effect: - A HOSTILE TAKE-OVER shall be deemed to occur in the event any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. - The TAKE-OVER PRICE per share shall be deemed to be equal to the greater of (A) the Fair Market Value per Option Share on the option surrender date or (B) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over. However, if the surrendered Option is designated as an Incentive Option in the Grant Notice, then the Take-Over Price shall not exceed the clause (A) price per share. IN WITNESS WHEREOF, Calpine Corporation has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below. CALPINE CORPORATION By: ---------------------------------- Title: ---------------------------------- ---------------------------------- 1~, OPTIONEE EFFECTIVE DATE: , 199 --------------------- -- 2. 57 CALPINE CORPORATION STOCK ISSUANCE AGREEMENT AGREEMENT made this ____ day of ___________, 19__, by and between Calpine Corporation, a Delaware corporation, and , a Participant in the Corporation's 1996 Stock Incentive Plan. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix. A. PURCHASE OF SHARES 1. PURCHASE. Participant hereby purchases __________ shares of Common Stock (the "Purchased Shares") pursuant to the provisions of the Stock Issuance Program at the purchase price of $______ per share (the "Purchase Price"). 2. PAYMENT. Concurrently with the delivery of this Agreement to the Corporation, Participant shall pay the Purchase Price for the Purchased Shares in cash or check payable to the Corporation and shall deliver a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares. 3. STOCKHOLDER RIGHTS. Until such time as the Corporation exercises the Repurchase Right, Participant (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation rights) with respect to the Purchased Shares, subject, however, to the transfer restrictions of this Agreement. 4. COMPLIANCE WITH LAW. Under no circumstances shall shares of Common Stock or other assets be issued or delivered to Participant pursuant to the provisions of this Agreement unless, in the opinion of counsel for the Corporation or its successors, there shall have been compliance with all applicable requirements of Federal and state securities laws, all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is at the time listed for trading and all other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. B. TRANSFER RESTRICTIONS 1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer, Participant shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Repurchase Right. 58 2. RESTRICTIVE LEGEND. The stock certificate for the Purchased Shares shall be endorsed with the following restrictive legend: "The shares represented by this certificate are unvested and subject to certain repurchase rights granted to the Corporation and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated __________, 199__ between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation's principal corporate offices." 3. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to the Repurchase Right to the same extent such shares would be so subject if retained by Participant. C. REPURCHASE RIGHT 1. GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the ninety (90)-day period following the date Participant ceases for any reason to remain in Service, to repurchase at the Purchase Price all or any portion of the Purchased Shares in which Participant is not, at the time of his or her cessation of Service, vested in accordance with the Vesting Schedule (such shares to be hereinafter referred to as the "Unvested Shares"). 2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to each Owner of the Unvested Shares prior to the expiration of the ninety (90)-day exercise period. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of such notice. The certificates representing the Unvested Shares to be repurchased shall be delivered to the Corporation prior to the close of business on the date specified for the repurchase. Concurrently with the receipt of such stock certificates, the Corporation shall pay to Owner, in cash or cash equivalent (including the cancellation of any purchase-money indebtedness), an amount equal to the Purchase Price previously paid for the Unvested Shares to be repurchased from Owner. 3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under Paragraph C.2. In addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and all Purchased Shares in which Participant vests in accordance with the following Vesting Schedule: 2. 59 (i) Upon Participant's completion of one (1) year of Service measured from ______________, 199__, Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, twenty-five percent (25%) of the Purchased Shares. (ii) Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, the remaining Purchased Shares in a series of thirty six (36) successive equal monthly installments upon Participant's completion of each additional month of Service over the thirty-six (36)-month period measured from the initial vesting date under subparagraph (i) above. 4. RECAPITALIZATION. Any new, substituted or additional securities or other property (including cash paid other than as a regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of securities subject to this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such Recapitalization upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. 5. CORPORATE TRANSACTION. (a) Immediately prior to the consummation of any Corporate Transaction, the Repurchase Right shall automatically lapse in its entirety and the Purchased Shares shall vest in full, except to the extent the Repurchase Right is to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction. (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction, such right shall apply to the new capital stock or other property (including any cash payments) received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. D. SPECIAL TAX ELECTION 1. SECTION 83(b) ELECTION . Under Code Section 83, the excess of the fair market value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Purchase Price paid for such shares will be reportable as ordinary 3. 60 income on the lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. Participant may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. Even if the fair market value of the Purchased Shares on the date of this Agreement equals the Purchase Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO. PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE FORFEITURE RESTRICTIONS LAPSE. 2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF. E. GENERAL PROVISIONS 1. ASSIGNMENT. The Corporation may assign the Repurchase Right to any person or entity selected by the Board, including (without limitation) one or more stockholders of the Corporation. 2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Participant) or of Participant, which rights are hereby expressly reserved by each, to terminate Participant's Service at any time for any reason, with or without cause. 3. NOTICES. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Agreement. 4. NO WAIVER. The failure of the Corporation in any instance to exercise the Repurchase Right shall not constitute a waiver of any other repurchase rights that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and Participant. No waiver of any breach or condition of this Agreement 4. 61 shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 5. CANCELLATION OF SHARES. If the Corporation shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. F. MISCELLANEOUS PROVISIONS 1. PARTICIPANT UNDERTAKING. Participant hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Participant or the Purchased Shares pursuant to the provisions of this Agreement. 2. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the terms of the Plan. 3. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to that State's conflict-of-laws rules. 4. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 5. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Participant, Participant's assigns and the legal representatives, heirs and legatees of Participant's estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. CALPINE CORPORATION 5. 62 By: ------------------------------- Title: ------------------------------- Address: ------------------------------- ------------------------------- ------------------------------- PARTICIPANT Address: ------------------------------- ------------------------------- 6. 63 SPOUSAL ACKNOWLEDGMENT The undersigned spouse of the Participant has read and hereby approves the foregoing Stock Issuance Agreement. In consideration of the Corporation's granting the Participant the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms of such Agreement, including (without limitation) the right of the Corporation (or its assigns) to purchase any Purchased Shares in which the Participant is not vested at the time of his or her termination of Service. ------------------------------------------ PARTICIPANT'S SPOUSE Address: --------------------------------- --------------------------------- 7. 64 EXHIBIT I ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED ______________ hereby sell(s), assign(s) and transfer(s) unto Calpine Corporation (the "Corporation"), ______________ ( ______ ) shares of the Common Stock of the Corporation standing in his or her name on the books of the Corporation represented by Certificate No. ______________ herewith and do(es) hereby irrevocably constitute and appoint ______________ Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ______________ , 199__. Signature ___________________________________ INSTRUCTION: Please do not fill in any blanks other than the signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Corporation to exercise the Repurchase Right without requiring additional signatures on the part of Participant. 65 EXHIBIT II SECTION 83(B) TAX ELECTION This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. (1) The taxpayer who performed the services is: Name: Address: Taxpayer Ident. No.: (2) The property with respect to which the election is being made is shares of the common stock of Calpine Corporation (3) The property was issued on , 199 . (4) The taxable year in which the election is being made is the calendar year 199 . (5) The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer's employment with the issuer is terminated. The issuer's repurchase right lapses in a series of annual and monthly installments over a four (4)-year period ending on . (6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $ per share. (7) The amount paid for such property is $ per share. (8) A copy of this statement was furnished to Calpine Corporation for whom taxpayer rendered the services underlying the transfer of property. (9) This statement is executed on , 199 . - ------------------------- --------------------------------- Spouse (if any) Taxpayer This election must be filed with the Internal Revenue Service Center with which taxpayer files his or her Federal income tax returns and must be made within thirty (30) days after the execution date of the Stock Issuance Agreement. This filing should be made by registered or certified mail, return receipt requested. Participant must retain two (2) copies of the completed form for filing with his or her Federal and state tax returns for the current tax year and an additional copy for his or her records. 66 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Issuance Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. CODE shall mean the Internal Revenue Code of 1986, as amended. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean Calpine Corporation, a Delaware corporation. G. OWNER shall mean Participant and all subsequent holders of the Purchased Shares who derive their chain of ownership through a Permitted Transfer from Participant. H. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. I. PARTICIPANT shall mean the person to whom the Purchased Shares are issued under the Stock Issuance Program. J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Participant obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to A-1. 67 Participant's will or the laws of intestate succession following Participant's death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Participant in connection with the acquisition of the Purchased Shares. K. PLAN shall mean the Corporation's 1996 Stock Incentive Plan. L. PLAN ADMINISTRATOR shall mean either the Board or a committee of the Board acting in its administrative capacity under the Plan. M. PURCHASE PRICE shall have the meaning assigned to such term in Paragraph A.1. N. PURCHASED SHARES shall have the meaning assigned to such term in Paragraph A.1. O. RECAPITALIZATION shall mean any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Corporation's outstanding Common Stock as a class without the Corporation's receipt of consideration. P. REORGANIZATION shall mean any of the following transactions: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) a sale, transfer or other disposition of all or substantially all of the Corporation's assets, (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation's outstanding voting securities are transferred in whole or in part to a person or persons different from the persons holding those securities immediately prior to the merger, or (iv) any transaction effected primarily to change the state in which the Corporation is incorporated or to create a holding company structure. Q. REPURCHASE RIGHT shall mean the right granted to the Corporation in accordance with Article C. R. SERVICE shall mean the Participant's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance, a non-employee member of the board of directors or a consultant. A-2. 68 S. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program under the Plan. T. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. U. VESTING SCHEDULE shall mean the vesting schedule specified in Paragraph C.3, subject to the acceleration provisions of Paragraph C.5. V. UNVESTED SHARES shall have the meaning assigned to such term in Paragraph C.1. A-3. 69 ADDENDUM TO STOCK ISSUANCE AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Issuance Agreement dated 2~ (the "Issuance Agreement") by and between Calpine Corporation (the "Corporation") and 1~ ("Participant") evidencing the stock issuance on such date to Participant under the terms of the Corporation's 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to such terms in the Issuance Agreement. INVOLUNTARY TERMINATION FOLLOWING CORPORATE TRANSACTION 1. To the extent the Repurchase Right is assigned to the successor corporation (or parent thereof) in connection with a Corporate Transaction, no accelerated vesting of the Purchased Shares shall occur upon such Corporate Transaction, and the Repurchase Right shall continue to remain in full force and effect in accordance with the provisions of the Issuance Agreement. The Participant shall, over Participant's period of Service following the Corporate Transaction, continue to vest in the Purchased Shares in one or more installments in accordance with the provisions of the Issuance Agreement. However, immediately upon an Involuntary Termination of Participant's Service within twelve (12) months following the Corporate Transaction, the Repurchase Right shall terminate automatically and all the Purchased Shares shall vest in full. 2. For purposes of this Addendum, the following definitions shall be in effect: An INVOLUNTARY TERMINATION shall mean the termination of Participant's Service by reason of: (i) Participant's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) Participant's voluntary resignation following (A) a change in Participant's position with the Corporation (or Parent or Subsidiary employing Participant) which materially reduces Participant's level of responsibility, (B) a reduction in Participant's level of compensation (including base salary, fringe benefits and participation in any corporate- 70 performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Participant's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Participant's consent. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Participant, any unauthorized use or disclosure by the Participant of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by the Participant adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of the Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). IN WITNESS WHEREOF, Calpine Corporation has caused this Addendum to be executed by its duly-authorized officer, and Participant has executed this Addendum, all as of the Effective Date specified below. CALPINE CORPORATION By: ---------------------------------- Title: ---------------------------------- ---------------------------------------- 1~, PARTICIPANT EFFECTIVE DATE: , 199 ------------------- -- 2. 71 ADDENDUM TO STOCK ISSUANCE AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Issuance Agreement dated 2~ (the "Issuance Agreement") by and between Calpine Corporation (the "Corporation") and 1~ ("Participant") evidencing the stock issuance on such date to Participant under the terms of the Corporation's 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to such terms in the Issuance Agreement. INVOLUNTARY TERMINATION FOLLOWING CHANGE IN CONTROL 1. No accelerated vesting of the Purchased Shares shall occur upon a Change in Control, and the Repurchase Right shall continue to remain in full force and effect in accordance with the provisions of the Issuance Agreement. The Participant shall, over Participant's period of Service following the Change in Control, continue to vest in the Purchased Shares in one or more installments in accordance with the provisions of the Issuance Agreement. However, immediately upon an Involuntary Termination of Participant's Service within twelve (12) months following the Change in Control, the Repurchase Right shall terminate automatically and all the Purchased Shares shall vest in full. 2. For purposes of this Addendum, the following definitions shall be in effect: A CHANGE IN CONTROL shall be deemed to occur in the event of a change in ownership or control of the Corporation effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or 72 (ii) a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members ceases by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. An INVOLUNTARY TERMINATION shall mean the termination of Participant's Service by reason of: (i) Participant's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) Participant's voluntary resignation following (A) a change in Participant's position with the Corporation (or Parent or Subsidiary employing Participant) which materially reduces Participant's level of responsibility, (B) a reduction in Participant's level of compensation (including base salary, fringe benefits and participation in any corporate- performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Participant's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Participant's consent. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Participant, any unauthorized use or disclosure by the Participant of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by the Participant adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of the Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). 2. 73 IN WITNESS WHEREOF, Calpine Corporation has caused this Addendum to be executed by its duly-authorized officer, and Participant has executed this Addendum, all as of the Effective Date specified below. CALPINE CORPORATION By: -------------------------------- Title: -------------------------------- --------------------------------------- 1(TILDE), PARTICIPANT EFFECTIVE DATE: , 199 ------------------ -- 3. 74 CALPINE CORPORATION AUTOMATIC STOCK OPTION AGREEMENT RECITALS A. The Corporation has implemented an automatic option grant program under the Corporation's 1996 Stock Incentive Plan pursuant to which eligible non-employee members of the Corporation's Board will automatically receive special option grants at designated intervals over their period of Board service in order to provide such individuals with a meaningful incentive to continue to serve as a member of the Board. B. Optionee is an eligible non-employee Board member, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the automatic grant of a stock option to purchase shares of the Corporation's Common Stock under the Plan. C. The granted option is intended to be a non-statutory option which does not meet the requirements of Section 422 of the Internal Revenue Code. D. All capitalized terms in this Agreement, to the extent not otherwise defined in the Agreement, shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, a Non-Statutory Option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5, 6 or 7. 3. LIMITED TRANSFERABILITY. This option may, in connection with the Optionee's estate plan, be assigned in whole or in part during Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established for the exclusive benefit of one or more such family members. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Corporation may deem appropriate. Should the Optionee die while holding this option, then this option shall be transferred in accordance with Optionee's will or the laws of descent and distribution. 75 4. EXERCISABILITY/VESTING. (a) This option shall be immediately exercisable for any or all of the Option Shares, whether or not the Option Shares are vested in accordance with the Vesting Schedule set forth in the Grant Notice, and shall remain so exercisable until the Expiration Date or the sooner termination of the option term under Paragraph 5, 6 or 7. (b) Optionee shall, in accordance with the Vesting Schedule set forth in the Grant Notice, vest in the Option Shares in a series of installments over his or her period of Board service. Vesting in the Option Shares may be accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event, however, shall any additional Option Shares vest following Optionee's cessation of service as a Board member. 5. CESSATION OF BOARD SERVICE. Should Optionee's service as a Board member cease while this option remains outstanding, then the option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date in accordance with the following provisions: (i) Should Optionee cease to serve as a Board member for any reason (other than death or Permanent Disability) while holding this option, then the period for exercising this option shall be reduced to a twelve (12)-month period commencing with the date of such cessation of Board service, but in no event shall this option be exercisable at any time after the Expiration Date. During such limited period of exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares (if any) in which Optionee is vested on the date of his or her cessation of Board service. Upon the earlier of (i) the expiration of such twelve (12)-month period or (ii) the specified Expiration Date, the option shall terminate and cease to be exercisable with respect to any vested Option Shares for which the option has not been exercised. (ii) Should Optionee die during the twelve (12)-month period following his or her cessation of Board service, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of descent and distribution shall have the right to exercise this option for any or all of the Option Shares in which Optionee is vested at the time of Optionee's cessation of Board service (less any Option Shares purchased by Optionee after such cessation of Board service but prior to death). Such right of exercise shall terminate, and this option shall accordingly cease to be exercisable for such vested Option Shares, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee's cessation of Board service or (ii) the specified Expiration Date of the option term. 2. 76 (iii) Should Optionee cease service as a Board member by reason of death or Permanent Disability, then all Option Shares at the time subject to this option but not otherwise vested shall immediately vest in full so that Optionee (or the personal representative of Optionee's estate or the person or persons to whom the option is transferred upon Optionee's death) shall have the right to exercise this option for any or all of the Option Shares as fully-vested shares of Common Stock at any time prior to the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee's cessation of Board service or (ii) the specified Expiration Date. (iv) Upon Optionee's cessation of Board service for any reason other than death or Permanent Disability, this option shall immediately terminate and cease to be outstanding with respect to any and all Option Shares in which Optionee is not otherwise at that time vested in accordance with the normal Vesting Schedule set forth in the Grant Notice or the special vesting acceleration provisions of Paragraph 6 or 7 below. 6. CORPORATE TRANSACTION. (a) In the event of a Corporate Transaction, all Option Shares at the time subject to this option but not otherwise vested shall automatically vest so that this option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the Option Shares at the time subject to this option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company. (b) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. 7. CHANGE IN CONTROL/HOSTILE TAKE-OVER. (a) All Option Shares subject to this option at the time of a Change in Control but not otherwise vested shall automatically vest so that this option shall, immediately prior to the effective date of such Change in Control, become fully exercisable for all of the Option Shares at the time subject to this option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. This option shall remain exercisable for such fully-vested Option Shares until the earliest to occur of (i) the 3. 77 specified Expiration Date, (ii) the sooner termination of this option in accordance with Paragraph 5 or 6 or (iii) the surrender of this option under Paragraph 7(b). (b) Optionee shall have an unconditional right (exercisable during the thirty (30)-day period immediately following the consummation of a Hostile Take-Over) to surrender this option to the Corporation in exchange for a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the Option Shares at the time subject to the surrendered option (whether or not those Option Shares are otherwise at the time vested) over (ii) the aggregate Exercise Price payable for such shares. This Paragraph 7(b) limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the option term and may not be assigned or transferred by Optionee. (c) To exercise the Paragraph 7(b) limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Corporation with written notice of the option surrender in which there is specified the number of Option Shares as to which the option is being surrendered. Such notice must be accompanied by the return of Optionee's copy of this Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) business days following such delivery date, and neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. Upon receipt of such cash distribution, this option shall be cancelled with respect to the shares subject to the surrendered option (or the surrendered portion), and Optionee shall cease to have any further right to acquire those Option Shares under this Agreement. The option shall, however, remain outstanding for the balance of the Option Shares (if any) in accordance with the terms and provisions of this Agreement, and the Corporation shall accordingly issue a new stock option agreement (substantially in the same form as this Agreement) for those remaining Option Shares. 8. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder; provided, however, that the aggregate Exercise Price shall remain the same. 9. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares. 4. 78 10. MANNER OF EXERCISING OPTION. (a) In order to exercise this option for all or any part of the Option Shares for which the option is at the time exercisable, Optionee or, in the case of exercise after Optionee's death, Optionee's executor, administrator, heir or legatee, as the case may be, must take the following actions: (i) To the extent the option is exercised for vested Option Shares, the Secretary of the Corporation shall be provided with written notice of the option exercise (the "Exercise Notice") in substantially the form of Exhibit I attached hereto, in which there is specified the number of vested Option Shares to be purchased under the exercised option. To the extent that the option is exercised for one or more unvested Option Shares, Optionee (or other person exercising the option) shall deliver to the Secretary of the Corporation a Purchase Agreement for those unvested Option Shares. (ii) The Exercise Price for the purchased shares shall be paid in one or more of the following alternative forms: - cash or check made payable to the Corporation's order; or - shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or - to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee shall provide irrevocable written instructions (A) to a Corporation-designated brokerage firm to effect the immediate sale of the vested shares purchased under the option and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for those shares plus the applicable Federal, state and local income taxes required to be withheld by the Corporation by reason of such exercise and (B) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. (iii) Appropriate documentation evidencing the right to exercise this option shall be furnished the Corporation if the person or persons exercising the option is other than Optionee. 5. 79 (iv) Appropriate arrangement must be made with the Corporation for the satisfaction of all Federal, state and local income tax withholding requirements applicable to the option exercise. (b) Except to the extent the sale and remittance procedure specified above is utilized in connection with the exercise of the option for vested Option Shares, payment of the Exercise Price for the purchased shares must accompany the Exercise Notice or Purchase Agreement delivered to the Corporation in connection with the option exercise. (c) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate or certificates representing the purchased Option Shares. To the extent any such Option Shares are unvested, the certificates for those Option Shares shall be endorsed with an appropriate legend evidencing the Corporation's repurchase rights and may be held in escrow with the Corporation until such shares vest. (d) In no event may this option be exercised for fractional shares. 11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Corporation or the stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law. 12. COMPLIANCE WITH LAWS AND REGULATIONS. (a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. (b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. However, the Corporation shall use its best efforts to obtain all such applicable approvals. 6. 80 13. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 14. CONSTRUCTION/GOVERNING LAW. This Agreement and the option evidenced hereby are made and granted pursuant to the automatic option grant program in effect under the Plan and are in all respects limited by and subject to the express terms and provisions of that program. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 15. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 7. 81 EXHIBIT I NOTICE OF EXERCISE I hereby notify Calpine Corporation (the "Corporation") that I elect to purchase ___________ shares of the Corporation's Common Stock (the "Purchased Shares") at the option exercise price of $____ per share (the "Exercise Price") pursuant to that certain option (the "Option") granted to me pursuant to the automatic option grant program under the Corporation's 1996 Stock Incentive Plan on __________, 199_. Concurrently with the delivery of this Exercise Notice to the Secretary of the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, I may utilize the special broker/dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price for any Purchased Shares in which I am vested at the time of exercise. ___________________________________, 199_ Date __________________________________ Optionee Address: _________________________ __________________________________ Print name in exact manner it is to appear on the stock certificate: __________________________________ Address to which certificate is to be sent, if different from address above: __________________________________ __________________________________ Social Security Number: __________________________________ 82 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Automatic Stock Option Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or A-1. 83 (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean Calpine Corporation, a Delaware corporation. H. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 10 of the Agreement. I. EXERCISE PRICE shall mean the exercise price payable per share as specified in the Grant Notice. J. EXPIRATION DATE shall mean the date on which the option term expires as specified in the Grant Notice. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. L. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice. M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock Option accompanying this Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. A-2. 84 N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. O. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. Q. OPTION SHARES shall mean the number of shares of Common Stock subject to the option. R. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice. S. PERMANENT DISABILITY shall mean the inability of Optionee to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. T. PLAN shall mean the Corporation's 1996 Stock Incentive Plan. U. PURCHASE AGREEMENT shall mean the stock purchase agreement (in form and substance satisfactory to the Corporation) which must be executed at the time the option is exercised for unvested Option Shares and which will accordingly (i) grant the Corporation the right to repurchase, at the Exercise Price, any and all of those Option Shares in which Optionee is not otherwise vested at the time of his or her cessation of service as a Board member and (ii) preclude the sale, transfer or other disposition of any of the Option Shares purchased under such agreement while those Option Shares remain subject to the repurchase right. V. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange. W. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over. A-3. 85 X. VESTING SCHEDULE shall mean the vesting schedule specified in the Grant Notice, pursuant to which Optionee will vest in the Option Shares in one or more installments over his or her period of Board service, subject to acceleration in accordance with the provisions of the Agreement. A-4. 86 INITIAL GRANT CALPINE CORPORATION NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR AUTOMATIC STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of Calpine Corporation (the "Corporation"): Optionee: --------------------------------------------- Grant Date: --------------------------------------------- Exercise Price: $ per share -------------------------------- Number of Option Shares: 10,000 shares Expiration Date: --------------------------------------------- Type of Option: Non-Statutory Stock Option Date Exercisable: Immediately Exercisable Vesting Schedule: The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation's repurchase right shall accordingly lapse with respect to, the Option Shares in a series of four (4) successive equal annual installments upon the Optionee's completion of each year of service as a member of the Corporation's Board of Directors (the "Board") over the four (4)-year period measured from the Grant Date. In no event shall any additional Option Shares vest after Optionee's cessation of Board service. Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the automatic option grant program under the Calpine Corporation 1996 Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Automatic Stock Option Agreement attached hereto as Exhibit A. Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation's principal offices. 87 REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND SHALL BE SUBJECT TO REPURCHASE BY THE CORPORATION, AT THE EXERCISE PRICE PAID PER SHARE, UPON OPTIONEE'S TERMINATION OF SERVICE AS A MEMBER OF THE CORPORATION'S BOARD OF DIRECTORS PRIOR TO VESTING IN THOSE SHARES. THE TERMS AND CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE. No Impairment of Rights. Nothing in this Notice or in the attached Automatic Stock Option Agreement or the Plan shall interfere with or otherwise restrict in any way the rights of the Corporation or the Corporation's stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law. Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Automatic Stock Option Agreement. DATED: , 199 ------------------------------------- --- CALPINE CORPORATION By: -------------------------------- Title: -------------------------------- -------------------------------- OPTIONEE Address: -------------------------------- ATTACHMENTS EXHIBIT A - AUTOMATIC STOCK OPTION AGREEMENT EXHIBIT B - PLAN SUMMARY AND PROSPECTUS 2. 88 EXHIBIT A AUTOMATIC STOCK OPTION AGREEMENT 89 EXHIBIT B PLAN SUMMARY AND PROSPECTUS 90 ANNUAL GRANT CALPINE CORPORATION NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR AUTOMATIC STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of Calpine Corporation (the "Corporation"): Optionee: ------------------------------------------------- Grant Date: ----------------------------------------------- Exercise Price: $ per share ------------------------------- Number of Option Shares: _____ shares Expiration Date: -------------------------------- Type of Option: Non-Statutory Stock Option Date Exercisable: Immediately Exercisable Vesting Schedule: The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation's repurchase right shall accordingly lapse with respect to, the Option Shares upon the Optionee's completion of one year of service as a member of the Corporation's Board of Directors (the "Board") measured from the Grant Date. In no event shall any additional Option Shares vest after Optionee's cessation of Board service. Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the automatic option grant program under the Calpine Corporation 1996 Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Automatic Stock Option Agreement attached hereto as Exhibit A. Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation's principal offices. 91 REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND SHALL BE SUBJECT TO REPURCHASE BY THE CORPORATION, AT THE EXERCISE PRICE PAID PER SHARE, UPON OPTIONEE'S TERMINATION OF SERVICE AS A MEMBER OF THE CORPORATION'S BOARD OF DIRECTORS PRIOR TO VESTING IN THOSE SHARES. THE TERMS AND CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE. No Impairment of Rights. Nothing in this Notice or in the attached Automatic Stock Option Agreement or the Plan shall interfere with or otherwise restrict in any way the rights of the Corporation or the Corporation's stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law. Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Automatic Stock Option Agreement. DATED: , 199 ------------------------------- -- CALPINE CORPORATION By: -------------------------------- Title: -------------------------------- -------------------------------- OPTIONEE Address: ----------------------------- ----------------------------- ATTACHMENTS EXHIBIT A - AUTOMATIC STOCK OPTION AGREEMENT EXHIBIT B - PLAN SUMMARY AND PROSPECTUS 2. 92 EXHIBIT A AUTOMATIC STOCK OPTION AGREEMENT EX-10.9.3 10 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.9.3 CALPINE CORPORATION EMPLOYEE STOCK PURCHASE PLAN I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of Calpine Corporation by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed Two Hundred Seventy Five Thousand (275,000) shares. B. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. 2 IV. OFFERING PERIODS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive offering periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Each offering period shall be of such duration (not to exceed twenty-four (24) months) as determined by the Plan Administrator prior to the start date. The initial offering period shall commence at the Effective Time and terminate on the last business day in August 1998. The next offering period shall commence on the first business day in September 1998, and subsequent offering periods shall commence as designated by the Plan Administrator. C. Each offering period shall be comprised of a series of one or more successive Purchase Intervals. Purchase Intervals shall run from the first business day in March each year to the last business day in August of the same year and from the first business day in September each year to the last business day in February of the following year. Accordingly, the first Purchase Interval in effect under the initial offering period shall commence at the Effective Time and terminate on the last business day in February 1997. D. Should the Fair Market Value per share of Common Stock on any Purchase Date within an offering period be less than the Fair Market Value per share of Common Stock on the start date of that offering period, then that offering period shall automatically terminate immediately after the purchase of shares of Common Stock on such Purchase Date, and a new offering period shall commence on the next business day following such Purchase Date. The new offering period shall have a duration of twenty four (24) months, unless a shorter duration is established by the Plan Administrator within five (5) business days following the start date of that offering period. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the start date of any offering period under the Plan may enter that offering period on such start date or on any subsequent Semi-Annual Entry Date within that offering period, provided he or she remains an Eligible Employee. B. Each individual who first becomes an Eligible Employee after the start date of an offering period may enter that offering period on any subsequent Semi-Annual Entry Date within that offering period on which he or she is an Eligible Employee. C. The date an individual enters an offering period shall be designated his or her Entry Date for purposes of that offering period. 2. 3 D. To participate in the Plan for a particular offering period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock purchase agreement and a payroll deduction authorization) and file such forms with the Plan Administrator (or its designate) on or before his or her scheduled Entry Date. VI. PAYROLL DEDUCTIONS A. The Plan Administrator shall, prior to the start of each offering period, determine the maximum percentage of Cash Earnings which each Participant may contribute to the Plan through payroll deductions during that offering period; provided, however, that the maximum percentage shall in no event exceed fifteen percent (15%) of such Cash Earnings. Each Participant may then authorize a level of payroll deductions to be in effect for such offering period in any multiple of one percent (1%) of the Cash Earnings paid to him or her during each Purchase Interval within that offering period, up to the maximum percentage established by the Plan Administrator for such offering period. The deduction rate authorized by the Participant shall continue in effect throughout the offering period, except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may, at any time during the offering period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Interval. (ii) The Participant may, prior to the commencement of any new Purchase Interval within the offering period, increase the rate of his or her payroll deduction by filing the appropriate form with the Plan Administrator. The new rate (which may not exceed the maximum percentage authorized by the Plan Administrator for that offering period) shall become effective on the start date of the first Purchase Interval following the filing of such form. B. Payroll deductions shall begin on the first pay day following the Participant's Entry Date into the offering period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of that offering period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date, whether within the same or a different offering period. 3. 4 VII. PURCHASE RIGHTS A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a separate purchase right for each offering period in which he or she participates. The purchase right shall be granted on the Participant's Entry Date into the offering period and shall provide the Participant with the right to purchase shares of Common Stock, in a series of successive installments over the remainder of such offering period, upon the terms set forth below. The Participant shall execute a stock purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be automatically exercised in installments on each successive Purchase Date within the offering period, and shares of Common Stock shall accordingly be purchased on behalf of each Participant (other than Participants whose payroll deductions have previously been refunded pursuant to the Termination of Purchase Right provisions below) on each such Purchase Date. The purchase shall be effected by applying the Participant's payroll deductions for the Purchase Interval ending on such Purchase Date to the purchase of whole shares of Common Stock at the purchase price in effect for the Participant for that Purchase Date. C. PURCHASE PRICE. The purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date within the offering period shall not be less than eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into that offering period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common Stock purchasable by a Participant on each Purchase Date during the offering period shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Interval ending with that Purchase Date by the purchase price in effect for the Participant for that Purchase Date. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed three hundred (300) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. 4. 5 E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable by the Participant on the Purchase Date shall be promptly refunded. F. TERMINATION OF PURCHASE RIGHT. The following provisions shall govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the next scheduled Purchase Date in the offering period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the Purchase Interval in which such termination occurs shall, at the Participant's election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time such purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the offering period for which the terminated purchase right was granted. In order to resume participation in any subsequent offering period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into that offering period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the Purchase Interval in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the Purchase Interval in which such leave commences, to (a) withdraw all the payroll deductions collected to date on his or her behalf for that Purchase Interval or (b) have such funds held for the purchase of shares on his or her behalf on the next scheduled Purchase Date. In no event, however, shall any 5. 6 further payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began, unless the Participant withdraws from the Plan prior to his or her return. G. CORPORATE TRANSACTION. Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the Purchase Interval in which such Corporate Transaction occurs to the purchase of whole shares of Common Stock at a purchase price per share not less than eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into the offering period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Corporate Transaction. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant shall continue to apply to any such purchase. The Corporation shall use its best efforts to provide at least ten (10)-days prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction. H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares of Common Stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. I. ASSIGNABILITY. The purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee 6. 7 stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value per share on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. For purposes of applying such accrual limitations to the purchase rights granted under the Plan, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue in a series of installments on each successive Purchase Date during the offering period on which such right remains outstanding. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Interval, then the payroll deductions which the Participant made during that Purchase Interval with respect to such purchase right shall be promptly refunded. D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on July 17, 1996 and shall become effective at the Effective Time, provided no purchase rights granted under the Plan shall be exercised, and no shares of Common Stock shall be issued hereunder, until (i) the Plan shall have been approved by the stockholders of the Corporation and (ii) the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. In the event such stockholder approval is not obtained, or such compliance is not effected, within twelve (12) months after the date on which the 7. 8 Plan is adopted by the Board, the Plan shall terminate and have no further force or effect, and all sums collected from Participants during the initial offering period hereunder shall be refunded. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest of (i) the last business day in August 2006, (ii) the date on which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following such termination. X. AMENDMENT OF THE PLAN The Board may alter, amend, suspend or discontinue the Plan at any time to become effective immediately following the close of any Purchase Interval. However, the Board may not, without the approval of the Corporation's stockholders, (i) materially increase the number of shares of Common Stock issuable under the Plan or the maximum number of shares purchasable per Participant on any one Purchase Date, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan or (iii) materially increase the benefits accruing to Participants under the Plan or materially modify the requirements for eligibility to participate in the Plan. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation. B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. C. The provisions of the Plan shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 8. 9 SCHEDULE A CORPORATIONS PARTICIPATING IN EMPLOYEE STOCK PURCHASE PLAN AS OF THE EFFECTIVE TIME Calpine Corporation 10 APPENDIX The following definitions shall be in effect under the Plan: A. BOARD shall mean the Corporation's Board of Directors. B. CASH EARNINGS shall mean the (i) regular base salary paid to a Participant by one or more Participating Companies during such individual's period of participation in one or more offering periods under the Plan plus (ii) any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate plus (iii) all overtime payments, bonuses, commissions, current profit-sharing distributions and other incentive-type payments. However, CASH EARNINGS shall not include any contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant's behalf by the Corporation or any Corporate Affiliate under any employee benefit or welfare plan now or hereafter established. C. CODE shall mean the Internal Revenue Code of 1986, as amended. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE AFFILIATE shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean Calpine Corporation, a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of Calpine Corporation which shall by appropriate action adopt the Plan. A-1. 11 H. EFFECTIVE TIME shall mean the time at which the Underwriting Agreement is executed and finally priced. Any Corporate Affiliate which becomes a Participating Corporation after such Effective Time shall designate a subsequent Effective Time with respect to its employee-Participants. I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a Participating Corporation on a basis under which he or she is regularly expected to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401(a). J. ENTRY DATE shall mean the date an Eligible Employee first commences participation in the offering period in effect under the Plan. The earliest Entry Date under the Plan shall be the Effective Time. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of the initial offering period which begins at the Effective Time, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. L. 1933 ACT shall mean the Securities Act of 1933, as amended. A-2. 12 M. PARTICIPANT shall mean any Eligible Employee of a Participating Corporation who is actively participating in the Plan. N. PARTICIPATING CORPORATION shall mean the Corporation and such Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan as of the Effective Time are listed in attached Schedule A. O. PLAN shall mean the Corporation's Employee Stock Purchase Plan, as set forth in this document. P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more Board members appointed by the Board to administer the Plan. Q. PURCHASE DATE shall mean the last business day of each Purchase Interval. The initial Purchase Date shall be February 28, 1997. R. PURCHASE INTERVAL shall mean each successive six (6)-month period within the offering period at the end of which there shall be purchased shares of Common Stock on behalf of each Participant. S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in March and September each year on which an Eligible Employee may first enter an offering period. T. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. U. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. A-3. 13 EMPLOYEE STOCK PURCHASE PLAN ("ESPP") ENROLLMENT/CHANGE FORM Action Complete Sections: ------ ------------------ SECTION 1: / / New Enrollment 2, 3, 7 and sign attached ACTION Stock Purchase Agreement / / Change Payroll Deductions 2, 4, 7 / / Terminate Payroll Deductions 2, 5, 7 / / Leave of Absence 2, 6, 7 ================================================================================================================== SECTION 2: Name_____________________________________________________________________ PERSONNEL Last First MI Dept. DATA Home Address_____________________________________________________________ Street _____________________________________________________________________ City State Zip Code Social Security #: / / / / - / / / - / / / / / ================================================================================================================== SECTION 3: Effective with the Purchase NEW Interval Beginning: Payroll Deduction Amount: ______% of cash earnings* ENROLLMENT / / March 1, 199_ / / September 1, 199_ * Must be a multiple of 1% up to a maximum of 15% of cash earnings / / Initial Offering Period ================================================================================================================== SECTION 4: Effective with the I authorize the following new level of payroll CHANGE Pay Period Beginning: _____________________ deductions: ________% of cash earnings* PAYROLL Month, Day and Year DEDUCTIONS * Must be a multiple of 1% up to a maximum of 15% of cash earnings NOTE: You may reduce your rate of payroll deductions once per purchase interval to become effective as soon as possible following the filing of the change form. You may also increase your rate of payroll deductions to become effective as of the start date of the next purchase interval. ================================================================================================================== SECTION 5: Effective with the Your election to terminate your payroll deductions TERMINATE Pay Period Beginning: _____________________ for the balance of the offering period cannot be PAYROLL Month, Day and Year changed, and you may not rejoin the offering period DEDUCTIONS at a later date. You will not be able to resume participation in the ESPP until a new offering period begins. In connection with my voluntary termination of payroll deductions, I elect the following action with respect to my ESPP payroll deductions to date in the current six (6)-month purchase interval: / / Purchase Calpine shares at end of the interval OR / / Refund ESPP payroll deductions collected NOTE: If your employment terminates for any reason or your eligibility status changes (less than 20 hrs/wk or less than 5 months/yr), you will immediately cease to participate in the ESPP, and your ESPP payroll deductions collected in that purchase interval will automatically be refunded to you. ================================================================================================================== SECTION 6 LEAVE OF In connection with my unpaid leave of absence, I elect the following action with respect ABSENCE to my ESPP payroll deductions to date in the current purchase interval: / / Purchase Calpine shares at end of the interval OR / / Refund ESPP payroll deductions collected NOTE: If you take an unpaid leave of absence, your payroll deductions will immediately cease. Upon your return to active service, your payroll deductions will automatically resume at the rate in effect for you at the time you went on leave. ================================================================================================================== SECTION 7 AUTHORIZATION I hereby authorize the specific action or actions indicated above. _____________________________ ________________________________________ Date Signature of Employee
14 CALPINE CORPORATION STOCK PURCHASE AGREEMENT I hereby elect to participate in the Employee Stock Purchase Plan (the "ESPP") effective with the Entry Date specified below, and I hereby subscribe to purchase shares of Common Stock of Calpine Corporation (the "Corporation") in accordance with the provisions of this Agreement and the ESPP. I hereby authorize payroll deductions from each of my paychecks following my entry into the ESPP in the 1% multiple of my earnings (not to exceed a maximum of 15%) specified in my attached Enrollment Form. Each offering period is divided into a series of successive purchase intervals. The initial purchase interval is to begin at the time of the initial public offering of the Common Stock and end on February 28, 1997. Subsequent purchase intervals will each be of six (6) months duration and will run from the first business day of March to the last business day of August each year and from the first business day of September each year until the last business of February in the following year. My participation will automatically remain in effect from one offering period to the next in accordance with this Agreement and my payroll deduction authorization, unless I withdraw from the ESPP or change the rate of my payroll deduction or unless my employment status changes. I may reduce the rate of my payroll deductions on one occasion per purchase interval, and I may increase my rate of payroll deduction to become effective at the beginning of any subsequent purchase interval within the offering period. My payroll deductions will be accumulated for the purchase of shares of the Corporation's Common Stock on the last business day of each purchase interval within the offering period. The purchase price per share will not be less than 85% of the lower of (i) the fair market value per share of Common Stock on my entry date into the offering period or (ii) the fair market value per share on the semi-annual purchase date. I will also be subject to ESPP restrictions (i) limiting the maximum number of shares which I may purchase on any one purchase date to 300 shares and (ii) prohibiting me from purchasing more than $25,000 worth of Common Stock for each calendar year my purchase right remains outstanding. I may withdraw from the ESPP at any time prior to the last business day of a purchase interval and elect either to have the Corporation refund all my payroll deductions for that purchase interval or to have those payroll deductions applied to the purchase of shares of the Corporation's Common Stock at the end of such interval. However, I may not rejoin that particular offering period at any later date. Upon the termination of my employment for any reason, including death or disability, or my loss of eligible employee status, my participation in the ESPP will immediately cease and all my payroll deductions for the purchase interval in which my employment terminates or my loss of eligibility occurs will automatically be refunded. If I take an unpaid leave of absence, my payroll deductions will immediately cease, and any payroll deductions for the purchase interval in which my leave begins will, at my election, either be refunded or applied to the purchase of shares of Common Stock at the end of that purchase interval. Upon my return to active service, my payroll deductions will automatically resume at the rate in effect when my leave began. A stock certificate for the shares purchased on my behalf at the end of each purchase interval will automatically be deposited into a brokerage account which the Corporation will open on my behalf. I will notify the Corporation of any sale or disposition of my ESPP shares, and I will satisfy all applicable income and employment tax withholding requirements at the time of such sale or disposition. The Corporation has the right, exercisable in its sole discretion, to amend or terminate the ESPP at any time, with such amendment or termination to become effective immediately following the exercise of outstanding purchase rights at the end of any current purchase interval. Should the Corporation elect to terminate the ESPP, I will have no further rights to purchase shares of Common Stock pursuant to this Agreement. I have received a copy of the official Plan Prospectus summarizing the major features of the ESPP. I have read this Agreement and the Prospectus and hereby agree to be bound by the terms of both this Agreement and the ESPP. The effectiveness of this Agreement is dependent upon my eligibility to participate in the ESPP. Date: ________________, 199__ ______________________________________ Signature of Employee Printed Name:_________________________ Entry Date: __________, 199__ 15 CALPINE CORPORATION --------------------------------------- EMPLOYEE STOCK PURCHASE PLAN QUESTION AND ANSWER SUMMARY --------------------------------------- The date of this Summary is ____________, 1996 16 INFORMATION ON THE EMPLOYEE STOCK PURCHASE PLAN Calpine Corporation, a Delaware corporation (the "Corporation"), has established a new stock purchase program which will allow eligible employees to acquire shares of the Corporation's common stock (the "Common Stock") at periodic intervals through accumulated payroll deductions. The new program is officially titled the Calpine Corporation Employee Stock Purchase Plan and will be referred to in this document as the Purchase Plan. QUESTIONS AND ANSWERS ABOUT THE PURCHASE PLAN This document sets forth in question and answer format the major features of the Purchase Plan and the principal rights and benefits available to the participating employees. 1. WHAT IS THE PURPOSE OF THE PURCHASE PLAN? The purpose of the Purchase Plan is to provide employees with the opportunity to acquire stock ownership in the Corporation through periodic payroll deductions. These deductions will be applied at semi-annual intervals to purchase shares of Common Stock at a discount from the then current market price. 2. WHEN WILL THE PURCHASE PLAN BECOME EFFECTIVE? The Purchase Plan will become effective at the time the Corporation signs the underwriting agreement for the initial public offering of the Common Stock. 3. WHO WILL ADMINISTER THE PURCHASE PLAN? The Purchase Plan will be administered by the Compensation Committee of the Board. This committee is comprised of two (2) or more non-employee Board members appointed by the Board. The members will serve for so long as the Board deems appropriate and may be removed by the Board at any time. The Compensation Committee in its capacity as administrator of the Purchase Plan will be referred to in this document as the "Plan Administrator." 4. HOW MANY SHARES OF COMMON STOCK MAY BE ISSUED UNDER THE PURCHASE PLAN? A total of 275,000 shares of Common Stock will be reserved for issuance under the Purchase Plan. These shares will be made available either from the Corporation's authorized but unissued shares of Common Stock or from shares of Common Stock reacquired by the Corporation, including shares repurchased on the open market. 5. HOW WILL THE COMMON STOCK BE MADE AVAILABLE FOR PURCHASE? Shares of Common Stock will be offered for purchase through a series of one or more offering periods, each with a maximum duration of twenty-four (24) months. The initial offering period will begin at the time the Corporation signs the underwriting agreement for the initial public offering of the Common Stock and will end on the last business day in August 1998. The next offering period is expected to start on the first business day in September 1998, and any subsequent offering periods will begin as designated by the Plan Administrator. 17 Each offering period will be comprised of a series of successive six (6)-month purchase intervals. However, the initial purchase interval will begin on the date the Corporation signs the underwriting agreement for the initial public offering of the Common Stock and will end on February 28, 1997. Subsequent purchase intervals will run from the first business day of March to the last business day in August each year and from the first business day of September each year to the last business day of February in the following year. If the fair market value per share of Common Stock on any semi-annual purchase date within an offering period is less than the fair market value per share of Common Stock on the start date of that offering period, then that offering period will automatically terminate with the purchase of shares of Common Stock on such semi-annual purchase date, and a new offering period will commence on the next business day. The new offering period will have a duration of twenty four (24) months, unless a shorter duration is established by the Plan Administrator within five (5) business days following the start date of that offering period. 6. AM I ELIGIBLE TO PARTICIPATE IN THE PURCHASE PLAN? You will be eligible to participate in the Purchase Plan if you are employed by the Corporation or any participating subsidiary on a basis under which you are regularly expected to work more than twenty (20) hours per week for more than five (5) months per calendar year. 7. WHEN MAY I BECOME A PARTICIPANT? If you are an eligible employee at the time an offering period begins, you may join the Purchase Plan at that time or on any subsequent semi-annual entry date (first business day in March and September each year) within that offering period, provided you remain an eligible employee. If you are not an eligible employee on the start date of an offering period, you may enter that offering period on the first semi-annual entry date (first business day in March and September each year) on which you are an eligible employee or on any subsequent semi-annual entry date within that offering period, provided you remain an eligible employee. The date on which you first join a particular offering period is your "Entry Date" for that offering period. On your Entry Date, you will be granted a purchase right to acquire shares of Common Stock for each purchase interval you complete during the offering period. 8. HOW DO I BECOME A PARTICIPANT? In order to participate in a particular offering period, you must complete and file the appropriate enrollment forms with the Plan Administrator on or before your scheduled Entry Date for that offering period. The enrollment forms include a stock purchase agreement and a payroll deduction authorization. These forms may be obtained from the Human Resources Department. 9. HOW MUCH MAY I INVEST THROUGH THE PURCHASE PLAN? You may authorize payroll deductions in 1% multiples of your cash earnings for each purchase interval you complete within the offering period, up to maximum of fifteen percent (15%). Your cash earnings will include (i) your regular base pay, plus (ii) any salary contributions you may make to any Section 401(k) Plan or Section 125 Cafeteria Benefit Plan now or hereafter maintained by the Corporation, plus (iii) all overtime payments, bonuses, commissions, current profit-sharing distributions and other incentive-type payments. However, your cash earnings will not include any contributions (other than Section 401(k) or Section 125 contributions) made on your behalf by the Corporation (or any parent or subsidiary) to any employee benefit or welfare plan. 2. 18 10. MAY I CHANGE THE RATE OF MY PAYROLL DEDUCTIONS? You may decrease your rate of payroll deduction at any time, but you may not make more than one reduction during the same purchase interval. The reduced rate will become effective as soon as possible following the filing of your reduction request with the Plan Administrator. You may increase your rate of payroll deduction by filing a new payroll deduction authorization with the Plan Administrator prior to the start of any new purchase interval (first business day in March and August each year) within the offering period. Your new rate (which may not be in excess of ten percent (10%) of your base salary) will become effective on the start date of the first purchase interval following the filing of your new authorization. 11. WHAT HAPPENS TO MY PAYROLL DEDUCTIONS? Your payroll deductions will be credited to an account established in your name on the Corporation's books. No interest will be paid on the balance credited to your account. Since the Corporation pays all administrative expenses of the Purchase Plan, the full amount of your payroll deductions will be applied to the purchase of Common Stock. Your payroll deductions may be commingled with the general assets of the Corporation and used for general corporate purposes. 12. WHEN WILL MY PURCHASE RIGHT BE EXERCISED? Your purchase right will be exercised on the last business day of each purchase interval. These purchase dates will occur on the last business day in February and August each year during the offering period. The first purchase date will occur on February 28, 1997. 13. HOW WILL MY PURCHASE RIGHT BE EXERCISED? Your purchase right will be exercised by applying the amount credited to your account to the purchase of whole shares of Common Stock on each purchase date. Any remaining amount in your account will be carried over to the next purchase interval. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitations on the maximum number of shares purchasable per participant (see Question 17) will be promptly refunded after such purchase date. 14. WHAT IS THE PURCHASE PRICE OF THE COMMON STOCK? The purchase price per share of Common Stock will be not less than eighty-five percent (85%) of the lower of (i) the fair market value per share of Common Stock on your Entry Date (see Question 7) into the offering period or (ii) the fair market value per share on the semi-annual purchase date. 15. HOW IS THE FAIR MARKET VALUE OF THE COMMON STOCK DETERMINED? The fair market value per share on any relevant date under the Purchase Plan will be the closing selling price of the Common Stock on that date, as reported on the Nasdaq National Market. However, the fair market value of the Common Stock on the start date of the initial offering period will be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the underwriting agreement. 16. WILL I RECEIVE A REPORT INDICATING THE AMOUNT AND STATUS OF MY ACCOUNT? After each purchase date, you will receive a report indicating the number of shares purchased on your behalf and the purchase price paid per share. 3. 19 17. ARE THERE ANY LIMITATIONS ON THE NUMBER OF SHARES I MAY PURCHASE? Yes. The following limitations will apply: (a) The total number of shares of Common Stock available for issuance under the Purchase Plan is limited to 275,000 shares (subject to the adjustments described under Question 24). (b) The maximum number of shares of Common Stock that you may purchase on any one purchase date may not exceed 300 shares (subject to the adjustments described under Question 24). (c) You may not purchase shares at a rate in excess of $25,000 worth of Common Stock (determined on the basis of the fair market value of the Common Stock on your Entry Date into the offering period) for each calendar year your purchase right remains outstanding. (d) Finally, no purchase right will be granted to any employee who, immediately after the grant of such right, would own (or otherwise hold options or other rights to purchase) stock possessing five percent (5%) or more of the total voting power or value of all classes of stock of the Corporation or any parent or subsidiary corporation. Any payroll deductions collected from you which cannot be applied to the purchase of Common Stock by reason of one or more of these limitations will be refunded. 18. WHAT IF THERE ARE NOT ENOUGH SHARES AVAILABLE TO COVER ALL THE EXERCISED PURCHASE RIGHTS ON A PARTICULAR PURCHASE DATE? If the total number of shares for which purchase rights are to be exercised on any purchase date exceeds the number of shares at the time available for issuance under the Purchase Plan, then the Plan Administrator will make a pro-rata allocation of the available shares on a uniform and non-discriminatory basis, and any payroll deductions not applied to the purchase of the available shares will be refunded. 19. MAY I TERMINATE MY PURCHASE RIGHT? Yes. You may terminate your purchase right by filing the prescribed notification form with the Plan Administrator at any time before the last business day of any purchase interval. No further payroll deductions will be collected on your behalf during the remainder of that period, and any payroll deductions already collected for that period will, at your election, be refunded to you or applied to the purchase of Common Stock on the next semi-annual purchase date. Once you have terminated your purchase right, you may not rejoin the offering period at any later date, and you must wait until the start of a new offering period to resume participation in the Purchase Plan. EXAMPLE: The initial offering period is to continue through August 31, 1998, and you enter that offering period on the start date. If you were to terminate your purchase right for that offering period on July 15, 1997, you would not be able to rejoin the Purchase Plan until the new offering period beginning on the first business day in September in 1998. 4. 20 20. HOW DO I REJOIN THE PURCHASE PLAN IF I TERMINATE MY PURCHASE RIGHT? Individuals who terminate their purchase rights may participate in any subsequent offering period by filing new enrollment forms on or before their scheduled Entry Date into the new offering period. 21. WHAT HAPPENS IF MY EMPLOYMENT TERMINATES OR MY ELIGIBILITY STATUS CHANGES? Your participation in the Purchase Plan will immediately cease should your employment terminate for any reason (including death or disability) or should you otherwise lose your status as an eligible employee. Any payroll deductions collected on your behalf for the purchase interval in your termination or loss of eligibility occurs will automatically be refunded to you (or the personal representative of your estate in the event of your death). 22. WHAT HAPPENS IF I GO ON AN UNPAID LEAVE OF ABSENCE? Your payroll deductions will cease with the paycheck immediately preceding the start of your leave and will not resume unless you return to active service. Your existing payroll deductions for the purchase interval in which your leave begins may either be withdrawn or applied to the purchase of Common Stock on the next scheduled purchase date. You must, however, make your election at the time your leave begins; otherwise, your payroll deductions will automatically be refunded. Upon your return to active service, your payroll deduction will automatically resume at the rate in effect before your leave began. 23. WHAT HAPPENS IF THE CORPORATION IS ACQUIRED? If the Corporation is acquired, whether by merger or asset sale (an "Acquisition"), then all payroll deductions for the purchase interval in which such Acquisition occurs will automatically be applied to the purchase of Common Stock immediately prior to the effective date of the Acquisition, subject to the share limitations summarized in Question 17. The purchase price for your shares will be eighty-five percent (85%) of the lower of (i) the fair market value of the Common Stock on your Entry Date into that offering period or (ii) the fair market value of the Common Stock immediately prior to the effective date of the Acquisition. The Corporation will use its best efforts to provide at least ten (10) days prior notice of any such Acquisition, and each participant will thereafter have the right to terminate his or her outstanding purchase rights at any time prior to the effective date of the Acquisition, should such participant prefer not to have any shares purchased on his or her behalf in connection with the Acquisition. 24. WHAT HAPPENS IF THERE IS A CHANGE IN THE CORPORATION'S CAPITAL STRUCTURE? In the event of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments will be made to (i) the maximum number and class of securities issuable under the Purchase Plan, (ii) the maximum number and class of securities purchasable per participant on any one purchase date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right. Such adjustments will prevent any dilution or enlargement of the rights and benefits of Purchase Plan participants. 25. MAY I ASSIGN OR TRANSFER MY PURCHASE RIGHTS UNDER THE PURCHASE PLAN? No. Your purchase rights may not be assigned or transferred. 5. 21 26. WHEN WILL I RECEIVE THE STOCK CERTIFICATE FOR MY PURCHASED SHARES? As soon as practicable after each purchase date, a stock certificate for the shares purchased on your behalf will be deposited directly to a Corporation-designated brokerage account maintained on your behalf and held in "street name" so that you may sell the shares promptly at any time. 27. AFTER BECOMING A STOCKHOLDER, MAY I VOTE MY SHARES? Yes, even if you do not have physical possession of a stock certificate. 28. WHEN MAY I SELL MY PURCHASED SHARES? Individuals who purchase Common Stock under the Purchase Plan may resell such shares without restriction, except for certain executive officers of the Corporation. However, the Federal and state income tax treatment of the sale proceeds may be more favorable if you hold your shares for a certain period of time prior to sale (see Questions and Answers on Federal Tax Consequences below). At the time you sell your purchased shares, you should inform the Corporation of the number of shares sold and the selling price per share, and you will be required to satisfy all applicable income and employment tax withholding requirements at the time of the sale. 29. CAN THE CORPORATION TERMINATE THE PURCHASE PLAN? Yes. The Plan Administrator has the discretion to terminate all outstanding purchase rights immediately following the close of any semi-annual purchase interval. If the Plan Administrator exercises this discretion, the Purchase Plan will terminate in its entirety, no further purchase rights will thereafter be granted or exercised and no further payroll deductions will be collected under the terminated plan. 30. CAN THE PURCHASE PLAN BE AMENDED? The Board may amend the Purchase Plan at any time to become effective immediately following the close of any semi-annual purchase interval. However, certain amendments may require the approval of the Corporation's stockholders. 31. WHAT IS THE MAXIMUM DURATION OF THE PURCHASE PLAN? The Purchase Plan will in all events terminate upon the earliest of (i) the last business day in August 2006, (ii) the date on which all shares available for issuance under the Purchase Plan have been sold or (iii) the date on which all purchase rights are exercised in connection with an Acquisition. 32. DOES THE PURCHASE PLAN HAVE ANY IMPACT ON THE TERMS OF MY EMPLOYMENT? Neither the Purchase Plan nor any outstanding purchase right is intended to provide any participant with the right to remain in the Corporation's employ for any specific period, and both you and the Corporation will each have the right to terminate your employment at any time and for any reason, with or without cause. 6. 22 QUESTIONS AND ANSWERS ON FEDERAL TAX CONSEQUENCES The following is a description of the Federal income tax consequences of participation in the Purchase Plan. State and local tax treatment, which is not discussed below, may vary from such Federal income tax treatment. You should consult with your own tax advisor as to the tax consequences of your particular transactions under the Purchase Plan. T1. WILL THE RECEIPT OF A PURCHASE RIGHT OR THE PURCHASE OF SHARES ON MY BEHALF UNDER THE PURCHASE PLAN RESULT IN TAXABLE INCOME? The Purchase Plan is intended to be an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code. Under a plan which so qualifies, no taxable income is recognized by the participant either upon receipt of the purchase right at the time of entry into the offering period or upon the actual purchase of shares on each semi-annual purchase date. T2. WHEN WILL I BE SUBJECT TO FEDERAL INCOME TAX ON THE PURCHASED SHARES? Generally, you will recognize income in the year in which you make a disposition of the purchased shares. The term "disposition" generally includes any transfer of legal title, whether by sale, exchange or gift, but does not include a transfer to your spouse or a transfer into joint ownership if you remain one of the joint owners or a transfer into your brokerage account. T3. HOW IS MY FEDERAL INCOME TAX LIABILITY DETERMINED WHEN I SELL MY SHARES? Your Federal income tax liability will depend on whether you make a qualifying or disqualifying disposition of the purchased shares. A qualifying disposition will occur if the sale or other disposition of those shares is made after you have held the shares for (i) more than two (2) years after your Entry Date into the offering period and (ii) more than one (1) year after the actual purchase date. A disqualifying disposition is any sale or other disposition which is made prior to the satisfaction of either of these two minimum holding-period requirements. T4. WHAT IF I MAKE A QUALIFYING DISPOSITION? You will recognize ordinary income in the year of the qualifying disposition equal to the lesser of (i) the amount by which the fair market value of the shares on the date of the qualifying disposition exceeds the purchase price paid for those shares or (ii) fifteen percent (15%) of the fair market value of the shares on your Entry Date into the offering period during which those shares were purchased. Any additional gain recognized upon the qualifying disposition will be a long-term capital gain. If the fair market value of the shares on the date of the qualifying disposition is less than the purchase price you paid for the shares, there will be no ordinary income, and any loss recognized will be a long-term capital loss. Illustration: On your Entry Date into the initial offering period, the fair market value of the Common Stock is $10.00 per share. On the February 28, 1997 purchase date, 200 shares of Common Stock are purchased on your behalf at a price of $8.50 per share when the fair market value is $15.00 per share. On December 15, 1998, more than two years after your Entry Date into the offering period, you sell the shares for $20.00 per share in a qualifying disposition. The income tax treatment of your $11.50 profit per share will be as follows: 7. 23 Ordinary Income $15.00 fair market value on the purchase date less Per Share $8.50 per share purchase price = $6.50 per share Short-Term $20.00 per share selling price less $15.00 fair Gain Per Share market value on the purchase date = $5.00 per share T5. WHAT IF I MAKE A DISQUALIFYING DISPOSITION? You will recognize ordinary income in the year of the disqualifying disposition equal to the excess of (i) the fair market value of the shares on the purchase date over (ii) purchase price paid for the shares. Any additional gain recognized upon the disqualifying disposition will be capital gain, which will be long-term if the shares are held for more than one (1) year. The amount of ordinary income you recognize upon such a disqualifying disposition will be reported by the Corporation on your W-2 wage statement for the year of such disposition, and any applicable withholding taxes which arise in connection with such disqualifying disposition will be collected from your wages or through your separate payment. Example: On your Entry Date into the initial offering period, the fair market value of the Common Stock is $10.00 per share. On the February 28, 1997 purchase date, 200 shares of Common Stock are purchased on your behalf at a price of $8.50 per share when the fair market value is $15.00 per share. On September 30, 1997, less than two years after your Entry Date into the offering period, you sell the shares for $20.00 per share in a disqualifying disposition. The income tax treatment of your $11.50 per share profit will be as follows: Ordinary Income $15.00 fair market value on the purchase date less Per Share $8.50 per share purchase price = $6.50 per share Short-Term $20.00 per share selling price less $15.00 fair Gain Per Share market value on the purchase date = $5.00 per share. T6. WHAT ARE THE APPLICABLE FEDERAL TAX RATES? Effective for the 1996 calendar year, the maximum Federal tax rate on ordinary income in excess of $263,750 ($131,875 for a married taxpayer filing a separate return) is 39.6%. The applicable $263,750 or $131,875 threshold is subject to future cost-of-living adjustments in taxable years beginning after December 31, 1996. Long-term capital gains are currently taxed at the same rates as ordinary income, subject to a maximum rate of 28%. Certain limitations are imposed upon a taxpayer's itemized deductions, and the personal exemptions claimed by the taxpayer are subject to phase-out. These limitations may result in the taxation of ordinary income at an effective top marginal rate in excess of 39.6%. T7. WHAT IF I DIE BEFORE DISPOSING OF THE SHARES? The personal representative of your estate must report as ordinary income in the year of your death the lesser of (i) the amount by which the fair market value of the shares on the date of your death exceeds the purchase price paid for such shares or (ii) fifteen percent (15%) of the fair market value of the shares on your Entry Date into the offering period during which those shares were purchased. 8. EX-10.10.1 11 AMENDED/RESTATED EMPLOYMENT AGMT. W/P. CARTWRIGHT 1 Exhibit 10.10.1 PETER CARTWRIGHT EMPLOYMENT AGREEMENT AMENDED AND RESTATED This Employment Agreement (this "Agreement") dated the fifteenth day of August, 1996, amends and restates the original Agreement between CALPINE CORPORATION, a California corporation (the "Company"), and PETER CARTWRIGHT ("Executive") dated the first day of January, 1995. This agreement provides for the employment of Executive on the terms and conditions set forth herein. WHEREAS, Executive has served as the President and Chief Executive Officer of the Company since its inception in 1984; and WHEREAS, the Company wishes to assure itself of the continued employment efforts of Executive for the period provided in this Agreement, and Executive is willing to continue to serve in the employ of the Company on a full-time basis for said period upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual agreements herein contained, intending to be legally bound, the Company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive hereby accepts such employment by the Company, upon the terms and conditions herein provided. 2. Term of Employment. Executive's employment with the Company pursuant to this Agreement shall commence on January 1, 1995 and shall continue through December 31, 1999, unless such employment is sooner terminated or subsequently extended as hereinafter provided. Unless earlier terminated, this Agreement shall automatically continue in effect for two (2) additional successive calendar year periods after December 31, 1999, unless either the Company or Executive elects to terminate this Agreement as of the start of any subsequent calendar year by providing not less than one hundred eighty (180) days prior written notice to the other party. The Company and Executive may agree to extend the Employment Period beyond such two (2) additional calendar year periods upon the terms and conditions of this Agreement or upon other terms, but neither the Company nor Executive is under any obligation to do so. The period during which this Agreement continues in effect shall constitute the "Employment Period". 3. Positions and Responsibilities. (a) Position. During the Employment Period, Executive shall serve as the Company's President and Chief Executive Officer ("CEO") and shall be responsible for the general management of the affairs of the Company, reporting directly to the Board of Directors of the Company (the "Board"). 2 (b) Duties. During the Employment Period, and subject to the control of the Board, Executive shall have general executive powers and active management and supervision over the property, business and affairs of the Company and shall perform such other executive and/or administrative duties consistent with the office of President and CEO as from time to time may be assigned to Executive by the Board, but subject to the conditions in this Agreement. Executive shall devote substantially Executive's full business time and attention to, and exert Executive's best efforts in, the performance of Executive's duties hereunder, so as to promote the business of the Company. Executive's principal place of business shall be at the Company's corporate offices in San Jose, California. (c) Board Membership. Executive shall serve as a member of the Board during the Employment Period, and the Company shall take all actions that are necessary or appropriate to cause Executive to be nominated and elected to the Board during the Employment Period. 4. Compensation. For all services rendered by Executive pursuant to this Agreement, the Company shall pay Executive, and Executive agrees to accept, the salary, bonuses and other benefits described below in this Section 4. (a) Salary. The Company shall pay Executive an annual base salary ("Base Salary") as determined by the Board in accordance with this Section 4, payable at periodic intervals in accordance with the Company's payroll practices for salaried employees. Executive's Base Salary for the calendar year ending December 31, 1994 is currently Three Hundred Thousand Dollars ($300,000.00). In accordance with Section 4(c) hereof, the amount of the Base Salary shall be reviewed by the Board on at least an annual basis for the year ending December 31, 1995 and all future years, and any increases will be effective as of the date determined appropriate by the Board. Executive's Base Salary may be increased for any reason, including to reflect inflation or such other adjustments as the Board may deem appropriate; provided, however, that Executive's Base Salary, as currently in effect as stated above or as so increased, may not be subsequently decreased, except with the prior written consent of Executive. (b) Bonuses. In addition to Base Salary, Executive shall be entitled to receive, for each fiscal year of the Company ending with or within the Employment Period, an annual bonus ("Bonus"), whether pursuant to a formal bonus or incentive plan or program of the Company or otherwise. Subject to this Section 4(b) and Section 4(c) hereof, such Bonus shall be based on such criteria as are in good faith deemed appropriate by the Board. Any Bonus earned by Executive for service or performance rendered in any fiscal year within the Employment Period shall be paid to Executive in accordance with the applicable plan or program and the Company's policies governing such matters. For the year ending December 31, 1994, Executive is entitled to participate in and receive a Bonus in accordance with the terms and conditions set forth in the Company's Annual Management Incentive Plan, a copy of which is attached hereto as Exhibit A; provided, however, that the target bonus for Executive as set forth in the current Annual Management Incentive Plan has been increased to seventy-five percent (75%). For the year ending December 31, 1995 and for all future years hereunder, Executive shall be entitled to participate in and receive a Bonus in accordance with 2. 3 the terms and conditions set forth in the Company's Annual Management Incentive Plan; provided, however, that the target bonus for Executive as set forth in the current Annual Management Incentive Plan shall similarly be increased to seventy-five percent (75%). In the event of Executive's death or Disability during the Employment Period, the Company shall pay to Executive or Executive's estate the pro rata portion of the Bonus that Executive would have earned in respect of the portion of the year prior to Executive's death or Disability. (c) Annual Compensation Review. Notwithstanding anything herein to the contrary, Executive's compensation, consisting of salary, bonus and stock option grants, shall be reviewed not less than annually by the Board of Directors. In order to assist the Board in accomplishing such review, the Company shall retain an independent executive compensation consultant to prepare a survey of the compensation of senior executives in positions similar to Executive. (d) Life Insurance. During the Employment Period, the Company shall provide to Executive a life insurance policy in accordance with the terms of the current policy maintained by the Company for Executive. (e) Health Care. During the Employment Period, Executive shall be eligible to participate in any health insurance programs and medical plans available to officers or employees of the Company. (f) Participation in Benefit and Equity Compensation Plans. During the Employment Period, Executive shall be eligible to receive all benefits, including those under equity participation and bonus programs, to which key employees are or become eligible under such plans or programs as may be established by the Board. In addition to any other plans or programs established by the Company, Executive shall be entitled to participate in the Company's Stock Option Program and any similar or replacement plan or program (the "Stock Option Program"). (g) 401(k) Plan Benefits. In addition to the other benefits to which Executive shall be entitled to under this Agreement, Executive shall be entitled to participate in the Company's 401(k) Plan and shall be entitled to receive the full benefit of contributions to be made by the Company for the benefit of Executive under the terms of the 401(k) Plan. 5. Vacation. During the Employment Period, Executive shall be entitled to vacation of twenty-five (25) business days in each year, with full salary, and Executive shall accrue paid vacation benefits during the Employment Period in accordance with the Company policy in effect for executive officers. 6. Indemnification. The Company shall maintain indemnification of Executive pursuant to the provisions of the Company's Articles of Incorporation and Bylaws to the fullest extent of California law and all other applicable law, and shall provide Executive with indemnification pursuant 3. 4 to the Company's standard indemnification agreement and any director's and officer's liability insurance policy maintained by the Company. 7. Benefits Payable Upon Disability or Death. (a) Disability Benefits. In the event of the Disability of Executive, the Company shall continue to pay Executive the salary payable to Executive in accordance with Section 4 hereof during the period of Executive's Disability; provided, however, that, in the event that Executive is disabled for a continuous period exceeding six (6) calendar months, the Company may elect at the expiration of this six (6) month period to terminate this Agreement and pay Executive the greater of (i) Executive's available monthly benefits from any existing Company-sponsored long-term disability plan; or (ii) sixty-six and two-thirds percent (66-2/3%) of the salary provided in Section 4(a) for the duration of the Employment Period. (b) Death Benefits. In the event of Executive's death during Executive's Disability or otherwise during the Employment Period, the Company shall cause payment to be made to Executive's most recently designated beneficiary (which, absent specific designation of a beneficiary for purposes of this provision, shall be Executive's most recently designated beneficiary under the Company's group life insurance program) a sum equal to three (3) times Executive's Base Salary. This obligation of the Company shall be discharged to the extent benefits are actually paid pursuant to the Company's group life insurance program, with the balance of said obligation to be discharged either by a cash payment from the Company, or, if the Company so elects, by supplementary life insurance policies to be obtained and maintained by the Company. 8. Severance Benefits. (a) Termination of Employment. In the event Executive's employment terminates for any reason, except as provided in Section 8(b) in connection with a Change of Control, then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If Executive's employment terminates by reason of Executive's voluntary resignation (and such termination is not an Involuntary Termination or a termination for Cause), then Executive shall not be entitled to receive severance or other benefits except for those (if any) to which Executive may be entitled under this Agreement or any separate agreement with the Company or as may then be established under the Company's then existing severance and benefit plans and policies at the time of such termination. (ii) Involuntary Termination Other Than For Cause. If Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) three (3) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) 4. 5 remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this Section 8(a)(ii)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 8(a)(ii)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of Internal Revenue Code of 1986, as amended ("Code"), Section 4980B ("COBRA"), by reason of Executive's termination of employment; (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option; and (D) the Company shall pay or reimburse Executive for any and all expenses incurred by Executive for outplacement services selected by Executive until the earlier of (I) the first anniversary of the date of termination of employment or (II) the date on which Executive commences employment with another employer. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other severance benefits under this Section 8. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (b) Termination Following a Change of Control. If Executive's employment with the Company is terminated at any time within twelve (12) months after a Change of Control, then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If Executive's employment terminates by reason of Executive's voluntary resignation (and such termination is not an Involuntary Termination or a termination for Cause), then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) two (2) times Executive's Current Compensation or 5. 6 (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this subsection 8(b)(i)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 8(b)(i)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of COBRA by reason of Executive's termination of employment; and (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option. (ii) Involuntary Termination Other Than For Cause. If Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the Company shall pay or otherwise provide to Executive the severance benefits described in Section 8(a)(ii) hereof. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other severance benefits under this Section 8. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (c) Benefit Reduction. Should any of Executive's severance benefits under this Section 8 (including any lump sum severance payment and any accelerated vesting of outstanding options or shares of stock) be deemed to be parachute payments under Code Section 280G, then, first, the dollar amount of any severance payment and, secondly, the accelerated vesting of any options or shares of stock, will be reduced to the extent (and only to the extent) necessary to provide Executive with the maximum after-tax benefit available, after taking into account any parachute 6. 7 excise tax which might otherwise be payable by Executive under Code Section 4999 and any analogous State income tax provision. 9. Noncompetition and Confidential Information. While employed by the Company, Executive will not directly or indirectly manage, operate, participate in, be employed by, perform consulting services for, or otherwise be connected in any manner with, any firm, person, corporation, or enterprise which would be competitive with the business of the Company. Executive will not at any time disclose to others any confidential information relating to the Company or to the business of the Company and confirms that such information constitutes the exclusive property of the Company. The foregoing shall not preclude Executive's investment in any such firm, corporation or enterprise provided that at any one time Executive and members of Executive's immediate family do not own more than one percent (1%) of any voting securities of any such entity. 10. Consulting. Executive and the Company may, but are not required to, enter into an agreement pursuant to which Executive will provide consulting services to the Company after the date of Executive's retirement or termination. Any consulting fees paid to Executive will be in addition to any retirement or severance payments. 11. Failure to Comply. If, for any reason other than Executive's death, Disability or Involuntary Termination, Executive shall cease to render services as required by this Agreement without the written consent of the Company, or if Executive shall breach the provisions of Section 9 hereof, then, except as provided in Section 8 hereof, Executive will thereby relinquish all rights to any benefits hereunder, including future salary payments and death benefits, and the Company shall reserve whatever rights, if any, it may have against Executive under this Agreement or otherwise. 12. Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and shall perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of Executive's rights hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 13. Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address from which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notice shall be directed to the attention of its Secretary. 7. 8 14. Miscellaneous Provisions. (a) Definition of Terms. The capitalized terms in this Agreement shall have the meanings set forth in this Agreement or in Appendix A hereto. (b) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by earnings that Executive may receive from any other source. (c) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer or representative of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision of another time. (d) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (f) Severability. If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity of unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (g) Arbitration. Any dispute or controversy arising under or in connection with this Agreement may be settled by arbitration in the County of San Francisco, California, in accordance with the rules of the American Arbitration Association then in effect. Such arbitration proceedings shall be nonbinding and any claim with respect to this Agreement, whether or not previously the subject of an arbitration proceeding, may be brought in any court of competent jurisdiction. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. 8. 9 (i) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company; provided, however, that if there is any such assignment, the Company will guarantee all payments and the performance of all obligations under this Agreement. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation or other entity that actually employs Executive. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. 15. Previous Agreement. This Agreement replaces the Fourth Employment Contract with Executive which covered the period from July 1, 1991 through December 31, 1995. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this day and year first above written. CALPINE CORPORATION: EXECUTIVE: By: /s/ PIERRE KRAFFT By: /s/ PETER CARTWRIGHT -------------------------------- ---------------------------------- Pierre Krafft, Chairman of the Peter Cartwright, President and Board of Directors Chief Executive Officer 9. 10 APPENDIX A DEFINITIONS Cause. "Cause" shall mean (i) material breach of any material terms of this Agreement, (ii) conviction of a felony, (iii) repeated unexplained or unjustified absence, (iv) willful breach of fiduciary duty under this Agreement or (v) gross negligence or willful misconduct where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries. Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company's current stockholder or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total combined voting power of the Company's then outstanding securities; or (ii) the majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 1. 11 Current Compensation. "Current Compensation" shall mean (i) an amount equal to the greater of (A) Executive's highest annual base salary for the year preceding the year in which a termination of employment occurs, (B) Executive's annual base salary at any time during the year in which a termination of employment occurs or (C) Executive's annual base salary on the date of termination of employment, plus (ii) an amount equal to the greater of the bonus payments Executive received in the preceding calendar year or the target bonus payment for the year in which a termination of employment occurs. Disability. "Disability" shall mean the inability of Executive to perform all the material duties of Executive's position as determined by an independent physician selected with the approval of the Company and Executive. Involuntary Termination. "Involuntary Termination" shall mean termination by the Company of Executive's employment for any reason other than for Cause, and shall include Executive's voluntary resignation following (i) the material breach by the Company of one or more of its obligations under this Agreement which are not otherwise corrected within ten (10) days following Executive's written notice to the Company of such breach, or (ii) the occurrence of any of the following events without Executive's express prior written consent: (A) a change in Executive's position with the Company which materially reduces Executive's level of responsibilities, (B) a reduction in Executive's level of compensation (including base salary, benefits and any non-discretionary and objective-standard incentive payment or bonus award), (C) a relocation of Executive's place of employment by more than twenty (20) miles from Executive's current place of employment, (D) the assignment of additional material job responsibilities or a reduction in job responsibilities inconsistent with Executive's position with the Company and Executive's prior responsibilities, or (E) in the event Executive is no longer the Company's President and CEO reporting to the Board. 2. EX-10.10.2 12 SENIOR VICE PRESIDENT EMPLOYMENT AGREEMENT 1 EXHIBIT 10.10.2 CALPINE CORPORATION SENIOR VICE PRESIDENT EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") has been entered into, effective as of August 1, 1996, between CALPINE CORPORATION, a California corporation (the "Company"), and Ann B. Curtis ("Executive") to provide for the employment of Executive on the terms and conditions set forth herein. WHEREAS, Executive has served as Senior Vice President of the Company since January, 1993; and WHEREAS, the Company wishes to assure itself of the continued employment efforts of Executive for the period provided in this Agreement, and Executive is willing to continue to serve in the employ of the Company on a full-time basis for said period upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual agreements herein contained, intending to be legally bound, the Company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive hereby accepts such employment by the Company, upon the terms and conditions herein provided. 2. Term of Employment. Executive's employment with the Company pursuant to this Agreement shall commence on August 1, 1996 and shall continue through July 31, 1999, unless such employment is sooner terminated or subsequently extended as hereinafter provided. Unless earlier terminated, this Agreement shall automatically continue in effect for two (2) additional successive calendar year periods after July 31, 1999, unless either the Company or Executive elects to terminate this Agreement as of the start of any subsequent calendar year by providing not less than one hundred eighty (180) days prior written notice to the other party. The Company and Executive may agree to extend the Employment Period beyond such two (2) additional calendar year periods upon the terms and conditions of this Agreement or upon other terms, but neither the Company nor Executive is under any obligation to do so. The period during which this Agreement continues in effect shall constitute the "Employment Period". 3. Positions and Responsibilities. (a) Position. During the Employment Period, Executive shall serve as the Company's Senior Vice President ("SVP") and shall be responsible for leading the Company's business management affairs, reporting to the President and Chief Executive Officer ("CEO") of the Company. (b) Duties. During the Employment Period, and subject to the control of the CEO, Executive shall have general executive powers and active management and supervision over the business management affairs of the Company and shall perform such other executive and/or administrative duties consistent with the office of SVP as from time to time may be assigned to Executive by the CEO, but subject to the conditions in this Agreement. Executive shall devote substantially Executive's full business time and attention to, and exert Executive's best efforts in, 1 2 the performance of Executive's duties hereunder, so as to promote the business of the Company. Executive's principal place of business shall be at the Company's corporate offices in San Jose, California. 4. Compensation. For all services rendered by Executive pursuant to this Agreement, the Company shall pay Executive, and Executive agrees to accept, the salary, bonuses and other benefits described below in this Section 4. (a) Salary. The Company shall pay Executive an annual base salary ("Base Salary") as determined by the CEO in accordance with this Section 4, payable at periodic intervals in accordance with the Company's payroll practices for salaried employees. Executive's Base Salary as of the effective date hereof is one hundred eighty thousand dollars ($180,000) per annum. In accordance with Section 4(c) hereof, the amount of the Base Salary shall be reviewed by the CEO on at least an annual basis, and any increases will be effective as of the date determined appropriate by the CEO. Executive's Base Salary may be increased for any reason, including to reflect inflation or such other adjustments as the CEO may deem appropriate; provided, however, that Executive's Base Salary, as currently in effect as stated above or as so increased, may not be subsequently decreased, except with the prior written consent of Executive. (b) Bonuses. In addition to Base Salary, Executive shall be entitled to receive, for each fiscal year of the Company ending with or within the Employment Period, an annual bonus ("Bonus"), whether pursuant to a formal bonus or incentive plan or program of the Company or otherwise. Subject to this Section 4(b) and Section 4(c) hereof, such Bonus shall be based on such criteria as are in good faith deemed appropriate by the CEO. Any Bonus earned by Executive for service or performance rendered in any fiscal year within the Employment Period shall be paid to Executive in accordance with the applicable plan or program and the Company's policies governing such matters. For the year ending December 31, 1996 and for all future years hereunder, Executive shall be entitled to participate in and receive a Bonus in accordance with the terms and conditions set forth in the Company's Annual Management Incentive Plan a copy of which is attached hereto as Appendix B; provided, however, that the target bonus for Executive as set forth in the current Annual Management Incentive Plan shall be forty percent (40%). In the event of Executive's death or Disability during the Employment Period, the Company shall pay to Executive or Executive's estate the pro rata portion of the Bonus that Executive would have earned in respect of the portion of the year prior to Executive's death or Disability. (c) Annual Compensation Review. Notwithstanding anything herein to the contrary, Executive's compensation, consisting of salary, bonus and stock option grants, shall be reviewed not less than annually by the CEO. (d) Life Insurance. During the Employment Period, the Company shall provide to Executive a life insurance policy in accordance with the terms of the current policy maintained by the Company for Executive. (e) Health Care. During the Employment Period, Executive shall be eligible to participate in any health insurance programs and medical plans available to officers or employees of the Company. 2 3 (f) Participation in Benefit and Equity Compensation Plans. During the Employment Period, Executive shall be eligible to receive all benefits, including those under equity participation and bonus programs, to which key employees are or become eligible under such plans or programs as may be established by the Company. In addition to any other plans or programs established by the Company, Executive shall be entitled to participate in the Company's Stock Option Program and any similar or replacement plan or program (the "Stock Option Program"). (g) 401(k) Plan Benefits. In addition to the other benefits to which Executive shall be entitled to under this Agreement, Executive shall be entitled to participate in the Company's 401(k) Plan and shall be entitled to receive the full benefit of contributions to be made by the Company for the benefit of Executive under the terms of the 401(k) Plan. 5. Vacation. During the Employment Period, Executive shall be entitled to vacation of twenty (20) business days in each year, with full salary, and Executive shall accrue paid vacation benefits during the Employment Period in accordance with the Company policy in effect for executive officers. 6. Indemnification. The Company shall maintain indemnification of Executive pursuant to the provisions of the Company's Articles of Incorporation and Bylaws to the fullest extent of California law and all other applicable law, and shall provide Executive with indemnification pursuant to the Company's standard indemnification agreement and any director's and officer's liability insurance policy maintained by the Company. 7. Benefits Payable Upon Disability or Death. (a) Disability Benefits. In the event of the Disability of Executive, the Company shall continue to pay Executive the salary payable to Executive in accordance with Section 4 hereof during the period of Executive's Disability; provided, however, that, in the event that Executive is disabled for a continuous period exceeding six (6) calendar months, the Company may elect at the expiration of this six (6) month period to terminate this Agreement and pay Executive the greater of (i) Executive's available monthly benefits from any existing Company-sponsored long-term disability plan; or (ii) sixty seven percent (67%) of the salary provided in Section 4(a) for the duration of the Employment Period. (b) Death Benefits. In the event of Executive's death during Executive's Disability or otherwise during the Employment Period, the Company shall cause payment to be made to Executive's most recently designated beneficiary (which, absent specific designation of a beneficiary for purposes of this provision, shall be Executive's most recently designated beneficiary under the Company's group life insurance program) a sum equal to three (3) times Executive's Base Salary. This obligation of the Company shall be discharged to the extent benefits are actually paid pursuant to the Company's group life insurance program, with the balance of said obligation to be discharged either by a cash payment from the Company, or, if the Company so elects, by supplementary life insurance policies to be obtained and maintained by the Company. 8. Severance Benefits. 3 4 (a) Termination of Employment. In the event Executive's employment terminates for any reason, except as provided in Section 8(b) in connection with a Change of Control, then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If Executive's employment terminates by reason of Executive's voluntary resignation (and such termination is not an Involuntary Termination or a termination for Cause), then Executive shall not be entitled to receive severance or other benefits except for those (if any) to which Executive may be entitled under this Agreement or any separate agreement with the Company or as may then be established under the Company's then existing severance and benefit plans and policies at the time of such termination. (ii) Involuntary Termination Other Than For Cause. If Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) three (3) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this Section 8(a)(ii)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 8(a)(ii)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of Internal Revenue Code of 1986, as amended ("Code"), Section 4980B ("COBRA"), by reason of Executive's termination of employment; (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option; and (D) the Company shall pay or reimburse Executive for any and all expenses incurred by Executive for outplacement services selected by Executive until the earlier of (I) the first anniversary of the date of termination of employment or (II) the date on which Executive commences employment with another employer. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other 4 5 severance benefits under this Section 8. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (b) Termination As a Result of a Change of Control. If Executive's employment with the Company is terminated as a result of a Change of Control (Change of Control for the purpose of Sections 8(b)(i)(ii) excludes an Initial Public Offering), then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If as a result of a Change of Control, material detrimental changes are made to Executive's position within twelve (12) months of the Change of Control and, or, Executive's position is relocated to a place more than sixty (60) miles from the Company's present office within six (6) months of the Change of Control, and as a result of these changes Executive's employment terminates by reason of voluntary resignation (and such termination is not an Involuntary Termination or a Termination for Cause), then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) two (2) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this subsection 8(b)(i)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 8(b)(i)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of COBRA by reason of Executive's termination of employment; and (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option. (ii) Involuntary Termination Other Than For Cause. If as a result of a Change of Control and within twelve (12) months of a Change of Control Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the Company 5 6 shall pay or otherwise provide to Executive the severance benefits described in Section 8(a)(ii) hereof. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other severance benefits under this Section 8. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (c) Benefit Reduction. Should any of Executive's severance benefits under this Section 8 (including any lump sum severance payment and any accelerated vesting of outstanding options or shares of stock) be deemed to be parachute payments under Code Section 280G, then, first, the dollar amount of any severance payment and, secondly, the accelerated vesting of any options or shares of stock, will be reduced to the extent (and only to the extent) necessary to provide Executive with the maximum after-tax benefit available, after taking into account any parachute excise tax which might otherwise be payable by Executive under Code Section 4999 and any analogous State income tax provision. 9. Noncompetition and Confidential Information. While employed by the Company, Executive will not directly or indirectly manage, operate, participate in, be employed by, perform consulting services for, or otherwise be connected in any manner with, any firm, person, corporation, or enterprise which would be competitive with the business of the Company. Executive will not at any time disclose to others any confidential information relating to the Company or to the business of the Company and confirms that such information constitutes the exclusive property of the Company. The foregoing shall not preclude Executive's investment in any such firm, corporation or enterprise provided that at any one time Executive and members of Executive's immediate family do not own more than one percent (1%) of any voting securities of any such entity. 10. Consulting. Executive and the Company may, but are not required to, enter into an agreement pursuant to which Executive will provide consulting services to the Company after the date of Executive's retirement or termination. Any consulting fees paid to Executive will be in addition to any retirement or severance payments. 11. Failure to Comply. If, for any reason other than Executive's death, Disability or Involuntary Termination, Executive shall cease to render services as required by this Agreement without the written consent of the Company, or if Executive shall breach the provisions of Section 9 hereof, then, except as provided in Section 8 hereof, Executive will thereby relinquish all rights to any benefits hereunder, including future salary payments and death benefits, and the Company shall reserve whatever rights, if any, it may have against Executive under this Agreement or otherwise. 12. Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and shall perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of Executive's rights hereunder shall inure to the benefit of, and 6 7 be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 13. Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address from which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notice shall be directed to the attention of its Secretary. 14. Miscellaneous Provisions. (a) Definition of Terms. The capitalized terms in this Agreement shall have the meanings set forth in this Agreement or in Appendix A hereto. (b) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by earnings that Executive may receive from any other source. (c) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer or representative of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision of another time. (d) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (f) Severability. If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity of unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (g) Arbitration. Any dispute or controversy arising under or in connection with this Agreement may be settled by arbitration in the County of San Francisco, California, in accordance with the rules of the American Arbitration Association then in effect. Such arbitration 7 8 proceedings shall be nonbinding and any claim with respect to this Agreement, whether or not previously the subject of an arbitration proceeding, may be brought in any court of competent jurisdiction. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (i) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company; provided, however, that if there is any such assignment, the Company will guarantee all payments and the performance of all obligations under this Agreement. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation or other entity that actually employs Executive. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. 15. Prior Agreements. This Agreement replaces any other agreements between the Company and the Executive. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this day and year first above written. CALPINE CORPORATION: EXECUTIVE: By: /s/ PETER CARTWRIGHT By: /s/ ANN B. CURTIS ------------------------------- -------------------------------- Peter Cartwright, President and Ann B. Curtis, Senior Vice President Chief Executive Officer 8 9 APPENDIX A DEFINITIONS Cause. "Cause" shall mean (i) material breach of any material terms of this Agreement, (ii) conviction of a felony, (iii) repeated unexplained or unjustified absence, (iv) willful breach of fiduciary duty under this Agreement or (v) gross negligence or willful misconduct where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries. Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company's current stockholder or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total combined voting power of the Company's then outstanding securities; or (ii) the majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Current Compensation. "Current Compensation" shall mean (i) an amount equal to the greater of (A) Executive's highest annual base salary for the year preceding the year in which a termination of employment occurs, (B) Executive's annual base salary at any time during the year in which a termination of employment occurs or (C) Executive's annual base salary on the date of termination of employment, plus (ii) an amount equal to the greater of the bonus payments Executive received in the preceding calendar year or the target bonus payment for the year in which a termination of employment occurs. 1 10 Disability. "Disability" shall mean the inability of Executive to perform all the material duties of Executive's position as determined by an independent physician selected with the approval of the Company and Executive. Involuntary Termination. "Involuntary Termination" shall mean termination by the Company of Executive's employment for any reason other than for Cause, and shall include Executive's voluntary resignation following (i) the material breach by the Company of one or more of its obligations under this Agreement which are not otherwise corrected within ten (10) days following Executive's written notice to the Company of such breach, or (ii) the occurrence of any of the following events without Executive's express prior written consent: (A) a change in Executive's position with the Company which materially reduces Executive's level of responsibilities, (B) a reduction in Executive's level of compensation (including base salary, benefits and any non-discretionary and objective-standard incentive payment or bonus award), (C) a relocation of Executive's place of employment by more than twenty (20) miles from Executive's current place of employment, (D) the assignment of additional material job responsibilities or a reduction in job responsibilities inconsistent with Executive's position with the Company and Executive's prior responsibilities, or (E) in the event Executive is no longer the Company's Senior Vice President reporting to the CEO. 2 11 APPENDIX B CALPINE CORPORATION ANNUAL MANAGEMENT INCENTIVE PLAN I. Purpose The purpose of the Calpine Corporation (the "Company") Annual Management Incentive Plan ("the Plan") is to assist the Company in attracting and retaining the desired management talent, building team effort, recognizing achievement of predetermined business objectives and providing increased performance motivation through established bonus opportunities associated with achieving or exceeding these objectives. II. Participation All full time regular non-operations and maintenance hourly employees of the Company are eligible to participate in the Plan. III. Administration The Plan shall be administered by the President of the Company. The President shall have broad authority to interpret the Plan, subject to the following decisions reserved for the Board of Directors of the Company (the "Board"): 1. The approval of the funding formula discussed in Section IV of this document. 2. The approval of the amount of aggregate incentive payments made under the Plan in any one year. 3. Interpretation of the Plan on any matters in which the President is not a disinterested party. Any decisions of the President in the interpretation of the Plan may be appealed in writing to the Board. However, all participants agree that any decision of the majority of the Board is final and binding on all parties. IV. Funding The building block for establishing the bonus funding is target bonuses. A target bonus amount will be communicated to each participant when first hired, expressed as a percentage of his/her base salary. The target bonus amount is that which the Company will be willing to pay if the participant and the Company achieve planned performance objectives. The target bonus pool for each bonus year will be equal to the base salaries of all eligible employees times the target bonus percentage established in Section V of this document for each employee level. The target performance for the Company will be established by the Board or a committee thereof in December of the year preceding the bonus year. The target performance will consist of two elements: 12 Annual Management Incentive Plan Page 2 - Target profits before taxes for the bonus year, and - Other targets including new business booked and such other non-objective targets as the Board may establish. The maximum bonus pool will be: Actual Performance Before Taxes ------------------------------- Target Bonus Pool x Target Performance Before Taxes (Up to a maximum of 2X target bonus pool) The bonus pool will be: Actual Performance ------------------ Maximum Bonus Pool x Target Performance The actual performance will be determined by the Board in the first quarter after the end of the bonus year based on its judgment of the overall achievement of the Company in meeting/exceeding the target performance. The Board's judgment will be final. V. Allocation The allocation of the bonus pool to individual participants is based on three factors. 1. The individual's target bonus amount. 2. The level of funding of the pool, as described above. 3. A measure of individual performance. A portion of each participant's bonus will be paid at the same level as the funding level. For example, if the funding level is 125 percent of target, a designated portion of each participant's bonus will be paid at 125 percent of target bonus amount. For the President, 100 percent of the target bonus amount will be paid at the same level as the funding level. The balance of each participant's bonus will be based on achievement of individual objectives. The levels of target bonuses and the allocation of the bonus fund for each level is as follows: INDIVIDUAL BONUS ALLOCATION FORMULA
TARGET COMPANY INDIVIDUAL CLASSIFICATION BONUS PERFORMANCE PERFORMANCE - -------------------------------------------------------------------------------- President 75% 100% 0%
13 Annual Management Incentive Plan Page 3 Sr. Management Sr. VP - Bus. Mgmt. 40% 50% 50% Sr. VP - Operations 40% 50% 50% VP - Bus. Development 30% 50% 50% VP - Finance 30% 50% 50% VP - Asset Management 30% 50% 50% Management 20% 50% 50% Professional 15% 50% 50% Administrative/Technical 10% 50% 50% Clerical 5% 50% 50%
VII. Employment Rights The selection of an employee of the Company as a participant will in no way enhance the employee's right to continued employment with Calpine nor limit the Company in its right to terminate or otherwise change the employment relationship with the employee. VIII. Governing Law The Plan shall be administered in accordance with California law, unless a superseding Federal law is applicable. EX-10.10.3 13 SENIOR VICE PRESIDENT EMPLOYMENT AGREEMENT 1 Exhibit 10.10.3 CALPINE CORPORATION SENIOR VICE PRESIDENT EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") has been entered into, effective as of August 1, 1996, between CALPINE CORPORATION, a California corporation (the "Company"), and Lynn A. Kerby ("Executive") to provide for the employment of Executive on the terms and conditions set forth herein. WHEREAS, Executive has served as Senior Vice President of the Company since April, 1993; and WHEREAS, the Company wishes to assure itself of the continued employment efforts of Executive for the period provided in this Agreement, and Executive is willing to continue to serve in the employ of the Company on a full-time basis for said period upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual agreements herein contained, intending to be legally bound, the Company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive hereby accepts such employment by the Company, upon the terms and conditions herein provided. 2. Term of Employment. Executive's employment with the Company pursuant to this Agreement shall commence on August 1, 1996 and shall continue through July 31, 1999, unless such employment is sooner terminated or subsequently extended as hereinafter provided. Unless earlier terminated, this Agreement shall automatically continue in effect for two (2) additional successive calendar year periods after July 31, 1999, unless either the Company or Executive elects to terminate this Agreement as of the start of any subsequent calendar year by providing not less than one hundred eighty (180) days prior written notice to the other party. The Company and Executive may agree to extend the Employment Period beyond such two (2) additional calendar year periods upon the terms and conditions of this Agreement or upon other terms, but neither the Company nor Executive is under any obligation to do so. The period during which this Agreement continues in effect shall constitute the "Employment Period". 3. Positions and Responsibilities. (a) Position. During the Employment Period, Executive shall serve as the Company's Senior Vice President ("SVP") and shall be responsible for leading the Company's operations and maintenance affairs, reporting to the President and Chief Executive Officer ("CEO") of the Company. (b) Duties. During the Employment Period, and subject to the control of the CEO, Executive shall have general executive powers and active management and supervision over the operations and maintenance affairs of the Company and shall perform such other executive and/or administrative duties consistent with the office of SVP as from time to time may be assigned to Executive by the CEO, but subject to the conditions in this Agreement. Executive shall devote substantially Executive's full business time and attention to, and exert Executive's 1 2 best efforts in, the performance of Executive's duties hereunder, so as to promote the business of the Company. Executive's principal place of business shall be at the Company's corporate offices in San Jose, California. 4. Compensation. For all services rendered by Executive pursuant to this Agreement, the Company shall pay Executive, and Executive agrees to accept, the salary, bonuses and other benefits described below in this Section 4. (a) Salary. The Company shall pay Executive an annual base salary ("Base Salary") as determined by the CEO in accordance with this Section 4, payable at periodic intervals in accordance with the Company's payroll practices for salaried employees. Executive's Base Salary as of the effective date hereof is two hundred ten thousand dollars ($210,000) per annum. In accordance with Section 4(c) hereof, the amount of the Base Salary shall be reviewed by the CEO on at least an annual basis, and any increases will be effective as of the date determined appropriate by the CEO. Executive's Base Salary may be increased for any reason, including to reflect inflation or such other adjustments as the CEO may deem appropriate; provided, however, that Executive's Base Salary, as currently in effect as stated above or as so increased, may not be subsequently decreased, except with the prior written consent of Executive. (b) Bonuses. In addition to Base Salary, Executive shall be entitled to receive, for each fiscal year of the Company ending with or within the Employment Period, an annual bonus ("Bonus"), whether pursuant to a formal bonus or incentive plan or program of the Company or otherwise. Subject to this Section 4(b) and Section 4(c) hereof, such Bonus shall be based on such criteria as are in good faith deemed appropriate by the CEO. Any Bonus earned by Executive for service or performance rendered in any fiscal year within the Employment Period shall be paid to Executive in accordance with the applicable plan or program and the Company's policies governing such matters. For the year ending December 31, 1996 and for all future years hereunder, Executive shall be entitled to participate in and receive a Bonus in accordance with the terms and conditions set forth in the Company's Annual Management Incentive Plan a copy of which is attached hereto as Appendix B; provided, however, that the target bonus for Executive as set forth in the current Annual Management Incentive Plan shall be forty percent (40%). In the event of Executive's death or Disability during the Employment Period, the Company shall pay to Executive or Executive's estate the pro rata portion of the Bonus that Executive would have earned in respect of the portion of the year prior to Executive's death or Disability. (c) Annual Compensation Review. Notwithstanding anything herein to the contrary, Executive's compensation, consisting of salary, bonus and stock option grants, shall be reviewed not less than annually by the CEO. (d) Life Insurance. During the Employment Period, the Company shall provide to Executive a life insurance policy in accordance with the terms of the current policy maintained by the Company for Executive. (e) Health Care. During the Employment Period, Executive shall be eligible to participate in any health insurance programs and medical plans available to officers or employees of the Company. 2 3 (f) Participation in Benefit and Equity Compensation Plans. During the Employment Period, Executive shall be eligible to receive all benefits, including those under equity participation and bonus programs, to which key employees are or become eligible under such plans or programs as may be established by the Company. In addition to any other plans or programs established by the Company, Executive shall be entitled to participate in the Company's Stock Option Program and any similar or replacement plan or program (the "Stock Option Program"). (g) 401(k) Plan Benefits. In addition to the other benefits to which Executive shall be entitled to under this Agreement, Executive shall be entitled to participate in the Company's 401(k) Plan and shall be entitled to receive the full benefit of contributions to be made by the Company for the benefit of Executive under the terms of the 401(k) Plan. 5. Vacation. During the Employment Period, Executive shall be entitled to vacation of twenty (20) business days in each year, with full salary, and Executive shall accrue paid vacation benefits during the Employment Period in accordance with the Company policy in effect for executive officers. 6. Indemnification. The Company shall maintain indemnification of Executive pursuant to the provisions of the Company's Articles of Incorporation and Bylaws to the fullest extent of California law and all other applicable law, and shall provide Executive with indemnification pursuant to the Company's standard indemnification agreement and any director's and officer's liability insurance policy maintained by the Company. 7. Benefits Payable Upon Disability or Death. (a) Disability Benefits. In the event of the Disability of Executive, the Company shall continue to pay Executive the salary payable to Executive in accordance with Section 4 hereof during the period of Executive's Disability; provided, however, that, in the event that Executive is disabled for a continuous period exceeding six (6) calendar months, the Company may elect at the expiration of this six (6) month period to terminate this Agreement and pay Executive the greater of (i) Executive's available monthly benefits from any existing Company- sponsored long-term disability plan; or (ii) sixty seven percent (67%) of the salary provided in Section 4(a) for the duration of the Employment Period. (b) Death Benefits. In the event of Executive's death during Executive's Disability or otherwise during the Employment Period, the Company shall cause payment to be made to Executive's most recently designated beneficiary (which, absent specific designation of a beneficiary for purposes of this provision, shall be Executive's most recently designated beneficiary under the Company's group life insurance program) a sum equal to three (3) times Executive's Base Salary. This obligation of the Company shall be discharged to the extent benefits are actually paid pursuant to the Company's group life insurance program, with the balance of said obligation to be discharged either by a cash payment from the Company, or, if the Company so elects, by supplementary life insurance policies to be obtained and maintained by the Company. 8. Severance Benefits. 3 4 (a) Termination of Employment. In the event Executive's employment terminates for any reason, except as provided in Section 8(b) in connection with a Change of Control, then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If Executive's employment terminates by reason of Executive's voluntary resignation (and such termination is not an Involuntary Termination or a termination for Cause), then Executive shall not be entitled to receive severance or other benefits except for those (if any) to which Executive may be entitled under this Agreement or any separate agreement with the Company or as may then be established under the Company's then existing severance and benefit plans and policies at the time of such termination. (ii) Involuntary Termination Other Than For Cause. If Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) three (3) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this Section 8(a)(ii)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 8(a)(ii)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of Internal Revenue Code of 1986, as amended ("Code"), Section 4980B ("COBRA"), by reason of Executive's termination of employment; (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option; and (D) the Company shall pay or reimburse Executive for any and all expenses incurred by Executive for outplacement services selected by Executive until the earlier of (I) the first anniversary of the date of termination of employment or (II) the date on which Executive commences employment with another employer. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other 4 5 severance benefits under this Section 8. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (b) Termination As a Result of a Change of Control. If Executive's employment with the Company is terminated as a result of a Change of Control (Change of Control for the purpose of Sections 8(b)(i)(ii) excludes an Initial Public Offering), then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If as a result of a Change of Control, material detrimental changes are made to Executive's position within twelve (12) months of the Change of Control and, or, Executive's position is relocated to a place more than sixty (60) miles from the Company's present office within six (6) months of the Change of Control, and as a result of these changes Executive's employment terminates by reason of voluntary resignation (and such termination is not an Involuntary Termination or a Termination for Cause), then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) two (2) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this subsection 8(b)(i)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 8(b)(i)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of COBRA by reason of Executive's termination of employment; and (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option. (ii) Involuntary Termination Other Than For Cause. If as a result of a Change of Control and within twelve (12) months of a Change of Control Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the Company 5 6 shall pay or otherwise provide to Executive the severance benefits described in Section 8(a)(ii) hereof. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other severance benefits under this Section 8. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (c) Benefit Reduction. Should any of Executive's severance benefits under this Section 8 (including any lump sum severance payment and any accelerated vesting of outstanding options or shares of stock) be deemed to be parachute payments under Code Section 280G, then, first, the dollar amount of any severance payment and, secondly, the accelerated vesting of any options or shares of stock, will be reduced to the extent (and only to the extent) necessary to provide Executive with the maximum after-tax benefit available, after taking into account any parachute excise tax which might otherwise be payable by Executive under Code Section 4999 and any analogous State income tax provision. 9. Noncompetition and Confidential Information. While employed by the Company, Executive will not directly or indirectly manage, operate, participate in, be employed by, perform consulting services for, or otherwise be connected in any manner with, any firm, person, corporation, or enterprise which would be competitive with the business of the Company. Executive will not at any time disclose to others any confidential information relating to the Company or to the business of the Company and confirms that such information constitutes the exclusive property of the Company. The foregoing shall not preclude Executive's investment in any such firm, corporation or enterprise provided that at any one time Executive and members of Executive's immediate family do not own more than one percent (1%) of any voting securities of any such entity. 10. Consulting. Executive and the Company may, but are not required to, enter into an agreement pursuant to which Executive will provide consulting services to the Company after the date of Executive's retirement or termination. Any consulting fees paid to Executive will be in addition to any retirement or severance payments. 11. Failure to Comply. If, for any reason other than Executive's death, Disability or Involuntary Termination, Executive shall cease to render services as required by this Agreement without the written consent of the Company, or if Executive shall breach the provisions of Section 9 hereof, then, except as provided in Section 8 hereof, Executive will thereby relinquish all rights to any benefits hereunder, including future salary payments and death benefits, and the Company shall reserve whatever rights, if any, it may have against Executive under this Agreement or otherwise. 12. Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and shall perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of Executive's rights hereunder shall inure to the benefit of, and 6 7 be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 13. Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address from which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notice shall be directed to the attention of its Secretary. 14. Miscellaneous Provisions. (a) Definition of Terms. The capitalized terms in this Agreement shall have the meanings set forth in this Agreement or in Appendix A hereto. (b) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by earnings that Executive may receive from any other source. (c) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer or representative of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision of another time. (d) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (f) Severability. If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity of unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (g) Arbitration. Any dispute or controversy arising under or in connection with this Agreement may be settled by arbitration in the County of San Francisco, California, in accordance with the rules of the American Arbitration Association then in effect. Such arbitration 7 8 proceedings shall be nonbinding and any claim with respect to this Agreement, whether or not previously the subject of an arbitration proceeding, may be brought in any court of competent jurisdiction. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (i) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company; provided, however, that if there is any such assignment, the Company will guarantee all payments and the performance of all obligations under this Agreement. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation or other entity that actually employs Executive. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. 15. Prior Agreements. This Agreement replaces any other agreements between the Company and the Executive. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this day and year first above written. CALPINE CORPORATION: EXECUTIVE: By: /s/ PETER CARTWRIGHT By: /s/ LYNN A. KERBY ------------------------------- -------------------------------- Peter Cartwright, President and Lynn A. Kerby Chief Executive Officer Senior Vice President 8 9 APPENDIX A DEFINITIONS Cause. "Cause" shall mean (i) material breach of any material terms of this Agreement, (ii) conviction of a felony, (iii) repeated unexplained or unjustified absence, (iv) willful breach of fiduciary duty under this Agreement or (v) gross negligence or willful misconduct where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries. Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company's current stockholder or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total combined voting power of the Company's then outstanding securities; or (ii) the majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Current Compensation. "Current Compensation" shall mean (i) an amount equal to the greater of (A) Executive's highest annual base salary for the year preceding the year in which a termination of employment occurs, (B) Executive's annual base salary at any time during the year in which a termination of employment occurs or (C) Executive's annual base salary on the date of termination of employment, plus (ii) an amount equal to the greater of the bonus payments Executive received in the preceding calendar year or the target bonus payment for the year in which a termination of employment occurs. 1 10 Disability. "Disability" shall mean the inability of Executive to perform all the material duties of Executive's position as determined by an independent physician selected with the approval of the Company and Executive. Involuntary Termination. "Involuntary Termination" shall mean termination by the Company of Executive's employment for any reason other than for Cause, and shall include Executive's voluntary resignation following (i) the material breach by the Company of one or more of its obligations under this Agreement which are not otherwise corrected within ten (10) days following Executive's written notice to the Company of such breach, or (ii) the occurrence of any of the following events without Executive's express prior written consent: (A) a change in Executive's position with the Company which materially reduces Executive's level of responsibilities, (B) a reduction in Executive's level of compensation (including base salary, benefits and any non-discretionary and objective-standard incentive payment or bonus award), (C) a relocation of Executive's place of employment by more than twenty (20) miles from Executive's current place of employment, (D) the assignment of additional material job responsibilities or a reduction in job responsibilities inconsistent with Executive's position with the Company and Executive's prior responsibilities, or (E) in the event Executive is no longer the Company's Senior Vice President reporting to the CEO. 2 11 APPENDIX B CALPINE CORPORATION ANNUAL MANAGEMENT INCENTIVE PLAN I. Purpose The purpose of the Calpine Corporation (the "Company") Annual Management Incentive Plan ("the Plan") is to assist the Company in attracting and retaining the desired management talent, building team effort, recognizing achievement of predetermined business objectives and providing increased performance motivation through established bonus opportunities associated with achieving or exceeding these objectives. II. Participation All full time regular non-operations and maintenance hourly employees of the Company are eligible to participate in the Plan. III. Administration The Plan shall be administered by the President of the Company. The President shall have broad authority to interpret the Plan, subject to the following decisions reserved for the Board of Directors of the Company (the "Board"): 1. The approval of the funding formula discussed in Section IV of this document. 2. The approval of the amount of aggregate incentive payments made under the Plan in any one year. 3. Interpretation of the Plan on any matters in which the President is not a disinterested party. Any decisions of the President in the interpretation of the Plan may be appealed in writing to the Board. However, all participants agree that any decision of the majority of the Board is final and binding on all parties. IV. Funding The building block for establishing the bonus funding is target bonuses. A target bonus amount will be communicated to each participant when first hired, expressed as a percentage of his/her base salary. The target bonus amount is that which the Company will be willing to pay if the participant and the Company achieve planned performance objectives. The target bonus pool for each bonus year will be equal to the base salaries of all eligible employees times the target bonus percentage established in Section V of this document for each employee level. The target performance for the Company will be established by the Board or a committee thereof in December of the year preceding the bonus year. The target performance will consist of two elements: 12 Annual Management Incentive Plan Page 2 - Target profits before taxes for the bonus year, and - Other targets including new business booked and such other non-objective targets as the Board may establish. The maximum bonus pool will be: Actual Performance Before Taxes ------------------------------- Target Bonus Pool x Target Performance Before Taxes (Up to a maximum of 2X target bonus pool) The bonus pool will be: Actual Performance ------------------ Maximum Bonus Pool x Target Performance The actual performance will be determined by the Board in the first quarter after the end of the bonus year based on its judgment of the overall achievement of the Company in meeting/exceeding the target performance. The Board's judgment will be final. V. Allocation The allocation of the bonus pool to individual participants is based on three factors. 1. The individual's target bonus amount. 2. The level of funding of the pool, as described above. 3. A measure of individual performance. A portion of each participant's bonus will be paid at the same level as the funding level. For example, if the funding level is 125 percent of target, a designated portion of each participant's bonus will be paid at 125 percent of target bonus amount. For the President, 100 percent of the target bonus amount will be paid at the same level as the funding level. The balance of each participant's bonus will be based on achievement of individual objectives. The levels of target bonuses and the allocation of the bonus fund for each level is as follows: INDIVIDUAL BONUS ALLOCATION FORMULA
TARGET COMPANY INDIVIDUAL CLASSIFICATION BONUS PERFORMANCE PERFORMANCE - ------------------------------------------------------------------------------------------------------- President 75% 100% 0%
13 Annual Management Incentive Plan Page 3 Sr. Management Sr. VP - Bus. Mgmt. 40% 50% 50% Sr. VP - Operations 40% 50% 50% VP - Bus. Development 30% 50% 50% VP - Finance 30% 50% 50% VP - Asset Management 30% 50% 50% Management 20% 50% 50% Professional 15% 50% 50% Administrative/Technical 10% 50% 50% Clerical 5% 50% 50%
VII. Employment Rights The selection of an employee of the Company as a participant will in no way enhance the employee's right to continued employment with Calpine nor limit the Company in its right to terminate or otherwise change the employment relationship with the employee. VIII. Governing Law The Plan shall be administered in accordance with California law, unless a superseding Federal law is applicable. EX-10.10.4 14 VICE PRESIDENT EMPLOYMENT AGREEMENT 1 Exhibit 10.10.4 CALPINE CORPORATION VICE PRESIDENT EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") has been entered into, effective as of August 1, 1996, between CALPINE CORPORATION, a California corporation (the "Company"), and Ronald A. Walter ("Executive") to provide for the employment of Executive on the terms and conditions set forth herein. WHEREAS, Executive has served as the Vice President of the Company since August, 1990; and WHEREAS, the Company wishes to assure itself of the continued employment efforts of Executive for the period provided in this Agreement, and Executive is willing to continue to serve in the employ of the Company on a full-time basis for said period upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual agreements herein contained, intending to be legally bound, the Company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive hereby accepts such employment by the Company, upon the terms and conditions herein provided. 2. Term of Employment. Executive's employment with the Company pursuant to this Agreement shall commence on August 1, 1996 and shall continue through July 31, 1999, unless such employment is sooner terminated or subsequently extended as hereinafter provided. Unless earlier terminated, this Agreement shall automatically continue in effect for two (2) additional successive calendar year periods after July 31, 1999, unless either the Company or Executive elects to terminate this Agreement as of the start of any subsequent calendar year by providing not less than one hundred eighty (180) days prior written notice to the other party. The Company and Executive may agree to extend the Employment Period beyond such two (2) additional calendar year periods upon the terms and conditions of this Agreement or upon other terms, but neither the Company nor Executive is under any obligation to do so. The period during which this Agreement continues in effect shall constitute the "Employment Period". 3. Positions and Responsibilities. During the Employment Period, Executive shall serve as the Company's Vice President ("VP") and shall be responsible for business development for the Company, reporting directly to the President and Chief Executive Officer ("CEO") of the Company. 4. Compensation. For all services rendered by Executive pursuant to this Agreement, the Company shall pay Executive, and Executive agrees to accept, the salary, bonuses and other benefits described below in this Section 4. (a) Salary. The Company shall pay Executive an annual base salary ("Base Salary") as determined by the CEO in accordance with this Section 4, payable at periodic intervals in accordance with the Company's payroll practices for salaried employees. Executive's Base Salary as of the effective date hereof is one hundred forty eight thousand dollars ($148,000) per 1 2 annum. In accordance with Section 4(c) hereof, the amount of the Base Salary shall be reviewed by the CEO on at least an annual basis, and any increases will be effective as of the date determined appropriate by the CEO. Executive's Base Salary may be increased for any reason, including to reflect inflation or such other adjustments as the CEO may deem appropriate; provided, however, that Executive's Base Salary, as currently in effect as stated above or as so increased, may not be subsequently decreased, except with the prior written consent of Executive. (b) Bonuses. In addition to Base Salary, Executive shall be entitled to receive, for each fiscal year of the Company ending with or within the Employment Period, an annual bonus ("Bonus"), whether pursuant to a formal bonus or incentive plan or program of the Company or otherwise. The Company's Annual Management Incentive Plan, in place as of the effective date hereof, is attached as Appendix B. (c) Annual Compensation Review. Notwithstanding anything herein to the contrary, Executive's compensation, consisting of salary, bonus and stock option grants, shall be reviewed not less than annually by the CEO. (d) Life Insurance. During the Employment Period, the Company shall provide to Executive a life insurance policy in accordance with the terms of the current policy maintained by the Company for Executive. (e) Health Care. During the Employment Period, Executive shall be eligible to participate in any health insurance programs and medical plans available to officers or employees of the Company. (f) Participation in Benefit and Equity Compensation Plans. During the Employment Period, Executive shall be eligible to receive all benefits, including those under equity participation and bonus programs, to which key employees are or become eligible under such plans or programs as may be established by the Company. In addition to any other plans or programs established by the Company, Executive shall be entitled to participate in the Company's Stock Option Program and any similar or replacement plan or program (the "Stock Option Program"). (g) 401(k) Plan Benefits. In addition to the other benefits to which Executive shall be entitled to under this Agreement, Executive shall be entitled to participate in the Company's 401(k) Plan and shall be entitled to receive the full benefit of contributions to be made by the Company for the benefit of Executive under the terms of the 401(k) Plan. 5. Severance Benefits. (a) Termination of Employment As a Result of a Change of Control. If Executive's employment with the Company is terminated as a result of a Change of Control (Change of Control for the purpose of Sections 5(a)(i)(ii) excludes an Initial Public Offering), then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If following a Change of Control, material detrimental changes are made to Executive's position within twelve (12) months of the Change of Control and, or, Executive's position is relocated to a place more than sixty (60) miles from 2 3 the Company's present office within six (6) months of the Change of Control, and as a result of these changes Executive's employment terminates by reason of voluntary resignation (and such termination is not an Involuntary Termination or a Termination for Cause), then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) two (2) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this subsection 5(a)(i)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 5(a)(i)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of COBRA by reason of Executive's termination of employment; and (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option. (ii) Involuntary Termination Other Than For Cause. If as a result of a Change of Control and within twelve (12) months of a Change of Control Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) three (3) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise 3 4 receivable by Executive pursuant to this Section 5(a)(ii)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 5(a)(ii)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of Internal Revenue Code of 1986, as amended ("Code"), Section 4980B ("COBRA"), by reason of Executive's termination of employment; (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option; and (D) the Company shall pay or reimburse Executive for any and all expenses incurred by Executive for outplacement services selected by Executive until the earlier of (I) the first anniversary of the date of termination of employment or (II) the date on which Executive commences employment with another employer. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other severance benefits under this Section 5. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (b) Benefit Reduction. Should any of Executive's severance benefits under this Section 5 (including any lump sum severance payment and any accelerated vesting of outstanding options or shares of stock) be deemed to be parachute payments under Code Section 280G, then, first, the dollar amount of any severance payment and, secondly, the accelerated vesting of any options or shares of stock, will be reduced to the extent (and only to the extent) necessary to provide Executive with the maximum after-tax benefit available, after taking into account any parachute excise tax which might otherwise be payable by Executive under Code Section 4999 and any analogous State income tax provision. 6. Noncompetition and Confidential Information. While employed by the Company, Executive will not directly or indirectly manage, operate, participate in, be employed by, perform consulting services for, or otherwise be connected in any manner with, any firm, person, corporation, or enterprise which would be competitive with the business of the Company. Executive will not at any time disclose to others any confidential information relating to the Company or to the business of the Company and confirms that such information constitutes the exclusive property of the Company. The foregoing shall not preclude Executive's investment in any such firm, corporation or enterprise provided that at any one time Executive and members of Executive's immediate family do not own more than one percent (1%) of any voting securities of any such entity. 7. Successors. Any successor to the Company or to all or substantially all of the Company's business or assets shall assume the obligations under this Agreement. 4 5 8. Miscellaneous Provisions. (a) Definition of Terms. The capitalized terms in this Agreement shall have the meanings set forth in this Agreement or in Appendix A hereto. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer or representative of the Company (other than Executive). (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this day and year first above written. CALPINE CORPORATION: EXECUTIVE: By: /s/ PETER CARTWRIGHT /s/ RONALD A. WALTER --------------------------------- ---------------------------------- Peter Cartwright, President and Ronald A. Walter, Vice President Chief Executive Officer 5 6 APPENDIX A DEFINITIONS Cause. "Cause" shall mean (i) material breach of any material terms of this Agreement, (ii) conviction of a felony, (iii) repeated unexplained or unjustified absence, (iv) willful breach of fiduciary duty under this Agreement or (v) gross negligence or willful misconduct where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries. Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company's current stockholder or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total combined voting power of the Company's then outstanding securities; or (ii) the majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Current Compensation. "Current Compensation" shall mean (i) an amount equal to the greater of (A) Executive's highest annual base salary for the year preceding the year in which a termination of employment occurs, (B) Executive's annual base salary at any time during the year in which a termination of employment occurs or (C) Executive's annual base salary on the date of termination of employment, plus (ii) an amount equal to the greater of the bonus payments Executive received in the preceding calendar year or the target bonus payment for the year in which a termination of employment occurs. 1 7 Involuntary Termination. "Involuntary Termination" shall mean termination by the Company of Executive's employment for any reason other than for Cause, and shall include Executive's voluntary resignation following (i) the material breach by the Company of one or more of its obligations under this Agreement which are not otherwise corrected within ten (10) days following Executive's written notice to the Company of such breach, or (ii) the occurrence of any of the following events without Executive's express prior written consent: (A) a change in Executive's position with the Company which materially reduces Executive's level of responsibilities, (B) a reduction in Executive's level of compensation (including base salary, benefits and any non-discretionary and objective-standard incentive payment or bonus award), (C) a relocation of Executive's place of employment by more than twenty (20) miles from Executive's current place of employment, (D) the assignment of additional material job responsibilities or a reduction in job responsibilities inconsistent with Executive's position with the Company and Executive's prior responsibilities, or (E) in the event Executive is no longer the Company's Vice President. 2 8 APPENDIX B CALPINE CORPORATION ANNUAL MANAGEMENT INCENTIVE PLAN I. Purpose The purpose of the Calpine Corporation (the "Company") Annual Management Incentive Plan ("the Plan") is to assist the Company in attracting and retaining the desired management talent, building team effort, recognizing achievement of predetermined business objectives and providing increased performance motivation through established bonus opportunities associated with achieving or exceeding these objectives. II. Participation All full time regular non-operations and maintenance hourly employees of the Company are eligible to participate in the Plan. III. Administration The Plan shall be administered by the President of the Company. The President shall have broad authority to interpret the Plan, subject to the following decisions reserved for the Board of Directors of the Company (the "Board"): 1. The approval of the funding formula discussed in Section IV of this document. 2. The approval of the amount of aggregate incentive payments made under the Plan in any one year. 3. Interpretation of the Plan on any matters in which the President is not a disinterested party. Any decisions of the President in the interpretation of the Plan may be appealed in writing to the Board. However, all participants agree that any decision of the majority of the Board is final and binding on all parties. IV. Funding The building block for establishing the bonus funding is target bonuses. A target bonus amount will be communicated to each participant when first hired, expressed as a percentage of his/her base salary. The target bonus amount is that which the Company will be willing to pay if the participant and the Company achieve planned performance objectives. The target bonus pool for each bonus year will be equal to the base salaries of all eligible employees times the target bonus percentage established in Section V of this document for each employee level. The target performance for the Company will be established by the Board or a committee thereof in December of the year preceding the bonus year. The target performance will consist of two elements: 9 Annual Management Incentive Plan Page 2 - Target profits before taxes for the bonus year, and - Other targets including new business booked and such other non-objective targets as the Board may establish. The maximum bonus pool will be: Actual Performance Before Taxes ------------------------------- Target Bonus Pool x Target Performance Before Taxes (Up to a maximum of 2X target bonus pool) The bonus pool will be: Actual Performance ------------------ Maximum Bonus Pool x Target Performance The actual performance will be determined by the Board in the first quarter after the end of the bonus year based on its judgment of the overall achievement of the Company in meeting/exceeding the target performance. The Board's judgment will be final. V. Allocation The allocation of the bonus pool to individual participants is based on three factors. 1. The individual's target bonus amount. 2. The level of funding of the pool, as described above. 3. A measure of individual performance. A portion of each participant's bonus will be paid at the same level as the funding level. For example, if the funding level is 125 percent of target, a designated portion of each participant's bonus will be paid at 125 percent of target bonus amount. For the President, 100 percent of the target bonus amount will be paid at the same level as the funding level. The balance of each participant's bonus will be based on achievement of individual objectives. The levels of target bonuses and the allocation of the bonus fund for each level is as follows: INDIVIDUAL BONUS ALLOCATION FORMULA
TARGET COMPANY INDIVIDUAL CLASSIFICATION BONUS PERFORMANCE PERFORMANCE - ------------------------------------------------------------------------------------------------------- President 75% 100% 0%
10 Annual Management Incentive Plan Page 3 Sr. Management Sr. VP - Bus. Mgmt. 40% 50% 50% Sr. VP - Operations 40% 50% 50% VP - Bus. Development 30% 50% 50% VP - Finance 30% 50% 50% VP - Asset Management 30% 50% 50% Management 20% 50% 50% Professional 15% 50% 50% Administrative/Technical 10% 50% 50% Clerical 5% 50% 50%
VII. Employment Rights The selection of an employee of the Company as a participant will in no way enhance the employee's right to continued employment with Calpine nor limit the Company in its right to terminate or otherwise change the employment relationship with the employee. VIII. Governing Law The Plan shall be administered in accordance with California law, unless a superseding Federal law is applicable. EX-10.10.5 15 VICE PRESIDENT EMPLOYMENT AGMT FOR ROBERT D. KELLY 1 Exhibit 10.10.5 CALPINE CORPORATION VICE PRESIDENT EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") has been entered into, effective as of August 1, 1996, between CALPINE CORPORATION, a California corporation (the "Company"), and Robert D. Kelly ("Executive") to provide for the employment of Executive on the terms and conditions set forth herein. WHEREAS, Executive has served as the Vice President of the Company since April, 1994; and WHEREAS, the Company wishes to assure itself of the continued employment efforts of Executive for the period provided in this Agreement, and Executive is willing to continue to serve in the employ of the Company on a full-time basis for said period upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual agreements herein contained, intending to be legally bound, the Company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive hereby accepts such employment by the Company, upon the terms and conditions herein provided. 2. Term of Employment. Executive's employment with the Company pursuant to this Agreement shall commence on August 1, 1996 and shall continue through July 31, 1999, unless such employment is sooner terminated or subsequently extended as hereinafter provided. Unless earlier terminated, this Agreement shall automatically continue in effect for two (2) additional successive calendar year periods after July 31, 1999, unless either the Company or Executive elects to terminate this Agreement as of the start of any subsequent calendar year by providing not less than one hundred eighty (180) days prior written notice to the other party. The Company and Executive may agree to extend the Employment Period beyond such two (2) additional calendar year periods upon the terms and conditions of this Agreement or upon other terms, but neither the Company nor Executive is under any obligation to do so. The period during which this Agreement continues in effect shall constitute the "Employment Period". 3. Positions and Responsibilities. During the Employment Period, Executive shall serve as the Company's Vice President ("VP") and shall be responsible for the project finance affairs of the Company, reporting directly to the Senior Vice President, Business Management of the Company. 4. Compensation. For all services rendered by Executive pursuant to this Agreement, the Company shall pay Executive, and Executive agrees to accept, the salary, bonuses and other benefits described below in this Section 4. (a) Salary. The Company shall pay Executive an annual base salary ("Base Salary") as determined by the Chief Executive Officer ("CEO") in accordance with this Section 4, payable at periodic intervals in accordance with the Company's payroll practices for salaried employees. Executive's Base Salary as of the effective date hereof is one hundred fifty five 1 2 thousand dollars ($155,000) per annum. In accordance with Section 4(c) hereof, the amount of the Base Salary shall be reviewed by the CEO on at least an annual basis, and any increases will be effective as of the date determined appropriate by the CEO. Executive's Base Salary may be increased for any reason, including to reflect inflation or such other adjustments as the CEO may deem appropriate; provided, however, that Executive's Base Salary, as currently in effect as stated above or as so increased, may not be subsequently decreased, except with the prior written consent of Executive. (b) Bonuses. In addition to Base Salary, Executive shall be entitled to receive, for each fiscal year of the Company ending with or within the Employment Period, an annual bonus ("Bonus"), whether pursuant to a formal bonus or incentive plan or program of the Company or otherwise. The Company's Annual Management Incentive Plan, in place as of the effective date hereof, is attached as Appendix B. (c) Annual Compensation Review. Notwithstanding anything herein to the contrary, Executive's compensation, consisting of salary, bonus and stock option grants, shall be reviewed not less than annually by the CEO. (d) Life Insurance. During the Employment Period, the Company shall provide to Executive a life insurance policy in accordance with the terms of the current policy maintained by the Company for Executive. (e) Health Care. During the Employment Period, Executive shall be eligible to participate in any health insurance programs and medical plans available to officers or employees of the Company. (f) Participation in Benefit and Equity Compensation Plans. During the Employment Period, Executive shall be eligible to receive all benefits, including those under equity participation and bonus programs, to which key employees are or become eligible under such plans or programs as may be established by the Company. In addition to any other plans or programs established by the Company, Executive shall be entitled to participate in the Company's Stock Option Program and any similar or replacement plan or program (the "Stock Option Program"). (g) 401(k) Plan Benefits. In addition to the other benefits to which Executive shall be entitled to under this Agreement, Executive shall be entitled to participate in the Company's 401(k) Plan and shall be entitled to receive the full benefit of contributions to be made by the Company for the benefit of Executive under the terms of the 401(k) Plan. 5. Severance Benefits. (a) Termination of Employment As a Result of a Change of Control. If Executive's employment with the Company is terminated as a result of a Change of Control (Change of Control for the purpose of Sections 5(a)(i)(ii) excludes an Initial Public Offering), then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If following a Change of Control, material detrimental changes are made to Executive's position within twelve (12) months of the Change 2 3 of Control and, or, Executive's position is relocated to a place more than sixty (60) miles from the Company's present office within six (6) months of the Change of Control, and as a result of these changes Executive's employment terminates by reason of voluntary resignation (and such termination is not an Involuntary Termination or a Termination for Cause), then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) two (2) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this subsection 5(a)(i)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 5(a)(i)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of COBRA by reason of Executive's termination of employment; and (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option. (ii) Involuntary Termination Other Than For Cause. If as a result of a Change of Control and within twelve (12) months of a Change of Control Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the following severance benefits shall be paid or otherwise provided to Executive: (A) the Company shall pay to Executive in the form of a lump sum payment, in cash, a severance payment equal to the lesser of (I) three (3) times Executive's Current Compensation or (II) Executive's Current Compensation multiplied by the sum of (x) the number of years (or any portion thereof, calculated on a daily basis) remaining under this Agreement had Executive's employment not been terminated, plus (y) an additional one-half year, which shall be paid to Executive within ten (10) days after the date of termination; (B) until the earlier of (I) the date this Agreement would otherwise have terminated had Executive's employment not been terminated (the "Remaining Term") or (II) the expiration of the three (3) year period measured from the date of Executive's termination of employment, the Company shall at its sole cost and expense provide Executive (and Executive's eligible dependents, if any) with life, disability, accident and group health insurance benefits substantially similar to those benefits that Executive (and Executive's dependents) were receiving immediately 3 4 prior to Executive's termination of employment; provided, however, that the benefits otherwise receivable by Executive pursuant to this Section 5(a)(ii)(B) shall be reduced to the extent comparable benefits are concurrently received by Executive (or Executive's dependents) pursuant to a similar plan or program of another employer, and any such other benefits actually received by Executive (or Executive's dependents) must be reported to the Company; and provided further, however, that the health care coverage provided by the Company pursuant to this Section 5(a)(ii)(B) shall be in lieu of any other continued health care coverage to which Executive or Executive's dependents would otherwise, at Executive's own expense, be entitled in accordance with the requirements of Internal Revenue Code of 1986, as amended ("Code"), Section 4980B ("COBRA"), by reason of Executive's termination of employment; (C) all stock options, warrants, rights and other Company stock-related awards granted to Executive by the Company that would otherwise have vested or become exercisable at any time in the future shall become fully vested and nonforfeitable upon the date of Executive's termination of employment, the Company's repurchase rights, if any, with respect to those vested shares shall immediately lapse, and each such stock option, to the extent vested, shall remain exercisable for the vested option shares until the expiration or sooner termination of the option term in accordance with the provisions of the agreement evidencing such option; and (D) the Company shall pay or reimburse Executive for any and all expenses incurred by Executive for outplacement services selected by Executive until the earlier of (I) the first anniversary of the date of termination of employment or (II) the date on which Executive commences employment with another employer. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other severance benefits under this Section 5. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (b) Benefit Reduction. Should any of Executive's severance benefits under this Section 5 (including any lump sum severance payment and any accelerated vesting of outstanding options or shares of stock) be deemed to be parachute payments under Code Section 280G, then, first, the dollar amount of any severance payment and, secondly, the accelerated vesting of any options or shares of stock, will be reduced to the extent (and only to the extent) necessary to provide Executive with the maximum after-tax benefit available, after taking into account any parachute excise tax which might otherwise be payable by Executive under Code Section 4999 and any analogous State income tax provision. 6. Noncompetition and Confidential Information. While employed by the Company, Executive will not directly or indirectly manage, operate, participate in, be employed by, perform consulting services for, or otherwise be connected in any manner with, any firm, person, corporation, or enterprise which would be competitive with the business of the Company. Executive will not at any time disclose to others any confidential information relating to the Company or to the business of the Company and confirms that such information constitutes the exclusive property of the Company. The foregoing shall not preclude Executive's investment in any such firm, corporation or enterprise provided that at any one time Executive and members of Executive's immediate family do not own more than one percent (1%) of any voting securities of any such entity. 4 5 7. Successors. Any successor to the Company or to all or substantially all of the Company's business or assets shall assume the obligations under this Agreement. 8. Miscellaneous Provisions. (a) Definition of Terms. The capitalized terms in this Agreement shall have the meanings set forth in this Agreement or in Appendix A hereto. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer or representative of the Company (other than Executive). (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this day and year first above written. CALPINE CORPORATION: EXECUTIVE: By: /s/ PETER CARTWRIGHT /s/ ROBERT D. KELLY -------------------------------- ------------------------------- Peter Cartwright, President and Robert D. Kelly, Vice President Chief Executive Officer 5 6 APPENDIX A DEFINITIONS Cause. "Cause" shall mean (i) material breach of any material terms of this Agreement, (ii) conviction of a felony, (iii) repeated unexplained or unjustified absence, (iv) willful breach of fiduciary duty under this Agreement or (v) gross negligence or willful misconduct where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries. Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company's current stockholder or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total combined voting power of the Company's then outstanding securities; or (ii) the majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Current Compensation. "Current Compensation" shall mean (i) an amount equal to the greater of (A) Executive's highest annual base salary for the year preceding the year in which a termination of employment occurs, (B) Executive's annual base salary at any time during the year in which a termination of employment occurs or (C) Executive's annual base salary on the date of termination of employment, plus (ii) an amount equal to the greater of the bonus payments Executive received in the preceding calendar year or the target bonus payment for the year in which a termination of employment occurs. 1 7 Involuntary Termination. "Involuntary Termination" shall mean termination by the Company of Executive's employment for any reason other than for Cause, and shall include Executive's voluntary resignation following (i) the material breach by the Company of one or more of its obligations under this Agreement which are not otherwise corrected within ten (10) days following Executive's written notice to the Company of such breach, or (ii) the occurrence of any of the following events without Executive's express prior written consent: (A) a change in Executive's position with the Company which materially reduces Executive's level of responsibilities, (B) a reduction in Executive's level of compensation (including base salary, benefits and any non-discretionary and objective-standard incentive payment or bonus award), (C) a relocation of Executive's place of employment by more than twenty (20) miles from Executive's current place of employment, (D) the assignment of additional material job responsibilities or a reduction in job responsibilities inconsistent with Executive's position with the Company and Executive's prior responsibilities, or (E) in the event Executive is no longer the Company's Vice President. 2 8 APPENDIX B CALPINE CORPORATION ANNUAL MANAGEMENT INCENTIVE PLAN I. Purpose The purpose of the Calpine Corporation (the "Company") Annual Management Incentive Plan ("the Plan") is to assist the Company in attracting and retaining the desired management talent, building team effort, recognizing achievement of predetermined business objectives and providing increased performance motivation through established bonus opportunities associated with achieving or exceeding these objectives. II. Participation All full time regular non-operations and maintenance hourly employees of the Company are eligible to participate in the Plan. III. Administration The Plan shall be administered by the President of the Company. The President shall have broad authority to interpret the Plan, subject to the following decisions reserved for the Board of Directors of the Company (the "Board"): 1. The approval of the funding formula discussed in Section IV of this document. 2. The approval of the amount of aggregate incentive payments made under the Plan in any one year. 3. Interpretation of the Plan on any matters in which the President is not a disinterested party. Any decisions of the President in the interpretation of the Plan may be appealed in writing to the Board. However, all participants agree that any decision of the majority of the Board is final and binding on all parties. IV. Funding The building block for establishing the bonus funding is target bonuses. A target bonus amount will be communicated to each participant when first hired, expressed as a percentage of his/her base salary. The target bonus amount is that which the Company will be willing to pay if the participant and the Company achieve planned performance objectives. The target bonus pool for each bonus year will be equal to the base salaries of all eligible employees times the target bonus percentage established in Section V of this document for each employee level. The target performance for the Company will be established by the Board or a committee thereof in December of the year preceding the bonus year. The target performance will consist of two elements: 9 Annual Management Incentive Plan Page 2 - Target profits before taxes for the bonus year, and - Other targets including new business booked and such other non-objective targets as the Board may establish. The maximum bonus pool will be: Actual Performance Before Taxes ------------------------------- Target Bonus Pool x Target Performance Before Taxes (Up to a maximum of 2X target bonus pool) The bonus pool will be: Actual Performance ------------------ Maximum Bonus Pool x Target Performance The actual performance will be determined by the Board in the first quarter after the end of the bonus year based on its judgment of the overall achievement of the Company in meeting/exceeding the target performance. The Board's judgment will be final. V. Allocation The allocation of the bonus pool to individual participants is based on three factors. 1. The individual's target bonus amount. 2. The level of funding of the pool, as described above. 3. A measure of individual performance. A portion of each participant's bonus will be paid at the same level as the funding level. For example, if the funding level is 125 percent of target, a designated portion of each participant's bonus will be paid at 125 percent of target bonus amount. For the President, 100 percent of the target bonus amount will be paid at the same level as the funding level. The balance of each participant's bonus will be based on achievement of individual objectives. The levels of target bonuses and the allocation of the bonus fund for each level is as follows: INDIVIDUAL BONUS ALLOCATION FORMULA
TARGET COMPANY INDIVIDUAL CLASSIFICATION BONUS PERFORMANCE PERFORMANCE - -------------------------------------------------------------------------------------------------------- President 75% 100% 0%
10 Annual Management Incentive Plan Page 3 Sr. Management Sr. VP - Bus. Mgmt. 40% 50% 50% Sr. VP - Operations 40% 50% 50% VP - Bus. Development 30% 50% 50% VP - Finance 30% 50% 50% VP - Asset Management 30% 50% 50% Management 20% 50% 50% Professional 15% 50% 50% Administrative/Technical 10% 50% 50% Clerical 5% 50% 50%
VII. Employment Rights The selection of an employee of the Company as a participant will in no way enhance the employee's right to continued employment with Calpine nor limit the Company in its right to terminate or otherwise change the employment relationship with the employee. VIII. Governing Law The Plan shall be administered in accordance with California law, unless a superseding Federal law is applicable. EX-10.10.6 16 AMENDED/RESTATED CONSULTING CONTRACT 1 EXHIBIT 10.10.6 FIRST AMENDED AND RESTATED CONSULTING CONTRACT BETWEEN CALPINE CORPORATION AND GEORGE J. STATHAKIS 2 TABLE OF CONTENTS Page ---- 1. SCOPE OF SERVICES 1 2. TERM 1 3. COMPENSATION 1 4. WARRANTY 2 5. INDEPENDENT CONTRACTOR 2 6. INSURANCE 2 7. INDEMNITY 2 8. ASSIGNMENT AND SUBCONTRACTING 3 9. CONFIDENTIALITY 3 10. JURISDICTION 3 11. PUBLICATION 3 12. SURVIVAL 3 13. ENTIRE CONTRACT AND AMENDMENTS 3 14. BINDING EFFECT 4 i 3 AMENDED AND RESTATED CONSULTING CONTRACT THIS AMENDED AND RESTATED CONSULTING CONTRACT originally dated as of January 1, 1996, ("Contract") is made and entered into effective as of the 3rd day of June, 1996, between Calpine Corporation, a California corporation, of 50 West San Fernando Street, San Jose, California 95113 ("CALPINE") and GEORGE J. STATHAKIS, One Bush Street, 15th Floor, San Francisco, California 94104 ("CONSULTANT"), with reference to the following: In consideration of the mutual agreements herein contained, the parties wish to amend and restate the Contract in its entirety as follows: 1. SCOPE OF SERVICES 1.1 CONSULTANT agrees to perform the following services: (a) Amend biweekly combined Corporate and Business Development staff meetings to become more familiar with CALPINE's operations and to provide advice and guidance to CALPINE management. (b) Provide advice and guidance to CALPINE's Business Development staff with regard to domestic and international business, with a more in-depth emphasis on international business. (c) In addition, but outside of the Retainer, Consultant will identify project investment opportunities for the Corporation and develop projects through to financing. 1.2 In addition to the foregoing, CONSULTANT agrees to provide advisory support to CALPINE's management in identifying potential buyers, private and/or public, and negotiating the sale of Electrowatt Ltd.'s stock in CALPINE. Hereinafter, the above-referenced sale shall be referred to as the "Transaction". The Transaction will be deemed a "Successful Transaction" if the cash payment to Electrowatt Ltd. is $200 million or more, and if the funds are transferred from the buyer to Electrowatt Ltd. before October 1, 1996 Zurich time. 2. TERM 2.1 This Contract shall be for a term lasting one year from the date first specified above, unless earlier terminated pursuant to this Contract or extended by mutual agreement of the parties. 2.2 Notwithstanding the above, either party may terminate this Contract at any time by giving thirty (30) days written notice to the other party, provided, however, that any payments due and payable upon termination shall be paid. 3. COMPENSATION 3.1 Compensation to CONSULTANT for services rendered other than in relation to the Transaction shall be as follows: (a) CALPINE will pay to CONSULTANT a monthly retainer ("the Retainer") of Five Thousand Dollars ($5,000.00), commencing January 1, 1996 and payable at the beginning of each month under the Term hereof. (b) A fee will be negotiated between the parties for those project investment opportunities identified and completed through closure by CONSULTANT. (c) In addition to the above, CALPINE agrees to reimburse CONSULTANT for all travel and other actual out-of- pocket expenses incurred in support of this Contract. Such expenses will not be incurred by CONSULTANT without prior approval of CALPINE. CONSULTANT shall furnish copier of all receipts with invoices for expenses incurred in support of this Contract. 3.2 For services rendered in relation to the Transaction, CONSULTANT shall be compensated as follows: (a) Upon the closing of a Successful Transaction involving Mitsul and/or General Electric Capital Corporation, or such other company proposed to CALPINE in writing by CONSULTANT and 1 4 approved by CALPINE, CALPINE shall pay CONSULTANT $500,000 plus 1/2% of all payments made to Electrowatt Ltd. at closing in excess of $200 million. (b) Upon the closing of a Successful Transaction involving a European domiciled company initially identified by Electrowatt Ltd. for which CONSULTANT provided advisory support services to CALPINE, CALPINE will pay CONSULTANT $100,000. (c) Upon the closing of a Successful Transaction not involving a company included under paragraph (a) or (b) above for which CONSULTANT provided advisory support services to CALPINE, CALPINE will pay CONSULTANT $250,000 plus 1/4% of all payments received by Electrowatt Ltd. at closing in excess of $200 million. 4. WARRANTY CONSULTANT assumes professional and technical responsibility for performance of Services to be provided hereunder in accordance with recognized professional standards. If within one year following completion of the Services, the Services fail to meet the aforesaid standards, and CALPINE promptly advises CONSULTANT in writing, CONSULTANT agrees to reperform deficient Services without charge to CALPINE up to a maximum amount equivalent to the compensation received for the deficient Services rendered. 5. INDEPENDENT CONTRACTOR 5.1 CONSULTANT acknowledges and agrees that it enters into this Contract as an independent contractor. Under no circumstances shall CONSULTANT look to CALPINE as its employer, nor as a partner, agent or principal. CONSULTANT shall not be entitled to any benefits accorded to CALPINE's employees including, without limitation, workers compensation, disability insurance, and vacation or sick pay. CONSULTANT shall be responsible for providing, at its expense and in its name, disability, workers' compensation or other insurance as well as licenses and permits usual or necessary for conducting the Services hereunder. 5.2 CONSULTANT shall pay, when and as due, any and all taxes incurred as a result of CONSULTANT's compensation hereunder, including estimated taxes. CONSULTANT hereby indemnifies CALPINE for any claims, losses costs, fees, liabilities, damages or injuries suffered by CALPINE arising out of CONSULTANT's breach of this section. 5.3 CONSULTANT represents that he or she has the qualifications and ability to perform the Services in a professional manner, without the advice, control or supervision of CALPINE. CONSULTANT shall be solely responsible for the professional performance of the Services, and shall receive no assistance, direction or control from CALPINE. CONSULTANT shall have sole discretion and control of its work and the manner in which it is performed. 6. INSURANCE 6.1 CONSULTANT shall maintain in full force and effect during the term of this Contract, the insurance described below, as well as such other insurance as deemed reasonably necessary by CALPINE to insure the services performed hereunder. 6.1.1 Automobile liability insurance covering owned, non-owned and hired automobiles for a combined single limit of $100,000/$300,000 for bodily injury and property damage. 6.2 CONSULTANT shall, upon request, furnish certificates showing that the above insurance will be in effect during the term of this Contract and shall specify that CALPINE must be given, in writing, thirty (30) days notice of cancellation, termination, or alternation of the policies evidenced by certificates. It is acknowledged, understood and agreed that no payment shall be due from CALPINE under this Contract at any time when CONSULTANT is not in full compliance with this provision dealing with insurance. 7. INDEMNITY 7.1 CALPINE agrees to indemnify CONSULTANT and hold him harmless against any claim by any person that CONSULTANT's performance arising from or in connection with CONSULTANT's relationship with CALPINE renders CONSULTANT liable to such person, and against any losses or damages suffered by CALPINE and its affiliates as a result of any such claim (including legal fees and expenses); provided, however, that such indemnity 2 5 will not extend to any action taken or omitted by CONSULTANT as a result of gross negligence or wilful misconduct. 7.2 CONSULTANT shall not be liable for any consequential or indirect damages occurring as a result of any recommendation, opinion or advice given by CONSULTANT, or from any implementation of CONSULTANT's recommendations by CALPINE, or from any other services performed hereunder by CONSULTANT for CALPINE. 8. ASSIGNMENT AND SUBCONTRACTING CONSULTANT shall not have the right to assign this Contract or subcontract any of the work without the prior written consent of CALPINE. CONSULTANT shall supervise all work subcontracted by CONSULTANT in performing the Services and shall be responsible for all work performed by a subcontractor as if CONSULTANT itself had performed such work. The assignment or subcontracting of any work to subcontractors shall not relieve CONSULTANT from any of its obligations under this Contract with respect to the Services. 9. CONFIDENTIALITY All data, information, work papers, technology and reports furnished or disclosed by CALPINE to CONSULTANT or its personnel in the course of performing the Services ("Information") are and shall remain the sole property of CALPINE and shall be kept confidential by CONSULTANT, and shall be delivered over to CALPINE at CALPINE's request. CONSULTANT agrees not to divulge all or any part of the Information to third parties, without the prior written consent of CALPINE, unless: (a) The Information is known to CONSULTANT prior to obtaining the same from CALPINE; (b) The Information is, at the time of disclosure by CONSULTANT, then in the public domain; or (c) The Information is obtained by CONSULTANT from a third party who did not receive same, directly or indirectly, from CALPINE and who has no obligation of secrecy with respect thereto. CONSULTANT further agrees that it will not, without the prior written consent of CALPINE, disclose to any third party any of such Information developed or obtained by CONSULTANT in the performance of this Contract. If so requested by CALPINE, CONSULTANT further agrees to require its employees to execute a nondisclosure agreement prior to performing Services under this Contract. 10. JURISDICTION This Contract shall be governed by and be construed in accordance with the laws of the State of California. 11. PUBLICATION CONSULTANT shall not use CALPINE's name or trademarks, photographs or otherwise claim any affiliation with CALPINE in any publication or public forum without obtaining prior written approval from CALPINE. 12. SURVIVAL The rights and obligations of the parties, which, by their nature, are normally intended to survive the termination or completion of this Contract shall remain in full force and effect following termination of this Contract for any reason. 13. ENTIRE CONTRACT AND AMENDMENTS This Contract, together with Exhibits and Schedules, if any, attached hereto, all of which are incorporated herein as part of this Contract by this reference, and together with all purchase orders, contain the entire agreement between the parties hereto with respect to the subject matter hereof. No amendment to this Contract or to any purchase order shall be binding upon either party hereto, unless it is in writing and executed on behalf of each party hereto by a duly authorized representative and expressly specified as such. 3 6 14. BINDING EFFECT This First Amended and Restated Contract shall be binding upon and inure to the benefit of the parties hereto, and to their successors and permitted assigns. IN WITNESS WHEREOF, this Contract is executed effective as of the day and year first above written. CALPINE: CONSULTANT: CALPINE CORPORATION GEORGE J. STATHAKIS By: /s/ Ann B. Curtis By: /s/ George J. Stathakis ----------------------- ------------------------ Title: Sr. Vice President Title: Owner -------------------- --------------------- Date: 6-20-96 Date: 6-20-96 -------------------- --------------------- 4 EX-10.11 17 FORM OF INDEMNIFICATION AGREEMENT 1 Exhibit 10.11 INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into this ____ day of ____________, 1996 between Calpine Corporation, a Delaware corporation ("the Company") and ____________________ ("Indemnitee"). WITNESSETH THAT: WHEREAS, Indemnitee performs a valuable service for the Company; and WHEREAS, the Board of Directors of the Company has adopted Bylaws (the "Bylaws") providing for the indemnification of the directors and executive officers of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended (the "DGCL"); and WHEREAS, the Bylaws and the DGCL by their nonexclusive nature, permit contracts between the Company and the directors and executive officers of the Company with respect to indemnification of such directors; and WHEREAS, in accordance with the authorization as provided by the DGCL, the Company may purchase and maintain a policy or policies of director's and officer's liability insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its directors\officers in the performance of their obligations as directors\officers of the Company; and WHEREAS, as a result of recent developments affecting the terms, scope and availability of D & O Insurance there exists general uncertainty as to the extent of protection afforded Company directors by such D & O Insurance and said uncertainty also exists under statutory and bylaw indemnification provisions; and WHEREAS, in recognition of past services and in order to induce Indemnitee to continue to serve as a director\officer of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's continued service as a [director\officer] after the date hereof, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the DGCL, as such may be amended from time to time, and Article 5 of the Bylaws, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof: (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(a) 2 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine that such indemnification may be made. (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 2. ADDITIONAL INDEMNITY. (a) Subject only to the exclusions set forth in Section 2(b) hereof, the Company hereby further agrees to hold harmless and indemnify Indemnitee against any and all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any Proceeding (including an action by or on behalf of the Company) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of his Corporate Status; provided, however, that with respect to actions by or on behalf of the Company, indemnification of Indemnitee against any judgments shall be made by the Company only 2. 3 as authorized in the specific case upon a determination that Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; and (b) No indemnity pursuant to this Section 2 shall be paid by the Company: (i) In respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (ii) On account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iii) On account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; or (iv) If a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 3. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 is unavailable and may not be paid to Indemnitee for any reason other than those set forth in paragraphs (i), (ii), (iii) and (iv) of Section 2(b), then in respect to any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and by the Indemnitee on the other hand from the transaction from which such Proceeding arose, and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the events which resulted in such Expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnitee on the other hand shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 3 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 3. 4 5. ADVANCEMENT OF EXPENSES. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's Corporate Status within 10 days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within 30 days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). 6. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control (as hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee (unless Indemnitee shall request that such determination be made by the Board of Directors or the stockholders, in which case the determination shall be made in the manner provided in Clause (ii) below), or (ii) if a Change in Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, said Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, or (C) if so directed by said 4. 5 Disinterested Directors, by the stockholders of the Company; and, if it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within 10 days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee's entitlement to indemnification. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 14 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the 5. 6 due commencement of any judicial proceeding or arbitration pursuant to Section 8(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). (d) The Company shall not be required to obtain the consent of the Indemnitee to the settlement of any Proceeding which the Company has undertaken to defend if the Company assumes full and sole responsibility for such settlement and the settlement grants the Indemnitee a complete and unqualified release in respect of the potential liability. 7. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) If the person, persons or entity empowered or selected under Section 6 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 30 days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30-day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 7(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) of this Agreement. (c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement (with or without court approval), conviction, or upon a plea 6. 7 of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. (d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. The provisions of this Section 7(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. 8. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 3 or 4 of this Agreement within 10 days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within 10 days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 or 7 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 8(a). The Company shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 8 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. 7. 8 (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 8, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 8, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 16 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. The Company shall indemnify Indemnitee against any and all expenses and, if requested by Indemnitee, shall (within 10 days after receipt by the Company of a written request therefor) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee to recover under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery, as the case may be. (e) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. 9. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the DGCL, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy 8. 9 hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 10. EXCEPTION TO RIGHT OF INDEMNIFICATION AND EXPENSE ADVANCEMENT. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of expenses under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors or (b) such Proceeding is being brought by the Indemnitee to assert his rights under this Agreement. 11. DURATION OF AGREEMENT. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director or officer of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 8 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director or officer of the Company or any other enterprise at the Company's request. 12. SECURITY. To the extent requested by the Indemnitee and approved by the Board of Directors, the Company may at any time and from time to time provide security to the 9. 10 Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee. 13. ENFORCEMENT. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 14. DEFINITIONS. For purposes of this Agreement: (a) "Change in Control" means a change in control of the Company occurring after the date of this Agreement of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the date of this Agreement (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act, as amended) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities (other than any such person or any affiliate thereof that is such a 20% beneficial owner as of the date hereof) without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, other than as a result of an event described in clause (a)(ii) of this Section 16, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. A Change in Control shall not be deemed to have occurred under item (i) above if the "person" described under item (i) 10. 11 is entitled to report its ownership on Schedule 13G promulgated under the Act and such person is able to represent that it acquired such securities in the ordinary course of its business and not with the purpose nor with the effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect. If the "person" referred to in the previous sentence would at any time not be entitled to continue to report such ownership on Schedule 13G pursuant to Rule 13d-1(b)(3)(i)(B) of the Act, then a Change in Control shall be deemed to have occurred at such time. (b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary. (e) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. (f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (g) "Proceeding" includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing 11. 12 or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any action taken by him or of any inaction on his part while acting as a director or officer of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement and excluding one initiated by an Indemnitee pursuant to Section 8 of this Agreement to enforce his rights under this Agreement. 15. SEVERABILITY. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 16. MODIFICATION AND WAIVER. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 17. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: 12. 13 (a) If to Indemnitee, to: ______________________________________ ______________________________________ ______________________________________ ______________________________________ (b) If to the Company, to: Calpine Corporation 50 San Fernando Street San Jose, California 95113 Attention: President and Chief Executive Officer or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 19. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 20. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 21. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without application of the conflict of laws principles thereof. 13. 14 22. GENDER. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. CALPINE CORPORATION By:_________________________________________ INDEMNITEE By:_________________________________________ _______________________, Indemnitee 14. EX-21.1 18 LIST OF SUBSIDIARIES 1 Exhibit 21.1 CALPINE CORPORATION LIST OF SUBSIDIARIES Anderson Springs Energy Company Bellingham Cogen, Inc. Biogas Assets, Inc. Biogas Development, Inc. Calpine Power Services Company Calpine Power Company Calpine Project Investments, Inc. Calpine Parlin Cogen, Inc. Calpine Operating Plant Services, Inc. Calpine Puma, Inc. Calpine Philadelphia Cogen, Inc. Calpine Agnews, Inc. Calpine Thermal Power, Inc. Calpine Vapor, Inc. Calpine Sumas, Inc. Calpine Sonoma, Inc. Calpine Siskiyou Geothermal Partners, L.P. Calpine Newark Cogen, Inc. Calpine Securities Company, L.P. Calpine Geysers Company, L.P. Calpine Grays Ferry Cogen, Inc. Calpine Fuels Corporation Calpine Coso Development Company, Inc. Calpine Monterey Cogeneraion, Inc. Calpine Canadian Gas, Ltd. Calpine Greenleaf Corporation Calpine Artesia Cogen, Inc. Calpine King City Cogen, Inc. Calpine Hunters Point, L.P. Calpine King City 2, Inc. Calpine Jersey Cogen, Inc. Calpine King City 1, Inc. Calpine King City, LLC Calpine Gilroy Cogen, L.P. Calpine Gilroy 1, Inc. Calpine Gilroy 2, Inc. CGL Two Corporation CGL One Corporation Cloverdale Geothermal Partners, L.P. 1 2 Geothermal Energy Partners, L.P. Greenleaf Unit One Associates, Inc. Greenleaf Unit One Associates, a California Limited Partnership Greenleaf Unit Two Associates, Inc. Healdsburg Energy Company, L.P. Modoc Power, Inc. Mount Hoffman Geothermal Company, L.P. Northwest Cogeneration, Inc. OES, Inc. Portsmouth Leasing Corporation Santa Rosa Energy Company Sonoma Geothermal Partners, L.P. Sutter Dryers, Inc. Thermal Power Company Whatcom Cogeneration Partners L.P. 2 EX-23.2 19 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this Registration Statement. ARTHUR ANDERSEN LLP San Jose, California August 20, 1996 EX-23.3 20 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 19, 1996, on our audits of the consolidated financial statements of Sumas Cogeneration Company, L.P. and Subsidiary in the Calpine Corporation Registration Statement (Form S-1) for the Registration of Common Stock. Moss Adams LLP Everett, Washington August 20, 1996 EX-23.4 21 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of the following: - our report dated February 3, 1995, except as to the information presented in Note 7 for which the date is March 30, 1995, on our audits of the combined financial statements of LFC No. 38 Corp. and Portsmouth Leasing Corporation and Subsidiaries as of and for the years ended December 31, 1994 and 1993. - our report dated February 3, 1995, except as to the information presented in Note 6 for which the date is March 30, 1995, on our audits of the consolidated financial statements of LFC No. 60 Corp. and Subsidiary as of and for the years ended December 31, 1994 and 1993. We also consent to the reference to our firm under the caption "EXPERTS". Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania August 20, 1996 EX-23.5 22 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report, dated July 18, 1996, with respect to the financial statements of Gilroy Energy Company, a wholly owned subsidiary of Gilroy Foods, Inc., which in turn is a wholly owned subsidiary of McCormick & Company, Inc., as of and for the years ended November 30, 1995 and 1994 included in the Registration Statement (Form S-1 No. 333-07497) and related Prospectus of Calpine Corporation for the registration of 20,751,750 shares of its common stock. ERNST & YOUNG LLP Baltimore, Maryland August 21, 1996 -----END PRIVACY-ENHANCED MESSAGE-----