Energy

Independent Power Producers

High Yield Research

April 27, 2004
Greg Imbruce 203/708-5804 gimbruce@jefco.com

Calpine Corp.

(CPN)

Tiverton/Rumford 9% Pass Through Certificates 18

Amt. O/S $MM $366.0 Next Call Date Price NA MW+50 Yield to Worst YTW STW Yrs. 11.12% 646 14.2 Cpn. Freq. Nxt. Cpn. Dt. 2 - 7/15/04 Jefco Rec. Buy

Seniority

Cpn.

Mty.

Rating B3 / B

Price 85.0

CY 10.59%

TIVERTON/RUMFORD PWR ASS Pass Thru Cert. 9.000% 7/15/18

Recommendation
We recommend the Tiverton/Rumford 9.00% Pass Through Certificates 18 (Certificates) as a Buy at 85.0 (11.12% YTW, +646 STW) and maintain a 97-price target on the project debt due to the following: Secured Interest: Secured First Lien interest in almost 500 MWs of Northeast, natural gas-fired, baseload generating capacity; Greater Transparency: Our comfort in learning that the 2003 capacity factors for the Tiverton and Rumford plants (disclosed for the first time in most recent 10K), was 80% and 70%, respectively (75% weighted average capacity factor); Corp. Guarantee: Calpine Corp. guaranteed leases (future payments totaled $824 mm at the beginning of 2004); Credit Statistics: Although Calpine does not breakout the Tiverton/Rumford financials, we estimate the plants generate $90 mm in aggregate annual EBITDA (based on the median $10.88/MWH spark spread for 1998-today and below 2003s $14.45/MWH average spark spread), which translates to acceptable credit statistics of 2.7x EBITDA/Cash Interest Expense and 4.0x Total Debt/EBITDA; Asset Coverage: Adequate asset coverage of 1.0x in the downside case (assumes the unlikely scenario that Calpine files Bankruptcy and the leases are deemed "real property", in which case the Lease Claims would be limited to 15% of the remaining lease payments) and 2.7x in the upside case (assumes the leases are considered financing arrangements); New Contracts: The Tiverton and Rumford plants were included in CPNs recently announced five power contracts to supply 350-MWs of electricity to five New Englandbased electric distribution companies for 2004 delivery although the contracts are most likely held at Calpine Energy Services (CES) and excluded from the Certificates collateral package, these are the first power sales contracts for the two plants and a positive for the project debt (contracts range from three to six months); Amortization: The Certificates amortization schedule reduces the 14-year maturity to an 8-year duration, due to an aggressive schedule in the outer years, specifically the $180 mm amortization payment due 1/15/10 (see amortization schedule on page 3); Relative Yield: Attractive relative yield vs. the Single-B-Rated index (7.22% YTW, +399 STW)

Swap Ideas
We recommend that investors involved in CPN at the Corp. level consider a more conservative approach to the name through the Certificates at the project level. We sense that the Companys May 6th earnings release may include weaker than expected results due to softer year-over-year spark spreads for the Companys uncontracted generation, in combination with an 11% reduction in 2004 contracted generation (88.0 MM MWH) vs. 2003 (98.9 MM MWH). We would consider
Calpine Corp.

Energy: Independent Power Producers

High Yield Research

swapping out of the 8.75% Corp. Second Lien Notes (90, 10.46% YTW, +612 STW), for example, and in the process of acquiring First Lien project debt for Corp. Second Lien debt, pick-up 66 bps in yield and 34 bps in spread-over-treasuries. Another swap idea is to sell the 8.5% Sr. Notes 11 (72, 15.25% YTW, +1,134) and buy the Certificates. This is a more costly approach in that a holder would be relinquishing over 400 bps in yield and almost 500 bps in spread, however, a defensive approach in which we expect current Sr. Noteholders will benefit in the coming weeks.

Sensitivity Analysis
The below asset coverages and theoretical prices are based on varying Corp. Unsecured future recoveries. As our analysis indicates, in both the Base and High Case, the theoretical price never falls below PAR due to ample asset coverage (1.8x minimum). In fact, the theoretical price only falls below PAR in the Low Case, which assumes CPN files bankruptcy and the Lease Claims are limited to 15% of the remaining lease payments due to being deemed true leases. Even in this pessimistic scenario, however, asset coverage exceeds 0.9x (6-points or 7% above the Certificates current trading price), which would result in a 12% Total Return if the Company filed bankruptcy in 2008, for example. Additionally, the Certificates reduced exposure to Corp., should limit volatility - we estimate a 3-point price move in the Corp. Sr. Notes theoretically results in a 1point price change in the Certificates.
SENSITIVITY ANALYSIS Corp. Unsec. Recovery Theory Px 100% 76% 95% 72% 90% 68% 85% 64% 80% 60% 75% 57% 70% 53% 65% 49% 60% 45% 55% 42% 50% 38% Low Case Asset Cov. Theory Px 1.08x 81% 1.06x 80% 1.04x 79% 1.02x 77% 1.01x 76% 0.99x 75% 0.97x 74% 0.96x 72% 0.94x 71% 0.92x 70% 0.91x 68% Base Case Asset Cov. Theory Px 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% 1.89x 100% High Case Asset Cov. Theory Px 2.88x 100% 2.77x 100% 2.66x 100% 2.56x 100% 2.45x 100% 2.34x 100% 2.23x 100% 2.13x 100% 2.02x 100% 1.91x 100% 1.81x 100%

*Theoretical prices are based on PV20, 18-month recovery.

Collateral
The Certificates are secured by the Tiverton (240-MW) and Rumford (251-MW) power generation plants, located in Tiverton, Rhode Island and Rumford, Maine, respectively. In addition, Calpine Corp. guaranteed the associated lease obligations. There is no Corp. guarantee, however, provided for the plants themselves, and any of Calpine's contractual rights against third parties relating to the facilities are excluded from the collateral package. Leases In the unlikely scenario that Calpine were to become a debtor in a case under the Bankruptcy Code, the bankruptcy court could hold that the leases are true leases of "real property" rather than financing arrangements. In that event, Bankruptcy Code Section 502(b)(6) could limit the owner lessor's claims against Calpine under the guarantees for amounts due under the leases in the same manner that it would limit the owner lessor's claims against Calpine for those amounts in the bankruptcy case. Bankruptcy Code Section 502(b)(6) limits the owner lessor's claims against the debtor for damages resulting from such rejection or other termination of either lease, whether occurring before or after the commencement of the debtor's bankruptcy case, to the greater of (a) one year's rent under the applicable lease or (b) 15% of the remaining rent due under the applicable lease (not to exceed three years' rent). The risk in purchasing the Certificates, therefore, is that if CPN files bankruptcy and the court deems the operating leases "real property," thereby limiting the substance of the Calpine guarantees.
[PLEASE SEE IMPORTANT DISCLOSURE INFORMATION ON THE LAST PAGE OF THIS REPORT.]

Calpine Corp.

[Page 2 of 7]

Energy: Independent Power Producers

High Yield Research

As our analysis indicates, however, the asset coverage exceeds 1.0x (assumes a 90% future recovery for Calpine Unsecured claims) in such scenario, which implies a 79-theoretical price (PV20, 18-months). The Low Case, therefore, is just 6-points or 9% below its current trading level, which we believe would be recovered on a total return basis noting our estimate of $900 mm for CPNs 3/31/04 liquidity ($300 fully available WorkCap Revolver + $650 mm in unrestricted cash).

Amortization Schedule
The Certificates begin amortizing in July 2004, with more than 49% ($180 mm) of the original amount issued, amortizing in January 2010. Scheduled principal payments are as follows:
AMORTIZATION SCHEDULE Repay Amort. % of Orig. Pmt. Pmt. Amt. Issued 7/15/04 7/15/06 7/15/07 1/15/08 1/15/09 1/15/10 1/15/11 1/15/12 1/15/13 1/15/14 1/15/15 1/15/16 1/15/17 Total $2.4 $10.9 $9.1 $7.2 $9.3 $180.0 $50.3 $28.8 $13.8 $15.4 $15.0 $18.7 $3.2 $364.0 0.7% 3.0% 2.5% 2.0% 2.5% 49.2% 13.7% 7.9% 3.8% 4.2% 4.1% 5.1% 0.9% 99.5% End Bal. $366.0 $363.6 $352.7 $343.6 $336.5 $327.1 $147.1 $96.8 $68.1 $54.3 $38.9 $23.9 $5.2 $2.0 $2.0

Valuation
The power generation plants securing the Certificates are quality assets due to their low heat rates, 97% baseload capacity, and location, location, location - the Northeast - where capacity factors and spark spreads remain relatively strong. We believe including the Tiverton and Rumford facilities in NPCC-Zone A (Western New York) is most appropriate, in place of the more general NEPOOL region in which Calpine lists these plants. Our asset valuation for both plants is based on a $10.88/MWh spark spread (median for 1998-Today and below 2003s $14.45/MWH average) and the 2003 capacity factors for each plant (75% weighted average, see Asset Value Assumptions). Under these assumptions, we value the plants at $270 mm or $550 per kW. As the below table highlights, our 97-price target for the Certificates is based on a weighted average of probabilities assigned to each of the three Cases.
Theoretical Price 79 100 100 97 Probability 16% 80% 4%

Low Base High Weighted Avg.

The treatment of the leases differentiates each of the Cases as summarized below. Base Case: The Base Case assumes that Calpine remains an ongoing operation and avoids bankruptcy in the long-term (80% probability assigned). In addition to the plants, we valued the leases at $423 mm utilizing a PV9. The total asset value, therefore, is $693 mm in the Base Case, which provides 1.9x asset coverage and a theoretical price of PAR (PV20, 18-months).
[PLEASE SEE IMPORTANT DISCLOSURE INFORMATION ON THE LAST PAGE OF THIS REPORT.]

Calpine Corp.

[Page 3 of 7]

Energy: Independent Power Producers

High Yield Research

Low Case (15% Leases): Our Low Case assumes Calpine files bankruptcy (16% overall probability assigned, which is based on 20% probability that CPN files bankruptcy in combination with an 80% probability that, in bankruptcy, the court determines the leases to be True Leases of Real Property). We expect the Lease Claims would be limited to 15% of the $824 mm in future lease payments (in place at the beginning of 2004) or $124 mm. We then apply an expected 90% Corp. Unsecured recovery to calculate the $111 mm Lease Claim recovery. In addition to the $270 mm plant value, therefore, the Total Recovery estimate is $281 mm in the Low Case, representing 1.0x asset coverage and a theoretical price of 79 (PV20, 18-months). High Case (100% Leases): Our High Case assumes Calpine files bankruptcy (4% overall probability assigned, which is based on 20% probability that CPN files bankruptcy in combination with a 20% probability that, in bankruptcy, the court determines the leases to be Financing Arrangements). As such, we expect the Lease Claim would be equal to 100% of the $824 mm in future lease payments (in place at the beginning of 2004). Although the increased Lease Claim would reduce the Calpine Corp. Unsecured recovery to 86% from the 90% used in the Low Case, the $974 mm Total Recovery in the High Case represents 2.7x asset coverage and a theoretical price of PAR (PV20, 18months).
TIVERTON/RUMFORD VALUATION
Low BK w/ Leases @ 15% PLANT VALUE ($MM) Tiverton Rumford Plant Value LEASE VALUE (PV9) Tiverton Rumford Lease Value TOTAL ASSET VALUE Tiverton Rumford Total Asset Value MW'S Tiverton Rumford Total $ PER KW Tiverton Rumford Total EQUITY VALUE Asset Value Debt Outstanding Equity Value / (Deficiency) LEASE CLAIM Future Lease Pmts. % of Future Lease Pmts. Applied as Claim Lease Claim Calpine Corp. - Unsecured Future Recovery Lease Claim Recovery TOTAL RECOVERY Asset Value Lease Claim Recovery Total Recovery VALUATION & ASSET COVERAGE Asset Coverage Excl. Lease Corp. Guarantee Lease Corp. Guarantee Total Asset Coverage Theoretical Price (PV20,18-Mths) # # $142 $128 $270 ---$142 $128 $270 240 251 491 $592 $510 $550 $270 $366 ($96) $824 15% $124 90% $111 $270 $111 $381 0.74x 0.30x 1.04x 79% Base Ongoing Operation PV9 $142 $128 $270 $212 $212 $423 $354 $340 $693 240 251 491 $592 $510 $550 $693 $366 $327 $824 ----$693 -$693 1.89x -1.89x 100% High BK w/ Leases @ 100% $142 $128 $270 ---$142 $128 $270 240 251 491 $592 $510 $550 $270 $366 ($96) $824 100% $824 86% $704 $270 $704 $974 0.74x 1.92x 2.66x 100%

[PLEASE SEE IMPORTANT DISCLOSURE INFORMATION ON THE LAST PAGE OF THIS REPORT.]

Calpine Corp.

[Page 4 of 7]

Energy: Independent Power Producers

High Yield Research

Asset Value Assumptions

The above asset valuation is based on a 15-year DCF analysis utilizing a 15% discount factor and the following input: Spark Spread: Variable Costs: Natural Gas Price: Other Variable Costs: Capacity Factors Tiverton: Rumford: Plant Heat Rate: Annual Costs: G&A: Maintenance CapEx: Debt Financing: Debt % of Total Transaction: Cost of Capital: $10.88/MWh (Median for 1998-Today) $5.50/mmBtu $2.00/MWh 80% 70% 7,000/kWh $3.0 mm $2.0 mm 70% 10%

Asset Description
Project TIVERTON Tiverton (RI) Rumford (ME) NERC Region NPCC-Zone A NPCC-Zone A Type Baseload Baseload Gross Interest MW 240 251 491 CPN Net Interest 100% 100% Net Interest MW 240 251 491 2003 Reported Generation MWh 1,689,698 1,547,533 3,237,231 Net Annual Capacity MWh 2,102,400 2,198,760 4,301,160 2003 Capacity Factor % 80% 70% 75% Spark Spread $/MWh $10.88 $10.88 Asset Value $MM $142.1 $128.0 $270.1 Unit Value $/kW $592 $510 $550

Tiverton (Tiverton, Rhode Island): The Tiverton facility is a 240-MW combined-cycle (baseload) facility in Tiverton, Rhode Island. Construction began in late 1998 and started commercial production in October 2000. Outside of the recently announced short-term contracts, Tiverton has not tied its output under a long-term power sales agreement. Instead, Tiverton's facility's output is sold on a wholesale basis to load aggregators and distributors either through bilateral contracts or into the Independent System Operator (ISO) spot electric market. Natural gas for the Tiverton facility is delivered by Aquila Energy Marketing Corporation and then transported to Tiverton using the Algonquin Gas Transmission Co. pipeline. The Tiverton lessee has an Interconnection Agreement with New England Power Co. (NEP). Rumford (Rumford, Maine): The Rumford facility is a 251-MW baseload facility (14-MW peaking capacity included), located in Rumford, Maine. Construction began in late 1998 and started commercial production in December 2000. Outside of the recently announced shortterm contracts, Rumford sells its output on a wholesale basis to load aggregators and distributors either through bilateral contracts or into the Independent System Operator (ISO) spot electric market. Natural gas for the Rumford facility is delivered by Aquila to Dawn, Ontario and then transported to Rumford using the TransCanada Pipelines Limited and Portland Natural Gas Transmission System pipelines. The Rumford lessee has an Interconnection Agreement with Central Maine Power.

[PLEASE SEE IMPORTANT DISCLOSURE INFORMATION ON THE LAST PAGE OF THIS REPORT.]

Calpine Corp.

[Page 5 of 7]

Energy: Independent Power Producers

High Yield Research

Cash Flow Structure

Calpine (Guarantor)
100% Indirect Owner 100% Indirect Owner

Tiverton Lessee
Rent assigned by owner lessor to indenture trustee Debt Service on Lessor Notes

Guaranty payments assigned by owner lessor to indenture trustee

Rumford Lessee
Rent assigned by owner lessor to indenture trustee Rent Less Debt Service on Lessor Notes

Indenture Trustee

Pass Through Trust

Pass Through Cert. Distributions

Owner Lessor

Pass Through Certificate Holders

Owner Participant

North American Electric Reliability Council Region (NERC) Map

Source: North American Energy Council (NERC)

[PLEASE SEE IMPORTANT DISCLOSURE INFORMATION ON THE LAST PAGE OF THIS REPORT.]

Calpine Corp.

[Page 6 of 7]

Energy: Independent Power Producers

High Yield Research

2004 Jefferies & Company, Inc. All rights reserved.

I, Greg Imbruce, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
This material has been prepared by Jefferies & Company, Inc. ("Jefferies") a U.S.-registered broker-dealer, employing appropriate expertise, and in the belief that it is fair and not misleading. It is approved for distribution in the United Kingdom by Jefferies International Limited ("JIL") regulated by the Financial Services Authority ("FSA"). The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore except for any obligations under the rules of the FSA, we do not guarantee its accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date, and are subject to change without notice. Jefferies and JIL and their affiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or principal for their own account. This material is intended for use only by professional or institutional investors falling within articles 19 or 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001and not the general investing public. None of the investments or investment services mentioned or described herein are available to other persons in the U.K. and in particular are not available to "private customers" as defined by the rules of the FSA or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario)."
[PLEASE SEE IMPORTANT DISCLOSURE INFORMATION ON THE LAST PAGE OF THIS REPORT.]

Calpine Corp.

[Page 7 of 7]