-----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, BiZybJDsfAh/inwMkQ6r2rQ89SD9F3yAKkEqRHBMtRxHBb80s7Yu3k6/skm8/fgp ygp/oFhccZypStZNjytymw== 0000916457-02-000017.txt : 20020515 0000916457-02-000017.hdr.sgml : 20020515 20020515162942 ACCESSION NUMBER: 0000916457-02-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALPINE CORP CENTRAL INDEX KEY: 0000916457 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 770212977 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12079 FILM NUMBER: 02652920 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 10-Q 1 q12002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number: 1-12079 CALPINE CORPORATION (A Delaware Corporation) I.R.S. Employer Identification No. 77-0212977 50 West San Fernando Street San Jose, California 95113 Telephone: (408) 995-5115 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 373,911,684 shares of Common Stock, par value $.001 per share, outstanding on May 13, 2002 In the Company's 2001 Report on Form 10-K the Company disclosed that it dismissed Arthur Andersen LLP effective March 29, 2002, as its independent public accountants and appointed Deloitte and Touche LLP as its new independent public accountants. Pursuant to Temporary Note 2T to Article 3 of Regulation S-X, this Report on Form 10-Q is being filed prior to the completion of the review by Deloitte and Touche LLP that would otherwise be required by Statement on Auditing Standards No. 71, "Interim Financial Information." CALPINE CORPORATION AND SUBSIDIARIES Report on Form 10-Q For the Quarter Ended March 31, 2002
INDEX PAGE NO. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Condensed Balance Sheets March 31, 2002 and December 31, 2001.................. 1 Consolidated Condensed Statements of Operations For the Three Months Ended March 31, 2002 and 2001.................................................................................... 3 Consolidated Condensed Statements of Cash Flows For the Three Months Ended March 31, 2002 and 2001.................................................................................... 5 Notes to Consolidated Condensed Financial Statements March 31, 2002......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 38 PART II - OTHER INFORMATION Item 1. Legal Proceedings........................................................................... 38 Item 2. Changes in Securities and Use of Proceeds................................................... 39 Item 6. Exhibits and Reports on Form 8-K............................................................ 40 Signatures................................................................................................................ 42
PART I - FINANCIAL INFORMATION In the Company's 2001 Report on Form 10-K the Company disclosed that it dismissed Arthur Andersen LLP effective March 29, 2002, as its independent public accountants and appointed Deloitte and Touche LLP as its new independent public accountants. Pursuant to Temporary Note 2T to Article 3 of Regulation S-X, this Report on Form 10-Q is being filed prior to the completion of the review by Deloitte and Touche LLP that would otherwise be required by Statement on Auditing Standards No. 71, "Interim Financial Information." Item 1. Financial Statements. CALPINE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS March 31, 2002 and December 31, 2001 (in thousands, except share and per share amounts)
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents ................................................... $ 410,772 $ 1,525,417 Accounts receivable, net..................................................... 817,936 966,080 Margin deposits and other prepaid expense ................................... 304,564 480,656 Inventories ................................................................. 90,627 78,862 Current derivative assets ................................................... 549,155 763,162 Other current assets ........................................................ 133,056 193,525 ------------ ------------ Total current assets ..................................................... 2,306,110 4,007,702 ------------ ------------ Restricted cash ................................................................ 91,070 95,833 Notes receivable, net of current portion ....................................... 160,359 158,124 Project development costs ...................................................... 185,412 179,783 Investments in power projects .................................................. 380,558 378,614 Deferred financing costs ....................................................... 223,893 210,811 Property, plant and equipment, net ............................................. 16,211,489 15,200,498 Goodwill and other intangible assets, net ...................................... 221,786 228,673 Long-term derivative assets .................................................... 554,354 564,952 Other assets ................................................................... 308,504 304,562 ------------ ------------ Total assets ............................................................. $ 20,643,535 $ 21,329,552 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................ $ 1,260,579 $ 1,283,843 Accrued payroll and related expense ......................................... 49,876 57,285 Accrued interest payable .................................................... 194,538 160,115 Notes payable and borrowings under lines of credit, current portion ......... 14,336 23,238 Capital lease obligation, current portion ................................... 2,279 2,206 Zero-Coupon Convertible Debentures Due 2021 ................................. 685,500 878,000 Current derivative liabilities .............................................. 450,865 625,339 Other current liabilities ................................................... 231,036 198,812 ------------ ------------ Total current liabilities ................................................ 2,889,009 3,228,838 ------------ ------------ Notes payable and borrowings under lines of credit, net of current portion ..... 10,000 74,750 Capital lease obligation, net of current portion ............................... 206,697 207,219 Construction/project financing ................................................. 3,424,097 3,393,410 Convertible Senior Notes Due 2006 .............................................. 1,200,000 1,100,000 Senior notes ................................................................... 7,039,516 7,049,038 Deferred income taxes, net ..................................................... 915,092 964,346 Deferred lease incentive ....................................................... 56,360 57,236 Deferred revenue ............................................................... 186,725 154,381 Long-term derivative liabilities ............................................... 497,916 822,848 Other liabilities .............................................................. 97,658 96,504 ------------ ------------ Total liabilities ........................................................ 16,523,070 17,148,570 ------------ ------------ -1- Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trusts ........................................................ 1,123,275 1,123,024 Minority interests ............................................................. 39,319 47,389 ------------ ------------ Stockholders' equity: Preferred stock, $.001 par value per share; authorized 10,000,000 shares; issued and outstanding one share in 2002 and 2001 ................ -- -- Common stock, $.001 par value per share; authorized 1,000,000,000 shares in 2002 and 2001; issued and outstanding 307,604,929 shares in 2002 and 307,058,751 shares in 2001 ............................ 308 307 Additional paid-in capital .................................................. 2,043,816 2,040,836 Retained earnings ........................................................... 1,121,733 1,196,000 Accumulated other comprehensive loss ........................................ (207,986) (226,574) ------------ ------------ Total stockholders' equity ............................................... 2,957,871 3,010,569 ------------ ------------ Total liabilities and stockholders' equity ............................... $ 20,643,535 $ 21,329,552 ============ ============ The accompanying notes are an integral part of these consolidated condensed financial statements.
-2- CALPINE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2002 and 2001 (in thousands, except per share amounts) (unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------------- 2002 2001 ------------ ------------ Revenue: Electric generation and marketing revenue Electricity and steam revenue.............................................. $ 620,179 $ 595,159 Sales of purchased power................................................... 908,301 453,602 Electric power derivative mark-to-market gain.............................. 4,166 1,306 ------------ ------------ Total electric generation and marketing revenue............................... 1,532,646 1,050,067 Oil and gas production and marketing revenue Oil and gas sales.......................................................... 67,488 156,687 Sales of purchased gas..................................................... 132,158 129,172 ------------ ------------ Total oil and gas production and marketing revenue............................ 199,646 285,859 Income from unconsolidated investments in power projects...................... 1,444 563 Other revenue................................................................. 4,611 3,262 ------------ ------------ Total revenue............................................................ 1,738,347 1,339,751 ------------ ------------ Cost of revenue: Electric generation and marketing expense Plant operating expense.................................................... 115,157 84,460 Royalty expense............................................................ 4,155 11,009 Purchased power expense.................................................... 815,005 456,266 ------------ ------------ Total electric generation and marketing expense............................... 934,317 551,735 Oil and gas production and marketing expense Oil and gas production expense............................................. 26,940 34,283 Purchased gas expense...................................................... 123,694 118,628 ------------ ------------ Total oil and gas production and marketing expense............................ 150,634 152,911 Fuel expense Cost of oil and natural gas burned by power plants......................... 326,443 264,563 Natural gas derivative mark-to-market loss (gain).......................... 6,392 (7,549) ------------ ------------ Total fuel expense............................................................ 332,835 257,014 Depreciation, depletion and amortization expense.............................. 103,873 72,013 Operating lease expense....................................................... 36,134 28,011 Other expense................................................................. 2,590 2,499 ------------ ------------ Total cost of revenue.................................................... 1,560,383 1,064,183 ------------ ------------ Gross profit.................................................................. 177,964 275,568 Project development expense..................................................... 11,338 15,839 Equipment cancellation cost..................................................... 168,471 -- General and administrative expense.............................................. 60,261 36,085 Merger expense.................................................................. -- 6,021 ------------ ------------ Income (loss) from operations................................................. (62,106) 217,623 Interest expense................................................................ 61,311 19,925 Distributions on trust preferred securities..................................... 15,386 15,175 Interest income................................................................. (12,176) (19,358) Other income, net............................................................... (9,093) (5,727) ------------ ------------ Income (loss) before provision (benefit) for income taxes..................... (117,534) 207,608 Provision (benefit) for income taxes............................................ (41,137) 88,981 ------------ ------------ Income (loss) before extraordinary gain and cumulative effect of a change in accounting principle.......................................... (76,397) 118,627 Extraordinary gain, net of tax provision of $1,362 and $-- ..................... 2,130 -- Cumulative effect of a change in accounting principle, net of tax provision of $-- and $669.......................................... -- 1,036 ------------ ------------ Net income (loss)............................................................. $ (74,267) $ 119,663 ============ ============ Basic earnings (loss) per common share: Weighted average shares of common stock outstanding........................... 307,332 300,554 Income (loss) before extraordinary gain and cumulative effect of a change in accounting principle............................................ $ (0.25) $ 0.39 Extraordinary gain............................................................ $ 0.01 $ -- Cumulative effect of a change in accounting principle......................... $ -- $ 0.01 ------------ ------------ Net income (loss)............................................................. $ (0.24) $ 0.40 ============ ============ -3- Diluted earnings (loss) per common share: Weighted average shares of common stock outstanding before dilutive effect of certain convertible securities............................ 307,332 316,832 Income (loss) before dilutive effect of certain convertible securities, extraordinary gain and cumulative effect of a change in accounting principle............................................... $ (0.25) $ 0.37 Dilutive effect of certain convertible securities (1)......................... $ -- $ (0.02) ------------ ------------ Income (loss) before extraordinary gain and cumulative effect of a change in accounting principle.......................................... $ (0.25) $ 0.35 Extraordinary gain............................................................ $ 0.01 $ -- Cumulative effect of a change in accounting principle......................... $ -- $ 0.01 ------------ ------------ Net income (loss)............................................................. $ (0.24) $ 0.36 ============ ============
__________ (1) Includes the effect of the assumed conversion of certain convertible securities in 2001. No convertible securities were included in the 2002 amounts as the securities were antidilutive. For the three months ended March 31, 2001, the assumed conversion calculation added 44,882 shares of common stock and $9,355 to the net income results. The accompanying notes are an integral part of these consolidated condensed financial statements. -4- CALPINE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2002 and 2001 (in thousands) (unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities: Net income (loss) ........................................................... $ (74,267) $ 119,663 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization ................................. 114,136 77,594 Equipment cancellation cost....................... ....................... 168,471 -- Deferred income taxes, net ............................................... (94,247) 41,216 Gain on sale of assets.................................................... (9,667) (10,750) Minority interests........................................................ 1 3,604 Income from unconsolidated investments in power projects.................. (1,444) (563) Distributions from unconsolidated investments in power projects........... 9 1,213 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable..................................................... 148,144 (10,316) Notes receivable........................................................ (5,202) (7,959) Current derivative assets............................................... 214,007 (391,291) Other current assets.................................................... 231,918 (29,969) Long-term derivative assets............................................. 10,598 (162,488) Other assets............................................................ (7,241) 3,176 Accounts payable and accrued expense ................................... 24,073 (132,685) Current derivative liabilities.......................................... (174,474) 408,781 Long-term derivative liabilities........................................ (324,906) 222,479 Other liabilities....................................................... 54,125 (9,969) Other comprehensive income (loss) relating to derivatives .............. 71,911 (86,181) ------------ ------------ Net cash provided by operating activities ............................. 345,945 35,555 ------------ ------------ Cash flows from investing activities: Purchases of property, plant and equipment .................................. (1,289,615) (795,561) Disposals of property, plant and equipment................................... 1,739 19,134 Advances to joint ventures .................................................. (23,121) (32,331) Decrease (increase) in notes receivable ..................................... 12,914 (21,588) Maturities of collateral securities ......................................... 3,325 2,885 Project development costs ................................................... (23,784) (19,210) Decrease (increase) in restricted cash ...................................... 16,929 (51,964) ------------ ------------ Net cash used in investing activities ................................. (1,301,613) (898,635) ------------ ------------ Cash flows from financing activities: Repurchase of Zero-Coupon Convertible Debentures Due 2021.................... (187,727) -- Repayments of notes payable and borrowings under lines of credit ............ (73,652) (134,493) Borrowings from project financing ........................................... 122,885 609,354 Repayments of project financing ............................................. (92,198) (403,810) Proceeds from issuance of Convertible Senior Notes Due 2006 ................. 100,000 -- Proceeds from issuance of senior notes ...................................... -- 1,150,000 Financing costs.............................................................. (31,479) (52,509) Other ....................................................................... 3,685 (31,460) ------------ ------------ Net cash provided by (used in) financing activities ................... (158,486) 1,137,082 ------------ ------------ Effect of exchange rate changes on cash and cash equivalents.................... (491) -- Net increase (decrease) in cash and cash equivalents ........................... (1,114,645) 274,002 Cash and cash equivalents, beginning of period ................................. 1,525,417 596,077 ------------ ------------ Cash and cash equivalents, end of period ....................................... $ 410,772 $ 870,079 ============ ============ Cash paid during the period for: Interest, net of amounts capitalized ........................................ $ 6,218 $ 12,599 Income taxes ................................................................ $ 12,255 $ 65,745
The accompanying notes are an integral part of these consolidated condensed financial statements. -5- CALPINE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 2002 (unaudited) 1. Organization and Operation of the Company Calpine Corporation ("Calpine"), a Delaware corporation, and subsidiaries (collectively, "the Company") is engaged in the generation of electricity in the United States, Canada and the United Kingdom. The Company is involved in the development, acquisition, ownership and operation of power generation facilities and the sale of electricity and its by-product, thermal energy, primarily in the form of steam. The Company has ownership interests in and operates gas-fired power generation and cogeneration facilities, gas fields, gathering systems and gas pipelines, geothermal steam fields and geothermal power generation facilities in the United States. In Canada, the Company has power facilities and oil and gas operations. In the United Kingdom, the Company has a gas-fired power cogeneration facility. Each of the generation facilities produces and markets electricity for sale to utilities and other third party purchasers. Thermal energy produced by the gas-fired cogeneration facilities is primarily sold to industrial users. Gas produced and not physically delivered to the Company's generating plants is sold to third parties. 2. Summary of Significant Accounting Policies Basis of Interim Presentation -- The accompanying unaudited interim consolidated condensed financial statements of the Company have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated condensed financial statements include the adjustments necessary to present fairly the information required to be set forth therein. The Company's historical amounts have been restated to reflect the pooling-of-interests transaction completed during the second quarter of 2001 for the acquisition of Encal Energy Ltd. ("Encal"). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2001, included in the Company's Annual Report on Form 10-K. The results for interim periods are not necessarily indicative of the results for the entire year. Use of Estimates in Preparation of Financial Statements -- The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 revenue and expense 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, useful lives of the generation facilities, provision for income taxes, fair value calculations of derivative instruments and depletion, depreciation and impairment of natural gas and petroleum property and equipment. See the "Critical Accounting Policies" subsection in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 for a further discussion of the Company's significant estimates. Revenue Recognition -- The Company is primarily an electric generation company, operating a portfolio of mostly wholly owned plants but also some plants in which its ownership interest is 50% or less and which are accounted for under the equity method. In conjunction with its electric generation business, the Company also produces, as a by-product, thermal energy for sale to customers, principally steam hosts at its cogeneration sites. In addition, the Company acquires and produces natural gas for its own consumption and sells the balance and oil produced to third parties. To protect and enhance the profit potential of its electric generation plants, the Company, through its subsidiary, Calpine Energy Services, L.P. ("CES"), enters into electric and gas hedging, balancing, optimization, and trading transactions in which purchased electricity and gas is resold to third parties. CES generally acts as a principal, takes title to the commodities purchased for resale, and assumes the risks and rewards of ownership. Therefore, in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and the Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent," CES recognizes revenue on a gross basis, except in the case of financial swap transactions, in which case the net gain or loss from the financial swap is recorded in income when the effects of the risks being managed are recognized. Managed risks typically include commodity price risk associated with fuel purchases and power sales. The Company, through Power Systems Mfg., LLC ("PSM"), designs and manufactures certain spare parts for gas turbines. The Company also generates small amounts of revenue by occasionally loaning funds to power projects, by providing operation and maintenance ("O&M") services to unconsolidated power projects, and by performing engineering services for data centers and other facilities requiring highly reliable power. Further details of the Company's revenue recognition policy for each type of revenue transaction are provided below: -6- Electric Generation and Marketing Revenue -- This includes electricity and steam sales, mark-to-market gains and losses from electric power derivatives and sales of purchased power. The Company actively manages the revenue stream for its portfolio of electric generating facilities. The Company markets on a system basis both power generated by its plants in excess of amounts under direct contract between the plant and a third party, and power purchased from third parties, through hedging, balancing and optimization transactions. CES performs a market-based allocation of total electric generation and marketing revenue, exclusive of mark-to-market activity, to electricity and steam sales (based on electricity delivered by the Company's electric generating facilities to serve CES contracts) and the balance is allocated to sales of purchased power. Sales of purchased power also includes revenue from the settlement of contracts that have been previously recorded in results of operations as electric power derivative mark-to-market gains or losses Oil and Gas Production and Marketing Revenue -- This includes sales to third parties of oil, gas and related products that are produced by the Company's Calpine Natural Gas and Calpine Canada Natural Gas subsidiaries and also sales of purchased gas arising from hedging, balancing and optimization transactions. Sales of purchased gas also includes revenue from the settlement of contracts that have been previously recorded in results of operations as natural gas derivative mark-to-market gains or losses. Oil and gas sales for produced products are recognized pursuant to the sales method. Income from Unconsolidated Investments in Power Projects -- The Company uses the equity method to recognize as revenue its pro rata share of the net income or loss of the unconsolidated investment until such time, if applicable, that the Company's investment is reduced to zero, at which time equity income is generally recognized only upon receipt of cash distributions from the investee. Other Revenue -- This includes O&M contract revenue, interest income on loans to power projects, PSM revenue from sales to third parties, engineering revenue and miscellaneous revenue. Purchased Power and Purchased Gas Expense -- The cost of power purchased from third parties for hedging, balancing, and optimization activities, along with costs from the subsequent settlement of contracts that have been previously recorded in results of operations as electric power derivative mark-to-market gains or losses, is recorded as purchased power expense, a component of electric generation and marketing expense. The Company records the cost of gas consumed in its power plants as cost of oil and natural gas burned by power plants, while gas purchased from third parties for hedging, balancing, and optimization activities, along with costs from the subsequent settlement of contracts that have been previously recorded in results of operations as natural gas derivative mark-to-market gains or losses, is recorded as purchased gas expense, a component of oil and gas production and marketing expense. Derivative Instruments -- Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement No. 133," SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an Amendment of FASB Statement No. 133" and related guidance from the Derivatives Implementation Group established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. SFAS No. 133 provides that the changes in fair value of derivatives designated as fair value hedges and the corresponding changes in the fair value of the hedged risk attributable to a recognized asset, liability, or unrecognized firm commitment be recorded in earnings. If the fair value hedge is effective, the amounts recorded will offset in earnings. SFAS No. 133 requires that as of the date of initial adoption, the difference between the fair value of derivative instruments and the previous carrying amount of these derivatives be recorded in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle. Upon adoption of SFAS No. 133 effective January 1, 2001, the Company recorded cumulative effects of a change in accounting principle of $1.0 million (net of a $0.7 million tax provision) to net income and $39.8 million (net of a $25.7 million tax provision) to other comprehensive income. -7- New Accounting Pronouncements -- In June 2001, the Company adopted SFAS No. 141, "Business Combinations," which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 eliminated the pooling-of-interests method of accounting for business combinations and modified the recognition of intangible assets and disclosure requirements. Adoption of SFAS No. 141 did not have a material effect on the Company's consolidated financial statements. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets." See Note 4 for more information. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not completed its analysis of the impact that SFAS No. 143 will have on its consolidated financial statements. On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that APB Opinion). SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. SFAS No. 144 also resolves several significant implementation issues related to SFAS No. 121, such as eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment and establishing criteria to define whether a long-lived asset is held for sale. Adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions shall be effective for financial statements issued on or after May 15, 2002, with early application encouraged. The Company does not believe that SFAS No. 145 will have a material effect on its results of operations. Reclassifications -- Prior period amounts in the consolidated condensed financial statements have been reclassified where necessary to conform to the 2002 presentation. -8- 3. Property, Plant and Equipment, Net, and Capitalized Interest Property, plant and equipment, net, consisted of the following (in thousands):
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ Buildings, machinery and equipment ............. $ 4,966,818 $ 4,585,139 Oil and gas properties, including pipelines .... 2,327,040 2,283,344 Geothermal properties .......................... 382,134 375,156 Other .......................................... 240,997 223,675 ------------ ------------ 7,916,989 7,467,314 Less: accumulated depreciation, depletion and amortization.................................... (935,600) (843,778) ------------ ------------ 6,981,389 6,623,536 Land ........................................... 80,680 80,506 Construction in progress ....................... 9,149,420 8,496,456 ------------ ------------ Property, plant and equipment, net ............. $ 16,211,489 $ 15,200,498 ============ ============
Construction in progress is primarily attributable to gas-fired power projects under construction including prepayments on gas turbine generators. Upon commencement of plant operation, these costs are transferred to the applicable property category, generally buildings, machinery and equipment. In March 2002, the Company announced a new turbine and construction program that will slow the growth in the Company's construction in progress. See Note 11 for a discussion of the turbine order cancellations during the quarter. Capitalized Interest -- The Company capitalizes interest on capital invested in projects during the advanced stages of development and the construction period in accordance with SFAS No. 34, "Capitalization of Interest Cost," as amended by SFAS No. 58, "Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method (an Amendment of FASB Statement No. 34)." The Company's qualifying assets include construction in progress, certain oil and gas properties under development, construction costs related to unconsolidated investments in power projects under construction, and advanced stage development costs. For the three months ended March 31, 2002 and 2001, the total amount of interest capitalized was $163.1 million and $104.0 million, including $35.1 million and $34.7 million, respectively, of interest incurred on funds borrowed for specific construction projects and $128.0 million and $69.3 million, respectively of interest incurred on general corporate funds used for construction. Upon commencement of plant operation, capitalized interest, as a component of the total cost of the plant, is amortized over the estimated useful life of the plant. The increase in the amount of interest capitalized during the three months ended March 31, 2002 reflects the significant increase in the Company's power plant construction program. In accordance with SFAS No. 34, the Company determines which debt instruments best represent a reasonable measure of the cost of financing construction assets in terms of interest cost incurred that otherwise could have been avoided. These debt instruments and associated interest cost are included in the calculation of the weighted average interest rate used for capitalizing interest on general funds. The primary debt instruments included in the rate calculation are the Company's senior notes and the corporate revolvers. 4. Goodwill and Other Intangible Assets On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that all intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather tested upon adoption and at least annually for impairment. The Company is required to complete the initial step of a transitional impairment test within six months of adoption of SFAS No. 142 and to complete the final step of the transitional impairment test by the end of the fiscal year. Any impairment loss resulting from the transitional impairment test would be recorded as a cumulative effect of a change in accounting principle for the quarter ended March 31, 2002. Subsequent impairment losses will be reflected in operating income or loss in the consolidated statements of operations. We will complete a transitional goodwill impairment test as required prior to June 30, 2002. In accordance with the standard, the Company discontinued the amortization of its recorded goodwill as of January 1, 2002 and identified reporting units based on its current segment reporting structure and allocated all recorded goodwill, as well as other assets and liabilities, to the reporting units. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization is provided below (in thousands except per share amounts): -9-
Three Months Ended March 31, ---------------------------------------------------------------------- 2002 2001 ------------------------------ ------------------------------ Per Share Per Share ------------------ ----------------- Amount Diluted Basic Amount Diluted Basic --------- ------- ------- --------- ------- ------- Reported income (loss) before extraordinary gain and cumulative effect of a change in accounting principle........................... $(76,397) $(0.25) $(0.25) $ 118,627 $ 0.35 $ 0.39 Add: Goodwill amortization, net of tax............ -- -- -- 136 -- -- Income (loss) before extraordinary gain and cumulative effect of a change in accounting principle, as adjusted............................ (76,397) (0.25) (0.25) 118,763 0.35 0.39 Extraordinary gain and cumulative effect of a change in accounting principle, net of tax........ 2,130 0.01 0.01 1,036 0.01 0.01 -------- ------ ------ --------- ------- ------- Net income (loss), as adjusted.................... $(74,267) $(0.24) $(0.24) $ 119,799 $ 0.36 $ 0.40 ======== ====== ====== ========= ======= =======
Recorded goodwill, by segment, as of March 31, 2002 was (in thousands): Electric Generation and Marketing ............................ $29,348 Oil and Gas Production and Marketing.......................... -- Corporate, Other and Eliminations ............................ -- ------- Total ..................................................... $29,348 =======
The Company also reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The components of the amortizable intangible assets consist of the following (in thousands):
As of March 31, 2002 As of December 31, 2001 ------------------------ ------------------------ Weighted Average Useful Life/Contract Carrying Accumulated Carrying Accumulated Life Amount Amortization Amount Amortization ------------- ---------- ------------ ---------- ------------ Patents .................. 5 $ 485 $ (158) $ 485 $ (134) Power sales agreements.... 14 173,479 (93,779) 173,479 (87,823) Fuel supply and fuel management contracts..... 33 127,543 (15,477) 127,543 (14,503) Other..................... 5 381 (36) 277 (25) --------- ---------- --------- --------- Total..................... $ 301,888 $ (109,450) $ 301,784 $(102,485) ========= ========== ========= =========
Amortization expense of other intangible assets was $7.0 million and $6.9 million in the three months ended March 31, 2002 and 2001, respectively. Assuming no future impairments of these assets or additions as the result of acquisitions, annual amortization expense will be $25.0 million for the twelve months ended December 31, 2002, $8.9 million in 2003, $8.4 million in 2004, $8.3 million in 2005 and $8.2 million in 2006. 5. Investments in Power Projects On March 29, 2002, the Company sold its 11.4% interest in the Lockport Power Plant in exchange for a $27.3 million note receivable from Fortistar Tuscarora LLC, a wholly owned subsidiary of Fortistar LLC, the project's managing general partner. The note is scheduled to be repaid in the second quarter of 2002. This transaction resulted in a pre-tax other income gain of $9.7 million. -10- 6. Financing In January 2002, the Company entered into a letter of intent with ING Bank on the debt portion of a proposed California peaker sale/leaseback, including 11 California peaker facilities. This transaction is expected to generate $500 million of cash that will be received throughout 2002 as the power facilities enter commercial operation. Between January 2, 2002, and February 11, 2002, the Company repurchased an additional $192.5 million of its Zero-Coupon Convertible Debentures Due 2021 ("Zero Coupons"), bringing total repurchases to $314.5 million, and bringing the amount of Zero Coupons outstanding as of March 31, 2002 to $685.5 million. The Zero Coupons were repurchased at a discount, resulting in an extraordinary gain of $2.1 million, after the write-off of related financing costs and provision for tax. See Note 14 for additional repurchases subsequent to March 31, 2002. On January 3, 2002, the Company sold $100 million in aggregate principal amount of 4% Convertible Senior Notes Due 2006 ("Convertible Notes"), pursuant to the exercise of the initial purchaser's remaining $100 million option to purchase additional Convertible Notes. These securities will be convertible into shares of Calpine common stock at a price of $18.07. In March 2002, the Company closed a new secured credit agreement comprised of (a) a $1.0 billion revolving credit facility expiring on May 24, 2003 and (b) a two-year term loan facility for up to $600 million, which as previously reported, was only to be made available to the Company upon satisfaction of certain conditions to borrowing on or before June 8, 2002. On May 10, 2002, the Company borrowed $500 million of the term loan facility and, subject to certain conditions, may borrow the remaining $100 million in one or two remaining tranches on or before June 8, 2002. At the March 2002 closing, the Company also amended its existing $400 million revolving credit agreement to provide, among other things, security for borrowings under that agreement. The security for the revolving and term loan facilities as originally provided included (a) a pledge of the capital stock of the Company's subsidiary holding, directly or indirectly, (i) the interests in its natural gas properties, (ii) the Saltend power plant located in the United Kingdom and (iii) the Company's equity investment in nine U.S. power plants, and (b) a pledge by certain of the Company's subsidiaries of a total of 65% of the capital stock of Calpine Canada Energy Ltd. As part of the recent funding of the $500 million term loan, the Company expanded the security for the revolving credit and term loan facilities under both the $1.6 billion and the $400 million credit agreements by pledging to the lenders substantially all of the Company's remaining first tier domestic subsidiaries (excluding CES). On March 13, 2002, the Company repaid the Michael Petroleum note payable, which had a balance of $64.8 million at repayment. 7. Derivative Instruments As an independent power producer primarily focused on generation of electricity using gas-fired turbines, the Company's natural physical commodity position is "short" fuel (i.e., natural gas consumer) and "long" power (i.e., electricity seller). To manage forward exposure to price fluctuation in these and (to a lesser extent) other commodities, the Company enters into derivative commodity instruments. All transactions are subject to the Company's risk management policy which prohibits positions that exceed total portfolio generation and fuel requirements. Any hedging, balancing, or optimization activities that the Company engages in are directly related to the Company's asset-based business model of owning and operating gas-fired electric power plants and are designed to protect the Company's "spark spread" (the difference between the Company's fuel cost and the revenue it receives for its electric generation). The Company hedges exposures that arise from the ownership and operation of power plants and related sales of electricity and purchases of natural gas, and the Company utilizes derivatives to optimize the returns the Company is able to achieve from these assets for the Company's shareholders. While certain of the Company's contracts are considered energy trading contracts as defined in EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," the Company's traders have low capital at risk and value at risk limits for energy trading, and its risk management policy limits, at any given time, its net sales of power to its generation capacity and limits its net purchases of gas to its fuel consumption requirements on a total portfolio basis. This model is markedly different from that of companies that engage in significant commodity trading operations that are unrelated to underlying physical assets. Derivative commodity instruments are accounted for under the requirements of SFAS No. 133. The Company enters into various foreign currency swap agreements to hedge against changes in exchange rates on certain of its senior notes denominated in currencies other than the U.S. dollar. The foreign currency swaps effectively convert floating exchange rates into fixed exchange rates so that the Company can predict with greater assurance what its U.S. dollar cost will be for purchasing foreign currencies to satisfy the interest and principal payments on these senior notes. -11- The Company also enters into various interest rate swap agreements to hedge against changes in floating interest rates on certain of its project financing facilities. The interest rate swap agreements effectively convert floating rates into fixed rates so that the Company can predict with greater assurance what its future interest costs will be and protect itself against increases in floating rates. In conjunction with its capital markets activities, the Company enters into various forward interest rate agreements to hedge against interest rate fluctuations that may occur after the Company has decided to issue long-term fixed rate debt but before the debt is actually issued. The forward interest rate agreements effectively prevent the interest rates on anticipated future long-term debt from increasing beyond a certain level, allowing the Company to predict with greater assurance what its future interest costs on fixed rate long-term debt will be. The Company enters into commodity financial instruments to convert floating or indexed electricity and gas (and to a lesser extent oil and refined product) prices to fixed prices in order to lessen its vulnerability to reductions in electric prices for the electricity it generates, to reductions in gas prices for the gas it produces, and to increases in gas prices for the fuel it consumes in its power plants. The Company seeks to "self-hedge" its gas consumption exposure to an extent with its own gas production position. The Company also routinely enters into physical commodity contracts for sales of its generated electricity and sales of its natural gas production to ensure favorable utilization of generation and production assets. Such contracts often meet the criteria of SFAS No. 133 as derivatives but are generally eligible for the normal purchase and sales exception under SFAS No. 138. Some of those that are not deemed normal purchases and sales, can be designated as hedges of the underlying consumption of gas or production of electricity. During 2001, the FASB issued SFAS No. 133 Implementation Issue No. C15, dealing with a proposed electric industry normal purchases and sales exception for capacity sales transactions ("The Eligibility of Option Contracts in Electricity for the Normal Purchases and Normal Sales Exception"). As a result of Issue No. C15, as revised, most of the Company's capacity sales contracts qualify for the normal purchases and sales exception. The Company also enters into physical options for short-term periods (typically one month) to balance its short-term generating position. The options, which the Company may write or purchase, typically provide for a premium component and firm price for energy when exercised. In 2001 the FASB cleared SFAS No. 133 Implementation Issue No. C16 "Applying the Normal Purchases and Normal Sales Exception to Contracts That Combine a Forward Contract and a Purchased Option Contract" ("C16"). The guidance in C16 applies to fuel supply contracts that require delivery of a contractual minimum quantity of fuel at a fixed price and have an option that permits the holder to take specified additional amounts of fuel at the same fixed price at various times. Under C16, the volumetric optionality provided by such contracts is considered a purchased option that disqualifies the entire derivative fuel supply contract from being eligible to qualify for the normal purchases and normal sales exception in SFAS No. 133. The Company has adopted the guidance provided by C16 effective April 1, 2002, and Issue C16 is expected to increase the volatility of the Company's reported earnings in the future. The changes in fair values of derivative instruments designated as cash flow hedges are recorded in other comprehensive income ("OCI") for the effective portion and in current earnings, using the dollar offset method, for the ineffective portion. The changes in fair values of derivative instruments designated as fair value hedges are recorded in current earnings, as are the changes in fair values of the hedged risk attributable to the recognized asset, liability or unrecognized firm commitment being hedged. The changes in fair values of derivative instruments that are not designated as hedges are recorded in current earnings. -12- The table below reflects the amounts (in thousands) that are recorded as assets and liabilities at March 31, 2002 for the Company's derivative instruments:
Commodity Interest Rate Currency Derivative Total Derivative Derivative Instruments Derivative Instruments Instruments Net Instruments ------------ ----------- ----------- ------------ Current derivative assets .............. $ -- $ -- $ 549,155 $ 549,155 Long-term derivative assets ............ -- -- 554,354 554,354 -------- --------- ---------- ---------- Total assets ......................... $ -- $ -- $1,103,509 $1,103,509 ======== ========= ========== ========== Current derivative liabilities ......... $(10,927) $ (1,971) $ (437,967) $ (450,865) Long-term derivative liabilities ....... (6,136) (12,690) (479,090) (497,916) -------- --------- ---------- ---------- Total liabilities ............... $(17,063) $ (14,661) $ (917,057) $ (948,781) ======== ========= ========== ========== Net derivative assets (liabilities)..... $(17,063) $ (14,661) $ 186,452 $ 154,728 ======== ========= ========== ==========
At any point in time, it is highly unlikely that total net derivative assets and liabilities will equal accumulated OCI, net of tax from derivatives, for three primary reasons: o Tax effect of OCI -- When the values and subsequent changes in values of derivatives that qualify as effective hedges are recorded into OCI, they are initially offset by a derivative asset or liability. Once in OCI, however, these values are tax effected against a deferred tax liabiality, thereby creating an imbalance between net OCI and net derivative assets and liabilities. o Derivatives not designated as cash flow hedges and hedge ineffectiveness -- Only derivatives that qualify as effective cash flow hedges will have an offsetting amount recorded in OCI. Derivatives not designated as cash flow hedges and the ineffective portion of derivatives designated as cash flow hedges will be recorded into earnings instead of OCI, creating a difference between net derivative assets and liabilities and pre-tax OCI from derivatives. o Termination of effective cash flow hedges prior to maturity -- Following the termination of a cash flow hedge and subsequent settlement with a counterparty, the derivative asset or liability is liquidated and removed from the books. At this point, no asset or liability exists on the books for the hedge but a balance remains in OCI, which is not recognized in earnings until the forecasted transactions occur. As a result, there will be a temporary difference between OCI and derivative assets and liabilities on the books until the remaining OCI balance is recognized in earnings. Below is a reconciliation from the Company's net derivative assets to its accumulated other comprehensive loss, net of tax from derivative instruments at March 31, 2002 (in thousands): Net derivative assets ............................................. $ 154,728 Derivatives not designated as cash flow hedges and recognized hedge ineffectiveness ................................ (126,740) Terminated cash flow hedges, prior to maturity .................... (255,817) Deferred tax asset attributable to accumulated other comprehensive loss on cash flow hedges .......................... 88,210 --------- Accumulated other comprehensive loss from derivative instruments, net of tax ............................... $(139,619) =========
The asset and liability balances for the Company's commodity derivative instruments represent the net totals after offsetting certain assets against certain liabilities under the criteria of FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts (an Interpretation of APB Opinion No. 10 and FASB Statement No. 105)" ("FIN 39"). For a given contract, FIN 39 will allow the offsetting of assets against liabilities so long as four criteria are met: (1) each of the two parties under contract owes the other determinable amounts; (2) the party reporting under the offset method has the right to set off the amount it owes against the amount owed to it by the other party; (3) the party reporting under the offset method intends to exercise its right to set off; and; (4) the right of set-off is enforceable by law. The table below reflects both the amounts (in thousands) recorded as assets and liabilities by the Company and the amounts that would have been recorded had the Company's commodity derivative instrument contracts not qualified for offsetting as of March 31, 2002. -13-
MARCH 31, 2002 ------------------------------ GROSS NET ----------- ------------ Current derivative assets .................. $ 1,182,400 $ 549,155 Long-term derivative assets ................ 957,666 554,354 ----------- ----------- Total derivative assets .................. $ 2,140,066 $ 1,103,509 =========== =========== Current derivative liabilities ............. $(1,071,212) $ (437,967) Long-term derivative liabilities ........... (882,402) (479,090) ----------- ----------- Total derivative liabilities ............. $(1,953,614) $ (917,057) =========== =========== Net commodity derivative assets .......... $ 186,452 $ 186,452 =========== ===========
The table above excludes the value of interest rate and currency derivative instruments. The table below reflects the impact of the Company's derivative instruments on its pre-tax earnings, both from cash flow hedge ineffectiveness and from the changes in market value of derivatives not designated as hedges of cash flows, for the three months ended March 31, 2002 and 2001, respectively (in thousands):
Three Months Ended March 31, ------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------ --------------------------------------- Hedge Undesignated Hedge Undesignated Ineffectiveness Derivatives Total Ineffectiveness Derivatives Total --------------- ------------ -------- --------------- ------------ ------- Natural gas derivatives (1)................. $ (2,596) $(3,796) $(6,392) $ 526 $ 7,023 $ 7,549 Power derivatives .......................... (222) 4,388 4,166 (1,217) 2,523 1,306 Interest rate derivatives (2) .............. (152) -- (152) -- -- -- Foreign currency derivatives ............... -- -- -- -- -- -- --------- --------- --------- --------- --------- -------- Total..................................... $ (2,970) $ 592 $(2,378) $ (691) $ 9,546 $ 8,855 ========= ========= ========= ========= ========= ========
(1) Composed of gas contracts and crude oil costless collar arrangements (2) Recorded within Other Income For the three months ended March 31, 2002 and 2001, the Company's realized commodity cash flow hedge activity contributed $50.7 million and $17.0 million, respectively, to pre-tax earnings based on the reclassification adjustment from OCI to earnings. For the three months ended March 31, 2002 and 2001, power hedges contributed $86.5 million and $(9.3) million, respectively, to pre-tax earnings. For the three months ended March 31, 2002 and 2001, gas and crude oil hedges contributed $(35.8) million and $26.3 million, respectively, to pre-tax earnings. As of March 31, 2002, the maximum length of time over which the Company was hedging its exposure to the variability in future cash flows for forecasted transactions was 6, 7, and 16 1/2 years, for commodity, foreign currency and interest rate derivative instruments, respectively. The company estimates that pre-tax gains of $80.1 million would be reclassified from accumulated OCI into earnings during the twelve months ended March 31, 2003 as the hedged transactions affect earnings assuming constant gas and power prices, interest rates, and exchange rates over time; however, the actual amounts that will be reclassified will likely vary based on the probability that gas and power prices as well as interest rates and exchange rates will, in fact, change. Therefore, management is unable to predict what the actual reclassification from OCI to earnings (positive or negative) will be for the next twelve months. -14- The table below presents (in thousands) the pre-tax gains (losses) currently held in OCI that will be recognized annually into earnings, assuming constant gas and power prices, interest rates, and exchange rates over time.
2007 2002 2003 2004 2005 2006 & After Total --------- ---------- --------- ---------- --------- --------- ---------- Crude oil OCI..................... $ (129) $ -- $ -- $ -- $ -- $ -- $ (129) Gas OCI........................... (88,344) (183,131) (69,772) (63,121) (22,540) -- (426,908) Power OCI......................... 206,945 66,583 353 1,320 1,898 (652) 276,447 Interest rates OCI................ (14,119) (12,118) (8,779) (7,612) (6,951) (18,937) (68,516) Foreign currency OCI.............. (1,971) (1,831) (1,700) (1,588) (1,500) (133) (8,723) --------- ---------- --------- --------- --------- --------- ---------- Total OCI....................... $ 102,382 $ (130,497) $ (79,898) $ (71,001) $ (29,093) $ (19,722) $ (227,829) ========= ========== ========= ========= ========= ========= ==========
8. Comprehensive Income (Loss) Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity. Comprehensive income (loss) includes net income (loss) and unrealized gains and losses from derivative instruments that qualify as hedges. The Company reports accumulated other comprehensive loss in its consolidated balance sheet. The tables below detail the changes in the Company's accumulated OCI balance and the components of the Company's comprehensive income (loss) (in thousands):
Accumulated Other Comprehensive Loss at March 31, 2002 ------------------------------------- Comprehensive Foreign Loss for the Three Cash Flow Currency Months Ended Hedges Translation Total March 31, 2002 --------- ----------- --------- ------------------ Net loss .......................................................... $ (74,267) Accumulated other comprehensive loss at beginning of period ....... $(183,377) $ (43,197) $(226,574) -- Cash flow hedges: Comprehensive pre-tax gain on cash flow hedges before reclassification adjustment during the three months ended March 31, 2002 ........................................ 120,610 -- 120,610 120,610 Reclassification adjustment for gain included in net loss for the three months ended March 31, 2002 .............. (48,699) -- (48,699) (48,699) Income tax provision for the three months ended March 31, 2002 .............................................. (28,153) -- (28,153) (28,153) --------- --------- --------- 43,758 -- 43,758 43,758 Foreign currency translation loss for the three months ended March 31, 2002 ........................................ -- (25,170) (25,170) (25,170) --------- --------- --------- --------- Accumulated other comprehensive loss at end of period ............. $(139,619) $ (68,367) $(207,986) -- ========= ========= ========= Comprehensive loss ................................................ $ (55,679) =========
-15-
Accumulated Other Comprehensive Loss at March 31, 2001 ------------------------------------- Comprehensive Foreign Income for the Three Cash Flow Currency Months Ended Hedges Translation Total March 31, 2001 --------- ----------- --------- ------------------ Net income......................................................... $ 119,663 Accumulated other comprehensive loss at beginning of period........ $ -- $ (23,085) $ (23,085) -- Cash flow hedges: Comprehensive pre-tax loss on cash flow hedges before reclassification adjustment during the three months ended March 31, 2001......................................... (69,134) -- (69,134) (69,134) Reclassification adjustment for gain included in net income for the three months ended March 31, 2001............. (17,047) -- (17,047) (17,047) Income tax benefit for the three months ended March 31, 2001............................................... 32,611 -- 32,611 32,611 --------- --------- --------- (53,570) -- (53,570) (53,570) Foreign currency translation gain for the three months ended March 31, 2001......................................... -- 14,694 14,694 14,694 --------- --------- --------- --------- Accumulated other comprehensive loss at end of period.............. $ (53,570) $ (8,391) $ (61,961) -- ========= ========= ========= Comprehensive income .............................................. $ 80,787 =========
9. Customers Enron During 2001, the Company, primarily through its CES subsidiary, transacted a significant volume of business with units of Enron Corp. ("Enron"), mainly Enron Power Marketing, Inc. ("EPMI") and Enron North America Corp. ("ENA"). ENA is the parent corporation of EPMI. Enron is the direct parent corporation of ENA. Most of these transactions were contracts for sales and purchases of power and gas for hedging purposes, some of which extended out as far as 2009. On December 2, 2001, Enron Corp. and certain of its subsidiaries filed voluntary petitions for Chapter 11 reorganization with the U.S. Bankruptcy Court for the Southern District of New York. EPMI and ENA are among the subsidiaries of Enron that filed for reorganization on December 2, 2001. The Company conducted a limited amount of business with EPMI and ENA during December of 2001 on a collateralized or prepaid basis and has conducted no business with EPMI or ENA since December 31, 2001. The following table sets forth information regarding the Company's settled physical transactions and non-hedging mark-to-market gains with Enron for the three months ended March 31, 2002 and 2001, (in thousands of dollars and thousands of MWh's, in the case of electricity transactions, and thousands of MMBtu's, in the case of oil and gas transactions):
For the Three Months Ended For the Three Months Ended March 31, 2002 March 31, 2001 -------------------------- -------------------------- Dollar Volume Dollar Volume --------- ------ --------- ------ Electric generation and marketing revenue (electricity and steam revenue and sales of purchased power) ................... $ -- -- $ 84,175 1,293 Oil and gas production and marketing revenue (sales of purchased gas) ................................................ -- -- 53,290 4,719 Other revenue .................................................. -- -- 1,348 -- ------- --------- Total power and fuel and other revenue from Enron .............. $ -- $ 138,813 ------- --------- Electric generation and marketing expense (Purchased power expense) ...................................................... $ -- -- $ 110,886 1,283 Fuel expense (cost of oil and natural gas burned by power plants and natural gas derivative mark-to-market gain) ........ -- -- 16,930 2,417 ------- --------- Total CES power and fuel expenses related to Enron (1) ......... $ -- $ 127,816 ======= =========
__________ (1) Expenses of CES only, as other Enron expenses incurred are not material. -16- The Company has terminated all of its open forward positions with ENA and EPMI as of March 31, 2002, and will settle with ENA and EPMI based on the value of the terminated contracts at the termination or replacement date, as applicable. Accordingly, all amounts associated with terminated ENA and EPMI forward contracts have been included within the Company's accounts payable. As of March 31, 2002, unrealized pre-tax losses on derivatives designated as effective cash flow hedges recorded in OCI associated with terminated ENA and EPMI contracts were $161.6 million. These amounts will be recognized in future earnings as the original hedged forecasted transactions occur. The sales to and purchases from various Enron subsidiaries were mostly for hedging, balancing and optimization transactions, and in most cases the purchases and sales are not related and should not be netted to try to gauge the profitability of transactions with Enron subsidiaries. On November 14, 2001, CES, ENA and EPMI entered into a Master Netting, Setoff and Security Agreement (the "Netting Agreement"). The Netting Agreement permits CES, on the one hand, and ENA and EPMI, on the other hand, to set off amounts owed to each other under an ISDA Master Agreement between CES and ENA, an Enfolio Master Firm Purchase/Sale Agreement between CES and ENA and a Master Energy Purchase/Sale Agreement between CES and EPMI (in each case, after giving effect to the netting provisions contained in each of these agreements). Based on legal analysis of the Netting Agreement, the Company believes it has no net collection exposure to Enron. Following are the accounts receivable and accounts payable balances, presented on both a gross and net basis, with ENA and EPMI at March 31, 2002 (in millions):
Receivables/Payables -------------------- Gross Gross Net Receivable Receivable Payable (Payable) ---------- ---------- -------------- Enron North America ........... $ 1,125.6 $ (1,404.7) $ (279.1) Enron Power Marketing ......... 836.7 (701.1) 135.6 ---------- ---------- -------- Total ....................... $ 1,962.3 $ (2,105.8) $ (143.5) ========== ========== ========
After netting the receivables and payables from ENA and EPMI, the Company has an existing or future obligation of $143.5 million as of March 31, 2002, which obligation will be offset by CES' losses, damages, attorneys' fees and other expenses arising from the default by Enron. Although the Company had no net collection exposure to ENA and EPMI at March 31, 2002, the Company established a $13.1 million reserve in December 2001 related to unrealized mark to market gains generated by Enron's insolvency, which caused earnings recognition for contracts that had previously been exempted from SFAS No. 133 accounting and which caused cash flow hedges to cease to be effective and marked-to-market in earnings until termination. The Company's treasury department includes a credit group focused on monitoring and managing counterparty risk. The credit group monitors the net exposure with each counterparty on a daily basis. The analysis is performed on a mark-to-market basis using the forward curves audited by the Company's Risk Controls group. The net exposure is compared against a counterparty credit risk threshold which is determined based on the counterparty's credit ratings, evaluation of the financial statements and bond values. The credit department monitors these thresholds to determine the need for additional collateral or an adjustment to activity with the counterparty. Nevada Power and Sierra Pacific Resources During the first quarter of 2002, two subsidiaries of Sierra Pacific Resources Corporation, Nevada Power Company ("NPC") and Sierra Pacific Resources ("SPR"), received credit downgrades to sub-investment grades from the major credit rating agencies. The credit downgrades resulted from short-term liquidity problems created when the Public Utilities Commission of Nevada disallowed a rate adjustment requested by NPC to cover the increased cost of buying power during the 2001 energy crisis. NPC and SPR have requested that their power suppliers extend payment terms to help them overcome their short-term liquidity problems. As of March 31, 2002, the Company had net collection exposures of approximately $30.7 million and $21.3 million with NPC and SPR, respectively. The Company's exposures include open forward power position contracts that are reported at fair value in the Company's balance sheet as well as receivable and payable balances relating to settled power deliveries. Management is continuing to monitor the exposure and its effect on the Company's financial condition. The table below details the components of the Company's exposure position at March 31, 2002 (in millions of dollars). The positive net positions represent realization exposure while the negative net positions represent the Company's existing or potential obligations. -17-
Receivables/Payables Fair Values -------------------------------- -------------------------------- Net Gross Gross Net Open Gross Gross Receivable Fair Fair Positions Receivable Payable (Payable) Value(+) Value(-) Value Total ---------- ------- ---------- -------- -------- --------- ------ Nevada Power Company ................... $ 3.5 $ (4.6) $ (1.1) $ 91.0 $ (59.2) $ 31.8 $ 30.7 Sierra Pacific Resources ............... 1.0 -- 1.0 20.3 -- 20.3 21.3 ----- ------ ------ ------- ------- ------ ------ Total ................................ $ 4.5 $ (4.6) $ (0.1) $ 111.3 $ (59.2) $ 52.1 $ 52.0 ===== ====== ====== ======= ======= ====== ======
Under the terms of its contracts with NPC and SPPC, the Company believes that it has the right to offset asset and liability positions. 10. Earnings (loss) per Share Basic earnings (loss) per common share were computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The dilutive effect of the potential exercise of outstanding options to purchase shares of common stock is calculated using the treasury stock method. The dilutive effect of the assumed conversion of certain convertible securities into the Company's common stock is based on the dilutive common share equivalents and the after tax distribution expense avoided upon conversion. The reconciliation of basic earnings (loss) per common share to diluted earnings (loss) per share is shown in the following table (in thousands except per share data).
PERIODS ENDED MARCH 31, ----------------------------------------------------------------- 2002 2001 ------------------------------- ------------------------------ NET NET INCOME INCOME (LOSS) SHARES EPS (LOSS) SHARES EPS -------- ------- ------ -------- ------- -------- THREE MONTHS: Basic earnings (loss) per common share: Income (loss) before extraordinary gain and cumulative effect of a change in accounting principle .................... $(76,397) 307,332 $(0.25) $118,627 300,554 $ 0.39 Extraordinary gain, net of tax .................................. 2,130 -- 0.01 -- -- -- Cumulative effect of a change in accounting principle, net of tax .................................................... -- -- -- 1,036 -- 0.01 -------- ------- ------ -------- ------- -------- Net income (loss) ............................................... $(74,267) 307,332 $(0.24) $119,663 300,554 $ 0.40 -------- ------- ------ -------- ------- -------- Diluted earnings (loss) per common share: Common shares issuable upon exercise of stock options using treasury stock method ................................... -- 16,278 ------- ------- Income (loss) before dilutive effect of certain convertible securities, extraordinary gain and cumulative effect of a change in accounting principle ........................... $(76,397) 307,332 $(0.25) $118,627 316,832 $ 0.37 Dilutive effect of certain convertible securities ............... -- -- -- 9,355 44,882 (0.02) -------- ------- ------ -------- ------- -------- Income (loss) before extraordinary gain and cumulative effect of a change in accounting principle .................... (76,397) 307,332 (0.25) 127,982 361,714 0.35 Extraordinary gain, net of tax .................................. 2,130 -- 0.01 -- -- -- Cumulative effect of a change in accounting principle, net of tax .................................................... -- -- -- 1,036 -- 0.01 -------- ------- ------ -------- ------- -------- Net income (loss) ............................................... $(74,267) 307,332 $ (0.24) $129,018 361,714 $ 0.36 ======== ======= ======== ======== ======= ========
The effect of 151,353,196 and 280,849 unexercised employee stock options, Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trusts, Zero Coupons and Convertible Notes were not included in the computation of diluted shares outstanding for the three months ended March 31, 2002 and 2001, because such inclusion would have been antidilutive. Because of the Company's loss for the three months ended March 31, 2002, basic shares were used in the calculation of fully diluted loss per share, under the guidelines of SFAS No. 128, "Earnings per Share," as using the basic shares produced the more dilutive effect on the loss per share. -18- 11. Commitments and Contingencies Capital Expenditures -- On March 12, 2002, the Company announced a new turbine program that reduces previously forecasted capital spending by approximately $1.2 billion in 2002 and $1.8 billion in 2003. The revision includes adjusted timing of turbine delivery and related payment schedules and also turbine cancellation orders. As a result of the turbine order cancellations and the cancellation of certain other equipment, the Company recorded a pre-tax charge of $168.5 million in the first quarter of 2002, based primarily on forfeited prepayments to date and an immaterial cash payment pursuant to contract terms. Litigation -- Calpine Corporation v. Automated Credit Exchange ("ACE"). On March 5, 2002, Calpine sued ACE in the Superior Court of the State of California for the County of Alameda for negligence and breach of contract to recover reclaim trading credits, a form of emission reduction credits that should have been held in Calpine's account with U.S. Trust Company (US Trust). ACE is a broker in emission reduction credits based in Pasadena, California. Calpine had paid ACE for Nitrogen oxide (NOx) coastal credits that were to be purchased by ACE and held by US Trust. The credits were to be held by US Trust pursuant to a Credit Holding Agreement, which provided, among other things, that US Trust was to hold the credits until receiving instructions from ACE to disburse the credits. ACE had agreed that (i) upon prior written instruction from Calpine, to instruct US Trust to take such actions as may be directed by Calpine to disburse the credits held in escrow pursuant to the Credit Holding Agreement and (ii) not to take any action, or otherwise instruct US Trust to take any action, concerning the credits held in escrow pursuant to the Credit Holding Agreement without prior written instruction from Calpine. Calpine and ACE entered into a settlement agreement that resolved all issues on March 29, 2002. The settlement provided for a partial recovery of $7 million and for the rights to the emission reduction credits to be held by ACE. The Company expects to recognize the $7 million in the second quarter of 2002, after all realization uncertainties are cleared. In accordance with the settlement agreement, Calpine has dismissed its complaint against ACE. Ben Johnson v. Peter Cartwright, et al. On December 17, 2001, a shareholder filed a derivative lawsuit on behalf of Calpine against its directors and one of its senior officers. This lawsuit is styled Johnson vs. Cartwright, et al. (No. CV803872), and is pending in the California Superior Court, Santa Clara County. Calpine is a nominal defendant in this lawsuit, which alleges claims relating to purportedly misleading statements about Calpine and stock sales by certain of the director defendants and the officer defendant. Calpine has filed a demurrer asking the court to dismiss the complaint on the ground that the shareholder plaintiff lacks standing to pursue claims on behalf of Calpine. The individual defendants have filed a demurrer asking the court to dismiss the complaint on the ground that it fails to state any claims against them. Securities Class Action Lawsuits. Since March 11, 2002, fourteen shareholder lawsuits have been filed against Calpine and certain of its officers in the United States District Court, Northern District of California. The actions captioned Weisz vs. Calpine Corp., et al., filed March 11, 2002, and Labyrinth Technologies, Inc. v. Calpine Corp., et al., filed March 28, 2002 are purported class actions on behalf of purchasers of Calpine stock between March 15, 2001 and December 13, 2001. Gustaferro v. Calpine Corp., filed April 18, 2002 is a purported class action on behalf of purchasers of Calpine stock between February 6, 2001 and December 13, 2001. The eleven other actions, captioned Local 144 Nursing Home Pension Fund vs. Calpine Corp., Lukowski vs. Calpine Corp., Hart vs. Calpine Corp., Atchison vs. Calpine Corp. and Laborers Local 1298 v. Calpine Corp., Bell v. Calpine Corp., Nowicki v. Calpine Corp. Pallotta v. Calpine Corp., Knepell v. Calpine Corp., Staub v. Calpine Corp, and Rose v. Calpine Corp. were filed between March 18, 2002 and April 23, 2002. The complaints in these eleven actions are virtually identical--they were filed by three law firms, in conjunction with other law firms as co-counsel. All eleven lawsuits are purported class actions on behalf of purchasers of Calpine's securities between January 5, 2001 and December 13, 2001. The complaints in these fourteen actions allege that, during the purported class periods, certain senior executives issued false and misleading statements about Calpine's financial condition in violation of Sections 10(b) and 20(1) of the Securities Exchange Act of 1934, as well as Rule 10b-5. These actions seek an unspecified amount of damages, in addition to other forms of relief. We expect that these actions, as well as any related actions that may be filed in the future, will be consolidated by the court into a single securities class action. We consider the lawsuits to be without merit, and we intend to defend vigorously against these allegations. Public Utilities Commission of the State of California v. Sellers of Long Term Contracts to the California Department of Water Resources; California Electricity Oversight Board v. Sellers of Long Term Contracts to the California Department of Water Resources. In February 2002 both the California Public Utilities Commission ("CPUC") and the California Electric Oversight Board ("EOB") filed complaints under Section 206 of the Federal Power Act with the Federal Energy Regulatory Commission ("FERC") (EL02-60-000 and EL02-62-000, respectively) alleging that the prices and terms of the long-term contracts with the California Department of Water Resources ("DWR") are unjust and unreasonable and counter to the public interest. CES is a respondent and the four long-term -19- contracts entered into between CES and DWR are subject to the complaint (see, Risk Factors - California Long-Term Supply Agreements). As part of Calpine's successful renegotiation of its long-term power contracts with DWR announced on April 22, 2002, the Office of the Governor, the CPUC, the EOB and the California Attorney General ("AG") agreed to settle this action and drop all challenges to Calpine's long-term contracts with DWR. On May 2, 2002 each of the CPUC, the EOB, and the AG filed a Notice of Partial Withdrawal with Prejudice of Complaint as to Calpine Energy Services, L.P. with the FERC. Pursuant to its respective notice each of the CPUC and the EOB withdrew all of their respective claims against CES which had been alleged in the above-for-mentioned complaints (EL02-60-000 and ELO2-62-000) concerning the justness and reasonableness of the terms under the long-term contracts with DWR. In addition, pursuant to its notice, the AG withdrew all claims as to CES in its complaint (EL02-71-000) wherein it had alleged that public utility sellers of energy and ancillary services to DWR and into markets operated by the California Independent System Operator and the California Power Exchange were not in compliance with their disclosure obligations under Section 205 of the Federal Power Act. The Company is involved in various other claims and legal actions arising out of the normal course of business. The Company does not expect that the outcome of these proceedings will have a material adverse effect on the Company's financial position or results of operations. 12. Operating Segments The Company's primary operating segments are electric generation and marketing; oil and gas production and marketing; and corporate activities and other. Electric generation and marketing includes the development, acquisition, ownership and operation of power production facilities, the sale of electricity and steam and electricity hedging and related activity. Oil and gas production and marketing includes the ownership and operation of gas fields, gathering systems and gas pipelines for internal gas consumption, third party sales and oil and gas hedging and related activity. Corporate activities and other consists primarily of financing activities, general and administrative costs and consolidating eliminations. Certain costs related to company-wide functions are allocated to each segment. However, interest on corporate debt is maintained at corporate and is not allocated to the segments. Due to the integrated nature of the business segments, estimates and judgments have been made in allocating certain revenue and expense items. The Company evaluates performance of these operating segments based upon several criteria including profits before tax.
ELECTRIC OIL AND GAS GENERATION PRODUCTION CORPORATE, OTHER AND MARKETING AND MARKETING AND ELIMINATIONS TOTAL ----------------------- ------------------- -------------------- ----------------------- 2002 2001 2002 2001 2002 2001 2002 2001 ---------- ---------- -------- -------- -------- -------- ---------- ---------- (in thousands) For the three months ended March 31, 2002 and 2001: Revenue......................... $1,534,143 $1,050,629 $236,348 $331,828 $(32,144) $(42,706) $1,738,347 $1,339,751 Income before taxes and extraordinary charge.......... (46,186) 127,791 13,064 116,535 (84,412) (36,718) (117,534) 207,608 Merger expense.................. -- -- -- 6,021 -- -- -- 6,021 Equipment cancellation cost..... 168,471 -- -- -- -- -- 168,471 --
ELECTRIC OIL AND GAS GENERATION PRODUCTION CORPORATE, OTHER AND MARKETING AND MARKETING AND ELIMINATIONS TOTAL ------------- ------------- ---------------- ----------- (in thousands) Total assets: March 31, 2002.................. $14,010,815 $3,714,004 $2,918,716 $20,643,535 December 31, 2001............... $12,572,848 $3,503,075 $5,253,629 $21,329,552
For the three months ended March 31, 2002 and 2001, there were intersegment revenues of approximately $36.7 million and $46.0 million, respectively. The elimination of these intersegment revenues, which primarily relate to the use of internally procured gas for the Company's power plants, are included in the Corporate and Other reporting segment. 13. California Power Market On February 25, 2002, both the CPUC and the EOB filed complaints under Section 206 of the Federal Power Act with FERC (EL02-60-000 and EL02-62-000, respectively) alleging that the prices and terms of the long-term contracts with DWR are unjust and unreasonable and counter to the public interest. Calpine was a respondent and the four long-term contracts entered into by Calpine were subject to the complaint. -20- On March 6, 2002, in accordance with the state legislation that authorized DWR to enter into the long-term power contracts, the CPUC issued a Rate Agreement, which dedicates a portion of the retail rate paid by electricity customers of the California investor-owned utilities to a fund to pay bondholders of bonds to be issued by DWR and to a fund to pay electricity suppliers such as Calpine. The proceeds from those bonds will be used in part to fund the Electric Power Fund established by the state legislation authorizing DWR to enter into long-term power contracts with the power suppliers whose recourse in the event of a default by DWR is to the Electric Power Fund. Proceeds from the bonds will also be used to repay the state of California General Fund. The bonds have not been issued, but representatives of the State have indicated that the bonds should be issued in the near future. FERC Investigation into California Wholesale Markets -- On February 13, 2002, FERC initiated an investigation of potential manipulation of electric and natural gas prices in the western United States. This investigation was initiated as a result of allegations that Enron Corp. through its affiliates used its market position to distort electric and natural gas markets in the West. The scope of the investigation is to consider whether as a result of any manipulation in the short-term markets for electric energy or natural gas or other undue influence on the wholesale markets by any party since January 1, 2000, the rates of the long-term contracts subsequently entered into in the West are potentially unjust and unreasonable. In connection with its investigation, FERC has, and may in the future, issue data requests seeking information regarding trading practices in California and the western electricity markets. FERC has stated that it may use the information gathered in connection with the investigation to determine how to proceed on any existing or future complaint brought under Section 206 of the Federal Power Act involving long-term power contracts entered into in the West since January 1, 2000, or to initiate a Federal Power Act Section 206 or Natural Gas Act Section 5 proceeding on its own initiative. 14. Subsequent Events On April 22, 2002, the Company announced that it had renegotiated CES' long-term power contracts with the DWR. The Office of the Governor, the CPUC, the EOB and the AG have endorsed the renegotiated contracts and have agreed to drop all pending claims against the Company and its affiliates, including withdrawing the complaint under Section 206 of the Federal Power Act recently filed by the CPUC and EOB with FERC and the CPUC and the EOB have agreed to terminate their efforts to seek refunds from the Company and its affiliates through FERC refund proceedings. In connection with the renegotiation, the Company has agreed to pay $6 million over three years to the AG to resolve any and all possible claims against the Company and its affiliates brought by the AG. The renegotiation includes the shortening of the duration of the two ten-year, baseload energy contracts by two years and of the 20-year peaker contract by ten years. These changes reduce DWR's long-term purchase obligations. In addition, CES agreed to reduce the energy price on one baseload contract from $61.00 to $59.60 per megawatt-hour, and to convert the energy portion of the peaker contract to gas index pricing from fixed energy pricing. CES has also agreed to deliver up to 12.2 million megawatt-hours of additional energy pursuant to the baseload energy contracts in 2002 and 2003. In connection with the renegotiation, CES has also agreed with DWR that DWR will have the right to assume and complete four of our projects currently planned for California and in the advanced development stage if the Company does not meet certain milestones with respect to each project assumed, provided that DWR reimburses the Company for all construction costs and certain other costs incurred by the Company to the date DWR assumes the relevant project. The negotiation resolved the dispute with DWR concerning payment of the capacity payment on the 495-megawatt peaking contract dated February 28, 2001. The contract provides that through December 31, 2002, CES may earn a capacity payment by committing to supply electricity to DWR from a source other than the peaker units designated in the contract. DWR made certain assertions challenging CES' right to substitute units or provide replacement energy and had withheld capacity payments in the amount of approximately $15.0 million since December 2001. As part of the renegotiation, the Company has received payment in full on these withheld capacity payments and will have the right to provide replacement capacity through December 31, 2002, based on the original contract terms. On May 2, 2002, each of the CPUC and the EOB filed a Notice of Partial Withdrawal with Prejudice of Complaint as to Calpine Energy Services, L.P. with the FERC in the EL02-60-000 and EL02-62-000 dockets, respectively. In April 2002 the Company entered into letters of intent for Wisconsin Public Service to purchase its 180-megawatt De Pere Energy Center and for Wisconsin Public Service to enter into a power purchase agreement for up to 235 megawatts of capacity and energy for 10 years from Calpine's Sherry Energy Center located near Marshfield, Wisconsin. Wisconsin Public Service will pay Calpine $120 million for the De Pere facility and termination of the existing power purchase agreement. The cost of the capacity purchases from the Sherry Energy Center will be approximately $250 million over the 10-year period. Wisconsin Public Service will be responsible for supplying the fuel to produce the energy it receives from the Sherry Energy Center. -21- On April 30, 2002, the Company completed a public offering of common stock of 66 million shares and priced the offering at $11.50 per share. The proceeds from the offering, after underwriting fees, were $734.3 million. Calpine has granted the underwriters an over-allotment option for an additional 9.9 million shares of its common stock, which may be exercised for up to 30 days. As of the date of this report, this option had not been exercised. Management cannot predict whether the underwriters will exercise this option in whole or in part. On April 30, 2002, the Company repurchased the remaining $685.5 million of Zero Coupons at par pursuant to a scheduled put provided for by the terms of the securities. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition to historical information, this report contains forward-looking statements. Such statements include those concerning Calpine Corporation's ("the Company's") expected financial performance and its strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements such as, but not limited to, (i) unseasonable weather patterns that reduce demand for power and natural gas, (ii) systemic economic slowdowns, which can adversely affect consumption of power by businesses and consumers, (iii) the timing and extent of deregulation of energy markets and the rules and regulations adopted on a transitional basis with respect thereto, (iv) the timing and extent of changes in commodity prices and derivative values for energy, particularly natural gas and electricity, (v) commercial operations of new plants that may be delayed or prevented because of various development and construction risks, such as a failure to obtain financing and the necessary permits to operate or the failure of third-party contractors to perform their contractual obligations, (vi) cost estimates are preliminary and actual costs may be higher than estimated, (vii) a competitor's development of a lower-cost gas-fired power plant, (viii) risks associated with marketing and selling power from power plants in the newly-competitive energy market, or (ix) the successful exploitation of an oil or gas resource that ultimately depends upon the geology of the resource, the total amount and cost to develop recoverable reserves, and operational factors relating to the extraction of natural gas. All information set forth in this filing is as of May 15, 2002, and Calpine undertakes no duty to update this information. Readers should carefully review the "Risk Factors" section in documents filed with the Securities and Exchange Commission. Selected Operating Information Set forth below is certain selected operating information for our power plants and steam fields, for which results are consolidated in our statements of operations. Results vary for the three months ended March 31, 2002, as compared to the same period in 2001, primarily due to the consolidation of acquisitions and increased production as a result of acquired plants and bringing new plants under construction on line. Electricity revenue is composed of fixed capacity payments, which are not related to production, and variable energy payments, which are related to production. Capacity revenue includes, besides traditional capacity payments, other revenues such as reliability must run and ancillary service revenues. The information set forth under thermal and other revenue consists of host thermal sales and other revenue (revenues in thousands).
Three months ended March 31, (in thousands, except ---------------------------- production and pricing data) 2002 2001 ----------- ---------- Power Plants: Electricity and steam ("E&S") revenues: Energy ............................................. $ 513,103 $ 435,382 Capacity ........................................... 75,391 117,727 Thermal and other .................................. 31,685 42,050 ----------- ---------- Subtotal ........................................... $ 620,179 $ 595,159 Spread on sales of purchased power (1) ............... 93,139 (1,348) ----------- ---------- Adjusted E&S revenues ................................ $ 713,318 $ 593,811 Megawatt hours produced .............................. 14,714,000 7,239,000 All-in electricity price per megawatt hour generated . $ 48.48 $ 82.03
_________ (1) From hedging, balancing and optimization activities related to our generating assets. The spread on trading activities is excluded. -22- Megawatt hours produced at the power plants increased 103.3% for the three months ended March 31, 2002 as compared to the same period in 2001. This was primarily due to the addition of power plants that were either acquired or commenced commercial operation subsequent to March 31, 2001. Lower average market prices caused the all-in electricity price per megawatt hour generated to decrease between periods. Results of Operations Set forth below is a table summarizing the dollar amounts and percentages of our total revenue for the three months ended March 31, 2002 and 2001 that represent purchased power and purchased gas sales and the costs we incurred to purchase the power and gas that we resold during these periods (in thousands, except for percentage data):
THREE MONTHS ENDED MARCH 31, ----------------------------- 2002 2001 ---------- ----------- Total revenue .............................. $1,738,347 $1,339,751 Sales of purchased power ................... 908,301 453,602 As a percentage of total revenue ........... 52.3% 33.9% Sale of purchased gas ...................... 132,158 129,172 As a percentage of total revenue ........... 7.6% 9.6% Total cost of revenue ("COR") .............. 1,560,383 1,064,183 Purchased power expense .................... 815,005 456,266 As a percentage of total COR ............... 52.2% 42.9% Purchased gas expense ...................... 123,694 118,628 As a percentage of total COR ............... 7.9% 11.1%
The accounting requirements under Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements" and EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" require us to show most of our hedging contracts on a gross basis (as opposed to netting sales and cost of revenue). The primary reason for the significant increase in these sales and cost of revenue in 2002 as compared with 2001 is the growth of our generation activity in 2002 as compared with 2001 and the corresponding increase in hedging, balancing, optimization, and trading activities. Rules in effect throughout 2002 and 2001 associated with the NEPOOL market in New England require that all power generated in NEPOOL be sold directly to the Independent System Operator ("ISO") in that market; we then buy from the ISO to serve our customer contracts. Generally accepted accounting principles in the United States of America require us to account for this activity, which applies to three of our merchant generating facilities, as the aggregate of two distinct sales and one purchase. This gross basis presentation increases revenues but not gross profit. The table below details the financial extent of our transactions with NEPOOL for the period indicated. The decrease in 2002 is primarily due to lower prices in 2002, partially offset by increased volume.
THREE MONTHS ENDED MARCH 31, ------------------ (in thousands) 2002 2001 ------- ------- Sales into NEPOOL ISO from power we generated ............ $50,581 $59,564 Sales into NEPOOL ISO from hedging and other activity .... 24,657 34,956 ------- ------- Total sales into NEPOOL ................................ $75,238 $94,520 Total purchases from NEPOOL ISO .......................... $75,834 $85,243
Three Months Ended March 31, 2002, Compared to Three Months Ended March 31, 2001. Revenue -- Total revenue increased to $1,738.3 million for the three months ended March 31, 2002, compared to $1,339.8 million for the same period in 2001. Electric generation and marketing revenue increased to $1,532.6 million in 2002 compared to $1,050.1 million in 2001. Sales of purchased power grew by $454.7 million due to increased price hedging, balancing, optimization and trading activity as a result of the growth of our subsidiary, Calpine Energy Services, LP ("CES") and our operating plant portfolio during the three months ended March 31, 2002. Approximately $25.0 million of the $482.5 million variance was due to electricity and steam sales, which increased due to our growing portfolio. Generation more than doubled but pricing dropped almost by half to moderate revenue growth. Our revenue for the period ended March 31, 2002, includes the consolidated results of additional facilities that we acquired or -23- completed construction on subsequent to March 31, 2001. We also recognized a $2.9 million increase in mark-to-market gains on power derivatives to $4.2 million in 2002. Oil and gas production and marketing revenue decreased to $199.6 million in 2002 compared to $285.9 million in 2001. The decrease is primarily due to an $89.2 million decrease in oil and gas sales to third parties because of much lower average pricing in 2002. Cost of revenue -- Cost of revenue increased to $1,560.4 million in 2002 compared to $1,064.2 million in 2001. Approximately $358.7 million of the $496.2 million increase relates to the cost of power purchased by our energy services organization due to increased price hedging, balancing, optimization and trading activities. Fuel expense increased 29.5%, from $257.0 million in 2001 to $332.8 million in 2002, due to a doubling of megawatt hours generated as offset by significantly lower gas prices in 2002. Plant operating expense increased by 36.3% from $84.5 million to $115.2 million but, expressed per mwh of generation, decreased from $11.67/mwh to $7.83/mwh as economies of scale are being realized due to the increase in the average size of our plants. Depreciation, depletion and amortization expense increased by 44.3%, from $72.0 million to $103.9 million, due primarily to additional power facilities in consolidated operations at March 31, 2002, as compared to the same period in 2001. Project development expense -- Project development expense decreased 28.4% as a result of a deceleration of our efforts in identifying new development opportunities due to overall market and liquidity issues. Equipment cancellation cost -- The pre-tax equipment cancellation charge of $168.5 million in the three months ended March 31, 2002 was as a result of the turbine order cancellations and the cancellation of certain other equipment based primarily on forfeited prepayments to date and an immaterial cash payment pursuant to contract terms. General and administrative expense -- General and administrative expense increased 67.0% to $60.3 million for the three months ended March 31, 2002, as compared to $36.1 million for the same period in 2001. The increase was attributable to continued growth in personnel and associated overhead costs necessary to support the overall growth in our operations and due to recent acquisitions, including power facilities and natural gas operations. General and administrative expense expressed per mwh of generation decreased to $4.10/mwh in 2002 from $4.98/mwh in 2001. Interest expense -- Interest expense increased 208.0% to $61.3 million for the three months ended March 31, 2002, from $19.9 million for the same period in 2001. Interest expense increased primarily due to the issuance of the Convertible Notes and additional senior notes in 2001. The associated incremental interest expense was partially offset by interest capitalized in connection with our growing construction portfolio. Interest capitalized increased from $104.0 million in the three months ended 2001 to $163.1 million in the three months ended 2002. Interest income -- Interest income decreased to $12.2 million for the three months ended March 31, 2002, compared to $19.4 million for the same period in 2001. This decrease is due to lower interest rates in 2002. Other income (expense) -- Other income (expense) increased to $9.1 million in 2002 from $5.7 million in 2001 primarily due to the $9.7 million gain on the sale of our 11.4% interest in the Lockport Power Plant. Provision for income taxes -- The effective income tax rate was approximately 35.0% and 42.9% for the three months ended March 31, 2002 and 2001, respectively. The decrease in rates was due to our expansion into Canada and the United Kingdom and our cross border financings, which reduced our effective blended tax rates. The 35% rate in 2002 was the same as the full year rate for 2001. Extraordinary charge, net -- The $2.1 million charge in 2002 (net of tax of $1.4 million) represents the repurchase of $192.5 million aggregate principal amount of our Zero Coupon Convertible Debentures Due 2021 ("Zero Coupons"), which was comprised primarily of a $4.8 million gain from the repurchase of the Zero Coupons at a discount, partially offset by a loss due to the write-off of unamortized deferred financing costs. Selected Balance Sheet Information Unconsolidated Investments in Power Projects -- Although our preference is to own 100% of the power plants we acquire or develop, there are situations when we take less than 100% ownership. Reasons why we may take less than a 100% interest in a power plant may include, but are not limited to: (a) our acquisitions of other IPP's such as Cogeneration Corporation of America in 1999 and SkyGen Energy LLC in 2000 in which minority interest projects were included in the portfolio of assets owned by the acquired entities (Grays Ferry Power Plant (40% now owned by Calpine) and Androscoggin Energy Center (32.3% now owned by Calpine) respectively); (b) opportunities to co-invest with non-regulated subsidiaries of regulated electric utilities, which under the Public Utility Regulatory Policies Act of 1978, as amended are restricted to 50% ownership of cogeneration qualifying facilities -- such as our investment in Gordonsville -24- Power Plant (50% owned by Calpine and 50% owned by Edison Mission Energy, which is wholly-owned by Edison International Company); and (c) opportunities to invest in merchant power projects with partners who bring marketing, funding, permitting or other resources that add value to a project. An example of this is Acadia Energy Center, which is under construction in Louisiana (50% owned by Calpine and 50% owned by Cleco Midstream Resources, an affiliate of Cleco Corporation). None of our equity investment projects have nominal carrying values as a result of material recurring losses. Further, there is no history of impairment in any of these investments. Accumulated other comprehensive loss -- Accumulated other comprehensive loss at March 31, 2002 decreased from $(226.6) million at December 31, 2001 to $(208.0) million at March 31, 2002. The change resulted from unrealized gains on derivatives designated as cash flow hedges of $43.8 million, net of amounts reclassified to net loss and income taxes, and foreign currency translation losses of $25.2 million. See Note 8 for further information. Liquidity and Capital Resources General -- The latter half of 2001, and particularly the fourth quarter, saw a significant contraction in the availability of capital for participants in the energy sector. This was due to a range of factors, including uncertainty arising from the collapse of Enron. While we have continued to be able to access the capital and bank credit markets, as discussed below, we recognize that terms of available financing in the future may not be attractive to us. To protect against this possibility, we have scaled back our capital expenditure program for 2002 and 2003 to enable us to conserve our available capital resources, but remain ready to access the capital markets as attractive opportunities arise. To date, we have obtained cash from our operations; borrowings under our credit facilities and other working capital lines; sale of debt, equity, trust preferred securities and convertible debentures; proceeds from sale/leaseback transactions and project financing. We have utilized this cash to fund our operations, service debt obligations, fund acquisitions, develop and construct power generation facilities, finance capital expenditures, support our hedging, balancing and optimization activities at CES, and meet our other cash and liquidity needs. Our business is capital intensive. Our ability to capitalize on growth opportunities is dependent on the availability of capital on attractive terms. Our strategy is also to reinvest our cash from operations into our business development and construction program, rather than to pay cash dividends. Cash Flow Activities -- The following table summarizes our cash flow activities for the periods indicated:
THREE MONTHS ENDED MARCH 31, ---------------------------- (in thousands) 2002 2001 ----------- ----------- Beginning cash and cash equivalents ............... $ 1,525,417 $ 596,077 Net cash provided by (used in): Operating activities ............................ 345,945 35,555 Investing activities ............................ (1,301,613) (898,635) Financing activities ............................ (158,486) 1,137,082 Effect of exchange rates changes on cash and cash equivalents................... (491) -- ----------- ----------- Net increase (decrease) in cash and cash equivalents .......................... (1,114,645) 274,002 ----------- ----------- Ending cash and cash equivalents .................. $ 410,772 $ 870,079 =========== ===========
Operating activities for the three months ended March 31, 2002 provided net cash of $345.9 million, compared to $35.6 million for the three months ended March 31, 2001. The cash provided by operating activities for the three months ended March 31, 2002 consisted primarily of a $592.2 million decrease in operating assets, mainly in derivative activity, accounts receivable and other current assets. The decrease in accounts receivable was primarily due to the collection from escrow of $222.3 million for the PG&E past due pre-petition receivables that were sold at a discount to a third party in December 2001. The decrease in other current assets is primarily due to reducing CES margin deposits and replacing them with letters of credit. This was offset by a $421.2 million decrease in operating liabilities, primarily related to derivative activity. Investing activities for the three months ended March 31, 2002 consumed net cash of $1.3 billion, primarily due to $1.3 billion for construction costs and capital expenditures including gas turbine generator costs and associated capitalized interest, $23.1 million of advances to joint ventures including associated capitalized interest for investments in power projects under construction, $23.8 million of capitalized project development costs including associated capitalized interest. This was partially offset by a $16.9 million decrease in restricted cash and a $12.9 million decrease in notes receivable. -25- Financing activities for the three months ended March 31, 2002 consumed $158.5 million of net cash consisting of $187.7 million for repurchase of Zero Coupons, $73.7 million for the repayment of notes payable and borrowings under lines of credit, $92.2 million for repayments of project financing and $31.5 million of additional financing costs. This was partially offset by $100.0 million of proceeds from the issuance of the Convertible Senior Notes Due 2006 pursuant to exercise of the initial purchasers' option and $122.9 million of proceeds from project financing. We continue to evaluate current and forecasted cash flow as a basis for financing operating requirements and capital expenditures. We believe that we will have sufficient liquidity from cash flow from operations, borrowings available under the lines of credit, access to the capital markets and working capital to satisfy all obligations under outstanding indebtedness, to finance anticipated capital expenditures and to fund working capital requirements for the next twelve months. PG&E and Enron Bankruptcies -- As stated above, in January 2002 we received the cash from escrow related to the December 2001 sale of past due pre-bankruptcy PG&E receivables to a third party. As discussed in Note 9 of the Notes to Consolidated Condensed Financial Statements, there is considerable uncertainty surrounding the Enron bankruptcy. Regardless of the resolution of the current situation, we believe, based on legal analysis, that we have no net collection exposure to Enron. Nevada Power and Sierra Pacific Resources -- During the first quarter of 2002, two subsidiaries of Sierra Pacific Resources Corporation, Nevada Power Company ("NPC") and Sierra Pacific Resources ("SPR"), received credit downgrades to sub-investment grades from the major credit rating agencies. The credit downgrades resulted from short-term liquidity problems created when the Public Utilities Commission of Nevada disallowed a rate adjustment requested by NPC to cover the increased cost of buying power during the 2001 energy crisis. NPC and SPR have requested that their power suppliers extend payment terms to help them overcome their short-term liquidity problems. As of March 31, 2002, we had net collection exposures of approximately $30.7 million and $21.3 million with NPC and SPR, respectively. Our exposures include open forward power position contracts that are reported at fair value in the Company's balance sheet as well as receivable and payable balances relating to settled power deliveries. We are continuing to monitor our exposure and its effect on our financial condition. CES Margin Deposits and Other Credit Support -- As of March 31, 2002, CES had $177.2 million in cash on deposit as margin deposits with third parties related to its business activities and letters of credit outstanding in support of CES business activities of $365.4 million. As of December 31, 2001, CES had deposited $345.5 million in cash as margin deposits with third parties related to its business activities and letters of credit outstanding in support of CES business activities of $259.4 million. The Company is evaluating various relationships with potential partners to strengthen its ability to conduct risk management activities and to support the credit requirements of its trading activities. While we believe that we have adequate liquidity to support CES' operations at this time, it is difficult to predict how these various factors will develop in 2002 and beyond. Therefore, it is difficult to predict the amount of credit support that the Company may need to provide as part of its business operations. Working Capital Position -- At March 31, 2002, working capital, defined as current assets less current liabilities, was $(582.9) million. This negative position was primarily the result of the $685.5 million of Zero Coupons, which were classified as a current liability until repaid in full on April 30, 2002. Letter of credit facilities -- At March 31, 2002, we had approximately $776.4 million in letters of credit outstanding under various credit support facilities, including facilities related to CES risk management activities. The remainder related to other operational and construction activities. Of the total letters of credit, $156.0 million was temporary coverage in excess of requirements due to transitioning certain of the letters of credit under the $400 million revolver to the new $1.0 billion revolver. At December 31, 2001, we had $642.5 million in letters of credit outstanding, including facilities relating to CES risk management activities. Revised Capital Expenditure Program -- Following a comprehensive review of our power plant development program, we announced in January 2002 the adoption of a revised capital expenditure program, which contemplates the completion of 27 power projects (representing 15,200 MW) then under construction. Three of these facilities achieved full or partial commercial operations as of March 31, 2002. Construction of an additional 34 advanced-stage development projects (representing 15,100 MW) will be placed on "hot standby" following completion of advanced development activities pending further review, reducing previously forecasted 2002 capital spending by as much as $2 billion. Construction of these advanced stage development projects is expected to proceed when there is an established market need for additional generating resources at prices that will allow us to meet our established investment criteria, and when capital is available to us on attractive terms. However, our entire development and construction program is flexible and subject to continuing review and revision based upon such criteria. -26- On March 12, 2002, we announced a new turbine program that reduces previously forecasted capital spending by approximately $1.2 billion in 2002 and $1.8 billion in 2003. The revision includes adjusted timing of turbine delivery and related payment schedules and also cancellation orders. As a result of these turbine cancellations and other equipment cancellations, we recorded a pre-tax charge of $168.5 million in the first quarter of 2002. Capital Availability -- Notwithstanding recent uncertainties in the domestic energy and capital markets, we have continued to raise substantial capital. In the first quarter of 2002, we closed a $1.6 billion secured working capital credit facility (see below for more information). We also issued in separate closings in December 2001 and January 2002 $1.2 billion in aggregate principal amount of Convertible Senior Notes due 2006. Proceeds from this offering and cash from general working capital were used to fully retire the Zero Coupons that remained outstanding at December 31, 2001. On April 30, 2002, we completed a public offering of common stock of 66 million shares and priced the offering at $11.50 per share. The proceeds after underwriting fees totaled $734.3 million. We granted the underwriters an over-allotment option for an additional 9.9 million shares of our common stock, which may be exercised for up to 30 days. As of the date of this report, this option had not been exercised. Management cannot predict whether the underwriters will exercise this option in whole or in part. The proceeds from the offering are expected to be used to repay debt and for general corporate purposes. In March 2002, we entered into a letter of intent with ING Bank on the debt portion of a proposed California peaker sale/leaseback, including 11 California peaker facilities. This transaction is expected to generate $500 million of cash that will be received throughout 2002 as the power facilities enter commercial operation. New Working Capital Credit Agreement -- In March 2002, the Company closed a new secured credit agreement comprised of (a) a $1.0 billion revolving credit facility expiring on May 24, 2003 and (b) a two-year term loan facility for up to $600 million, which as previously reported, was only to be made available to the Company upon satisfaction of certain conditions to borrowing on or before June 8, 2002. On May 10, 2002, the Company borrowed $500 million of the term loan facility and, subject to certain conditions, may borrow the remaining $100 million in one or two remaining tranches on or before June 8, 2002. At the March 2002 closing, the Company also amended its existing $400 million revolving credit agreement to provide, among other things, security for borrowings under that agreement. The security for the revolving and term loan facilities as originally provided included (a) a pledge of the capital stock of the Company's subsidiary holding, directly or indirectly, (i) the interests in its natural gas properties, (ii) the Saltend power plant located in the United Kingdom and (iii) the Company's equity investment in nine U.S. power plants, and (b) a pledge by certain of the Company's subsidiaries of a total of 65% of the capital stock of Calpine Canada Energy Ltd. As part of the recent funding of the $500 million term loan, the Company expanded the security for the revolving credit and term loan facilities under both the $1.6 billion and the $400 million credit agreements by pledging to the lenders substantially all of the Company's remaining first tier domestic subsidiaries (excluding CES). Credit Considerations -- On March 12, 2002, Fitch downgraded our senior unsecured debt to BB. On March 25, 2002, Standard & Poor's downgraded our corporate credit rating from BB+ to BB and our investor unsecured debt from BB+ to B+. Many other issuers in the power generation sector have also been downgraded by one or more of the ratings agencies during this period. Such downgrades can have a negative impact on our liquidity by reducing attractive financing opportunities and increasing the amount of collateral required by trading counterparties. Off-Balance Sheet Commitments -- In accordance with SFAS No. 13 and SFAS No. 98, "Accounting for Leases" our operating leases are not reflected on our balance sheet. We have also entered into several sale/leaseback transactions. All counterparties in these transactions are third parties that are unrelated to Calpine. The sale/leaseback transactions involving Tiverton, Rumford, South Point, Broad River, and RockGen utilize special-purpose entities formed by the equity investors with the sole purpose of owning a power generation facility. Some of the Company's operating leases contain customary restrictions on dividends, additional debt and further encumbrances similar to those typically found in project finance instruments. Calpine has no ownership or other interest in any of these special-purpose entities. In accordance with APB Opinion No. 18 "The Equity Method of Accounting For Investments in Common Stock" and FASB Interpretation No. 35, "Criteria for Applying the Equity Method of Accounting for Investments in Common Stock (An Interpretation of APB Opinion No. 18)," the debt on the books of our unconsolidated investments in power projects is not reflected on our balance sheet. At March 31, 2002, investee debt is approximately $673.0 million. Based on our pro rata ownership share of each of the investments, our share would be approximately $248.8 million. However, all such debt is non-recourse to us. For the Aries Power Plant construction debt, we and Aquila Energy, a wholly owned subsidiary of Aquila Inc, have provided support arrangements until construction is completed to cover cost overruns, if any. -27- Performance Metrics In understanding our business, we believe that certain performance metrics are particularly important. These include: o Average gross profit margin based on pro forma (non-GAAP) revenue and pro forma (non-GAAP) cost of revenue. A high percentage of our revenue consists of CES hedging, balancing, optimization, and trading activity undertaken primarily to enhance the value of our generating assets (see "Marketing, Hedging, Optimization, and Trading" subsection of the Business Section of our 2001 Form 10-K). CES's hedging, balancing, optimization, and trading activity is primarily accomplished by buying and selling electric power and buying and selling natural gas or by entering into gas financial instruments such as exchange-traded swaps or forward contracts. Under SAB No. 101 and EITF No. 99-19, we must show the purchases and sales of electricity and gas on a gross basis in our statement of operations when we act as a principal, take title to the electricity and gas we purchase for resale, and enjoy the risks and rewards of ownership. This is notwithstanding the fact that the net gain or loss on certain financial hedging instruments, such as exchange-traded forward contracts for natural gas, is shown as a net item in our GAAP financials. Because of the inflating effect on revenue of much of our hedging, balancing, optimization, and trading activity, we believe that revenue levels and trends do not reflect our performance as accurately as gross profit, and that it is analytically useful to look at our results on a pro forma, non-GAAP basis with all hedging, balancing, optimization, and trading activity netted. This analytical approach nets the sales of purchased power with purchased power expense (with the exception of net realized sales and expenses on electrical trading activity, which is shown on a net basis in sales of purchased power) and includes that net amount as an adjustment to electricity and steam ("E&S") revenue for our generation assets. Similarly, we believe that it is analytically useful to net the sales of purchased gas with purchased gas expense (with the exception of net realized sales and expenses on gas trading activity, which is shown on a net basis in sales of purchased gas) and include that net amount as an adjustment to cost of oil and natural gas burned by power plants, a component of fuel expense. This allows us to look at all hedging, balancing, optimization, and trading activity consistently (net presentation) and better understand our performance trends. It should be noted that in this non-GAAP analytical approach, total gross profit does not change from the GAAP presentation, but the gross profit margins as a percent of revenue do differ from corresponding GAAP amounts because the inflating effects on our revenue of hedging, balancing, optimization, and trading activities are removed. o Average availability and average capacity factor or operating rate. Availability represents the percent of total hours during the period that our plants were available to run after taking into account the downtime associated with both scheduled and unscheduled outages. The capacity factor, sometimes called operating rate, is calculated by dividing (a) total megawatt hours generated by our power plants (excluding peakers) by multiplying (b) the weighted average megawatts in operation during the period by (c) the total hours in the period. The capacity factor is thus a measure of total actual generation as a percent of total potential generation. If we elect not to generate during periods when electricity pricing is too low or gas prices too high to operate profitably, the capacity factor will reflect that decision as well as both scheduled and unscheduled outages due to maintenance and repair requirements. o Average heat rate for gas-fired fleet of power plants expressed in Btu's of fuel consumed per kWh generated. We calculate the average heat rate for our gas-fired power plants (excluding peakers) by dividing (a) fuel consumed in Btu's by (b) kilowatt-hours generated. The resultant heat rate is a measure of fuel efficiency, so the lower the heat rate, the better. We also calculate a "steam-adjusted" heat rate, in which we adjust the fuel consumption in Btu's down by the equivalent heat content in steam or other thermal energy exported to a third party, such as to steam hosts for our cogeneration facilities. Our goal is to have the lowest average heat rate in the industry. o Average all-in realized electric price expressed in dollars per MWh generated. We calculate the all-in realized electric price per MWh generated by dividing (a) adjusted E&S revenue, which includes capacity revenues, energy revenues, thermal revenues and the spread on sales of purchased electricity for hedging, balancing, and optimization activity, by (b) total generated MWh's in the period. o Average cost of natural gas expressed in dollars per millions of Btu's of fuel consumed. At Calpine, the fuel costs for our gas-fired power plants are a function of the price we pay for fuel purchased and the results of the fuel hedging, balancing, and optimization activities by CES. Accordingly, we calculate the cost of natural gas per millions of Btu's of fuel consumed in our power plants by dividing (a) adjusted cost of oil and natural gas burned by power plants which includes the cost of fuel consumed by our plants (adding back cost of intercompany "equity" gas from Calpine Natural Gas, which is eliminated in consolidation), and the spread on sales of purchased gas for hedging, balancing, and optimization activity by (b) the heat content in millions of Btu's of the fuel we consumed in our power plants for the period. -28- o Average spark spread expressed in dollars per MWh generated. Our risk management activities focus on managing the spark spread for our portfolio of power plants, the spread between the sales price for electricity generated and the cost of fuel. We calculate the spark spread per MWh generated by subtracting (a) adjusted cost of oil and natural gas burned by power plants from (b) adjusted E&S revenue and dividing the difference by (c) total generated MWh's in the period. The table below presents, side-by-side, both our GAAP and pro forma non-GAAP netted revenue, costs of revenue and gross profit showing the purchases and sales of electricity and gas for hedging, balancing, optimization, and trading activity on a net basis. It also shows the other performance metrics discussed above.
Non-GAAP Netted GAAP Presentation Presentation Three Months Ended March 31, Three Months Ended March 31, ---------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (In thousands) Revenue, Cost of Revenue and Gross Profit Revenue: Electric generation and marketing revenue Electricity and steam revenue(1) ................................ $ 620,179 $ 595,159 $ 713,318 $ 593,811 Sales of purchased power(1) ..................................... 908,301 453,602 157 (1,316) Electric power derivative mark-to-market gain .................... 4,166 1,306 4,166 1,306 ----------- ----------- ----------- ----------- Total electric generation and marketing revenue .................... 1,532,646 1,050,067 717,641 593,801 Oil and gas production and marketing revenue Oil and gas sales ............................................... 67,488 156,687 67,488 156,687 Sales of purchased gas(1) ....................................... 132,158 129,172 6,072 3,169 ----------- ----------- ----------- ----------- Total oil and gas production and marketing revenue ................. 199,646 285,859 73,560 159,856 Income from unconsolidated investments in power projects ........... 1,444 563 1,444 563 Other revenue ...................................................... 4,611 3,262 4,611 3,262 ----------- ----------- ----------- ----------- Total revenue ................................................. 1,738,347 1,339,751 797,256 757,482 ----------- ----------- ----------- ----------- Cost of revenue: Electric generation and marketing expense Plant operating expense ......................................... 115,157 84,460 115,157 84,460 Royalty expense ................................................. 4,155 11,009 4,155 11,009 Purchased power expense(1) ...................................... 815,005 456,266 -- -- ----------- ----------- ----------- ----------- Total electric generation and marketing expense .................... 934,317 551,735 119,312 95,469 Oil and gas production and marketing expense Oil and gas production expense .................................. 26,940 34,283 26,940 34,283 Purchased gas expense(1) ........................................ 123,694 118,628 -- -- ----------- ----------- ----------- ----------- Total oil and gas production and marketing expense ................. 150,634 152,911 26,940 34,283 Fuel expense Cost of oil and natural gas burned by power plants(1) ........... 326,443 264,563 324,051 257,188 Natural gas derivative mark-to-market loss (gain) ............... 6,392 (7,549) 6,392 (7,549) ----------- ----------- ----------- ----------- Total fuel expense ................................................. 332,835 257,014 330,443 249,639 Depreciation, depletion and amortization expense ................... 103,873 72,013 103,873 72,013 Operating lease expense ............................................ 36,134 28,011 36,134 28,011 Other expense ...................................................... 2,590 2,499 2,590 2,499 ----------- ----------- ----------- ----------- Total cost of revenue ......................................... 1,560,383 1,064,183 619,292 481,914 ----------- ----------- ----------- ----------- Gross profit .................................................... $ 177,964 $ 275,568 $ 177,964 $ 275,568 =========== =========== =========== =========== Gross profit margin ............................................. 10% 21% 22% 36%
-29-
Non-GAAP Netted Presentation Three Months December 31, -------------------------- 2002 2001 -------- -------- (In thousands) Other Non-GAAP Performance Metrics Average availability and capacity factor: Average availability ........................................................................... 94% 92% Average capacity factor or operating rate based on total hours (excluding peakers) ............. 71% 69% Average heat rate for gas-fired power plants (excluding peakers) (Btu's/kWh): Not steam adjusted ............................................................................. 8,173 8,670 Steam adjusted ................................................................................. 7,374 7,506 Average all-in realized electric price: Adjusted electricity and steam revenue (in thousands) .......................................... $713,318 $593,811 MWh generated (in thousands) ................................................................... 14,714 7,239 Average all-in realized electric price per MWh ................................................. $ 48.48 $ 82.03 Average cost of natural gas: Cost of oil and natural gas burned by power plants (in thousands) .............................. $324,051 $257,188 Fuel cost elimination .......................................................................... 36,702 43,216 -------- -------- Adjusted cost of oil and natural gas burned by power plants .................................... $360,753 $300,404 MMBtu of fuel consumed by generating plants (in thousands) ..................................... 106,524 47,992 Average cost of natural gas per MMBtu .......................................................... $ 3.39 $ 6.26 MWh generated (in thousands) ................................................................... 14,714 7,239 Average cost of oil and natural gas burned by power plants per MWh ............................. $ 24.52 $ 41.50 Average spark spread: Adjusted electricity and steam revenue (in thousands) .......................................... $713,318 $593,811 Less: Adjusted cost of oil and natural gas burned by power plants (in thousands) ............... 360,753 300,404 -------- -------- Spark spread (in thousands) .................................................................... $352,565 $293,407 MWh generated (in thousands) ................................................................... 14,714 7,239 Average spark spread per MWh ................................................................... $ 23.96 $ 40.53
The non-GAAP presentation above also facilitates a look at the total "trading" activity impact on gross profit. For the three months ended March 31, 2002 and 2001, trading activity consisted of:
Three Months Ended March 31, ------------------------ 2002 2001 ------- -------- ELECTRICITY Electric generation and marketing revenue Realized gain (loss) Sales of purchased power .............................. $ 157 $ (1,316) Unrealized Electric power derivative mark-to-market gain ......... 4,166 1,306 ------- -------- Subtotal........................................................................ $ 4,323 $ (10) GAS Oil and gas production and marketing revenue Realized gain (loss) Sales of purchased gas ................................ $ 6,072 $ 3,169 Fuel Expense Unrealized Natural gas derivative mark-to-market gain (loss)...... (6,392) 7,549 ------- -------- Subtotal........................................................................ $ (320) $ 10,718
Three Months Three Months Ended Percent of Ended Percent of March 31, Gross March 31, Gross 2002 Profit 2001 Profit ------------ ---------- ------------ ---------- Total trading activity gain....................... $ 4,003 2.2% $ 10,708 3.9% Realized gain (loss).............................. $ 6,229 3.5% $ 1,853 0.7% Unrealized (mark-to-market) gain (loss)(2)........ $ (2,226) (1.3)% $ 8,855 3.2%
__________ -30- (1) Following is a reconciliation of GAAP to non-GAAP presentation further to the narrative set forth under this Performance Metrics section ($ in thousands):
To Net Hedging, Balancing & To Net Netted GAAP Optimization Trading Non-GAAP Balance Activity Activity Balance ---------- ------------ --------- ---------- Three months ended March 31, 2002 Electricity and steam revenue.......................... $ 620,179 $ 93,139 $ -- $ 713,318 Sales of purchased power............................... 908,301 (842,606) (65,538) 157 Sales of purchased gas................................. 132,158 (132,158) 6,072 6,072 Purchased power expense................................ 815,005 (749,467) (65,538) -- Purchased gas expense.................................. 123,694 (123,694) -- -- Cost of oil and natural gas burned by power plants..... 326,443 (8,464) 6,072 324,051 Three months ended March 31, 2001 Electricity and steam revenue.......................... $ 595,159 $ (1,348) $ -- $ 593,811 Sales of purchased power............................... 453,602 (443,482) (11,436) (1,316) Sales of purchased gas................................. 129,172 (129,172) 3,169 3,169 Purchased power expense................................ 456,266 (444,830) (11,436) -- Purchased gas expense.................................. 118,628 (118,628) -- -- Cost of oil and natural gas burned by power plants..... 264,563 (10,544) 3,169 257,188
(2) For the three months ended March 31, 2002, the mark-to-market gains shown above as "trading" activity include a net loss on hedge ineffectiveness of $(2,818), consisting of an ineffectiveness loss on power hedges of $(222), an ineffectiveness loss on crude oil costless collar arrangements of $(5,042) and an ineffectiveness gain on gas hedges of $2,446. For the three months ended March 31, 2001, the mark-to-market gains shown above as "trading" activity include a net loss on hedge ineffectiveness of $(691), consisting of an ineffectiveness loss on power hedges of $1,217 and an ineffectiveness gain on gas hedges of $526. Outlook At May 15, 2002, we had 22 projects under construction, representing an additional 13,412 megawatts of net capacity. We have also announced plans to develop 34 additional power generation projects, representing a net capacity of 15,100 megawatts. Our new $2 billion revolving credit and term loan facilities and April 2002 issuance of 66 million shares of common stock have ameliorated our 2002 liquidity concerns. We have made significant progress in reducing our operations and maintenance costs and general and administrative expenses per unit of electrical generation as we have doubled our generation of electricity from the first quarter of 2001 to the first quarter of 2002. Our outlook for 2002 is stable and profitable, but we recognize that the pace of pricing and spark spread improvement is dependent on the nation's economic recovery and on weather, particularly in the summer and winter periods. We remain confident in our strategy, as outlined in our 2001 Form 10-K, and optimistic about our future performance. Overview Summary of Key Activities Power Plant Development and Construction:
Date Project Description - ---- ------------------------------------- ---------------------------- 1/02 Gilroy Peaking Energy Center Commercial operation 2/02 Magic Valley Generating Station Commercial operation 2/02 King City Energy Center (Peaker Unit) Commercial operation 3/02 Aries Power Project Partial commercial operation 4/02 Island Cogeneration Commercial operation 4/02 Channel Energy Center Combined-cycle operation
Finance Note Repayments:
Date Amount Description - ------- ------------- ------------------------------ 3/13/02 $64.8 million Michael Petroleum Note Payable 4/1/02 $10.0 million Silverado Note Payable
-31- Repurchases of Zero-Coupon Convertible Debentures Due 2021:
Date Amount - --------------------------------------- -------------- January 2, 2002, through April 30, 2002 $878.0 million
Calpine Corporation's Sale of 4% Convertible Senior Notes Due 2006 and Common Stock:
Date Offering Description Use of Proceeds - ------- ------------------- --------------------------- ------------------------------- 1/3/02 $100 million Conversion price of $18.07 For general corporate purposes per common share 4/30/02 $759 million, gross 66 million shares at $11.50 For general corporate purposes, per share including debt repayment
Working Capital Credit Facility:
Date Amount Security Use of Proceeds - ------- ------------ ----------------------------------- ------------------------------- 3/12/02 $2.0 billion Natural gas properties, Saltend Finance capital expenditures and Power Plant, our equity other general corporate purposes investment in 9 U.S. power plants, 65% of the capital stock of Calpine Canada Ltd., and our remaining first tier domestic subsidiaries (excluding CES)
Turbine Cancellations:
Date of Reduction in Capital Announcement Spending Earnings Effect - ------------ -------------------- ------------------------------------- 3/12/02 $1.2 billion in 2002 $168.5 million pre-tax charge in 2002 $1.8 billion in 2003
Other:
Date Description - ------- ------------------------------------------- 1/02 Letter of intent for sale/leaseback of 11 California peaker facilities 3/12/02 Fitch, Inc. lowered the credit rating on senior unsecured debt from BB+ to BB, and it lowered the rating on convertible trust preferred securities from BB- to B 3/25/02 Standard & Poor's downgraded corporate credit rating from BB+ to BB, and senior unsecured debt from BB+ to B+ 3/29/02 Sale of 11.4% interest in Lockport Power Plant for $27.3 million 4/2/02 Proposed sale of De Pere Energy Center for $120 million, including termination of existing power purchase agreement 4/22/02 Renegotiation of California Department of Water Resources long-term power contracts
California Power Market California Long-Term Supply Contracts -- On February 25, 2002, both the California Public Utilities Commission ("CPUC") and the California Electric Oversight Board ("EOB")filed complaints under Section 206 of the Federal Power Act with the Federal Energy Regulatory Commission ("FERC") (EL02-60-000 and EL02-62-000, respectively) alleging that the prices and terms of the long-term contracts with the California Department of Water Resources ("DWR") are unjust and unreasonable and counter to the public interest. Calpine was a respondent and the four long-term contracts entered into by Calpine were subject to the complaint. On March 6, 2002, in accordance with the state legislation that authorized DWR to enter into the long-term power contracts, the CPUC issued a Rate Agreement, which dedicates a portion of the retail rate paid by electricity customers of the California investor-owned utilities to a fund to pay bondholders of bonds to be issued by DWR and to a fund to pay electricity suppliers such as Calpine. The proceeds from those bonds will be used in part to -32- fund the Electric Power Fund established by the state legislation authorizing DWR to enter into long-term power contracts with the power suppliers whose recourse in the event of a default by DWR is to the Electric Power Fund. Proceeds from the bonds will also be used to repay the state of California General Fund. The bonds have not been issued, but representatives of the State have indicated that the bonds should be issued in the near future. On April 22, 2002, the Company announced that it had renegotiated CES' long-term power contracts with DWR. The Office of the Governor, the CPUC, the EOB and the California Attorney General ("AG") have endorsed the renegotiated contracts and have agreed to drop all pending claims against the Company and its affiliates, including withdrawing the complaint under Section 206 of the Federal Power Act recently filed by the CPUC and EOB with FERC and the CPUC and the EOB have agreed to terminate their efforts to seek refunds from the Company and its affiliates through FERC refund proceedings. In connection with the renegotiation, the Company has agreed to pay $6 million over three years to the AG to resolve any and all possible claims against the Company and its affiliates brought by the AG. The renegotiation includes the shortening of the duration of the two ten-year, baseload energy contracts by two years and of the 20-year peaker contract by ten years. These changes reduce DWR's long-term purchase obligations. In addition, CES agreed to reduce the energy price on one baseload contract from $61.00 to $59.60 per megawatt-hour, and to convert the energy portion of the peaker contract to gas index pricing from fixed energy pricing. CES has also agreed to deliver up to 12.2 million megawatt-hours of additional energy pursuant to the baseload energy contracts in 2002 and 2003. In connection with the renegotiation, CES has also agreed with DWR that DWR will have the right to assume and complete four of our projects currently planned for California and in the advanced development stage if the Company does not meet certain milestones with respect to each project assumed, provided that DWR reimburses the Company for all construction costs and certain other costs incurred by the Company to the date DWR assumes the relevant project. The negotiation resolved the dispute with DWR concerning payment of the capacity payment on the 495-megawatt peaking contract dated February 28, 2001. The contract provides that through December 31, 2002, CES may earn a capacity payment by committing to supply electricity to DWR from a source other than the peaker units designated in the contract. DWR made certain assertions challenging CES' right to substitute units or provide replacement energy and had withheld capacity payments in the amount of approximately $15.0 million since December 2001. As part of the renegotiation, the Company has received payment in full on these withheld capacity payments and will have the right to provide replacement capacity through December 31, 2002 based on the original contract terms. On May 2, 2002, each of the CPUC and the EOB filed a Notice of Partial Withdrawal with Prejudice of Complaint as to Calpine Energy Services, L.P. with the FERC in the EL02-60-000 and EL02-62-000 dockets, respectively. FERC Investigation into California Wholesale Markets -- On February 13, 2002, FERC initiated an investigation of potential manipulation of electric and natural gas prices in the western United States. This investigation was initiated as a result of allegations that Enron Corp. through its affiliates used its market position to distort electric and natural gas markets in the West. The scope of the investigation is to consider whether as a result of any manipulation in the short-term markets for electric energy or natural gas or other undue influence on the wholesale markets by any party since January 1, 2000, the rates of the long-term contracts subsequently entered into in the West are potentially unjust and unreasonable. In connection with its investigation, FERC has, and may in the future, issue data requests seeking information regarding trading practices in California and the western electricity markets. FERC has stated that it may use the information gathered in connection with the investigation to determine how to proceed on any existing or future complaint brought under Section 206 of the Federal Power Act involving long-term power contracts entered into in the West since January 1, 2000, or to initiate a Federal Power Act Section 206 or Natural Gas Act Section 5 proceeding on its own initiative. Financial Market Risks Energy price fluctuations -- As an independent power producer primarily focused on generation of electricity using gas-fired turbines, our natural physical commodity position is "short" (we require) gas and "long" (we own) power capacity. To manage forward exposure to price fluctuation in these and (to a lesser extent) other commodities, we enter into derivative commodity instruments. All transactions are subject to our risk management policy which prohibits positions that exceed production capacity and fuel requirements on a total portfolio basis. Any hedging, balancing, or optimization activities that we engage in are directly related to our asset-based business model of owning and operating gas-fired electric power plants. We hedge exposures that arise from the ownership and operation of power plants and related sales of electricity and purchases of natural gas, and we utilize derivatives to optimize the returns we are able to achieve from these assets for our shareholders. This model is markedly different from that of companies that engage in significant commodity trading operations that are unrelated to underlying physical assets. Derivative commodity instruments are accounted for under the requirements of SFAS No. 133, as amended. -33- The change in fair value of outstanding commodity derivative instruments from January 1, 2002 through March 31, 2002 is summarized in the table below (in thousands): Fair value of contracts outstanding at January 1, 2002 $ (88,123) (Gains) losses realized or otherwise settled during the period (1)............................... (56,928) Changes in fair value attributable to changes in valuation techniques and assumptions............ -- Other changes in fair value (2).................................................................. 331,503 --------- Fair value of contracts outstanding at March 31, 2002 (3)........................................ $ 186,452 =========
__________ (1) Realized cash flow hedges of $50.7 million reported in Note 7 of the financial statements and $6.2 million realized gain on trading activity reported in the performance metrics section of the management discussion and analysis, both included in this filing. (2) Includes $204.0 million for the reclassification of Enron obligations from derivative assets and liabilities to Accounts Payable as a result of the termination of Calpine's contracts with Enron. (3) Net assets reported in Note 7 of the Notes to Consolidated Financial Statements included in this filing. The fair value of outstanding derivative commodity instruments at March 31, 2002, based on price source and the period during which the instruments will mature (i.e., be realized) are summarized in the table below (in thousands):
Fair Value Source 2002 2003-2004 2005-2006 After 2006 Total - ----------------- -------- -------- -------- ---------- -------- Prices actively quoted ....................................... $ 7,498 $(14,593) $(30,746) $ -- $(37,841) Prices provided by other external sources .................... 1,334 44,071 16,159 -- 61,564 Prices based on models and other valuation methods ........... 103,605 34,886 26,298 (2,060) 162,729 -------- -------- -------- -------- -------- Total fair value ............................................. $112,437 $ 64,364 $ 11,711 $ (2,060) $186,452 ======== ======== ======== ======== ========
The Company's traders maintain fair value price information derived from various sources in the Company's trading and risk management systems. The propriety of that information is validated by the Company's Risk Control function. Prices actively quoted include validation with prices sourced from commodities exchanges (e.g., New York Mercantile Exchange). Prices provided by other external sources include quotes from commodity brokers and electronic trading platforms. Prices based on models and other valuation methods are validated using quantitative methods. Validation methods have been independently reviewed for propriety. The counterparty credit quality associated with the fair value of outstanding derivative commodity instruments at March 31, 2002, and the period during which the instruments will mature (i.e., be realized) are summarized in the table below (in thousands):
Credit Quality (based on April 22, 2002 ratings) 2002 2003-2004 2005-2006 After 2006 Total - ------------------------------------------------ -------- --------- --------- ---------- -------- Investment grade.............................................. $114,854 $ 73,794 $ 18,678 $ (2,078) $205,248 Non-investment grade.......................................... 40,463 (42,852) (17,819) -- (20,208) No external ratings........................................... (1,029) 2,307 116 18 1,412 -------- -------- -------- -------- -------- Total fair value.............................................. $154,288 $ 33,249 $ 975 $ (2,060) $186,452 ======== ======== ======== ======== ========
-34- The fair value of outstanding derivative commodity instruments and the change in fair value that would be expected from a ten percent adverse price change are shown in the table below (in thousands):
CHANGE IN FAIR VALUE FROM 10% ADVERSE FAIR VALUE PRICE CHANGE ---------- -------------- At March 31, 2002: Crude oil ....................... $ (2,132) $ (4,746) Electricity ..................... 286,181 (29,715) Natural gas ..................... (97,597) (134,607) --------- --------- Total ....................... $ 186,452 $(169,068) ========= =========
Derivative commodity instruments included in the table are those included in Note 7 to the unaudited Consolidated Condensed Financial Statements. The fair value of derivative commodity instruments included in the table is based on present value adjusted quoted market prices of comparable contracts. The positive fair value of electricity derivative commodity instruments includes the effect of decreased power prices versus our derivative forward commitments. Conversely, the negative fair value of the natural gas derivatives reflects a general decline in gas prices versus our derivative forward commitments. Derivative commodity instruments offset physical positions exposed to the cash market. None of the offsetting physical positions are included in the table above. Price changes were calculated by assuming an across-the-board ten percent adverse price change regardless of term or historical relationship between the contract price of an instrument and the underlying commodity price. In the event of an actual ten percent change in prices, the fair value of Calpine's derivative portfolio would typically change by more than ten percent for earlier forward months and less than ten percent for later forward months because of the higher volatilities in the near term and the effects of discounting expected future cash flows. The primary factors affecting the fair value of the Company's derivatives at any point in time are (1) the volume of open derivative positions (MMBtu and Mwh), and (2) changing commodity market prices, principally for electricity and natural gas. The total volume of open gas derivative positions decreased 53% from December 31, 2001 to March 31, 2002, while the total volume of open power derivative positions decreased 12% for the same period. In that prices for electricity and natural gas are among the most volatile of all commodity prices, there may be material changes in the fair value of the Company's derivatives over time, driven both by price volatility and the increases in volume of open derivative transactions. Under SFAS No. 133, the change since the last balance sheet date in the total value of the derivatives (both assets and liabilities) is reflected either in OCI, net of tax, or in the statement of operations as an item (gain or loss) of current earnings. As of March 31, 2002, the majority of the balance in accumulated OCI represented the unrealized net loss associated with commodity cash flow hedging transactions. As noted above, there is a substantial amount of volatility inherent in accounting for the fair value of these derivatives, and the Company's results during the three months ended March 31, 2002 have reflected this. See Note 7 for additional information on derivative activity and also the 2001 Form 10-K for a further discussion of the Company's accounting policies related to derivative accounting. This treatment depends upon whether the derivative is designated as a cash flow or fair value hedge or whether the derivative is not designated in a hedge relationship. The following accounting applies: o Changes in the value of derivatives designated as cash flow hedges, net of any ineffectiveness, are recorded to OCI. o Changes in the value of derivatives designated as fair value hedges are recorded in the statement of operations with the offsetting change in value of the hedge item also recorded in the statement of operations. Any difference between these two entries to the statement of operations represents hedge ineffectiveness. o The change in value of derivatives not designated in hedge relationships is recorded to the statement of operations. In 2001 the FASB cleared SFAS No. 133 Implementation Issue No. C16 "Applying the Normal Purchases and Normal Sales Exception to Contracts That Combine a Forward Contract and a Purchased Option Contract" ("C16"). The guidance in C16 applies to fuel supply contracts that require delivery of a contractual minimum quantity of fuel at a fixed price and have an option that permits the holder to take specified additional amounts of fuel at the same fixed price at various times. Under C16, the volumetric optionality provided by such contracts is considered a purchased option that disqualifies the entire derivative fuel supply contract from being eligible to qualify for the normal -35- purchases and normal sales exception in SFAS No. 133. The Company has adopted the guidance provided by C16 effective April 1, 2002, and Issue C16 is expected to increase the volatility of the Company's reported earnings in the future. Interest rate swaps and cross currency swaps -- From time to time, we use interest rate swap and cross currency swap agreements to mitigate our exposure to interest rate and currency fluctuations associated with certain of our debt instruments. We do not use interest rate swap and currency swap agreements for speculative or trading purposes. In regards to foreign currency denominated senior notes, the swap notional amounts equal the amount of the related principal debt. The following tables summarize the fair market values of our existing interest rate swap and currency swap agreements as of March 31, 2002 (dollars in thousands):
Notional Principal Weighted Average Weighted Average Fair Market Maturity Date Amount Interest Rate Interest Rate Value - ------------- ------------------ ---------------- ---------------- ----------- (Pay) (Receive) 2009 .............................. $ 14,862 6.9% 3-month US LIBOR $ (940) 2011 .............................. 53,126 6.9% 3-month US LIBOR (3,324) 2012 .............................. 118,692 6.5% 3-month US LIBOR (5,554) 2014 .............................. 67,929 6.7% 3-month US LIBOR (4,086) 2015 .............................. 22,500 7.0% 3-month US LIBOR (1,728) 2018 .............................. 17,500 7.0% 3-month US LIBOR (1,431) -------- --- -------- Total ........................... $294,609 6.7% 3-month US LIBOR $(17,063) ======== === ========
Frequency of Fixed Currency Currency Fair Market Maturity Date Notional Principal Exchange Exchange Value - ------------- ----------------------------------- ------------------------------- ------------- ----------- (Pay/Receive) (Pay/Receive) 2007........... US$127,763/C$200,000 US$5,545/C$8,750 Semi-annually $ (3,929) 2008........... Pound sterling 109,550/Euro 175,000 Pound sterling 5,152/Euro 7,328 Semi-annually (10,732) -------- Total.... $(14,661) ========
Long-term senior notes and construction/project financing -- Because of the significant capital requirements within our industry, additional financing is often needed to fund our growth. We use two primary forms of debt to raise this financing -- long-term senior notes and construction/project financing. Our Senior Notes bear fixed interest rates and are generally used to fund acquisitions, replace construction financing for power plants once they achieve commercial operations, and for general corporate purposes. Our construction/project financing is funded through two separate credit agreements, Calpine Construction Finance Company L.P. and Calpine Construction Finance Company II, LLC. Borrowings under these credit agreements bear variable interest rates, and are used exclusively to fund the construction of our power plants. -36- The following table summarizes the fair market value of our existing long-term senior notes and construction/project financing as of March 31, 2002 (dollars in thousands):
Outstanding Weighted Average Fair Market Maturity Date Balance Interest Rate Value - ------------- ----------- ---------------- ----------- Long-term senior notes: Senior Notes Due 2005 ........................... $ 250,000 8.3% $ 205,000 Senior Notes Due 2006 ........................... 171,750 10.5% 152,858 Senior Notes Due 2006 ........................... 250,000 7.6% 200,000 Convertible Senior Notes Due 2006 ............... 1,200,000 4.0% 924,000 Senior Notes Due 2007 ........................... 275,000 8.8% 222,750 Senior Notes Due 2007 ........................... 125,500 8.8% 100,400 Senior Notes Due 2008 ........................... 400,000 7.9% 312,000 Senior Notes Due 2008 ........................... 2,030,000 8.5% 1,745,800 Senior Notes Due 2008 ........................... 152,446 8.4% 121,957 Senior Notes Due 2009 ........................... 350,000 7.8% 269,500 Senior Notes Due 2010 ........................... 750,000 8.6% 585,000 Senior Notes Due 2011 ........................... 2,000,000 8.5% 1,570,000 Senior Notes Due 2011 ........................... 284,820 8.9% 219,311 ---------- --- ---------- Total long-term senior notes................. $8,239,516 7.8% $6,628,576 ========== === ========== Construction/project financing: Calpine Construction Finance Company L.P. ....... $ 981,400 1-month US LIBOR $ 981,400 Calpine Construction Finance Company II, LLC .... 2,442,697 1-month US LIBOR 2,442,697 ---------- ---------------- ---------- Total long-term construction/ project financing.......................... $3,424,097 1-month US LIBOR $3,424,097 ========== ================ ==========
Short-term investments -- As of March 31, 2002, we had short-term investments of $14.1 million. These short-term investments consist of highly liquid investments with maturities of less than three months. We have the ability to hold these investments to maturity, and as a result, we would not expect the value of these investments to be affected to any significant degree by the effect of a sudden change in market interest rates. New Accounting Pronouncements In June 2001, we adopted SFAS No. 141, "Business Combinations," which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 eliminated the pooling-of-interests method of accounting for business combinations and modified the recognition of intangible assets and disclosure requirements. Adoption of SFAS No. 141 did not have a material effect on the consolidated financial statements. In Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2001, the subsection entitled "SFAS No. 141" in the Impact of Recent Accounting Pronouncements section was inadvertently overwritten with an outdated draft of the SFAS No. 142 accounting pronouncement paragraph. The paragraph above discussing SFAS No. 141 supersedes the discussion in the 2001 Form 10-K. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, extends the allowable useful lives of certain intangible assets, and requires impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 will apply to goodwill and other intangible assets arising from transactions completed both before and after its effective date. The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001. See Note 4 for more information. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. We have not completed our analysis of the impact that SFAS No. 143 will have on our consolidated financial statements. On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring -37- Events and Transactions," for the disposal of a segment of a business (as previously defined in that APB Opinion). SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. SFAS No. 144 also resolves several significant implementation issues related to SFAS No. 121, such as eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment and establishing criteria to define whether a long-lived asset is held for sale. Adoption of SFAS No. 144 did not have a material effect on the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions shall be effective for financial statements issued on or after May 15, 2002, with early application encouraged. We do not believe that SFAS No. 145 will have a material effect on our results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. See "Financial Market Risks" in Item 2. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Calpine Corporation v. Automated Credit Exchange ("ACE"). On March 5, 2002, Calpine sued ACE in the Superior Court of the State of California for the County of Alameda for negligence and breach of contract to recover reclaim trading credits, a form of emission reduction credits that should have been held in Calpine's account with U.S. Trust Company (US Trust). ACE is a broker in emission reduction credits based in Pasadena, California. Calpine had paid ACE for Nitrogen oxide (NOx) coastal credits that were to be purchased by ACE and held by US Trust. The credits were to be held by US Trust pursuant to a Credit Holding Agreement, which provided, among other things, that US Trust was to hold the credits until receiving instructions from ACE to disburse the credits. ACE had agreed that (i) upon prior written instruction from Calpine, to instruct US Trust to take such actions as may be directed by Calpine to disburse the credits held in escrow pursuant to the Credit Holding Agreement and (ii) not to take any action, or otherwise instruct US Trust to take any action, concerning the credits held in escrow pursuant to the Credit Holding Agreement without prior written instruction from Calpine. Calpine and ACE entered into a settlement agreement that resolved all issues on March 29, 2002. The settlement provided for a partial recovery of $7 million and for the rights to the emission reduction credits to be held by ACE. The Company expects to recognize the $7 million in the second quarter of 2002, after all realization uncertainties are cleared. In accordance with the settlement agreement, Calpine has dismissed its complaint against ACE. Ben Johnson v. Peter Cartwright, et al. On December 17, 2001, a shareholder filed a derivative lawsuit on behalf of Calpine against its directors and one of its senior officers. This lawsuit is styled Johnson vs. Cartwright, et al. (No. CV803872), and is pending in the California Superior Court, Santa Clara County. Calpine is a nominal defendant in this lawsuit, which alleges claims relating to purportedly misleading statements about Calpine and stock sales by certain of the director defendants and the officer defendant. Calpine has filed a demurrer asking the court to dismiss the complaint on the ground that the shareholder plaintiff lacks standing to pursue claims on behalf of Calpine. The individual defendants have filed a demurrer asking the court to dismiss the complaint on the ground that it fails to state any claims against them. Securities Class Action Lawsuits. Since March 11, 2002, fourteen shareholder lawsuits have been filed against Calpine and certain of its officers in the United States District Court, Northern District of California. The actions captioned Weisz vs. Calpine Corp., et al., filed March 11, 2002, and Labyrinth Technologies, Inc. v. Calpine Corp., et al., filed March 28, 2002 are purported class actions on behalf of purchasers of Calpine stock between March 15, 2001 and December 13, 2001. Gustaferro v. Calpine Corp., filed April 18, 2002 is a purported class action on behalf of purchasers of Calpine stock between February 6, 2001 and December 13, 2001. The eleven other actions, captioned Local 144 Nursing Home Pension Fund vs. Calpine Corp., Lukowski vs. Calpine Corp., Hart vs. Calpine Corp., Atchison vs. Calpine Corp. and Laborers Local 1298 v. Calpine Corp., Bell v. Calpine Corp., Nowicki v. Calpine Corp. Pallotta v. Calpine Corp., Knepell v. Calpine Corp., Staub v. Calpine Corp, and Rose v. Calpine Corp. were filed between March 18, 2002 and April 23, 2002. The complaints in these eleven actions are virtually identical--they were filed by -38- three law firms, in conjunction with other law firms as co-counsel. All eleven lawsuits are purported class actions on behalf of purchasers of Calpine's securities between January 5, 2001 and December 13, 2001. The complaints in these fourteen actions allege that, during the purported class periods, certain senior executives issued false and misleading statements about Calpine's financial condition in violation of Sections 10(b) and 20(1) of the Securities Exchange Act of 1934, as well as Rule 10b-5. These actions seek an unspecified amount of damages, in addition to other forms of relief. We expect that these actions, as well as any related actions that may be filed in the future, will be consolidated by the court into a single securities class action. We consider the lawsuits to be without merit, and we intend to defend vigorously against these allegations. Public Utilities Commission of the State of California v. Sellers of Long Term Contracts to the California Department of Water Resources; California Electricity Oversight Board v. Sellers of Long Term Contracts to the California Department of Water Resources. In February 2002 both the CPUC and the EOB filed complaints under Section 206 of the Federal Power Act with FERC (EL02-60-000 and EL02-62-000, respectively) alleging that the prices and terms of the long-term contracts with DWR are unjust and unreasonable and counter to the public interest. CES is a respondent and the four long-term contracts entered into between CES and DWR are subject to the complaint (see, Risk Factors - California Long-Term Supply Agreements). As part of Calpine's successful renegotiation of its long-term power contracts with DWR announced on April 22, 2002, the Office of the Governor, the CPUC, the EOB and the AG agreed to settle this action and drop all challenges to Calpine's long-term contracts with DWR. On May 2, 2002 each of the CPUC, the EOB, and the AG filed a Notice of Partial Withdrawal with Prejudice of Complaint as to Calpine Energy Services, L.P. with the FERC. Pursuant to its respective notice each of the CPUC and the EOB withdrew all of their respective claims against CES which had been alleged in the above-for-mentioned complaints (EL02-60-000 and ELO2-62-000) concerning the justness and reasonableness of the terms under the long-term contracts with DWR. In addition, pursuant to its notice, the AG withdrew all claims as to CES in its complaint (EL02-71-000) wherein it had alleged that public utility sellers of energy and ancillary services to DWR and into markets operated by the California Independent System Operator and the California Power Exchange were not in compliance with their disclosure obligations under Section 205 of the Federal Power Act. The Company is involved in various other claims and legal actions arising out of the normal course of business. The Company does not expect that the outcome of these proceedings will have a material adverse effect on the Company's financial position or results of operations. Item 2. Changes in Securities and Use of Proceeds. 4% Convertible Senior Notes due 2006. On December 26, 2001, we completed a private placement of $1,000,000,000 aggregate principal amount of 4% Convertible Senior Notes due 2006 (the "senior notes due 2006"). The initial purchaser of the senior notes due 2006 was Deutsche Bank Alex. Brown Inc. (the "initial purchaser"). The initial purchaser exercised its option to acquire an additional $200,000,000 aggregate principal amount of the senior notes due 2006 by purchasing an additional $100,000,000 aggregate principal amount of the senior notes due 2006 on each of December 31, 2001 and January 3, 2002. The offering price of the senior notes due 2006 was 100% of the principal amount of the senior notes due 2006, less an aggregate underwriting discount of $30,000,000. Each sale of the senior notes due 2006 to the initial purchaser was exempt from registration in reliance on Section 4(2) and Regulation D under the Securities Act of 1933, as amended, as a transaction not involving a public offering. The senior notes due 2006 were re-offered by the initial purchaser to qualified institutional buyers in reliance on Rule 144A under the Securities Act. The senior notes due 2006 are convertible into shares of our common stock at a conversion price of $18.07 per share. The conversion price is subject to adjustment in certain circumstances. We have reserved 66,408,411 shares of our authorized common stock for issuance upon conversion of the senior notes due 2006. The senior notes due 2006 are convertible at any time on or before the close of business on the day that is two business days prior to the maturity date, December 26, 2006, unless we have previously repurchased the senior notes due 2006. Holders of the senior notes due 2006 have the right to require us to repurchase their senior notes due 2006 on December 26, 2004. We may choose to pay the repurchase price in cash or shares of common stock, or a combination thereof. -39- Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following exhibits are filed herewith unless otherwise indicated: EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION *3.1 Amended and Restated Certificate of Incorporation of Calpine Corporation (a) *3.2 Certificate of Correction of Calpine Corporation (b) *3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Calpine Corporation (c) *3.4 Certificate of Designation of Series A Participating Preferred Stock of Calpine Corporation (b) *3.5 Amended Certificate of Designation of Series A Participating Preferred Stock of Calpine Corporation (b) *3.6 Amended Certificate of Designation of Series A Participating Preferred Stock of Calpine Corporation (c) *3.7 Certificate of Designation of Special Voting Preferred Stock of Calpine Corporation(d) 3.8 Certificate of Ownership and Merger Merging Calpine Natural Gas GP, Inc. into Calpine Corporation. 3.9 Certificate of Ownership and Merger Merging Calpine Natural Gas Company into Calpine Corporation. *3.10 Amended and Restated By-laws of Calpine Corporation (f) *4.1 Indenture dated as of August 10, 2000, between Calpine Corporation and Wilmington Trust Company, as Trustee.(f) *4.2 First Supplemental Indenture dated as of September 28, 2000, between Calpine Corporation and Wilmington Trust Company, as Trustee.(b) *4.3 Amended and Restated Rights Agreement, dated as of September 19, 2001, between Calpine Corporation and EquiServe Trust Company, N.A., as Rights Agent.(g) *10.1 Second Amended and Restated Credit Agreement ("Second Amended and Restated Credit Agreement") dated as of May 23, 2000, among the Company, Bayerische Landesbank, as Co-Arranger and Syndication Agent, The Bank of Nova Scotia, as Lead Arranger and Administrative Agent, and the Lenders named therein.(h) *10.2 First Amendment and Waiver to Second Amended and Restated Credit Agreement, dated as of April 19, 2001, among the Company, The Bank of Nova Scotia, as Administrative Agent, and the Lenders named therein.(e) *10.3 Second Amendment to Second Amended and Restated Credit Agreement, dated as of March 8, 2002, among the Company, The Bank of Nova Scotia, as Administrative Agent, and the Lenders named therein.(e) 10.4 Third Amendment to Second Amended and Restated Credit Agreement, dated as of May 9, 2002, among the Company, The Bank of Nova Scotia, as Administrative Agent, and the Lenders named therein. *10.5 Credit Agreement, dated as of March 8, 2002, among the Company, the Lenders named therein, The Bank of Nova Scotia and Bayerische Landesbank Girozentrale, as lead arrangers and bookrunners, Salomon Smith Barney Inc. and Deutsche Banc Alex. Brown Inc., as lead arrangers and bookrunners, Bank of America, National Association, and Credit Suisse First Boston, Cayman Islands Branch, as lead arrangers and syndication agents, TD Securities (USA) Inc., as lead arranger, The Bank of Nova Scotia, as joint administrative agent and funding agent, and Citicorp USA, Inc., as joint administrative agent.(e) 10.6 First Amendment to Credit Agreement, dated as of May 9, 2002, among the Company, The Bank of Nova Scotia, as Joint Administrative Agent and Funding Agent, Citicorp USA, Inc., as Joint Administrative Agent, and the Lenders named therein. -40- *10.7 Assignment and Security Agreement, dated as of March 8, 2002, by the Company in favor of The Bank of Nova Scotia, as administrative agent for each of the Lender Parties named therein.(e) *10.8 Pledge Agreement, dated as of March 8, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for the Lender Parties named therein.(e) 10.9 Amendment Number One to Pledge Agreement, dated as of May 9, 2002, among the Company and The Bank of Nova Scotia, as Joint Administrative Agent and Funding Agent. *10.10 Pledge Agreement, dated as of March 8, 2002, by Quintana Minerals (USA), Inc., JOQ Canada, Inc. and Quintana Canada Holdings, LLC in favor of The Bank of Nova Scotia, as Agent for the Lender Parties named therein.(e) 10.11 First Amendment Pledge Agreement, dated as of May 9, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for each of the Lender Parties named therein. 10.12 First Amendment Pledge Agreement (Membership Interests), dated as of May 9, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for each of the Lender Parties named therein. 10.13 Note Pledge Agreement, dated of May 9, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for each of the Lender Parties named therein. ________________ * Incorporated by reference. (a) Incorporated by reference to Calpine Corporation's Registration Statement on Form S-3 (Registration No. 333-40652), filed with the SEC on June 30, 2000. (b) Incorporated by reference to Calpine Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the SEC on March 15, 2001. (c) Incorporated by reference to Calpine Corporation's Registration Statement on Form S-3 (Registration No. 333-66078), filed with the SEC on July 27, 2001. (d) Incorporated by reference to Calpine Corporation's Quarterly Report on Form 10-Q dated March 31, 2001, filed with the SEC on May 15, 2001. (e) Incorporated by reference to Calpine Corporation's Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on March 29, 2002. (f) Incorporated by reference to Calpine Corporation's Registration Statement on Form S-3 (Registration No. 333-76880), filed with the SEC on January 17, 2002. (g) Incorporated by reference to Calpine Corporation's Registration Statement on Form 8-A/A filed with the SEC on September 28, 2001. (h) Incorporated by reference to Calpine Corporation's Current Report on Form 8-K dated July 25, 2000, filed with the SEC on August 9, 2000. (b) Reports on Form 8-K The registrant filed the following reports on Form 8-K during the quarter ended March 31, 2002:
DATE OF REPORT DATE FILED ITEM REPORTED - -------------- ---------- ------------- December 24, 2001 ..................... January 16, 2002 5,7 November 14, 2001 ..................... January 17, 2002 5,7 January 31, 2002 ...................... February 8, 2002 5,7 March 12, 2002 ........................ March 13, 2002 5,7 March 13, 2002 ........................ March 13, 2002 5 March 25, 2002 ........................ March 26, 2002 4,7
-41- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CALPINE CORPORATION By: /s/ Robert D. Kelly Date: May 15, 2002 - ------------------------------- Robert D. Kelly Executive Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Charles B. Clark, Jr. Date: May 15, 2002 - ------------------------------- Charles B. Clark, Jr. Senior Vice President and Corporate Controller (Principal Accounting Officer) -42- The following exhibits are filed herewith unless otherwise indicated: EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION *3.1 Amended and Restated Certificate of Incorporation of Calpine Corporation (a) *3.2 Certificate of Correction of Calpine Corporation (b) *3.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Calpine Corporation (c) *3.4 Certificate of Designation of Series A Participating Preferred Stock of Calpine Corporation (b) *3.5 Amended Certificate of Designation of Series A Participating Preferred Stock of Calpine Corporation (b) *3.6 Amended Certificate of Designation of Series A Participating Preferred Stock of Calpine Corporation (c) *3.7 Certificate of Designation of Special Voting Preferred Stock of Calpine Corporation(d) 3.8 Certificate of Ownership and Merger Merging Calpine Natural Gas GP, Inc. into Calpine Corporation. 3.9 Certificate of Ownership and Merger Merging Calpine Natural Gas Company into Calpine Corporation. *3.10 Amended and Restated By-laws of Calpine Corporation (f) *4.1 Indenture dated as of August 10, 2000, between Calpine Corporation and Wilmington Trust Company, as Trustee.(f) *4.2 First Supplemental Indenture dated as of September 28, 2000, between Calpine Corporation and Wilmington Trust Company, as Trustee.(b) *4.3 Amended and Restated Rights Agreement, dated as of September 19, 2001, between Calpine Corporation and EquiServe Trust Company, N.A., as Rights Agent.(g) *10.1 Second Amended and Restated Credit Agreement ("Second Amended and Restated Credit Agreement") dated as of May 23, 2000, among the Company, Bayerische Landesbank, as Co-Arranger and Syndication Agent, The Bank of Nova Scotia, as Lead Arranger and Administrative Agent, and the Lenders named therein.(h) *10.2 First Amendment and Waiver to Second Amended and Restated Credit Agreement, dated as of April 19, 2001, among the Company, The Bank of Nova Scotia, as Administrative Agent, and the Lenders named therein.(e) *10.3 Second Amendment to Second Amended and Restated Credit Agreement, dated as of March 8, 2002, among the Company, The Bank of Nova Scotia, as Administrative Agent, and the Lenders named therein.(e) 10.4 Third Amendment to Second Amended and Restated Credit Agreement, dated as of May 9, 2002, among the Company, The Bank of Nova Scotia, as Administrative Agent, and the Lenders named therein. *10.5 Credit Agreement, dated as of March 8, 2002, among the Company, the Lenders named therein, The Bank of Nova Scotia and Bayerische Landesbank Girozentrale, as lead arrangers and bookrunners, Salomon Smith Barney Inc. and Deutsche Banc Alex. Brown Inc., as lead arrangers and bookrunners, Bank of America, National Association, and Credit Suisse First Boston, Cayman Islands Branch, as lead arrangers and syndication agents, TD Securities (USA) Inc., as lead arranger, The Bank of Nova Scotia, as joint administrative agent and funding agent, and Citicorp USA, Inc., as joint administrative agent.(e) 10.6 First Amendment to Credit Agreement, dated as of May 9, 2002, among the Company, The Bank of Nova Scotia, as Joint Administrative Agent and Funding Agent, Citicorp USA, Inc., as Joint Administrative Agent, and the Lenders named therein. *10.7 Assignment and Security Agreement, dated as of March 8, 2002, by the Company in favor of The Bank of Nova Scotia, as administrative agent for each of the Lender Parties named therein.(e) -43- *10.8 Pledge Agreement, dated as of March 8, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for the Lender Parties named therein.(e) 10.9 Amendment Number One to Pledge Agreement, dated as of May 9, 2002, among the Company and The Bank of Nova Scotia, as Joint Administrative Agent and Funding Agent. *10.10 Pledge Agreement, dated as of March 8, 2002, by Quintana Minerals (USA), Inc., JOQ Canada, Inc. and Quintana Canada Holdings, LLC in favor of The Bank of Nova Scotia, as Agent for the Lender Parties named therein.(e) 10.11 First Amendment Pledge Agreement, dated as of May 9, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for each of the Lender Parties named therein. 10.12 First Amendment Pledge Agreement (Membership Interests), dated as of May 9, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for each of the Lender Parties named therein. 10.13 Note Pledge Agreement, dated of May 9, 2002, by the Company in favor of The Bank of Nova Scotia, as Agent for each of the Lender Parties named therein. ________________ * Incorporated by reference. (a) Incorporated by reference to Calpine Corporation's Registration Statement on Form S-3 (Registration No. 333-40652), filed with the SEC on June 30, 2000. (b) Incorporated by reference to Calpine Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the SEC on March 15, 2001. (c) Incorporated by reference to Calpine Corporation's Registration Statement on Form S-3 (Registration No. 333-66078), filed with the SEC on July 27, 2001. (d) Incorporated by reference to Calpine Corporation's Quarterly Report on Form 10-Q dated March 31, 2001, filed with the SEC on May 15, 2001. (e) Incorporated by reference to Calpine Corporation's Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on March 29, 2002. (f) Incorporated by reference to Calpine Corporation's Registration Statement on Form S-3 (Registration No. 333-76880), filed with the SEC on January 17, 2002. (g) Incorporated by reference to Calpine Corporation's Registration Statement on Form 8-A/A filed with the SEC on September 28, 2001. (h) Incorporated by reference to Calpine Corporation's Current Report on Form 8-K dated July 25, 2000, filed with the SEC on August 9, 2000. -44- EX-3.(I) 3 ex3-8.txt STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 04:01 PM 04/24/2002 020262655 - 0939652 CERTIFICATE OF OWNERSHIP AND MERGER MERGING CALPINE NATURAL GAS GP, INC. a Delaware corporation INTO CALPINE CORPORATION a Delaware corporation (Pursuant to Section 253 of the General Corporation Law of the State of Delaware) Calpine Corporation, a corporation duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That Calpine Corporation (the "Company") and Calpine Natural Gas GP, Inc. ("Calpine GP") are corporations duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware. SECOND: That the Company owns all of the issued and outstanding shares of the capital stock of Calpine GP. THIRD: That the Company, by resolutions of its board of directors duly adopted at a meeting held on the 22nd day of April, 2002, determined to and did merge into itself said Calpine GP, and that such resolutions have not been rescinded and are in full force and effect on the date hereof, which resolutions are in the following words, to wit: "WHEREAS, Calpine Natural Gas GP, Inc., a Delaware corporation ("Calpine GP"), is a wholly owned subsidiary of the Company; WHEREAS, the board of directors of the Company deems it advisable and in the best interest of the Company to merge Calpine GP with and into the Company, with the Company being the surviving corporation; NOW, THEREFORE, BE IT RESOLVED, that Calpine GP be merged with and into the Company pursuant to Section 253 of the General Corporation Law of the State of Delaware, and that the Company succeed to and possess all the rights and assets of Calpine GP and be subject to all of the liabilities and obligations of Calpine GP; RESOLVED FURTHER, that each share of the capital stock of Calpine GP issued and outstanding immediately prior to the effective time of the merger shall, upon the effective time and by virtue of the merger, be cancelled without payment therefor; RESOLVED FURTHER, that the merger shall become effective at such time designated in the Certificate of Ownership and Merger filed by the Company with the Secretary of State of the State of Delaware to effect the merger; RESOLVED FURTHER, that the appropriate officers of the Company are hereby authorized and empowered to file the necessary documents with the Secretary of State of the State of Delaware, to incur the necessary expenses therefor and to take, or cause to be taken, all such further action and to execute and deliver or cause to be executed and delivered, in the name of and on behalf of the Company, all such further instruments and documents as any such officer may deem to be necessary or advisable in order to effect the purpose and intent of the foregoing resolutions and to be in the best interests of the Company (as conclusively evidenced by the taking of such action or the execution and delivery of such instruments and documents, as the case may be, by or under the direction of any such officer); RESOLVED FURTHER, that the prior actions of the officers and directors of the Company in undertaking to carry out the transactions contemplated by the foregoing resolutions be, and the same hereby are, in all respects, approved, adopted, ratified and confirmed; and RESOLVED FURTHER, anything herein or elsewhere to the contrary notwithstanding, the merger may be amended or terminated and abandoned by the board of directors of the Company at any time prior to the time that the Certificate of Ownership and Merger filed with the Secretary of State of Delaware becomes effective." FOURTH: The merger shall become effective at 11:58 p.m., Eastern Time on April 24, 2002. IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by its duly authorized officer this 24 day of April, 2002. CALPINE CORPORATION By: /s/ Peter Cartwright --------------------------- Peter Cartwright, President EX-3.(I) 4 ex3-9.txt CERTIFICATE OF OWNERSHIP AND MERGER MERGING CALPINE NATURAL GAS COMPANY a Delaware corporation INTO CALPINE CORPORATION a Delaware corporation (Pursuant to Section 253 of the General Corporation Law of the State of Delaware) Calpine Corporation, a corporation duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That Calpine Corporation (the "Company") and Calpine Natural Gas Company ("CNGC") are corporations duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware. SECOND: That the Company owns all of the issued and outstanding shares of the capital stock of CNGC. THIRD: That the Company, by resolutions of its board of directors duly adopted at a meeting held on the 22nd day of April, 2002, determined to and did merge into itself said CNGC, and that such resolutions have not been rescinded and are in full force and effect on the date hereof, which resolutions are in the following words, to wit: "WHEREAS, the merger of Calpine Natural Gas GP, Inc., a Delaware corporation, with and into the Company and the receipt of 990 shares of the common stock of Calpine Natural Gas Company, a Delaware corporation, from Calpine Natural Gas Holdings, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (the "Stock Transfer"), resulted in CNGC becoming a wholly owned subsidiary of the Company; WHEREAS, the board of directors of the Company deems it advisable and in the best interests of the Company to merge CNGC with and into the Company, with the Company being the surviving corporation; NOW, THEREFORE, BE IT RESOLVED, that CNGC be merged with and into the Company pursuant to Section 253 of the General Corporation Law of the State of Delaware, and that the Company succeed to and possess all the rights and assets of CNGC and be subject to all of the liabilities and obligations of CNGC; RESOLVED FURTHER, that each share of the capital stock of CNGC issued and outstanding immediately prior to the effective time of the merger shall, upon the effective time and by virtue of the merger, be cancelled without payment therefor; 1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 04:02 PM 04/24/2002 020262278 - 0939652 RESOLVED FURTHER, that the merger shall become effective at such time designated in the Certificate of Ownership and Merger filed by the Company with the Secretary of State of the State of Delaware to effect the merger; RESOLVED FURTHER, that the appropriate officers of the Company are hereby authorized and empowered to file the necessary documents with the Secretary of State of the State of Delaware, to incur the necessary expenses therefor and to take, or cause to be taken, all such further action and to execute and deliver or cause to be executed and delivered, in the name of and on behalf of the Company, all such further instruments and documents as any such officer may deem to be necessary or advisable in order to effect the purpose and intent of the foregoing resolutions and to be in the best interests of the Company (as conclusively evidenced by the taking of such action or the execution and delivery of such instruments and documents, as the case may be, by or under the direction of any such officer); RESOLVED FURTHER, that the prior actions of the officers and directors of the Company in undertaking to carry out the transactions contemplated by the foregoing resolutions be, and the same hereby are, in all respects, approved, adopted, ratified and confirmed; and RESOLVED FURTHER, anything herein or elsewhere to the contrary notwithstanding, the merger may be amended or terminated and abandoned by the board of directors of the Company at any time prior to the time that the Certificate of Ownership and Merger filed with the Secretary of State of Delaware becomes effective." FOURTH: The merger shall become effective at 11:59 p.m., Eastern Time on April 24, 2002. IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by its duly authorized officer this 24 day of April, 2002. CALPINE CORPORATION By: /s/ Peter Cartwright --------------------------- Peter Cartwright, President 2 EX-10 5 ex10-4.txt THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of May 9, 2002 (herein called this "Amendment"), is entered into by and among CALPINE CORPORATION, a Delaware corporation (herein called the "Company"), the various financial institutions listed on the signature page hereof (the "Lenders") and THE BANK OF NOVA SCOTIA, as administrative agent for the Lenders (herein, in such capacity, called the "Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company, the Lenders and the Agent have heretofore entered into a certain Second Amended and Restated Credit Agreement, dated as of May 23, 2000, as amended by that certain First Amendment and Waiver to Second Amended and Restated Credit Agreement, dated as of April 19, 2001 and that certain Second Amendment to Second Amended and Restated Credit Agreement, dated as of March 8, 2002 (herein called the "Credit Agreement"); and WHEREAS, the Company, the Lenders and the Agent now desire to amend the Credit Agreement in certain respects, as hereinafter provided, WHEREAS, the Company has requested that the Lenders waive certain provisions of the Loan Documents, and subject to the terms and provisions hereinafter set forth, the Lenders have agreed to do so; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Company, the Lenders and the Agent hereby agree as follows: SECTION 1. The Credit Agreement is hereby amended as follows: (a) Clause (a) of Section 8.2.2 of the Credit Agreement is hereby amended by adding the following clause immediately prior to the end thereof: "and any Indebtedness evidenced by promissory notes pledged pursuant to the Note Pledge Agreement (as such term is defined in the 2002 Credit Agreement)." (b) Clause (a) of Section 8.2.3 of the Credit Agreement is hereby amended by adding the following proviso immediately prior to the end thereof: "; provided, however, that all proceeds from any Incremental Dedicated Assets (as such term is defined in the 2002 Credit Agreement) shall be applied as more particularly set forth in the 2002 Credit Agreement." SECTION 2. The effectiveness of this Amendment is conditioned upon receipt by the Agent of all the following documents, each in form and substance satisfactory to the Agent: (i) This Amendment duly executed by the Company, Required Lenders and Calpine Gilroy; and (ii) Such other documents as the Agent shall have reasonably requested. SECTION 3. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended hereby. SECTION 4. THIS AMENDMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. All obligations of the Company and rights of the Lenders and the Agent expressed herein shall be in addition to and not in limitation of those provided by applicable law. Whenever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. SECTION 5. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing one or more counterparts. SECTION 6. This Amendment shall be binding upon the Company, the Lenders and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Agent and the successors and assigns of the Lenders and the Agent. SECTION 7. THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AMENDMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AMENDMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. CALPINE CORPORATION By:____________________________________ Name:__________________________________ Title:_________________________________ THE BANK OF NOVA SCOTIA, as Agent and Lender By:____________________________________ Name:__________________________________ Title:_________________________________ BAYERISCHE LANDESBANK GIROZENTRALE By:____________________________________ Name:__________________________________ Title:_________________________________ By:____________________________________ Name:__________________________________ Title:_________________________________ CIBC INC. By:____________________________________ Name:__________________________________ Title:_________________________________ CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH By:____________________________________ Name:__________________________________ Title:_________________________________ By:____________________________________ Name:__________________________________ Title:_________________________________ BAYERISCHE HYPO-UND VEREINSBANK AG By:____________________________________ Name:__________________________________ Title:_________________________________ By:____________________________________ Name:__________________________________ Title:_________________________________ ING (U.S.) CAPITAL LLC By:____________________________________ Name:__________________________________ Title:_________________________________ By:____________________________________ Name:__________________________________ Title:_________________________________ TORONTO DOMINION (TEXAS) INC. By:____________________________________ Name:__________________________________ Title:_________________________________ UNION BANK OF CALIFORNIA, N.A. By:____________________________________ Name:__________________________________ Title:_________________________________ BANK OF AMERICA, N.A. By:____________________________________ Name:__________________________________ Title:_________________________________ CREDIT LYONNAIS NEW YORK BRANCH By:____________________________________ Name:__________________________________ Title:_________________________________ DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By:____________________________________ Name:__________________________________ Title:_________________________________ By:____________________________________ Name:__________________________________ Title:_________________________________ FLEET NATIONAL BANK By:____________________________________ Name:__________________________________ Title:_________________________________ FORTIS CAPITAL CORP. By:____________________________________ Name:__________________________________ Title:_________________________________ The undersigned has reviewed and approved the Amendment and confirms that its obligations under the Assignment Agreement remain in full force and effect. CALPINE GILROY COGEN, L.P., a Delaware limited partnership By: Calpine Gilroy 1, Inc., a Delaware corporation, its general partner By:________________________________ Title: Address: 50 W. San Fernando St. San Jose, CA 95113 Attention: Vice President - Finance Telecopier: 408-995-0505 EX-10 6 ex10-6.txt FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of May 9, 2002 (herein called this "Amendment"), is entered into by and among CALPINE CORPORATION, a Delaware corporation (herein called the "Company"), the various financial institutions listed on the signature page hereof (the "Lenders") THE BANK OF NOVA SCOTIA ("Scotiabank"), as joint administrative agent and funding agent (in such capacity, the "Agent") and CITICORP USA, INC. ("CUSA"), as Joint Administrative Agents (in such capacity, together with Scotiabank, the "Administrative Agents"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company, the Lenders and the Administrative Agents have heretofore entered into a certain Credit Agreement, dated as of March 8, 2002 (herein called the "Credit Agreement"); and WHEREAS, the Company, the Lenders and the Administrative Agents now desire to amend the Credit Agreement in certain respects, as hereinafter provided, WHEREAS, the Company has requested that the Lenders consent to certain corporate mergers, and subject to the terms and provisions hereinafter set forth, the Lenders have agreed to do so; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Company, the Lenders and the Administrative Agents hereby agree as follows: SECTION 1. The Administrative Agents and the Required Lenders do hereby consent to the corporate reorganizations described on Schedule 1.1 hereto. SECTION 2. The Credit Agreement is hereby amended as follows: (a) The following definitions contained in Section 1.1 of the Credit Agreement are hereby amended and restated in their entirety as follows: "Applicable Margin" means, in the case of any Base Rate Loan, LIBO Rate Loan or L/C Advance maintained under the Revolving Loan Commitment, a rate per annum determined by reference to the Borrower's Credit Rating as follows:
Revolving Loans Applicable Base Applicable LIBO Borrower's Credit Rating Rate Margin Rate Margin Level 1 1.50% 2.50% Level 2 1.75% 2.75% Level 3 2.00% 3.00% Level 4 2.25% 3.25% Level 5 2.75% 3.75%
The applicable Level for the Borrower shall be determined by reference to the definition of the term "Borrower's Credit Rating." The Applicable Margin for any Term B Loan maintained as a LIBO Rate Loan shall be 3.75% and the Applicable Margin for any Term B Loan maintained as a Base Rate Loan shall be 2.75%. Notwithstanding anything to the contrary herein, if at the time of the Borrowing of Term B Loans hereunder, the Applicable Margin for any Term B Loan shall have been increased or decreased from the rates set forth in the preceding sentence in accordance with Section 11.1, the Applicable Margin for Revolving Loans as set forth above shall be increased or decreased by a corresponding amount. "Asset Sale" means any sale, transfer, lease or other disposition described in Section 8.2.10(c). "Available Investment and Leaseback Basket" means, as of any date, an amount equal to 3% of the consolidated tangible assets of the Borrower and its Subsidiaries as of the end of the most recent fiscal quarter. "CNGC" means, prior to the CNGC Restructuring, Calpine Natural Gas Company LP, a Delaware limited partnership, and after the CNGC Restructuring, Calpine Natural Gas Company, a Delaware corporation. "CNGH" means, prior to the CNGC Restructuring, Calpine Natural Gas Holdings, Inc., a Delaware corporation, and after the CNGC Restructuring, Calpine Natural Gas Holdings, LLC, a Delaware limited liability company, and in either case, a direct, Wholly-Owned Subsidiary of the Borrower. "Dedicated Assets" means, collectively, the Domestic Gas Reserves, the Canadian Gas Reserves, all property owned by Calpine Holdings and any of its Subsidiaries, all property owned by CCEC and any of its Subsidiaries (other than Calpine Canada Power Holdings Ltd. and its Subsidiaries), all property owned by the Incremental Pledged Subsidiaries and any of their Subsidiaries, the final 25% of the Borrower's indirect equity ownership interest in the holding company which owns the Whitbey Energy Centre, the Island Energy Centre and the Calgary Energy Centre, the property subject to the Pledge Agreements, the First Amendment Pledge Agreements, the Note Pledge Agreement, the Deeds of Trust, the Assignment Agreement, and all other property and interests pledged as collateral security for the Obligations. The Dedicated Assets shall be ratably available under the Pledge Agreement, the First Amendment Pledge Agreements, the Note Pledge Agreement, the Deeds of Trust and the Assignment Agreement to secure the Obligations under this Agreement and the Existing Credit Agreement. "Dedicated Subsidiary" means CCEC and each of its Subsidiaries, Calpine Holdings (and any successor thereto) and each of its Subsidiaries, CNGH and each of its Subsidiaries, and each of the Incremental Pledged Subsidiaries and each of their respective Subsidiaries. "Loan Document" means this Agreement, the Notes, the Pledge Agreements, the First Amendment Pledge Agreements, the Note Pledge Agreement, the Guaranty, the Deeds of Trust, the Assignment Agreement, the Hazardous Materials Indemnity, the Fee Letter, and each other relevant agreement, document or instrument delivered in connection therewith. "Required Lenders" means, at any time, Lenders owed or holding (a) if the Revolving Loan Commitments shall not have been terminated, at least 51% of the aggregate of all Term B Loans then outstanding, all unfunded Term B Loan Commitments, all Revolving Loans then outstanding, all Letter of Credit Outstandings on such date, and all unfunded Revolving Loan Commitments or (b) if the Revolving Loan Commitments shall have been terminated, at least 51% of the aggregate amount of all Loans and L/C Advances then outstanding. "Term B Loan Commitment Termination Date" means the earliest of (a) June 8, 2002; (b) the date on which the Term B Loan Commitments of the Term B Lenders are terminated in full or reduced to zero in accordance with Section 2.2; and (c) the date on which any Commitment Termination Event occurs. Upon the occurrence of any event described above, the Term B Loan Commitments shall terminate automatically and without further action. (b) There shall be added to Section 1.1 of the Credit Agreement, the following terms in appropriate alphabetical sequence: "CES" means Calpine Energy Services, L.P., a Delaware limited partnership. "CNGC Restructuring" means the series of transactions described on Schedule 1.1 hereof, pursuant to which the assets of CNGC will be merged with and into the Borrower. "First Amendment Pledge Agreements" means the pledge agreements executed and delivered pursuant to the First Amendment to Credit Agreement dated as of May 9, 2002, among the parties hereto, as such agreements may be amended, supplemented, restated or otherwise modified from time to time, which will cover all equity interests in each of the Incremental Pledged Subsidiaries held by the Borrower. "Incremental Dedicated Assets" all property owned by any of the Incremental Pledged Subsidiaries and by each of their respective Subsidiaries. The Incremental Dedicated Assets shall be available under the First Amendment Pledge Agreements to secure the Obligations under this Agreement and the Existing Credit Agreement, and all Net Cash Proceeds therefrom shall be applied as provided in Sections 3.1.1 and 3.1.2. "Incremental Pledged Subsidiaries" means each of the Subsidiaries listed on Section A of Schedule III hereof. "Note Pledge Agreement" means the pledge agreement executed and delivered by the Borrower pursuant to the First Amendment to Credit Agreement dated as of May 9, 2002 among the parties hereto, as such agreement may be amended, supplemented, restated or otherwise modified from time to time, which will pledge to the Agent the promissory notes described in Section 8.1.10. "Permitted Sale" means any individual sale, transfer, lease, contribution or conveyance of a portion of the Domestic Gas Reserves (together with related tangible personal property) having a value, according to the most recent, year-end report evaluating the Domestic Gas Reserves prepared by an independent petroleum engineer acceptable to the Agent (an "Engineering Report"), of less than $5,000,000; provided however, that the aggregate value of all Permitted Sale(s) in any one calendar year shall not exceed five percent (5%) of the value, according to the most recent Engineering Report, of all proven categories of oil and gas reserves then comprising the Domestic Gas Reserves. Solely for purposes of the preceding sentence, the value of such oil and gas reserves shall be determined using net future cash flow, discounted at ten percent (10%), using the forward strip, NYMEX pricing as of December 31, 2001 for Permitted Sales for the calendar year ending December 31, 2002, and the forward strip, NYMEX pricing as of each succeeding calendar year end for Permitted Sales in the immediately succeeding calendar year, and in each case other assumptions reasonably acceptable to the Agent. (c) Section 2.1.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: Section 2.1.1. Term B Loan Commitment. On not more than three dates prior to the Term B Loan Commitment Termination Date, each Term B Lender severally will make loans in U.S. Dollars (relative to such Lender, its "Term B Loan") to the Borrower equal to such Lender's Term Percentage of the aggregate amount of the Borrowing of Term B Loans requested by the Borrower to be made on such day. The Commitment of each Term B Lender described in this Section 2.1.1 is herein referred to as its "Term B Loan Commitment". On the Term B Commitment Termination Date, the Term B Loan Commitment shall terminate, and any portion of the Term B Loan Commitment Amount that is not borrowed on such date shall be extinguished. No amounts paid or prepaid with respect to Term B Loans may be reborrowed. (d) Section 2.1.2 of the Credit Agreement is hereby amended by inserting the following sentence immediately following the first sentence thereof: "The Commitment of each Revolving Lender described in this Section 2.1.2 to make Revolving Loans is herein referred to as its "Revolving Loan Commitment". (e) Clause (a) of Section 2.2.2 of the Credit Agreement is hereby amended by inserting the phrase "(other than Incremental Dedicated Assets)" after the words "Dedicated Assets" in the fourth line thereof and by replacing the reference therein to Section 8.2.10(b) with a reference to Section 8.2.10(c). (f) Clause (e) of Section 3.1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(e) shall, upon the receipt of Net Available Cash from an Asset Sale of any Incremental Dedicated Asset, make a written offer to the Term B Lenders to prepay the Term B Loans (and reduce the Term B Loan Commitment Amount) by an amount equal to one hundred percent (100%) of such Net Available Cash; provided, however, that the Borrower may, at its discretion retain (and as a consequence of such retention, there shall be excluded from such mandatory offer) up to an aggregate of $300,000,000 of such Net Available Cash from the sale of uninstalled turbines and equipment and provided, further, that the Borrower may, at its discretion retain (and as a consequence of such retention, there shall be excluded from such mandatory offer) an additional amount of such Net Available Cash equal to (w) the Net Available Cash from the sale of the De Pere project in Wisconsin and of the Borrower's minority interest in the Lockport energy project in New York plus (x) the Net Available Cash realized from the transactions described in Section C1 of Schedule III (other than any Net Available Cash realized from any transaction among or between the Borrower and any Affiliates thereof or among or between any of the Borrower's Affiliates) plus (y) the Available Investment and Lease Basket minus the aggregate amount of all obligations of each Incremental Subsidiary and each Subsidiary thereof permitted by clause (y) of the last sentence of Section 8.2.3 and then outstanding, to the extent (and only to the extent) that an amount equal to such retained Net Available Cash is reinvested (i) in power projects directly owned by the Borrower or a Dedicated Subsidiary or (ii) in oil or gas reserves directly owned by the Borrower or a Dedicated Subsidiary within 365 days of such asset sale. Such offer shall be transmitted by facsimile and by overnight courier to each Term B Lender and shall be deemed received on the Business Day following transmittal. Each Term B Lender shall have three Business Days following its receipt of such offer to submit a written response to the Borrower's prepayment offer, and if any Term B Lender shall not have responded by the close of business on the third Business Day, it shall be deemed to have accepted such offer. Payment shall be made to all Term B Lenders that have accepted the prepayment offer on the fourth Business Day following their receipt of the offer from the Borrower. If any Term B Lender elects not to accept its pro rata share of the proceeds from a particular Asset Sale of Incremental Dedicated Assets, such proceeds shall be applied to ratably prepay the Revolving Loans and the loans under the Existing Credit Agreement (without any corresponding reduction of the Revolving Commitment Amount, the Revolving Loan Commitments or the commitments under the Existing Credit Agreement). Upon the repayment in full of all Term B Loans, all Net Available Cash from any Asset Sale of any Incremental Dedicated Assets shall be applied to ratably prepay the Revolving Loans and the loans under the Existing Credit Agreement (without any corresponding reduction of the Revolving Commitment Amount, the Revolving Loan Commitments or the commitments under the Existing Credit Agreement). Upon the conversion of any non-cash proceeds realized from any Asset Sale of Incremental Dedicated Assets (whether received by the Borrower or any Subsidiary) to cash, the principal amount of such cash proceeds and any interest attributable thereto shall be deemed to be Net Available Cash from Incremental Dedicated Assets and applied by the Agent as provided in this clause (e); (g) Clause (f) of Section 3.1.1 of the Credit Agreement is hereby amended by inserting the phrase "(other than Incremental Dedicated Assets)" after the words "Dedicated Assets" and by replacing the period at the end thereof with "; and". (h) There shall be added to the Credit Agreement a new clause (g) to Section 3.1.1 reading in its entirety as follows: "(g) shall, if a debt rating of BB- or better has not been given to the Loans by S&P on or before May 30, 2002, prepay all Term B Loans then outstanding on June 1, 2002." (i) The reference in the final sentence of Section 4.5 to "Section 8.2.10(b)(iii)" is hereby deleted and a reference to "Section 8.2.10(c)" is substituted therefor. (j) Section 6.2 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: SECTION 6.2. Term B Loan Borrowing. The obligations of the Term B Lenders to fund each Borrowing of the Term B Loans shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 6.2; provided, that on the Term B Loan Commitment Termination Date, the Term B Loan Commitments shall expire. (k) Subsection (a) of Section 6.3.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (a) the representations and warranties set forth in Article VII (excluding, however, those contained in Section 7.7) and in each other Loan Document (excluding the representations and warranties set forth in the Deeds of Trust except to the extent that a breach thereof would reasonably be expected to cause a Material Adverse Effect) shall be true and correct in all material respects with the same effect as if then made (unless stated to relate solely to an early date, in which case such representations and warranties shall be true and correct as of such earlier date); (l) Clause (c) of Section 8.1.1 of the Credit Agreement is hereby amended by adding the following clause immediately prior to the end thereof: "and a certificate, executed by an Authorized Officer of the Borrower, showing a computation of the amounts described in clauses (w), (x) and (y) and subsections (i) and (ii) of Section 3.1.1(e) and in clauses (x) and (y) of the last sentence of Section 8.2.3 as of the end of such period." (m) Section 8.1.4 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: Section 8.1.4 Insurance. (a) Except as provided in Section 8.1.4(b), the Borrower will, and will cause each of its Subsidiaries to, maintain or cause to be maintained with responsible insurance companies insurance with respect to its properties and business (including business interruption insurance) against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and will, upon request of the Agent, furnish to each Lender at reasonable intervals a certificate of an Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower and its Subsidiaries in accordance with this Section. (b) With respect to the Domestic Gas Reserves, the Borrower will, and will cause each of its Subsidiaries to, maintain or cause to be maintained the insurance required by the Deeds of Trust. (n) Section 8.1.10 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: SECTION 8.1.10. Intercompany Notes. On or before the tenth day following the initial funding of Term B Loans, the Borrower shall cause all Indebtedness then owing from any of its Dedicated Subsidiaries to be evidenced by a non-recourse secured promissory note and pledged to the Agent, pursuant to the Note Pledge Agreement, as collateral security for the Obligations, and the Borrower will, promptly upon the creation of any additional Indebtedness owing from any of its Dedicated Subsidiaries that has not been evidenced by a non-recourse secured note pledged to the Agent, cause such Indebtedness to be evidenced by a promissory note and pledged to the Agent, pursuant to the Note Pledge Agreement, as collateral security for the Obligations. It is understood and agreed that (i) upon the conversion to equity of all Indebtedness owing from a Dedicated Subsidiary to the Borrower or the repayment of all Indebtedness from a Dedicated Subsidiary to the Borrower, the promissory note of such Dedicated Subsidiary shall be released from the Note Pledge Agreement and cancelled and (ii) subject to the approval of the Agent (not to be unreasonably withheld), the Borrower may substitute new non-recourse secured promissory notes for promissory notes previously pledged to the Agent. If all of the Indebtedness owing from a Dedicated Subsidiary to the Borrower shall be converted to equity, not later than ten days thereafter the Borrower shall pledge to the Agent such equity interest and deliver to the Agent the stock certificate, if any, evidencing such interest together with duly executed stock powers, in blank. (o) Section 8.1.11 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: SECTION 8.1.11 Ownership Interests. CNGH shall at all times directly or indirectly own 100% of all equity interests of CCEC, which shall, in turn, directly or indirectly own 100% of the equity interests in Calpine Canada Natural Gas Partnership and Calpine Saltend Energy Centre, PLC. Calpine Canada Natural Gas Partnership shall at all times own all of the Canadian Gas Reserves. The Borrower shall at all times own 100% of the equity interests of CNGH. After the completion of the transactions described in Section 8.1.9, CNGH shall at all times own 100% of the equity interests of Calpine Holdings. Calpine Holdings shall at all times own 100% of the equity interests of CCFCI. (p) There shall be added to the Credit Agreement a new Section 8.1.12 reading in its entirety as follows: SECTION 8.1.12 Incremental Domestic Gas Reserves. The Borrower shall cause all acquisitions of additional Domestic Gas Reserves after May 1, 2002 to be made by the Borrower or by a Dedicated Subsidiary. (q) Clause (a) of Section 8.2.2 of the Credit Agreement is hereby amended by adding the following immediately prior to the end thereof: "and any Indebtedness evidenced by promissory notes pledged to the Agent pursuant to the Note Pledge Agreement". (r) Clause (e) of Section 8.2.2 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(e) Indebtedness of one or more Subsidiaries of the Borrower incurred solely to finance the development, construction or purchase of, or repairs, expansions, enhancements, improvements or additions to, the assets of one or more Subsidiaries so long as (i) the principal amount of any such Indebtedness (x) for development of existing gas reserves does not exceed an aggregate of $50,000,000 for any such existing reserves or (y) for expansions, enhancements, improvements or additions to an existing asset which has already achieved commercial operation does not exceed an aggregate of $60,000,000 for any single financing or series of related financings for such asset (exclusive of up to $250,000,000 of Indebtedness for the expansion of the energy center at Zion, Illinois) and (ii) recourse for any such Indebtedness is limited solely (A) to the asset or assets being financed or to the assets of CES, (B) to such Subsidiaries themselves, where the asset or assets being financed constitute all or substantially all of the assets of such Subsidiaries (each, a "Special Purpose Subsidiary"), and/or (C) to the stock or other direct or indirect ownership interests in such Special Purpose Subsidiaries;" (s) The penultimate sentence of Section 8.2.2 of the Credit Agreement is hereby amended by adding the following proviso immediately prior to the end thereof: "and provided further that in no event shall any Incremental Pledged Subsidiary or any Subsidiary thereof incur any Indebtedness of the type permitted by clause (f) of this Section 8.2.2 after May 1, 2002." (t) The last sentence of Section 8.2.3 of the Credit Agreement is hereby amended by adding the following clause immediately prior to the end thereof: "and in no event shall any Incremental Pledged Subsidiary or any Subsidiary thereof create any Liens of the type permitted by clause (m) of this Section 8.2.3 after May 1, 2002 other than (x) Liens incurred in connection with transactions described in Section C1 of Schedule III and (y) Liens securing obligations to the extent of the Available Investment and Leaseback Basket minus the aggregate amount retained by the Borrower pursuant to clause (y) of the second proviso of the carry-over sentence in Section 3.1.1(e)." (u) Subsection (c) of Section 8.2.5 of the Credit Agreement is hereby amended by adding the following immediately prior to the end thereof: "and Investments by the Borrower of the assets of CES in Persons that are neither Subsidiaries of the Borrower nor Investment Joint Ventures of the Borrower in connection with the establishment of a trading joint venture or similar arrangement". (v) Subsection (i) of clause (b) of Section 8.2.6 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (i) make any payment or prepayment of principal of, or make any payment of interest on, any Senior Notes or any Subordinated Debt on any day other than the stated date for such payment or prepayment set forth in the documents and instruments memorializing any Senior Notes or such Subordinated Debt, or which would violate the subordination provisions of any such Subordinated Debt; provided, that the Borrower may so pay or prepay all or a portion of the Senior Notes if either (A) both before and after giving effect thereto, no Default shall have occurred or be continuing and there are no Loans outstanding hereunder or (B) both before and after giving effect thereto, no Default shall have occurred and be continuing and the aggregate amount of all such prepayments shall not exceed 50% of aggregate Net Equity Proceeds received by the Borrower from and after March 8, 2002. (w) Subsection (b) of Section 8.2.9 of the Credit Agreement is hereby amended by adding the following proviso at the end thereof: "provided, further, that if any Dedicated Subsidiary shall merge with any other Subsidiary, such Dedicated Subsidiary shall be the continuing Person following such merger; and provided further, that if any Dedicated Subsidiary shall liquidate or dissolve voluntarily into, or merge into, the Borrower, the assets or stock of such Dedicated Subsidiary shall be pledged by the Borrower as collateral security for the Obligations and the obligations of the Borrower under the Existing Credit Agreement". (x) Subsection (d) of Section 8.2.9 of the Credit Agreement is hereby amended by deleting the period at the end thereof and by adding the following at the end of such subsection: "provided, however, that if any Dedicated Subsidiary shall merge with any Restricted Subsidiary that is not a Dedicated Subsidiary, such Dedicated Subsidiary shall be the continuing Person following such merger; and (y) Section 8.2.9 of the Credit Agreement is hereby further amended by adding a new subsection (e) thereto as follows: "(e) a Subsidiary may consolidate with, or merge into or with, another Person to the extent otherwise permitted under Section 8.2.10." (z) Section 8.2.10 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: SECTION 8.2.10. Asset Dispositions, etc. The Borrower will not, and will not permit any of its Subsidiaries to, sell, transfer, lease, contribute or otherwise convey, or grant options, warrants or other rights with respect to, all or any substantial part of its assets (including accounts receivable and capital stock of Subsidiaries) to any Person other than to the Borrower or a Restricted Subsidiary, unless (a) such sale, transfer, lease, contribution or conveyance is (i) in the ordinary course of its business, (ii) permitted by Section 8.2.9 or (iii) of CES or its Subsidiaries or any of their respective assets; or (b) in the event such sale, transfer, lease, contribution or conveyance involves the Domestic Gas Reserves, such sale, transfer, lease, contribution or conveyance is, individually and taken together with all prior sales, transfers, leases, contributions or conveyances within the same calendar year, a Permitted Sale; or (c) such sale, transfer, lease, contribution or conveyance is not covered by clauses (a) or (b) above and (i) the Borrower or its Subsidiary receives consideration at the time of such sale, transfer, lease, contribution or conveyance at least equal to the fair market value of assets being sold, transferred, leased, contributed or conveyed, (ii) at least sixty percent (60%) of the consideration received by the Borrower or such Subsidiary is in the form of cash or cash equivalents, (iii) in the case of any such sale, transfer, lease, contribution or conveyance by a Subsidiary that is not an Incremental Pledged Subsidiary, an amount equal to 100% of Net Available Cash therefrom is either reinvested in Additional Assets of a Dedicated Subsidiary within 365 days of such Asset Sale or applied by the Borrower as provided herein to prepay the Loans and the loans outstanding under the Existing Credit Agreement, so long as any Net Available Cash from Dedicated Assets (other than Incremental Dedicated Assets) is applied by the Borrower as provided in Section 2.2.2 and (iv) in the case of any such sale, transfer, lease, contribution or conveyance by an Incremental Pledged Subsidiary, an amount equal to 100% of Net Available Cash therefrom is applied by the Borrower as provided in Section 3.1.1(e). (aa) There shall be added to the Credit Agreement a new Section 10.9 reading in its entirety as follows: SECTION 10.9 Collateral Matters. The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Lien on any property granted to or held by the Agent under any Loan Document (i) upon termination of the Commitments and payment in full of all Obligations (other than contingent indemnification obligations) and the expiration or termination of all Letters of Credit, (ii) that is sold or to be sold as part of or in connection with any sale permitted hereunder or under any other Loan Document, or (iii) subject to Section 11.1, if approved, authorized or ratified in writing by the Required Lenders. Upon request by the Agent at any time, the Required Lenders will instruct the Agent to release its interest in particular types or items of property, pursuant to this Section 10.9. (bb) Clause (g) of Section 11.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(g) release any Lien created by a Loan Document shall be effective without the consent of Lenders having at least 75% of the aggregate of all Term B Loans then outstanding, all unfunded Term B Loan Commitments, all Revolving Loans then outstanding, all Letter of Credit Outstandings on such date, and all unfunded Revolving Loan Commitments, except that no such consent shall be required to the extent that the sale or other disposition of the asset subject to the Lien is permitted hereunder and the proceeds thereof are applied as required by this Agreement;" (cc) Item 7.12 ("Environmental Matters") of the Disclosure Schedule is hereby amended by adding thereto those items set forth on Schedule 7.12 attached hereto. (dd) There shall be added to the Credit Agreement a new Schedule 1.1 in the form of Schedule 1.1 attached hereto. (ee) There shall be added to the Credit Agreement a new Schedule III in the form of Schedule III attached hereto. SECTION 3. By their execution hereof, each of the undersigned Lenders hereby waives the conditions precedent set forth in Section 6.2.1, 6.2.4 and 6.2.5 of the Credit Agreement with respect to the initial funding of the Term B Loans to the extent, but only to the extent, that that such funding shall have occurred on or before May 10, 2002. If the initial funding of the Term B Loans shall not have occurred by May 10, 2002, the waivers granted herein shall terminate at 12:00 midnight, eastern daylight time, on such date. SECTION 4. To induce the Lenders and the Administrative Agents to enter into this Amendment, the Company hereby reaffirms, as of the date hereof, its representations and warranties contained in Article VII of the Credit Agreement (except to the extent such representations and warranties relate solely to an earlier date) and additionally represents and warrants as follows: (i) The execution and delivery of this Amendment, and the performance by the Company of its obligations hereunder, are within the Company's corporate powers, have been duly authorized by all necessary action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Company or of any agreement binding upon the Company; (ii) As of the date of this Amendment, the Company owns all of the equity interests in Calpine Holdings and CNGH and CNGH owns all of the equity interests in CNGC; (iii) This Amendment is the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms; and (iv) No Default has occurred and is continuing and no Default will result from the execution and delivery of this Amendment. SECTION 5. The effectiveness of this Amendment is conditioned upon receipt by the Administrative Agents of all the following documents, each in form and substance satisfactory to the Administrative Agents: (i) This Amendment duly executed by the Company and the Required Lenders; (ii) The First Amendment Pledge Agreements duly executed and delivered by the Company to pledge the shares of the corporations described on Section A of Schedule III owned by the Company and the membership interests of CNGH and the other limited liability companies described on Section A of Schedule III owned by the Company; (iii) Documentation sufficient to satisfy the Administrative Agent that the corporate reorganization described on Schedule 1.1 is complete; (iv) The Agent shall have received confirmation that all of the Domestic Gas Reserves shall have been transferred to the Borrower and that the other requirements of Section 8.1.8 shall have been satisfied on or before the date of the requested Borrowing; (v) The Note Pledge Agreement duly executed by the Borrower to pledge the intercompany notes described in Section 8.1.10 of the Credit Agreement; (vi) The Agent and Term B Lead Arrangers shall have received confirmation that the debt rating given to the Loans and then in effect from Moody's shall be Ba3 or better; (vii) The Agent shall have received opinions, dated the date of the Effective Date and addressed to the Agent and all Lenders, from Lisa Bodensteiner, Esq., general counsel of the Borrower, and Covington & Burling, special counsel to the Borrower, substantially in the form of Exhibits B-1 and B-2; and (viii) The Agent shall have received such other documents as the Administrative Agents shall have reasonably requested. SECTION 6. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended hereby. SECTION 7. Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Credit Agreement. SECTION 8. THIS AMENDMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. All obligations of the Company and rights of the Lenders and the Administrative Agents expressed herein shall be in addition to and not in limitation of those provided by applicable law. Whenever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. SECTION 9. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing one or more counterparts. SECTION 10. This Amendment shall be binding upon the Company, the Lenders and the Administrative Agents and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Administrative Agents and the successors and assigns of the Lenders and the Administrative Agents. SECTION 11. THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AMENDMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AMENDMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. CALPINE CORPORATION By:____________________________________ Name:__________________________________ Title:_________________________________ THE BANK OF NOVA SCOTIA, as Administrative Agent and Lender By:____________________________________ Name:__________________________________ Title:_________________________________ CITICORP USA, INC., as Administrative Agent and Lender By:____________________________________ Name:__________________________________ Title:_________________________________ BAYERISCHE LANDESBANK GIROZENTRALE By:____________________________________ Name:__________________________________ Title:_________________________________ By:____________________________________ Name:__________________________________ Title:_________________________________ BANK OF AMERICA, NATIONAL ASSOCIATION. By:____________________________________ Name:__________________________________ Title:_________________________________ CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH By:_____________________________________ Name:___________________________________ Title:__________________________________ By:_____________________________________ Name:___________________________________ Title:__________________________________ TORONTO DOMINION (TEXAS) INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ DEUTSCHE BANK TRUST COMPANY AMERICAS By:_____________________________________ Name:___________________________________ Title:__________________________________ ING CAPITAL LLC By:_____________________________________ Name:___________________________________ Title:__________________________________ By:_____________________________________ Name:___________________________________ Title:__________________________________ SCHEDULE 1.1 STEP 1 Calpine Corporation ("Calpine") 1,000 Shares of 1,000 Shares of Common Stock Common Stock Calpine Natural Calpine Natural Gas GP, Inc., Gas Holdings, Inc. ("Calpine GP") ("Holdings") 1% GP Interest 99% LP Interest Calpine Natural Gas Company, L.P. ("CNGC") CNGC will convert from a Delaware limited partnership to a Delaware corporation ("Conversion #1") and will change its name to Calpine Natural Gas Company. Conversion #1 will be effective at 11:57 p.m., Eastern Time ("ET"), on the date of the Conversion (the "Conversion Date"). By virtue of Conversion #1, the 1% general partner interest (the "GP Interest") held by Calpine GP and the 99% limited partner interest (the "LP Interest") held by Holdings will be converted into 10 shares of common stock and 990 shares of common stock in the converted corporation, respectively. STEP 2 Calpine 1,000 Shares of 1,000 Shares of Common Stock Common Stock Calpine GP Holdings 10 Shares of 990 shares of Common Stock Common Stock CNGC Holdings will convert from a Delaware corporation to a Delaware limited liability company ("Conversion #2") and will change its name to Calpine Natural Gas Holdings, LLC. Conversion #2 will be effective at 11:57 p.m., ET, on the Conversion Date. By virtue of Conversion #2, the 1,000 shares of common stock held by Calpine (the "Holdings Stock") will be converted into 100% of the limited liability company interest in the converted LLC (the "Membership Interest"). STEP 3 Calpine 100% 100% Common Stock Membership Interest Merger #1 Calpine GP Holdings 10 Shares of 990 shares of Common Stock Common Stock CNGC Calpine GP will merge with and into Calpine ("Merger #1"), with Calpine acquiring in Merger #1 the 10 shares of CNGC stock held by Calpine GP. Merger #1 will be effective at 11:58 p.m., ET, on the Conversion Date. STEP 4 Calpine 10 Shares of 100% Common Stock Membership Interest Stock Distribution Holdings 990 shares of Common Stock CNGC To avoid having to obtain Calpine stockholder approval for Merger #2 in Step 5, Holdings will distribute its 990 shares of CNGC stock to Calpine. The stock distribution will be effective at 11:58 p.m., ET, on the Conversion Date. STEP 5 Calpine Merger #2 1,000 Shares of 100% Common Stock Membership Interest CNGC Holdings In order to move the assets held by CNGC to Calpine by operation of law rather than assignment, CNGC will merge with and into Calpine ("Merger #2"). Merger #2 will be effective at 11:59 p.m., ET, on the Conversion Date. STEP 6 Calpine 100% Membership Interest Holdings Calpine Corporation will enter into the 2002 credit restructuring, under which it will mortgage the assets it receives from Calpine Natural Gas Company in Merger #2. SCHEDULE III A. Direct Subsidiaries to be pledged. 1. Calpine CCFC II Holdings, Inc. 2. Calpine Central, Inc. 3. Calpine Eastern Corporation 4. Calpine Dighton, Inc. 5. CPN Auburndale, Inc. 6. Calpine Auburndale, Inc. 7. Calpine Gordonsville, Inc. 8. Calpine Rumford, Inc. 9. Calpine Rumford I, Inc. 10. Calpine Tiverton, Inc. 11. Calpine Tiverton I, Inc. 12. Calpine Northeast Marketing, Inc. 13. Calpine Marketing, LLC 14. Venture Acquisition Company 15. Calpine Northbrook Energy Corporation of Maine, Inc. 16. Androscoggin Energy, Inc. 17. Calpine Project Holdings, Inc. 18. Calpine Sumas, Inc. 19. Northwest Cogeneration, Inc. 20. Calpine King City 1, Inc. 21. Calpine King City 2, Inc. 22. Calpine Gilroy 1, Inc. 23. Calpine Gilroy 2, Inc. 24. Sutter Dryers, Inc. 25. Anacapa Land Company LLC 26. Calpine Metcalf EPC, Inc. 27. Goldendale Energy, Inc. 28. CPN MEC Holdings, LLC 29. Bellingham Cogen, Inc. 30. GATX/Calpine-Agnews, Inc. 31. Calpine Agnews, Inc. 32. Calpine Pittsburgh, LLC 33. CPN Blue Spruce Holdings, LLC 34. Calpine Power Company 35. Calpine Vapor, Inc. 36. Modoc Power, Inc. 37. Santa Rosa Energy Company 38. Geysers Finance Company 39. Calpine Thermal Power, Inc. 40. Calpine Calistoga Holdings, LLC 41. Calpine Operations Management Company, Inc. 42. Calpine Fuels Corporation 43. CPN Pipeline Company 44. Calpine Sonoran Pipeline LLC 45. Calpine c*Power, Inc. 46. WRMS Engineering, Inc. 47. Calpine Cogeneration Corporation (80% ownership interest) -- see Section B below 48. Chippokes Energy Center, LLC 49. Palmetto Energy Center, LLC 50. Warnerville Energy Center, LLC 51. CPN Cascade, Inc. 52. CPN Telephone Flat, Inc. 53. Anderson Springs Energy Company 54. Calpine Sonoma, Inc. 55. South Point Energy Center LLC 56. Los Esteros Critical Energy Center, LLC 57. Calpine California Holdings, Inc. 58. Calpine Eastern Holdings, Inc. B. Restrictions on Calpine Corporation's Ability to Pledge. Calpine Cogeneration Corporation - pledge of shares comprising Calpine Corporation's 80% ownership interest would require prior consent of the owner of the shares comprising the remaining 20% interest (NRG); such consent is not to be unreasonably withheld. Calpine shall use commercially reasonable efforts to obtain such consent and pledge its 80% ownership interest and shall, in any event, execute such pledge documentation by December 20, 2002. C. Subsidiaries that may be released. 1. To the extent the shares (or other indicia of ownership) of the following Subsidiaries have been pledged by the Company, such shares will be released upon the completion of financing or sale/leaseback transactions in connection with the projects owned by such Subsidiaries: CPN Acadia, Inc., subsidiary of Calpine Central, Inc. Zion Energy Center LLC, subsidiary of Calpine CCFCII Holdings, Inc. Calpine Oneta Power, LP, subsidiary of Calpine CCFCII Holdings, Inc. Calpine King City Cogen, LLC, subsidiary of Calpine King City 1, Inc. and Calpine King City 2, Inc. Calpine California Holdings, Inc. Auburndale Peaker Energy Center, LLC, subsidiary of Calpine Eastern Corp. CPN Bethpage 3rd Turbine, Inc., subsidiary of Calpine Eastern Corp. It is understood that the shares of the foregoing Subsidiaries may, with prior written notice to the Administrative Agents, be transferred to another Incremental Pledged Subsidiary to facilitate the completion of any such financing or sale/leaseback transaction. 2. The shares of Calpine GP, Inc. (general partner of Calpine Natural Gas Company LP) will be released upon the closing of the First Amendment to the Credit Agreement. 3. The shares of Calpine Natural Gas Holdings, Inc. (limited partner of Calpine Natural Gas Company, LP) will be released upon the closing of the First Amendment to the Credit Agreement. 4. On or before June 8, 2002, the stock of Calpine CCFC Holdings, Inc. shall be transferred to Calpine Natural Gas Holdings, LLC. SCHEDULE 7.12 1. Alvin, Texas -- A horizontal separator tank ruptured in July 2001, resulting in a personal injury claim filed by Alonzo Cruz, one of the GT Oilfield Repair employees injured in the incident. Named Defendants are Calpine Natural Gas Company L.P. and Dickey Cox (d/b/a Cox Gauging Service). It is alleged that Cox was negligent in the operation of a pressure valve at the facility, and that Calpine Natural Gas Company L.P. failed to maintain a safe work environment. Both GT Oilfield Repair and Cox Gauging were independent contractors at the site. Calpine Natural Gas Company L.P. is being defended and indemnified by GT Oilfield Repair, pursuant to a contractual indemnity. At this juncture, there is no workers' compensation lien against Calpine Natural Gas Company L.P. Mortgagor has to date spent $600,000 total on this site ($300,000 on replacement of damaged equipment and $300,000 on environmental containment, removal, and remediation). There is a gas well that is currently shut-in that needs to be redrilled (estimated cost $1,000,000) or plugged and abandoned (estimated cost $200,000). The property itself is bordered on two sides by residential areas. 2. ARCO plant site, South Texas -- This property was acquired by Mortgagor pursuant to an acquisition of Pioneer assets. Mortgagor has to date spent $180,000 to remediate the contaminated soil and pond water, with the possibility of an additional $70,000 needed to complete the work. 3. Westfield, New York -- This involves a 2500 sq. ft tract, to which Mortgagor holds title. The estimated cost to excavate and remove the contaminated soil is $25,000. Mortgagor will then attempt to sell the remediated tract to the buyer that previously purchased the surrounding property from TGX (n/k/a Mortgagor). 4. West Drakes Bay, Louisiana -- Mortgagor is currently in negotiations with a potential buyer for this property, which is currently not producing. If the property is not sold, there will be plugging and abandonment costs of approximately $200,000 for the well and platform. 5. San Juan Basin, New Mexico -- Mortgagor acquired some open pits in connection with an acquisition from Robert L. Bayless Producer, LLC. This should be resolved completely in the near future for a minimal amount. The bedrock in the area is close to the surface, with the result that the borderline contamination is well contained. Mortgagor has the full support of local environmental authorities. 6. Rio Vista Field, California -- Schuler Homes has made a claim against Mortgagor for excavation and disposal of contaminated soil near an old open sump pit. Representatives from Mortgagor met with Amerada Hess, who accepted its contractual responsibility and is currently handling the claim. 7. Clayton Field, Texas -- Pursuant to a pending sale by Kinder Morgan to Kopono Energy of an easement, due diligence uncovered a two feet deep plume of old condensate on top of groundwater. Initial sampling revealed that the plume did not extend to property owned by Mortgagor. Recent tests confirm that it is remote that Mortgagor has any potential responsibility for this plume. In the unlikely event that Mortgagor does bear some liability, it is unknown at this time what the remediation costs would be. 8. Rio Vista Field, California -- Pursuant to an acquisition of Vintage Petroleum, Inc., Mortgagor sublet a field office back to Vintage. This field office was allegedly surrounded by arsenic contaminated rock. An investigation was conducted by Entrix in March 2001. Chevron (a former property owner) hired Entrix, and appears to be accepting responsibility for any contamination. Mortgagor has not been informed of the test results. Additionally at this site, there are several dozen joints of pipe that contain an asbestos coating that are segregated on a pipe rack. The asbestos coating is in a nonfriable state, and does not pose any environmental risk at this time. The estimated cost for moving this pipe to an approved offsite landfill is $7- $10,000, which will be accomplished shortly. EX-10 7 ex10-9.txt AMENDMENT NUMBER ONE TO PLEDGE AGREEMENT THIS AMENDMENT NUMBER ONE TO PLEDGE AGREEMENT, dated as of May 9, 2002 (herein called this "Amendment"), is entered into by and among CALPINE CORPORATION, a Delaware corporation (herein called the "Company") and THE BANK OF NOVA SCOTIA, as joint administrative agent and funding agent (in such capacity, the "Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and the Agent have heretofore entered into a certain Pledge Agreement, dated as of March 8, 2002 (herein called the "Agreement"); and WHEREAS, the Company, the Lenders and the Administrative Agents now desire to amend the Agreement in certain respects, as hereinafter provided, NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Company and the Agent hereby agree as follows: SECTION 1. Attachment 1 to the Agreement is hereby replaced with Attachment 1-A hereto which deletes the references to Calpine Natural Gas GP, Inc. and Calpine Natural Gas Holdings, Inc. All references to Attachment 1 in the Agreement shall be deemed to refer to Attachment 1-A attached hereto. SECTION 2. To induce the Lenders and the Agent to enter into this Amendment, the Company hereby reaffirms, as of the date hereof, its representations and warranties contained in Article III of the Agreement (except to the extent such representations and warranties relate solely to an earlier date) and additionally represents and warrants as follows: (i) The execution and delivery of this Amendment, and the performance by the Company of its obligations hereunder, are within the Company's corporate powers, have been duly authorized by all necessary action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Company or of any agreement binding upon the Company; (ii) As of the date of this Amendment, the Company owns all of the equity interests in Calpine Holdings; (iii) This Amendment is the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms; and (iv) No Default has occurred and is continuing and no Default will result from the execution and delivery of this Amendment. SECTION 3. The effectiveness of this Amendment is conditioned upon receipt by the Administrative Agents of all the following documents, each in form and substance satisfactory to the Administrative Agents: (i) This Amendment duly executed by the Company and the Agent; and (ii) Such other documents as the Administrative Agents shall have reasonably requested. SECTION 4. This Amendment shall be deemed to be an amendment to the Agreement, and the Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Agreement as amended hereby. SECTION 5. Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Agreement. SECTION 6. THIS AMENDMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. All obligations of the Company and rights of the Agent expressed herein shall be in addition to and not in limitation of those provided by applicable law. Whenever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. SECTION 7. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing one or more counterparts. SECTION 8. This Amendment shall be binding upon the Company and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company and the Agent and the successors and assigns of the Agent. SECTION 9. THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AMENDMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AMENDMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. CALPINE CORPORATION By:__________________________________________ Name:________________________________________ Title:_______________________________________ THE BANK OF NOVA SCOTIA, as Administrative Agent By:__________________________________________ Name:________________________________________ Title:_______________________________________ ATTACHMENT 1-A ATTACHMENT 1 to Pledge Agreement
Pledged Shares - -------------- Pledged Share Issuer Common Stock - -------------------- ------------ Authorized Outstanding % of Shares Shares Shares Pledged ---------- ----------- ----------- Calpine CCFC Holdings, Inc. ....... 1000 1000 100%
EX-10 8 ex10-11.txt FIRST AMENDMENT PLEDGE AGREEMENT THIS FIRST AMENDMENT PLEDGE AGREEMENT (this "Pledge Agreement"), dated as of May 9, 2002, made by Calpine Corporation, a Delaware corporation (the "Borrower"), in favor of The Bank of Nova Scotia, as agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the Lender Parties (as defined below). W I T N E S S E T H: WHEREAS, pursuant to that certain Credit Agreement, dated as of March 8, 2002 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "2002 Credit Agreement"), among the Borrower, the various financial institutions as are or may become parties hereto (collectively, the "2002 Lenders"), The Bank of Nova Scotia and Bayerische Landesbank Girozentrale, as Lead Arrangers and Bookrunners on the Revolving Facility, Salomon Smith Barney Inc. and Deutsche Banc Alex. Brown Inc., as Lead Arrangers and Bookrunners on the Term B Facility, The Bank of Nova Scotia, as Joint Administrative Agent and Funding Agent, Citicorp USA, Inc., as Joint Administrative Agent, Bank of America, National Association and Credit Suisse First Boston, Cayman Islands Branch as Lead Arrangers and Syndication Agents for the Revolving Facility and TD Securities (USA) Inc. as Lead Arranger for the Revolving Facility, the Lenders have extended Commitments to make Loans and to issue Letters of Credit to the Borrower; and WHEREAS, pursuant to that certain Second Amended and Restated Credit Agreement, dated as of May 23, 2000 (together with all amendments and other modifications, if any, from time to time made thereto, the "2000 Credit Agreement" and together with the 2002 Credit Agreement, the "Credit Agreements"), among the Borrower, the various financial institutions as are or may become parties thereto (collectively, the "2000 Lenders" and together with the 2002 Lenders, the "Lenders"), Bayerische Landesbank Girozentrale as co-arranger and syndication agent for the 2000 Lenders and The Bank of Nova Scotia as lead arranger and administrative agent for the 2000 Lenders; and WHEREAS, as a condition precedent to the effectiveness of that certain First Amendment to Credit Agreement, dated as of even date herewith, the Borrower is required to execute and deliver this Pledge Agreement; and WHEREAS, the Borrower has duly authorized the execution, delivery and performance of this Pledge Agreement; and WHEREAS, it is in the best interests of the Borrower to execute this Pledge Agreement inasmuch as the Borrower will derive substantial direct and indirect benefits from the Loans made and Letters of Credit issued from time to time to the Borrower by the Lenders pursuant to the Credit Agreements; NOW THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) and to issue Letters of Credit for the account of the Borrower pursuant to the Credit Agreements, the Borrower agrees, for the benefit of each Lender Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Pledge Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Agent" is defined in the preamble. "Borrower" is defined in the preamble. "Collateral" is defined in Section 2.1. "Credit Agreements" is defined in the second recital. "Distributions" means all stock dividends, liquidating dividends, shares of stock resulting from (or in connection with the exercise of) stock splits, reclassifications, warrants, options, non-cash dividends, mergers, consolidations, and all other distributions (whether similar or dissimilar to the foregoing) on or with respect to any Pledged Shares or other shares of capital stock constituting Collateral, but shall not include Dividends. "Dividends" means cash dividends and cash distributions with respect to any Pledged Shares or other Pledged Property made in the ordinary course of business and not a liquidating dividend. "Lender Party" means, as the context may require, any Lender, Issuer or the Agent and each of its respective successors, transferees and assigns under either of the Credit Agreements. "Lenders" is defined in the second recital. "Pledge Agreement" is defined in the preamble. "Pledged Property" means all Pledged Shares and all other pledged shares of capital stock, all other securities, all assignments of any amounts due or to become due, all other instruments which are now being delivered by the Borrower to the Agent or may from time to time hereafter be delivered by the Borrower to the Agent for the purpose of pledge under this Pledge Agreement or any other Loan Document, and all proceeds of any of the foregoing. "Pledged Share Issuer" means each Person identified in Attachment 1 hereto as the issuer of the Pledged Shares identified opposite the name of such Person. "Pledged Shares" means all shares of capital stock of any Pledged Share Issuer which are delivered by the Borrower to the Agent as Pledged Property hereunder. "Secured Obligations" is defined in Section 2.2. "Securities Act" is defined in Section 6.2. "U.C.C." means the Uniform Commercial Code as in effect in the State of New York. SECTION 1.2. Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Pledge Agreement, including its preamble and recitals, have the meanings provided in the Credit Agreements. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Pledge Agreement, including its preamble and recitals, with such meanings. ARTICLE II PLEDGE SECTION 2.1. Grant of Security Interest. The Borrower hereby pledges, hypothecates, assigns, charges, mortgages, delivers, and transfers to the Agent, for its benefit and the ratable benefit of each of the Lender Parties, and hereby grants to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in, all of the following property (the "Collateral"): (a) all issued and outstanding shares of capital stock of each Pledged Share Issuer identified in Attachment ----------- 1 hereto; - (b) and the certificates representing the Pledged Shares and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (c) all additional shares of stock of any issuer of the Pledged Shares from time to time acquired by the Borrower in any manner, and the certificates representing such additional shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; (d) all other Pledged Shares issued from time to time; (e) all other Pledged Property, whether now or hereafter delivered to the Agent in connection with this Pledge Agreement; (f) all Dividends, Distributions, interest, and other payments and rights with respect to any Pledged Property; and (g) all proceeds of any of the foregoing. SECTION 2.2. Security for Obligations. This Pledge Agreement secures the payment and performance in full of all Obligations of the Borrower now or hereafter existing under the Credit Agreements, the Notes, each Letter of Credit and each other Loan Document to which the Borrower is or may become a party, whether for principal, interest, costs, fees, expenses, or otherwise, and all obligations of the Borrower now or hereafter existing under this Pledge Agreement and each other Loan Document to which it is or may become a party (all such obligations of the Borrower being the "Secured Obligations"). SECTION 2.3. Delivery of Pledged Property. All certificates or instruments representing or evidencing any Collateral, including all Pledged Shares, shall be delivered to and held by or on behalf of the Agent pursuant hereto, shall be in suitable form for transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank. SECTION 2.4. Intentionally Omitted. SECTION 2.5. Continuing Security Interest; Transfer of Note. This Pledge Agreement shall create a continuing security interest in the Collateral and subject to Section 8.1.9 of the Credit Agreement shall (a) remain in full force and effect until payment in full of all Secured Obligations and the termination of all Commitments, (b) be binding upon the Borrower and its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each other Lender Party. Without limiting the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any right or obligation under the Loan Documents to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Pledge Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 of each of the Credit Agreements. Upon the indefeasible payment in full, in cash, of all Secured Obligations and the termination of all Commitments, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Borrower. Upon any such termination, the Agent will, at the Borrower's sole expense, deliver to the Borrower, without any representations, warranties or recourse of any kind whatsoever, all certificates and instruments representing or evidencing all Pledged Shares, together with all other Collateral held by the Agent hereunder, and execute and deliver to the Borrower such documents as the Borrower shall reasonably request to evidence such termination. SECTION 2.6. Security Interest Absolute. All rights of the Agent and the security interests granted to the Agent hereunder, and all obligations of the Borrower hereunder, shall be absolute and unconditional, irrespective of (a) any lack of validity or enforceability of either of the Credit Agreements, any Note or any other Loan Document, (b) the failure of any Lender Party or any holder of any Note (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any other Obligor or any other Person under the provisions of either of the Credit Agreements, any Note, any other Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any Obligations of the Borrower or any other Obligor, (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations or any other extension, compromise or renewal of any Obligation of the Borrower or any other Obligor, (d) any reduction, limitation, impairment or termination of any Obligations of the Borrower or any other Obligor for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the Borrower hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligations of the Borrower, any other Obligor or otherwise, (e) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of either of the Credit Agreements, any Note or any other Loan Document, (f) any addition, exchange, release, surrender or non-perfection of any collateral (including the Collateral), or any amendment to or waiver or release of or addition to or consent to departure from any guaranty, for any of the Obligations, or (g) any other circumstances which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any other Obligor, any surety or any guarantor. SECTION 2.7. Subrogation, etc. The Borrower will not exercise any rights which it may acquire by reason of any payment made hereunder, whether by way of subrogation, reimbursement or otherwise until the prior indefeasible payment in full, in cash, of all Obligations of the Borrower and each other Obligor. Any amount paid to the Borrower on account of any payment made hereunder prior to the payment in full of all Obligations of the Borrower and each other Obligor shall be held in trust for the benefit of the Lender Parties and each holder of a Note and shall immediately be paid to the Lender Parties and each holder of a Note and credited and applied against the Obligations of the Borrower and each other Obligor, whether matured or unmatured, in accordance with the terms of the Credit Agreements; provided, however, that if (a) the Borrower has made payment to the Lender Parties and each holder of a Note of all or any part of the Obligations of the Borrower or any other Obligor, and (b) all Obligations of the Borrower and each other Obligor have been indefeasibly paid in full, in cash, and all Commitments have been permanently terminated, each Lender Party and each holder of a Note agrees that, at the Borrower's request, the Lender Parties and the holders of the Notes will execute and deliver to the Borrower appropriate documents (without recourse and without representation or warranty and at the sole cost and expense of Borrower) necessary to evidence the transfer by subrogation to the Borrower of an interest in the Obligations of the Borrower and each other Obligor resulting from such payment by the Borrower. In furtherance of the foregoing, for so long as any Obligations or Commitments remain outstanding, the Borrower shall refrain from taking any action or commencing any proceeding against the Borrower or any other Obligor (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Pledge Agreement to any Lender Party or any holder of a Note. SECTION 2.8. Waiver of Subrogation. Until such time as the Obligations have been indefeasibly paid in full, in cash, and the Commitments have been terminated, the Borrower hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against the Borrower or any other Obligor that arise from the existence, payment, performance or enforcement of the Borrower's obligations under this Pledge Agreement or any other Loan Document, including any right of subrogation, reimbursement, exoneration, or indemnification, any right to participate in any claim or remedy of the Lender Parties against the Borrower or any other Obligor or any collateral which the Agent now has or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including the right to take or receive from the Borrower or any other Obligor, directly or indirectly, in cash or other property or by set-off or in any manner, payment or security on account of such claim or other rights. If any amount shall be paid to the Borrower in violation of the preceding sentence and the Obligations shall not have been indefeasibly paid in full, in cash, and the Commitments have not been terminated, such amount shall be deemed to have been paid to the Borrower for the benefit of, and held in trust for, the Lender Parties, and shall forthwith be paid to the Lender Parties to be credited and applied upon the Obligations, whether matured or unmatured. The Borrower acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Credit Agreements and that the waiver set forth in this Section is knowingly made in contemplation of such benefits. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Warranties, etc. The Borrower represents and warrants unto each Lender Party, as at the date of each pledge and delivery hereunder (including each pledge and delivery of Pledged Shares) by the Borrower to the Agent of any Collateral, as set forth in this Article. SECTION 3.1.1 Ownership, No Liens, etc. The Borrower is the legal and beneficial owner of, and has good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all liens, security interests, options, or other charges or encumbrances, except any lien or security interest granted pursuant hereto in favor of the Agent. SECTION 3.1.2 Valid Security Interest. The delivery of such Collateral to the Agent is effective to create a valid, perfected, first priority security interest in such Collateral and all proceeds thereof, securing the Secured Obligations. No filing or other action will be necessary to perfect or protect such security interest. SECTION 3.1.3 As to Pledged Shares. In the case of any Pledged Shares constituting such Collateral, all of such Pledged Shares are duly authorized and validly issued, fully paid, and non-assessable, and constitute all of the issued and outstanding shares of capital stock entitled to vote in the election of the Board of Directors of each Pledged Share Issuer. ARTICLE IV COVENANTS SECTION 4.1. Protect Collateral; Further Assurances, etc. The Borrower will not sell, assign, transfer, pledge, or encumber in any other manner the Collateral (except in favor of the Agent hereunder and as otherwise expressly permitted by the Credit Agreements. The Borrower will warrant and defend the right and title herein granted unto the Agent in and to the Collateral (and all right, title, and interest represented by the Collateral) against the claims and demands of all Persons whomsoever. The Borrower agrees that at any time, and from time to time, at the expense of the Borrower, the Borrower will promptly execute and deliver all further instruments, and take all further action, that may be necessary or desirable, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 4.2. Stock Powers, etc. The Borrower agrees that all Pledged Shares (and all other shares of capital stock constituting Collateral) delivered by the Borrower pursuant to this Pledge Agreement will be accompanied by duly executed undated blank stock powers, or other equivalent instruments of transfer acceptable to the Agent. The Borrower will, from time to time upon the request of the Agent, promptly deliver to the Agent such stock powers, instruments, and similar documents, satisfactory in form and substance to the Agent, with respect to the Collateral as the Agent may reasonably request and will, from time to time upon the request of the Agent after the occurrence of any Event of Default, promptly transfer any Pledged Shares or other shares of common stock constituting Collateral into the name of any nominee designated by the Agent. SECTION 4.3. Continuous Pledge. Subject to Section 2.4, the Borrower will, at all times, keep pledged to the Agent pursuant hereto all Pledged Shares and all other shares of capital stock constituting Collateral, all Dividends and Distributions with respect thereto, and all other Collateral and other securities, instruments, proceeds, and rights from time to time received by or distributable to the Borrower in respect of any Collateral. SECTION 4.4. Voting Rights; Dividends, etc. The Borrower agrees after any Event of Default shall have occurred and be continuing and the Agent has notified the Borrower of the Agent's intention to exercise its voting power under this Section 4.4 (i) the Agent may exercise (to the exclusion of the Borrower) the voting power and all other incidental rights of ownership with respect to any Pledged Shares or other shares of capital stock constituting Collateral and the Borrower hereby grants the Agent an irrevocable proxy, exercisable under such circumstances, to vote the Pledged Shares and such other Collateral; and (ii) promptly to deliver to the Agent such additional proxies and other documents as may be necessary to allow the Agent to exercise such voting power. The Agent agrees that unless an Event of Default shall have occurred and be continuing and the Agent shall have given the notice referred to in Section 4.4(b), the Borrower shall have the exclusive voting power with respect to any shares of capital stock (including any of the Pledged Shares) constituting Collateral and the Agent shall, upon the written request of the Borrower, promptly deliver such proxies and other documents, if any, as shall be reasonably requested by the Borrower which are necessary to allow the Borrower to exercise voting power with respect to any such share of capital stock (including any of the Pledged Shares) constituting Collateral; provided, however, that no vote shall be cast, or consent, waiver, or ratification given, or action taken by the Borrower that would impair any Collateral or be inconsistent with or violate any provision of the Credit Agreements or any other Loan Document (including this Pledge Agreement). SECTION 4.5. Additional Undertakings. The Borrower will not, without the prior written consent of the Agent take or omit to take any action the taking or the omission of which would result in any impairment or alteration of any obligation of the maker of any instrument constituting Collateral. ARTICLE V THE AGENT SECTION 5.1. Agent Appointed Attorney-in-Fact. The Borrower hereby irrevocably appoints the Agent the Borrower's attorney-in-fact, with full authority in the place and stead of the Borrower and in the name of the Borrower or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including without limitation: (a) after the occurrence and continuance of an Event of Default, to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; and (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral. The Borrower hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2. Agent May Perform. If the Borrower fails to perform any agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Agent incurred in connection therewith shall be payable by the Borrower pursuant to Section 6.4. SECTION 5.3. Agent Has No Duty. The powers conferred on the Agent hereunder are solely to protect its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Property, whether or not the Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Borrower reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) The Agent may (i) transfer all or any part of the Collateral into the name of the Agent or its nominee, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (ii) notify the parties obligated on any of the Collateral to make payment to the Agent of any amount due or to become due thereunder, (iii) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, (iv) endorse any checks, drafts, or other writings in the Borrower's name to allow collection of the Collateral, (v) take control of any proceeds of the Collateral, and (vi) execute (in the name, place and stead of the Borrower) endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. SECTION 6.2. Securities Laws. If the Agent shall determine to exercise its right to sell all or any of the Collateral pursuant to Section 6.1, the Borrower agrees that, upon request of the Agent, the Borrower will, at its own expense: (a) execute and deliver, and cause each issuer of the Collateral contemplated to be sold and the directors and officers thereof to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Agent, advisable to register such Collateral under the provisions of the Securities Act of 1933, as from time to time amended (the "Securities Act"), and to cause the registration statement relating thereto to become --------------- effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (b) use its best efforts to qualify the Collateral under the state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by the Agent; (c) cause each such issuer to make available to its security holders, as soon as practicable, an earnings statement that will satisfy the provisions of Section 11(a) of the Securities Act; and (d) do or cause to be done all such other acts and things as may be necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. SECTION 6.3. Compliance with Restrictions. The Borrower agrees that in any sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Borrower further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Agent be liable nor accountable to the Borrower for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. SECTION 6.4. Application of Proceeds. All cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral may thereafter be applied (after payment of any amounts payable to the Agent pursuant to Article III of the Credit Agreements and Section 6.4) in whole or in part by the Agent against, all or any part of the Secured Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after payment in full of all the Secured Obligations, and the termination of all Commitments, shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive such surplus. SECTION 6.5. Indemnity and Expenses. The Borrower hereby indemnifies and holds harmless the Agent from and against any and all claims, losses, and liabilities arising out of or resulting from this Pledge Agreement (including enforcement of this Pledge Agreement), except claims, losses, or liabilities resulting from the Agent's gross negligence or willful misconduct. Upon demand, the Borrower will pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Agent may incur in connection with: (a) the administration of this Pledge Agreement, the Credit Agreements and each other Loan Document; (b) the custody, preservation, use, or operation of, or the sale of, collection from, or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Agent hereunder; or (d) the failure by the Borrower to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Loan Document. This Pledge Agreement is a Loan Document executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments, etc. No amendment to or waiver of any provision of this Pledge Agreement nor consent to any departure by the Borrower herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 7.3. Protection of Collateral. The Agent may from time to time, at its option, perform any act which the Borrower agrees hereunder to perform and which the Borrower shall fail to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of an Event of Default) and the Agent may from time to time take any other action which the Agent reasonably deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. SECTION 7.4. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and, if to the Borrower, mailed or telegraphed or delivered to it at the address set forth below its signature hereto, if to the Agent, mailed or delivered to it, addressed to it at the address of the Agent specified in the 2002 Credit Agreement or, as to either party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 7.5. Section Captions. Section captions used in this Pledge Agreement are for convenience of reference only, and shall not affect the construction of this Pledge Agreement. SECTION 7.6. Severability. Wherever possible each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. SECTION 7.7. Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS 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. SECTION 7.8. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS PLEDGE AGREEMENT. SECTION 7.9. Waiver of Jury Trial. THE LENDER PARTIES AND THE BORROWER 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, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER PARTIES ENTERING INTO THE CREDIT AGREEMENTS AND EACH SUCH OTHER LOAN DOCUMENT. IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. CALPINE CORPORATION By:_____________________________________________ Name:___________________________________________ Title:__________________________________________ Address: 50 West San Fernando Avenue San Jose, CA 95113 Facsimile No.: (408) 995-0505 Attention: Senior Vice President-Finance THE BANK OF NOVA SCOTIA By:_____________________________________________ Name:___________________________________________ Title:__________________________________________ Address: 580 California Street Suite 2100 San Francisco, CA 94111 Facsimile No.: (415) 397-0791 Attention: Jon Burckin with a copy to: The Bank of Nova Scotia 600 Peachtree Street, N.E. Suite 2700 Atlanta, GA 30308 Attention: Hilma Gabbidon Administrative Agent Loan Administration Facsimile No.: (404) 888-8998 ATTACHMENT 1 to Pledge Agreement
Pledged Shares - -------------- Pledged Share Issuer Common Stock - -------------------- ------------ Authorized Outstanding % of Shares Shares Shares Pledged ---------- ----------- ----------- Calpine CCFC II Holdings, Inc. 1000 1000 100% Calpine Central, Inc. 1000 1000 100% Calpine Eastern Corporation 1000 1000 100% Calpine Dighton, Inc. 1000 1000 100% CPN Auburndale, Inc. 1000 1000 100% Calpine Auburndale, Inc. 1000 1000 100% Calpine Gordonsville, Inc. 1000 1000 100% Calpine Rumford, Inc. 100 100 100% Calpine Rumford I, Inc. 1000 1000 100% Calpine Tiverton, Inc. 100 100 100% Calpine Tiverton I, Inc. 100 100 100% Calpine Northeast Marketing, Inc. 100 100 100% Venture Acquisition Company 1000 1000 100% Calpine Northbrook Energy Corporation of Maine, Inc. 1000 1000 100% Androscoggin Energy, Inc. 1000 1000 100% Calpine Project Holdings, Inc. 1000 1000 100% Calpine Sumas, Inc. 1000 1000 100% Northwest Cogeneration, Inc. 1000 1000 100% Calpine King City 1, Inc. 1000 1000 100% Calpine King City 2, Inc. 1000 1000 100% Calpine Gilroy 1, Inc. 1000 1000 100% Calpine Gilroy 2, Inc. 1000 1000 100% Sutter Dryers, Inc. 1000 1000 100% Calpine Metcalf EPC, Inc. 1000 1000 100% Goldendale Energy, Inc. 100 100 100% Bellingham Cogen, Inc. 1000 1000 100% GATX/Calpine Agnews, Inc. 3000 3000 100% Calpine Agnews, Inc. 1000 1000 100% Calpine Power Company 1000 1000 100% Calpine Vapor, Inc. 1000 1000 100% Modoc Power, Inc. 1000 1000 100% Santa Rosa Energy Company 1000 1000 100% Geysers Finance Company 100,000 100,000 100% Calpine Thermal Power, Inc. 1000 1000 100% Calpine Operations Management Company, Inc. 1000 1000 100% Calpine Fuels Corporation 1000 1000 100% CPN Pipeline Company 1000 1000 100% Calpine Eastern Holdings, Inc. 1000 1000 100% Calpine c*Power, Inc. 1000 1000 100% WRMS Engineering, Inc. 100,000 100,000 100% CPN Cascade, Inc. 1000 1000 100% CPN Telephone Flat, Inc. 1000 1000 100% Anderson Springs Energy Company 1000 1000 100% Calpine Sonoma, Inc. 1000 1000 100% Calpine California Holdings, Inc. 1000 1000 100%
EX-10 9 ex10-12.txt FIRST AMENDMENT PLEDGE AGREEMENT (Membership Interests) THIS FIRST AMENDMENT PLEDGE AGREEMENT (this "Pledge Agreement"), dated as of May 9, 2002, made by Calpine Corporation, a Delaware corporation (the "Borrower"), in favor of The Bank of Nova Scotia, as agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the Lender Parties (as defined below). W I T N E S S E T H: WHEREAS, pursuant to that certain Credit Agreement, dated as of March 8, 2002 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "2002 Credit Agreement"), among the Borrower, the various financial institutions as are or may become parties hereto (collectively, the "2002 Lenders"), The Bank of Nova Scotia and Bayerische Landesbank Girozentrale, as Lead Arrangers and Bookrunners on the Revolving Facility, Salomon Smith Barney Inc. and Deutsche Banc Alex. Brown Inc., as Lead Arrangers and Bookrunners on the Term B Facility, The Bank of Nova Scotia, as Joint Administrative Agent and Funding Agent, Citicorp USA, Inc., as Joint Administrative Agent, Bank of America, National Association and Credit Suisse First Boston, Cayman Islands Branch as Lead Arrangers and Syndication Agents for the Revolving Facility and TD Securities (USA) Inc. as Lead Arranger for the Revolving Facility, the Lenders have extended Commitments to make Loans and to issue Letters of Credit to the Borrower; and WHEREAS, pursuant to that certain Second Amended and Restated Credit Agreement, dated as of May 23, 2000 (together with all amendments and other modifications, if any, from time to time made thereto, the "2000 Credit Agreement" and together with the 2002 Credit Agreement, the "Credit Agreements"), among the Borrower, the various financial institutions as are or may become parties thereto (collectively, the "2000 Lenders" and together with the 2002 Lenders, the "Lenders"), Bayerische Landesbank Girozentrale as co-arranger and syndication agent for the 2000 Lenders and The Bank of Nova Scotia as lead arranger and administrative agent for the 2000 Lenders; and WHEREAS, as a condition precedent to the effectiveness of that certain First Amendment to Credit Agreement, dated as of even date herewith, the Borrower is required to execute and deliver this Pledge Agreement; and WHEREAS, the Borrower has duly authorized the execution, delivery and performance of this Pledge Agreement; and WHEREAS, it is in the best interests of the Borrower to execute this Pledge Agreement inasmuch as the Borrower will derive substantial direct and indirect benefits from the Loans made and Letters of Credit issued from time to time to the Borrower by the Lenders pursuant to the Credit Agreements; NOW THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) and to issue Letters of Credit for the account of the Borrower pursuant to the Credit Agreements, the Borrower agrees, for the benefit of each Lender Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Pledge Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Agent" is defined in the preamble. "Borrower" is defined in the preamble. "Collateral" is defined in Section 2.1. "Credit Agreements" is defined in the second recital. "Distributions" means all cash distributions made in respect of the Pledged Interests, whether of net income, return of capital or otherwise, and all other distributions (whether similar or dissimilar to the foregoing) on or with respect to any Pledged Interests or other rights or interests constituting Collateral. "Lender Party" means, as the context may require, any Lender, Issuer or the Agent and each of its respective successors, transferees and assigns under either of the Credit Agreements. "Lenders" is defined in the second recital. "Pledge Agreement" is defined in the preamble. "Pledged Property" means all Pledged Interests, securities, all assignments of any amounts due or to become due, all other instruments which are now being delivered by the Borrower to the Agent or may from time to time hereafter be delivered by the Borrower to the Agent for the purpose of pledge under this Pledge Agreement or any other Loan Document, and all proceeds of any of the foregoing. "Pledged Interests Issuer" means each Person identified in Attachment 1 hereto as the issuer of the Pledged Interests identified opposite the name of such Person. "Pledged Interests" means all membership interests in the Pledged Interests Issuer, as such interests are amended, modified, or supplemented from time to time and together with any interest in the Pledged Interests Issuer taken in extension or renewal thereof or substitution therefore. "Secured Obligations" is defined in Section 2.2. "Securities Act" is defined in Section 6.2. "U.C.C." means the Uniform Commercial Code as in effect in the State of New York. SECTION 1.2. Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Pledge Agreement, including its preamble and recitals, have the meanings provided in the Credit Agreements. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Pledge Agreement, including its preamble and recitals, with such meanings. ARTICLE II PLEDGE SECTION 2.1. Grant of Security Interest. The Borrower hereby pledges, hypothecates, assigns, charges, mortgages, delivers, and transfers to the Agent, for its benefit and the ratable benefit of each of the Lender Parties, and hereby grants to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in, all of the following property (the "Collateral"): (a) all Pledged Interests identified in Attachment 1 hereto; (b) and the certificates representing the Pledged Interests and all dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Interests; (c) all additional membership interests of any issuer of the Pledged Interests from time to time acquired by the Borrower in any manner, and the certificates representing such additional membership interests, and all dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such membership interests; (d) all other Pledged Interests issued from time to time; (e) all other Pledged Property, whether now or hereafter delivered to the Agent in connection with this Pledge Agreement; (f) all Distributions, interest, and other payments and rights with respect to any Pledged Property; and (g) all proceeds of any of the foregoing. SECTION 2.2. Security for Obligations. This Pledge Agreement secures the payment and performance in full of all Obligations of the Borrower now or hereafter existing under the Credit Agreements, the Notes, each Letter of Credit and each other Loan Document to which the Borrower is or may become a party, whether for principal, interest, costs, fees, expenses, or otherwise, and all obligations of the Borrower now or hereafter existing under this Pledge Agreement and each other Loan Document to which it is or may become a party (all such obligations of the Borrower being the "Secured Obligations"). SECTION 2.3. Delivery of Pledged Property. All certificates or instruments representing or evidencing any Collateral, including all Pledged Interests , shall be delivered to and held by or on behalf of the Agent pursuant hereto, shall be in suitable form for transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank. SECTION 2.4. Intentionally Omitted. SECTION 2.5. Continuing Security Interest; Transfer of Note. This Pledge Agreement shall create a continuing security interest in the Collateral and subject to Section 8.1.9 of the Credit Agreement shall (a) remain in full force and effect until payment in full of all Secured Obligations and the termination of all Commitments, (b) be binding upon the Borrower and its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each other Lender Party. Without limiting the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any right or obligation under the Loan Documents to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Pledge Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 of each of the Credit Agreements. Upon the indefeasible payment in full, in cash, of all Secured Obligations and the termination of all Commitments, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Borrower. Upon any such termination, the Agent will, at the Borrower's sole expense, deliver to the Borrower, without any representations, warranties or recourse of any kind whatsoever, all certificates and instruments representing or evidencing all Pledged Interests, together with all other Collateral held by the Agent hereunder, and execute and deliver to the Borrower such documents as the Borrower shall reasonably request to evidence such termination. SECTION 2.6. Security Interest Absolute. All rights of the Agent and the security interests granted to the Agent hereunder, and all obligations of the Borrower hereunder, shall be absolute and unconditional, irrespective of (a) any lack of validity or enforceability of either of the Credit Agreements, any Note or any other Loan Document, (b) the failure of any Lender Party or any holder of any Note (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any other Obligor or any other Person under the provisions of either of the Credit Agreements, any Note, any other Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any Obligations of the Borrower or any other Obligor, (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations or any other extension, compromise or renewal of any Obligation of the Borrower or any other Obligor, (d) any reduction, limitation, impairment or termination of any Obligations of the Borrower or any other Obligor for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the Borrower hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligations of the Borrower, any other Obligor or otherwise, (e) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of either of the Credit Agreements, any Note or any other Loan Document, (f) any addition, exchange, release, surrender or non-perfection of any collateral (including the Collateral), or any amendment to or waiver or release of or addition to or consent to departure from any guaranty, for any of the Obligations, or (g) any other circumstances which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any other Obligor, any surety or any guarantor. SECTION 2.7. Subrogation, etc. The Borrower will not exercise any rights which it may acquire by reason of any payment made hereunder, whether by way of subrogation, reimbursement or otherwise until the prior indefeasible payment in full, in cash, of all Obligations of the Borrower and each other Obligor. Any amount paid to the Borrower on account of any payment made hereunder prior to the payment in full of all Obligations of the Borrower and each other Obligor shall be held in trust for the benefit of the Lender Parties and each holder of a Note and shall immediately be paid to the Lender Parties and each holder of a Note and credited and applied against the Obligations of the Borrower and each other Obligor, whether matured or unmatured, in accordance with the terms of the Credit Agreements; provided, however, that if (a) the Borrower has made payment to the Lender Parties and each holder of a Note of all or any part of the Obligations of the Borrower or any other Obligor, and (b) all Obligations of the Borrower and each other Obligor have been indefeasibly paid in full, in cash, and all Commitments have been permanently terminated, each Lender Party and each holder of a Note agrees that, at the Borrower's request, the Lender Parties and the holders of the Notes will execute and deliver to the Borrower appropriate documents (without recourse and without representation or warranty and at the sole cost and expense of Borrower) necessary to evidence the transfer by subrogation to the Borrower of an interest in the Obligations of the Borrower and each other Obligor resulting from such payment by the Borrower. In furtherance of the foregoing, for so long as any Obligations or Commitments remain outstanding, the Borrower shall refrain from taking any action or commencing any proceeding against the Borrower or any other Obligor (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Pledge Agreement to any Lender Party or any holder of a Note. SECTION 2.8. Waiver of Subrogation. Until such time as the Obligations have been indefeasibly paid in full, in cash, and the Commitments have been terminated, the Borrower hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against the Borrower or any other Obligor that arise from the existence, payment, performance or enforcement of the Borrower's obligations under this Pledge Agreement or any other Loan Document, including any right of subrogation, reimbursement, exoneration, or indemnification, any right to participate in any claim or remedy of the Lender Parties against the Borrower or any other Obligor or any collateral which the Agent now has or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including the right to take or receive from the Borrower or any other Obligor, directly or indirectly, in cash or other property or by set-off or in any manner, payment or security on account of such claim or other rights. If any amount shall be paid to the Borrower in violation of the preceding sentence and the Obligations shall not have been indefeasibly paid in full, in cash, and the Commitments have not been terminated, such amount shall be deemed to have been paid to the Borrower for the benefit of, and held in trust for, the Lender Parties, and shall forthwith be paid to the Lender Parties to be credited and applied upon the Obligations, whether matured or unmatured. The Borrower acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Credit Agreements and that the waiver set forth in this Section is knowingly made in contemplation of such benefits. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Warranties, etc. The Borrower represents and warrants unto each Lender Party, as at the date of each pledge and delivery hereunder (including each pledge and delivery of Pledged Interests ) by the Borrower to the Agent of any Collateral, as set forth in this Article. SECTION 3.1.1 Ownership, No Liens, etc. The Borrower is the legal and beneficial owner of, and has good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all liens, security interests, options, or other charges or encumbrances, except any lien or security interest granted pursuant hereto in favor of the Agent. SECTION 3.1.2 Valid Security Interest. The delivery of such Collateral to the Agent is effective to create a valid, perfected, first priority security interest in such Collateral and all proceeds thereof, securing the Obligations. No other filing or other action will be necessary to perfect or protect such security interest. SECTION 3.1.3 As to Pledged Interests . In the case of any Pledged Interests constituting such Collateral, all of such Pledged Interests are duly authorized and validly issued, fully paid, and non-assessable, and constitute all of the issued and outstanding shares of capital stock entitled to vote in the election of the Board of Directors of each Pledged Interests Issuer. SECTION 3.1.4 Nature of Membership Interests. No right, title and interest of the Borrower in the Pledged Interests Issuers are represented by a certificate of interest or instrument, except such certificates or instruments, if any, as have been delivered to the Agent and are held in its possession, together with transfer documents as required in this Pledge Agreement (and the Borrower covenants and agrees that any such certificates or instruments hereafter received by the Borrower with respect to any of the Collateral will be held in trust for the Agent and promptly delivered to the Agent). ARTICLE IV COVENANTS SECTION 4.1. Protect Collateral; Further Assurances, etc. The Borrower will not sell, assign, transfer, pledge, or encumber in any other manner the Collateral (except in favor of the Agent hereunder and as otherwise expressly permitted by the Credit Agreements. The Borrower will warrant and defend the right and title herein granted unto the Agent in and to the Collateral (and all right, title, and interest represented by the Collateral) against the claims and demands of all Persons whomsoever. The Borrower agrees that at any time, and from time to time, at the expense of the Borrower, the Borrower will promptly execute and deliver all further instruments, and take all further action, that may be necessary or desirable, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. The Borrower hereby authorizes the Agent to file any financing statement that (i) indicates the Collateral and (ii) contains any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including whether the Borrower is an organization, the type of organization and any organizational identification number issued to the Borrower. SECTION 4.2. Certificates, etc. The Borrower agrees that all certificates evidencing Pledged Interests, if any, delivered by the Borrower pursuant to this Pledge Agreement will be accompanied by duly executed undated blank stock powers, or other equivalent instruments of transfer reasonably acceptable to the Agent. The Borrower will, from time to time upon the reasonable request of the Agent, promptly deliver to the Agent such stock powers, instruments, and similar documents, reasonably satisfactory in form and substance to the Agent, with respect to the Collateral as the Agent may reasonably request and will, from time to time upon the reasonable request of the Agent after the occurrence of any Event of Default, promptly transfer any Pledged Interests into the name of any nominee designated by the Agent. SECTION 4.3. Continuous Pledge. Subject to Section 2.4, the Borrower will, at all times, keep pledged to the Agent pursuant hereto all Pledged Interests and all other shares of capital stock constituting Collateral, all Distributions with respect thereto, and all other Collateral and other securities, instruments, proceeds, and rights from time to time received by or distributable to the Borrower in respect of any Collateral. SECTION 4.4. Voting Rights. The Borrower agrees after any Event of Default shall have occurred and be continuing and the Agent has notified the Borrower of the Agent's intention to exercise its voting power under this Section 4.4 (i) the Agent may exercise (to the exclusion of the Borrower) the voting power and all other incidental rights of ownership with respect to any Pledged Interests or other shares of capital stock constituting Collateral and the Borrower hereby grants the Agent an irrevocable proxy, exercisable under such circumstances, to vote the Pledged Interests and such other Collateral; and (ii) promptly to deliver to the Agent such additional proxies and other documents as may be necessary to allow the Agent to exercise such voting power. The Agent agrees that unless an Event of Default shall have occurred and be continuing and the Agent shall have given the notice referred to in this Section 4.4, the Borrower shall have the exclusive voting power with respect to any membership interests including any of the Pledged Interests ) constituting Collateral and the Agent shall, upon the written request of the Borrower, promptly deliver such proxies and other documents, if any, as shall be reasonably requested by the Borrower which are necessary to allow the Borrower to exercise voting power with respect to any such membership interests (including any of the Pledged Interests ) constituting Collateral; provided, however, that no vote shall be cast, or consent, waiver, or ratification given, or action taken by the Borrower that would impair any Collateral or be inconsistent with or violate any provision of the Credit Agreements or any other Loan Document (including this Pledge Agreement). SECTION 4.5. Additional Undertakings. The Borrower will not, without the prior written consent of the Agent take or omit to take any action the taking or the omission of which would result in any impairment or alteration of any obligation of the maker of any instrument constituting Collateral. ARTICLE V THE AGENT SECTION 5.1. Agent Appointed Attorney-in-Fact. The Borrower hereby irrevocably appoints the Agent the Borrower's attorney-in-fact, with full authority in the place and stead of the Borrower and in the name of the Borrower or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including without limitation: (a) after the occurrence and continuance of an Event of Default, to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; and (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral. The Borrower hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2. Agent May Perform. If the Borrower fails to perform any agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Agent incurred in connection therewith shall be payable by the Borrower pursuant to Section 6.4. SECTION 5.3. Agent Has No Duty. The powers conferred on the Agent hereunder are solely to protect its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Property, whether or not the Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Borrower reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) The Agent may (i) transfer all or any part of the Collateral into the name of the Agent or its nominee, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (ii) notify the parties obligated on any of the Collateral to make payment to the Agent of any amount due or to become due thereunder, (iii)enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, (iv) endorse any checks, drafts, or other writings in the Borrower's name to allow collection of the Collateral, (v) take control of any proceeds of the Collateral, and (vi) execute (in the name, place and stead of the Borrower) endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. SECTION 6.2. Securities Laws. If the Agent shall determine to exercise its right to sell all or any of the Collateral pursuant to Section 6.1, the Borrower agrees that, upon request of the Agent, the Borrower will, at its own expense: (a) execute and deliver, and cause each Pledged Interests Issuer of the Collateral contemplated to be sold and the members thereof to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Agent, advisable to register such Collateral under the provisions of the Securities Act of 1933, as from time to time amended (the "Securities Act"), and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (b) use its best efforts to qualify the Collateral under the state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by the Agent; (c) cause each such issuer to make available to its security holders, as soon as practicable, an earnings statement that will satisfy the provisions of Section 11(a) of the Securities Act; and (d) do or cause to be done all such other acts and things as may be necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. SECTION 6.3. Compliance with Restrictions. The Borrower agrees that in any sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Borrower further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Agent be liable nor accountable to the Borrower for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. SECTION 6.4. Application of Proceeds. All cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral may thereafter be applied (after payment of any amounts payable to the Agent pursuant to Article III of the Credit Agreements and Section 6.4) in whole or in part by the Agent against, all or any part of the Secured Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after payment in full of all the Secured Obligations, and the termination of all Commitments, shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive such surplus. SECTION 6.5. Indemnity and Expenses. The Borrower hereby indemnifies and holds harmless the Agent from and against any and all claims, losses, and liabilities arising out of or resulting from this Pledge Agreement (including enforcement of this Pledge Agreement), except claims, losses, or liabilities resulting from the Agent's gross negligence or willful misconduct. Upon demand, the Borrower will pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Agent may incur in connection with: (a) the administration of this Pledge Agreement, the Credit Agreements and each other Loan Document; (b) the custody, preservation, use, or operation of, or the sale of, collection from, or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Agent hereunder; or (d) the failure by the Borrower to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Loan Document. This Pledge Agreement is a Loan Document executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments, etc. No amendment to or waiver of any provision of this Pledge Agreement nor consent to any departure by the Borrower herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 7.3. Protection of Collateral. The Agent may from time to time, at its option, perform any act which the Borrower agrees hereunder to perform and which the Borrower shall fail to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of an Event of Default) and the Agent may from time to time take any other action which the Agent reasonably deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. SECTION 7.4. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and, if to the Borrower, mailed or telegraphed or delivered to it at the address set forth below its signature hereto, if to the Agent, mailed or delivered to it, addressed to it at the address of the Agent specified in the 2002 Credit Agreement or, as to either party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 7.5. Section Captions. Section captions used in this Pledge Agreement are for convenience of reference only, and shall not affect the construction of this Pledge Agreement. SECTION 7.6. Severability. Wherever possible each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. SECTION 7.7. Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS 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. SECTION 7.8. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS PLEDGE AGREEMENT. SECTION 7.9. Waiver of Jury Trial. THE LENDER PARTIES AND THE BORROWER 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, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER PARTIES ENTERING INTO THE CREDIT AGREEMENTS AND EACH SUCH OTHER LOAN DOCUMENT. IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. CALPINE CORPORATION By:__________________________________________ Name:________________________________________ Title:_______________________________________ Address: 50 West San Fernando Avenue San Jose, CA 95113 Facsimile No.: (408) 995-0505 Attention: Senior Vice President-Finance THE BANK OF NOVA SCOTIA By:__________________________________________ Name:________________________________________ Title:_______________________________________ Address: 580 California Street Suite 2100 San Francisco, CA 94111 Facsimile No.: (415) 397-0791 Attention: Jon Burckin with a copy to: The Bank of Nova Scotia 600 Peachtree Street, N.E. Suite 2700 Atlanta, GA 30308 Attention: Hilma Gabbidon Administrative Agent Loan Administration Facsimile No.: (404) 888-8998 ATTACHMENT 1 to Pledge Agreement Pledged Interests Pledged Interest Issuer Description - ----------------------- ----------- Calpine Natural Gas Holdings, LLC Calpine Marketing, LLC Anacapa Land Company LLC CPN MEC Holdings, LLC Calpine Pittsburgh, LLC CPN Blue Spruce Holdings, LLC Calpine Calistoga Holdings, LLC Chippokes Energy Center, LLC Palmetto Energy Center, LLC Warnerville Energy Center, LLC Southpoint Energy Center, LLC Calpine Sonoran Pipeline, LLC Los Esteros Critical Energy Center, LLC EX-10 10 ex10-13.txt NOTE PLEDGE AGREEMENT THIS NOTE PLEDGE AGREEMENT (this "Pledge Agreement"), dated as of May 9, 2002, made by Calpine Corporation, a Delaware corporation (the "Borrower"), in favor of The Bank of Nova Scotia, as agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the Lender Parties (as defined below). W I T N E S S E T H: WHEREAS, pursuant to that certain Credit Agreement, dated as of March 8, 2002 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "2002 Credit Agreement"), among the Borrower, the various financial institutions as are or may become parties hereto (collectively, the "2002 Lenders"), The Bank of Nova Scotia and Bayerische Landesbank Girozentrale, as Lead Arrangers and Bookrunners on the Revolving Facility, Salomon Smith Barney Inc. and Deutsche Banc Alex. Brown Inc., as Lead Arrangers and Bookrunners on the Term B Facility, The Bank of Nova Scotia, as Joint Administrative Agent and Funding Agent, Citicorp USA, Inc., as Joint Administrative Agent, Bank of America, National Association and Credit Suisse First Boston, Cayman Islands Branch as Lead Arrangers and Syndication Agents for the Revolving Facility and TD Securities (USA) Inc. as Lead Arranger for the Revolving Facility, the Lenders have extended Commitments to make Loans and to issue Letters of Credit to the Borrower; and WHEREAS, pursuant to that certain Second Amended and Restated Credit Agreement, dated as of May 23, 2000 (together with all amendments and other modifications, if any, from time to time made thereto, the "2000 Credit Agreement" and together with the 2002 Credit Agreement, the "Credit Agreements"), among the Borrower, the various financial institutions as are or may become parties thereto (collectively, the "2000 Lenders" and together with the 2002 Lenders, the "Lenders"), Bayerische Landesbank Girozentrale as co-arranger and syndication agent for the 2000 Lenders and The Bank of Nova Scotia as lead arranger and administrative agent for the 2000 Lenders; and WHEREAS, as a condition precedent to the effectiveness of that certain First Amendment to Credit Agreement, dated as of even date herewith, the Borrower is required to execute and deliver this Pledge Agreement; and WHEREAS, the Borrower has duly authorized the execution, delivery and performance of this Pledge Agreement; and WHEREAS, it is in the best interests of the Borrower to execute this Pledge Agreement inasmuch as the Borrower will derive substantial direct and indirect benefits from the Loans made and Letters of Credit issued from time to time to the Borrower by the Lenders pursuant to the Credit Agreements; NOW THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) and to issue Letters of Credit for the account of the Borrower pursuant to the Credit Agreements, the Borrower agrees, for the benefit of each Lender Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Pledge Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Agent" is defined in the preamble. "Borrower" is defined in the preamble. "Collateral" is defined in Section 2.1. "Credit Agreements" is defined in the second recital. "Lender Party" means, as the context may require, any Lender, Issuer or the Agent and each of its respective successors, transferees and assigns under either of the Credit Agreements. "Lenders" is defined in the second recital. "Pledge Agreement" is defined in the preamble. "Pledged Note Issuer" means each Person identified in Attachment 1 hereto as the issuer of the Pledged Note identified opposite the name of such Person. "Pledged Notes" means all promissory notes of any Pledge Note Issuer which are delivered by the Borrower to the Agent as Pledged Property hereunder, as such promissory notes, in accordance with Section 4.5, are amended, modified or supplemented from time to time and together with any promissory note of any Pledged Note Issuer taken in extension or renewal. "Pledged Property" means all Pledged Notes and all other assignments of any amounts due or to become due, all other instruments which are now being delivered by the Borrower to the Agent or may from time to time hereafter be delivered by the Borrower to the Agent for the purpose of pledge under this Pledge Agreement or any other Loan Document, and all instruments, proceeds and rights from time to time received by or distributable to the Borrower in respect of any of the foregoing. "Secured Obligations" is defined in Section 2.2. "U.C.C." means the Uniform Commercial Code as in effect in the State of New York. SECTION 1.2. Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Pledge Agreement, including its preamble and recitals, have the meanings provided in the Credit Agreements. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Pledge Agreement, including its preamble and recitals, with such meanings. ARTICLE II PLEDGE SECTION 2.1. Grant of Security Interest. The Borrower hereby pledges, hypothecates, assigns, charges, mortgages, delivers, and transfers to the Agent, for its benefit and the ratable benefit of each of the Lender Parties, and hereby grants to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in, all of the following property (the "Collateral"): (a) all promissory notes of each Pledge Note Issuer identified in Attachment 1 hereto; (b) all other Pledged Notes issued from time to time; (c) all other Pledged Property, whether now or hereafter delivered to the Agent in connection with this Pledge Agreement; (d) all interest and other payments and rights with respect to any Pledged Property; and (e) all proceeds of any of the foregoing. SECTION 2.2. Security for Obligations. This Pledge Agreement secures the payment and performance in full of all Obligations of the Borrower now or hereafter existing under the Credit Agreements, the Notes, each Letter of Credit and each other Loan Document to which the Borrower is or may become a party, whether for principal, interest, costs, fees, expenses, or otherwise, and all obligations of the Borrower now or hereafter existing under this Pledge Agreement and each other Loan Document to which it is or may become a party (all such obligations of the Borrower being the "Secured Obligations"). SECTION 2.3. Delivery of Pledged Property. All instruments representing or evidencing any Collateral, including all Pledged Notes, shall be delivered to and held by or on behalf of (and, in the case of Pledged Notes, endorsed to the order of) the Agent pursuant hereto, shall be in suitable form for transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank. SECTION 2.4. Payment on Pledged Notes. In the event that any payment of principal or interest is to be made on any Pledged Note at a time when no Default or Event of Default has occurred and is continuing, such payment may be paid directly to the Borrower. If an Event of Default or Default has occurred and is continuing, then any such payment shall be paid directly to the Agent. SECTION 2.5. Continuing Security Interest; Transfer of Note. This Pledge Agreement shall create a continuing security interest in the Collateral and subject to Section 8.1.9 of the Credit Agreement shall (a) remain in full force and effect until payment in full of all Secured Obligations and the termination of all Commitments, (b) be binding upon the Borrower and its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each other Lender Party. Without limiting the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any right or obligation under the Loan Documents to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Pledge Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 of each of the Credit Agreements. Upon the indefeasible payment in full, in cash, of all Secured Obligations and the termination of all Commitments, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Borrower. Upon any such termination, the Agent will, at the Borrower's sole expense, deliver to the Borrower, without any representations, warranties or recourse of any kind whatsoever, all certificates and instruments representing or evidencing all Pledged Property, together with all other Collateral held by the Agent hereunder, and execute and deliver to the Borrower such documents as the Borrower shall reasonably request to evidence such termination. SECTION 2.6. Security Interest Absolute. All rights of the Agent and the security interests granted to the Agent hereunder, and all obligations of the Borrower hereunder, shall be absolute and unconditional, irrespective of (a) any lack of validity or enforceability of either of the Credit Agreements, any Note or any other Loan Document, (b) the failure of any Lender Party or any holder of any Note (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any other Obligor or any other Person under the provisions of either of the Credit Agreements, any Note, any other Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any Obligations of the Borrower or any other Obligor, (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations or any other extension, compromise or renewal of any Obligation of the Borrower or any other Obligor, (d) any reduction, limitation, impairment or termination of any Obligations of the Borrower or any other Obligor for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the Borrower hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligations of the Borrower, any other Obligor or otherwise, (e) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of either of the Credit Agreements, any Note or any other Loan Document, (f) any addition, exchange, release, surrender or non-perfection of any collateral (including the Collateral), or any amendment to or waiver or release of or addition to or consent to departure from any guaranty, for any of the Obligations, or (g) any other circumstances which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any other Obligor, any surety or any guarantor. SECTION 2.7. Subrogation, etc. The Borrower will not exercise any rights which it may acquire by reason of any payment made hereunder, whether by way of subrogation, reimbursement or otherwise until the prior indefeasible payment in full, in cash, of all Obligations of the Borrower and each other Obligor. Any amount paid to the Borrower on account of any payment made hereunder prior to the payment in full of all Obligations of the Borrower and each other Obligor shall be held in trust for the benefit of the Lender Parties and each holder of a Note and shall immediately be paid to the Lender Parties and each holder of a Note and credited and applied against the Obligations of the Borrower and each other Obligor, whether matured or unmatured, in accordance with the terms of the Credit Agreements; provided, however, that if (a) the Borrower has made payment to the Lender Parties and each holder of a Note of all or any part of the Obligations of the Borrower or any other Obligor, and (b) all Obligations of the Borrower and each other Obligor have been indefeasibly paid in full, in cash, and all Commitments have been permanently terminated, each Lender Party and each holder of a Note agrees that, at the Borrower's request, the Lender Parties and the holders of the Notes will execute and deliver to the Borrower appropriate documents (without recourse and without representation or warranty and at the sole cost and expense of Borrower) necessary to evidence the transfer by subrogation to the Borrower of an interest in the Obligations of the Borrower and each other Obligor resulting from such payment by the Borrower. In furtherance of the foregoing, for so long as any Obligations or Commitments remain outstanding, the Borrower shall refrain from taking any action or commencing any proceeding against the Borrower or any other Obligor (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Pledge Agreement to any Lender Party or any holder of a Note. SECTION 2.8. Waiver of Subrogation. Until such time as the Obligations have been indefeasibly paid in full, in cash, and the Commitments have been terminated, the Borrower hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against the Borrower or any other Obligor that arise from the existence, payment, performance or enforcement of the Borrower's obligations under this Pledge Agreement or any other Loan Document, including any right of subrogation, reimbursement, exoneration, or indemnification, any right to participate in any claim or remedy of the Lender Parties against the Borrower or any other Obligor or any collateral which the Agent now has or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including the right to take or receive from the Borrower or any other Obligor, directly or indirectly, in cash or other property or by set-off or in any manner, payment or security on account of such claim or other rights. If any amount shall be paid to the Borrower in violation of the preceding sentence and the Obligations shall not have been indefeasibly paid in full, in cash, and the Commitments have not been terminated, such amount shall be deemed to have been paid to the Borrower for the benefit of, and held in trust for, the Lender Parties, and shall forthwith be paid to the Lender Parties to be credited and applied upon the Obligations, whether matured or unmatured. The Borrower acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Credit Agreements and that the waiver set forth in this Section is knowingly made in contemplation of such benefits. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Warranties, etc. The Borrower represents and warrants unto each Lender Party, as at the date of each pledge and delivery hereunder (including each pledge and delivery of a Pledged Note) by the Borrower to the Agent of any Collateral, as set forth in this Article. SECTION 3.1.1 Ownership, No Liens, etc. The Borrower is the legal and beneficial owner of, and has good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all liens, security interests, options, or other charges or encumbrances, except any lien or security interest granted pursuant hereto in favor of the Agent. SECTION 3.1.2 Valid Security Interest. The delivery of such Collateral to the Agent is effective to create a valid, perfected, first priority security interest in such Collateral and the proceeds thereof, securing the Secured Obligations. No other filing or other action will be necessary to perfect or protect such security interest. SECTION 3.1.3 As to Pledged Notes. In the case of each Pledged Note constituting such Collateral, all of such Pledged Notes are duly authorized, executed, endorsed, issued and delivered, and are the legal, valid and binding obligations of the issuers thereof, and are not in default. ARTICLE IV COVENANTS SECTION 4.1. Protect Collateral; Further Assurances, etc. The Borrower will not sell, assign, transfer, pledge, or encumber in any other manner the Collateral (except in favor of the Agent hereunder and as otherwise expressly permitted by the Credit Agreements). The Borrower will warrant and defend the right and title herein granted unto the Agent in and to the Collateral (and all right, title, and interest represented by the Collateral) against the claims and demands of all Persons whomsoever. The Borrower agrees that at any time, and from time to time, at the expense of the Borrower, the Borrower will promptly execute and deliver all further instruments, and take all further action, that may be necessary or desirable, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. The Borrower hereby authorizes the Agent to file any financing statement that (i) indicates the Collateral and (ii) contains any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including whether the Borrower is an organization, the type of organization and any organizational identification number issued to the Borrower. SECTION 4.2. [Intentionally Omitted]. SECTION 4.3. Continuous Pledge. Subject to Section 2.4, the Borrower will, at all times, keep pledged to the Agent pursuant hereto all Pledged Notes, all interest, principal and other proceeds received by the Agent with respect to the Pledged Notes and all other Collateral. SECTION 4.4. [Intentionally Omitted] SECTION 4.5. Additional Undertakings. Except as otherwise contemplated by Section 8.1.10 of the Credit Agreement, the Borrower will not, without the prior written consent of the Agent (not to be unreasonably withheld): (a) enter into any agreement amending, supplementing, or waiving any provision of any Pledged Note (including any underlying instrument pursuant to which such Pledged Note is issued) or compromising or releasing or extending the time for payment or any obligation of the maker thereof; or (b) take or omit to take any action the taking of the omission of which would result in any impairment of alteration of any obligation of the maker of any Pledged Note or other instrument constituting Collateral. ARTICLE V THE AGENT SECTION 5.1. Agent Appointed Attorney-in-Fact. The Borrower hereby irrevocably appoints the Agent the Borrower's attorney-in-fact, with full authority in the place and stead of the Borrower and in the name of the Borrower or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including without limitation: (a) after the occurrence and continuance of an Event of Default, to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; and (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral. The Borrower hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2. Agent May Perform. If the Borrower fails to perform any agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Agent incurred in connection therewith shall be payable by the Borrower pursuant to Section 6.4. SECTION 5.3. Agent Has No Duty. The powers conferred on the Agent hereunder are solely to protect its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Property, whether or not the Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Borrower reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) The Agent may (i) transfer all or any part of the Collateral into the name of the Agent or its nominee, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (ii) notify the parties obligated on any of the Collateral to make payment to the Agent of any amount due or to become due thereunder, (iii) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, (iv) endorse any checks, drafts, or other writings in the Borrower's name to allow collection of the Collateral, (v) take control of any proceeds of the Collateral, and (vi) execute (in the name, place and stead of the Borrower) endorsements, assignments and other instruments of conveyance or transfer with respect to all or any of the Collateral. SECTION 6.2. [Intentionally Omitted]. SECTION 6.3. Compliance with Restrictions. The Borrower agrees that in any sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Borrower further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Agent be liable nor accountable to the Borrower for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. SECTION 6.4. Application of Proceeds. All cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral may thereafter be applied (after payment of any amounts payable to the Agent pursuant to Article III of the Credit Agreements and this Section 6.4) in whole or in part by the Agent against, all or any part of the Secured Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after payment in full of all the Secured Obligations, and the termination of all Commitments, shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive such surplus. SECTION 6.5. Indemnity and Expenses. The Borrower hereby indemnifies and holds harmless the Agent from and against any and all claims, losses, and liabilities arising out of or resulting from this Pledge Agreement (including enforcement of this Pledge Agreement), except claims, losses, or liabilities resulting from the Agent's gross negligence or willful misconduct. Upon demand, the Borrower will pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Agent may incur in connection with: (a) the administration of this Pledge Agreement, the Credit Agreements and each other Loan Document; (b) the custody, preservation, use, or operation of, or the sale of, collection from, or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Agent hereunder; or (d) the failure by the Borrower to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Loan Document. This Pledge Agreement is a Loan Document executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments, etc. No amendment to or waiver of any provision of this Pledge Agreement nor consent to any departure by the Borrower herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 7.3. Protection of Collateral. The Agent may from time to time, at its option, perform any act which the Borrower agrees hereunder to perform and which the Borrower shall fail to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of an Event of Default) and the Agent may from time to time take any other action which the Agent reasonably deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. SECTION 7.4. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and, if to the Borrower, mailed or telegraphed or delivered to it at the address set forth below its signature hereto, if to the Agent, mailed or delivered to it, addressed to it at the address of the Agent specified in the 2002 Credit Agreement or, as to either party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 7.5. Section Captions. Section captions used in this Pledge Agreement are for convenience of reference only, and shall not affect the construction of this Pledge Agreement. SECTION 7.6. Severability. Wherever possible each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. SECTION 7.7. Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS 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. SECTION 7.8. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS PLEDGE AGREEMENT. SECTION 7.9. Waiver of Jury Trial. THE LENDER PARTIES AND THE BORROWER 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, UNDER, OR IN CONNECTION WITH, THIS PLEDGE AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER PARTIES OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER PARTIES ENTERING INTO THE CREDIT AGREEMENTS AND EACH SUCH OTHER LOAN DOCUMENT. IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. CALPINE CORPORATION By:__________________________________________ Name:________________________________________ Title:_______________________________________ Address: 50 West San Fernando Avenue San Jose, CA 95113 Facsimile No.: (408) 995-0505 Attention: Senior Vice President-Finance THE BANK OF NOVA SCOTIA By:__________________________________________ Name:________________________________________ Title:_______________________________________ Address: 580 California Street Suite 2100 San Francisco, CA 94111 Facsimile No.: (415) 397-0791 Attention: Jon Burckin with a copy to: The Bank of Nova Scotia 600 Peachtree Street, N.E. Suite 2700 Atlanta, GA 30308 Attention: Hilma Gabbidon Administrative Agent Loan Administration Facsimile No.: (404) 888-8998 ATTACHMENT 1 to Pledge Agreement Pledged Notes Pledged Note Issuer Description - ------------------- ----------- All notes to be delivered by Calpine Corporation to the Agent in compliance with Section 8.1.10 of the Credit Agreement. -----END PRIVACY-ENHANCED MESSAGE-----