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<ACCESSION-NUMBER>0000916457-02-000026
<TYPE>10-Q
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<PERIOD>20020630
<FILING-DATE>20020812
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>CALPINE CORP
<CIK>0000916457
<ASSIGNED-SIC>4911
<IRS-NUMBER>770212977
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
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<FILE-NUMBER>001-12079
<FILM-NUMBER>02725682
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<BUSINESS-ADDRESS>
<STREET1>50 WEST SAN FERNANDO ST
<CITY>SAN JOSE
<STATE>CA
<ZIP>95113
<PHONE>4089955115
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>50 W SAN FERNANDO
<STREET2>SUITE 500
<CITY>SAN JOSE
<STATE>CA
<ZIP>95113
</MAIL-ADDRESS>
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<TYPE>10-Q
<SEQUENCE>1
<FILENAME>q2-2002.txt
<TEXT>


================================================================================

                                  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 June 30, 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:

376,699,769  shares of Common Stock,  par value $.001 per share,  outstanding on
August 8, 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,  the  quarterly  report on Form 10-Q for the three  months  ended March 31,
2002,  has  subsequently  been reviewed by Deloitte and Touche LLP in accordance
with Statement on Auditing Standards No. 71, "Interim Financial Information."

================================================================================


<PAGE>

                      CALPINE CORPORATION AND SUBSIDIARIES
                               Report on Form 10-Q
                       For the Quarter Ended June 30, 2002
<TABLE>
<CAPTION>
                                      INDEX


                                                                                                                         Page No.
<S>                                                                                                                         <C>
PART I - FINANCIAL INFORMATION
  Item 1.  Financial Statements.
              Consolidated Condensed Balance Sheets June 30, 2002 and December 31, 2001...........................           3
              Consolidated Condensed Statements of Operations For the Three and Six Months
                Ended June 30, 2002 and 2001......................................................................           4
              Consolidated Condensed Statements of Cash Flows For the Six Months
                Ended June 30, 2002 and 2001......................................................................           6
              Notes to Consolidated Condensed Financial Statements June 30, 2002..................................           7
  Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations..................          25
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk.............................................          45
PART II - OTHER INFORMATION
  Item 1.  Legal Proceedings......................................................................................          46
  Item 4.  Submission of Matters to a Vote of Security Holders....................................................          47
  Item 6.  Exhibits and Reports on Form 8-K.......................................................................          48
Signatures........................................................................................................          51
</TABLE>





























































                                      -2-
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

                      CALPINE CORPORATION AND SUBSIDIARIES
                      Consolidated Condensed Balance Sheets
                       June 30, 2002 and December 31, 2001
               (In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
                                                                                                       June 30,        December 31,
                                                                                                         2002              2001
                                                                                                     ------------      -------------
                                                                                                      (unaudited)
                                             ASSETS
<S>                                                                                                  <C>               <C>
Current assets:
   Cash and cash equivalents....................................................................     $    528,767      $  1,525,417
   Accounts receivable, net.....................................................................        1,009,552           966,080
   Margin deposits and other prepaid expense....................................................          244,454           480,656
   Inventories..................................................................................           96,662            78,862
   Current derivative assets....................................................................          583,943           763,162
   Other current assets.........................................................................          227,948           193,525
                                                                                                     ------------      ------------
      Total current assets......................................................................        2,691,326         4,007,702
                                                                                                     ------------      ------------
Restricted cash.................................................................................          107,298            95,833
Notes receivable, net of current portion........................................................          173,155           158,124
Project development costs.......................................................................          187,372           179,783
Investments in power projects...................................................................          431,046           378,614
Deferred financing costs........................................................................          229,739           210,811
Property, plant and equipment, net..............................................................       17,118,306        15,276,056
Goodwill and other intangible assets, net.......................................................          140,984           153,115
Long-term derivative assets.....................................................................          665,787           564,952
Other assets....................................................................................          484,723           304,562
                                                                                                     ------------      ------------
        Total assets............................................................................     $ 22,229,736      $ 21,329,552
                                                                                                     ============      ============
                              LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable.............................................................................     $  1,250,424      $  1,283,843
   Accrued payroll and related expense..........................................................           49,899            57,285
   Accrued interest payable.....................................................................          186,302           160,115
   Notes payable and borrowings under lines of credit, current portion..........................           10,523            23,238
   Capital lease obligation, current portion....................................................            2,277             2,206
   Construction/project financing, current portion..............................................          147,363                --
   Zero-Coupon Convertible Debentures Due 2021..................................................               --           878,000
   Current derivative liabilities...............................................................          473,140           625,339
   Other current liabilities....................................................................          202,377           198,812
                                                                                                     ------------      ------------
      Total current liabilities.................................................................        2,322,305         3,228,838
                                                                                                     ------------      ------------
Term loan.......................................................................................        1,000,000                --
Notes payable and borrowings under lines of credit, net of current portion......................           77,453            74,750
Capital lease obligation, net of current portion................................................          206,700           207,219
Construction/project financing, net of current portion..........................................        3,434,097         3,393,410
Convertible Senior Notes Due 2006...............................................................        1,200,000         1,100,000
Senior notes....................................................................................        7,085,886         7,049,038
Deferred income taxes, net......................................................................          938,566           964,346
Deferred lease incentive........................................................................           55,484            57,236
Deferred revenue................................................................................          201,766           154,381
Long-term derivative liabilities................................................................          580,919           822,848
Other liabilities...............................................................................           95,163            96,504
                                                                                                     ------------      ------------
        Total liabilities.......................................................................       17,198,339        17,148,570
                                                                                                     ------------      ------------
Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trusts..        1,123,537         1,123,024
Minority interests..............................................................................           40,000            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 375,602,307 shares in 2002 and 307,058,751 shares in 2001............              376               307
Additional paid-in capital......................................................................        2,791,942         2,040,836
Retained earnings...............................................................................        1,194,249         1,196,000
Accumulated other comprehensive loss............................................................         (118,707)         (226,574)
                                                                                                     ------------      ------------
   Total stockholders' equity...................................................................        3,867,860         3,010,569
                                                                                                     ------------      ------------
      Total liabilities and stockholders' equity................................................     $ 22,229,736      $ 21,329,552
                                                                                                     ============      ============
</TABLE>
              The accompanying notes are an integral part of these
                  consolidated condensed financial statements.


                                      -3-
<PAGE>

                      CALPINE CORPORATION AND SUBSIDIARIES
                 Consolidated Condensed Statements of Operations
            For the Three and Six Months Ended June 30, 2002 and 2001
                    (In thousands, except per share amounts)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                      Three Months Ended                  Six Months Ended
                                                                            June 30,                           June 30,
                                                                  -----------------------------      ------------------------------
                                                                      2002             2001              2002              2001
                                                                  ------------     ------------      ------------      ------------
<S>                                                               <C>              <C>               <C>               <C>
Revenue:
   Electric generation and marketing revenue
      Electricity and steam revenue..........................     $    708,752     $    505,711      $  1,328,931      $  1,100,870
      Sales of purchased power...............................          868,606          683,196         1,776,907         1,136,798
      Electric power derivative mark-to-market gain..........            6,104           68,433            10,270            69,739
                                                                  ------------     ------------      ------------      ------------
        Total electric generation and marketing revenue......        1,583,462        1,257,340         3,116,108         2,307,407
   Oil and gas production and marketing revenue
      Oil and gas sales......................................           52,163          116,319           119,651           273,006
      Sales of purchased gas.................................          302,044          226,693           434,202           355,865
                                                                  ------------     ------------      ------------      ------------
        Total oil and gas production and marketing revenue...          354,207          343,012           553,853           628,871
   Income (loss) from unconsolidated investments in
    power projects...........................................           (1,121)           1,600               323             2,163
   Other revenue.............................................            5,258           10,921             9,869            14,183
                                                                  ------------     ------------      ------------      ------------
           Total revenue.....................................        1,941,806        1,612,873         3,680,153         2,952,624
                                                                  ------------     ------------      ------------      ------------
Cost of revenue:
   Electric generation and marketing expense
      Plant operating expense................................          118,930           69,259           234,087           153,719
      Royalty expense........................................            4,194            6,916             8,349            17,925
      Purchased power expense................................          698,176          655,322         1,513,181         1,111,588
                                                                  ------------     ------------      ------------      ------------
        Total electric generation and marketing expense......          821,300          731,497         1,755,617         1,283,232
   Oil and gas production and marketing expense
      Oil and gas production expense.........................           27,836           27,308            54,776            61,591
      Purchased gas expense..................................          333,724          218,330           457,418           336,958
                                                                  ------------     ------------      ------------      ------------
        Total oil and gas production and marketing expense...          361,560          245,638           512,194           398,549
   Fuel expense
      Cost of oil and natural gas burned by power plants.....          350,848          251,876           677,291           516,439
      Natural gas derivative mark-to-market loss (gain)......            3,203          (23,446)            9,595           (30,995)
                                                                  ------------     ------------      ------------      ------------
        Total fuel expense...................................          354,051          228,430           686,886           485,444
   Depreciation, depletion and amortization expense..........          110,122           72,144           213,995           144,157
   Operating lease expense...................................           36,263           27,449            72,397            55,460
   Other expense.............................................            2,204            3,490             4,794             5,989
                                                                  ------------     ------------      ------------      ------------
           Total cost of revenue.............................        1,685,500        1,308,648         3,245,883         2,372,831
                                                                  ------------     ------------      ------------      ------------
              Gross profit...................................          256,306          304,225           434,270           579,793
Project development expense..................................           24,713            4,372            36,051            20,211
Equipment cancellation cost..................................               --               --           168,471                --
General and administrative expense...........................           53,601           50,537           113,862            86,622
Merger expense...............................................               --           35,606                --            41,627
                                                                  ------------     ------------      ------------      ------------
   Income from operations....................................          177,992          213,710           115,886           431,333
Interest expense.............................................           67,058           43,331           128,369            63,256
Distributions on trust preferred securities..................           15,387           15,387            30,773            30,562
Interest income..............................................           (9,762)         (20,531)          (21,938)          (39,889)
Other income, net............................................           (2,766)          (3,291)          (11,859)           (9,018)
                                                                  ------------     ------------      ------------      ------------
   Income (loss) before provision (benefit) for income taxes.          108,075          178,814            (9,459)          386,422
Provision (benefit) for income taxes.........................           35,559           69,849            (5,578)          158,830
                                                                  ------------     ------------      ------------      ------------
   Income (loss) before extraordinary gain (loss) and
    cumulative effect of a change in accounting principle....           72,516          108,965            (3,881)          227,592
Extraordinary gain (loss), net of tax provision of $--, $834,
 $1,362 and $834.............................................               --           (1,300)            2,130            (1,300)
Cumulative effect of a change in accounting principle,
 net of tax provision of $--, $--, $--and $669...............               --               --                --             1,036
                                                                  ------------     ------------      ------------      ------------
              Net income (loss)..............................     $     72,516     $    107,665      $     (1,751)     $    227,328
                                                                  ============     ============      ============      ============
</TABLE>








                                      -4-
<PAGE>

                      CALPINE CORPORATION AND SUBSIDIARIES
                Consolidated Condensed Statements of Operations
           For the Three and Six Months Ended June 30, 2002 and 2001
                    (In thousands, except per share amounts)
                                  (unaudited)
                                  (continued)
<TABLE>
<CAPTION>
                                                                      Three Months Ended                  Six Months Ended
                                                                            June 30,                           June 30,
                                                                  -----------------------------      ------------------------------
                                                                      2002             2001              2002              2001
                                                                  ------------     ------------      ------------      ------------
<S>                                                               <C>              <C>               <C>               <C>
Basic earnings (loss) per common share:
   Weighted average shares of common stock outstanding.......          356,158          302,729           331,745           301,641
   Income (loss) before extraordinary gain (loss) and
    cumulative effect of a change in accounting principle....     $       0.20     $       0.36      $      (0.01)     $       0.75
   Extraordinary gain (loss).................................     $         --     $         --      $         --      $         --
   Cumulative effect of a change in accounting principle.....     $         --     $         --      $         --      $         --
                                                                  ------------     ------------      ------------      ------------
              Net income (loss)..............................     $       0.20     $       0.36      $      (0.01)     $       0.75
                                                                  ============     ============      ============      ============

Diluted earnings (loss) per common share:
   Weighted average shares of common stock outstanding before
    dilutive effect of certain convertible securities........          365,606          318,255           331,745           317,544
   Income (loss) before dilutive effect of certain
    convertible securities, extraordinary gain (loss) and
    cumulative effect of a change in accounting principle....     $       0.20     $       0.34      $      (0.01)     $       0.72
   Dilutive effect of certain convertible securities (1).....     $      (0.01)    $      (0.02)     $         --      $      (0.04)
                                                                  ------------     ------------      ------------      ------------
   Income (loss) before extraordinary gain (loss) and
    cumulative effect of a change in accounting principle....     $       0.19     $       0.32      $      (0.01)     $       0.68
   Extraordinary gain (loss).................................     $         --     $         --      $         --      $         --
   Cumulative effect of a change in accounting principle.....     $         --     $         --      $         --      $         --
                                                                  ------------     ------------      ------------      ------------
              Net income (loss)..............................     $       0.19     $       0.32      $      (0.01)     $       0.68
                                                                  ============     ============      ============      ============
----------
<FN>
(1)  Includes  the  effect  of  the  assumed   conversion  of  certain  dilutive
     convertible securities.  No convertible securities were included in the six
     months  ended 2002 amounts as the  securities  were  antidilutive.  For the
     three months  ended June 30,  2002,  and for the three and six months ended
     June 30, 2001, the assumed conversion  calculation added 85,320, 41,964 and
     49,379  shares of common stock and  $11,306,  $7,507 and $20,838 to the net
     income results, respectively.
</FN>
</TABLE>
              The accompanying notes are an integral part of these
                  consolidated condensed financial statements.



































                                      -5-
<PAGE>

                      CALPINE CORPORATION AND SUBSIDIARIES
                 Consolidated Condensed Statements of Cash Flows
                 For the Six Months Ended June 30, 2002 and 2001
                                 (In thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                           Six Months Ended
                                                                                                                June 30,
                                                                                                     -------------------------------
                                                                                                          2002              2001
                                                                                                     -------------     -------------
<S>                                                                                                  <C>               <C>
Cash flows from operating activities:
   Net income (loss)............................................................................     $     (1,751)     $    227,328
      Adjustments to reconcile net income (loss) to net cash provided by operating activities:
      Depreciation, depletion and amortization..................................................          244,540           148,552
      Equipment cancellation cost...............................................................          168,471                --
      Development cost write-off................................................................           22,300                --
      Deferred income taxes, net................................................................          115,953           123,937
      Gain on sale of assets....................................................................          (11,513)          (10,750)
      Minority interests........................................................................             (948)            3,157
      Income from unconsolidated investments in power projects..................................             (323)           (2,163)
      Distributions from unconsolidated investments in power projects...........................               18             2,459
      Change in operating assets and liabilities, net of effects of acquisitions:
        Accounts receivable.....................................................................          (43,472)         (315,344)
        Notes receivable........................................................................          (10,404)          (43,624)
        Current derivative assets...............................................................          179,219        (1,048,198)
        Other current assets....................................................................          197,001           (36,253)
        Long-term derivative assets.............................................................         (100,835)         (874,306)
        Other assets............................................................................            6,025            (9,918)
        Accounts payable and accrued expense....................................................          (17,000)          131,502
        Current derivative liabilities..........................................................         (152,199)          689,931
        Long-term derivative liabilities........................................................         (241,903)          957,448
        Other liabilities.......................................................................           56,006            42,471
        Other comprehensive income relating to derivatives......................................           54,260           103,744
                                                                                                     ------------      ------------
           Net cash provided by operating activities............................................          463,445            89,973
                                                                                                     ------------      ------------
Cash flows from investing activities:
   Purchases of property, plant and equipment...................................................       (2,479,037)       (2,557,041)
   Disposals of property, plant and equipment and investments in power projects.................           49,822            19,134
   Advances to joint ventures...................................................................          (43,823)          (63,871)
   Decrease (increase) in notes receivable......................................................            2,859           (93,723)
   Maturities of collateral securities..........................................................            3,325             2,885
   Project development costs....................................................................          (63,654)          (55,314)
   Increase in restricted cash..................................................................          (27,814)          (24,705)
                                                                                                     ------------      ------------
           Net cash used in investing activities................................................       (2,558,322)       (2,772,635)
                                                                                                     ------------      ------------
Cash flows from financing activities:
   Proceeds from issuance of Zero-Coupon Convertible Debentures Due 2021........................               --         1,000,000
   Repurchase of Zero-Coupon Convertible Debentures Due 2021....................................         (873,227)               --
   Borrowings from term loan notes payable and lines of credit..................................        1,077,453               258
   Repayments of notes payable and repayments under lines of credit.............................          (87,465)         (444,568)
   Borrowings from project financing............................................................          280,248         1,479,673
   Repayments of project financing..............................................................          (92,198)       (1,234,433)
   Proceeds from issuance of Convertible Senior Notes Due 2006..................................          100,000                --
   Proceeds from issuance of senior notes.......................................................               --         2,650,000
   Repayments of senior notes...................................................................               --          (105,000)
   Proceeds from issuance of common stock.......................................................          751,172            49,369
   Financing costs..............................................................................          (59,925)          (64,534)
   Other........................................................................................           (1,789)           (2,660)
                                                                                                     ------------      ------------
           Net cash provided by financing activities............................................        1,094,269         3,328,105
                                                                                                     ------------      ------------
Effect of exchange rate changes on cash and cash equivalents....................................            3,958                --
Net increase (decrease) in cash and cash equivalents............................................         (996,650)          645,443
Cash and cash equivalents, beginning of period..................................................        1,525,417           596,077
                                                                                                     ------------      ------------
Cash and cash equivalents, end of period........................................................     $    528,767      $  1,241,520
                                                                                                     ============      ============
Cash paid during the period for:
   Interest, net of amounts capitalized.........................................................     $     59,809      $     (7,351)
   Income taxes.................................................................................     $     13,043      $    114,083

              The accompanying notes are an integral part of these
                  consolidated condensed financial statements.
</TABLE>








                                      -6-
<PAGE>

                      CALPINE CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
                                  June 30, 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 owns power  facilities
and oil and gas operations.  In the United Kingdom, the Company owns 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  power  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.  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. 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").

     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 useful lives and
carrying  values  of  assets  (including  the  carrying  value  of  projects  in
development, construction and operation), 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 the  Company's  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, and optimization transactions, subject to market conditions,
and CES has also, from time to time,  entered into contracts  considered  energy
trading  contracts  under  Emerging  Issues Task Force  ("EITF") Issue No. 98-10
"Accounting  for  Contracts  Involved  in  Energy  Trading  and Risk  Management
Activities."  CES  executes  these  transactions  primarily  through  the use of
physical forward commodity purchases and sales and financial commodity swaps and
options. With respect to its physical forward contracts, CES generally acts as a
principal, takes title to the commodities,  and assumes the risks and rewards of
ownership.  Therefore,  in accordance  with Staff  Accounting  Bulletin No. 101,
"Revenue  Recognition  in  Financial  Statements"  and  EITF  Issue  No.  99-19,
"Reporting  Revenue Gross as a Principal Versus Net as an Agent," CES recognizes
revenue from settlement of its physical forward  contracts on a gross basis. CES
settles its financial swap and option  transactions  net and does not take title
to the  underlying  commodity.  Accordingly,  CES records  gains and losses from
settlement of financial swaps and options net in income. Managed risks typically
include commodity price risk associated with fuel purchases and power sales.


                                      -7-
<PAGE>

     It is our policy not to engage in "roundtrip"  trades.  We have conducted a
detailed  analysis of our records looking for instances of transactions that may
have the  characteristics  of  "roundtrip"  trades  (i.e.,  trades with the same
counterparty  at the same time,  price and location) for the period from January
1, 2000 through June 30, 2002, and have  determined that while there were a very
small number of transactions  with such  characteristics,  there was no material
impact on our financial  statements from any such trades and none were conducted
for the purpose of increasing trading volume,  revenue,  or market prices or for
any other improper purpose.

     The Company,  through its wholly owned subsidiary,  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:

     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.  Subject to market and other  conditions,  the Company
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, optimization and
trading 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 include
revenue from the  settlement of contracts that had been  previously  recorded in
results of  operations  as electric  power  derivative  mark-to-market  gains or
losses prior to realization.

     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,
subject to market and other  conditions,  sales of  purchased  gas arising  from
hedging,  balancing,  optimization and trading transactions.  Sales of purchased
gas  also  include  revenue  from  the  settlement  of  contracts  that had been
previously   recorded  in  results  of  operations  as  natural  gas  derivative
mark-to-market  gains or  losses,  prior to  realization.  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,  optimization and trading activities,
along with costs  from the  subsequent  settlement  of  contracts  that had been
previously  recorded  in results of  operations  as  electric  power  derivative
mark-to-market gains or losses, prior to realization,  are 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,  optimization and trading activities, along with
costs from the  subsequent  settlement  of  contracts  that had been  previously
recorded in results of operations as natural gas derivative mark-to-market gains
or losses,  prior to  realization,  are  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," and as further amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of FASB Statement No.
133," together with 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 unless exempted from derivative treatment as a normal
purchase and sale. 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.

                                      -8-
<PAGE>

     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 ("OCI") 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  perfectly
effective, such amounts recorded in earnings will be equal and offsetting.

     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 OCI,  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 the
cumulative effect 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 OCI.

     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.  The
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 does not
believe  that SFAS No.  143 will  have a  material  impact  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 has not had 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" stating that
gains or losses from  extinguishment  of debt that fall  outside of the scope of
APB Opinion No. 30 should not be classified as extraordinary.  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 adoption  encouraged.  The Company has not completed its analysis but
believes that SFAS No. 145 may have a material effect on the presentation of its
financial statements but no impact on net income.





                                      -9-
<PAGE>

     In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal  Activities," which addresses accounting for restructuring
and  similar  costs.  SFAS No.  146  supersedes  previous  accounting  guidance,
principally  EITF Issue No. 94-3,  "Liability  Recognition for Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (Including  Certain
Costs  Incurred in a  Restructuring)."  The Company will adopt the provisions of
SFAS No. 146 for  restructuring  activities  initiated  after December 31, 2002.
SFAS No. 146 requires that the liability  for costs  associated  with an exit or
disposal activity be recognized when the liability is incurred.  Under Issue No.
94-3, a liability  for an exit cost was  recognized at the date of commitment to
an exit plan. SFAS No. 146 also  establishes that the liability should initially
be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the
timing  of  recognizing  future  restructuring  costs  as  well  as the  amounts
recognized.  The Company does not believe that SFAS No. 146 will have a material
effect on its consolidated financial statements.

     In June  2002 the EITF  reached  a  consensus  on two of the  three  issues
considered  in EITF 02-03,  "Recognition  and  Reporting  of Gains and Losses on
Energy Trading Contracts under EITF Issues No. 98-10,  `Accounting for Contracts
Involved  in Energy  Trading  and Risk  Management  Activities'  and No.  00-17,
`Measuring  the Fair Value of  Energy-Related  Contracts  in applying  Issue No.
98-10.'"  The  issues  upon  which the EITF  reached a  consensus  required  net
presentation of energy trading contracts in a company's financial statements and
required that companies make certain disclosures  regarding their energy trading
contracts.   The  net  presentation   requirement  is  effective  for  financial
statements  issued for periods  ending after July 15, 2002,  and the  disclosure
requirements  are  effective for  financial  statements  issued for fiscal years
ending  after July 15,  2002.  The  Company is still  assessing  the  impacts of
adopting  this  standard on its financial  statements,  but believes  that, at a
minimum,  all energy trading  contracts will be reported net, rather than gross,
upon  adoption  of this  standard.  The  standard is expected to have a material
impact on total revenues and expenses, but no impact on net income.

     Reclassifications  -- Prior period  amounts in the  consolidated  condensed
financial  statements have been  reclassified  where necessary to conform to the
2002 presentation.

3.   Property, Plant and Equipment, and Capitalized Interest

     Property,  plant  and  equipment,  net,  consisted  of  the  following  (in
thousands):
<TABLE>
<CAPTION>
                                                                                   June 30,        December 31,
                                                                                     2002              2001
                                                                                 -------------     -------------
<S>                                                                              <C>               <C>
Buildings, machinery and equipment.........................................      $  7,382,378      $  4,690,484
Oil and gas properties, including pipelines................................         2,420,500         2,283,344
Geothermal properties......................................................           393,472           371,156
Other......................................................................           326,404           223,675
                                                                                 ------------      ------------
                                                                                   10,522,754         7,568,659
   Less:  Accumulated depreciation, depletion and amortization.............        (1,088,505)         (855,065)
                                                                                 ------------      ------------
                                                                                    9,434,249         6,713,594
Land.......................................................................            90,794            80,506
Construction in progress...................................................         7,593,263         8,481,956
                                                                                 ------------      ------------
Property, plant and equipment, net.........................................      $ 17,118,306      $ 15,276,056
                                                                                 ============      ============
</TABLE>

     Construction  in progress is  primarily  attributable  to  gas-fired  power
projects under construction  including prepayments on gas turbine generators and
other long lead-time items of equipment for certain development projects not yet
in  construction.   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 change in its turbine and
construction program that will slow the growth in the Company's  construction in
progress. See Note 13 for a discussion of the turbine order cancellations during
the first quarter.

     During the second quarter of 2002, the Company  reclassified $203.7 million
of turbine costs from  construction in progress to other assets, as the turbines
will not be used for the Company's current power plant development  program. The
Company recorded a $14.2 million charge to project development expense to effect
a reduction  in the  carrying  value of such  turbines.  The  Company  currently
anticipates  that some of the turbines  will be used for future power plants and
others  may be sold to third  parties.  The  Company is now in  negotiations  to
cancel or restructure  the contracts for up to 89 units.  The Company expects to
complete these negotiations in the fourth quarter of 2002. The Company may also,
subject  to market  conditions,  take  steps to  further  adjust or  restructure
turbine orders,  including canceling additional turbine orders,  consistent with
the Company's power plant construction and development programs.


                                      -10-
<PAGE>

     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.  During the three months
ended June 30,  2002 and 2001,  the total  amount of  interest  capitalized  was
$171.0 million and $115.6  million,  including  $37.0 million and $31.2 million,
respectively,  of interest incurred on funds borrowed for specific  construction
projects  and  $134.0  million  and $84.4  million,  respectively,  of  interest
incurred on general corporate funds used for construction. During the six months
ended June 30,  2002 and 2001,  the total  amount of  interest  capitalized  was
$334.1 million and $219.6  million,  including  $72.1 million and $65.9 million,
respectively,  of interest incurred on funds borrowed for specific  construction
projects  and $262.0  million  and $153.7  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 2002,  compared to 2001, reflects the
significant increase in the Company's power plant construction program. However,
the Company  expects that the amount of interest  capitalized  will  decrease in
future periods as the power plants in construction are completed and as a result
of the current suspension of certain of the Company's development projects.

     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, the Company's term loan facility and
the Company's revolving credit facilities.

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  was  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 future  impairment losses will be reflected in operating income
or loss in the consolidated statements of operations.  The Company completed the
transitional  goodwill  impairment test as required and determined that the fair
value of the  reporting  units  holding  goodwill  exceeded  their net  carrying
values. Therefore, the Company did not record any impairment expense.

     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):

<TABLE>
<CAPTION>
                                                                             Three Months Ended June 30,
                                                          --------------------------------------------------------------------
                                                                        2002                                2001
                                                          --------------------------------    --------------------------------
                                                                             Per Share                           Per Share
                                                                        ------------------                  ------------------
                                                             Amount     Diluted      Basic      Amount      Diluted      Basic
                                                          ----------    -------     ------    ----------    -------     ------
<S>                                                       <C>           <C>         <C>       <C>           <C>         <C>
Reported income before extraordinary
 items and cumulative effect of accounting changes....    $   72,516    $ 0.19      $ 0.20    $  108,965    $ 0.32      $ 0.36
      Add: Goodwill amortization......................            --        --          --           205        --          --
Pro forma income before extraordinary items and
 cumulative effect of accounting changes..............        72,516      0.19        0.20       109,170      0.32        0.36
Extraordinary items and cumulative effect of
 accounting changes, net of tax.......................            --        --          --        (1,300)       --          --
                                                          ----------    ------      ------    ----------    ------      ------
      Pro forma net income............................    $   72,516    $ 0.19      $ 0.20    $  107,870    $ 0.32      $ 0.36
                                                          ==========    ======      ======    ==========    ======      ======
</TABLE>






                                      -11-
<PAGE>
<TABLE>
<CAPTION>
                                                                               Six Months Ended June 30,
                                                          --------------------------------------------------------------------
                                                                        2002                                2001
                                                          --------------------------------    --------------------------------
                                                                             Per Share                           Per Share
                                                                        ------------------                  ------------------
                                                             Amount     Diluted      Basic      Amount      Diluted      Basic
                                                          ----------    -------     ------    ----------    -------     ------
<S>                                                       <C>           <C>         <C>       <C>           <C>         <C>
Reported income (loss) before extraordinary
 items and cumulative effect of accounting changes.       $   (3,881)   $(0.01)     $(0.01)   $  227,592    $ 0.68      $ 0.75
      Add: Goodwill amortization......................            --        --          --           341        --        0.01
Pro forma income (loss) before extraordinary items
 and cumulative effect of accounting changes..........        (3,881)    (0.01)      (0.01)      227,933      0.68        0.76
Extraordinary items and cumulative effect of
 accounting changes, net of tax.......................         2,130        --          --          (264)       --          --
                                                          ----------    ------      ------    ----------    ------      ------
      Pro forma net income (loss).....................    $   (1,751)   $(0.01)     $(0.01)   $  227,669    $ 0.68      $ 0.76
                                                          ==========    ======      ======    ==========    ======      ======
</TABLE>

     Recorded goodwill, by segment, as of June 30, 2002, was (in thousands):

Electric Generation and Marketing........................       $  29,348
Oil and Gas Production and Marketing.....................              --
Corporate, Other and Eliminations........................              --
                                                                ---------
   Total.................................................       $  29,348
                                                                =========

     Subsequent  goodwill  impairment tests will be performed,  at a minimum, in
the fourth  quarter of each  year,  in  conjunction  with the  Company's  annual
reporting process.

     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):
<TABLE>
<CAPTION>
                                                                    As of June 30, 2002         As of December 31, 2001
                                                                 --------------------------    --------------------------
                                                   Weighted
                                                    Average
                                                    Useful
                                                 Life/Contract    Carrying     Accumulated      Carrying     Accumulated
                                                     Life          Amount      Amortization      Amount      Amortization
                                                 -------------   ----------    ------------    ----------    ------------
<S>                                                   <C>        <C>            <C>            <C>            <C>
Patents......................................          5         $      485     $     (182)    $      485     $     (134)
Power sales agreements.......................         14            173,090       (100,103)       173,090        (88,178)
Fuel supply and fuel management contracts....         26             22,198         (3,660)        22,198         (3,216)
Geothermal lease rights......................         20             19,493           (300)        19,493           (250)
Other........................................          5                662            (47)           277            (25)
                                                                 ----------     ----------     ----------     ----------
   Total.....................................                    $  215,928     $ (104,292)    $  215,543     $  (91,803)
                                                                 ==========     ==========     ==========     ==========
</TABLE>

     Amortization  expense of other intangible  assets was $6.2 million and $1.0
million in the three  months  ended June 30,  2002 and 2001,  respectively,  and
$12.4  million and $2.0  million in the six months ended June 30, 2002 and 2001,
respectively. Assuming no future impairments of these assets or additions as the
result of acquisitions,  annual  amortization  expense will be $22.0 million for
the twelve months ended December 31, 2002, $5.9 million in 2003, $5.4 million in
2004, $5.3 million in 2005 and $5.2 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.  This transaction  resulted in a pre-tax other income
gain of $9.7 million. The note was repaid in the second quarter of 2002.

6.   Financing

     On  January  31,  2002,  the  Company's  subsidiary,  Calpine  Construction
Management  Company,  Inc., entered into an agreement with Siemens  Westinghouse
Power  Corporation  to reschedule  the  production and delivery of gas and steam
turbine  generators  and related  equipment.  Under the  agreement,  the Company
obtained vendor financing of up to $232.0 million bearing variable  interest for
other gas and steam turbine generators and related  equipment.  The financing is



                                      -12-
<PAGE>

due prior to the earliest of the equipment  site delivery date  specified in the
agreement,  the  Company's  requested  date of turbine site delivery or June 25,
2003.  At March 31,  2002 and June 30,  2002,  there were $0 and $47.4  million,
respectively, in borrowings outstanding under this agreement.

     On April 30,  2002,  the  Company  completed  a  registered  offering of 66
million  shares of its common stock at $11.50 per share.  The proceeds from this
offering, after underwriting fees, were $734.3 million.

     On April 30, 2002, the Company  repurchased the remaining $685.5 million in
aggregate  principal amount of its Zero Coupon  Convertible  Debentures due 2021
("Zero Coupons") at par pursuant to a scheduled put provided for by the terms of
the Zero Coupons.

     On May 14,  2002,  the  Company's  subsidiary,  Calpine  California  Energy
Finance,  LLC,  entered into an amended and restated  credit  agreement with ING
Capital LLC for the funding of 9 California peaker  facilities,  of which $100.0
million  was  drawn  on May 24,  2002.  The  total  $100.0  million  funding  is
classified as current  project  financing,  of which $50.0 million was repaid on
August 7, 2002,  and $50.0 million will be payable on September  30, 2002.  This
peaker  funding is part of the  Company's  expected  long-term  financing of its
California peaker facilities which is anticipated to be $500.0 million.

     On May 31, 2002, the Company  increased its two-year secured bank term loan
to $1.0  billion  from  $600.0  million,  and  reduced  the size of its  secured
corporate revolving credit facilities to $1.0 billion from $1.4 billion. At June
30, 2002, the Company has $1.0 billion in funded  borrowings  outstanding  under
the term loan  facility,  and $75.0  million  in funded  borrowings  and  $723.2
million outstanding in letters of credit under the revolving credit facility.

     In 2003 and 2004, $981.4 million and $2,452.7 million, respectively,  under
the Company's secured revolving  construction  financing facilities will mature,
requiring the Company to refinance this indebtedness.

7.   DePere Transaction

     On June  28,  2002,  the  Company  executed  a  definitive  agreement  with
Wisconsin Public Service for the sale of its 180-megawatt  DePere Energy Center.
This  agreement  is subject  to certain  conditions,  including  the  receipt of
regulatory  approval by the State of Wisconsin,  which is expected to be decided
in  September  2002.  If the  agreement is approved by  regulatory  authorities,
Wisconsin  Public  Service would pay the Company  $120.4  million for the DePere
facility and the existing power purchase agreement would be terminated.

8.   Derivative Instruments

Commodity 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.  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.  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. From time to time the Company has entered into contracts
considered  energy trading  contracts under EITF Issue No. 98-10.  However,  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
and EITF Issue No.  98-10.

     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  purchases and sales  exception.  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.

                                      -13-
<PAGE>

     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. On April 1, 2002,  the
Company adopted C16. At June 30, 2002, the Company had no fuel supply  contracts
to which C16 applies.  However, one of the Company's equity method investees has
fuel supply  contracts  subject to C16. The equity  investee also adopted C16 on
April 1, 2002. The contracts  qualified as highly effective hedges of the equity
method  investee's  forecasted  purchase  of gas.  Accordingly,  the Company has
recorded $7.8 million net of tax as a cumulative  effect of change in accounting
principle  to other  comprehensive  income  for its share of the  equity  method
investee's other comprehensive income from accounting change.

Interest Rate and Currency Derivative Instruments

     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 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.

Summary of Derivative Values

     The table below  reflects the amounts (in  thousands)  that are recorded as
assets  and  liabilities  at  June  30,  2002,  for  the  Company's   derivative
instruments:
<TABLE>
<CAPTION>
                                                                                                       Commodity
                                                                 Interest Rate       Currency          Derivative         Total
                                                                   Derivative       Derivative        Instruments       Derivative
                                                                  Instruments       Instruments           Net          Instruments
                                                                 -------------      -----------       -----------      -----------
<S>                                                               <C>               <C>               <C>              <C>
     Current derivative assets...............................     $        --       $       199       $   583,744      $   583,943
     Long-term derivative assets.............................              --             4,167           661,620          665,787
                                                                  -----------       -----------       -----------      -----------
        Total assets.........................................     $        --       $     4,366       $ 1,245,364      $ 1,249,730
                                                                  ===========       ===========       ===========      ===========
     Current derivative liabilities..........................     $    10,178       $       609       $   462,353      $   473,140
     Long-term derivative liabilities........................          12,483                --           568,436          580,919
                                                                  -----------       -----------       -----------      -----------
        Total liabilities....................................     $    22,661       $       609       $ 1,030,789      $ 1,054,059
                                                                  ===========       ===========       ===========      ===========
           Net derivative assets (liabilities)...............     $   (22,661)      $     3,757       $   214,575      $   195,671
                                                                  ===========       ===========       ===========      ===========
</TABLE>

     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
          liability,  thereby  creating  an  imbalance  between  net OCI and net
          derivative assets and liabilities.





                                      -14-
<PAGE>

     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  instrument 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  of the Company's net  derivative  assets to its
accumulated other comprehensive loss, net of tax from derivative  instruments at
June 30, 2002 (in thousands):
<TABLE>
<CAPTION>
<S>                                                                                                 <C>
Net derivative assets.........................................................................      $  195,671
Derivatives not designated as cash flow hedges and recognized hedge ineffectiveness...........        (165,955)
Cash flow hedges terminated prior to maturity.................................................        (277,804)
Deferred tax asset attributable to accumulated other comprehensive loss on cash flow hedges...          81,474
Accumulated OCI from unconsolidated investees (1).............................................          31,743
Other reconciling items.......................................................................           5,754
                                                                                                    ----------
Accumulated other comprehensive loss from derivative instruments, net of tax..................      $ (129,117)
                                                                                                    ==========
<FN>
(1)  Includes  $12.8  million  (pre-tax)  relating to the  cumulative  effect of
     accounting  change from  unconsolidated  investee.  See  discussion  of New
     Accounting Pronouncements in Note 2 of the financial statements.
</FN>
</TABLE>

     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 June 30, 2002.

                                                         June 30, 2002
                                                 ------------------------------
                                                     Gross              Net
                                                 ------------      ------------
Current derivative assets.....................   $  1,733,012      $    583,744
Long-term derivative assets...................        835,937           661,620
                                                 ------------      ------------
   Total derivative assets....................   $  2,568,949      $  1,245,364
                                                 ============      ============
Current derivative liabilities................   $  1,611,620      $    462,353
Long-term derivative liabilities                      742,754           568,436
                                                 ------------      ------------
   Total derivative liabilities...............   $  2,354,374      $  1,030,789
                                                 ============      ============
      Net commodity derivative assets.........   $    214,575      $    214,575
                                                 ============      ============

     The table above excludes the value of interest rate and currency derivative
instruments.

     The tables below reflect 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 and six months  ended  June 30,  2002 and 2001,  respectively  (in
thousands):






                                      -15-
<PAGE>
<TABLE>
<CAPTION>
                                                                  Three Months Ended June 30,
                                     -------------------------------------------------------------------------------------------
                                                           2002                                           2001
                                     ------------------------------------------     --------------------------------------------
                                          Hedge        Undesignated                      Hedge         Undesignated
                                     Ineffectiveness   Derivatives       Total      Ineffectiveness    Derivatives       Total
                                     ---------------   ------------     -------     ---------------    -----------     ---------
<S>                                      <C>            <C>             <C>             <C>             <C>            <C>
Natural gas and crude oil
 derivatives.......................      $   990        $(4,193)        $(3,203)        $(3,998)        $ 27,444       $  23,446
Power derivatives..................       (1,002)         7,106           6,104           1,217           67,216          68,433
Interest rate derivatives (1)......         (188)            --            (188)            (17)              --             (17)
Foreign currency derivatives.......           --             --              --              --               --              --
                                         -------        -------         -------         -------         --------       ---------
   Total...........................      $  (200)       $ 2,913         $ 2,713         $(2,798)        $ 94,660       $  91,862
                                         =======        =======         =======         ========        ========       =========

<CAPTION>
                                                                   Six Months Ended June 30,
                                     -------------------------------------------------------------------------------------------
                                                           2002                                           2001
                                     ------------------------------------------     --------------------------------------------
                                          Hedge        Undesignated                      Hedge         Undesignated
                                     Ineffectiveness   Derivatives       Total      Ineffectiveness    Derivatives       Total
                                     ---------------   ------------     -------     ---------------    -----------     ---------
<S>                                      <C>            <C>             <C>             <C>             <C>            <C>
Natural gas and crude oil
 derivatives.......................      $(1,605)       $(7,990)        $(9,595)        $(3,472)        $ 34,467       $  30,995
Power derivatives..................       (1,224)        11,494          10,270              --           69,739          69,739
Interest rate derivatives (1)......         (340)            --            (340)            (17)              --             (17)
Foreign currency derivatives.......           --             --              --              --               --              --
                                         -------        -------         -------         -------         --------       ---------
   Total...........................      $(3,169)       $ 3,504         $   335         $(3,489)        $104,206       $ 100,717
                                         =======        =======         =======         =======         ========       =========
<FN>
 (1)  Recorded within Other Income
</FN>
</TABLE>

     For the three and six months  ended June 30, 2002 and 2001,  the  Company's
realized commodity cash flow hedge activity  contributed $36.0 million and $86.8
million,  respectively,  and $4.8 million and $21.8  million,  respectively,  to
pre-tax earnings based on the reclassification  adjustment from OCI to earnings.
For the  three  and six  months  ended  June 30,  2002 and  2001,  power  hedges
contributed $75.3 million and $161.8 million, respectively, and $3.1 million and
$(6.2) million,  respectively, to pre-tax earnings. For the three and six months
ended  June 30,  2002 and 2001,  gas and crude oil  hedges  contributed  $(39.3)
million and $(75.0) million,  respectively,  and $1.7 million and $28.0 million,
respectively,  to pre-tax earnings.  For the three and six months ended June 30,
2002,  interest  rate hedges  contributed  $(2.6)  million  and $(4.6)  million,
respectively,  to pre-tax earnings.  For the three and six months ended June 30,
2002,   currency   hedges   contributed   $(2.8)  million  and  $(2.8)  million,
respectively,  to pre-tax earnings.  For the three and six months ended June 30,
2001,  interest  rate hedges and  currency  hedges did not impact the  Company's
pre-tax earnings.

     As of June 30, 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, 6 1/2, and 12 years,  for commodity,  foreign  currency and
interest rate derivative instruments,  respectively.  The Company estimates that
pre-tax gains of $13.8 million would be reclassified  from  accumulated OCI into
earnings   during  the  twelve  months  ended  June  30,  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.


















                                      -16-
<PAGE>

     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.

<TABLE>
<CAPTION>
                                                                                                          2007
                                     2002          2003          2004          2005          2006        & After         Total
                                  ---------     ---------     ---------     ---------     ---------     ---------     ----------
<S>                               <C>           <C>            <C>           <C>           <C>           <C>          <C>
Crude oil OCI.................    $  (1,024)    $      --      $     --      $     --      $     --      $     --     $  (1,024)
Gas OCI.......................      (48,633)     (188,244)      (56,318)      (56,760)      (11,607)       13,092      (348,470)
Power OCI.....................      141,834        67,361         6,318         1,908         6,586          (818)      223,189
Interest rate OCI.............       (9,273)      (14,763)      (11,112)       (9,435)       (8,607)      (25,698)      (78,888)
Foreign currency OCI..........         (238)         (781)         (554)         (589)         (553)       (2,683)       (5,398)
                                  ---------     ---------     ---------      --------      --------      --------     ---------
   Total OCI..................    $  82,666     $(136,427)     $(61,666)     $(64,876)     $(14,181)     $(16,107)    $(210,591)
                                  =========     =========      ========      ========      ========      ========     =========
</TABLE>

9.   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 cash flow 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):
<TABLE>
<CAPTION>
                                                                            Accumulated Other Comprehensive Income (Loss)
                                                                                           At June 30, 2002
                                                                 -------------------------------------------------------------------
                                                                                    Foreign
                                                                  Cash Flow         Currency                          Comprehensive
                                                                   Hedges          Translation         Total         Income / (Loss)
                                                                 -----------       -----------      -----------      ---------------
<S>                                                              <C>               <C>              <C>                <C>
Net loss for the three months ended March 31, 2002............                                                         $  (74,267)
Accumulated other comprehensive loss at
 December 31, 2001............................................   $ (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
      Reclassification adjustment for gain included in net
       loss for the three months ended March 31, 2002.........      (48,699)
      Income tax provision for the three months ended
       March 31, 2002.........................................      (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)
                                                                                   ----------       ----------         ----------
Total comprehensive loss for the three months ended
 March 31, 2002...............................................                                                         $  (55,679)
                                                                                                                       ==========
Accumulated other comprehensive loss at March 31, 2002........   $ (139,619)       $  (68,367)      $ (207,986)
                                                                 ==========        ==========       ==========
Net income for the three months ended June 30, 2002...........                                                         $   72,516
Accumulated other comprehensive loss at March 31, 2002........   $ (139,619)       $  (68,367)      $ (207,986)
   Cash flow hedges:
      Comprehensive pre-tax gain on cash flow hedges
       before reclassification adjustment during the three
       months ended June 30, 2002.............................       47,855
      Reclassification adjustment for gain included in net
       income  for the three months ended June 30, 2002.......      (30,617)
      Income tax provision for the three months ended
       June 30, 2002..........................................       (6,736)
                                                                 ----------
                                                                     10,502                             10,502             10,502
   Foreign currency translation gain for the three months
    ended June 30, 2002.......................................                         78,777           78,777             78,777
                                                                 ----------        ----------       ----------         ----------
Total comprehensive income for the three months ended
 June 30, 2002................................................                                                            161,795
                                                                                                                       ----------
Total comprehensive income for the six months ended
 June 30, 2002................................................                                                         $  106,116
                                                                                                                       ==========
Accumulated other comprehensive income/(loss) at
 June 30, 2002................................................   $ (129,117)       $   10,410       $ (118,707)
                                                                 ==========        ==========       ==========
</TABLE>


                                      -17-
<PAGE>
<TABLE>
<CAPTION>
                                                                            Accumulated Other Comprehensive Income (Loss)
                                                                                           At June 30, 2001
                                                                 -------------------------------------------------------------------
                                                                                    Foreign
                                                                  Cash Flow         Currency                          Comprehensive
                                                                   Hedges          Translation         Total         Income / (Loss)
                                                                 -----------       -----------      -----------      ---------------
<S>                                                              <C>               <C>              <C>                <C>
Net income for the three months ended March 31, 2001                                                                   $  119,663
Accumulated other comprehensive loss at
 December 31, 2000............................................   $       --        $  (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)
      Reclassification adjustment for gain included in net
       loss for the three months ended March 31, 2001.........      (17,047)
      Income tax provision for the three months ended
       March 31, 2001.........................................       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
                                                                 ----------        ----------       ----------         ----------
Total comprehensive income for the three months ended
 March 31, 2001...............................................                                                         $   80,787
                                                                                                                       ==========
Accumulated other comprehensive loss at March 31, 2001........   $  (53,570)       $   (8,391)      $  (61,961)
                                                                 ==========        ==========       ==========
Net income for the three months ended June 30, 2001...........                                                         $  107,665
Accumulated other comprehensive loss at March 31, 2001........   $  (53,570)       $   (8,391)      $  (61,961)
   Cash flow hedges:
      Comprehensive pre-tax gain on cash flow hedges
       before reclassification adjustment during the three
       months ended June 30, 2001.............................      263,714
      Reclassification adjustment for gain included in net
       income for the three months ended June 30, 2001........       (4,745)
      Income tax provision for the three months ended
       June 30, 2001..........................................     (102,047)
                                                                 ----------
                                                                    156,922                            156,922            156,922
   Foreign currency translation loss for the three months
    ended June 30, 2001.......................................                        (16,550)         (16,550)           (16,550)
                                                                 ----------        ----------       ----------         ----------
Total comprehensive income for the three months ended
 June 30, 2001................................................                                                            248,037
                                                                                                                       ----------
Total comprehensive income for the six months ended
 June 30, 2001................................................                                                         $  328,824
                                                                                                                       ==========
Accumulated other comprehensive income (loss) at
 June 30, 2001................................................   $  103,352        $  (24,941)      $   78,411
                                                                 ==========        ==========       ==========
</TABLE>

10.  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,  the  terms of  which  extended  out as far as 2009.  On
December 2, 2001,  Enron Corp. and certain of its  subsidiaries,  including EPMI
and ENA, filed voluntary  petitions for Chapter 11 reorganization  with the U.S.
Bankruptcy Court for the Southern District of New York.

     The Company 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 and six months ended June 30, 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):











                                      -18-
<PAGE>

<TABLE>
<CAPTION>
                                                                   For the Three Months Ended          For the Six Months Ended
                                                                          June 30, 2001                      June 30, 2001
                                                                   --------------------------         --------------------------
                                                                     Dollar         Volume              Dollar           Volume
                                                                   ---------      ----------          ---------        ----------
<S>                                                                <C>              <C>               <C>                <C>
Electric generation and marketing revenue (electricity and
 steam revenue and sales of purchased power).................      $ 264,716         2,869            $ 348,891           4,162
Oil and gas production and marketing revenue (sales of
 purchased gas)..............................................         92,969         9,315              146,259          11,369
Other revenue................................................            676            --                2,050              --
                                                                   ---------                          ---------
   Total power and fuel and other revenue from Enron.........      $ 358,361                          $ 497,200
                                                                   ---------                          ---------
Electric generation and marketing expense (purchased
 power expense)..............................................      $ 254,340         2,119            $ 365,226           3,401
Fuel expense (cost of oil and natural gas burned by power
 plants and natural gas derivative mark-to-market gain)......         70,475        10,626               87,405          13,043
                                                                   ---------                          ---------
   Total CES power and fuel expenses related to Enron (1).....     $ 324,815                          $ 452,631
                                                                   =========                          =========
----------
<FN>
(1)  Expenses of CES only, as other Enron expenses incurred are not material.
</FN>
</TABLE>

     The Company has terminated  all of its open forward  positions with ENA and
EPMI,  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 net amounts  associated with terminated ENA and EPMI forward  contracts have
been included within the Company's  accounts  payable.  During 2001 and prior to
the  termination  of its  forward  contracts  with ENA and EPMI,  certain of the
Company's  ENA and EPMI  contracts  had been  designated  as cash  flow  hedges.
Accordingly,  prior to termination of these positions,  balances had accumulated
in OCI. As of June 30, 2002, the Company had remaining unrealized pre-tax losses
of $183.4  million on derivatives  previously  designated as effective cash flow
hedges.  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, optimization and trading 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.

     After netting the receivables  from and payables to ENA and EPMI,  based on
certain assumptions, the Company has calculated an existing or future obligation
to Enron of  approximately  $143.5 million as of June 30, 2002, which obligation
the Company expects will be offset by CES' losses, damages,  attorneys' fees and
other expenses  arising from the default by Enron,  and which amount is included
in the Company's accounts payable balance at June 30, 2002.

Nevada Power and Sierra Pacific Power Company

     During  the first  quarter  of 2002,  two  subsidiaries  of Sierra  Pacific
Resources Company, Nevada Power Company ("NPC") and Sierra Pacific Power Company
("SPPC"),  received credit  downgrades to  sub-investment  grades from the major
credit  rating  agencies.  Additionally,  NPC  acknowledged  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 has  requested  that its power  suppliers  extend
payment terms to help it overcome its short-term liquidity problems.  During the
second  quarter  of 2002,  NPC  indicated  to its  power  suppliers  that it was
experiencing  cash flow  difficulties.  In June and July 2002 NPC  underpaid the
Company by  approximately  $4.2 million,  and the Company  expects that NPC will
underpay the Company by  approximately  an additional  $18.4 million this summer
and early fall,  with  repayments  of deferred  amounts  beginning at some point
thereafter once NPC's cash flow stabilizes.  In consideration of the uncertainty
surrounding NPC's ability to make timely payments,  the Company is maintaining a
bad debt reserve of approximately  $2.7 million against NPC  receivables,  which
will be closely  monitored.  In  addition,  NPC and SPPC filed with the  Federal
Energy Regulatory Commission ("FERC") under Section 206 of the Federal Power Act
- see Note 13 for further discussion.


                                      -19-
<PAGE>

     As  of  June  30,  2002,  the  Company  had  net  collection  exposures  of
approximately  $34.8 million and $20.2 million with NPC and SPPC,  respectively.
However,  SPPC is paying the Company currently.  The Company's exposures include
open forward  power  contracts  that are reported at fair value on the Company's
balance sheet as well as receivable and payable balances relating to prior 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 June 30, 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.

<TABLE>
<CAPTION>
                                           Receivables/Payables                                  Fair Values
                                  --------------------------------------    -----------------------------------------------------
                                                                 Net          Gross          Gross        Net Open
                                    Gross         Gross       Receivable    Fair Value    Fair Value      Positions
                                  Receivable     Payable      (Payable)        (+)            (-)           Value          Total
                                  ----------    ---------     ----------    ----------    -----------     ---------       -------
<S>                                <C>           <C>           <C>           <C>            <C>            <C>            <C>
NPC...........................     $  23.6       $ (18.7)      $   4.9       $  74.6        $ (44.7)       $  29.9        $  34.8
SPPC..........................         1.4            --           1.4          18.8             --           18.8           20.2
                                   -------       -------       -------       -------        -------        -------        -------
   Total......................     $  25.0       $ (18.7)      $   6.3       $  93.4        $ (44.7)       $  48.7        $  55.0
                                   =======       =======       =======       =======        =======        =======        =======
</TABLE>

     Under the terms of its contracts  with NPC and SPPC,  the Company  believes
that it has the right to offset asset and liability positions.

PSM License Receivable

     In December  2001 PSM and a Dutch power  services  company  entered  into a
perpetual world-wide license agreement for certain PSM proprietary  reverse-flow
venturi  technology.  The license fee, while earned upfront, is payable over the
period from January 2002 through March 2004. The Company  recognized the license
fee of $11  million  (less  imputed  interest  on the  receivable)  as income in
December 2001. As of the date of this filing, the Company has a receivable of $7
million,  with no payments  currently past due. The indirect parent of the Dutch
company, a German holding company,  filed for insolvency in Germany in July 2002
and the  direct  parent  of the  Dutch  company  is  expected  to also  file for
insolvency.  However,  the Dutch company has assured the Company that it has not
and  currently  does not expect to file for  insolvency  in the near  term.  The
Company has been  further  assured in a letter from the German  holding  company
dated July 11,  2002,  that the Dutch  company  expects to continue  the license
arrangement  and to meet its  obligations  thereunder.  Based  on the  Company's
evaluation  of these and other  factors,  a loss does not seem  probable at this
time. Accordingly, the Company has not established a reserve against the related
receivable but will continue to closely monitor the situation.

Credit Evaluations

     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  analyzed 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.

11.  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 interest expense and 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).













                                      -20-
<PAGE>
<TABLE>
<CAPTION>
                                                                                    Periods Ended June 30,
                                                         ---------------------------------------------------------------------------
                                                                        2002                                   2001
                                                         ----------------------------------     ------------------------------------
                                                           Net                                    Net
                                                          Income        Shares        EPS        Income        Shares         EPS
                                                         ---------     --------      ------     ---------     --------      -------
<S>                                                      <C>            <C>          <C>        <C>            <C>          <C>
THREE MONTHS:
   Basic earnings per common share:
   Income before extraordinary loss and
    cumulative effect of a change in accounting
    principle.........................................   $  72,516      356,158      $ 0.20     $ 108,965      302,729      $ 0.36
   Extraordinary loss, net of tax.....................          --           --          --        (1,300)          --          --
   Cumulative effect of a change in accounting
    principle, net of tax.............................          --           --          --            --           --          --
                                                         ---------      -------      ------     ---------      -------      ------
        Net income ...................................   $  72,516      356,158      $ 0.20     $ 107,665      302,729      $ 0.36
                                                         =========      -------      ======     =========      -------      ======
   Diluted earnings per common share:
   Common shares issuable upon exercise of stock
    options using treasury stock method...............                    9,448                                 15,526
                                                                        -------                                -------
   Income before dilutive effect of certain
    convertible securities, extraordinary loss and
    cumulative effect of a change in accounting
    principle.........................................   $  72,516      365,606        0.20     $ 108,965      318,255      $ 0.34
   Dilutive effect of certain convertible securities..      11,306       85,320       (0.01)        7,507       41,964       (0.02)
                                                         ---------      -------      ------     ---------      -------      ------
   Income before extraordinary loss and
    cumulative effect of a change in accounting
    principle.........................................      83,822      450,926        0.19       116,472      360,219        0.32
   Extraordinary loss, net of tax.....................          --           --          --        (1,300)          --          --
   Cumulative effect of a change in accounting
    principle, net of tax.............................          --           --          --            --           --          --
                                                         ---------      -------      ------     ---------      -------      ------
        Net income ...................................   $  83,822      450,926      $ 0.19     $ 115,172      360,219      $ 0.32
                                                         =========      =======      ======     =========      =======      ======

 <CAPTION>
                                                                                    Periods Ended June 30,
                                                         ---------------------------------------------------------------------------
                                                                        2002                                   2001
                                                         ----------------------------------     ------------------------------------
                                                            Net                                    Net
                                                          Income                                 Income
                                                          (Loss)        Shares        EPS        (Loss)        Shares         EPS
                                                         ---------     --------      ------     ---------     --------      -------
<S>                                                      <C>            <C>          <C>        <C>            <C>          <C>
SIX MONTHS:
   Basic earnings (loss) per common share:
   Income (loss) before extraordinary gain (loss)
    and cumulative effect of a change in accounting
    principle.........................................   $  (3,881)     331,745      $(0.01)    $ 227,592      301,641      $ 0.75
   Extraordinary gain (loss), net of tax..............       2,130           --          --        (1,300)          --          --
   Cumulative effect of a change in accounting
    principle, net of tax.............................          --           --          --         1,036           --          --
                                                         ---------      -------      ------     ---------      -------      ------
        Net income (loss).............................   $  (1,751)     331,745      $(0.01)    $ 227,328      301,641      $ 0.75
                                                         =========      -------      ======     =========      -------      ======
   Diluted earnings (loss) per common share:
   Common shares issuable upon exercise of stock
    options using treasury stock method...............                       --                                 15,903
                                                                        -------                                -------
   Income (loss) before dilutive effect of certain
    convertible securities, extraordinary gain (loss)
     and cumulative effect of a change in accounting
    principle.........................................   $  (3,881)     331,745      $(0.01)    $ 227,592      317,544      $ 0.72
   Dilutive effect of certain convertible securities..          --           --          --        20,838       49,379       (0.04)
                                                         ---------      -------      ------     ---------      -------      ------
   Income (loss) before extraordinary gain (loss)
    and cumulative effect of a change in accounting
    principle.........................................      (3,881)     331,745       (0.01)      248,430      366,923        0.68
   Extraordinary gain (loss), net of tax..............       2,130           --          --        (1,300)          --          --
   Cumulative effect of a change in accounting
    principle, net of tax.............................          --           --          --         1,036           --          --
                                                         ---------      -------      ------     ---------      -------      ------
        Net income (loss).............................   $  (1,751)     331,745      $(0.01)    $ 248,166      366,923      $ 0.68
                                                         =========      =======      ======     =========      =======      ======
</TABLE>






                                      -21-
<PAGE>

     For the three and six months  ended June 30, 2002 and for the three and six
months ended June 30, 2001, respectively,  the effect of 38,237, 145,819, 25,886
and  13,597  thousand  unexercised  employee  stock  options,  Company-obligated
mandatorily  redeemable  convertible  preferred securities of subsidiary trusts,
Zero Coupons and  Convertible  Senior  Notes Due 2006,  were not included in the
computation of diluted shares outstanding because such inclusion would have been
antidilutive.

12.  Stock Compensation

     The Company accounts for qualified stock compensation under APB Opinion No.
25,  "Accounting  for Stock Issued to  Employees."  Had  compensation  cost been
determined  consistent  with the  methodology of SFAS No. 123,  "Accounting  for
Stock-Based  Compensation,"  which  provides  for the  accounting  of options as
compensation  expense,  the Company's net income (loss) and earnings  (loss) per
share would have been changed to the following pro forma amounts (in  thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                                       Three Months Ended                  Six Months Ended
                                                                             June 30,                           June 30,
                                                                    -------------------------         ---------------------------
                                                                      2002             2001             2002               2001
                                                                    --------        ---------         ---------         ---------
<S>                                                                 <C>             <C>               <C>               <C>
Net income (loss)
      As reported............................................       $ 72,516        $ 107,665         $ (1,751)         $ 227,328
      Pro Forma..............................................         67,543           99,650          (15,585)           212,020
Earnings (loss) per share data:
   Basic earnings (loss) per share
      As reported............................................       $   0.20         $   0.36         $  (0.01)         $    0.75
      Pro Forma..............................................           0.19             0.33            (0.05)              0.70
   Diluted earnings (loss) per share
      As reported............................................       $   0.19         $   0.32         $  (0.01)         $    0.68
      Pro Forma..............................................           0.17             0.30            (0.05)              0.64
</TABLE>

     For the three and six months  ended June 30,  2002 and 2001,  respectively,
the fair value of options granted was $9.76 and $7.74,  and $39.01 and $35.36 on
the  dates of grant  using  the  Black-Scholes  option  pricing  model  with the
following weighted-average assumptions: expected dividend yields of 0%, expected
volatility of 97% for the three and six months ended June 30, 2002,  and 64% for
the three and six months ended June 30, 2001,  risk-free interest rates of 4.86%
for the three and six months  ended June 30,  2002,  and 5.42% for the three and
six months ended June 30, 2001, and expected lives of 10 years for the three and
six months ended June 30, 2002 and 2001, respectively.

13.  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 order cancellations. 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--

     Securities  Derivative Lawsuit. On December 17, 2001, a shareholder filed a
derivative lawsuit on behalf of the Company against its directors and one of its
senior officers.  This lawsuit is captioned  Johnson v. Cartwright,  et al. (No.
CV803872),  and is pending in the California Superior Court, Santa Clara County.
The  Company  is a nominal  defendant  in this  lawsuit,  which  alleges  claims
relating to purportedly  misleading statements about the Company and stock sales
by certain of the director defendants and the officer defendant. The Company 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 the
Company.  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.  The Company  considers  this  lawsuit to be without  merit and intends to
vigorously defend against it.

     Securities Class Action Lawsuits.  Fourteen  shareholder lawsuits have been
filed  against  the Company  and  certain of its  officers in the United  States
District Court, Northern District of California.  The actions captioned Weisz v.
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



                                      -22-
<PAGE>

December 13, 2001.  The eleven other actions,  captioned  Local 144 Nursing Home
Pension Fund v. Calpine Corp., Lukowski v. Calpine Corp., Hart v. Calpine Corp.,
Atchison v. Calpine Corp., 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 the Company'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  Calpine  executives  issued false and misleading
statements  about the  Company'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.  The  Company  expects  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.

     In addition,  a fifteenth  securities class action, Ser v. Calpine, et al.,
was filed on May 13,  2002.  The  underlying  allegations  in the Ser action are
substantially the same to those in the  above-referenced  actions.  However, the
Ser  action is  brought  on behalf of a  purported  class of  purchasers  of the
Company's  8.5% Senior  Notes due  February  15, 2011  ("2011  Notes"),  and the
alleged  class period is October 15, 2001,  through  December 13, 2001.  The Ser
complaint alleges that, in violation of Sections 11 and 15 of the Securities Act
of 1933,  the Prospectus  Supplement  dated October 11, 2001, for the 2011 Notes
contained  false and  misleading  statements  regarding the Company's  financial
condition. This action names the Company, certain of its officers and directors,
and the  underwriters  of the 2011 Notes  offering as  defendants,  and seeks an
unspecified amount of damages, in addition to other forms of relief. The Company
expects that this action will either be consolidated  with the  above-referenced
actions  or will  proceed  as a parallel  related  action  before the same judge
presiding over the other actions.

     The Company  considers  the  allegations  against  Calpine in each of these
lawsuits to be without merit, and intends to defend vigorously against them.

     California  Business & Professions Code Section 17200 Cases. The lead case,
T&E Pastorino Nursery v. Duke Energy Trading and Marketing,  L.L.C., et al., was
served on May 2, 2002,  by T&E  Pastorino  Nursery,  on behalf of itself and all
others similarly situated.  This purported class action complaint against twenty
energy  traders and energy  companies  including  CES,  alleges that  defendants
exercised  market  power and  manipulated  prices  in  violation  of  California
Business & Professions Code Section 17200 et seq., and seeks injunctive  relief,
restitution and attorneys' fees.

     The  Company  also has been  named in five  other  similar  complaints  for
violations of Section 17200 captioned  Bronco Don Holdings,  LLP. v. Duke Energy
Marketing and Trading, et al.; Century Theatres, Inc. v. Allegheny Energy Supply
Company,  LLC; RDJ Farms,  Inc. v.  Allegheny  Energy Supply  Company,  LLC; J&M
Karsant  Family Limited  Partnership v. Duke Energy Trading and Marketing,  LLC;
and Leo's Day and Night Pharmacy v. Duke Energy Trading and Marketing,  LLC. All
six of these cases have been removed in a  multidistrict  litigation  proceeding
from the various  state  courts in which they were  originally  filed to federal
court, where a motion is now pending to transfer and consolidate these cases for
pretrial  proceedings  with other  cases in which the  Company is not named as a
defendant. In addition,  plaintiffs in the T&E Pastorino Nursery case have filed
a motion to remand that matter to California state court.

     The Company  considers  the  allegations  against  Calpine in each of these
lawsuits to be without merit, and intends to vigorously defend against them.

     California  Department of Water Resources Case. On May 1, 2002,  California
State  Senator  Tom  McClintock  and others  filed a  complaint  against  Vikram
Budhraja, a consultant to the California  Department of Water Resources ("DWR"),
DWR itself,  and more than twenty-nine energy providers and other interested
parties,  including the Company.  The complaint alleges that the long-term power
contracts  that DWR entered  into with these  energy  providers,  including  the
Company,  are rendered void because  Budhraja,  who  negotiated the contracts on
behalf of DWR, allegedly had an undisclosed  financial interest in the contracts
due to his  connection  to one of the energy  providers,  Edison  International.
Among other  things,  the  complaint  seeks an  injunction  prohibiting  further
performance  of the  long-term  contracts and  restitution  of any funds paid to
energy  providers by the State of California  under the  contracts.  The Company
considers the  allegations  against Calpine in this lawsuit to be without merit,
and intends to vigorously defend against them.

     Nevada  Section 206  Complaint.  On December 4, 2001,  NPC and SPPC filed a
complaint  with the FERC under  Section 206 of the  Federal  Power Act against a
number of parties to their power sales  agreements,  including the Company.  NPC
and SPPC allege in their complaint,  which seeks a refund,  that the prices they




                                      -23-
<PAGE>

agreed to pay in certain of the power sales  agreements,  including those signed
with the  Company,  were  negotiated  during a time  when the power  market  was
dysfunctional and that they are unjust and  unreasonable.  The Company considers
the complaint to be without merit and is vigorously defending against it.

     Emissions Credits Lawsuit.  As described in previous  reports,  on March 5,
2002, the Company sued Automated  Credit Exchange  ("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 the  Company's  account  with U.S.  Trust
Company ("US Trust"). the Company and ACE entered into a settlement agreement on
March  29,  2002,  pursuant  to which ACE made a payment  to the  Company  of $7
million and  transferred  to the Company  the rights to the  emission  reduction
credits to be held by ACE. The Company  dismissed its complaint against ACE. The
Company  recognized the $7 million in the second quarter of 2002. In June 2002 a
complaint was filed by InterGen North America, L.P.  ("InterGen"),  against Anne
M. Sholtz, the owner of ACE, and EonXchange,  another  Sholtz-controlled entity,
which  filed for  bankruptcy  protection  on May 6,  2002.  InterGen  alleges it
suffered  a loss of  emission  reduction  credits  from  EonXchange  in a manner
similar to the the Company's loss from ACE.  InterGen's  complaint  alleges that
Anne Sholtz  co-mingled  assets among ACE,  EonXchange and other Sholtz entities
and that ACE and other  Sholtz  entities  should  be  deemed to be one  economic
enterprise and all retroactively included in the EonXchange bankruptcy filing as
of May 6, 2002.  InterGen's complaint refers to the payment by ACE of $7 million
to the Company,  alleging that InterGen's ability to recover from EonXchange has
been  undermined  thereby.  The  Company is unable to assess the  likelihood  of
InterGen's complaint being upheld at this time.

     The Company is involved in various other claims and legal  actions  arising
out of the normal course of its  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.

14.  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, balancing, optimization and trading 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,  balancing,  optimization  and  trading
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.

<TABLE>
<CAPTION>
                                                 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)
<S>                                        <C>         <C>         <C>       <C>       <C>         <C>        <C>         <C>
For the three months
  ended June 30, 2002 and 2001:
   Revenue............................     $1,582,351  $1,261,705  $494,831  $381,983  $(135,376)  $(30,815)  $1,941,806  $1,612,873
   Income (loss) before taxes and
    extraordinary charge..............         77,263     167,518    59,801    55,278    (28,989)   (43,982)     108,075     178,814
   Merger expense.....................             --          --        --    35,606         --         --           --      35,606

 <CAPTION>
                                                 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)
<S>                                        <C>         <C>         <C>       <C>       <C>         <C>        <C>         <C>
For the six months
  ended June 30, 2002 and 2001:
   Revenue............................     $3,116,494  $2,312,334  $731,179  $713,811  $(167,520)  $(73,521)  $3,680,153  $2,952,624
   Income (loss) before taxes and
    extraordinary charge..............         31,077     295,309    72,865   171,813   (113,401)   (80,700)      (9,459)    386,422
   Merger expense.....................             --          --        --    41,627         --         --           --      41,627
   Equipment cancellation cost........        168,471          --        --        --         --         --      168,471          --
</TABLE>

                                      -24-
<PAGE>
<TABLE>
<CAPTION>
                                                          Electric           Oil and Gas
                                                         Generation          Production          Corporate, Other
                                                        and Marketing       and Marketing        and Eliminations           Total
                                                        -------------       -------------        ----------------        -----------
                                                                                      (in thousands)
<S>                                                      <C>                  <C>                    <C>                 <C>
Total assets:
   June 30, 2002....................................     $14,040,562          $3,706,453             $4,482,721          $22,229,736
   December 31, 2001................................     $12,572,848          $3,503,075             $5,253,629          $21,329,552
</TABLE>

     For the three months ended June 30, 2002 and 2001, there were  intersegment
revenues of approximately  $140.6 million and $39.0 million,  respectively.  For
the six months ended June 30, 2002 and 2001, there were intersegment revenues of
approximately $177.3 million and $84.9 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.

15.  California Power Market

On April 22, 2002, the Company announced that it had renegotiated CES' long-term
power  contracts  with  DWR.  The  Office of the  Governor  of  California,  the
California Public Utilities Commission (the "CPUC"), the California  Electricity
Oversight  Board (the  "EOB") and the  California  Attorney  General  (the "AG")
endorsed  the  renegotiated  contracts  and  agreed to drop all  pending  claims
against the Company and its  affiliates,  including  withdrawing  the  complaint
under  Section 206 of the Federal  Power Act that had been filed by the CPUC and
EOB with FERC,  and the  termination by the CPUC and the EOB of 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.

     CES had  signed  three  long-term  contracts  with  DWR in  February  2001,
comprising  two  10-year  baseload  energy  contracts  and one  20-year  peaking
contract.  The renegotiation provided for the shortening of the duration of each
of the two 10-year,  baseload  energy  contracts by two years and of the 20-year
peaker contract by ten years.  These changes  reduced 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 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 also agreed with DWR that DWR will have the right to
assume  and  complete  four of the  Company's  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.

     In addition,  the  negotiation  resolved  the dispute  with DWR  concerning
payment of the capacity payment on the peaking  contract.  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 had 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, 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.

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) the timing
and  extent of  deregulation  of energy  markets  and the rules and  regulations
adopted on a transitional  basis with respect thereto (ii) the timing and extent
of  changes  in  commodity  prices  for  energy,  particularly  natural  gas and
electricity  (iii)  commercial  operations  of new plants that may be delayed or
prevented  because of various  development  and  construction  risks,  such as a
failure  to obtain the  necessary  permits to  operate,  failure of  third-party





                                      -25-
<PAGE>

contractors  to  perform  their  contractual  obligations  or  failure to obtain
financing on acceptable terms (iv)  unscheduled  outages of operating plants (v)
unseasonable  weather  patterns  that  produce  reduced  demand  for power  (vi)
systemic economic slowdowns,  which can adversely affect consumption of power by
businesses and consumers  (vii) cost estimates are  preliminary and actual costs
may be higher than  estimated  (viii) a  competitor's  development of lower-cost
generating  gas-fired  power plants (ix) risks  associated  with  marketing  and
selling power from power plants in the  newly-competitive  energy market (x) the
successful  exploitation of an oil or gas resource that ultimately  depends upon
the geology of the resource,  the total amount and costs to develop  recoverable
reserves and operations  factors  relating to the extraction of natural gas (xi)
the effects on the Company's  business  resulting from reduced  liquidity in the
trading and power  industry  (xii) the  Company's  ability to access the capital
markets on attractive  terms (xiii) sources and uses of cash are estimates based
on current  expectations;  actual  sources  may be lower and actual  uses may be
higher  than  estimated  (xiv) the direct or indirect  effects on the  Company's
business of a lowering of its credit  rating (or actions it may take in response
to  changing   credit  rating   criteria),   including,   increased   collateral
requirements,  refusal by the Company's  current or potential  counterparties to
enter into transactions with it and its inability to obtain credit or capital in
desired amounts or on favorable  terms. All information set forth in this filing
is as of  August  9,  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.

     We file annual,  quarterly and special reports,  proxy statements and other
information  with the SEC. You may obtain and copy any document we file with the
SEC at the SEC's public reference rooms in Washington,  D.C., Chicago,  Illinois
and New York, New York. You may obtain information on the operation of the SEC's
public  reference  facilities  by  calling  the SEC at  1-800-SEC-0330.  You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC at its principal office at 450 Fifth Street, N.W.,  Washington,  D.C.
20549-1004.  Our SEC filings  are also  accessible  through the  Internet at the
SEC's website at http://www.sec.gov.

     Our reports on Forms 10-K, 10-Q and 8-K are available for download, free of
charge, as soon as reasonably  practicable,  at our website at www. calpine.com.
The content of our website is not a part of this report.  You may request a copy
of these  filings,  at no cost to you, by writing or  telephoning us at: Calpine
Corporation, 50 West San Fernando Street, San Jose, California 95113, attention:
Lisa M. Bodensteiner,  Assistant Secretary,  telephone:  (408) 995-5115. We will
not send  exhibits  to the  documents,  unless  the  exhibits  are  specifically
requested and you pay our fee for duplication and delivery.

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 and six months  ended June 30, 2002,  as
compared  to the same  periods in 2001,  for the  reasons  discussed  more fully
throughout this Management's  Discussion and Analysis of Financial Condition and
Results  of  Operations.  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).

<TABLE>
<CAPTION>
                                                                       Three Months Ended                  Six Months Ended
                                                                             June 30,                            June 30,
                                                                   -----------------------------      ------------------------------
                                                                       2002             2001              2002              2001
                                                                   ------------     ------------      ------------      ------------
                                                                         (in thousands, except production and pricing data)
<S>                                                                <C>              <C>               <C>               <C>
Power Plants:
   Electricity and steam ("E&S") revenue:
      Energy.................................................      $    409,415     $    345,960      $    922,519      $    781,341
      Capacity...............................................           257,107          127,595           332,497           245,323
      Thermal and other......................................            42,230           32,156            73,915            74,206
                                                                   ------------     ------------      ------------      ------------
        Subtotal.............................................      $    708,752     $    505,711      $  1,328,931      $  1,100,870
   Spread on sales of purchased power (1)....................           169,611           26,801           262,750            25,453
                                                                   ------------     ------------      ------------      ------------
   Adjusted E&S revenues.....................................      $    878,363     $    532,512      $  1,591,681      $  1,126,323
   Megawatt hours produced...................................        15,720,000        7,878,000        30,434,000        15,117,000
   All-in electricity price per megawatt hour generated......      $      55.88     $      67.59      $      52.30      $      74.51
---------
<FN>
(1)  From  hedging,   balancing  and  optimization  activities  related  to  our
     generating assets. The spread on trading activities is excluded.
</FN>
</TABLE>


                                      -26-
<PAGE>

     Credit  restrictions  on certain  Calpine  Energy  Services,  L.P.  ("CES")
activities in 2002 could negatively impact the volume of hedging,  balancing and
optimization activities in the future.

     Megawatt hours produced at the power plants increased 100% and 101% for the
three and six months  ended June 30,  2002,  as compared to the same  periods in
2001.  This was  primarily  due to the addition of power plants that were either
acquired or commenced  commercial  operation  subsequent  to June 30, 2001.  The
decrease in average all-in electricity price per megawatt hour generated in 2002
reflects the  softening  market  conditions in 2002 for power.  The  information
above is related to our generating assets and excludes trading  activities which
are discussed in the Results of Operations and Performance Metrics below.

     The increase in electricity and steam revenues due to the addition of power
plants was moderated by the reduction in CES's trading activities due to current
market conditions. However, we will evaluate alternatives as they are identified
for relationships  with potential  partners to strengthen our ability to conduct
risk management activities and to support the credit requirements of its trading
activities, but will proceed only if any such arrangement adds value to us.

Results of Operations

     Set forth below is a table  summarizing  the dollar amounts and percentages
of our total  revenue for the three and six months ended June 30, 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 percentage data):

<TABLE>
<CAPTION>
                                                                       Three Months Ended                  Six Months Ended
                                                                             June 30,                            June 30,
                                                                   -----------------------------      ------------------------------
                                                                       2002             2001              2002              2001
                                                                   ------------     ------------      ------------      ------------
<S>                                                                <C>              <C>               <C>               <C>
Total revenue.................................................     $ 1,941,806      $ 1,612,873       $ 3,680,153       $ 2,952,624
Sales of purchased power......................................         868,606          683,196         1,776,907         1,136,798
As a percentage of total revenue..............................            44.7%            42.4%             48.3%             38.5%
Sales of purchased gas........................................         302,044          226,693           434,202           355,865
As a percentage of total revenue..............................            15.6%            14.1%             11.8%             12.1%
Total cost of revenue ("COR").................................       1,685,500        1,308,648         3,245,883         2,372,831
Purchased power expense.......................................         698,176          655,322         1,513,181         1,111,588
As a percentage of total COR..................................            41.4%            50.1%             46.6%             46.8%
Purchased gas expense.........................................         333,724          218,330           457,418           336,958
As a percentage of total COR..................................            19.8%            16.7%             14.1%             14.2%
</TABLE>

     The accounting  requirements  under Staff Accounting  Bulletin ("SAB") 101,
"Revenue  Recognition in Financial  Statements"  and Emerging  Issues Task Force
("EITF") Issue No. 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.

<TABLE>
<CAPTION>
                                                                       Three Months Ended                  Six Months Ended
                                                                             June 30,                            June 30,
                                                                   -----------------------------      ------------------------------
                                                                       2002             2001              2002              2001
                                                                   ------------     ------------      ------------      ------------
                                                                                            (in thousands)
<S>                                                                 <C>              <C>               <C>               <C>
Sales into NEPOOL ISO from power we generated................       $  63,455        $  61,892         $  114,036        $  121,456
Sales into NEPOOL ISO from hedging and other activity........          20,148           21,688             44,805            56,644
                                                                    ---------        ---------         ----------        ----------
   Total sales into NEPOOL ISO...............................       $  83,603        $  83,580         $  158,841        $  178,100
   Total purchases from NEPOOL ISO...........................       $  85,344        $  81,317         $  161,178        $  166,560
</TABLE>



                                      -27-
<PAGE>

Three Months Ended June 30, 2002, Compared to Three Months Ended June 30, 2001.

     Revenue -- Total revenue increased to $1,941.8 million for the three months
ended June 30, 2002, compared to $1,612.9 million for the same period in 2001.

     Electric  generation and marketing revenue increased to $1,583.5 million in
2002 compared to $1,257.3 million in 2001.  Approximately  $203.0 million of the
$326.1 million variance was due to electricity and steam sales,  which increased
due to our growing  portfolio of power  plants.  Generation  almost  doubled but
average pricing dropped by 17%,  moderating  revenue growth. Our revenue for the
period ended June 30,  2002,  includes the  consolidated  results of  additional
facilities that we acquired or completed  construction on subsequent to June 30,
2001.  Sales of purchased  power grew by $185.4  million due to increased  price
hedging,   balancing  and  optimization  activity  around  our  operating  plant
portfolio  during the three  months  ended June 30,  2002.  This was offset by a
$62.3 million decrease in electric power derivative  mark-to-market gain. In the
three months ended June 30, 2001,  we  recognized a  significant  mark-to-market
gain from power  contracts  in a market  area  where we did not have  generation
assets. Due to industry-wide  credit restrictions on risk management and trading
activities in 2002, such  opportunities  and other trading  activities have been
greatly restricted.

     Oil and gas production and marketing revenue increased to $354.2 million in
2002 compared to $343.0  million in 2001. The increase is due to a $75.4 million
increase in sales of purchased  gas,  offset by a $64.2 million  decrease in oil
and gas sales to third parties  primarily  because of much lower average natural
gas pricing in 2002.

     Cost of revenue -- Cost of revenue  increased  to $1,685.5  million in 2002
compared to $1,308.6  million in 2001.  Approximately  $42.9  million and $115.4
million  of the  $376.9  million  increase  relates to the cost of power and gas
purchased by our energy services  organization,  respectively,  due to increased
price hedging,  balancing,  optimization  and trading  activities.  Fuel expense
increased  55%, from $228.4 million in 2001 to $354.1 million in 2002, due to an
increase  of  122%  in  gas-fired   megawatt   hours   generated  as  offset  by
significantly  lower gas prices in 2002 and an  improvement in average heat rate
of our generation  portfolio.  Plant operating  expense  increased by 71.7% from
$69.3 million to $118.9 million but, expressed per MWh of generation,  decreased
from  $8.79/MWh to $7.57/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 52.6%, from $72.1 million to $110.1 million,
due primarily to additional power facilities in consolidated  operations at June
30, 2002, as compared to the same period in 2001.

     Project  development expense -- Project development expense increased $20.3
million as we expensed  $18.1  million in costs related to the  cancellation  or
indefinite suspension of certain development projects.

     Merger  expense -- The merger  expense of $35.6 million in the three months
ended June 30, 2001 was a result of the  pooling-of-interests  transaction  with
Encal Energy Ltd.

     Interest expense -- Interest  expense  increased 54.8% to $67.1 million for
the three months ended June 30, 2002,  from $43.3 million for the same period in
2001.   Interest  expense  increased  primarily  due  to  the  issuance  of  the
Convertible Senior Notes Due 2006 and additional senior notes in the second half
of 2001 and due to the fact that interest expense on construction projects stops
being capitalized once the project goes into commercial operations and a greater
number of projects went into commercial operation in the three months ended June
30, 2002,  than in the three months  ended June 30, 2001.  Interest  capitalized
increased  from $115.6 million in the three months ended June 30, 2001 to $171.0
million in the three months ended June 30, 2002,  as a  consequence  of a larger
construction  portfolio in 2002. We expect that  interest  expense will increase
and the amount of interest capitalized will decrease in the future as our plants
in construction are completed, and also as a result of the current suspension of
our development projects.

     Interest income -- Interest income  decreased to $9.8 million for the three
months  ended June 30,  2002,  compared to $20.5  million for the same period in
2001.  This decrease is due primarily to lower cash balances and interest  rates
in 2002.

     Other income -- Other  income  declined by $0.5 million in the three months
ended June 30, 2002,  compared to the same period in 2001. In the 2002 period we
recognized  $7.0  million of  recovery  from ACE for losses  incurred on reclaim
trading  credit  transactions  (see Note 13 to the  financial  statements),  and
additionally,  we recognized  gains from asset sales of $7.6  million.  However,
these gains were partially offset by letter of credit fees of $6.2 million, $3.4
million for cost of a forfeited deposit on an asset purchase that did not close,
foreign exchange  translation losses of $2.0 million, due primarily to weakening
in the Canadian dollar,  and minority  interest expense of $0.9 million.  In the
corresponding period in 2001, we had a foreign exchange translation gain of $3.0
million.




                                      -28-
<PAGE>

     Provision  for  income  taxes  --  The   effective   income  tax  rate  was
approximately 32.9% and 39.1% for the three months ended June 30, 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 and due to the  reversal  of $2.6  million of a specific  tax
reserve in 2002.

     Extraordinary  loss,  net -- The $1.3  million  charge  (net of tax of $0.8
million) in the three  months  ended June 30,  2001  related to the write off of
unamortized  deferred  financing  costs as a result of the repayment of the $105
million 9 1/4% Senior Notes Due 2004.

Six Months Ended June 30, 2002, Compared to Six Months Ended June 30, 2001.

     Revenue -- Total revenue  increased to $3,680.2  million for the six months
ended June 30, 2002, compared to $2,952.6 million for the same period in 2001.

     Electric  generation and marketing revenue increased to $3,116.1 million in
2002  compared to $2,307.4  million in 2001.  Sales of  purchased  power grew by
$640.1  million due to  increased  price  hedging,  balancing  and  optimization
activity around our operating  plant portfolio  during the six months ended June
30, 2002.  Approximately  $228.1  million of the variance was due to electricity
and steam sales,  which increased due to our growing  portfolio of power plants.
Generation  more than doubled,  but average  pricing  dropped by 30% to moderate
revenue  growth.  Our revenue for the period ended June 30,  2002,  includes the
consolidated  results of  additional  facilities  that we acquired or  completed
construction on subsequent to June 30, 2001. The increase in electric generation
and marketing  revenue was offset by a $59.5 million  decrease in electric power
derivative  mark-to-market  gain.  In the six  months  ended June 30,  2001,  we
recognized a significant  mark-to-market  gain from power  contracts in a market
area  where we did not  have  generation  assets.  Due to  industry-wide  credit
restrictions   on  risk   management  and  trading   activities  in  2002,  such
opportunities and other trading activities have been greatly restricted.

     Oil and gas production and marketing revenue decreased to $553.9 million in
2002  compared to $628.9  million in 2001.  The decrease is  primarily  due to a
$153.4  million  decrease in oil and gas sales to third parties  because of much
lower average natural gas pricing in 2002, offset by a $78.3 million increase in
the sales of purchased gas.

     Cost of revenue -- Cost of revenue  increased  to $3,245.9  million in 2002
compared to $2,372.8  million in 2001.  Approximately  $401.6 million and $120.5
million  of the  $873.1  million  increase  relates to the cost of power and gas
purchased by our energy  services  organization,  respectively  due to increased
price hedging,  balancing,  optimization  and trading  activities.  Fuel expense
increased 41.5%, from $485.4 million in 2001 to $686.9 million in 2002, due to a
127% increase in gas-fired  megawatt hours generated as offset by  significantly
lower gas prices and an improved  average heat rate of our generation  portfolio
in 2002.  Plant  operating  expense  increased  by 52.3% from $153.7  million to
$234.1 million but,  expressed per MWh of generation,  decreased from $10.17/MWh
to $7.69/MWh as economies of scale are being realized due to the increase in the
average size of our plants.  Royalty  expense  decreased  $9.6  million  between
periods  due to a  decrease  in  revenue  for  The  Geysers  geothermal  plants.
Depreciation, depletion and amortization expense increased by 48.4%, from $144.2
million to $214.0  million,  due  primarily to  additional  power  facilities in
consolidated  operations  at June 30,  2002,  as  compared to the same period in
2001.   Operating   lease  expense   increased  30.5%  between  periods  due  to
sale/leaseback transactions subsequent to June 30, 2001.

     Project  development expense -- Project development expense increased 78.4%
as we expensed $22.3 million in costs related to the  cancellation or indefinite
suspension of certain development projects.

     Equipment cancellation cost -- The pre-tax equipment cancellation charge of
$168.5  million in the six months  ended June 30,  2002,  was as a result of the
turbine order  cancellations  and the  cancellation  of certain other  equipment
based primarily on forfeited prepayments to date.

     General and administrative  expense -- General and  administrative  expense
increased  31.4% to $113.9  million for the six months ended June 30,  2002,  as
compared  to  $86.6  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 $3.74/MWh in
2002 from $5.73/MWh in 2001.

     Merger  expense  -- The merger  expense of $41.6  million in the six months
ended June 30, 2001 was a result of the  pooling-of-interests  transaction  with
Encal Energy Ltd.

     Interest expense -- Interest expense increased 102.9% to $128.4 million for
the six months  ended June 30, 2002,  from $63.3  million for the same period in
2001.   Interest  expense  increased  primarily  due  to  the  issuance  of  the



                                      -29-
<PAGE>

     Convertible Senior Notes Due 2006 and additional senior notes in the second
half of 2001 and due to the new plants going into commercial operations at which
point capitalization of interest expense ceases.  Interest capitalized increased
from $219.6  million in the six months ended June 30, 2001 to $334.1  million in
the six months ended June 30, 2002,  due to a larger  construction  portfolio in
2002. We expect that  interest  expense will continue to increase and the amount
of  interest  capitalized  will  decrease  in future  periods  as our  plants in
construction  are completed,  and also as a result of the current  suspension of
our development projects.

     Interest income -- Interest  income  decreased to $21.9 million for the six
months  ended June 30,  2002,  compared to $39.9  million for the same period in
2001.  This decrease is due primarily to lower cash balances and interest  rates
in 2002.

     Other  income -- Other  income  increased by $2.8 million in the six months
ended June 30, 2002,  compared to the same period in 2001. In the 2002 period we
recognized  $7.0  million of  recovery  from ACE for losses  incurred on reclaim
trading  credit  transactions  (see Note 13 to the  financial  statements),  and
additionally,  we recognized net gains from asset sales of $18.8 million,  which
was  primarily  due to a gain of $9.7 million from the sale of our  interests in
the Lockport project, gains of $4.3 million from sales of non-strategic Canadian
properties, and a gain of $2.7 million from the sale of our 7.5% interest in the
Bayonne project.  However, these gains were partially offset by letter of credit
fees of $6.2 million,  $3.4 million for cost of a forfeited  deposit on an asset
purchase that did not close, foreign exchange translation losses of $2.2 million
and minority interest expense of $0.9 million.  In the  corresponding  period in
2001, we had gains on sales of assets of $12.7  million,  primarily  from a $7.2
million gain on the sale of our development  interests in the Elwood project and
a gain of $4.9  million  from  the  sale of our  7.5%  interest  in the  Bayonne
project,  which was partially offset by a foreign  exchange  translation loss of
$2.4 million, due primarily to weakening in the Canadian dollar.

     Provision  for  income  taxes  --  The   effective   income  tax  rate  was
approximately  59.0% and 41.1% for the six months  ended June 30, 2002 and 2001,
respectively.  The  increase is not  meaningful  since the 2002  effective  rate
reflects  the  reversal of $2.6  million of specific  tax reserve in 2002 and is
applied to a small net loss.

     Extraordinary gain (loss), net -- The $2.1 million gain (net of tax of $1.4
million) in 2002 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.  The $1.3 million charge (net of tax of
$0.8 million) in 2001 related to the write off of unamortized deferred financing
costs as a result of the  repayment  of the $105 million 9 1/4% Senior Notes Due
2004.

     Cumulative  effect of a change in  accounting  principle - In 2001 the $1.0
million  of  additional  income  (net  of tax of  $0.7  million),  is due to the
adoption of 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," and as further
amended by SFAS No. 138,  "Accounting  for Certain  Derivative  Instruments  and
Certain Hedging Activities - an Amendment of FASB Statement No. 133."

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 IPPs 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);  (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 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.






                                      -30-
<PAGE>

     Accumulated other comprehensive loss -- The amount of the accumulated other
comprehensive  loss  decreased  from  $(226.6)  million at December 31, 2001, to
$(118.7)  million at June 30, 2002. The change resulted from unrealized gains on
derivatives  designated  as cash flow  hedges of $54.3  million,  net of amounts
reclassified to net loss and income taxes, and foreign currency translation gain
of $53.6 million. See Note 9 for further information.

Liquidity and Capital Resources

     General -- The latter half of 2001, and  particularly  the fourth  quarter,
saw the beginning of 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 and a perceived  near
term surplus supply of electric generating capacity.  While we have been able to
access the capital and bank credit  markets,  as discussed  below,  we recognize
that  terms  of  financing  available  to us now  and 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
facilities  and  other  working  capital  lines;  sale of  debt,  equity,  trust
preferred  securities and convertible  debentures;  proceeds from sale/leaseback
transactions,  sale of  non-strategic  assets  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,   optimization  and  trading
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; the timing of the
availability of such capital in today's  environment is uncertain.  Our strategy
is also to reinvest our cash from operations  into our business  development and
construction program, rather than to pay cash dividends.

     Factors  that could affect our  liquidity  and capital  resources  are also
discussed in the "Risk  Factors"  section of our Annual  Report on Form 10-K for
the year ended December 31, 2001.

     Cash  Flow  Activities  -- The  following  table  summarizes  our cash flow
activities for the periods indicated:

<TABLE>
<CAPTION>
                                                                                      Six Months Ended June 30,
                                                                                  ------------------------------
                                                                                       2002              2001
                                                                                  ------------      ------------
                                                                                          (in thousands)
<S>                                                                               <C>               <C>
Beginning cash and cash equivalents...........................................    $  1,525,417      $    596,077
Net cash provided by (used in):
   Operating activities.......................................................         463,445            89,973
   Investing activities.......................................................      (2,558,322)       (2,772,635)
   Financing activities.......................................................       1,094,269         3,328,105
   Effect of exchange rates changes on cash and cash equivalents..............           3,958                --
                                                                                  ------------      ------------
   Net increase (decrease) in cash and cash equivalents.......................        (996,650)          645,443
                                                                                  ------------      ------------
      Ending cash and cash equivalents........................................    $    528,767      $  1,241,520
                                                                                  ============      ============
</TABLE>

     Operating  activities for the six months ended June 30, 2002,  provided net
cash of $463.4 million,  compared to $90.0 million for the six months ended June
30, 2001.  The cash  provided by operating  activities  for the six months ended
June 30, 2002,  consisted  of a $227.5  million  decrease in  operating  assets,
primarily  relating to a $236.2  million  decrease in margin  deposits and other
prepaid  expenses.  This was offset by a $355.1  million  decrease in  operating
liabilities,  primarily related to derivative activity. A primary factor causing
the  significant  increase in cash flow from  operations in the six months ended
June 30, 2002, in comparison to the same period in 2001, is the  realization  of
over $200  million of  pre-bankruptcy  petition  PG&E  receivables  in the first
quarter  of  2002,  which  helped  our  operating  cash  flow  performance  and,
similarly,  the failure to collect those  receivables in the first half of 2001,
which reduced operating cash flow in that period.

     Investing  activities for the six months ended June 30, 2002,  consumed net
cash of $2.6 billion,  primarily due to $2.5 billion for construction  costs and
capital  expenditures  including  gas  turbine  generator  costs and  associated
capitalized  interest,  $43.8  million of advances to joint  ventures  including
associated   capitalized  interest  for  investments  in  power  projects  under
construction,  $63.7 million of capitalized  project development costs including
associated  capitalized  interest,  and a $27.8  million  increase in restricted
cash.  This was  partially  offset by a $49.8  million of  proceeds  on sales of
property, plant and equipment and investments in power projects.

                                      -31-
<PAGE>

     Financing  activities for the six months ended June 30, 2002, provided $1.1
billion of net cash  consisting of $751.2  million of proceeds from the offering
of common  stock,  $100.0  million of proceeds  from the issuance of  additional
Convertible   Senior  Notes  Due  2006  pursuant  to  exercise  of  the  initial
purchasers' remaining purchase option, $1.1 billion of proceeds from drawings on
our term loan and revolving lines of credit, and $280.2 million of proceeds from
project  financing.  This  was  partially  offset  by  $873.2  million  for  the
repurchase of the outstanding  Zero Coupons,  $87.5 million for the repayment of
notes  payable  and  borrowings  under our lines of credit,  $92.2  million  for
repayments of project financing and $59.9 million of additional financing costs.

     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  sale/leaseback  and other
markets,  sale  of  non-strategic  assets  and  cash  balances  to  satisfy  all
obligations  under  outstanding  indebtedness,  to finance  anticipated  capital
expenditures  and to fund  working  capital  requirements  for the  next  twelve
months.

     Enron  Bankruptcy -- We believe,  based on legal analysis,  that we have no
net  collection  exposure to Enron.  See Note 10 to the  Consolidated  Condensed
Financial Statements.

     Nevada Power and Sierra  Pacific  Power Company -- During the first quarter
of 2002, two  subsidiaries  of Sierra Pacific  Resources  Company,  Nevada Power
Company  ("NPC") and Sierra  Pacific Power  Company  ("SPPC"),  received  credit
downgrades  to  sub-investment  grades from the major  credit  rating  agencies.
Additionally,  NPC  acknowledged  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 has
requested that its power suppliers  extend payment terms to help it overcome its
short-term liquidity problems.  During the second quarter of 2002, NPC indicated
to its power suppliers that it was experiencing cash flow difficulties.  In June
and July 2002 NPC underpaid us by approximately $4.2 million, and we expect that
NPC will underpay us by  approximately  an additional  $18.4 million this summer
and early fall. In consideration of the uncertainty surrounding NPC's ability to
make timely  payments,  we are  maintaining a bad debt reserve of  approximately
$2.7 million against NPC receivables.  See Part II -- Other Information - Item 1
for further discussion.

     As of June 30, 2002, we had net collection exposures of approximately $34.8
million and $20.2  million  with NPC and SPPC,  respectively.  However,  SPPC is
paying us currently. Our exposures include open forward power contracts that are
reported at fair value on our balance  sheet as well as  receivable  and payable
balances  relating to prior power  deliveries.  We are continuing to monitor our
exposure and its effect on our financial condition.

     PSM License  Receivable -- In December 2001 PSM and a Dutch power  services
company entered into a perpetual  world-wide  license  agreement for certain PSM
proprietary  reverse-flow  venturi  technology.  The license  fee,  while earned
upfront,  is payable over the period from January 2002 through  March 2004.  The
Company  recognized the license fee of $11 million (less imputed interest on the
receivable) as income in December 2001. As of the date of this filing, we have a
receivable  of $7 million,  with no payments  currently  past due.  The indirect
parent of the Dutch company,  a German holding company,  filed for insolvency in
Germany in July 2002 and the direct  parent of the Dutch  company is expected to
also file for insolvency.  However,  the Dutch company has assured us that it
has not and currently  does not expect to file for  insolvency in the near term.
We have been further  assured in a letter from the German holding  company dated
July 11,  2002,  that the Dutch  company  expects  to  continue  the  license
arrangement and to meet its obligations  thereunder.  Based on our evaluation of
these  and  other  factors,  a  loss  does  not  seem  probable  at  this  time.
Accordingly,  we have not established a reserve  against the related  receivable
but will continue to closely monitor the situation.

     CES Margin  Deposits and Other Credit  Support -- As of June 30, 2002,  CES
had $67.3  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 $315.0 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.  While we believe that we have adequate
liquidity to support CES'  operations  at this time,  it is difficult to predict
future developments and the amount of credit support that we may need to provide
as part of our business operations.

     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 contemplated the completion of
27 power  projects  (representing  15,200 MW) then under  construction.  Nine of
these facilities have subsequently achieved full or partial commercial operation
as of June 30, 2002.  Construction  of advanced  stage  development  projects is




                                      -32-
<PAGE>

expected to proceed only 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  may again  become  available  to us on
attractive terms.  Further,  our entire development and construction  program is
flexible and subject to continuing review and revision based upon such criteria.

     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 of some 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.

     Uses and Sources of Funding -- As of August 1, 2002,  our estimated uses of
funds  for 2002 are as  follows:  construction  costs of $2.6  billion,  cost to
repurchase  the  remaining  Zero Coupons of $0.9 billion,  other debt  repayment
costs of $0.1 billion, maintenance and gas capital expenditures of $0.3 billion,
cash  lease  payments  of $0.3  billion,  estimated  Enron  contract  settlement
payments of $0.1  billion and $0.7  billion for  turbines  for  financeable  and
future  projects.  These  uses of funds  will be  funded  primarily  through  an
estimated $0.8 billion of operating cash flow for 2002, $0.3 billion of CES cash
collateral  replaced  with  letters of credit  and cash on hand of $1.8  billion
(consists of cash on hand of $1.5  billion at December  31,  2001,  $0.2 billion
from the sale of the PG&E receivables, $0.1 billion from the sale of Convertible
Senior  Notes Due 2006 in early  January  2002).  The other  sources  of funding
include $1.0 billion  from the two-year  term loan,  $0.7 billion from the April
equity offering,  $0.6 billion from our construction  revolvers and our proposed
California  peaker  leases,  as well as $0.3 billion from our secured  revolving
credit facilities.  We are also negotiating the sale of non-strategic assets for
approximately  $0.3 billion.  Other potential sources of cash include monetizing
our Canadian power generation  assets for approximately  $0.3 billion,  entering
into a  sale/leaseback  transaction  for our Zion  facility for cash proceeds of
$0.2  billion,  selling our Gilroy note  receivable  for $0.2  billion,  selling
certain additional assets, including oil and gas properties, for proceeds net of
debt  repayment of $0.4 billion,  and financing for our future  turbines of $0.3
billion.  Actual costs for the projected uses of funds identified above, and net
proceeds from the projected  sources of funds  identified  above could vary from
those estimates, potentially in material respects. Factors that could affect the
accuracy of these  estimates are discussed in our Annual Report on Form 10-K for
the year ended December 31, 2001, in the "Risk Factors" section.

     Capital  Availability  --  Notwithstanding   recent  uncertainties  in  the
domestic energy and capital markets,  we raised  substantial  capital earlier in
2002.  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.  The proceeds from the offering were
used to repay debt and for general corporate purposes.

     On May 14, 2002, our subsidiary,  Calpine  California Energy Finance,  LLC,
entered into an amended and restated  credit  agreement with ING Capital LLC for
the funding of 9 California peaker facilities, of which $100.0 million was drawn
on May 24,  2002.  The total $100.0  million  funding is  classified  as current
project  financing,  of which $50.0  million  was repaid on August 7, 2002,  and
$50.0 million will be payable on September 30, 2002. This peaker funding is part
of our expected long-term financing of our California peaker facilities which is
anticipated to be $500.0 million.

     During the second  quarter of 2002, we increased our two-year  secured bank
term loan to $1.0 billion from $600 million, and reduced the size of our secured
corporate revolving credit facilities to $1.0 billion from $1.4 billion. At June
30, 2002,  we had $1.0  billion in  borrowings  outstanding  under the term loan
facility and $75.0 million in borrowings  outstanding under the revolving credit
facility.

     Letter of  credit  facilities  -- At June 30,  2002,  we had  approximately
$874.6  million in letters of credit  outstanding  under various  credit support
facilities,  including facilities related to CES risk management activities, and
other  operational and construction  activities.  Of the total letters of credit
outstanding,  $723.2  million were issued under the corporate  revolving  credit
facilities.  At December  31, 2001,  we had $642.5  million in letters of credit
outstanding, including facilities relating to CES risk management activities.

     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 sale/leaseback  transactions  involving
our Tiverton,  Rumford,  South Point,  Broad River,  and RockGen  projects.  All
counterparties in these transactions are third parties that are unrelated to us.
The sale/leaseback  transactions utilize special-purpose  entities formed by the
equity investors with the sole purpose of owning a power generation facility. We
have no ownership or other  interest in any of these  special-purpose  entities.
Some of our  operating  leases  contain  customary  restrictions  on  dividends,
additional  debt and further  encumbrances  similar to those  typically found in
project finance debt instruments.




                                      -33-
<PAGE>

     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 June 30, 2002, investee debt totaled $660.6 million.  Based on our pro
rata  ownership  share of each of the  investments,  our  share  would be $244.8
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. Additionally, one of our projects with an operating lease
has $237.8 million of debt outstanding at June 30, 2002.

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 recent
          revenue has  consisted 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  natural gas
          price swaps, 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 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)  KWh  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.



                                      -34-
<PAGE>

     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.

     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.

<TABLE>
<CAPTION>
                                                                                                           Non-GAAP Netted
                                                                       GAAP Presentation                    Presentation
                                                                  Three Months Ended June 30,        Three Months Ended June 30,
                                                                  ----------------------------       ----------------------------
                                                                     2002             2001              2002             2001
                                                                  -----------      -----------       -----------      -----------
                                                                                          (In thousands)
<S>                                                               <C>              <C>               <C>              <C>
Revenue, Cost of Revenue and Gross Profit
Revenue:
   Electric generation and marketing revenue
      Electricity and steam revenue(1).......................     $   708,752      $   505,711       $   878,363      $   532,512
      Sales of purchased power(1)............................         868,606          683,196               819            1,073
      Electric power derivative mark-to-market gain..........           6,104           68,433             6,104           68,433
                                                                  -----------      -----------       -----------      -----------
        Total electric generation and marketing revenue......       1,583,462        1,257,340           885,286          602,018
   Oil and gas production and marketing revenue
      Oil and gas sales......................................          52,163          116,319            52,163          116,319
      Sales of purchased gas(1)..............................         302,044          226,693             1,383            1,715
                                                                  -----------      -----------       -----------      -----------
        Total oil and gas production and marketing revenue...         354,207          343,012            53,546          118,034
   Income (loss) from unconsolidated investments in
    power projects...........................................          (1,121)           1,600            (1,121)           1,600
   Other revenue.............................................           5,258           10,921             5,258           10,921
                                                                  -----------      -----------       -----------      -----------
           Total revenue.....................................       1,941,806        1,612,873           942,969          732,573
                                                                  -----------      -----------       -----------      -----------
</TABLE>



                               (table continues)


















                                      -35-
<PAGE>
                                (table continued)
<TABLE>
<CAPTION>
                                                                                                           Non-GAAP Netted
                                                                       GAAP Presentation                    Presentation
                                                                  Three Months Ended June 30,        Three Months Ended June 30,
                                                                  ----------------------------       ----------------------------
                                                                     2002             2001              2002             2001
                                                                  -----------      -----------       -----------      -----------
                                                                                          (In thousands)
<S>                                                               <C>              <C>               <C>              <C>
Cost of revenue:
   Electric generation and marketing expense
      Plant operating expense................................         118,930           69,259           118,930           69,259
      Royalty expense........................................           4,194            6,916             4,194            6,916
      Purchased power expense(1).............................         698,176          655,322                --               --
                                                                  -----------      -----------       -----------      -----------
        Total electric generation and marketing expense......         821,300          731,497           123,124           76,175
   Oil and gas production and marketing expense
      Oil and gas production expense.........................          27,836           27,308            27,836           27,308
      Purchased gas expense(1)...............................         333,724          218,330                --               --
                                                                  -----------      -----------       -----------      -----------
        Total oil and gas production and marketing expense...         361,560          245,638            27,836           27,308
   Fuel expense
      Cost of oil and natural gas burned by power plants(1)..         350,848          251,876           383,911          245,228
      Natural gas derivative mark-to-market loss (gain)......           3,203          (23,446)            3,203          (23,446)
                                                                  -----------      -----------       -----------      -----------
        Total fuel expense...................................         354,051          228,430           387,114          221,782
   Depreciation, depletion and amortization expense..........         110,122           72,144           110,122           72,144
   Operating lease expense...................................          36,263           27,449            36,263           27,449
   Other expense.............................................           2,204            3,490             2,204            3,490
                                                                  -----------      -----------       -----------      -----------
           Total cost of revenue.............................       1,685,500        1,308,648           686,663          428,348
                                                                  -----------      -----------       -----------      -----------
Gross profit.................................................     $   256,306      $   304,225       $   256,306      $   304,225
                                                                  ===========      ===========       ===========      ===========
Gross profit margin..........................................              13%              19%               27%              42%

<CAPTION>
                                                                                                           Non-GAAP Netted
                                                                       GAAP Presentation                    Presentation
                                                                    Six Months Ended June 30,          Six Months Ended June 30,
                                                                  ----------------------------       ----------------------------
                                                                     2002             2001              2002             2001
                                                                  -----------      -----------       -----------      -----------
                                                                                          (In thousands)
<S>                                                               <C>              <C>               <C>              <C>
Revenue, Cost of Revenue and Gross Profit
Revenue:
   Electric generation and marketing revenue
      Electricity and steam revenue(1).......................     $ 1,328,931      $ 1,100,870       $ 1,591,681      $ 1,126,323
      Sales of purchased power(1)............................       1,776,907        1,136,798               976             (243)
      Electric power derivative mark-to-market gain..........          10,270           69,739            10,270           69,739
                                                                  -----------      -----------       -----------      -----------
        Total electric generation and marketing revenue......       3,116,108        2,307,407         1,602,927        1,195,819
   Oil and gas production and marketing revenue
      Oil and gas sales......................................         119,651          273,006           119,651          273,006
      Sales of purchased gas(1)..............................         434,202          355,865             7,455            4,884
                                                                  -----------      -----------       -----------      -----------
        Total oil and gas production and marketing revenue...         553,853          628,871           127,106          277,890
   Income from unconsolidated investments in
    power projects...........................................             323            2,163               323            2,163
   Other revenue.............................................           9,869           14,183             9,869           14,183
                                                                  -----------      -----------       -----------      -----------
           Total revenue.....................................       3,680,153        2,952,624         1,740,225        1,490,055
                                                                  -----------      -----------       -----------      -----------
</TABLE>



                               (table continues)

















                                      -36-
<PAGE>

                               (table continued)
<TABLE>
<CAPTION>
                                                                                                           Non-GAAP Netted
                                                                       GAAP Presentation                    Presentation
                                                                    Six Months Ended June 30,          Six Months Ended June 30,
                                                                  ----------------------------       ----------------------------
                                                                     2002             2001              2002             2001
                                                                  -----------      -----------       -----------      -----------
                                                                                          (In thousands)
<S>                                                               <C>              <C>               <C>              <C>
Cost of revenue:
   Electric generation and marketing expense
      Plant operating expense................................         234,087          153,719           234,087          153,719
      Royalty expense........................................           8,349           17,925             8,349           17,925
      Purchased power expense(1).............................       1,513,181        1,111,588                --               --
                                                                  -----------      -----------       -----------      -----------
        Total electric generation and marketing expense......       1,755,617        1,283,232           242,436          171,644
   Oil and gas production and marketing expense
      Oil and gas production expense.........................          54,776           61,591            54,776           61,591
      Purchased gas expense(1)...............................         457,418          336,958                --               --
                                                                  -----------      -----------       -----------      -----------
        Total oil and gas production and marketing expense...         512,194          398,549            54,776           61,591
   Fuel expense
      Cost of oil and natural gas burned by power plants(1)..         677,291          516,439           707,962          502,416
      Natural gas derivative mark-to-market loss (gain)......           9,595          (30,995)            9,595          (30,995)
                                                                  -----------      -----------       -----------      -----------
        Total fuel expense...................................         686,886          485,444           717,557          471,421
   Depreciation, depletion and amortization expense..........         213,995          144,157           213,995          144,157
   Operating lease expense...................................          72,397           55,460            72,397           55,460
   Other expense.............................................           4,794            5,989             4,794            5,989
                                                                  -----------      -----------       -----------      -----------
           Total cost of revenue.............................       3,245,883        2,372,831         1,305,955          910,262
                                                                  -----------      -----------       -----------      -----------
Gross profit.................................................     $   434,270      $   579,793       $   434,270      $   579,793
                                                                  ===========      ===========       ===========      ===========
Gross profit margin..........................................              12%              20%               25%              39%

<CAPTION>
                                                                        Non-GAAP Netted                    Non-GAAP Netted
                                                                          Presentation                       Presentation
                                                                   Three Months Ended June 30,         Six Months Ended June 30,
                                                                  ----------------------------       ----------------------------
                                                                      2002             2001              2002              2001
                                                                  -----------      -----------       -----------      -----------
                                                                                          (In thousands)
<S>                                                               <C>              <C>               <C>              <C>
Other Non-GAAP Performance Metrics
Average availability and capacity factor:
   Average availability......................................              95%              91%               95%              91%
   Average capacity factor or operating rate based on
    total hours (excluding peakers)..........................              66%              65%               68%              67%
Average heat rate for gas-fired power plants (excluding
 peakers) (Btu's/kWh):
   Not steam adjusted........................................           8,158            8,504             8,165            8,582
   Steam adjusted............................................           7,455            7,612             7,416            7,562
Average all-in realized electric price:
   Adjusted electricity and steam revenue (in thousands).....     $   878,363      $   532,512       $ 1,591,681      $ 1,126,323
   MWh generated (in thousands)..............................          15,720            7,878            30,434           15,117
   Average all-in realized electric price per MWh............     $     55.88      $     67.59       $     52.30      $     74.51
Average cost of natural gas:
   Cost of oil and natural gas burned by power plants
    (in thousands)...........................................     $   383,911      $   245,228       $   707,962      $   502,416
   Fuel cost elimination.....................................          61,357           35,455            69,954           78,671
                                                                  -----------      -----------       -----------      -----------
   Adjusted cost of oil and natural gas burned by
    power plants.............................................     $   445,268      $   280,683       $   777,916      $   581,087
   MMBtu of fuel consumed by generating plants
    (in thousands)...........................................         112,750           53,151           219,274          101,144
   Average cost of natural gas per MMBtu.....................     $      3.95      $      5.28       $      3.55      $      5.75
   MWh generated (in thousands)..............................          15,720            7,878            30,434           15,117
   Average cost of oil and natural gas burned by
    power plants per MWh.....................................     $     28.32      $     35.63       $     25.56      $     38.44
Average spark spread:
   Adjusted electricity and steam revenue (in thousands).....     $   878,363      $   532,512       $ 1,591,681      $ 1,126,323
      Less: Adjusted cost of oil and natural gas burned by
       power plants (in thousands)...........................         445,268          280,683           777,916          581,087
                                                                  -----------      -----------       -----------      -----------
   Spark spread (in thousands)...............................     $   433,095      $   251,829       $   813,765      $   545,236
   MWh generated (in thousands)..............................          15,720            7,878            30,434           15,117
   Average spark spread per MWh..............................     $     27.56      $     31.97       $     26.74      $     36.07
</TABLE>
     The  non-GAAP  presentation  above  also  facilitates  a look at the  total
"trading"  activity  impact on gross profit.  For the three and six months ended
June 30, 2002 and 2001, trading activity consisted of (dollars in thousands):


                                      -37-
<PAGE>

<TABLE>
<CAPTION>
                                                                                 Three Months Ended            Six Months Ended
                                                                                      June 30,                     June 30,
                                                                              -----------------------       -----------------------
                                                                                2002           2001           2002           2001
                                                                              --------       --------       --------       --------
<S>                                                                           <C>            <C>            <C>            <C>
ELECTRICITY           Electric generation and marketing revenue
Realized gain (loss)    Sales of purchased power............................. $    819       $  1,073       $    976       $   (243)
Unrealized              Electric power derivative mark-to-market gain........    6,104         68,433         10,270         69,739
                                                                              --------       --------       --------       --------
   Subtotal.................................................................. $  6,923       $ 69,506       $ 11,246       $ 69,496
GAS                   Oil and gas production and marketing revenue
Realized gain (loss)    Sales of purchased gas............................... $  1,383       $  1,715       $  7,455       $  4,884
                      Fuel Expense
Unrealized              Natural gas derivative mark-to-market gain (loss)....   (3,203)        23,446         (9,595)        30,995
                                                                              --------       --------       --------       --------
   Subtotal.................................................................. $ (1,820)      $ 25,161       $ (2,140)      $ 35,879
</TABLE>

<TABLE>
<CAPTION>
                                                                                Three Months                Three Months
                                                                                   Ended      Percent of       Ended      Percent of
                                                                                  June 30,      Gross         June 30,      Gross
                                                                                    2002        Profit          2001        Profit
                                                                                ------------  ----------    ------------  ----------
<S>                                                                               <C>             <C>         <C>            <C>
Total trading activity gain..................................................     $  5,103        2.0%        $ 94,667       31.1%
Realized gain (loss).........................................................     $  2,202        0.9%        $  2,788        0.9%
Unrealized (mark-to-market) gain (loss)(2)...................................     $  2,901        1.1%        $ 91,879       30.2%

<CAPTION>
                                                                                 Six Months                  Six Months
                                                                                   Ended      Percent of       Ended      Percent of
                                                                                  June 30,      Gross         June 30,      Gross
                                                                                    2002        Profit          2001        Profit
                                                                                ------------  ----------     -----------  ----------
<S>                                                                               <C>             <C>         <C>            <C>
Total trading activity gain..................................................     $  9,106        2.1%        $ 105,375      18.2%
Realized gain (loss).........................................................     $  8,431        1.9%        $   4,641       0.8%
Unrealized (mark-to-market) gain (loss)(2)...................................     $    675        0.2%        $ 100,734      17.4%
<FN>
(1)  Following is a reconciliation of GAAP to non-GAAP  presentation  further to
     the  narrative  set forth  under  this  Performance  Metrics  section ($ in
     thousands):

     (2) For the three and six months  ended June 30, 2002,  the  mark-to-market
gains  shown  above  as  "trading"   activity   include  a  net  loss  on  hedge
ineffectiveness of $(12) and $(2,829),  consisting of an ineffectiveness loss on
power hedges of $(1,002) and $(1,224),  an ineffectiveness  gain (loss) on crude
oil costless  collar  arrangements  of $711 and $(4,330) and an  ineffectiveness
gain on gas hedges of $279 and $2,725.  For the three and six months  ended June
30, 2001, the  mark-to-market  gains shown above as "trading" activity include a
net loss on hedge  ineffectiveness  of $(2,781) and  $(3,472),  consisting of an
ineffectiveness  gain on power  hedges of $1,217  and $0 and an  ineffectiveness
loss on gas hedges of $(3,998) and $(3,472).
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                                                                      To Net
                                                                                     Hedging,
                                                                                    Balancing &         To Net            Netted
                                                                      GAAP         Optimization        Trading           Non-GAAP
                                                                     Balance         Activity          Activity          Balance
                                                                  -----------      ------------       ----------       -----------
<S>                                                               <C>               <C>               <C>               <C>
Three months ended June 30, 2002
   Electricity and steam revenue.............................     $   708,752       $  169,611        $      --        $   878,363
   Sales of purchased power..................................         868,606         (856,876)         (10,911)               819
   Sales of purchased gas....................................         302,044         (302,044)           1,383              1,383
   Purchased power expense...................................         698,176         (687,265)         (10,911)                --
   Purchased gas expense.....................................         333,724         (333,724)              --                 --
   Cost of oil and natural gas burned by power plants........         350,848           31,680            1,383            383,911
Three months ended June 30, 2001
   Electricity and steam revenue.............................     $   505,711       $   26,801        $      --        $   532,512
   Sales of purchased power..................................         683,196         (578,230)        (103,893)             1,073
   Sales of purchased gas....................................         226,693         (226,693)           1,715              1,715
   Purchased power expense...................................         655,322         (551,429)        (103,893)                --
   Purchased gas expense.....................................         218,330         (218,330)              --                 --
   Cost of oil and natural gas burned by power plants........         251,876           (8,363)           1,715            245,228
</TABLE>


                                      -38-
<PAGE>
<TABLE>
<CAPTION>
                                                                                      To Net
                                                                                     Hedging,
                                                                                    Balancing &         To Net            Netted
                                                                      GAAP         Optimization        Trading           Non-GAAP
                                                                     Balance         Activity          Activity          Balance
                                                                  -----------      ------------       ----------       -----------
<S>                                                               <C>               <C>               <C>               <C>
Six months ended June 30, 2002
   Electricity and steam revenue.............................     $ 1,328,931       $  262,750        $      --        $ 1,591,681
   Sales of purchased power..................................       1,776,907       (1,699,482)         (76,449)               976
   Sales of purchased gas....................................         434,202         (434,202)           7,455              7,455
   Purchased power expense...................................       1,513,181       (1,436,732)         (76,449)                --
   Purchased gas expense.....................................         457,418         (457,418)              --                 --
   Cost of oil and natural gas burned by power plants........         677,291           23,216            7,455            707,962
Six months ended June 30, 2001
   Electricity and steam revenue.............................     $ 1,100,870       $   25,453        $      --        $ 1,126,323
   Sales of purchased power..................................       1,136,798       (1,021,713)        (115,328)              (243)
   Sales of purchased gas....................................         355,865         (355,865)           4,884              4,884
   Purchased power expense...................................       1,111,588         (996,260)        (115,328)                --
   Purchased gas expense.....................................         336,958         (336,958)              --                 --
   Cost of oil and natural gas burned by power plants........         516,439          (18,907)           4,884            502,416
</TABLE>

Outlook

     At August 9, 2002, we had 25 projects under  construction,  representing an
additional  11,650  megawatts of net  capacity.  The  completion of our projects
currently  under  construction,  which we expect  to occur in the later  half of
2004, would give us interests in 96 power plants totaling 28,539 megawatts.

     Our new $2 billion revolving credit and term loan facilities and April 2002
issuance  of 66  million  shares  of  common  stock  together  with our  ongoing
financing programs and sales of non-strategic  assets have helped to improve our
2002 liquidity position.  For 2003 to 2004, our secured  construction  financing
revolving facilities will mature,  requiring us to restructure or refinance this
indebtedness.  We remain  confident  that we will have the ability to  refinance
this indebtedness as it matures, but recognize that this is dependent,  in part,
on market  conditions  that are  difficult  to  predict  and are  outside of our
control.  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 second
quarter of 2001 to the second quarter of 2002 and, as a result of the suspension
of certain of our  development  projects  and the  restructuring  of our turbine
contracts  completed to date,  our capital  expenditure  requirements  have been
reduced.  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  Annual  Report on Form  10-K for the year  ended  December  31,  2001,  and
optimistic about our future performance. However, market conditions make it more
difficult to predict future results than in prior  periods.  Additional  factors
that can affect our  future  performance  are  described  in the "Risk  Factors"
section of our Annual Report on Form 10-K for the year ended December 31, 2001.

Overview

Summary of Key Activities

Power Plant Development and Construction:


    Date               Project                         Description
  --------    ------------------------------   --------------------------------
    4/02      Island Cogeneration              Commercial operation
    4/02      Channel Energy Center            Combined-cycle operation
    5/02      Aries Power Peaker Plant         Combined-cycle operation
    5/02      Baytown Energy Center            Commercial operation
    6/02      Metcalf Energy Center            Construction commenced
    6/02      Decatur Energy Center            Partial commercial operation
    6/02      Freestone Energy Center          Partial commercial operation
    6/02      Zion Energy Center               Commercial operation
    6/02      Delta Energy Center              Commercial operation
    7/02      Freestone Energy Center          Combined-cycle operation
    7/02      Bethpage Energy Peaker Center    Commercial operation
    7/02      Yuba City Energy Center          Commercial operation
    8/02      Acadia Energy Center             Commercial operation











                                      -39-
<PAGE>

Finance

Note Repayments and New Funding:

       Date            Amount                          Description
  --------    -----------------------------    --------------------------------
  5/10/02     $500.0 million                   Funding under two-year term loan
  5/24/02     $100.0 million                   Funding for Gilroy and King City
                                                  Peaker Projects
  5/31/02     $500.0 million                   Funding under two-year term loan
   8/7/02     $50.0 million                    Repayment of peaker funding


Repurchases of Zero-Coupon Convertible Debentures Due 2021:

                    Date                                Amount
                  -------                          --------------
                  4/30/02                          $685.5 million


Sale of Common Stock:

   Date          Offering              Description            Use of Proceeds
---------   -------------------   ----------------------   ---------------------
 4/30/02    $759 million, gross   66 million shares        For general corporate
                                    at $11.50 per share      purposes, including
                                                             debt repayment

Other:

   Date                                Description
---------      -----------------------------------------------------------------
 4/22/02       Renegotiation of California Department of Water Resources
                 long-term power contracts
 6/28/02       Execution of definitive agreements with Wisconsin Public
                 Service for the sale of DePere Energy Center, including
                 termination of existing power purchase agreement


California Power Market

     On April 22, 2002, we announced  that we had  renegotiated  CES'  long-term
power  contracts with the California  Department of Water Resources (the "DWR").
The Office of the  Governor  of  California,  the  California  Public  Utilities
Commission (the "CPUC"), the California  Electricity Oversight Board (the "EOB")
and the  California  Attorney  General  (the  "AG")  endorsed  the  renegotiated
contracts and agreed to drop all pending claims  against us and our  affiliates,
including  withdrawing  the complaint under Section 206 of the Federal Power Act
that had been filed by the CPUC and EOB with FERC,  and the  termination  by the
CPUC and the EOB of their  efforts to seek  refunds  from us and our  affiliates
through FERC refund proceedings.  In connection with the renegotiation,  we have
agreed to pay $6  million  over  three  years to the AG to  resolve  any and all
possible claims against us and our affiliates brought by the AG.

     CES had  signed  three  long-term  contracts  with  DWR in  February  2001,
comprising  two  10-year  baseload  energy  contracts  and one  20-year  peaking
contract.  The renegotiation provided for the shortening of the duration of each
of the two 10-year,  baseload  energy  contracts by two years and of the 20-year
peaker contract by ten years.  These changes  reduced 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 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 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 we do not meet certain milestones with respect
to each project  assumed,  provided that DWR reimburses us for all  construction
costs  and  certain  other  costs  incurred  by us to the date DWR  assumes  the
relevant project. The Company will generate over $8.7 billion in revenue between
2002 and 2011 from the DWR contracts.

     In addition,  the  negotiation  resolved  the dispute  with DWR  concerning
payment of the capacity payment on the peaking  contract.  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 had 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,  we have received  payment in full on these withheld
capacity  payments  and will  have the  right to  provide  replacement  capacity
through December 31, 2002, 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.



                                      -40-
<PAGE>

Financial Market Risks

     As an  independent  power  producer  primarily  focused  on  generation  of
electricity using gas-fired turbines, our 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,   we  enter  into   derivative   commodity
instruments.  We enter 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 our  vulnerability  to  reductions  in
electric prices for the electricity we generate, to reductions in gas prices for
the gas we produce,  and to  increases  in gas prices for the fuel we consume in
our power plants.  We seek to "self-hedge"  our gas  consumption  exposure to an
extent  with  our  own gas  production  position.  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 and are designed to protect our "spark  spread" (the  difference  between
our fuel cost and the revenue we receive for our electric generation).  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.  From time to time we have entered into contracts  considered
energy trading  contracts under EITF Issue No. 98-10,  "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." However, our traders
have low  capital at risk and value at risk limits for energy  trading,  and our
risk management  policy limits, at any given time, our net sales of power to our
generation  capacity and limits our net purchases of gas to our 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 and EITF Issue No.
98-10.

     The change in fair value of outstanding  commodity  derivative  instruments
from January 1, 2002,  through June 30, 2002,  is  summarized in the table below
(in thousands):

<TABLE>
<S>                                                                                                 <C>
Fair value of contracts outstanding at January 1, 2002........................................      $ (88,123)
   (Gains) losses realized or otherwise settled during the period (1).........................        (95,167)
   Changes in fair value attributable to changes in valuation techniques and assumptions......             --
   Change in fair value attributable to new contracts and price movements.....................        176,748
   Reclassification of Enron obligations from derivative assets and liabilities to
    accounts payable (2)......................................................................        221,117
                                                                                                    ---------
      Fair value of contracts outstanding at June 30, 2002 (3)................................      $ 214,575
                                                                                                    =========
----------
<FN>
(1)  Realized gains from commodity cash flow hedges of $86.8 million reported in
     Note 8 of the  financial  statements  and  $8.4  million  realized  gain on
     trading  activity  reported  in  the  performance  metrics  section  of the
     management discussion and analysis, both included in this filing.

(2)  At termination the Enron  contracts  ceased to be derivatives as defined by
     SFAS 133;  however,  we are required to pay Enron for the contractual value
     at termination. See Note 10 to the financial statements.

(3)  Net  assets  reported  in Note 8 of the  Notes  to  Consolidated  Financial
     Statements included in this filing.

     The fair value of outstanding  derivative commodity instruments at June 30,
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):
</FN>
</TABLE>

<TABLE>
<CAPTION>
Fair Value Source                                               2002        2003-2004      2005-2006    After 2006      Total
-----------------                                            ----------     ---------      ---------    ----------    ---------
<S>                                                          <C>            <C>            <C>          <C>           <C>
   Prices actively quoted................................    $  (22,541)    $  35,225      $  (9,143)   $       --    $   3,541
   Prices provided by other external sources.............        81,796        88,434         35,119            24      205,373
   Prices based on models and other valuation methods....        (2,273)       (5,749)        16,334        (2,651)       5,661
                                                             ----------     ---------      ---------    ----------    ---------
      Total fair value...................................    $   56,982     $ 117,910      $  42,310    $   (2,627)     214,575
                                                             ==========     =========      =========    ==========    =========
</TABLE>







                                      -41-
<PAGE>

     Our risk  managers  maintain  fair value  price  information  derived  from
various  sources  in  our  risk  management  systems.   The  propriety  of  that
information is validated by our 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.

     The  counterparty   credit  quality  associated  with  the  fair  value  of
outstanding  derivative  commodity  instruments at June 30, 2002, and the period
during which the  instruments  will mature (i.e., be realized) are summarized in
the table below (in thousands):
<TABLE>
<CAPTION>
Credit Quality (based on July 23, 2002, ratings)               2002        2003-2004      2005-2006    After 2006      Total
-------------------------------------------------            ----------     ---------      ---------    ----------    ---------
<S>                                                          <C>            <C>            <C>          <C>           <C>
   Investment grade......................................    $   10,457     $ 127,214      $  51,990    $   (2,661)   $ 187,000
   Non-investment grade..................................        48,945        (8,523)        (9,680)           34       30,776
   No external ratings...................................        (2,420)         (781)            --            --       (3,201)
                                                             ----------     ---------      ---------    ----------    ---------
      Total fair value...................................    $   56,982     $ 117,910      $  42,310    $   (2,627)   $ 214,575
                                                             ==========     =========      =========    ==========    =========
</TABLE>

     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 June 30, 2002:
   Crude oil.............................    $   (2,315)         $    4,108
   Electricity...........................       255,322             (43,196)
   Natural gas...........................       (38,432)           (135,118)
                                             ----------          ----------
      Total..............................    $  214,575          $ (174,206)
                                             ==========          ==========

     Derivative  commodity  instruments included in the table are those included
in Note 8 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 our  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  58%
from December 31, 2001,  to June 30, 2002,  while the total volume of open power
derivative  positions  decreased  10% 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 our  derivatives  over time,
driven both by price  volatility  and the  changes 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 other comprehensive income ("OCI"), net of tax, or in the statement of
operations as an item (gain or loss) of current  earnings.  As of June 30, 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 our results during the six months ended June 30,
2002, have reflected  this. See Note 8 for additional  information on derivative
activity and also the 2001 Form 10-K for a further  discussion of our accounting
policies  related to derivative  accounting.  How we account for our derivatives
depends upon whether we have  designated  the  derivative as a cash flow or fair
value  hedge or not  designated  the  derivative  in a hedge  relationship.  The
following accounting applies:

                                      -42-
<PAGE>

     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
purchases  and normal  sales  exception  in SFAS No. 133.  On April 1, 2002,  we
adopted C16. We have no fuel supply contracts to which C16 applies. However, one
of our equity  method  investees has fuel supply  contracts  subject to C16. The
equity  investee  also  adopted  C16 on April 1,  2002.  Because  the  contracts
qualified as highly effective hedges of the equity method investee's  forecasted
purchase of gas, the equity  method  investee  designated  the contracts as cash
flow  hedges.  Accordingly,  we  have  recorded  $7.8  million  net  of tax as a
cumulative effect of change in accounting  principle to OCI for its share of the
equity method investee's OCI from accounting change.

     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 June 30, 2002,
(dollars in thousands):

<TABLE>
<CAPTION>
                      Notional Principal   Weighted Average     Weighted Average        Fair Market
   Maturity Date            Amount          Interest Rate        Interest Rate             Value
   -------------      ------------------   ----------------     ----------------        -----------
                                                (Pay)               (Receive)
   <S>                   <C>                     <C>            <C>                      <C>
   2011.........             51,760              6.9%           3-month US LIBOR         $ (5,120)
   2012.........            117,936              6.5%           3-month US LIBOR          (10,943)
   2014.........             67,929              6.7%           3-month US LIBOR           (6,598)
                         ----------              ---                                     ---------
      Total.....         $  237,625              6.7%           3-month US LIBOR         $ (22,661)
                         ==========              ===                                     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                           Frequency of
                                                                                             Currency        Fair Market
Maturity Date            Notional Principal                 Fixed Currency Exchange          Exchange          Value
-------------    -----------------------------------    -------------------------------    -------------     -----------
                            (Pay/Receive)                        (Pay/Receive)
<C>              <C>                                    <C>                                <C>               <C>
2007.........    US$127,763/C$200,000                   US$5,545/C$8,750                   Semi-annually     $   1,889
2008.........    Pound sterling 109,550/Euro 175,000    Pound sterling 5,152/Euro 7,328    Semi-annually         1,868
                                                                                                             ---------
   Total.....                                                                                                $   3,757
                                                                                                             =========
</TABLE>

     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  related   instruments   including
Convertible Senior Notes Due 2006 and construction/project financing. Our senior
notes and related  instruments  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.




                                      -43-
<PAGE>

     The  following  table  summarizes  the fair  market  value of our  existing
long-term senior notes and  construction/project  financing as of June 30, 2002,
(dollars in thousands):

<TABLE>
<CAPTION>
                                                                           Outstanding       Weighted Average        Fair Market
                            Instrument                                        Balance          Interest Rate            Value
-----------------------------------------------------------------          -----------       ----------------        -----------
Long-term senior notes:
<S>                                                                        <C>               <C>                     <C>
   Senior Notes Due 2005.........................................          $   250,000              8.3%             $   145,000
   Senior Notes Due 2006.........................................              171,750             10.5%                 108,203
   Senior Notes Due 2006.........................................              250,000              7.6%                 140,000
   Convertible Senior Notes Due 2006.............................            1,200,000              4.0%                 924,000
   Senior Notes Due 2007.........................................              275,000              8.8%                 154,000
   Senior Notes Due 2007.........................................              131,700              8.8%                  84,288
   Senior Notes Due 2008.........................................              400,000              7.9%                 208,000
   Senior Notes Due 2008.........................................            2,030,000              8.5%               1,096,200
   Senior Notes Due 2008.........................................              172,516              8.4%                 115,586
   Senior Notes Due 2009.........................................              350,000              7.8%                 182,000
   Senior Notes Due 2010.........................................              750,000              8.6%                 397,500
   Senior Notes Due 2011.........................................            2,000,000              8.5%               1,060,000
   Senior Notes Due 2011.........................................              304,920              8.9%                 198,198
                                                                           -----------            -----              -----------
      Total long-term senior notes...............................          $ 8,285,886              7.8%             $ 4,812,975
                                                                           ===========            =====              ===========
Construction/project financing:
   Peaker financing (1)..........................................          $   100,000           4.4% (2)            $   100,000
   Term loan due (due 2004)......................................            1,000,000       3-month US LIBOR          1,000,000
   Calpine Construction Finance Company L.P. (due 2003)..........              981,400       1-month US LIBOR            981,400
   Calpine Construction Finance Company II, LLC (due 2004).......            2,452,697       1-month US LIBOR          2,452,697
                                                                           -----------                               -----------
      Total long-term construction/project financing.............          $ 4,534,097                               $ 4,534,097
                                                                           ===========                               ===========
<FN>
(1)  $50 million  repaid  August  2002,  $50 million  due September 30,2002.
(2)  Blended rate of two tranches.
</FN>
</TABLE>

     Short-term   investments  --  As  of  June  30,  2002,  we  had  short-term
investments of $190.0 million.  These short-term  investments  consist of highly
liquid  investments with original  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.

     Construction/project  financing  facilities  -- In 2003  and  2004,  $981.4
million and  $2,452.7  million,  respectively,  under our  secured  construction
financing  revolving  facilities  will mature,  requiring  us to refinance  this
indebtedness.  We remain  confident  that we will have the ability to  refinance
this indebtedness as it matures, but recognize that this is dependent,  in part,
on market conditions that are difficult to predict.

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 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





                                      -44-
<PAGE>

fair  value can be made.  SFAS No. 143 is  effective  for  financial  statements
issued for fiscal years  beginning  after June 15, 2002.  We do not believe that
SFAS  No.  143  will  have  a  material  impact  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
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 has not had 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" stating that
gains or losses from  extinguishment  of debt that fall outside the scope of APB
Opinion  No. 30 should not be  classified  as  extraordinary.  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 adoption  encouraged.  We have not completed our analysis but believe
that  SFAS  No.  145 may  have a  material  effect  on the  presentation  of our
financial statements, but no impact on net income.

     In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal  Activities," which addresses accounting for restructuring
and  similar  costs.  SFAS No.  146  supersedes  previous  accounting  guidance,
principally  EITF Issue No. 94-3,  "Liability  Recognition for Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (Including  Certain
Costs  Incurred in a  Restructuring)."  We will adopt the provisions of SFAS No.
146 for restructuring activities initiated after December 31, 2002. SFAS No. 146
requires  that the  liability  for  costs  associated  with an exit or  disposal
activity be recognized  when the liability is incurred.  Under Issue No. 94-3, a
liability  for an exit cost was  recognized at the date of commitment to an exit
plan.  SFAS No. 146 also  establishes  that the  liability  should  initially be
measured  and recorded at fair value.  Accordingly,  SFAS No. 146 may affect the
timing  of  recognizing  future  restructuring  costs  as  well  as the  amounts
recognized.  We do not believe that SFAS No. 146 will have a material  effect on
our consolidated financial statements.

     In June  2002 the EITF  reached  a  consensus  on two of the  three  issues
considered  in EITF 02-03,  "Recognition  and  Reporting  of Gains and Losses on
Energy Trading Contracts under EITF Issues No. 98-10,  `Accounting for Contracts
Involved  in Energy  Trading  and Risk  Management  Activities'  and No.  00-17,
`Measuring  the Fair Value of  Energy-Related  Contracts  in applying  Issue No.
98-10.'"  The  issues  upon  which the EITF  reached a  consensus  required  net
presentation, both prospective and retroactive, of energy trading contracts in a
company's  financial   statements  and  required  that  companies  make  certain
disclosures  regarding  their energy  trading  contracts.  The net  presentation
requirement  is effective for  financial  statements  issued for periods  ending
after July 15, 2002, and the disclosure requirements are effective for financial
statements  issued for fiscal years  ending  after July 15,  2002.  We are still
assessing the impacts of adopting this standard on our financial statements, but
we believe,  as a minimum,  all energy  trading  contracts will be reported net,
rather than gross,  upon adoption of this standard.  The standard is expected to
have a material  impact on total  revenues  and  expenses,  but no impact on net
income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

See "Financial Market Risks" in Item 2.








                                      -45-
<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

     Securities  Derivative Lawsuit. On December 17, 2001, a shareholder filed a
derivative  lawsuit on behalf of Calpine  against our  directors  and one of our
senior officers.  This lawsuit is captioned  Johnson v. 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.  We have 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.  We  consider  this
lawsuit to be without merit and intend to vigorously defend against it.

     Securities Class Action Lawsuits.  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 v. 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 v.  Calpine  Corp.,  Lukowski v.  Calpine  Corp.,  Hart v.  Calpine  Corp.,
Atchison v. Calpine Corp., 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 our securities  between January 5, 2001, and December
13, 2001.

     The complaints in these fourteen actions allege that,  during the purported
class periods,  certain senior  Calpine  executives  issued false and misleading
statements  about our  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.

     In addition,  a fifteenth  securities class action, Ser v. Calpine, et al.,
was filed on May 13,  2002.  The  underlying  allegations  in the Ser action are
substantially the same to those in the  above-referenced  actions.  However, the
Ser action is brought on behalf of a purported  class of  purchasers of our 8.5%
Senior Notes due February 15, 2011 ("2011 Notes"),  and the alleged class period
is October 15, 2001,  through December 13, 2001. The Ser complaint alleges that,
in violation of Sections 11 and 15 of the Securities Act of 1933, the Prospectus
Supplement  dated  October  11,  2001,  for the 2011 Notes  contained  false and
misleading  statements  regarding  our  financial  condition.  This action names
Calpine, certain of our officers and directors, and the underwriters of the 2011
Notes offering as defendants,  and seeks an  unspecified  amount of damages,  in
addition  to other  forms of relief.  We expect  that this action will either be
consolidated  with the  above-referenced  actions or will  proceed as a parallel
related  action  before  the same judge  presiding  over the other  actions.  We
consider the allegations against Calpine in each of these lawsuits to be without
merit, and we intend to defend vigorously against them.

     California  Business & Professions Code Section 17200 Cases--The lead case,
T&E Pastorino Nursery v. Duke Energy Trading and Marketing,  L.L.C., et al., was
served on May 2, 2002,  by T&E Pastorino  Nursery,  on behalf of itself and all
others similarly situated.  This purported class action complaint against twenty
energy  traders and energy  companies  including  CES,  alleges that  defendants
exercised  market  power and  manipulated  prices  in  violation  of  California
Business & Professions Code Section 17200 et seq., and seeks injunctive  relief,
restitution and attorneys' fees.

     We also have been named in five other similar  complaints for violations of
Section 17200 captioned  Bronco Don Holdings,  LLP. v. Duke Energy Marketing and
Trading, et al.; Century Theatres, Inc. v. Allegheny Energy Supply Company, LLC;
RDJ Farms,  Inc. v.  Allegheny  Energy Supply  Company,  LLC; J&M Karsant Family
Limited Partnership v. Duke Energy Trading and Marketing, LLC; and Leo's Day and
Night Pharmacy v. Duke Energy Trading and Marketing, LLC. All six of these cases
have been  removed in a  multidistrict  litigation  proceeding  from the various
state  courts in which  they were  originally  filed to federal  court,  where a
motion is now  pending to transfer  and  consolidate  these  cases for  pretrial
proceedings  with  other  cases  in which we are not  named as a  defendant.  In
addition,  plaintiffs in the T&E  Pastorino  Nursery case have filed a motion to
remand that matter to California state court.

     We consider the allegations against Calpine in each of these lawsuits to be
without merit, and we intend to vigorously defend against them.

                                      -46-
<PAGE>

     California  Department of Water Resources Case. On May 1, 2002,  California
State  Senator  Tom  McClintock  and others  filed a  complaint  against  Vikram
Budhraja,  a consultant to DWR, DWR itself, and more than twenty-nine energy
providers and other interested parties, including Calpine. The complaint alleges
that the  long-term  power  contracts  that DWR entered  into with these  energy
providers, including Calpine, are rendered void because Budhraja, who negotiated
the contracts on behalf of DWR, allegedly had an undisclosed  financial interest
in the contracts due to his  connection to one of the energy  providers,  Edison
International. Among other things, the complaint seeks an injunction prohibiting
further performance of the long-term contracts and restitution of any funds paid
to energy providers by the State of California under the contracts.  We consider
the  allegations  against Calpine in this lawsuit to be without merit and intend
to vigorously defend against them.

     Nevada  Section 206  Complaint.  On December 4, 2001,  NPC and SPPC filed a
complaint with the Federal Energy Regulatory  Commission  ("FERC") under Section
206 of the  Federal  Power Act  against a number of parties to their power sales
agreements,  including  Calpine.  NPC and SPPC allege in their complaint,  which
seeks a refund, that the prices they agreed to pay in certain of the power sales
agreements,  including those signed with Calpine,  were negotiated during a time
when  the  power  market  was   dysfunctional  and  that  they  are  unjust  and
unreasonable.  We consider the complaint to be without merit and are  vigorously
defending against it.

     Emissions Credits Lawsuit.  As described in our previous reports,  on March
5, 2002, we sued Automated  Credit Exchange ("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 our account with U.S.  Trust  Company ("US
Trust").  Calpine and ACE entered into a settlement agreement on March 29, 2002,
pursuant to which ACE made a payment to us of $7 million and  transferred  to us
the rights to the emission reduction credits to be held by ACE, and we dismissed
our complaint against ACE. We recognized the $7 million in the second quarter of
2002.  In June  2002 a  complaint  was filed by  InterGen  North  America,  L.P.
("InterGen"),  against Anne M. Sholtz, the owner of ACE, and EonXchange, another
Sholtz-controlled  entity, which filed for bankruptcy protection on May 6, 2002.
InterGen  alleges  it  suffered  a  loss  of  emission  reduction  credits  from
EonXchange  in a manner  similar  to our loss  from  ACE.  InterGen's  complaint
alleges  that Anne Sholtz  co-mingled  assets  among ACE,  EonXchange  and other
Sholtz  entities and that ACE and other Sholtz  entities  should be deemed to be
one  economic  enterprise  and  all  retroactively  included  in the  EonXchange
bankruptcy filing as of May 6, 2002.  InterGen's complaint refers to the payment
by ACE of $7 million to us,  alleging  that  InterGen's  ability to recover from
EonXchange has been undermined  thereby.  We are unable to assess the likelihood
of InterGen's complaint being upheld at this time.

     We are involved in various  other claims and legal  actions  arising out of
the normal  course of our  business.  We do not expect that the outcome of these
proceedings  will have a material  adverse  effect on our financial  position or
results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

     Our Annual Meeting of  Stockholders  was held on May 23, 2002, (the "Annual
Meeting") in Aptos, California. At the Annual Meeting, the stockholders voted on
the following matters:  (i) the proposal to elect two Class III Directors to the
Board of Directors for a term of three years expiring in 2005, (ii) the proposal
to amend the Company's  1996 Stock  Incentive Plan to increase by 12 million the
number  of shares  of the  Company's  Common  Stock,  par value  $.001 per share
("Common Stock")  available for grants of options and other  stock-based  awards
under such plan,  (iii) the proposal to amend the Company's  2000 Employee Stock
Purchase Plan to increase by 8 million the number of Common Stock  available for
grants of  purchase  rights  under such  plan,  (iv) two  stockholder  proposals
regarding (a) the  composition  of the Company's  Board of Directors and (b) the
Company's stockholder rights plan, (v) the proposal to ratify the appointment of
Deloitte & Touche LLP as independent  accountants for the Company for the fiscal
year ending December 31, 2002. The stockholders elected management's nominees as
the Class III Directors in an  uncontested  election,  approved the amendment to
the Company's 1996 Stock  Incentive Plan to increase by 12 million the number of
shares of the Company's  Common Stock  available for grants of options and other
stock-based awards under such plan, approved the amendment to the Company's 2000
Employee Stock Purchase Plan to increase by 8 million the number of Common Stock
available  for  grants  of  purchase  rights  under  such  plan,   rejected  the
stockholder  proposal  regarding  the  composition  of the  Company's  Board  of
Directors,  approved  the  stockholder  proposal  that the Board of Directors be
requested to redeem the stockholders  right plan unless such plan is approved by
a majority vote of the  stockholders  to be held as soon as may be  practicable,
and ratified the appointment of independent  accountants by the following votes,
respectively:








                                      -47-
<PAGE>

(i)    Election of Peter  Cartwright as Class III Director for a three-year term
       expiring 2005: 266,247,019 FOR and 3,748,417 ABSTAIN;

       Election of Susan C. Schwab as Class III Director  for a three-year  term
       expiring 2005: 266,315,844 FOR and 3,679,592 ABSTAIN;

(ii)   Amendment to the Company's  1996 Stock  Incentive  Plan to increase by 12
       million the number of shares of the Company's  Common Stock available for
       grants  of  options  and  other  stock-based   awards  under  such  plan:
       84,312,894 FOR,  68,320,701  AGAINST, 2,204,515  ABSTAIN, and 115,157,326
       Broker non-votes;

(iii)  Amendment to the Company's  Employee Stock Purchase Plan to increase by 8
       million the number of shares of the Company's  Common Stock available for
       grants of purchase rights under such plan:  137,879,225  FOR,  14,783,654
       AGAINST, 2,175,231 ABSTAIN, and 115,157,326 Broker non-votes;

(iv)   Proposal  regarding  composition  of the  Company's  Board of  Directors:
       51,697,103 FOR,  100,003,353 AGAINST,  3,137,654 ABSTAIN, and 115,157,326
       Broker non-votes;

(v)    Proposal  that  the  Board  of  Directors  be  requested  to  redeem  the
       stockholders  right plan unless such plan is approved by a majority  vote
       of the stockholders to be held as soon as may be practicable:  92,639,512
       FOR,  58,655,073  AGAINST,  3,543,525  ABSTAIN,  and  115,157,326  Broker
       non-votes;

     (vi)   Ratification  of  the  appointment  of  Deloitte  &  Touche  LLP  as
independent   accountants   for  the  fiscal  year  ending  December  31,  2002:
261,041,303 FOR, 4,899,355 AGAINST, and 4,054,779 ABSTAIN.

       The three-year  terms of Class I and Class II Directors  continued  after
the Annual Meeting and will expire in 2003 and 2004,  respectively.  The Class I
Directors are Jeffrey E. Garten,  George J. Stathakis,  and John O. Wilson.  The
Class II Directors are Ann B. Curtis, Kenneth T. Derr and Gerald Greenwald.

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 (e)

     *3.9      Certificate of Ownership and Merger Merging  Calpine  Natural Gas
               Company into Calpine Corporation (e)

     *3.10     Amended and Restated By-laws of Calpine Corporation (f)

     *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 (g)





                                      -48-
<PAGE>

                                  EXHIBIT INDEX
                                   (continued)
    EXHIBIT
     NUMBER                        DESCRIPTION
    -------    -----------------------------------------------------------------

     *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 (f)

     *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
               (f)

     *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
               (e)

     *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 (f)

     *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 (e)

     +10.7     Increase in Term B Loan Commitment Amount Notice, effective as of
               May 31, 2002, by The Bank of Nova Scotia and Citicorp USA,  Inc.,
               as Administrative Agents

     *10.8     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
               (f)

     *10.9     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 (f)

     *10.10    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 (e)

     *10.11    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 (f)

     *10.12    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 (e)

     *10.13    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 (e)

     *10.14    Note 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 (e)

     +10.15    Hazardous Materials Undertaking and Indemnity (Multistate), dated
               as of May 9,  2002,  by the  Company in favor of The Bank of Nova
               Scotia, as Agent

     +10.16    Hazardous Materials Undertaking and Indemnity (California), dated
               as of May 9,  2002,  by the  Company in favor of The Bank of Nova
               Scotia, as Agent

     +10.17    Form of Mortgage, Deed of Trust, Assignment,  Security Agreement,
               Financing  Statement and Fixture  Filing  (Multistate),  from the
               Company to Jon Burckin and Kemp  Leonard,  as  Trustees,  and The
               Bank of Nova Scotia, as Agent




                                      -49-
<PAGE>

                                  EXHIBIT INDEX
                                   (continued)
    EXHIBIT
     NUMBER                        DESCRIPTION
    -------    -----------------------------------------------------------------

     +10.18    Form  of  Deed  of  Trust  with  Power  of  Sale,  Assignment  of
               Production,  Security Agreement,  Financing Statement and Fixture
               Filing (California), dated as of May 1, 2002, from the Company to
               Chicago Title Insurance Company, as Trustee, and The Bank of Nova
               Scotia, as Agent

     +10.19    Form of Mortgage, Deed of Trust, Assignment,  Security Agreement,
               Financing  Statement and Fixture Filing  (Colorado),  dated as of
               May 1, 2002,  from the Company to Kemp Leonard and John Quick, as
               Trustees, and The Bank of Nova Scotia, as Agent

     +10.20    Form of Mortgage,  Assignment,  Security  Agreement and Financing
               Statement (Louisiana),  dated as of May 1, 2002, from the Company
               to The Bank of Nova Scotia, as Agent

     +10.21    Form of Mortgage, Deed of Trust, Assignment,  Security Agreement,
               Financing Statement and Fixture Filing (New Mexico),  dated as of
               May 1, 2002,  from the Company to Kemp Leonard and John Quick, as
               Trustees, and The Bank of Nova Scotia, as Agent

     +99.1     Certification of Peter Cartwright  Pursuant to 18 U.S.C.  Section
               1350,  as Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
               Act of 2002

     +99.2     Certification  of Robert D. Kelly  Pursuant to 18 U.S.C.  Section
               1350,  as Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
               Act of 2002

----------------
*    Incorporated by reference
+    Filed herewith

(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 Quarterly Report on Form
     10-Q dated March 31, 2002, filed with the SEC on May 15, 2002.

(f)  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.

(g)  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 or Form 8-K/A during
the quarter ended June 30, 2002:

      .      Date of Report               Date Filed           Item Reported
       ---------------------------     ----------------        -------------
      March 25, 2002..............      April 8, 2002               4,7
      April 22, 2002..............      April 25, 2002              5,7
      April 24, 2002..............      April 26, 2002              5,7
      May 2, 2002.................      May 3, 2002                 5,7
      May 31, 2002................      June 4, 2002                5,7
      June 4, 2002................      June 6, 2002                5,7










                                      -50-
<PAGE>



                                   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


Date: August 9, 2002                   By:         /s/ ROBERT D. KELLY
                                          -------------------------------------
                                                     Robert D. Kelly
                                               Executive Vice President and
                                                  Chief Financial Officer
                                               (Principal Financial Officer)

Date: August 9, 2002                   By:      /s/ CHARLES B. CLARK, JR.
                                          --------------------------------------
                                                   Charles B. Clark, Jr.
                                                 Senior Vice President and
                                                   Corporate Controller
                                               (Principal Accounting Officer)































































                                      -51-
<PAGE>

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 (e)

     *3.9      Certificate of Ownership and Merger Merging  Calpine  Natural Gas
               Company into Calpine Corporation (e)

     *3.10     Amended and Restated By-laws of Calpine Corporation (f)

     *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 (g)

     *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 (f)

     *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
               (f)

     *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
               (e)

     *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 (f)

     *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 (e)

     +10.7     Increase in Term B Loan Commitment Amount Notice, effective as of
               May 31, 2002, by The Bank of Nova Scotia and Citicorp USA,  Inc.,
               as Administrative Agents

     *10.8     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
               (f)

     *10.9     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 (f)


                                      -52-
<PAGE>

                                  EXHIBIT INDEX
                                  (continued)
    EXHIBIT
     NUMBER                        DESCRIPTION
    -------    -----------------------------------------------------------------

     *10.10    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 (e)

     *10.11    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 (f)

     *10.12    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 (e)

     *10.13    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 (e)

     *10.14    Note 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 (e)

     +10.15    Hazardous Materials Undertaking and Indemnity (Multistate), dated
               as of May 9,  2002,  by the  Company in favor of The Bank of Nova
               Scotia, as Agent

     +10.16    Hazardous Materials Undertaking and Indemnity (California), dated
               as of May 9,  2002,  by the  Company in favor of The Bank of Nova
               Scotia, as Agent

     +10.17    Form of Mortgage, Deed of Trust, Assignment,  Security Agreement,
               Financing  Statement and Fixture  Filing  (Multistate),  from the
               Company to Jon Burckin and Kemp  Leonard,  as  Trustees,  and The
               Bank of Nova Scotia, as Agent

     +10.18    Form  of  Deed  of  Trust  with  Power  of  Sale,  Assignment  of
               Production,  Security Agreement,  Financing Statement and Fixture
               Filing (California), dated as of May 1, 2002, from the Company to
               Chicago Title Insurance Company, as Trustee, and The Bank of Nova
               Scotia, as Agent

     +10.19    Form of Mortgage, Deed of Trust, Assignment,  Security Agreement,
               Financing  Statement and Fixture Filing  (Colorado),  dated as of
               May 1, 2002,  from the Company to Kemp Leonard and John Quick, as
               Trustees, and The Bank of Nova Scotia, as Agent

     +10.20    Form of Mortgage,  Assignment,  Security  Agreement and Financing
               Statement (Louisiana),  dated as of May 1, 2002, from the Company
               to The Bank of Nova Scotia, as Agent

     +10.21    Form of Mortgage, Deed of Trust, Assignment,  Security Agreement,
               Financing Statement and Fixture Filing (New Mexico),  dated as of
               May 1, 2002,  from the Company to Kemp Leonard and John Quick, as
               Trustees, and The Bank of Nova Scotia, as Agent

     +99.1     Certification of Peter Cartwright  Pursuant to 18 U.S.C.  Section
               1350,  as Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
               Act of 2002

     +99.2     Certification  of Robert D. Kelly  Pursuant to 18 U.S.C.  Section
               1350,  as Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
               Act of 2002

----------------
*    Incorporated by reference
+    Filed herewith

(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.




                                      -53-
<PAGE>

(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 Quarterly Report on Form
     10-Q dated March 31, 2002, filed with the SEC on May 15, 2002.

(f)  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.

(g)  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.











































































                                      -54-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>ex10-7.txt
<TEXT>
                                                                    EXHIBIT 10.7


                INCREASE IN TERM B LOAN COMMITMENT AMOUNT NOTICE


To the Revolving Lenders party to the
hereinafter described Credit Agreement

     Re: Calpine Corporation

Gentlemen and Ladies:

     This  notice is  delivered  to you  pursuant  to Section  2.8 of the Credit
Agreement,  dated as of March 8, 2002 (together with all amendments from time to
time made  thereto,  the  "Credit  Agreement"),  among  Calpine  Corporation,  a
Delaware  corporation (the "Borrower"),  certain financial  institutions and The
Bank Of Nova Scotia and Citicorp USA, Inc.  ("Citi"),  as administrative  agents
(the  "Administrative  Agents").  Unless otherwise defined herein or the context
otherwise  requires,  terms used herein have the meanings provided in the Credit
Agreement.

     Pursuant to a letter dated May 31, 2002,  the Borrower  requested,  and the
Lead Term B Arrangers approved, an increase in the Term B Loan Commitment Amount
by  $400,000,000  (the "Increased  Amount").  As of May 31, 2002, the applicable
Percentages  of each Lender  shall be  adjusted to give effect to the  Increased
Amount and the Revolving  Commitment  Amount of each  Revolving  Lender shall be
reduced as follows.

     Pursuant to the Fee Letter,  until the Revolving  Commitment Amount of each
of the Revolving Lead Arrangers have been reduced to $100,000,000, the Increased
Amount  shall be applied to the ratable  reduction of the  Revolving  Commitment
Amount of each of the Revolving Lead  Arrangers.  Once the Revolving  Commitment
Amount  of each of the  Revolving  Lead  Arrangers  has  been  so  reduced,  the
remaining  Increased  Amount  shall be applied to the ratable  reduction  of the
Revolving Commitment Amount of the Revolving Lead Arrangers and Toronto Dominion
(Texas) Inc. The new schedule  reflecting the revised Revolving  Commitments and
Revolving  Percentages of each Revolving  Lender are attached hereto as Schedule
II.

                                            THE BANK OF NOVA SCOTIA, as
                                            Administrative Agent


                                            By:  /s/ KEMP LEONARD
                                                 -------------------------------
                                                 Name:  Kemp Leonard
                                                        ------------------------
                                                 Title: Director
                                                        ------------------------


                                            CITICORP USA, INC., as
                                            Administrative Agent


                                            By:  /s/ DAVE R. GONCHER
                                                 -------------------------------
                                            Name:  Dave R. Goncher
                                                   -----------------------------
                                            Title: Director
                                                   -----------------------------



<PAGE>


                                                                     SCHEDULE II


                                                       Revolving      Revolving
Lender                                                 Commitment     Percentage
------                                                 -----------    ----------

The Bank of Nova Scotia                                $80,000,000      13.333%
Citicorp USA, Inc.                                     $80,000,000      13.333%
Bayerische Landesbank Girozentrale                     $80,000,000      13.333%
Bankers Trust Company                                  $80,000,000      13.333%
Credit Suisse First Boston, Cayman Islands Branch      $80,000,000      13.333%
Bank of America, National Association                  $80,000,000      13.333%
Toronto Dominion (Texas) Inc.                          $80,000,000      13.333%
ING (U.S.) Capital LLC                                 $40,000,000       6.667%

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>ex10-15.txt
<TEXT>
                                                                   EXHIBIT 10.15

                                                           Execution Counterpart

                  HAZARDOUS MATERIALS UNDERTAKING AND INDEMNITY


     This Hazardous  Materials  Undertaking and Indemnity (this  "Indemnity") is
executed by CALPINE  CORPORATION,  a Delaware  corporation (the "Indemnitor") in
favor of THE BANK OF NOVA SCOTIA, a Canadian chartered bank ("Scotiabank"),  for
itself  and as agent  for the  commercial  lending  institutions  to each of the
Credit Agreements (as defined below) (herein collectively, with their successors
and  assigns,  the  "Lenders";  the  Agent,  all  Issuers  and the  Lenders  are
collectively  referred to as the "Indemnified  Parties"),  with reference to the
following facts:

     A.  Indemnitor  is party to that  certain  (i) Credit  Agreement  (the "New
Credit  Agreement"),  dated as of March 8, 2002, among  Indemnitor,  the various
financial institutions as are or may become parties thereto  (collectively,  the
"New Lenders"), 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, New York Branch, as lead arrangers
and  syndication  agents and TD  Securities  (USA) Inc.,  as lead  arranger  and
Scotiabank as joint  administrative  agent and funding agent,  and Citicorp USA,
Inc., as Joint  Administrative Agent and (ii) Second Amended and Restated Credit
Agreement (the  "Existing  Credit  Agreement",  and together with the New Credit
Agreement, the "Credit Agreements"), dated as of May 23, 2000, among Indemnitor,
the various  financial  institutions  as are or may become parties  thereto (the
"Existing  Lenders"),  Bayerische  Landesbank  Girozentrale,  as co-arranger and
syndication agent for the Existing Lenders and the Agent.

     B. The Loans, the Letters of Credit, the Guaranty and all other Obligations
owing  to any of the  Lenders  under  each of the  Credit  Agreements  are to be
secured  by,  among  other  things,  all of the  right,  title and  interest  of
Indemnitor  in the real  property  and  interests  comprising  the  Domestic Gas
Reserves and all fixtures, personal property and other improvements now existing
or to be constructed on any of such properties (such properties, descriptions of
which  are  attached  hereto as  Exhibit  A,  herein  collectively  called,  the
"Properties"), with respect to which Indemnitor has executed counterparts of the
Deed of Trust.

     C. Lenders are willing to make the Credit Extensions to Indemnitor upon the
terms and conditions set forth in the Credit  Agreements,  the Deed of Trust and
the  other  Loan  Documents  (collectively,  the "Loan  Documents")  only if the
Indemnified  Parties are  indemnified and held harmless with respect to any risk
that the Properties may now or in the future be in any way contaminated,  or its
use or value impacted by any Hazardous Materials, as defined below.

     D. It is a  condition  precedent  to the  making  of the  Term B Loans  and
issuance  of the  Letters of Credit that  Indemnitor  execute  and deliver  this
Indemnity.

     E. In order to induce  the Agent and the  Lenders  to make the Loans and to
issue or cause to be issued the Letters of Credit,  and with the full  intention
and


<PAGE>

understanding  that  the  Indemnified  Parties  will  rely  hereon,   Indemnitor
represents, warrants, covenants and agrees as follows:

     1. Certain  Definitions.  As used in this  Indemnity,  the following  terms
shall have the following respective meanings:

     "Hazardous  Materials"  means  crude or refined  oil or  fraction  thereof,
petroleum  substances,   petrochemical   products,   PCBs,  asbestos,   asbestos
containing   materials,   urea  formaldehyde,   salts,   flammable   explosives,
radioactive   materials,   hazardous  wastes,  toxic,  mutagenic  or  pathogenic
substances or related materials,  including,  without limitation, any substances
defined as or included in the definition of "hazardous  substances,"  "hazardous
wastes,"  "hazardous  materials,"  or "toxic  substances"  under any  applicable
federal or state laws or regulations.

     "Hazardous  Materials  Laws"  means  all  federal,  state  or  local  laws,
ordinances,   regulations,   orders  and  directives   pertaining  to  Hazardous
Materials.

     Capitalized  terms used and not  otherwise  defined  herein  shall have the
respective  meanings specified in either or both of the New Credit Agreement and
the Existing Credit Agreement, as context requires.

     2.  Representations and Warranties.  Without limiting the generality of any
of the  representations  or  warranties  contained in the other Loan  Documents,
Indemnitor hereby represents and warrants to the Agent and the other Indemnified
Parties  that,  except as disclosed on Exhibit B hereto,  as of the date of this
Indemnity and continuing thereafter,

          (a) the Properties and each portion thereof  (including the underlying
     groundwater)  are not and have  not  been a site  for the use,  generation,
     manufacture, discharge, assembly, processing, storage, release, disposal or
     transportation to or from of any Hazardous Materials,  except in connection
     with the production,  storage and transportation of crude oil, natural gas,
     other  hydrocarbons  and  petroleum,  and other  petroleum  products in the
     ordinary course of Indemnitor's business;

          (b) the Properties and each portion thereof  (including the underlying
     groundwater) are presently in compliance in all material  respects with all
     Hazardous Materials Laws, including,  without limitation, those relating to
     exposure to Hazardous Materials,  the labeling,  storage and containment of
     Hazardous Materials, and air, soil and surface and ground water conditions;

          (c)  there  have  been no  past,  and  there  are no  pending  or,  to
     Indemnitor's knowledge, threatened

               (i)  claims,  complaints,  notices or  requests  for  information
          received by  Indemnitor  with respect to any alleged  violation of any
          Environmental Law, including Hazardous Materials Laws, that, singly or
          in


                                      -2-
<PAGE>

          the  aggregate,  may reasonably be expected to result in a Material
          Adverse Effect, or

               (ii)  complaints,  notices or inquiries to  Indemnitor  regarding
          potential  liability under any Environmental Law, including  Hazardous
          Materials Laws,  that,  singly or in the aggregate,  may reasonably be
          expected to result in a Material Adverse Effect;

          (d) there have been no  unremediated  Releases of Hazardous  Materials
     at, on or under any property  (including the  Properties) now or previously
     owned or leased by Indemnitor that, singly or in the aggregate,  result in,
     or may reasonably be expected to result in, a Material Adverse Effect;

          (e) Indemnitor has been issued and is in material  compliance with all
     permits,   certificates,   approvals,   licenses  and  other   governmental
     authorizations  relating to  environmental  matters and  necessary  for its
     businesses;

          (f) no property  (including the Properties) now or previously owned or
     leased by  Indemnitor  is listed or proposed for listing  (with  respect to
     owned property only) on the National Priorities List pursuant to CERCLA, on
     the CERCLIS or on any similar state list of sites  requiring  investigation
     or clean-up;

          (g) Indemnitor has not directly  transported or directly  arranged for
     the  transportation  of any  Hazardous  Material to any  location  which is
     listed or proposed for listing on the National  Priorities List pursuant to
     CERCLA, on the CERCLIS or on any similar state list or which is the subject
     of  federal,  state or local  enforcement  actions or other  investigations
     which may lead to material claims against Indemnitor for any remedial work,
     damage to natural  resources  or personal  injury,  including  claims under
     CERCLA;

          (h) there are no polychlorinated biphenyls or friable asbestos present
     at any property  (including  the  Properties)  now or  previously  owned or
     leased by Indemnitor  that,  singly or in the aggregate,  result in, or may
     reasonably be expected to result in, a Material Adverse Effect; and

          (i) no conditions  exist at, on or under any property  (including  the
     Properties) now or previously owned or leased by Indemnitor which, with the
     passage  of time,  or the  giving  of notice  or both,  would  give rise to
     liability under any Environmental  Law, which liability would reasonably be
     expected to result in a Material Adverse Effect.

     3. Covenants.  Indemnitor  hereby covenants and agrees that, so long as any
obligation  under any of the Loan Documents or otherwise in connection  with the
Loans is outstanding:

          (a)  Indemnitor  shall not permit the Properties or any portion of any
     parcel  thereof  to  be  a  site  for  the  use,  generation,  manufacture,
     discharge,   assembly,   processing,    storage,   Release,   disposal   or
     transportation to or from of


                                      -3-
<PAGE>

     Hazardous  Materials  except (i) as disclosed on Exhibit B hereto,  (ii) in
     such  quantities  and as may be necessary for the  production,  storage and
     transportation of crude oil, natural gas and other Hydrocarbons (as defined
     in the Deed of Trust) in the ordinary  course of  Indemnitor's  business as
     conducted on the Effective Date,  (iii) as necessary or required to develop
     the Properties in the ordinary course of Indemnitor's  business and (iv) as
     may be  necessary  to  respond  to any  emergency,  each of which  excepted
     activities will be conducted in a manner designed to minimize environmental
     risk;

          (b) Indemnitor shall keep and maintain the Properties and each portion
     of any parcel  thereof in  compliance  in all  material  respects  with all
     Environmental  Laws,  including Hazardous Materials Laws (and to the extent
     there are  violations of such laws existing as of the date hereof which are
     disclosed on Exhibit B, with the remediation plans and work plans listed on
     Exhibit B), and otherwise  shall not cause or permit the  Properties or any
     portion of any parcel thereof to be in violation,  in any material respect,
     of such laws;

          (c) As to any claim or matter not  disclosed on Exhibit B,  Indemnitor
     shall immediately advise the Agent in writing of:

               (i)  any  and  all   enforcement,   cleanup,   removal  or  other
          governmental or regulatory actions instituted, completed or threatened
          against  Indemnitor  or the  Properties  pursuant  to  any  applicable
          Environmental Laws, including Hazardous Materials Laws that, singly or
          in the  aggregate,  have,  or may  reasonably  be expected to have,  a
          Material Adverse Effect;

               (ii) any and all material  claims made or threatened by any third
          party  against  Indemnitor  or the  Properties  relating to any claim,
          liability,   cause  of  action,   nuisance,   fine,  penalty,  charge,
          administrative  or judicial  order or proceeding,  judgment,  remedial
          action or cleanup requirement, enforcement, damage, contribution, cost
          recovery,  compensation,  loss or injury  resulting from any Hazardous
          Materials that, singly or in the aggregate, have, or may reasonably be
          expected to have, a Material  Adverse Effect (the matters set forth in
          Sections  3(c)(i)  and (ii)  hereof  are  hereinafter  referred  to as
          "Hazardous Materials Claims");

               (iii) any  change in any claim or matter  disclosed  in Exhibit B
          that, singly or in the aggregate,  have, or may reasonably be expected
          to have, a Material Adverse Effect; and

               (iv) For the purpose of protecting the collateral given to secure
          the  Obligations,   the  Agent  shall  have  the  right  to  join  and
          participate in, as a party if it so elects,  any legal  proceedings or
          actions  initiated in connection with any Hazardous  Materials  Claims
          and to have its reasonable  attorneys' fees and expenses in connection
          therewith paid by Indemnitor;


                                      -4-
<PAGE>

          (d) Indemnitor  shall not,  without the Agent's prior written  consent
     (which  consent shall not be  unreasonably  withheld or delayed),  take any
     remedial action in response to the presence of any Hazardous  Materials on,
     under,  or about the  Properties  (except (i) with  respect to oil, gas and
     other  Hydrocarbons,  in the ordinary course of Indemnitor's  business,  or
     (ii) as may be necessary to respond to any  emergency),  nor enter into any
     settlement agreement, consent decree, or other compromise in respect of any
     Hazardous Material Claim in excess of $250,000;

          (e) Annually,  at the time Indemnitor's  audited financial  statements
     are  required  to  be  delivered  to  the  Agent  pursuant  to  the  Credit
     Agreements,  Indemnitor  shall  deliver  to the  Agent a report  discussing
     significant  issues or  concerns  arising,  or measures  taken,  during the
     preceding  year and those  contemplated  for the following year relating to
     compliance with Hazardous Materials Laws and Environmental Laws, including,
     without  limitation,  compliance  with  any  then  effective  order  of the
     Regional Water Quality  Control Board (or other lead agency)  pertaining to
     the  characterization,  abatement and  remediation of soil and  groundwater
     contamination of the Properties;

          (f) To the extent that  Indemnitor has the right to do so,  Indemnitor
     shall  permit  the  Agent  or  its  agents,  at the  cost  and  expense  of
     Indemnitor,  to enter upon the Properties  and all parts  thereof,  for the
     purpose  of  investigating  and  inspecting  the  condition  and  operation
     thereof,  and shall permit reasonable access to the field offices and other
     offices,  including  the  principal  place of business,  of  Indemnitor  to
     inspect and examine the Properties and to inspect,  review and reproduce as
     necessary any books,  records,  accounts,  contracts or other  documents of
     Indemnitor;

          (g) Without  limiting the generality of the foregoing  clause (f), the
     Agent  shall  have  the  right,   subject  to  any   existing   contractual
     restrictions  binding on  Indemnitor  and on  twenty-four  (24) hours prior
     notice to  Indemnitor,  to cause such persons and entities as the Agent may
     designate  to enter the  Properties  to conduct (at the cost and expense of
     Indemnitor),  or to cause Indemnitor to conduct (at the cost and expense of
     Indemnitor),  such tests and investigations as the Agent deems necessary to
     determine  whether  any  hazardous   substance  or  solid  waste  is  being
     generated,   transported,   stored,  or  disposed  of  in  accordance  with
     applicable  Environmental  Laws. Such tests and investigations may include,
     without limitation,  underground borings, ground water analyses and borings
     from the  floors,  ceilings  and walls of any  improvements  located on the
     Properties. This Section 3(g) shall not be construed to affect or limit the
     obligations of Indemnitor pursuant to Section 4 hereof;

          (h) The Agent shall have no duty to visit or observe the Properties or
     to conduct  tests,  and no site visit,  observation or testing by the Agent
     shall impose any liability on the Agent,  nor shall Indemnitor or any other
     Obligor be  entitled  to rely on any visit,  observation  or testing by the
     Agent in any  respect.  The  Agent  may,  in its  discretion,  disclose  to
     Indemnitor or any other Person, including any


                                      -5-
<PAGE>

     governmental  agency,  any  report or  finding  made as a result  of, or in
     connection  with,  any site  visit,  observation  or  testing by the Agent.
     Indemnitor  agrees that the Agent makes no  warranty or  representation  to
     Indemnitor  or  any  other  Obligor   regarding  the  truth,   accuracy  or
     completeness  of any such  report  or  findings  that may be so  disclosed.
     Indemnitor also acknowledges  that,  depending upon the results of any site
     visit,  observation  or testing by the Agent and  disclosed to  Indemnitor,
     Indemnitor may have a legal  obligation to notify one or more  governmental
     agencies  of  such   results,   that  such   reporting   requirements   are
     site-specific,  and are to be evaluated  by  Indemnitor  without  advice or
     assistance from the Agent; and

          (i) Cooperate fully with any environmental  consultant retained by the
     Agent to prepare reports on the Properties.

     4.  Continuing  Indemnity.  Indemnitor  hereby  agrees to  indemnify,  hold
harmless and defend (by one law firm reasonably satisfactory to the Agent unless
an Event of Default  shall have  occurred and be  continuing)  the Agent and the
other  Indemnified  Parties and its and their  directors,  officers,  employees,
agents,  successors and assigns  (collectively,  "Indemnitees") from and against
any and all claims (including without limitation third party claims for personal
injury or real or  personal  property  damage),  losses,  damages,  liabilities,
fines,  penalties,  charges,  administrative and judicial proceedings (including
informal  proceedings)  and orders,  judgments,  remedial  action  requirements,
enforcement  actions  of any  kind,  and all  costs  and  expenses  incurred  in
connection therewith (including but not limited to reasonable  attorneys' and/or
paralegals'  fees and  expenses),  including,  but not  limited  to,  all  costs
incurred in connection with any  investigation  or monitoring of site conditions
or any clean-up,  remedial, removal or restoration work by any federal, state or
local government  agency,  arising directly or indirectly,  in whole or in part,
out of (i) the presence on or under the  Properties of any Hazardous  Materials,
or any escape, seepage, leakage, spillage, discharge, emission or Release of any
Hazardous  Materials  on,  under or from the  Properties,  or (ii) any  activity
carried on or  undertaken on or off the  Properties,  whether prior to or during
the term of the Loans,  and whether by Indemnitor or any predecessor in title or
any  employees,  agents,  contractors  or  subcontractors  of  Indemnitor or any
predecessor  in title,  or any third persons at any time occupying or present on
the Properties,  in connection with the handling,  treatment,  removal, storage,
decontamination, clean-up, transport or disposal of any Hazardous Materials that
at any time are  located  or  present  on or under or that at any time  migrate,
flow,  percolate,  diffuse  or in any way  move  onto or under  the  Properties;
provided  however,  that nothing  herein shall  require  Indemnitor to indemnify
Indemnitees  for any matter arising  solely from the gross  negligence or wilful
misconduct  of the Agent.  The  foregoing  indemnity  shall further apply to any
residual  contamination  on or under the  Properties,  or affecting  any natural
resources, and to any contamination of any property or natural resources arising
in connection with the generation, use, handling, storage, transport or disposal
of any  such  Hazardous  Materials,  and  irrespective  of  whether  any of such
activities  were or will be  undertaken  in  accordance  with  applicable  laws,
regulations,  codes and ordinances.  It is expressly  understood and agreed that
the indemnity provided for herein shall survive:  (i) the repayment of the Loans
and the release of or reconveyance


                                      -6-
<PAGE>

(whether full or partial) of the Deed of Trust; or (ii) the acquisition of title
to all or any  portion of the  Properties  by the  Agent,  or any  successor  in
interest to the Agent, or any nominee or designee of any of them, by foreclosure
under or transfer in lieu of  foreclosure  of the Deed of Trust,  whether or not
the same is otherwise in satisfaction of Indemnitor's  obligations in connection
with the Loan.

     5. Time of the Essence. Time is of the essence of this Indemnity.

     6.  Governing  Law.  This  Indemnity  shall be governed by and construed in
accordance  with  the  laws of the  State  of New  York,  except  to the  extent
preempted by Federal Law. Indemnitor irrevocably agrees that any legal action or
proceeding with respect to this Indemnity may be brought in a court of competent
jurisdiction of the State of New York or of the United States of America, as the
Agent may elect,  and by execution and delivery of this Indemnity the Indemnitor
hereby  irrevocably  submits to each such  jurisdiction;  and agrees  that final
judgment  against  the  Indemnitor  in any such  action or  proceeding  shall be
conclusive  and may be enforced  in any  jurisdiction  within the United  States
including, without limitation, the State of New York, by suit on the judgment, a
certified  copy of which  shall be  conclusive  evidence  of the fact and of the
amount of the indebtedness owed.

     7. Indemnitor  Waivers.  Indemnitor  waives: (a) any defense based upon any
legal  disability  to enter  into the  Credit  Agreements  or other  defense  of
Indemnitor  under the Credit  Agreements;  (b) any defense  based on any lack of
authority of the officers, directors, partners or agents acting or purporting to
act on behalf of Indemnitor or any principal of Indemnitor, or any defect in the
formation of Indemnitor or any  principal of  Indemnitor;  (c) any defense based
upon the  application  of the proceeds of the Loans by  Indemnitor  for purposes
other than the purposes  represented  by  Indemnitor to the Agent or intended or
understood by Agent or Indemnitor;  (d) any defense based upon Agent's election,
in  any  proceeding  instituted  under  the  Federal  Bankruptcy  Code,  of  the
application of Section 111(b)(2) of the Federal Bankruptcy Code or any successor
statute;  (e) any  defense  based upon any  borrowing  or any grant of  security
interest  under Section 364 of the Federal  Bankruptcy  Code;  (f)  presentment,
demand,  protest  and notice of any kind;  and (g) the benefit of any statute of
limitations  affecting the liability of Indemnitor  hereunder or the enforcement
hereof.

     8. Other Provisions.

          (a) This  Indemnity is a Loan  Document  executed  pursuant to the New
     Credit  Agreement  and shall be  construed,  administered  and  applied  in
     accordance with the terms and provisions  thereof  (including  [Article XI]
     thereof).

          (b) All notices  pursuant to this Indemnity  shall be delivered at the
     times,  in the manner and to the addressees as set forth in Section 11.2 of
     each of the Credit Agreements.


                                      -7-
<PAGE>

          (c) No amendment to or waiver of any  provision of this  Indemnity nor
     consent to any departure by Indemnitor  herefrom shall be effective  unless
     the same shall be in writing and signed by the Agent and Indemnitor.

          (d) This  Indemnity  shall be binding on and for the  benefit  of, the
     parties hereto, together with their respective successors and assigns.

          (e)  The  obligations  of  Indemnitor   hereunder  shall  survive  any
     termination of this Indemnity and the  termination of all the  Commitments.
     The  representations  and  warranties  made by Indemnitor in this Agreement
     shall survive the execution and delivery of this Indemnity.

          (f)  Any   provision  of  this   Indemnity   which  is  prohibited  or
     unenforceable  in any  jurisdiction  shall,  as to such  provision and such
     jurisdiction,   be  ineffective  to  the  extent  of  such  prohibition  or
     unenforceability  without  invalidating  the  remaining  provisions of this
     Indemnity or affecting the validity or  enforceability of such provision in
     any other jurisdiction.

          (g)  The  various   headings  of  this   Indemnity  are  inserted  for
     convenience only and shall not affect the meaning or interpretation of this
     Indemnity or any provisions hereof.

          (h) This  Indemnity  may be executed by the parties  hereto in several
     counterparts,  each of which shall be deemed to be an  original  and all of
     which  shall  constitute  together  but one and the  same  agreement.  This
     Indemnity  shall become  effective  when  counterparts  hereof  executed on
     behalf of Indemnitor and the Agent shall have been received by the Agent.


                                      -8-
<PAGE>



Dated:  as of May 9, 2002

                                       "Indemnitor"

                                       CALPINE CORPORATION, a Delaware
                                       corporation

                                        By:_____________________________________
                                           Name:
                                           Title:


                                        "Agent"

                                        THE BANK OF NOVA SCOTIA, as Agent


                                        By______________________________________
                                           Name:
                                           Title:_______________________________


<PAGE>


                                    EXHIBIT A
                                       to
                  HAZARDOUS MATERIAL UNDERTAKING AND INDEMNITY
                  --------------------------------------------

                         Legal Description of Properties


<PAGE>



                                    EXHIBIT B
                                       to
                  HAZARDOUS MATERIAL UNDERTAKING AND INDEMNITY
                  --------------------------------------------

                            Description of Hazardous
                          Materials On Properties, etc.

                                      None

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>ex10-16.txt
<TEXT>
                                                                   EXHIBIT 10.16

                                                           Execution Counterpart

             HAZARDOUS MATERIALS UNDERTAKING AND unsecured INDEMNITY


     This  Hazardous   Materials   Undertaking  and  Unsecured  Indemnity  (this
"Indemnity") is executed by CALPINE  CORPORATION,  a Delaware  corporation  (the
"Indemnitor")  in favor of THE BANK OF NOVA SCOTIA,  a Canadian  chartered  bank
("Scotiabank"),  for itself and as agent for the commercial lending institutions
to each of the Credit Agreements (as defined below) (herein  collectively,  with
their  successors  and assigns,  the "Lenders";  the Agent,  all Issuers and the
Lenders  are  collectively  referred  to as  the  "Indemnified  Parties"),  with
reference to the following facts:

     A.  Indemnitor  is party to that  certain  (i) Credit  Agreement  (the "New
Credit  Agreement"),  dated as of March 8, 2002, among  Indemnitor,  the various
financial institutions as are or may become parties thereto  (collectively,  the
"New Lenders"), 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, New York Branch, as lead arrangers
and  syndication  agents and TD  Securities  (USA) Inc.,  as lead  arranger  and
Scotiabank as joint  administrative  agent and funding agent,  and Citicorp USA,
Inc., as Joint  Administrative Agent and (ii) Second Amended and Restated Credit
Agreement (the  "Existing  Credit  Agreement",  and together with the New Credit
Agreement, the "Credit Agreements"), dated as of May 23, 2000, among Indemnitor,
the various  financial  institutions  as are or may become parties  thereto (the
"Existing  Lenders"),  Bayerische  Landesbank  Girozentrale,  as co-arranger and
syndication agent for the Existing Lenders and the Agent.

     B. The Loans, the Letters of Credit, the Guaranty and all other Obligations
owing  to any of the  Lenders  under  each of the  Credit  Agreements  are to be
secured  by,  among  other  things,  all of the  right,  title and  interest  of
Indemnitor  in the real  property  and  interests  comprising  the  Domestic Gas
Reserves and all fixtures, personal property and other improvements now existing
or to be constructed on any of such properties (such properties, descriptions of
which  are  attached  hereto as  Exhibit  A,  herein  collectively  called,  the
"Properties"), with respect to which Indemnitor has executed counterparts of the
Deed of Trust.

     C. Lenders are willing to make the Credit Extensions to Indemnitor upon the
terms and conditions set forth in the Credit  Agreements,  the Deed of Trust and
the  other  Loan  Documents  (collectively,  the "Loan  Documents")  only if the
Indemnified  Parties are  indemnified and held harmless with respect to any risk
that the Properties may now or in the future be in any way contaminated,  or its
use or value impacted by any Hazardous Materials, as defined below.

     D. It is a  condition  precedent  to the  making  of the  Term B Loans  and
issuance  of the  Letters of Credit that  Indemnitor  execute  and deliver  this
Indemnity.

     E. In order to induce  the Agent and the  Lenders  to make the Loans and to
issue or cause to be issued the Letters of Credit,  and with the full  intention
and


<PAGE>

understanding  that  the  Indemnified  Parties  will  rely  hereon,   Indemnitor
represents, warrants, covenants and agrees as follows:

     1. Certain  Definitions.  As used in this  Indemnity,  the following  terms
shall have the following respective meanings:

     "Hazardous  Materials"  means  crude or refined  oil or  fraction  thereof,
petroleum  substances,   petrochemical   products,   PCBs,  asbestos,   asbestos
containing   materials,   urea  formaldehyde,   salts,   flammable   explosives,
radioactive   materials,   hazardous  wastes,  toxic,  mutagenic  or  pathogenic
substances or related materials,  including,  without limitation, any substances
defined as or included in the definition of "hazardous  substances,"  "hazardous
wastes,"  "hazardous  materials,"  or "toxic  substances"  under any  applicable
federal or state laws or regulations.

     "Hazardous  Materials  Laws"  means  all  federal,  state  or  local  laws,
ordinances,   regulations,   orders  and  directives   pertaining  to  Hazardous
Materials.

     Capitalized  terms used and not  otherwise  defined  herein  shall have the
respective  meanings specified in either or both of the New Credit Agreement and
the Existing Credit Agreement, as context requires.

     2.  Representations and Warranties.  Without limiting the generality of any
of the  representations  or  warranties  contained in the other Loan  Documents,
Indemnitor hereby represents and warrants to the Agent and the other Indemnified
Parties  that,  except as disclosed on Exhibit B hereto,  as of the date of this
Indemnity and continuing thereafter,

          (a) the Properties and each portion thereof  (including the underlying
     groundwater)  are not and have  not  been a site  for the use,  generation,
     manufacture, discharge, assembly, processing, storage, release, disposal or
     transportation to or from of any Hazardous Materials,  except in connection
     with the production,  storage and transportation of crude oil, natural gas,
     other  hydrocarbons  and  petroleum,  and other  petroleum  products in the
     ordinary course of Indemnitor's business;

          (b) the Properties and each portion thereof  (including the underlying
     groundwater) are presently in compliance in all material  respects with all
     Hazardous Materials Laws, including,  without limitation, those relating to
     exposure to Hazardous Materials,  the labeling,  storage and containment of
     Hazardous Materials, and air, soil and surface and ground water conditions;

          (c)  there  have  been no  past,  and  there  are no  pending  or,  to
     Indemnitor's knowledge, threatened

               (i)  claims,  complaints,  notices or  requests  for  information
          received by  Indemnitor  with respect to any alleged  violation of any
          Environmental Law, including Hazardous Materials Laws, that, singly or
          in


                                      -2-
<PAGE>

          the  aggregate,  may  reasonably  be  expected to result in a Material
          Adverse Effect, or

               (ii)  complaints,  notices or inquiries to  Indemnitor  regarding
          potential  liability under any Environmental Law, including  Hazardous
          Materials Laws,  that,  singly or in the aggregate,  may reasonably be
          expected to result in a Material Adverse Effect;

          (d) there have been no  unremediated  Releases of Hazardous  Materials
     at, on or under any property  (including the  Properties) now or previously
     owned or leased by Indemnitor that, singly or in the aggregate,  result in,
     or may reasonably be expected to result in, a Material Adverse Effect;

          (e) Indemnitor has been issued and is in material  compliance with all
     permits,   certificates,   approvals,   licenses  and  other   governmental
     authorizations  relating to  environmental  matters and  necessary  for its
     businesses;

          (f) no property  (including the Properties) now or previously owned or
     leased by  Indemnitor  is listed or proposed for listing  (with  respect to
     owned property only) on the National Priorities List pursuant to CERCLA, on
     the CERCLIS or on any similar state list of sites  requiring  investigation
     or clean-up;

(g)  Indemnitor  has not  directly  transported  or  directly  arranged  for the
     transportation of any Hazardous Material to any location which is listed or
     proposed for listing on the National Priorities List pursuant to CERCLA, on
     the  CERCLIS  or on any  similar  state  list or  which is the  subject  of
     federal,  state or local enforcement actions or other  investigations which
     may lead to material  claims  against  Indemnitor  for any  remedial  work,
     damage to natural  resources  or personal  injury,  including  claims under
     CERCLA;

          (h) there are no polychlorinated biphenyls or friable asbestos present
     at any property  (including  the  Properties)  now or  previously  owned or
     leased by Indemnitor  that,  singly or in the aggregate,  result in, or may
     reasonably be expected to result in, a Material Adverse Effect;

          (i) no conditions  exist at, on or under any property  (including  the
     Properties) now or previously owned or leased by Indemnitor which, with the
     passage  of time,  or the  giving  of notice  or both,  would  give rise to
     liability under any Environmental  Law, which liability would reasonably be
     expected to result in a Material Adverse Effect; and

          (j) to the best of the  knowledge of  Indemnitor,  no property  owned,
     operated or leased by  Indemnitor  is located  within two thousand  (2,000)
     feet of a significant  disposal of "hazardous  waste" within the meaning of
     Section 25221 of the California Health and Safety Code.


                                      -3-
<PAGE>

     3. Covenants.  Indemnitor  hereby covenants and agrees that, so long as any
obligation  under any of the Loan Documents or otherwise in connection  with the
Loans is outstanding:

          (a)  Indemnitor  shall not permit the Properties or any portion of any
     parcel  thereof  to  be  a  site  for  the  use,  generation,  manufacture,
     discharge,   assembly,   processing,    storage,   Release,   disposal   or
     transportation to or from of Hazardous Materials except (i) as disclosed on
     Exhibit B hereto,  (ii) in such  quantities and as may be necessary for the
     production,  storage and transportation of crude oil, natural gas and other
     Hydrocarbons  (as defined in the Deed of Trust) in the  ordinary  course of
     Indemnitor's  business  as  conducted  on  the  Effective  Date,  (iii)  as
     necessary or required to develop the  Properties in the ordinary  course of
     Indemnitor's  business  and  (iv) as may be  necessary  to  respond  to any
     emergency,  each of which excepted activities will be conducted in a manner
     designed to minimize environmental risk;

          (b) Indemnitor shall keep and maintain the Properties and each portion
     of any parcel  thereof in  compliance  in all  material  respects  with all
     Environmental  Laws,  including Hazardous Materials Laws (and to the extent
     there are  violations of such laws existing as of the date hereof which are
     disclosed on Exhibit B, with the remediation plans and work plans listed on
     Exhibit B), and otherwise  shall not cause or permit the  Properties or any
     portion of any parcel thereof to be in violation,  in any material respect,
     of such laws;

          (c) As to any claim or matter not  disclosed on Exhibit B,  Indemnitor
     shall immediately advise the Agent in writing of:

               (i)  any  and  all   enforcement,   cleanup,   removal  or  other
          governmental or regulatory actions instituted, completed or threatened
          against  Indemnitor  or the  Properties  pursuant  to  any  applicable
          Environmental Laws, including Hazardous Materials Laws that, singly or
          in the  aggregate,  have,  or may  reasonably  be expected to have,  a
          Material Adverse Effect;

               (ii) any and all material  claims made or threatened by any third
          party  against  Indemnitor  or the  Properties  relating to any claim,
          liability,   cause  of  action,   nuisance,   fine,  penalty,  charge,
          administrative  or judicial  order or proceeding,  judgment,  remedial
          action or cleanup requirement, enforcement, damage, contribution, cost
          recovery,  compensation,  loss or injury  resulting from any Hazardous
          Materials that, singly or in the aggregate, have, or may reasonably be
          expected to have, a Material  Adverse Effect (the matters set forth in
          Sections  3(c)(i)  and (ii)  hereof  are  hereinafter  referred  to as
          "Hazardous Materials Claims");

               (iii) any  change in any claim or matter  disclosed  in Exhibit B
          that, singly or in the aggregate,  have, or may reasonably be expected
          to have, a Material Adverse Effect; and


                                      -4-
<PAGE>

               (iv) Indemnitor's discovery of any occurrence or condition on any
          real  property  adjoining  or in the vicinity of the  Properties  that
          could cause the  Properties  or any part thereof to be  classified  as
          "border-zone  property" under the provisions of California  Health and
          Safety Code,  Sections  25220,  et seq., or any regulation  adopted in
          accordance  therewith,  or to be otherwise subject to any restrictions
          on the ownership, occupancy,  transferability or use of the Properties
          under any Environmental Law, including  Hazardous  Materials Laws. For
          the  purpose  of  protecting  the  collateral   given  to  secure  the
          Obligations,  the Agent  shall have the right to join and  participate
          in, as a party if it so  elects,  any  legal  proceedings  or  actions
          initiated in  connection  with any Hazardous  Materials  Claims and to
          have  its  reasonable  attorneys'  fees  and  expenses  in  connection
          therewith paid by Indemnitor;

          (d) Indemnitor  shall not,  without the Agent's prior written  consent
     (which  consent shall not be  unreasonably  withheld or delayed),  take any
     remedial action in response to the presence of any Hazardous  Materials on,
     under,  or about the  Properties  (except (i) with  respect to oil, gas and
     other  Hydrocarbons,  in the ordinary course of Indemnitor's  business,  or
     (ii) as may be necessary to respond to any  emergency),  nor enter into any
     settlement agreement, consent decree, or other compromise in respect of any
     Hazardous Material Claim in excess of $250,000;

          (e) Annually,  at the time Indemnitor's  audited financial  statements
     are  required  to  be  delivered  to  the  Agent  pursuant  to  the  Credit
     Agreements,  Indemnitor  shall  deliver  to the  Agent a report  discussing
     significant  issues or  concerns  arising,  or measures  taken,  during the
     preceding  year and those  contemplated  for the following year relating to
     compliance with Hazardous Materials Laws and Environmental Laws, including,
     without  limitation,  compliance  with  any  then  effective  order  of the
     Regional Water Quality  Control Board (or other lead agency)  pertaining to
     the  characterization,  abatement and  remediation of soil and  groundwater
     contamination of the Properties;

          (f) To the extent that  Indemnitor has the right to do so,  Indemnitor
     shall  permit  the  Agent  or  its  agents,  at the  cost  and  expense  of
     Indemnitor,  to enter upon the Properties  and all parts  thereof,  for the
     purpose  of  investigating  and  inspecting  the  condition  and  operation
     thereof,  and shall permit reasonable access to the field offices and other
     offices,  including  the  principal  place of business,  of  Indemnitor  to
     inspect and examine the Properties and to inspect,  review and reproduce as
     necessary any books,  records,  accounts,  contracts or other  documents of
     Indemnitor;

          (g) Without  limiting the generality of the foregoing  clause (f), the
     Agent  shall  have  the  right,   subject  to  any   existing   contractual
     restrictions  binding on  Indemnitor  and on  twenty-four  (24) hours prior
     notice to  Indemnitor,  to cause such persons and entities as the Agent may
     designate  to enter the  Properties  to conduct (at the cost and expense of
     Indemnitor), or to cause Indemnitor to


                                      -5-
<PAGE>

     conduct  (at  the  cost  and  expense  of   Indemnitor),   such  tests  and
     investigations  as the Agent  deems  necessary  to  determine  whether  any
     hazardous substance or solid waste is being generated, transported, stored,
     or disposed of in accordance with applicable Environmental Laws. Such tests
     and investigations may include,  without limitation,  underground  borings,
     ground water  analyses  and borings from the floors,  ceilings and walls of
     any improvements located on the Properties.  This Section 3(g) shall not be
     construed  to affect or limit the  obligations  of  Indemnitor  pursuant to
     Section 4 hereof;

          (h) The Agent shall have no duty to visit or observe the Properties or
     to conduct  tests,  and no site visit,  observation or testing by the Agent
     shall impose any liability on the Agent,  nor shall Indemnitor or any other
     Obligor be  entitled  to rely on any visit,  observation  or testing by the
     Agent in any  respect.  The  Agent  may,  in its  discretion,  disclose  to
     Indemnitor or any other  Person,  including any  governmental  agency,  any
     report or finding  made as a result  of, or in  connection  with,  any site
     visit,  observation  or testing by the Agent.  Indemnitor  agrees  that the
     Agent  makes no  warranty  or  representation  to  Indemnitor  or any other
     Obligor regarding the truth, accuracy or completeness of any such report or
     findings  that may be so  disclosed.  Indemnitor  also  acknowledges  that,
     depending upon the results of any site visit, observation or testing by the
     Agent and disclosed to Indemnitor,  Indemnitor may have a legal  obligation
     to notify one or more  governmental  agencies  of such  results,  that such
     reporting  requirements  are  site-specific,  and  are to be  evaluated  by
     Indemnitor without advice or assistance from the Agent; and

          (i) Cooperate fully with any environmental  consultant retained by the
     Agent to prepare reports on the Properties.

     4. Continuing,  Unsecured Indemnity. Indemnitor hereby agrees to indemnify,
hold harmless and defend (by one law firm  reasonably  satisfactory to the Agent
unless an Event of Default shall have occurred and be continuing)  the Agent and
the other Indemnified Parties and its and their directors,  officers, employees,
agents,  successors and assigns  (collectively,  "Indemnitees") from and against
any and all claims (including without limitation third party claims for personal
injury or real or  personal  property  damage),  losses,  damages,  liabilities,
fines,  penalties,  charges,  administrative and judicial proceedings (including
informal  proceedings)  and orders,  judgments,  remedial  action  requirements,
enforcement  actions  of any  kind,  and all  costs  and  expenses  incurred  in
connection therewith (including but not limited to reasonable  attorneys' and/or
paralegals'  fees and  expenses),  including,  but not  limited  to,  all  costs
incurred in connection with any  investigation  or monitoring of site conditions
or any clean-up,  remedial, removal or restoration work by any federal, state or
local government  agency,  arising directly or indirectly,  in whole or in part,
out of (i) the presence on or under the  Properties of any Hazardous  Materials,
or any escape, seepage, leakage, spillage, discharge, emission or Release of any
Hazardous  Materials  on,  under or from the  Properties,  or (ii) any  activity
carried on or  undertaken on or off the  Properties,  whether prior to or during
the term of the Loans,  and whether by Indemnitor or any predecessor in title or
any employees, agents, contractors or


                                      -6-
<PAGE>

subcontractors  of Indemnitor or any  predecessor in title, or any third persons
at any time  occupying  or present on the  Properties,  in  connection  with the
handling, treatment, removal, storage,  decontamination,  clean-up, transport or
disposal of any Hazardous  Materials  that at any time are located or present on
or under or that at any time  migrate,  flow,  percolate,  diffuse or in any way
move onto or under the Properties;  provided however,  that nothing herein shall
require  Indemnitor to indemnify  Indemnitees for any matter arising solely from
the gross negligence or wilful misconduct of the Agent. The foregoing  indemnity
shall further apply to any residual contamination on or under the Properties, or
affecting any natural  resources,  and to any  contamination  of any property or
natural  resources  arising in connection  with the generation,  use,  handling,
storage, transport or disposal of any such Hazardous Materials, and irrespective
of whether any of such  activities were or will be undertaken in accordance with
applicable  laws,   regulations,   codes  and  ordinances.   Indemnitor   hereby
acknowledges  and agrees that the obligations of Indemnitor under this Indemnity
shall be  unlimited  personal  obligations  and also shall NOT be secured by the
Deed of Trust. In this regard,  Agent's appraisal of the value of the Properties
is such that Agent is not willing to accept the consequences, under California's
"one form of action" rule (i.e., Section 726 of the Code of Civil Procedure) and
"Anti-Deficiency Rules" (i.e., Sections 580(a), 580(b) and 580(d) of the Code of
Civil Procedure) of inclusion of the obligations  under this Indemnity among the
obligations  secured  by the Deed of  Trust,  and that the  Agent  and the other
Indemnified  Parties would not make the Loans or issue or cause to be issued the
Letters  of  Credit in the  absence  of the  personal  liability  undertaken  by
Indemnitor for these obligations. It is expressly understood and agreed that the
indemnity provided for herein shall survive:  (i) the repayment of the Loans and
the release of or  reconveyance  (whether full or partial) of the Deed of Trust;
or (ii) the  acquisition of title to all or any portion of the Properties by the
Agent,  or any successor in interest to the Agent, or any nominee or designee of
any of them, by foreclosure under or transfer in lieu of foreclosure of the Deed
of Trust,  whether or not the same is otherwise in  satisfaction of Indemnitor's
obligations in connection with the Loan.

     5. Time of the Essence. Time is of the essence of this Indemnity.

     6.  Governing  Law.  This  Indemnity  shall be governed by,  construed  and
enforced in accordance  with the laws of the State of California.  In any action
brought under or arising out of this  Indemnity,  Indemnitor  hereby consents to
the  jurisdiction  of any  competent  court within the State of  California  and
consents to service of process by any means authorized by California law.

     7. Indemnitor  Waivers.  Indemnitor  waives: (a) any defense based upon any
legal  disability  to enter  into the  Credit  Agreements  or other  defense  of
Indemnitor  under the Credit  Agreements;  (b) any defense  based on any lack of
authority of the officers, directors, partners or agents acting or purporting to
act on behalf of Indemnitor or any principal of Indemnitor, or any defect in the
formation of Indemnitor or any  principal of  Indemnitor;  (c) any defense based
upon the  application  of the proceeds of the Loans by  Indemnitor  for purposes
other than the purposes  represented  by  Indemnitor to the Agent or intended or
understood by Agent or Indemnitor;  (d) any and all rights and defenses  arising
out of an election of remedies by Agent, even though that


                                      -7-
<PAGE>

election of remedies, such as a nonjudicial foreclosure with respect to security
for a guaranteed  obligation,  has destroyed  Indemnitor's rights of subrogation
and  reimbursement  against the principal by the operation of Section  580(d) of
the California Code of Civil Procedure or otherwise;  (e) any defense based upon
Agent's  election,  in any proceeding  instituted  under the Federal  Bankruptcy
Code, of the application of Section 111(b)(2) of the Federal  Bankruptcy Code or
any successor statute;  (f) any defense based upon any borrowing or any grant of
security  interest  under  Section  364  of the  Federal  Bankruptcy  Code;  (g)
presentment,  demand, protest and notice of any kind; and (h) the benefit of any
statute of  limitations  affecting the liability of Indemnitor  hereunder or the
enforcement  hereof.  Indemnitor  further waives any and all rights and defenses
that Indemnitor may have because  Indemnitor's debt is secured by real property;
this means,  among other  things,  that:  (1) Agent may collect from  Indemnitor
without  first   foreclosing  on  any  real  or  personal  property  pledged  by
Indemnitor;  (2) if Agent forecloses on any real property  collateral pledged by
Indemnitor,  then the  amount of the debt may be  reduced  only by the price for
which that collateral is sold at the foreclosure sale, even if the collateral is
worth more than the sale price. The foregoing  sentence is an unconditional  and
irrevocable  waiver of any rights and defenses  Indemnitor  may have because its
debt is secured by real  property.  These  rights and  defenses  being waived by
Indemnitor  include,  but are not limited to, any rights or defenses  based upon
Section 580(a), 580(b), 580(d) or 726 of the California Code of Civil Procedure.

     8. Other Provisions.

          (a) This  Indemnity is a Loan  Document  executed  pursuant to the New
     Credit  Agreement  and shall be  construed,  administered  and  applied  in
     accordance with the terms and provisions  thereof  (including  [Article XI]
     thereof).

          (b) All notices  pursuant to this Indemnity  shall be delivered at the
     times,  in the manner and to the addressees as set forth in Section 11.2 of
     each of the Credit Agreements.

          (c) No amendment to or waiver of any  provision of this  Indemnity nor
     consent to any departure by Indemnitor  herefrom shall be effective  unless
     the same shall be in writing and signed by the Agent and Indemnitor.

          (d) This  Indemnity  shall be binding on and for the  benefit  of, the
     parties hereto, together with their respective successors and assigns.

          (e)  The  obligations  of  Indemnitor   hereunder  shall  survive  any
     termination of this Indemnity and the  termination of all the  Commitments.
     The  representations  and  warranties  made by Indemnitor in this Agreement
     shall survive the execution and delivery of this Indemnity.

          (f)  Any   provision  of  this   Indemnity   which  is  prohibited  or
     unenforceable  in any  jurisdiction  shall,  as to such  provision and such
     jurisdiction,   be  ineffective  to  the  extent  of  such  prohibition  or
     unenforceability without invalidating the


                                      -8-
<PAGE>

     remaining  provisions  of this  Indemnity  or  affecting  the  validity  or
     enforceability of such provision in any other jurisdiction.

          (g)  The  various   headings  of  this   Indemnity  are  inserted  for
     convenience only and shall not affect the meaning or interpretation of this
     Indemnity or any provisions hereof.

          (h) This  Indemnity  may be executed by the parties  hereto in several
     counterparts,  each of which shall be deemed to be an  original  and all of
     which  shall  constitute  together  but one and the  same  agreement.  This
     Indemnity  shall become  effective  when  counterparts  hereof  executed on
     behalf of Indemnitor and the Agent shall have been received by the Agent.


                                      -9-
<PAGE>



Dated:  as of May 9, 2002

                                       "Indemnitor"

                                       CALPINE CORPORATION, a Delaware
                                       corporation

                                       By:______________________________________
                                          Name:
                                          Title:


                                       "Agent"

                                       THE BANK OF NOVA SCOTIA, as Agent


                                       By_______________________________________
                                          Name:
                                          Title:________________________________



<PAGE>



                                    EXHIBIT A
                                       to
             HAZARDOUS MATERIAL UNDERTAKING AND UNSECURED INDEMNITY
             ------------------------------------------------------

                         Legal Description of Properties


<PAGE>



                                    EXHIBIT B
                                       to
             HAZARDOUS MATERIAL UNDERTAKING AND UNSECURED INDEMNITY
             ------------------------------------------------------

                            Description of Hazardous
                          Materials On Properties, etc.

                                      None

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>ex10-17.txt
<TEXT>
                                                                   EXHIBIT 10.17




--------------------------------------------------------------------------------


                  MORTGAGE, DEED OF TRUST, ASSIGNMENT, SECURITY
                AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING

                                      FROM

                              CALPINE CORPORATION,
                             a Delaware corporation
                         (Taxpayer I.D. No. 77-0212977),
                                     Trustor

                                       TO

                              JON BURCKIN, Trustee

                                       AND

                              KEMP LEONARD, Trustee

                                       AND

                            THE BANK OF NOVA SCOTIA,
                        (Taxpayer I.D. No. 13-494-1099),
                            for itself and as Agent,
                                   Beneficiary

                          Dated as of [Month] __, 2002


--------------------------------------------------------------------------------

"THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS."

"THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES."

"THOSE  PORTIONS OF THE MORTGAGED  PROPERTY  WHICH ARE  AS-EXTRACTED  COLLATERAL
(INCLUDING, WITHOUT LIMITATION, OIL AND GAS), AND THE ACCOUNTS RELATING THERETO,
WILL BE  FINANCED  AT THE  WELLHEADS  OF THE  WELLS  LOCATED  ON THE  PROPERTIES
DESCRIBED IN EXHIBIT A HERETO,  AND THIS FINANCING  STATEMENT IS TO BE FILED FOR
RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS."



<PAGE>

"MORTGAGOR  HAS AN  INTEREST OF RECORD IN THE REAL  ESTATE  CONCERNED,  WHICH IS
DESCRIBED IN EXHIBIT A HERETO."

"SOME OF THE PERSONAL PROPERTY  CONSTITUTING A PORTION OF THE MORTGAGED PROPERTY
IS OR IS TO BE AFFIXED TO THE PROPERTIES  DESCRIBED IN EXHIBIT A HERETO AND THIS
FINANCING  STATEMENT IS TO BE FILED FOR RECORD,  AMONG OTHER PLACES, IN THE REAL
ESTATE RECORDS."

"A POWER OF SALE HAS BEEN  GRANTED IN THIS  MORTGAGE.  A POWER OF SALE MAY ALLOW
THE MORTGAGEE TO TAKE THE MORTGAGED  PROPERTY AND SELL IT WITHOUT GOING TO COURT
IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR UNDER THIS MORTGAGE."

"MORTGAGOR AGREES BY EXPRESS LANGUAGE IN THIS MORTGAGE TO SUBJECT THE TRUST REAL
ESTATE TO THE TERMS OF THE DEED OF TRUST ACT (SECTIONS  48-10-1  THROUGH 21 NMSA
(1978))."

THIS INSTRUMENT WAS PREPARED BY AND
WHEN RECORDED AND/OR FILED
RETURN TO:

Kevin L. Shaw, Esq.
Mayer, Brown, Rowe & Maw
350 South Grand Avenue
Suite 2500
Los Angeles, California  90071




<PAGE>

                  MORTGAGE, DEED OF TRUST, ASSIGNMENT, SECURITY
                AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING


     THIS MORTGAGE,  DEED OF TRUST,  ASSIGNMENT,  SECURITY AGREEMENT,  FINANCING
STATEMENT AND FIXTURE FILING (this "Mortgage"), dated as of [Month] __, 2002, is
from  CALPINE  CORPORATION,  a  Delaware  corporation  (hereinafter  called  the
"Mortgagor"  or  "Borrower"),  to JON  BURCKIN  and KEMP  LEONARD,  as  Trustees
(hereinafter,  collectively, called the "Trustees"), and THE BANK OF NOVA SCOTIA
("Scotiabank"),  a Canadian  chartered  bank  having  offices at 580  California
Street,  Suite  2100,  San  Francisco,   CA  94119,  for  itself  and  as  agent
(hereinafter called the "Agent") for the Lender Parties (as defined below).

                                   ARTICLE I

                            Recitals and Definitions
                            ------------------------

     1.1 Borrower, certain institutional lenders (individually,  a "2002 Lender"
and collectively,  the "2002 Lenders") and Scotiabank have entered into a Credit
Agreement,  dated as of  March  8,  2002  (herein,  as the same may be  amended,
modified or supplemented  from time to time,  called the "2002 Loan Agreement"),
pursuant to which the 2002  Lenders  have  agreed to make loans to Borrower  and
issue or cause to be  issued  letters  of credit  for the  benefit  of  Borrower
(individually,  a "2002 Letter of Credit" and collectively, the "2002 Letters of
Credit")  in amounts not to exceed at any one time  outstanding  $1,600,000,000,
and Borrower,  to evidence its  indebtedness  to the 2002 Lenders under the 2002
Loan Agreement,  has executed and delivered (or will execute and deliver) to the
2002 Lenders its secured  promissory notes in the aggregate,  original principal
amount  of   $1,600,000,000,   to  mature  not  later   than  [May  24,   2003]1
(individually,  a "2002 Loan Note" and collectively, the "2002 Loan Notes"), the
2002 Loan Notes being payable to the order of the 2002 Lenders, bearing interest
as provided for therein,  and  containing  provisions  for payment of attorneys'
fees and acceleration of maturity in the event of default, as therein set forth.

     1.2 Borrower,  certain  institutional lenders  (individually,  an "Existing
Lender" and  collectively,  the "Existing  Lenders";  and together with the 2002
Lenders,  the "Lenders")  and Scotiabank  have entered into a Second Amended and
Restated Credit  Agreement dated as of May 23, 2000 (herein,  as the same may be
amended,  modified,  or  supplemented  from time to time,  called the  "Existing
Credit  Agreement")  pursuant to which the Existing  Lenders have agreed to make
loans to Borrower  and issue or cause to be issued any letters of credit for the
benefit  of  Borrower   (individually,   an  "Existing  Letter  of  Credit"  and
collectively,  the "Existing Letters of Credit") in amounts not to exceed at any
one time  $400,000,000,  and  Borrower,  to  evidence  its  indebtedness  to the
Existing Lenders under the Existing Credit Agreement, has executed and delivered
to the Existing  Lenders its secured  promissory  notes to mature not later than
May 24,


_______________
1    Per  definitions  of  "Stated  Maturity  Date" and "Term B Loan  Commitment
     Termination Date," this might be as late as June 8th, 2003.


                                      -1-
<PAGE>

  2003  (individually,  an  "Existing  Loan Note" and  collectively,  the
"Existing  Loan  Notes"),  the Existing Loan Notes being payable to the order of
the Existing Lenders,  bearing interest as provided for therein,  and containing
provisions for payment of attorneys'  fees and  acceleration  of maturity in the
event of default, as therein set forth. The 2002 Loan Agreement and the Existing
Credit  Agreement are herein  collectively  called the "Credit  Agreements." The
2002 Loan Notes and the  Existing  Loan Notes are herein  individually  called a
"Loan Note" and collectively called the "Loan Notes". The 2002 Letters of Credit
and the Existing Letters of Credit are herein  individually  called a "Letter of
Credit" and collectively called the "Letters of Credit".

     1.3 It is a condition  precedent to the  obligation  of the Lenders to make
Loans  under the Credit  Agreements,  to issue or cause to be issued  Letters of
Credit under the Credit  Agreements  and to the  obligations  of the Agent,  the
Lenders or the Lender Parties (as the case may be), that the Mortgagor  executes
and delivers this instrument.

     1.4 For all  purposes  of  this  Mortgage,  unless  the  context  otherwise
requires:

          A. "Affiliate" of any Person means any other Person which, directly or
     indirectly, controls, is controlled by or is under common control with such
     Person  (excluding any trustee under, or any committee with  responsibility
     for  administering,  any Plan (as  defined  in the Credit  Agreements)).  A
     Person shall be deemed to be "controlled by" any other Person if such other
     Person possesses, directly or indirectly, power

               (a) to vote  10% or more of the  securities  (on a fully  diluted
          basis) having  ordinary  voting power for the election of directors or
          managing general partners; or

               (b) to  direct  or cause  the  direction  of the  management  and
          policies of such Person whether by contract or otherwise.

          B. "Agent" is defined in the Preamble of this Mortgage.

          C.  "Applicable  Law" means with respect to any Person or matter,  any
     federal, state, regional, tribal or local statute, law, code, rule, treaty,
     convention,   application,   order,  decree,  consent  decree,  injunction,
     directive,  determination or other  requirement  (whether or not having the
     force of law) relating to such Person or matter and, where applicable,  any
     interpretation thereof by a Governmental Authority having jurisdiction with
     respect  thereto  or  charged  with the  administration  or  interpretation
     thereof.

          D. "Borrower" is defined in the Preamble of this Mortgage.

          E. "Credit Agreements" is defined in Section 1.2 of this Mortgage.

          F. "Deed of Trust" means each mortgage,  deed of trust,  or other real
     property collateral  security instrument in a form reasonably  satisfactory
     to the Agent,  executed and delivered pursuant to Section 8.1.8 of the 2002
     Credit


                                      -2-
<PAGE>

     Agreement,  as amended,  supplemented,  restated or otherwise modified from
     time to time, including, without limitation, this Mortgage.

          G. "Event of Default"  means any happening or occurrence  described in
     Article V hereinbelow,  and any other happening or occurrence  specifically
     designated  herein or in any of the other  Security  Documents  (as defined
     herein) as constituting an event of default thereunder.

          H.  "Environmental   Laws"  means  any  and  all  present  and  future
     Applicable  Laws  issued,  promulgated  or entered  thereunder  relating to
     pollution or  protection  of the  environment,  including  laws relating to
     reclamation   of  land  and  waterways  and  laws  relating  to  emissions,
     discharges,  releases or threatened  releases of pollutants,  contaminants,
     chemicals, or industrial,  toxic or hazardous substances or wastes into the
     environment  (including,  without  limitation,  ambient air, surface water,
     ground water, land surface or subsurface  strata) or otherwise  relating to
     the  manufacture,   processing,   distribution,  use,  treatment,  storage,
     disposal, transport or handling of pollutants, contaminants,  chemicals, or
     industrial, toxic or hazardous substances or wastes.

          I. "Existing  Assignment  Agreement" means that certain Assignment and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California limited  partnership,  pursuant to Section 6.1.3 of the Existing
     Credit  Agreement,  substantially  in the form of Exhibit F to the Existing
     Credit  Agreement,  as  amended,  supplemented,  amended  and  restated  or
     otherwise modified from time to time.

          J.  "Existing  Credit  Agreement"  is defined  in Section  1.2 of this
     Mortgage.

          K. "Existing Lenders" is defined in Section 1.2 of this Mortgage.

          L.  "Existing  Letters of  Credit"  is defined in Section  1.2 of this
     Mortgage.

          M. "Existing Loan Documents" means the Existing Credit Agreement,  the
     Existing  Loan Notes,  the Existing  Assignment  Agreement,  and each other
     relevant  agreement,  document  or  instrument  (including  the fee  letter
     described in Section 3.3.2 of the Existing Credit  Agreement)  delivered in
     connection therewith.

          N. "Existing Loan Notes" is defined in Section 1.2 of this Mortgage.

          O. "Fee Letter"  means the fee letter  agreement  described in Section
     3.3.2 of the 2002 Credit Agreement.

          P.  "Governmental   Authority"  means  any  and  all  courts,  boards,
     agencies, commissions,  offices or authorities of any nature whatsoever for
     any governmental unit (federal, state, county, district,  municipal,  city,
     tribe or


                                      -3-
<PAGE>

     otherwise)   whether  now  or  hereafter  in  existence  charged  with  the
     administration, interpretation or enforcement of any Applicable Law.

          Q.  "Guaranty"  means  the  guaranty  executed  and  delivered  by the
     Guarantors  pursuant to Section 6.1.3 of the 2002 Credit Agreement,  in the
     form of Exhibit H thereto,  as amended,  supplemented or otherwise modified
     from time to time.

          R.  "Hazardous  Materials  Indemnity"  means  that  certain  Hazardous
     Materials  Indemnity  executed and  delivered  by the Borrower  pursuant to
     Section  8.1.8 of the 2002  Credit  Agreement,  as  amended,  supplemented,
     restated or otherwise modified from time to time.

          S. "Hedging  Agreements"  means:  (a) interest  rate swap  agreements,
     basis  swap  agreements,   interest  rate  cap  agreements,   forward  rate
     agreements,  interest  rate  floor  agreements  and  interest  rate  collar
     agreements,  and all other  agreements or arrangements  designed to protect
     such Person against  fluctuations  in interest  rates or currency  exchange
     rates,  and (b) forward  contracts,  options,  futures  contracts,  futures
     options,  commodity swaps, commodity options,  commodity collars, commodity
     caps, commodity floors and all other agreements or arrangements designed to
     protect such Person against fluctuations in the price of commodities.

          T.  "Hedging  Obligations"  means  with  respect  to any  Person,  all
     liabilities  (including  without  limitation  obligations  and  liabilities
     arising in connection with or as a result of early or premature termination
     of a Hedging  Agreement,  whether or not occurring as a result of a default
     thereunder) of such Person under a Hedging Agreement.

          U. "Hydrocarbons"  means collectively,  oil, gas, casinghead gas, drip
     gasoline, natural gasoline, condensate,  distillate and all other liquid or
     gaseous  hydrocarbons and related minerals and all products  therefrom,  in
     each case whether in a natural or a processed state.

          V.  "Indebtedness",  "Note"  and  "Notes"  shall  have the  respective
     meanings set forth in Section 2.2 of this Mortgage.

          W. "Indemnification Claim" is defined in Section 4.6 of this Mortgage.

          X. "Indemnified Person" is defined in Section 3.10 of this Mortgage.

          Y. "Joint Operating  Agreements" shall mean, with respect to the lands
     described in Exhibit A, the respective  operating  agreement  burdening the
     lands described in Exhibit A.

          Z. "lands  described in Exhibit A" shall  include the real property or
     other  interest  in any  lands  which are  either  described  in  Exhibit A
     attached hereto or the description of which is incorporated in Exhibit A by
     reference to an


                                      -4-
<PAGE>

     instrument or document  containing in, or referring to, such a description,
     and shall also include any lands now or  hereafter  unitized or pooled with
     lands which are either  described in Exhibit A or the  description of which
     is  incorporated  in Exhibit A by  reference  and  Fixtures and all rights,
     titles and interests appurtenant thereto.

          AA. "Leases" means any and all leases  (including  without  limitation
     oil and gas leases and oil, gas and other minerals leases),  surface leases
     or easements, subleases, licenses,  concessions,  operating rights or other
     agreements  (written or verbal,  now or hereafter in effect)  which grant a
     possessory  interest  in and to,  or the  right  to  explore,  use,  lease,
     license,  possess, produce, process, store and transport Hydrocarbons from,
     operate from, or otherwise enjoy, the Mortgaged Property, together with all
     amendments, modifications, extensions and renewals thereof.

          BB.  "Legal  Requirements"  means (i) any and all  present  and future
     judicial  decisions,  statutes,  rulings,  rules,  regulations,   licenses,
     decisions,   orders,   injunctions,   decrees,  permits,   certificates  or
     ordinances  of  any  Governmental   Authority  in  any  way  applicable  to
     Mortgagor,  or  the  Mortgaged  Property,  including  the  ownership,  use,
     occupancy,  operation,  maintenance,  repair or reconstruction thereof, and
     any other Applicable Law enacted by any Governmental  Authority relating to
     health or the  environment,  (ii)  Mortgagor's  presently  or  subsequently
     effective  Organic  Documents,  (iii) any and all Leases,  (iv) any and all
     leases  and  other  contracts  (written  or  oral) of any  nature  to which
     Mortgagor,  or the  Mortgaged  Property  may be  bound  and (v) any and all
     restrictions,  restrictive covenants or zoning,  present and future, as the
     same may apply to the Mortgaged Property.

          CC.  "Lender  Party" or "Lender  Parties"  means,  as the  context may
     require,  the Agent,  any Lender and any Affiliate of any Lender that is an
     issuer under a letter of credit,  and each of their respective  successors,
     transferees and assigns.

          DD. "Loan  Documents"  means the Existing Loan  Documents and the 2002
     Loan Documents.

          EE. "Loan Note" is defined in Section 1.2 of this Mortgage.

          FF. "Losses" is defined in Section 3.10 of this Mortgage.

          GG.  "Maximum  Lawful  Rate"  means the  maximum  nonusurious  rate of
     interest that may be received,  charged or contracted for under  Applicable
     Law from time to time in effect.

          HH.  "Mortgaged  Property" means the properties,  rights and interests
     hereinafter described in Section 1.5 and defined as the Mortgaged Property.

          II. "Mortgagor" is defined in the Preamble of this Mortgage.


                                      -5-
<PAGE>

          JJ.  "Obligations"  means  any and all of the  covenants,  warranties,
     representations   and   other   obligations   (other   than  to  repay  the
     Indebtedness)  made or undertaken by Mortgagor or others to the Agent,  the
     Lender  Parties,  the  Trustees  or  others  as set  forth  in  the  Credit
     Agreements or other Loan Documents.

          KK. "oil and gas leases"  shall  include oil, gas and mineral  leases,
     subleases and assignments thereof, operating rights, and shall also include
     subleases and assignments of operating rights.

          LL. "Operating  Equipment" means all surface or subsurface  machinery,
     goods,  equipment,  fixtures,  inventory,  facilities,  supplies  or  other
     property of whatsoever  kind or nature  (excluding  drilling rigs,  trucks,
     automotive  equipment  or other  property  taken to the premises to drill a
     well or for other similar  temporary  uses) now or hereafter  located on or
     under any of the lands  described  in  Exhibit A which are  useful  for the
     production,  gathering, treatment, processing, storage or transportation of
     Hydrocarbons  (together with all  accessions,  additions and attachments to
     any thereof),  including, but not by way of limitation,  all oil wells, gas
     wells, water wells,  injection wells, casing,  tubing, tubular goods, rods,
     pumping  units  and  engines,   christmas   trees,   platforms,   derricks,
     separators,  compressors,  gun barrels, flow lines, tanks, gas systems (for
     gathering, treating and compression), pipelines (including gathering lines,
     laterals  and  trunklines),   chemicals,   solutions,  water  systems  (for
     treating, disposal and injection), steam generation and injection equipment
     and  systems,  power  plants,  poles,  lines,  transformers,  starters  and
     controllers,  machine  shops,  tools,  storage yards and  equipment  stored
     therein, buildings and camps, telegraph,  telephone and other communication
     systems, roads, loading docks, loading racks and shipping facilities.

          MM.  "Organic   Documents"   means  the  Articles  of   Incorporation,
     Certificate of  Incorporation,  limited  liability  company  certificate of
     formation and regulations or operating  agreement,  partnership  agreement,
     limited partnership agreement,  joint venture agreement, trust agreement or
     other  similar  documents  governing  the  organization  and operation of a
     business association.

          NN. "Permits" means all authorizations, approvals, permits, variances,
     land use entitlements, consents, licenses, franchises and agreements issued
     by or  entered  into  with  any  Governmental  Authority  now or  hereafter
     required for all stages of exploration, developing, operating, and plugging
     and  abandoning oil and gas wells  (including,  without  limitation,  those
     shown on Exhibit A) on all or any part of the lands  described in Exhibit A
     (or any other lands any production  from which, or profits or proceeds from
     such  production,  is attributed to any interest in the lands  described in
     Exhibit A).

          OO. "Permitted  Encumbrances" means the outstanding liens,  easements,
     building  lines,  restrictions,   exceptions,   reservations,   conditions,
     limitations,  security interests and other matters (if any) as reflected on
     Exhibit "B"


                                      -6-
<PAGE>

     attached hereto and the lien and security interests created by the Security
     Documents.

          PP.  "Person"  means any  natural  person,  corporation,  partnership,
     limited  liability   company,   firm,   association,   trust,   government,
     governmental  agency or any other entity,  whether acting in an individual,
     fiduciary or other capacity.

          QQ.  "Personalty"  means  all of the  right,  title  and  interest  of
     Mortgagor  now  owned  or  hereafter  acquired  in and  to  all  furniture,
     furnishings,  Equipment,  machinery,  Goods,  General  Intangibles,  money,
     Accounts,   receivables,   Contract  Rights,   Inventory,  all  refundable,
     returnable or  reimbursable  fees,  deposits or other funds or evidences of
     credit or  indebtedness  deposited  by or on behalf of  Mortgagor  with any
     Governmental  Authority,  agencies,  boards,  corporations,   providers  of
     utility services,  public or private,  including specifically,  but without
     limitation,  all refundable,  returnable or reimbursable tap fees,  utility
     deposits,  commitment  fees and development  costs,  and all other personal
     property  (other than the  Fixtures) of any kind or character as defined in
     and subject to the provisions of Article 9 of the Uniform  Commercial Code,
     now or hereafter located upon, within or about, or used in connection with,
     the  lands   described  in  Exhibit  A,  together  with  all   accessories,
     replacements  and  substitutions  thereto  or  therefor  and  the  Proceeds
     thereof.

          RR.  "Pledge  Agreements"  means the pledge  agreements  executed  and
     delivered  pursuant to Section 6.1.4 of the 2002 Credit Agreement,  as such
     agreements  may be amended,  supplemented,  restated or otherwise  modified
     from time to time.

          SS.  "Production  Sale Contracts"  means  contracts now in effect,  or
     hereafter  entered  into by  Mortgagor,  or  entered  into  by  Mortgagor's
     predecessors  in interest,  for the sale,  purchase,  exchange,  gathering,
     transportation,  treating or processing of  Hydrocarbons  produced from the
     lands described in Exhibit A.

          TT. "Rents and  Revenues"  means all of the rents,  revenues,  income,
     proceeds,  profits  and other  benefits  paid or  payable by parties to the
     Leases other than  Mortgagor  for using,  leasing,  licensing,  possessing,
     operating,  selling or otherwise enjoying the Mortgaged Property, including
     the proceeds from the sale of Hydrocarbons.

          UU. "Security Documents" means the Notes, this Mortgage, the financing
     statements and any and all other  instruments now or hereafter  executed by
     Mortgagor or any other person or party to evidence or secure the payment of
     the  Indebtedness or the performance and discharge of the  Obligations,  as
     any of the foregoing may be amended,  renewed or extended.  Notwithstanding
     that the  definition of Security  Documents  and various of the  components
     thereof include documents that may be amended, renewed or


                                           -7-
<PAGE>

     extended,  such definition shall in no way be construed to suggest that any
     party has agreed (or is obligated) to amend, renew or extend them.

          VV. "2002  Assignment  Agreement"  means that certain  Assignment  and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California  limited  partnership,  pursuant  to  Section  6.1.8 of the 2002
     Credit  Agreement,  substantially  in the  form of  Exhibit  K  hereto,  as
     amended, supplemented, amended and restated or otherwise modified from time
     to time.

          WW. "2002 Loan Agreement" is defined in Section 1.1 of this Mortgage.

          XX. "2002 Lenders" is defined in Section 1.1 of this Mortgage.

          YY.  "2002  Letters of  Credit"  is  defined  in  Section  1.1 of this
     Mortgage.

          ZZ. "2002 Loan Documents"  means the 2002 Credit  Agreement,  the 2002
     Loan Notes, the Pledge  Agreements,  the Guaranty,  the Deeds of Trust, the
     2002  Assignment  Agreement,  the Hazardous  Materials  Indemnity,  the Fee
     Letter, and each other relevant agreement, document or instrument delivered
     in connection therewith.

          AAA. "2002 Loan Notes" is defined in Section 1.1 of this Mortgage.

          BBB.  "Taxes"  means all real  property and personal  property  taxes,
     production taxes, assessments,  permit fees, water, gas, sewer, electricity
     and other utility rates and charges,  charges for any easement,  license or
     agreement  maintained  for the benefit of the Mortgaged  Property,  and all
     other taxes,  charges and assessments and any interest,  costs or penalties
     with respect thereto,  of any kind and nature  whatsoever which at any time
     prior to or after the execution hereof may be charged,  assessed, levied or
     imposed  upon the  Mortgaged  Property  or the  Rents and  Revenues  or the
     ownership, use, occupancy or enjoyment thereof.

          CCC.   "Transportation   Agreements"   shall  mean  any  contracts  or
     agreements entered into from time to time by Mortgagor,  or entered into by
     Mortgagor's  predecessors in interest,  relating to the  transportation  of
     Hydrocarbons,   as  any  such   agreement   or  contract  may  be  amended,
     supplemented, restated or otherwise modified from time to time.

          DDD.  "Trustees"  means the  Trustees  defined in the Preamble of this
     Mortgage and any  successor or substitute  trustee  appointed in accordance
     with the terms hereof.

          EEE.  "Water  Rights"  means  (including   without   limitation  those
     described  in Exhibit A hereto) all now or  hereafter  existing or acquired
     water and water rights,  reservoirs and reservoir rights, ditches and ditch
     rights,  wells and well rights,  whether  evidenced or initiated by permit,
     decree,   well  registration,   appropriation  not  decreed,   water  court
     application, shares of stock or other


                                      -8-
<PAGE>

     interests  in mutual  ditch or  reservoir  companies  or  carrier  ditch or
     reservoir  companies  or  otherwise,  appertaining  or  appurtenant  to  or
     beneficially  used or useful in  connection  with the  lands  described  in
     Exhibit A, together with all pumps,  well  casings,  wellheads,  electrical
     installations,  pumphouses, meters, monitoring wells and systems, measuring
     devices, pipes, pipelines,  and other structures or personal property which
     are or may be used to produce, regulate, measure, distribute, store, or use
     water  from the said  water  and water  rights,  reservoirs  and  reservoir
     rights, ditches and ditch rights, wells and well rights.

          FFF. "Uniform Commercial Code" means the Uniform Commercial Code as in
     effect from time to time in the State of __________ or any other applicable
     state,  and  the  terms  "Accounts",   "Account   Debtor",   "As  Extracted
     Collateral",   "Chattel  Paper",  "Contract  Rights",  "Deposit  Accounts",
     "Documents",  "Electronic Chattel Paper",  "General Intangibles",  "Goods",
     "Equipment",  "Fixtures", "Inventory",  "Instruments", and "Proceeds" shall
     have  the  respective  meanings  assigned  to  such  terms  in the  Uniform
     Commercial Code.

     1.5 Grant. NOW, THEREFORE, Mortgagor, to secure the full and timely payment
of the  Indebtedness  and the full and timely  performance  and discharge of the
Obligations,  has granted,  bargained,  sold,  warranted,  mortgaged,  assigned,
transferred  and  conveyed,  and by these  presents does grant,  bargain,  sell,
warrant, mortgage, assign, pledge and hypothecate,  transfer and convey unto the
Trustees,  IN TRUST,  WITH POWER OF SALE,  for the use and benefit of the Agent,
for itself and as agent for the Lender Parties, all Mortgagor's right, title and
interest,  whether  now  owned  or  hereafter  acquired,  in  and  to all of the
hereinafter  described  properties,  rights and interests;  and, insofar as such
properties,  rights and  interests  consist of Equipment,  General  Intangibles,
Accounts,  As  Extracted  Collateral,   Contract  Rights,  Inventory,  Fixtures,
Proceeds of  collateral  or any other  personal  property of a kind or character
defined in, or subject to the applicable  provisions of, the Uniform  Commercial
Code  (as in  effect  from  time to time in the  appropriate  jurisdiction  with
respect to each of said  properties,  rights and  interests),  Mortgagor  hereby
grants to said Trustees, for the use and benefit of the Agent, for itself and as
agent for the Lender Parties,  a security interest therein to the full extent of
Mortgagor's  legal and  beneficial  interest  therein,  now  owned or  hereafter
acquired, namely:

          (a) the lands  described in Exhibit A, and Leases,  the fee,  mineral,
     overriding  royalty,  royalty and other  interests  which are  described in
     Exhibit A,

          (b) the  presently  existing  and (subject to the terms of Section 3.7
     hereof) hereafter arising unitization, unit operating,  communitization and
     pooling agreements and the properties covered and the units created thereby
     (including, without limitation, all units formed under orders, regulations,
     rules,  approvals,  decisions or other  official  acts of any  Governmental
     Authority) which are specifically described in Exhibit A or which relate to
     any of the properties and interests specifically described in Exhibit A,


                                      -9-
<PAGE>

          (c) the  Hydrocarbons  which are in,  under,  upon,  produced or to be
     produced from or which are  attributed or allocated to the lands  described
     in Exhibit A,

          (d) the Production Sale Contracts,

          (e) the Joint Operating Agreements,

          (f) the Transportation Agreements,

          (g) the Operating Equipment,

          (h) the Permits,

          (i) the Water Rights,

          (j) the Hedging Agreements,

          (k) the Leases,

          (l) the Personalty,

          (m) the Rents and Revenues,

          (n)  without  duplication  of any  other  provision  of this  granting
     clause, Equipment, Fixtures and other Goods necessary or used in connection
     with,   and  Inventory,   Accounts,   As  Extracted   Collateral,   General
     Intangibles,  Contract Rights, Chattel Paper, Deposit Accounts,  Documents,
     Electronic  Chattel  Paper,  Instruments  and  Proceeds  arising  from,  or
     relating to, the properties and other interests described in Exhibit A,

          (o) any and all liens and security interests in Hydrocarbons  securing
     the payment of proceeds  from the sale of  Hydrocarbons,  including but not
     limited to those liens and security interests provided for in Section 9.343
     of the Texas  Business  and  Commerce  Code or  similar  statutes  of other
     jurisdictions or any successor statutes,

together with any and all corrections or amendments to, or renewals,  extensions
or ratifications  of, or replacements or substitutions  for, any of the same, or
any instrument relating thereto, and all accounts,  contracts,  contract rights,
options,  nominee  agreements,  unitization  or  pooling  agreements,  operating
agreements  and  unit  operating  agreements,   processing  agreements,   farmin
agreements, farmout agreements, joint venture agreements, partnership agreements
(including mining partnerships), exploration agreements, bottom hole agreements,
dry  hole  agreements,  support  agreements,  acreage  contribution  agreements,
surface use and surface damage agreements,  net profits  agreements,  production
payment  agreements,  Hedging Agreements,  insurance  policies,  title opinions,
title abstracts, title materials and information, files, records, writings, data
bases, information, systems, logs, well cores,


                                      -10-
<PAGE>

fluid samples, production data and reports, well testing data and reports, maps,
seismic  and   geophysical,   geological  and  chemical  data  and  information,
interpretative and analytical reports of any kind or nature (including,  without
limitation,  reserve  studies and reserve  evaluations),  computer  hardware and
software and all documentation therefor or relating thereto (including,  without
limitation,  all  licenses  relating  to or  covering  such  computer  hardware,
software and/or  documentation),  trade secrets,  trademarks,  service marks and
business names and the goodwill of the business  relating  thereto,  copyrights,
copyright registrations, unpatented inventions, patent applications and patents,
rights-of-way,   franchises,  bonds,  easements,   servitudes,  surface  leases,
permits,  licenses,  tenements,   hereditaments,   appurtenances,   concessions,
occupancy  agreements,  privileges,  development  rights,  condemnation  awards,
claims against third parties,  general intangibles,  rents,  royalties,  issues,
profits,  products and proceeds,  whether now or hereafter  existing or arising,
used or useful in connection with, covering,  relating to, or arising from or in
connection with, any of the aforesaid items (a) through (o), inclusive,  in this
granting clause  mentioned,  and all other things of value and incident  thereto
(including,  without  limitation,  any  and all  liens,  lien  rights,  security
interests and other  properties,  rights and interests) which Mortgagor might at
any time have or be  entitled  to,  but  excluding  any data or  contracts  with
respect to which  mortgaging  or  granting  of a lien or a security  interest is
prohibited by existing third party agreements,

all the aforesaid properties,  rights and interests, together with any additions
thereto  which  may be  subjected  to the lien  and  security  interest  of this
Mortgage by means of supplements hereto, being hereinafter, collectively, called
the "Mortgaged Property".

     Subject,  however, to (i) Permitted  Encumbrances  (including all presently
existing royalties,  overriding royalties,  payments out of production and other
burdens   which  are  referred  to  in  Exhibit  A  and  which  are  taken  into
consideration in computing any percentage, decimal or fractional interest as set
forth in Exhibit A), (ii) the  assignment of production  contained in Article IV
hereof,  but only insofar and so long as said  assignment  of  production is not
inoperative under the provisions of Section 4.5 hereof,  and (iii) the condition
that none of the Trustees,  the Agent nor any of the other Lender  Parties shall
be liable in any  respect for the  performance  of any  covenant  or  obligation
(including,  without limitation,  measures required to comply with Environmental
Laws) of Mortgagor in respect of the Mortgaged Property.

     TO HAVE AND TO HOLD  the  Mortgaged  Property  unto  the  Trustees  for the
benefit of the Agent, for itself and as agent for the Lender Parties, forever to
secure  the  payment  of the  Indebtedness  and to secure  the  performance  and
discharge of the Obligations of Mortgagor herein and therein contained.

     Mortgagor, in consideration of the premises and to induce the Agent and the
Lender  Parties,  as the case may be, to make the Loans and issue the Letters of
Credit, hereby covenants and agrees with each of the Trustees and the Agent, for
itself and as agent for the Lender Parties, as follows:


                                      -11-
<PAGE>

                                   ARTICLE II

                              Indebtedness Secured
                              --------------------

     2.1 Items of Indebtedness  Secured. The following items of indebtedness are
secured hereby:

          (a) The Loan Notes (including future advances to be made thereunder by
     the Agent or the Lenders), the Letter of Credit Outstandings (as defined in
     the  Credit  Agreements)  and all  other  obligations  and  liabilities  of
     Mortgagor under the Credit Agreements;

          (b) All indebtedness  and future advances  evidenced by any promissory
     notes  evidencing any  additional  loans which the Agent or the Lenders may
     from time to time make to Mortgagor,  if any, the Agent and the Lenders not
     being obligated, however, to make such additional loans;

          (c) Any sums  advanced or expenses or costs  incurred by the Trustees,
     the Agent or the Lender Parties,  or by any receiver  appointed  hereunder,
     which are made or incurred  pursuant to, or permitted by, the terms hereof,
     plus  interest  thereon at the rate herein  specified or  otherwise  agreed
     upon,  from the date of the advances or the  incurring of such  expenses or
     costs until reimbursed;

          (d) Any and all other  indebtedness  of Mortgagor or any  Affiliate of
     Mortgagor to the Agent or any Lender Party now or hereafter owing,  whether
     direct or indirect,  primary or secondary,  fixed or  contingent,  joint or
     several,   regardless  of  how  evidenced  or  arising,  including  without
     limitation, all Letters of Credit; and

          (e) Any  extensions,  refinancings,  modifications  or renewals of all
     such indebtedness described in subparagraphs (a) through (d) above, whether
     or not Mortgagor executes any extension agreement or renewal instrument.

     2.2 Indebtedness and the Notes Defined. All the above items of indebtedness
described in subparagraphs (a) through (e) of Section 2.1 hereof are hereinafter
collectively  referred to as the "Indebtedness".  Any promissory note evidencing
any part of the Indebtedness,  including,  without  limitation,  any of the Loan
Notes, is hereinafter referred to as a "Note", and all such promissory notes are
hereinafter referred to collectively as the "Notes".

     2.3 [Maximum  Amount.  The maximum amount of the  Indebtedness  that may be
outstanding  at any time, and from time to time, and secured by this Mortgage is
$__________.]


                                      -12-
<PAGE>

                                  ARTICLE III

                      Particular Covenants, Representations
                      -------------------------------------
                           and Warranties of Mortgagor
                           ---------------------------

     3.1 Payment of the Indebtedness  and Performance of Obligations.  Mortgagor
will duly and  punctually  pay the  Indebtedness,  as and when called for in the
Credit  Agreements  and the  Security  Documents  and on or before the due dates
thereof, and will timely perform and discharge all of the Obligations (including
each and every  obligation  owing on  account of the  Notes),  in full and on or
before the dates same are to be performed and discharged.

     3.2  Certain  Representations  and  Warranties.  Mortgagor  represents  and
warrants  (and  with  respect  to  those  matters  set  forth  in the  following
subsections (b) and (f), as to those portions of the Mortgaged Property that are
operated by persons other than Mortgagor,  Mortgagor  makes such  representation
and warranty to the best of its knowledge) that

          (a) the oil and gas  leases  described  in Exhibit A hereto are valid,
     subsisting  leases,  superior and paramount to all other oil and gas leases
     respecting the properties to which they pertain,

          (b) all producing  wells  located on the lands  described in Exhibit A
     have been drilled,  operated and produced in conformity with all Applicable
     Laws of all Governmental  Authorities having jurisdiction,  and are subject
     to no penalties on account of past  production,  and such wells are in fact
     bottomed  under and are  producing  from,  and the well  bores  are  wholly
     within,  the  lands  described  in  Exhibit A or lands  pooled or  unitized
     therewith,

          (c) Mortgagor,  to the extent of the interest  specified in Exhibit A,
     has  valid  and  indefeasible  title to each  property  right  or  interest
     constituting the Mortgaged  Property  described in Exhibit A and has a good
     and legal right to grant and convey the same to the Trustees; such interest
     entitles  Mortgagor to receive not less than the share of Hydrocarbons from
     such property  indicated as its net revenue interest or "NRI" share of such
     Hydrocarbons, and obligates Mortgagor to pay for not more than the share of
     operating and other costs,  liabilities  and expenses  associated with such
     property  indicated  as its  working  interest or "WI" share of such costs,
     liabilities and expenses,

          (d) the  Mortgaged  Property  is free from all  encumbrances  or liens
     whatsoever,  except for the Permitted  Encumbrances  or as permitted by the
     provisions of Section 3.4(e) hereof,

          (e) Mortgagor is not obligated,  by virtue of any prepayment under any
     contract providing for the sale by Mortgagor of Hydrocarbons which contains
     a "take or pay"  clause  or  under  any  similar  arrangement,  to  deliver
     Hydrocarbons at some future time without then or thereafter  receiving full
     payment therefor,


                                      -13-
<PAGE>

          (f) the Mortgaged Property is currently being operated, maintained and
     developed,  in all material  respects,  in accordance  with all  applicable
     currently  existing  Permits,  Legal  Requirements  and all Applicable Laws
     (including, without limitation, Environmental Laws),

          (g) the cover page to this  Mortgage  lists the correct  legal name of
     Mortgagor and Mortgagor has not been known by any legal name different from
     the one set forth on the cover page of this  Mortgage,  except as set forth
     on Schedule I to this Mortgage; Mortgagor is not now and has not been known
     by any trade  name,  nor has  Mortgagor  been the  subject of any merger or
     other corporate reorganization,

          (h) the  execution,  delivery  and  performance  by  Mortgagor  of the
     Security  Documents and the borrowing  evidenced by the Loan Notes, (i) are
     within  Mortgagor's  corporate  powers  and have  been duly  authorized  by
     Mortgagor's  Board  of  Directors,  shareholders  and all  other  requisite
     corporate  action,   (ii)  have  received  all  (if  any)  requisite  prior
     governmental  approval  and  consent  in order to be  legally  binding  and
     enforceable  in  accordance  with the terms  thereof,  and  (iii)  will not
     violate,  be in conflict with,  result in a breach or constitute  (with due
     notice or lapse of time, or both) a default under, any Legal Requirement or
     result in the creation or imposition of any lien,  charge or encumbrance of
     any nature whatsoever upon any of Mortgagor's property or assets, except as
     contemplated  by the  provisions  of the Security  Documents.  The Security
     Documents  constitute the legal, valid and binding obligations of Mortgagor
     and  others  obligated  under  the  terms  of the  Security  Documents,  in
     accordance with their respective terms, and

          (i) there are no  actions,  suits or  proceedings  pending,  or to the
     knowledge of Mortgagor  threatened,  against or affecting  Mortgagor or the
     Mortgaged Property that could materially  adversely affect Mortgagor or the
     Mortgaged  Property,  or involving the validity or  enforceability  of this
     Mortgage or the priority of the liens and security interests created by the
     Security  Documents,  and no event  has  occurred  (including  specifically
     Mortgagor's execution of the Security Documents and its consummation of the
     Loans described therein) which will violate, be in conflict with, result in
     the breach of, or constitute  (with due notice or lapse of time, or both) a
     material default under, any Legal  Requirement or result in the creation or
     imposition of any lien, charge or encumbrance of any nature whatsoever upon
     any of  Mortgagor's  property  other than the liens and security  interests
     created by the Security Documents.

     3.3 Further  Assurances.  Mortgagor  will  warrant  and forever  defend the
Mortgaged  Property unto the Trustees against every person  whomsoever  lawfully
claiming the same or any part thereof,  subject to Permitted  Encumbrances,  and
Mortgagor  will  maintain and preserve  the lien and  security  interest  hereby
created  so long  as any of the  Indebtedness  remains  unpaid.  Mortgagor  will
execute and deliver  such other and further  instruments  and will do such other
and  further  acts as, in the  opinion  of the  Trustees  or the  Agent,  may be
necessary or desirable to carry out more


                                      -14-
<PAGE>

effectually  the  purposes of this  Mortgage,  including,  without  limiting the
generality  of the  foregoing,  (i) prompt  correction  of any defect  which may
hereafter  be  discovered  in the  title  to the  Mortgaged  Property  or in the
execution and  acknowledgment of this Mortgage,  any Note, or any other document
executed in connection  herewith,  and (ii) prompt execution and delivery of all
notices to parties operating,  purchasing or receiving proceeds of production of
Hydrocarbons  from the Mortgaged  Property,  and all division orders or transfer
orders,  any of  which,  in the  opinion  of the  Agent,  is  needed in order to
transfer  effectually or to assist in transferring  effectually to the Agent the
assigned proceeds of production from the Mortgaged Property.

     3.4 Operation of the Mortgaged Property. So long as the Indebtedness or any
part thereof remains unpaid, and whether or not Mortgagor is the operator of any
particular part of the Mortgaged  Property,  Mortgagor shall, at Mortgagor's own
expense:

          (a) Do all things necessary to keep unimpaired  Mortgagor's  rights in
     the Mortgaged  Property and not, except in the ordinary course of business,
     abandon any well or  forfeit,  surrender  or release  any Lease  capable of
     producing  Hydrocarbons  in paying  quantities,  without the prior  written
     consent of the Agent;

          (b) Obtain  and  maintain  all  required  Permits  and cause the lands
     described  in  Exhibit A to be  maintained,  developed,  protected  against
     drainage,  and operated for the  production of  Hydrocarbons  in a good and
     workmanlike  manner as would a prudent  operator,  and in  accordance  with
     generally accepted industry practices,  Joint Operating Agreements, and all
     Applicable Laws, excepting those being contested in good faith;

          (c) Duly  pay and  discharge,  or  cause  to be paid  and  discharged,
     promptly as and when due and payable,  all rentals and royalties (including
     shut-in  royalties) payable in respect of the Mortgaged  Property,  and all
     expenses  incurred in or arising from the operation or  development  of the
     Mortgaged  Property  not later  than the due date  thereof,  or the day any
     fine, penalty, interest or cost may be added thereto or imposed, or the day
     any lien may be filed, for the non-payment  thereof (if such day is used to
     determine the due date of the respective item);

          (d) Cause the  Operating  Equipment  to be kept in good and  effective
     operating  condition,  ordinary  wear and tear  excepted,  and all repairs,
     renewals,  replacements,  additions  and  improvements  thereof or thereto,
     needful to the  production  of  Hydrocarbons  from the lands  described  in
     Exhibit A, to be promptly made;

          (e) Not, without the prior written consent of the Agent, create, place
     or permit to be created or  placed,  or through  any act or failure to act,
     acquiesce in the placing of, or allow to remain, any mortgage, pledge, lien
     (statutory,  constitutional or contractual), security interest, encumbrance
     or  charge,  or  conditional  sale  or  other  title  retention  agreement,
     regardless  of whether same are expressly  subordinate  to the liens of the
     Security  Documents,  with  respect to


                                      -15-
<PAGE>

     all or any portion of the Mortgaged  Property,  the Leases or the Rents and
     Revenues other than (1) the Permitted Encumbrances,  (2) Taxes constituting
     a lien but not due and payable, (3) defects or irregularities in title, and
     liens,  charges or encumbrances,  which, in the Agent's reasonable opinion,
     are not such as to interfere materially with the development,  operation or
     value of the Mortgaged  Property and not such as to affect materially title
     thereto,  (4) those  being  contested  by  Mortgagor  in good faith in such
     manner as not to jeopardize  the Trustees' and the Agent's rights in and to
     the Mortgaged Property,  (5) those liens permitted by each Section 8.2.3 of
     each of the Credit Agreements, and (6) those consented to in writing by the
     Agent;

          (f) Carry with financially sound and reputable insurance companies and
     in amounts satisfactory to the Agent the following insurance: (1) workmen's
     compensation  insurance and public  liability and property damage insurance
     in  respect of all  activities  in which  Mortgagor  might  incur  personal
     liability  for the death of or injury to an  employee or third  person,  or
     damage to or destruction of another's property;  and (2) to the extent such
     insurance is carried by similar companies  engaged in similar  undertakings
     in the same  general  areas in which the  Mortgaged  Property  is  located,
     insurance in respect of the Operating Equipment,  against loss or damage by
     fire, lightning, hail, tornado, explosion and other similar risks, hazards,
     casualties and contingencies  (including  business  interruption  insurance
     covering loss of Rents and Revenues); provided, that any such insurance may
     be provided by way of self  insurance to the extent that similar  companies
     engaged in similar undertakings in the same general areas also self-insure.
     Each insurance  policy issued in connection  therewith shall provide by way
     of  endorsements,  riders  or  otherwise  that (i) name the Agent as a loss
     payee on all property  insurance  policies and an additional insured on all
     liability  insurance  policies,  and provide that  proceeds  from  property
     insurance policies will be payable to the Agent as its interest may appear,
     which  proceeds  are  hereby  assigned  to the  Agent,  it being  agreed by
     Mortgagor  that such  payments  shall be applied A) if there be no Event of
     Default  existing or which would exist but for due notice or lapse of time,
     or  both,  to the  restoration,  repair  or  replacement  of the  Mortgaged
     Property,  or B) if there be an Event of Default  existing,  or which would
     exist but for due  notice or lapse of time,  or both,  at the option of the
     Agent,  either for the above  stated  purpose or toward the  payment of the
     Indebtedness;  (ii) the  coverage  of the Agent  shall  not be  terminated,
     reduced or affected in any manner  regardless of any breach or violation by
     Mortgagor of any  warranties,  declarations  or  conditions in such policy;
     (iii) no such  insurance  policy  shall be canceled,  endorsed,  altered or
     reissued  to effect a change in  coverage  for any reason and to any extent
     whatsoever unless such insurer shall have first given the Agent thirty (30)
     days prior written notice thereof; and (iv) the Agent may, but shall not be
     obligated   to,  make  premium   payments  to  prevent  any   cancellation,
     endorsement,  alteration or reissuance  and such payments shall be accepted
     by the  insurer  to  prevent  same.  The Agent  shall be  furnished  with a
     certificate  evidencing such coverage in form and content acceptable to the
     Agent.  All policies to be maintained  under this Mortgage are to be issued
     on forms and by companies  and with  endorsements  acceptable to the Agent.



                                      -16-
<PAGE>

     Mortgagor  shall  maintain  insurance  in an amount  sufficient  to prevent
     Mortgagor from becoming a co-insurer  under any policy required  hereunder.
     If Mortgagor  fails to maintain the level of insurance  required under this
     Mortgage,  then Mortgagor shall and hereby agrees to indemnify the Agent to
     the extent that a casualty  occurs and insurance  proceeds  would have been
     available had such insurance been maintained;

          (g) Furnish to the Agent as soon as possible  and in any event  within
     five (5) days after the  occurrence  from time to time of any change in the
     address of Mortgagor's location (as described on the signature page hereto)
     or in the name of Mortgagor, notice in writing of such change;

          (h) Not initiate or acquiesce in any change in any material  zoning or
     other land use or Water  Rights  classification  now or hereafter in effect
     and affecting the Mortgaged Property or any part thereof;

          (i) Notify the Agent in writing as soon as  possible  and in any event
     within five (5) days after it shall become aware of the  occurrence  of any
     Event of Default  under  Section 5.1 or any event which,  with notice,  the
     passage of time or both would be such an Event of Default;

          (j) Appear and defend,  with  counsel  acceptable  to the Agent in its
     reasonable  discretion2,  and hold the Agent  harmless  from,  any  action,
     proceeding  or claim  affecting  the  Mortgaged  Property or the rights and
     powers of the Agent or any of the Trustees  under the  Security  Documents,
     and all  costs  and  expenses  incurred  by the  Agent  in  protecting  its
     interests  hereunder  in such an  event  (including  all  court  costs  and
     attorneys' fees) shall be borne by Mortgagor;

          (k) Subject to Mortgagor's right to contest the same, promptly pay all
     Taxes legally imposed upon this  instrument or upon the Mortgaged  Property
     or upon  the  income  and  profits  thereof,  or upon the  interest  of the
     Trustees, the Agent or the other Lender Parties therein;  provided that the
     Mortgagor  shall not be liable for taxes  accruing  after a transfer of the
     Mortgaged Property following a foreclosure.

          (l) Comply with,  conform to and obey, in all material  respects,  all
     present  and future  Legal  Requirements  and not use,  maintain,  operate,
     occupy,  or allow the use,  maintenance,  operation  or  occupancy  of, the
     Mortgaged  Property in any manner which (a) violates any present and future
     Legal  Requirement,  (b) may be dangerous unless safeguarded as required by
     Applicable Law, (c)  constitutes a public or private  nuisance or (d) makes
     void,  voidable or  cancelable,  or increases the premium of, any insurance
     then in force with respect thereto; and


_______________
2    Calpine will propose revisions to this section.


                                      -17-
<PAGE>

          (m) Not, without the prior written consent of the Agent, permit any of
     the  Fixtures  or  Personalty  to be  removed  at any time  from the  lands
     described in Exhibit A unless (i) the removed  item is removed  temporarily
     for maintenance and repair, (ii) if removed permanently,  is replaced by an
     article of equal suitability and value, owned by Mortgagor,  free and clear
     of any lien or security  interest  except such as may be first  approved in
     writing by the Agent or (iii) such  Fixtures or  Personalty  are removed in
     connection  with the plugging and  abandoning of wells,  or  abandonment of
     other facilities, in each case as permitted by this Mortgage.

     3.5 Performance of Leases.  Mortgagor will: (a) duly and punctually perform
and  comply  with  any  and  all  representations,   warranties,  covenants  and
agreements  expressed  as  binding  upon it under  each of the  Leases;  (b) not
voluntarily  terminate,  cancel or waive its  rights or the  obligations  of any
other party under any of the Leases;  (c) use all reasonable efforts to maintain
each of the Leases in force and effect  during  the full term  thereof;  and (d)
appear in and defend (or cause its  operator to appear in and defend) any action
or proceeding arising under or in any manner connected with any of the Leases or
the  representations,  warranties,  covenants and  agreements of it or the other
party or parties thereto.

     3.6 Recording,  etc. Mortgagor will promptly,  and at Mortgagor's  expense,
record,  register,  deposit and file this and every other instrument in addition
or supplemental hereto in such offices and places and at such times and as often
as may be  necessary  to  preserve,  protect  and  renew  the lien and  security
interest hereof as a first lien on and prior perfected security interest in real
or  personal  property,  as the case may be, and the rights and  remedies of the
Trustees,  of the Agent and of the other Lender  Parties,  and otherwise will do
and observe all things or matters  necessary or expedient to be done or observed
by reason of any  Applicable  Law,  for the  purpose  of  effectively  creating,
maintaining  and preserving the lien and security  interest hereof on and in the
Mortgaged Property.

     3.7 Sale or Mortgage of the Mortgaged Property.  Except (a) as set forth in
Section 7.1 of this Mortgage; (b) as permitted by each Section 8.2.10 of each of
the Credit  Agreements;  (c) for sales of severed  Hydrocarbons  in the ordinary
course  of  Mortgagor's  business;  (d)  sales of or  dispositions  of  surplus,
obsolete or worn inventory or equipment;  and (e) the lien and security interest
created by this Mortgage,  Mortgagor will not sell,  convey,  mortgage,  pledge,
hypothecate,  pool,  unitize or otherwise  dispose of or encumber the  Mortgaged
Property  nor any  portion  thereof,  nor any of  Mortgagor's  right,  title  or
interest  therein,  without first securing the written consent of the Agent; and
Mortgagor will not enter into any arrangement  with any gas pipeline  company or
other consumer of Hydrocarbons regarding the Mortgaged Property whereby said gas
pipeline  company  or  consumer  may set  off any  claim  against  Mortgagor  by
withholding payment for any Hydrocarbons actually delivered.

     3.8 Records,  Statements  and Reports.  Mortgagor will keep proper books of
record  and  account  in which  complete  and  correct  entries  will be made of
Mortgagor's  transactions  in  accordance  with  generally  accepted  accounting
principles and will


                                      -18-
<PAGE>

furnish or cause to be furnished to the Agent such  information  concerning  the
business,  affairs and  financial  condition of Mortgagor as the Trustees or the
Agent may from time to time reasonably request.  Without limiting the generality
of the foregoing, Mortgagor shall furnish to the Agent upon its request, but not
more than every six (6) months: (a) reports prepared by an independent petroleum
engineer  acceptable to the Agent  concerning  (1) the quantity of  Hydrocarbons
recoverable  from the Mortgaged  Property,  (2) the projected income and expense
attributable to the Mortgaged Property,  and (3) the expediency of any change in
methods  of  treatment  or  operation  of  all  or  any  wells   productive   of
Hydrocarbons,  any new drilling or development, any method of secondary recovery
by repressuring or otherwise,  or any other action with respect to the Mortgaged
Property,  the  decision  as to which may  increase  or reduce the  quantity  of
Hydrocarbons  ultimately  recoverable or the rate of production thereof, and (b)
reports  for the  prior  period  showing  the  gross  proceeds  from the sale of
Hydrocarbons  produced  from the lands  described  in Exhibit A  (including  any
thereof  taken by  Mortgagor  for  Mortgagor's  own use),  the  quantity of such
Hydrocarbons  sold, the severance,  gross production,  occupation,  or gathering
taxes deducted from or paid out of such proceeds,  the number of wells operated,
drilled or abandoned,  and such other  information  as the Agent may  reasonably
request (upon request of the Agent,  such reports referred to in clauses (a) and
(b) above shall set forth such  information on a lease or unit basis,  and after
the occurrence of an Event of Default,  and upon the Agent's request,  Mortgagor
shall deliver the reports described in clause (b) on a monthly basis).

     3.9 Right of Entry.

          (a)  Upon  at  least  twenty-four  (24)  hours  notice  to  Mortgagor,
     Mortgagor will permit the Trustees or the Agent, or the agents of either of
     them,  at the cost and expense of  Mortgagor,  to enter upon the  Mortgaged
     Property  and all parts  thereof,  for the  purpose  of  investigating  and
     inspecting the condition and operation thereof, and shall permit reasonable
     access to the field offices and other  offices (to the fullest  extent that
     Mortgagor  may do so under  the  terms of the  applicable  Joint  Operating
     Agreements  and  other  applicable   agreements   affecting  the  Mortgaged
     Property),  including  the  principal  place of  business,  of Mortgagor to
     inspect and  examine  the  Mortgaged  Property  and to inspect,  review and
     reproduce as necessary  any books,  records,  accounts,  contracts or other
     documents of Mortgagor.

     (b) Without limiting the generality of the foregoing,  the Agent shall have
the right (to the fullest extent that Mortgagor may do so under the terms of the
applicable Joint Operating Agreements and other applicable  agreements affecting
the Mortgaged Property), on twenty-four (24) hours prior notice to Mortgagor, to
cause  such  persons  and  entities  as the  Agent  may  designate  to enter the
Mortgaged  Property  to conduct (at the cost and  expense of  Mortgagor),  or to
cause  Mortgagor to conduct (at the cost and expense of  Mortgagor),  such tests
and  investigations  as the Agent  deems  necessary  to  determine  whether  any
hazardous materials or solid waste is being generated,  transported,  stored, or
disposed of in accordance with applicable Environmental Laws. Such tests and


                                      -19-
<PAGE>

investigations may include,  without  limitation,  underground  borings,  ground
water  analyses  and  borings  from  the  floors,  ceilings  and  walls  of  any
improvements  located on the Mortgaged  Property.  This Section 3.9 shall not be
construed to affect or limit the  obligations  of Mortgagor  pursuant to Section
3.4 hereof.

          (c) The Agent  shall  have no duty to visit or observe  the  Mortgaged
     Property, or to conduct tests, and no site visit, observation or testing by
     the Agent (or its  agents and  independent  contractors)  shall  impose any
     liability on the Agent or any other Lender  Party,  nor shall  Mortgagor or
     any other obligor be entitled to rely on any visit,  observation or testing
     by the Agent in any respect. The Agent may, in its discretion,  disclose to
     Mortgagor or any other Person,  including any Governmental  Authority,  any
     report or finding  made as a result  of, or in  connection  with,  any site
     visit, observation or testing by the Agent. Mortgagor agrees that the Agent
     makes no warranty  or  representation  to  Mortgagor  or any other  obligor
     regarding  the  truth,  accuracy  or  completeness  of any such  report  or
     findings  that  may be so  disclosed.  Mortgagor  also  acknowledges  that,
     depending upon the results of any site visit, observation or testing by the
     Agent and disclosed to Mortgagor,  Mortgagor may have a legal obligation to
     notify one or more  Governmental  Authorities  of such  results,  that such
     reporting  requirements  are  site-specific,  and  are to be  evaluated  by
     Mortgagor without advice or assistance from the Agent.

     3.10 Environmental Laws.

          (a) Mortgagor  represents  and warrants,  to the best of its knowledge
     after  due  inquiry,  and  except  as set  forth in each  Item  7.12 of the
     Disclosure Schedule attached to each of the Credit Agreements that:

               (i) the  Mortgaged  Property  is in  compliance  in all  material
          respects  with all  applicable  Environmental  Laws and  there  are no
          conditions  existing  currently  which  would  be  likely  to  subject
          Mortgagor to damages,  penalties,  injunctive  relief or cleanup costs
          under any Environmental Laws or assertions  thereof,  or which require
          or are likely to require  cleanup,  removal,  remedial action or other
          response  pursuant to  Environmental  Laws by Mortgagor;  and all use,
          generation,   manufacturing,  release,  discharge,  storage,  deposit,
          treatment,  recycling or disposal of any materials on, under or at the
          Mortgaged  Property or transported  to or from the Mortgaged  Property
          (or tanks or other facilities  thereon  containing such materials) are
          being and will be conducted  in  accordance  in all material  respects
          with applicable  Environmental Laws including without limitation those
          requiring cleanup, removal or any other remedial action;

               (ii) Mortgagor is not a party to any litigation or administrative
          proceedings,  nor so far as is known by Mortgagor is any litigation or
          administrative  proceeding  threatened  against it,  which  asserts or
          alleges that Mortgagor has violated or is violating Environmental Laws
          or that


                                      -20-
<PAGE>

          Mortgagor  is required to clean up,  remove or take  remedial or other
          responsive action due to the disposal, depositing,  discharge, leaking
          or other release of any hazardous substances or materials; neither the
          Mortgaged  Property nor Mortgagor is subject to any judgment,  decree,
          order or citation related to or arising out of Environmental  Laws and
          neither has been named or listed as a potentially responsible party by
          any Governmental Authority in a matter arising under any Environmental
          Laws; and

               (iii)  Mortgagor  has also  obtained all Permits  required  under
          applicable  Environmental  Laws which are  necessary  for its  current
          exploration, production, transportation, storage, use, and development
          activities at the Mortgaged Property.

          (b) Mortgagor  shall not use or permit the  Mortgaged  Property or any
     part thereof to be used to generate, manufacture, refine, transport, treat,
     store,  handle,  dispose,   transfer,  produce  or  process  any  hazardous
     materials,  except in strict  compliance with all applicable  Environmental
     Laws, nor shall Mortgagor  cause or permit,  as a result of any intentional
     or unintentional  act or omission on the part of Mortgagor or any tenant or
     subtenant, a release of any hazardous materials onto the Mortgaged Property
     or onto  any  other  property.  Mortgagor  shall  comply,  in all  material
     respects,  with all  applicable  Environmental  Laws and shall  obtain  and
     comply with any and all  registrations or Permits required  thereunder.  To
     the extent any  hazardous  materials  are released or  discharged  onto the
     Mortgaged  Property on or after the date of this Mortgage,  Mortgagor shall
     conduct and complete all investigations,  studies,  sampling,  and testing,
     and all  remedial,  removal,  and other  actions  necessary to clean up and
     remove all such  hazardous  materials  on, from, or affecting the Mortgaged
     Property  or  any  part  thereof  (i) in  accordance  with  all  applicable
     Environmental  Laws; (ii) to the  satisfaction  of the Agent;  and (iii) in
     accordance with the orders and directives of all  Governmental  Authorities
     having jurisdiction over the Mortgaged  Property.  Mortgagor shall promptly
     notify  the  Agent of its  receipt  of any  notice  of a  violation  of any
     Environmental Laws.

          (c) Regardless of whether any site assessments are conducted  pursuant
     to this Mortgage,  and without  limiting the liability of Mortgagor for the
     breach of any warranty,  representation or covenant  contained herein or in
     any  other  Security  Document,   and  notwithstanding  any  limitation  of
     liability  contained  in the Note or other  Security  Documents,  Mortgagor
     hereby agrees to unconditionally and absolutely defend,  indemnify and hold
     harmless  the Agent and each of the Lender  Parties,  and their  respective
     employees,  affiliates,  agents and  attorneys,  and the Trustees under the
     Mortgage and any  successors or substitute  trustee under the Mortgage (any
     person to be  indemnified  being herein called the  "Indemnified  Person"),
     from  and  against,  and  be  responsible  for,  any  and  all  liabilities
     (including strict liability),  actions, demands,  penalties,  fines, taxes,
     assessments, losses (including, without limitation, diminution in the value
     of  the  Mortgaged  Property),  costs  and  expenses  (including,   without
     limitation,


                                      -21-
<PAGE>

     attorneys',  paralegals',  accountants' and other experts' and consultants'
     fees and expenses, and remedial costs, including, without limitation, costs
     of monitoring),  suits, damages,  including,  without limitation,  punitive
     damages and foreseeable and unforeseeable  consequential  damages, costs of
     any  settlement  or judgment  and claims  (including,  without  limitation,
     third-party claims for personal injury or real or personal property damage)
     of any and every kind  whatsoever  (hereinafter,  collectively,  called the
     "Losses"),  which  may now or in the  future  (whether  before or after the
     release,  or other  termination  of the  Mortgage  and the  other  Security
     Documents) be paid,  imposed  upon,  incurred or suffered by or asserted or
     awarded against any of the Indemnified Persons or the Mortgaged Property by
     any  person or entity or  Governmental  Authority  for,  with  respect  to,
     arising  out of, or as a direct or  indirect  result of, any one or more of
     the following: (i) the presence or suspected presence, release or suspected
     release of any hazardous materials at, upon, under, within, above, from, by
     or in connection  with the Mortgaged  Property or any portion  thereof,  or
     elsewhere in connection with the  transportation of hazardous  materials to
     or from the Mortgaged Property (including,  without limitation, in the air,
     soil,  groundwater  or surface  water),  or the escape,  seepage,  leakage,
     spillage, discharge, emission or release from the Mortgaged Property of any
     hazardous  materials;  (ii) any  violations of any  Environmental  Laws at,
     upon, under, within, from, by or in connection with the Mortgaged Property;
     (iii) the  environmental  condition  of the  Mortgaged  Property;  (iv) the
     imposition by any  Governmental  Authority of any lien or so-called  "super
     priority  lien" upon the Mortgaged  Property as a result of the presence or
     release of hazardous materials, or any violation of any Environmental Laws,
     at,  upon,  under,  within,  from,  by or  connection  with  the  Mortgaged
     Property;  (v) obligations to remediate hazardous materials  contamination,
     or to  remediate  any  condition  which  constitutes  a  violation  of  any
     Environmental  Laws; (vi) any site  assessments of the Mortgaged  Property;
     (vii)  liability  for personal  injury or property  damage or damage to the
     environment or fines,  penalties and punitive  damages,  resulting from the
     presence  or  release  of  hazardous  materials  or any  violations  of any
     Environmental Laws, at, upon, under, within, from, by or in connection with
     the Mortgaged  Property;  and (viii) any environmental  matter described in
     this Mortgage,  including,  without limitation,  matters arising out of any
     breach of the covenants, representations and warranties set forth herein in
     each instance  described in (i) through (viii) hereof regardless of whether
     any such Losses  arise out of or result  from any breach of the  covenants,
     representations  and  warranties  pertaining to  environmental  matters set
     forth in this Mortgage or the other Security  Documents,  and regardless of
     whether  or not  caused  by or  within  the  control  of  Mortgagor  or any
     Indemnified  Person;  or whether any such matters arise  before,  during or
     after any  foreclosure  of the  Mortgage or other taking of title to all or
     any  portion of the  Mortgaged  Property  or the  enforcement  of any other
     remedies under the Security Documents (if any such event occurs).  [WITHOUT
     LIMITATION,  THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON
     WITH RESPECT TO LOSSES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT
     OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE OR THE STRICT


                                      -22-
<PAGE>

     LIABILITY OF ANY SUCH INDEMNIFIED  PERSON,  BUT NOT THE GROSS NEGLIGENCE OR
     WILLFUL  MISCONDUCT OF ANY SUCH  INDEMNIFIED  PERSON.3] The following shall
     apply to that portion of the Mortgaged Property located in the State of New
     Mexico: To the extent the foregoing indemnity is governed by Section 56-7-1
     NMSA (1978), said indemnity shall not extend to liability, claims, damages,
     losses  or  expenses,  including  attorneys  fees,  arising  out of (a) the
     preparation  or approval of maps,  drawings,  opinions,  reports,  surveys,
     change orders,  designs or specifications by an Indemnified  Person, or (b)
     the  giving of or the  failure to give  directions  or  instructions  by an
     Indemnified  Person  where such  giving or failure  to give  directions  or
     instructions  is the primary cause of bodily injury to persons or damage to
     property.  To the extent the  foregoing  indemnity  is  governed by Section
     56-7-2  NMSA  (1978),  said  indemnity  shall not extend to (a) the sole or
     concurrent  negligence of an Indemnified Person, (b) the sole or concurrent
     negligence of an independent  contractor who is directly  responsible to an
     Indemnified  Person,  or (c) an accident that occurs in operations  carried
     on, at the direction,  or under the supervision of an Indemnified Person or
     in accordance with methods and means specified by an Indemnified Person.

          (d)  Notwithstanding  the foregoing or any contrary  provision hereof,
     Mortgagor's  indemnification  obligations  set forth in this  Section  3.10
     shall  not  extend to any such  Losses  which  are  attributable  solely to
     contamination  by hazardous  materials  first  introduced  to the Mortgaged
     Property  after a foreclosure  of this Mortgage or other taking of title to
     the Mortgaged Property by any of Indemnified Persons.

          (e)  The   indemnification   provided  in  this   Section  3.10  shall
     specifically apply to and include claims or actions brought by or on behalf
     of tenants or employees of Mortgagor.  Mortgagor  hereby  expressly  waives
     (with respect to any claims of any  Indemnified  Person  arising under this
     Section  3.10) any immunity to which  Mortgagor  may  otherwise be entitled
     under any industrial or worker's compensation laws.

          (f) In the event any of the Indemnified  Persons shall suffer or incur
     any such Losses,  Mortgagor shall pay to such Indemnified Persons the total
     of all such Losses  suffered or incurred  within ten (10) days after demand
     therefore.

          (g) Mortgagor agrees that the representations,  covenants,  warranties
     and  indemnifications  contained in this Mortgage shall survive the release
     of the  Mortgage,  the  foreclosure  or the  taking  of a deed  in  lieu of
     foreclosure, other termination of the lien of the Mortgage, or the exercise
     by the  Agent of any  other  remedies  under the  Security  Documents,  the
     discharge  of  Mortgagor's  Obligations  under  any of the  other  Security
     Documents,  or any transfer of the


_______________
3    In  certain  states  the  Indemnification  provisions  should  appear  in a
     separate document.


                                      -23-
<PAGE>

     Mortgaged Property, even if as a part of such foreclosure,  deed in lieu of
     foreclosure or other enforcement  action,  the Indebtedness is satisfied in
     full.

     3.11 Corporate  Mortgagor.  Mortgagor will continue to be duly qualified to
transact business in each state where the conduct of its business requires it to
be  qualified,  and will not,  without the prior  written  consent of the Agent,
consolidate or merge with any other partnership,  company,  corporation or other
Person.

     3.12 Taxpayer I.D. Number. The taxpayer  identification number of Mortgagor
is 77-0212977. The taxpayer identification number of the Agent is 13-494-1099.

                                   ARTICLE IV

Assignment of Production4

     4.1 Assignment.

          (a) Mortgagor hereby transfers,  assigns,  warrants and conveys to the
     Agent,  effective  as of [Month] 1, 2002,  at 7:00 A.M.,  local  time,  all
     Hydrocarbons  which are  thereafter  produced  from and which accrue to the
     Mortgaged  Property,  and all proceeds  therefrom.  Subject to the terms of
     Section  4.1(b),  all parties  producing,  purchasing or receiving any such
     Hydrocarbons,  or having such, or proceeds  therefrom,  in their possession
     for which  they or  others  are  accountable  to the Agent by virtue of the
     provisions  of this  Article IV, are  authorized  and directed to treat and
     regard the Agent as the assignee and  transferee  of Mortgagor and entitled
     in  Mortgagor's  place  and  stead to  receive  such  Hydrocarbons  and all
     proceeds  therefrom;  and  said  parties  and  each of them  shall be fully
     protected  in so  treating  and  regarding  the Agent and shall be under no
     obligation to see to the  application  by the Agent of any such proceeds or
     payments  received by it;  provided,  however,  that, until the Agent shall
     have instructed such parties to deliver such  Hydrocarbons and all proceeds
     therefrom  directly to the Agent, such parties shall be entitled to deliver
     such  Hydrocarbons and all proceeds  therefrom to Mortgagor.  So long as no
     Default  (as  defined  in the  Credit  Agreements),  shall  have  occurred,
     Mortgagor  shall be entitled to keep and retain all such  proceeds from the
     sale of such Hydrocarbons.

          (b) Upon a Default (it being understood that the  determination of the
     occurrence of a Default by the Agent shall be conclusive  and binding as to
     all such parties for all purposes  hereof),  the Agent may at any time (and
     from time to time)  thereafter give notice thereof to any party  producing,
     purchasing or receiving any such Hydrocarbons,  or having such, or proceeds
     therefrom,  in their possession for which they or others are accountable to
     the  Agent,  directing  that  said  Hydrocarbons  and  products  are  to be
     delivered into pipelines connected


_______________
4    Mechanics of the assignment  subject to discussions with local counsel.  In
     some  states,  this should be absolute in form,  in others,  it may be more
     appropriate as an assignment for security purposes.


                                      -24-
<PAGE>

     with the oil and gas leases, or to the purchaser thereof, free and clear of
     all  Taxes,  and the  proceeds  from  the  sale of such  Hydrocarbons  paid
     directly to the Agent in  accordance  with  Section  4.5 of this  Mortgage.
     Mortgagor  agrees to perform all such acts, and to execute all such further
     assignments, transfers and division orders, and other instruments as may be
     required  or  desired  by the  Agent or any  party  in  order to have  said
     revenues and proceeds so paid to the Agent.  The Agent is fully  authorized
     to receive and give receipt for said revenues and proceeds;  to endorse and
     cash any and all checks and drafts payable to the order of Mortgagor or the
     Agent for the account of Mortgagor received from or in connection with said
     revenues or proceeds  and apply the  proceeds  thereof in  accordance  with
     Section 4.2 hereof, and to execute transfer and division orders in the name
     of Mortgagor, or otherwise, with warranties binding Mortgagor.

     4.2 Application of Proceeds. All payments received by the Agent pursuant to
Section 4.1 hereof shall be placed in a cash collateral account at the Agent and
on the last business day of each calendar month applied as follows:

          First:  To the  payment  and  satisfaction  of all costs and  expenses
     incurred in connection  with the  collection of such  proceeds,  and to the
     payment of all items of the  Indebtedness and the Obligations not evidenced
     by any Note.

          Second:  To the payment of the  interest  on the Notes  accrued to the
     date of such payment.

          Third:  To the payment of the amounts of principal  then due and owing
     on the Notes.

          Fourth:  The  balance,  if any,  shall  either be  applied on the then
     unmatured principal amounts of the Notes, such application to be on such of
     the Notes and  installments  thereof  as the Agent may  select,  or, at the
     option of the Agent, released to Mortgagor.

     4.3 No Liability of the Agent in Collecting.  The Agent is hereby  absolved
from all liability for failure to enforce collection of any proceeds so assigned
(and no such  failure  shall be  deemed to be a waiver of any right of the Agent
under  this  Article  IV)  and  from  all  other  responsibility  in  connection
therewith,  except the responsibility to account to Mortgagor for funds actually
received.

     4.4  Assignment  Not a Restriction  on the Agent's  Rights.  Nothing herein
contained  shall  detract from or limit the absolute  obligation of Mortgagor to
make payment of the Indebtedness  regardless of whether the proceeds assigned by
this  Article  IV are  sufficient  to pay the same,  and the  rights  under this
Article IV shall be in addition to all other security now or hereafter  existing
to secure the payment of the Indebtedness.

     4.5 Status of  Assignment.  Notwithstanding  the other  provisions  of this
Article IV and in addition to the other  rights  hereunder,  the  Trustees,  the
Agent or any receiver  appointed in judicial  proceedings for the enforcement of
this Mortgage shall have the


                                      -25-
<PAGE>

right to  receive  all of the  Hydrocarbons  herein  assigned  and the  proceeds
therefrom after the occurrence and during the continuance of any Default and, in
any event,  after any Note or other item of  Indebtedness  has been declared due
and payable in accordance with the provisions of Section 5.1 hereof and to apply
all of said  proceeds as  provided  in Section 4.2 hereof.  Upon any sale of the
Mortgaged  Property or any part thereof pursuant to Article VI, the Hydrocarbons
thereafter produced from the property so sold, and the proceeds therefrom, shall
be included in such sale and shall pass to the  purchaser  free and clear of the
assignment contained in this Article IV.

     4.6 Indemnification  Obligations.  The following provisions shall apply to,
and be deemed in each case to modify,  each of the  provisions  of this Mortgage
(except those set forth in Section 3.10 hereof) and the other Security Documents
(except to the extent otherwise expressly provided therein) wherein Mortgagor is
obligated to indemnify each of the Indemnified Persons:

          (a)  Mortgagor  agrees to indemnify the Trustees and the Agent against
     all  legal   and   administrative   proceedings   for  which  a  claim  for
     indemnification   may  be  made   by  the   Indemnified   Person   (herein,
     collectively,  called "Indemnification Claims") made against or incurred by
     them or any of them as a  consequence  of the  assertion,  either before or
     after the  payment  in full of the  Indebtedness,  that they or any of them
     received  Hydrocarbons  herein assigned or the proceeds  thereof claimed by
     third persons and the Trustees and the Agent shall have the right to defend
     against any such Indemnification Claims,  employing attorneys therefor, and
     unless furnished with reasonable indemnity,  they or any of them shall have
     the right to pay or compromise and adjust all such Indemnification  Claims.
     Mortgagor  will  indemnify and pay to the Trustees or the Agent any and all
     such  amounts as may be paid in respect  thereof or as may be  successfully
     adjudged against the Trustees and the Agent or any of them. The obligations
     of Mortgagor as hereinabove set forth in this Section 4.6 shall survive the
     release termination, foreclosure or assignment of this Mortgage or any sale
     hereunder.

          (b)  Mortgagor  shall pay when due any  judgments  with  respect to an
     Indemnification  Claim against any of the Indemnified Persons and which are
     rendered  by a final order or decree of a court of  competent  jurisdiction
     from  which no further  appeal  may be taken or has been  taken  within the
     applicable  appeal period.  In the event that such payment is not made, any
     of the  Indemnified  Persons  at its  sole  discretion  may  pay  any  such
     judgments,  in whole or in part,  and look to Mortgagor  for  reimbursement
     pursuant to this Mortgage, or may proceed to file suit against Mortgagor to
     compel such payment.

          (c) Any  amount  which  Mortgagor  is  obligated  to pay to or for the
     benefit of an Indemnified Person with respect to an Indemnification  Claim,
     but which is not paid when due,  shall bear interest at the default or post
     maturity  rate of  interest  provided  for in the Note  from the date  such
     amount is due until such amount is paid.


                                      -26-
<PAGE>

                                   ARTICLE V

                                Events of Default
                                -----------------

     5.1 Events of Default  Hereunder.  In case any one or more of the following
events of default (each,  an "Event of Default")  shall occur and shall not have
been remedied:

          (a) default in the payment of principal of or interest on any Note, or
     in the  payment  of  any  other  Indebtedness  or in  the  performance  and
     discharge of the Obligations secured hereby, when due;

          (b) the  occurrence of an event of default (other than any relating to
     non-payment  of  principal  of or interest on any Note) under the terms and
     provisions of either Credit  Agreement and the continuance of such event of
     default for the applicable period of grace, if any;

          (c) any  warranty or  representation  made by  Mortgagor  herein shall
     prove to be untrue in any  material  respect  as of the date made or deemed
     made; or

          (d) failure by Mortgagor,  within the applicable  period of grace,  if
     any, to cure a default in the due performance or observance of any covenant
     or agreement  contained in this Mortgage and not  constituting a default in
     the payment of principal of or interest  upon any Note or in the payment of
     any other Indebtedness;

then and in any such event the Agent,  at its  option,  may  enforce  any of the
provisions of Article VI hereof,  without any notice or demand of any kind, both
of which are hereby expressly waived.

                                   ARTICLE VI

                           Enforcement of the Security
                           ---------------------------

     6.1  Acceleration.  Upon the  occurrence of an Event of Default and if such
Event of Default  shall be  continuing,  the  Trustees  shall have the right and
power to declare  the then  unpaid  principal  balance on the Note,  the accrued
interest  and any other  accrued but unpaid  portion of the  Indebtedness  to be
immediately  due and payable,  without  further  notice,  presentment,  protest,
demand or action of any nature  whatsoever  (each of which  hereby is  expressly
waived by  Mortgagor),  whereupon  the same  shall  become  immediately  due and
payable.

     6.2 Title  Examination.  Upon the  occurrence of an Event of Default and if
such Event of Default shall be continuing, the Trustees shall have the right and
power to cause to be brought down to date a title  examination and tax histories
of the  Mortgaged  Property,  procure  title  opinions  or title  reports or, if
necessary, procure new abstracts and tax histories.


                                      -27-
<PAGE>

     6.3 Environmental  Audit. Upon the occurrence of an Event of Default and if
such Event of Default shall be continuing, the Trustees shall have the right and
power to procure an updated or entirely new environmental audit of the Mortgaged
Property  including the lands  described in Exhibit A, buildings,  soil,  ground
water and subsurface investigations; have the buildings inspected by an engineer
or other qualified inspector;  enter upon the Mortgaged Property at any time and
from time to time to show the  Mortgaged  Property to potential  purchasers  and
potential  bidders at foreclosure  sale; make available to potential  purchasers
and potential bidders all information obtained pursuant to the foregoing and any
other  information  in the  possession  of the  Agent  regarding  the  Mortgaged
Property.

     6.4 Power of Sale of Real  Property  Constituting  a Part of the  Mortgaged
Property.  Upon  the  occurrence  of an Event of  Default  and if such  Event of
Default  shall be  continuing,  the  Trustees  shall have the right and power to
sell,  to the extent  permitted by Applicable  Law, at one or more sales,  as an
entirety or in parcels, as they may elect, the real property constituting a part
of the Mortgaged Property,  at such place or places and otherwise in such manner
and upon such notice as may be required by Applicable Law, or, in the absence of
any  such  requirement,  as the  Trustees  may  deem  appropriate,  and to  make
conveyance to the purchaser or purchasers;  and Mortgagor shall warrant title to
such real property to such  purchaser or  purchasers.  The Trustees may postpone
the sale of all or any portion of such real property by public  announcement  at
the time and place of such sale,  and from time to time  thereafter  may further
postpone such sale by public  announcement made at the time of sale fixed by the
preceding  postponement.  The right of sale hereunder  shall not be exhausted by
one or any sale, and the Trustees may make other and successive  sales until all
of the trust estate be legally sold.  With respect to that  portion,  if any, of
the Mortgaged  Property  situated in the State of Wyoming,  this Mortgage may be
foreclosed by advertisement and sale as provided by applicable Wyoming statutes.
With respect to that portion,  if any, of the Mortgaged Property situated in the
State of  Oklahoma,  the Agent  shall  have the right and power at its option to
declare the  Indebtedness  secured hereby due and payable and to sell, or direct
the  Trustees  to sell,  the "real  estate,"  as such term is defined  under the
provisions of 46 O.S. Supp.  1986,  ss.42,  constituting a part of the Mortgaged
Property,  all under the terms of 46 O.S. Supp.  1986, ss.40 et seq., and shall,
to the extent  permitted by Applicable  Law, have the other rights  conferred on
the Trustees under the provisions of this Mortgage.

     6.5 Rights of the Trustees with Respect to Personal Property Constituting a
Part of the Mortgaged  Property.  Upon the occurrence of an Event of Default and
if such Event of Default shall be continuing,  the Trustees will have all rights
and  remedies  granted  by  Applicable  Law,  and  particularly  by the  Uniform
Commercial Code, including,  but not limited to, the right to take possession of
all personal  property  constituting a part of the Mortgaged  Property,  and for
this  purpose the Trustees or the Agent may enter upon any premises on which any
or all of such personal  property is situated and take possession of and operate
such  personal  property (or any portion  thereof) or remove it  therefrom.  The
Trustees or the Agent may require  Mortgagor to assemble such personal  property
and make it available  to the Trustees or the Agent at a place to be  designated
by the Trustees or the Agent which is reasonably convenient to all parties.



                                      -28-
<PAGE>

Unless such personal  property is perishable or threatens to decline speedily in
value or is of a type customarily sold on a recognized  market,  the Trustees or
the Agent  will give  Mortgagor  reasonable  notice of the time and place of any
public sale or of the time after which any private sale or other  disposition of
such personal  property is to be made.  This  requirement of sending  reasonable
notice will be met if the notice is mailed by first-class mail, postage prepaid,
to  Mortgagor  at the  address  shown  below the  signatures  at the end of this
Mortgage at least five (5) days before the time of the sale or disposition.

     6.6 Rights with Respect to Fixtures  Constituting  a Part of the  Mortgaged
Property.  Upon  the  occurrence  of an Event of  Default  and if such  Event of
Default  shall be  continuing,  the  Trustees  may elect to treat  the  fixtures
constituting a part of the Mortgaged Property as either real property collateral
or personal  property  collateral  and then  proceed to exercise  such rights as
apply to such type of collateral.

     6.7 Judicial Proceedings. Upon the occurrence of an Event of Default and if
such  Event of  Default  shall be  continuing,  the  Trustees,  in lieu of or in
addition to exercising  any power of sale  hereinabove  given,  may proceed by a
suit or suits in equity or at law, whether for a foreclosure  hereunder for each
or upon credit in one or more  parcels or portions  under  executory or ordinary
process, at the Agent's sole option,  without  appraisement  (appraisement being
expressly  waived),  or for  the  sale  of the  Mortgaged  Property,  or for the
specific  performance of any covenant or agreement herein contained or in aid of
the execution of any power herein granted,  or for the appointment of a receiver
pending any foreclosure  hereunder or the sale of the Mortgaged Property, or for
the enforcement of any other appropriate  legal or equitable  remedy.  Mortgagor
hereby acknowledges the Indebtedness secured hereby,  whether now existing or to
arise  hereafter,  and  confesses  judgment  thereon  in the full  amount of the
Indebtedness in favor of the Agent and any future holder or holders of the Notes
if such obligations are not paid at maturity.

     6.8 Possession of the Mortgaged Property. It shall not be necessary for the
Trustees  or the Agent to have  physically  present or  constructively  in their
possession  at any sale  held by the  Trustees  or the  Agent  or by any  court,
receiver or public officer any or all of the Mortgaged  Property;  and Mortgagor
shall  deliver to the  purchasers at such sale on the date of sale the Mortgaged
Property  purchased  by  such  purchasers  at such  sale,  and if it  should  be
impossible or  impracticable  for any of such purchasers to take actual delivery
of the  Mortgaged  Property,  then the  title  and  right of  possession  to the
Mortgaged Property shall pass to such purchaser at such sale as completely as if
the same had been actually present and delivered.

     6.9 Certain Aspects of a Sale. The Agent shall have the right to become the
purchaser at any sale held by the  Trustees or by any court,  receiver or public
officer, and the Agent shall have the right to credit upon the amount of the bid
made  therefor  the amount  payable out of the net  proceeds of such sale to it.
Recitals  contained  in any  conveyance  made to any  purchaser at any sale made
hereunder  shall  conclusively  establish  the truth and accuracy of the matters
therein  stated,  including,  without  limiting the generality of the foregoing,
nonpayment  of the unpaid  principal  sum of, and the  interest  accrued on, the
Notes, after the same have become due and payable,


                                      -29-
<PAGE>

advertisement  and  conduct  of  such  sale in the  manner  provided  herein  or
appointment of any successor Trustee hereunder.

     6.10 Receipt to Purchaser.  Upon any sale,  whether made under the power of
sale herein  granted and  conferred  or by virtue of judicial  proceedings,  the
receipt  of  the  Trustees,  or  of  the  officer  making  sale  under  judicial
proceedings, shall be sufficient discharge to the purchaser or purchasers at any
sale for his or their purchase money,  and such purchaser or purchasers,  or his
or their  assigns or  personal  representatives,  shall not,  after  paying such
purchase  money and  receiving  such  receipt of the Trustees or of such officer
therefor,  be obliged to see to the application of such purchase money, or be in
anywise answerable for any loss, misapplication or nonapplication thereof.

     6.11 Effect of Sale. Any sale or sales of the Mortgaged  Property,  whether
under the power of sale herein  granted and  conferred  or by virtue of judicial
proceedings,  shall  operate  to divest all right,  title,  interest,  claim and
demand  whatsoever  either at law or in equity,  of Mortgagor  of, in and to the
premises and the property sold, and shall be a perpetual bar, both at law and in
equity,  against Mortgagor,  and Mortgagor's  successors or assigns, and against
any and all  persons  claiming or who shall  thereafter  claim all or any of the
property  sold from,  through or under  Mortgagor or  Mortgagor's  successors or
assigns. Nevertheless, Mortgagor, if requested by the Agent so to do, shall join
in the  execution  and  delivery  of all  proper  conveyances,  assignments  and
transfers of the properties so sold.

     6.12  Application  of Proceeds.  The proceeds of any sale of, and the Rents
and Revenues and other amounts generated by the holding,  leasing,  operation or
other use of,  the  Mortgaged  Property  shall be  applied  by the Agent (or the
receiver,  if one is  appointed)  to the  extent  that  funds  are so  available
therefrom in the following orders of priority:

          (a)  first,  to the  payment  of the  costs  and  expenses  of  taking
     possession  of the  Mortgaged  Property  and of  holding,  using,  leasing,
     repairing,  improving and selling the same, including,  without limitation,
     (i) trustees' and receivers'  fees, (ii) court costs,  (iii) attorneys' and
     accountants' fees, (iv) costs of advertisement,  and (v) the payment of any
     and all  Taxes,  liens,  security  interests  or  other  rights,  title  or
     interests  equal or  superior  to the lien and  security  interest  of this
     Mortgage  (except  those to which  the  Mortgaged  Property  has been  sold
     subject to and without in any way implying the Agent's prior consent to the
     creation thereof);

          (b)  second,  to the  payment  of all  amounts,  other than the unpaid
     principal  balance and accrued but unpaid  interest due on the Note,  which
     may be due to the  Agent  or the  Lenders  under  the  Security  Documents,
     together with interest thereon as provided therein;

          (c) third,  to the payment of all accrued but unpaid  interest  due on
     the Note;


                                      -30-
<PAGE>

          (d) fourth,  to the payment of the unpaid principal balance due on the
     Note in the inverse order of maturity,  and interest  shall cease as to the
     amount so paid;

          (e) fifth, to the extent funds are available  therefor out of the sale
     proceeds or the Rents and Revenues and to the extent known by the Agent, to
     the payment of any  indebtedness  or  obligation  secured by a  subordinate
     Mortgage on or security interest in the Mortgaged Property; and

          (f) sixth, to Mortgagor or Mortgagor's successors or assigns, as their
     interests shall appear.

     6.13  Mortgagor's  Waiver of  Appraisement,  Marshalling  and Other Rights.
Mortgagor  agrees, to the full extent that Mortgagor may lawfully so agree, that
Mortgagor  will not at any time insist  upon or plead or in any manner  whatever
claim the benefit of any appraisement,  valuation, stay, extension or redemption
law now or hereafter in force,  in order to prevent or hinder the enforcement or
foreclosure  of this Mortgage or the absolute sale of the Mortgaged  Property or
the  possession  thereof  by any  purchaser  at any sale  made  pursuant  to any
provision  hereof,  or  pursuant  to  the  decree  of  any  court  of  competent
jurisdiction;  but  Mortgagor,  for  Mortgagor  and all who may claim through or
under  Mortgagor,  so far as  Mortgagor  or  those  claiming  through  or  under
Mortgagor now or hereafter  lawfully may,  hereby waives the benefit of all such
laws;  provided,  however,  that  appraisement of any of the Mortgaged  Property
located  in the State of  Oklahoma  is hereby  expressly  waived or not,  at the
option of the Trustees,  such option to be exercised prior to or at the time the
judgment is rendered in any foreclosure hereof. Mortgagor, for Mortgagor and all
who may claim through or under Mortgagor,  waives,  to the extent that Mortgagor
may lawfully do so, any and all right to have the Mortgaged Property  marshalled
upon any foreclosure of the lien hereof, or sold in inverse order of alienation,
and agrees that the  Trustees,  the Agent or any court  having  jurisdiction  to
foreclose such lien may sell the Mortgaged  Property as an entirety.  Mortgagor,
for Mortgagor and all who may claim through or under Mortgagor,  further waives,
to the full extent  that  Mortgagor  may  lawfully  do so, any  requirement  for
posting a receiver's  bond or replevin bond or other similar type of bond if the
Trustees  or the Agent  commence an action for  appointment  of a receiver or an
action for replevin to recover possession of any of the Mortgaged  Property.  If
any law in this paragraph  referred to and now in force,  of which  Mortgagor or
Mortgagor's  successor or successors might take advantage despite the provisions
hereof,  shall hereafter be repealed or cease to be in force, such law shall not
thereafter be deemed to constitute any part of the contract herein  contained or
to preclude the operation or application  of the  provisions of this  paragraph.
Pursuant to Section  39-5-19,  New Mexico  Statutes,  Annotated,  1978 Comp., as
amended,  Mortgagor  agrees that as to the  Mortgaged  Property  situated in the
State of New Mexico,  the redemption period shall be shortened to one (1) month.
Mortgagor  hereby  waives  all  rights  of  appraisement,   sale,  homestead  or
redemption  allowed  under  any  law or  laws  of the  State  of  Arkansas,  and
especially  redemption  under the Act of the  General  Assembly  of the State of
Arkansas approved May 8, 1899, and acts amendatory  thereto.  If Mortgagor is an
individual, Mortgagor


                                      -31-
<PAGE>

waives and releases all rights of dower, courtesy and homestead in the Mortgaged
Property  insofar as such  rights may in any way  affect  the  purposes  of this
Mortgage.

     6.14 Costs and Expenses. All costs and expenses (including attorneys' fees)
incurred by the Trustees or the Agent in protecting  and enforcing  their rights
hereunder shall  constitute a demand  obligation owing by Mortgagor to the party
incurring  such costs and  expenses  and shall draw  interest  at an annual rate
equal to the  highest  rate of interest  from time to time  accruing on the Loan
Note plus one percent (1%) until paid,  all of which shall  constitute a portion
of the Indebtedness.

     6.15 Sale of the Mortgaged  Property in Texas. If any Note is not paid when
due,  whether by acceleration or otherwise,  the Trustees are hereby  authorized
and empowered to sell any part of the Mortgaged Property located in the State of
Texas at public  sale to the  highest  bidder for cash in the area at the county
courthouse  of the county in Texas in which the Texas  portion of the  Mortgaged
Property or any part thereof is situated,  as herein  described,  designated  by
such county's  commissioner's  court for such  proceedings,  or if no area is so
designated,  at the door of the  county  courthouse  of said  county,  at a time
between the hours of 10:00 A.M.  and 4:00 P.M.  which is no later than three (3)
hours after the time  stated in the notice  described  immediately  below as the
earliest  time at which such sale would occur on the first Tuesday of any month,
after  advertising the earliest time at which said sale would occur,  the place,
and terms of said sale, and the portion of the Mortgaged Property to be sold, by
(a) posting (or by having some person or persons  acting for the Trustees  post)
for at least  twenty-one  (21) days  preceding the date of the sale,  written or
printed  notice of the proposed  sale at the  courthouse  door of said county in
which the sale is to be made; and if such portion of the Mortgaged Property lies
in more  than one  county,  one such  notice  of sale  shall  be  posted  at the
courthouse  door of each county in which such part of the Mortgaged  Property is
situated and such part of the Mortgaged  Property may be sold in the area at the
county  courthouse  of any  one of such  counties  designated  by such  county's
commissioner's  court for such proceedings,  or if no area is so designated,  at
the courthouse door of such county,  and the notice so posted shall designate in
which county such  property  shall be sold,  and (b) filing in the office of the
county  clerk of each  county  in which  any part of the  Texas  portion  of the
Mortgaged  Property  which is to be sold at such sale is  situated a copy of the
notice posted in accordance  with the preceding  clause (a). In addition to such
posting  and filing of  notice,  the Agent or other  holder of the  Indebtedness
shall, at least  twenty-one (21) days preceding the date of sale, serve or cause
to be served  written notice of the proposed sale by certified mail on Mortgagor
and on each other debtor, if any, obligated to pay the Indebtedness according to
the records of the Agent or other  holder of the  Indebtedness.  Service of such
notice  shall be completed  upon  deposit of the notice,  enclosed in a postpaid
wrapper  properly  addressed to Mortgagor  and such other  debtors at their most
recent address or addresses as shown by the records of the Agent or other holder
of the  Indebtedness in a post office or official  depository under the care and
custody of the United States Postal Service.  The affidavit of any person having
knowledge of the facts to the effect that such a service was completed  shall be
prima facie evidence of the fact of service.  Mortgagor agrees that no notice of
any sale, other than as set out in this Section,  need be given by the Trustees,
the Agent or any other person, except as may


                                      -32-
<PAGE>

otherwise be required by  Applicable  Law.  Mortgagor  hereby  designates as its
address for the purpose of such notice the address set out on the signature page
hereof;  and agrees that such address shall be changed only by depositing notice
of such  change  enclosed  in a postpaid  wrapper in a post  office or  official
depository  under the care and  custody of the  United  States  Postal  Service,
certified mail,  postage  prepaid,  return receipt  requested,  addressed to the
Agent or other holder of the  Indebtedness  at the address for the Agent set out
herein  (or  to  such  other  address  as  the  Agent  or  other  holder  of the
Indebtedness  may have designated by notice given as above provided to Mortgagor
and such other  debtors).  Any such notice of change of address of  Mortgagor or
other  debtors or of the Agent or of other holder of the  Indebtedness  shall be
effective  three (3)  business  days after such  deposit if such post  office or
official depository is located in the State of Texas,  otherwise to be effective
upon receipt.  Mortgagor  authorizes and empowers the Trustees to sell the Texas
portion of the  Mortgaged  Property in lots or parcels or in its entirety as the
Trustees  shall deem  expedient;  and to execute and deliver to the purchaser or
purchasers thereof good and sufficient deeds of conveyance thereto by fee simple
title,  with evidence of general  warranty by  Mortgagor,  and the title of such
purchaser or purchasers when so made by the Trustees,  Mortgagor binds itself to
warrant and forever  defend.  Where  portions of the  Mortgaged  Property lie in
different  counties,  sales in such  counties may be conducted in any order that
the Trustees may deem expedient;  and one or more such sales may be conducted in
the same month,  or in successive  or different  months as the Trustees may deem
expedient.  Notwithstanding  anything  to the  contrary  contained  herein,  the
Trustees  may  postpone  the sale  provided for in this Section 5.16 at any time
without the  necessity  of a public  announcement.  The  provisions  hereof with
respect to the posting and giving of notices of sale are intended to comply with
the  provisions  of Section  51.002 of the Property  Code of the State of Texas,
effective  January 1, 1984,  and in the event the  requirements,  or any notice,
under such Section  51.002 of the  Property  Code of the State of Texas shall be
eliminated or the  prescribed  manner of giving such notices  modified by future
amendment  to, or  adoption of any statute  superseding,  Section  51.002 of the
Property Code of the State of Texas, the requirement for such particular notices
shall be deemed  stricken from or modified in this  Mortgage in conformity  with
such  amendment  or  superseding  statute,  effective as of the  effective  date
thereof.

     6.16 Fair Market  Value.  It is expressly  agreed by Mortgagor  that to the
extent  Section  51.003 of the Texas  Property  Code, or any amendment  thereto,
requires  that the  "fair  market  value"  of the  Mortgaged  Property  shall be
determined as of the foreclosure  date in order to enforce a deficiency  against
Mortgagor or any other party liable for repayment of the Indebtedness,  the term
"fair market value" shall include those matters  required by Applicable  Law and
shall also include the additional factors set forth below:

          (a) The  Mortgaged  Property  is to be  valued  "AS IS" and  "WITH ALL
     FAULTS" and there shall be no assumption of restoration of or refurbishment
     of improvements, if any, after the date of the foreclosure;


                                      -33-
<PAGE>

          (b) An offset to the fair market value of the Mortgaged  Property,  as
     determined  hereunder,  shall be made by  deducting  from  such  value  the
     reasonable  estimated  closing costs  relating to the sale of the Mortgaged
     Property,  including  but  not  limited  to  brokerage  commissions,  title
     examination and curative expenses,  tax prorations,  escrow fees, and other
     common charges which are incurred by a seller of property; and

          (c) After  consideration of the factors required by Applicable Law and
     those required  above,  an additional  discount  factor shall be calculated
     based  upon the  estimated  time it will take to  effectuate  a sale of the
     Mortgaged  Property so that the "fair  market  value" as so  determined  is
     discounted  to be as of the date of the  foreclosure  sale of the Mortgaged
     Property.

     6.17 Operation of the Mortgaged Property by the Trustees or the Agent. Upon
the  occurrence of an Event of Default and during the  continuance of such Event
of Default and in addition to all other rights herein conferred on the Trustees,
the Trustees or the Agent (or any person, firm or corporation  designated by the
Trustees  or the  Agent)  shall  have the  right  and  power,  but  shall not be
obligated,  to enter upon and take possession of any of the Mortgaged  Property,
and to exclude Mortgagor, and Mortgagor's agents or servants,  wholly therefrom,
and to hold,  use,  administer,  manage and  operate the same to the extent that
Mortgagor  shall  be at the  time  entitled  and in its  place  and  stead.  The
Trustees,  the Agent,  or any  person,  firm or  corporation  designated  by the
Trustees or the Agent,  may operate the same without any  liability to Mortgagor
in connection with such operations, except to use ordinary care in the operation
of  such  properties,  and  the  Trustees,  the  Agent  or any  person,  firm or
corporation  designated  by the  Trustees or the Agent,  shall have the right to
collect,  receive and receipt for all  Hydrocarbons  produced and sold from said
properties, to make repairs, purchase machinery and equipment, conduct work-over
operations,  drill  additional  wells and to  exercise  every  power,  right and
privilege of Mortgagor with respect to the Mortgaged  Property.  When and if the
expenses of such  operation and  development  (including  costs of  unsuccessful
work-over  operations or additional  wells) paid by the Trustees or the Agent or
attributable to Mortgagor's  undivided interest therein and withheld,  or offset
against,  by an operator or other party have been paid or  reimbursed in full by
Mortgagor and the Indebtedness paid, said properties shall, if there has been no
sale or foreclosure, be returned to Mortgagor.

     6.18  Separate  Sales.  The  Mortgaged  Property may be sold in one or more
parcels and in such manner and order as the Agent, in its sole  discretion,  may
elect, it being  expressly  understood and agreed that the right of sale arising
out of any Event of Default  shall not be exhausted by any one or more sales but
other and successive  sales may be made until all of the Mortgaged  Property has
been sold or until the Indebtedness has been fully satisfied.

     6.19 Remedies  Cumulative,  Concurrent and  Non-Exclusive.  The Agent shall
have all rights,  remedies and recourses  granted in the Security  Documents and
available at law or equity (including  specifically those granted by the Uniform
Commercial  Code in effect and  applicable  to the  Mortgaged  Property,  or any
portion


                                      -34-
<PAGE>

thereof),  and same (a) shall be cumulative and  concurrent,  (b) may be pursued
separately,  successively or concurrently  against any one or more of Mortgagor,
any  Guarantor,  or others  obligated  under the Note,  or against the Mortgaged
Property,  at the sole discretion of the Agent, (c) may be exercised as often as
occasion therefor shall arise, it being agreed by Mortgagor that the exercise or
failure to exercise  any of same shall in no event be  construed  as a waiver or
release thereof or of any other right, remedy or recourse,  and (d) are intended
to be, and shall be, non-exclusive.

     6.20 Release of and Resort to Collateral. The Agent may release, regardless
of  consideration,  any  part  of  the  Mortgaged  Property  without,  as to the
remainder, in any way impairing, affecting,  subordinating or releasing the lien
or security interests created in or evidenced by the Security Documents or their
stature as a first and prior lien and security  interest in and to the Mortgaged
Property.  For  payment of the  Indebtedness,  the Agent may resort to any other
security  therefor  held by  Trustees  in such order and manner as the Agent may
elect.

     6.21 Discontinuance of Proceedings.  In case the Agent shall have proceeded
to invoke any right,  remedy or recourse  permitted under the Security Documents
and shall  thereafter  elect to discontinue or abandon same for any reason,  the
Agent shall have the unqualified right so to do and, in such an event, Mortgagor
and the Agent shall be restored to their  former  positions  with respect to the
Indebtedness,  the Obligations,  the Security Documents,  the Mortgaged Property
and otherwise, and the rights, remedies, recourses and powers of the Agent shall
continue as if same had never been invoked.

     6.22  Uniform  Commercial  Code  Remedies.  The Agent (or  Trustees  in the
Agent's  behalf) shall have all the rights,  remedies and recourses with respect
to the Personalty,  Fixtures,  Leases and Rents and Revenues  afforded a Secured
Party by the aforesaid  Uniform  Commercial  Code (being  Chapter 9 of the Texas
Business and Commerce Code, as to property within the scope thereof and situated
in the State of Texas) in  addition  to,  and not in  limitation  of,  the other
rights,  remedies  and  recourses  afforded  the Agent  and/or  Trustees  by the
Security Documents.

     6.23 No Obligation of Trustees or the Agent.  The  assignment  and security
interest  herein  granted  shall not be deemed or  construed  (a) to  constitute
Trustees or the Agent as a trustee in possession  of the  Mortgaged  Property or
(b) to  obligate  Trustees or the Agent to (i) lease the  Mortgaged  Property or
attempt to do same, (ii) take any action, (iii) incur any expenses or perform or
discharge any obligation,  duty or liability  whatsoever under any of the Leases
or otherwise.

                                  ARTICLE VII

                            Miscellaneous Provisions
                            ------------------------

     7.1 Pooling and Unitization.  Mortgagor shall have the right, and is hereby
authorized, to pool or unitize all or any part of the lands described in Exhibit
A, insofar as relates to the Mortgaged Property, with adjacent lands, leaseholds
and other


                                      -35-
<PAGE>

interests,  when, in the  reasonable  judgment of Mortgagor,  it is necessary or
advisable  to do so in  order  to  form a  drilling  and/or  production  unit to
facilitate  the  orderly  development  of that  part of the  Mortgaged  Property
affected  thereby,  or to comply with the  requirements of any Applicable Law or
governmental  order or regulation  relating to the spacing of wells or proration
of the production therefrom;  provided, however, that any unit so formed for the
production  of oil shall not  substantially  exceed 160  acres,  and any unit so
formed  for the  production  of gas shall not  substantially  exceed  640 acres,
unless a larger area is required to conform to an Applicable Law or governmental
order or  regulation  relating  to the spacing of wells or to obtain the maximum
allowable   production  under  any  Applicable  Law  or  governmental  order  or
regulation  relating  to the  proration  of  production  therefrom;  and further
provided  that  the  Hydrocarbons  produced  from any  unit so  formed  shall be
allocated among the separately owned tracts or interests  comprising the unit in
a uniform manner consistently  applied.  Any unit so formed may relate to one or
more zones or horizons,  and a unit formed for a particular zone or horizon need
not conform in area to any other unit  relating to a different  zone or horizon,
and a unit  formed for the  production  of oil need not conform in area with any
unit formed for the production of gas.  Immediately  after formation of any such
unit,  Mortgagor  shall furnish to the Trustees and the Agent a true copy of the
pooling  agreement,  declaration  of pooling or other  instrument  creating such
unit, in such number of counterparts as the Trustees may reasonably request. The
interest in any such unit  attributable  to the Mortgaged  Property (or any part
thereof)  included  therein  shall become a part of the  Mortgaged  Property and
shall be subject to the lien  hereof in the same manner and with the same effect
as though such unit and the  interest of  Mortgagor  therein  were  specifically
described  in  Exhibit  A.  Mortgagor  may enter  into  pooling  or  unitization
agreements not hereinabove authorized only with the prior written consent of the
Agent, which consent shall not be unreasonably withheld.

     7.2 No Liability.  Trustees and the Agent shall not be liable for any error
of judgment or act done by Trustees and the Agent in good faith, or be otherwise
responsible or accountable under any circumstances whatsoever,  except for their
negligence or bad faith.  Trustees and the Agent shall not be personally  liable
in case of entry by them,  or anyone  entering  by virtue of the  powers  herein
granted them, upon the Mortgaged  Property for debts  contracted or liability or
damages  incurred in the  management  or  operation of the  Mortgaged  Property.
Trustees and the Agent shall have the right to rely on any instrument,  document
or signature  authorizing or supporting any action taken or proposed to be taken
by them hereunder,  believed by them in good faith to be genuine. Trustees shall
be entitled to reimbursement for expenses incurred by them in the performance of
their duties hereunder and to reasonable compensation for such of their services
hereunder  as shall be  rendered.  Mortgagor  will,  from time to time,  pay the
compensation due to Trustees and the Agent hereunder and reimburse  Trustees and
the Agent  for,  and save  them  harmless  against,  any and all  liability  and
expenses which may be incurred by them in the performance of their duties.

     7.3 Successor Trustees.  Any Trustee may resign in writing addressed to the
Agent or may be removed at any time with or without  cause by an  instrument  in
writing duly executed by the Agent. In case of the death, resignation or removal
of a Trustee,


                                      -36-
<PAGE>

one or more  successor  Trustees may be appointed by the Agent by  instrument of
substitution  complying with any applicable  requirements of Applicable Law, and
in the absence of any such requirement  without formality other than appointment
and  designation in writing.  Such  appointment  and  designation  shall be full
evidence of the right and  authority  to make the same and of all facts  therein
recited,  and upon the  making  of any such  appointment  and  designation  this
conveyance shall vest in the named successor Trustee or Trustees, all the estate
and title of the prior Trustee in all of the Mortgaged Property,  and he or they
shall thereupon succeed to all the rights,  powers,  privileges,  immunities and
duties hereby  conferred  upon the prior Trustee.  All references  herein to the
Trustees  shall be deemed  to refer to the  Trustees  from  time to time  acting
hereunder.  7.4 Actions or Advances by the Agent or the Trustees. Each and every
covenant  herein  contained  shall be performed and kept by Mortgagor  solely at
Mortgagor's  expense.  If  Mortgagor  shall  fail to  perform or keep any of the
covenants of whatsoever kind or nature contained in this Mortgage, the Agent, or
the Trustees or any receiver  appointed  hereunder or under Applicable Law, may,
but shall not be obligated  to, take action  and/or make advances to perform the
same in Mortgagor's  behalf, and Mortgagor hereby agrees to repay the expense of
such action and such  advances upon demand plus interest at an annual rate equal
to the  Alternate  Base Rate (as defined in the Credit  Agreements)  of interest
from  time to time  accruing  on the Loan Note plus the  Applicable  Margin  (as
defined in the Credit  Agreements)  plus two percent  (2%) until paid or, in the
event  any  promissory  note  evidences  such  indebtedness,  upon the terms and
conditions  thereof. No such advance or action by the Agent, the Trustees or any
receiver  appointed  hereunder  shall be deemed to  relieve  Mortgagor  from any
default hereunder.

     7.5 No Waiver.  Any  failure  by  Trustees  or the Agent to insist,  or any
election  by Trustees or the Agent not to insist,  upon  strict  performance  by
Mortgagor  of  any  of the  terms,  provisions  or  conditions  of the  Security
Documents  shall not be  deemed  to be a waiver  of same or of any  other  term,
provision or condition  thereof,  and Trustees or the Agent shall have the right
at any time or times  thereafter to insist upon strict  performance by Mortgagor
of any and all of such terms, provisions and conditions.

     7.6 Defense of Claims. Mortgagor will notify the Trustees and the Agent, in
writing,  promptly of the  commencement of any legal  proceedings  affecting the
lien or security interest hereof or the Mortgaged Property, or any part thereof,
and will take such action, employing attorneys agreeable to the Trustees and the
Agent5,  as may  be  necessary  or  appropriate  to  preserve  Mortgagor's,  the
Trustees' and the Agent's  rights  affected  thereby and/or to hold harmless the
Trustees,  the Agent and the Lender Parties in respect of such proceedings;  and
should  Mortgagor  fail or refuse to take any such  action,  the Trustees or the
Agent may, upon giving prior  written  notice  thereof to  Mortgagor,  take such
action  in  behalf  and in the name of  Mortgagor  and at  Mortgagor's  expense.
Moreover,  the  Agent or the  Trustees  on behalf  of the  Agent,  may take such
independent  action in  connection  therewith  as it or they may in its or their
discretion


_______________
5    Calpine will propose revisions to this section.


                                      -37-
<PAGE>

deem proper,  Mortgagor  hereby  agreeing that all sums advanced or all expenses
incurred in such actions plus  interest at an annual rate equal to the Alternate
Base Rate (as defined in the Credit  Agreements)  of interest  from time to time
accruing on the Loan Note plus the  Applicable  Margin (as defined in the Credit
Agreements) plus two percent (2%) until paid, will, on demand, be reimbursed, as
appropriate,  to the Agent, the Trustees or any receiver appointed  hereunder or
under  Applicable  Law. The obligations of Mortgagor as hereinabove set forth in
this  Section  7.6  shall  survive  the  release,  termination,  foreclosure  or
assignment of this Mortgage or any sale hereunder.

     7.7 The Mortgaged  Property to Revert.  If the Indebtedness  shall be fully
paid and the covenants herein contained shall be well and truly performed,  then
all of the Mortgaged  Property  shall revert to Mortgagor and the entire estate,
right,  title and interest of the Trustees and the Agent shall thereupon  cease;
and the Trustees and the Agent in such case shall, upon the request of Mortgagor
and at Mortgagor's  cost and expense,  deliver to Mortgagor  proper  instruments
acknowledging satisfaction of this Mortgage.

     7.8  Covenants  Running with the Land.  All  Obligations  contained in this
Mortgage are intended by the parties to be, and shall be construed as, covenants
running with the Mortgaged Property.

     7.9 Renewals, Amendments and Other Security. Renewals and extensions of the
Indebtedness  and  modifications  of any kind of the Obligations may be given at
any time and amendments may be made to agreements with third parties relating to
any part of such Indebtedness or the Mortgaged Property and the Trustees and the
Agent may take or may now hold other security from others for the  Indebtedness,
all without  notice to or consent of  Mortgagor.  The  Trustees or the Agent may
resort first to such other security or any part thereof or first to the security
herein given or any part thereof,  or from time to time to either or both,  even
to the partial or complete abandonment of either security, and such action shall
not be a waiver of any rights  conferred by this Mortgage,  which shall continue
as a first lien upon and prior  perfected  security  interest  in the  Mortgaged
Property  not  expressly  released  until the  Notes and all other  Indebtedness
secured hereby are fully paid.

     7.10 Mortgage, Assignment, etc. This Mortgage shall be deemed to be and may
be enforced from time to time as an assignment, chattel mortgage, contract, deed
of trust, financing statement,  real estate mortgage, or security agreement, and
from time to time as any one or more thereof.

     7.11 Limitation on Interest. No provision of this Mortgage or of the Notes,
the Credit  Agreements or any other Loan  Document  shall require the payment or
permit the  collection of interest in excess of the Maximum Lawful Rate or which
is  otherwise  contrary  to  Applicable  Law.  If any excess of interest in such
respect  is herein or in the  Notes,  the  Credit  Agreements  or any other Loan
Document  provided for, or shall be  adjudicated to be so provided for herein or
in the Notes, the Credit Agreements or any other Loan Document,  Mortgagor shall
not be obligated to pay such excess.


                                      -38-
<PAGE>

     7.12  Severability.  The Security Documents are intended to be performed in
accordance  with,  and only to the extent  permitted  by, all  applicable  Legal
Requirements.  If  any  provision  of  any  of  the  Security  Documents  or the
application  thereof to any person or circumstance  shall, for any reason and to
any extent, be invalid or unenforceable, neither the remainder of the instrument
in which such  provision is contained nor the  application  of such provision to
other persons or circumstances nor the other instruments referred to hereinabove
shall be affected  thereby,  but rather shall be enforced to the greatest extent
permitted by Applicable Law. It is hereby expressly  stipulated and agreed to be
the intent of Mortgagor and the Agent at all times to comply with the usury, and
all  other,  laws  relating  to the  Security  Documents.  If, at any time,  the
applicable  Legal  Requirements  render  usurious  any amount  called for in any
Security  Document,  then it is  Mortgagor's,  Trustees' and the Agent's express
intent  that such  document  be  immediately  deemed  reformed  and the  amounts
collectible reduced, without the necessity of the execution of any new document,
so as to comply with the then Applicable Law but so as to permit the recovery of
the fullest amount otherwise called for in such Security Documents.

     7.13 Waiver by the  Trustees.  Any and all  covenants in this  Mortgage may
from time to time by instrument in writing  signed by the Trustees and the Agent
be waived to such  extent and in such manner as the  Trustees  and the Agent may
desire,  but no such waiver shall ever affect or impair  either the Trustees' or
the  Agent's  rights or liens or  security  interests  hereunder,  except to the
extent specifically stated in such written instrument.

     7.14 Action by  Individual  Trustee.  Any Trustee from time to time serving
hereunder shall have the absolute right, acting individually, to take any action
and to give any consent and to exercise any right, remedy,  power,  privilege or
authority  conferred  upon the Trustees,  and any action taken by either Trustee
from time to time serving  hereunder shall be binding upon the other Trustee and
no person dealing with either Trustee from time to time serving  hereunder shall
be obligated  to confirm the power and  authority of such Trustee to act without
the concurrence of the other Trustee. In this Mortgage, the term "Trustee" means
the Trustees hereinabove named, or either of them, as the context requires,  and
any successor Trustee.

     7.15 No Partnership.  Nothing contained in this Mortgage is intended to, or
shall be construed as, creating to any extent and in any manner whatsoever,  any
partnership,  joint venture, or association among Mortgagor,  the Trustees,  the
Agent and their respective Affiliates, or in any way as to make the Agent or the
Trustee's co-principals with Mortgagor with reference to the Mortgaged Property,
and any inferences to the contrary are hereby expressly negated.

     7.16  Successors  and Assigns.  This  Mortgage is binding  upon  Mortgagor,
Mortgagor's  successors  and  assigns,  and shall  inure to the  benefit  of the
Trustees,  their successors,  and the Agent, its successors and assigns, and the
provisions hereof shall likewise be covenants running with the land.


                                      -39-
<PAGE>

     7.17 Article and Section Headings. The article and section headings in this
Mortgage are inserted for convenience of reference and shall not be considered a
part of this Mortgage or used in its interpretation.

     7.18 Execution in Counterparts. This Mortgage may be executed in any number
of  counterparts,  each of which  shall  for all  purposes  be  deemed  to be an
original and all of which are identical,  except that, to facilitate recordation
or filing,  in any  particular  counterpart  portions of Exhibit A hereto  which
describe  properties  situated in parishes or counties  other than the parish or
county  in which  such  counterpart  is to be  recorded  or filed  may have been
omitted.

     7.19 Special Filing as Financing Statement. This Mortgage shall likewise be
a Security Agreement and a Financing Statement. This Mortgage shall be filed for
record,  among other places, in the real estate records of each county or parish
in which any  portion  of the real  property  covered  by the oil and gas leases
described in Exhibit A hereto is situated,  and,  when filed in such counties or
parishes shall be effective as a financing  statement  covering Fixtures located
on oil and gas properties,  which oil and gas properties  (and accounts  arising
therefrom) are to be financed at the wellheads of the wells located on the lands
described in Exhibit A. At the option of the Agent,  a carbon,  photographic  or
other  reproduction of this Mortgage or of any financing  statement covering the
Mortgaged  Property or any portion  thereof  shall be  sufficient as a financing
statement and may be filed as such.

     7.20 Notices. Except as otherwise required by Sections 6.5 and 6.15 hereof,
any notice, request, demand or other Mortgage which may be required or permitted
to be given or served upon Mortgagor shall be sufficiently  given when mailed by
first-class  mail,  addressed  to  Mortgagor  at the  address  shown  below  the
signatures at the end of this Mortgage or to such different address as Mortgagor
shall have designated by written notice received by the Agent or the Trustees.

     7.21  Reliance.   Notwithstanding   any  reference  herein  to  the  Credit
Agreements,  the  Notes  or the  Letters  of  Credit,  no party  shall  have any
obligation to inquire into the terms or conditions of any such documents and all
parties shall be fully  authorized to rely upon any statement,  certificate,  or
affidavit of Agent or any future holder of any portion of the Indebtedness as to
the occurrence of any event such as the occurrence of any event of default.

     7.22 The Agent as Agent for the Lender Parties. As described above, certain
Affiliates  of the Agent and the  Lenders  are or may become  parties to certain
Hedging Agreements with Mortgagor and/or Affiliates of Mortgagor.  This Mortgage
secures the  obligations of Mortgagor and such  Affiliates,  as the case may be,
under such Hedging Agreements, and the parties acknowledge for all purposes that
the Agent acts for itself and as agent on behalf of such Affiliates of the Agent
and such  Lenders  which are so  entitled  to share in the rights  and  benefits
accruing to the Agent under this Mortgage in respect of the Mortgaged Property.


                                      -40-
<PAGE>

     7.23 Applicable Law. As to any tract or parcel of land comprising a portion
of the  Mortgaged  Property,  this  Mortgage  shall be governed by and construed
according to the Applicable Laws of the State where such tract or parcel of land
is situated.

     7.24 Subrogation.  If any or all of the proceeds of the Note have been used
to extinguish,  extend or renew any indebtedness heretofore existing against the
Mortgaged Property,  then, to the extent of such funds so used, the Indebtedness
and this  Mortgage  shall be  subrogated  to all of the rights,  claims,  liens,
titles and  interests  heretofore  existing  against the  Mortgaged  Property to
secure the  indebtedness  so  extinguished,  extended  or renewed and the former
rights,  claims, liens, titles and interests,  if any, are not waived but rather
are continued in full force and effect in favor of the Agent and are merged with
the lien and security  interest  created  herein as cumulative  security for the
repayment of the Indebtedness and the satisfaction of the Obligations.

     7.25  Fixture  Filing.  Portions of the  Mortgaged  Property  are or are to
become  fixtures  relating to the above  described  real estate,  and  Mortgagor
herein  expressly  covenants  and agrees that the filing of this Mortgage in the
Real Estate Records in the county where the Mortgaged  Property is located shall
also operate from the time of filing therein as a financing statement filed as a
fixture  filing in accordance  with Section  9.502(c) of the Uniform  Commercial
Code - Secured Transactions of the State of Texas.

     7.26  Subordination by The Agent.  From time to time at the Agent's option,
by instrument  executed by the Agent and recorded in the real  property  records
where  this  Mortgage  has been  recorded,  the Agent may  subordinate  the lien
created by this  Mortgage to any interest in the  Mortgaged  Property.  Any such
subordination  shall be solely at the Agent's option,  and in no event shall the
Agent be obligated to subordinate the lien or security  interest created by this
Mortgage.


                                      -41-
<PAGE>



     IN WITNESS  WHEREOF,  Mortgagor  has executed or caused to be executed this
Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and
Fixture  Filing in the presence of the  undersigned  Notary Public on this _____
day of __________, 2002.6



                              MORTGAGOR AND DEBTOR
                              --------------------




                                       CALPINE CORPORATION, a Delaware
                                       corporation


                                       By ______________________________________

                                       Title___________________________________7

                                       Printed Name_____________________________


ATTEST:


____________________________________
Secretary
Printed Name________________________



The name and mailing address of Mortgagor is:


Calpine Corporation
1000 Louisiana Street, Suite 800
Houston, TX  77002


_______________
6    Exact content and formatting of the signature and acknowledgement  pages is
     being revised to account for execution at different  times and places,  and
     before different notaries by the various parties.
7    Please  furnish  the  names  and  titles of  Calpine  Corporation  officers
     executing this instrument.


                                      -42-
<PAGE>



SECURED PARTIES


                                       _________________________________________
                                       JON BURCKIN, Trustee


                                       _________________________________________
                                       KEMP LEONARD, Trustee


                                       THE BANK OF NOVA SCOTIA, as Agent


                                       By_______________________________________
                                            Vice President
                                            Printed Name________________________



ATTEST:


_______________________________________
Banking Officer/Clerk
Printed Name___________________________



The names and mailing addresses of the Secured Parties are:

THE BANK OF NOVA SCOTIA

JON BURCKIN, Trustee and KEMP LEONARD, Trustee

580 California Street
Suite 2100
San Francisco, CA  9411


                                      -43-
<PAGE>



STATE OF TEXAS    )
                  )  SS.
COUNTY OF HARRIS  )


     BE IT REMEMBERED  that I, , a Notary Public duly  qualified,  commissioned,
sworn and acting in and for the County and State aforesaid, hereby certify that,
on this day of , 2002,  there appeared before me severally each of the following
persons,  each  being  either a Trustee  or else the  designated  officer of the
corporation  or  association  set  opposite  his name,  and each  such  Trustee,
corporation and association being a party to the foregoing instrument:

     __________, the __________, and __________, the _____________ Secretary, of
Calpine  Corporation,  a Delaware  corporation,  [which has no corporate  seal]8
whose address is _____________;


     __________, Vice President, and __________,  Banking Officer/Clerk,  of THE
BANK OF NOVA SCOTIA, a Canadian  chartered bank, whose address is 580 California
Street, Suite 2100, San Francisco, CA 94111; and

     __________ and __________ whose addresses are 580 California Street,  Suite
2100, San Francisco, CA 94111, as Trustees.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO       The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing


_______________
8    New Mexico and Wyoming requirement, if applicable. Presumably Calpine has a
     seal and it will be available at the closing.


                                       -1-
<PAGE>

               instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for the said  county  and state,  on this ____ day of  _________,
               2002,     within    my    jurisdiction     the    within    named
               _______________________________  who acknowledged  that (he)(she)
               is the  ___________________________  of  Calpine  Corporation,  a
               Delaware  corporation,  and  that  for  and  on  behalf  of  said
               corporation and as its act and deed (he)(she)  executed the above
               and foregoing  instrument after first having been duly authorized
               by said corporation so to do.

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each  such  person as  the designated officers of the corporation
NEW MEXICO     or association set opposite their names (or as Trustees,  as  the
               case  may  be) on  behalf of  said corporation or association, or
               himself as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.


                                      -2-
<PAGE>



                       Witness my hand and official seal.





                                       _________________________________________
                                       Notary Public
                                       Residing at______________________________


My commission expires:


                                      -3-
<PAGE>



STATE OF TEXAS    )
                  )  SS.
COUNTY OF HARRIS  )


     BE IT REMEMBERED  that I, , a Notary Public duly  qualified,  commissioned,
sworn and acting in and for the County and State aforesaid, hereby certify that,
on this day of , 2002,  there appeared before me severally each of the following
persons,  each  being  either a Trustee  or else the  designated  officer of the
corporation  or  association  set  opposite  his name,  and each  such  Trustee,
corporation and association being a party to the foregoing instrument:

     __________, the __________, and __________, the _____________ Secretary, of
Calpine  Corporation,  a Delaware  corporation,  [which has no corporate  seal]9
whose address is __________;

     __________, Vice President, and __________,  Banking Officer/Clerk,  of THE
BANK OF NOVA SCOTIA, a Canadian  chartered bank, whose address is 580 California
Street, Suite 2100, San Francisco, CA 94111; and

     __________ and __________ whose addresses are 580 California Street,  Suite
2100, San Francisco, CA 94111, as Trustees.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein  mentioned  and  set  forth.

COLORADO10     The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing


_______________
9    New Mexico and Wyoming requirement, if applicable.
10   Add blocks for Kansas and Montana


                                      -1-
<PAGE>

               instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for the said county and state,  on this _____ day of  __________,
               2002,     within    my    jurisdiction     the    within    named
               _______________________________  who acknowledged  that (he)(she)
               is the  ___________________________  of  Calpine  Corporation,  a
               Delaware  corporation,  and  that  for  and  on  behalf  of  said
               corporation and as its act and deed (he)(she)  executed the above
               and foregoing  instrument after first having been duly authorized
               by said  corporation  so to do.

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.


                                      -2-
<PAGE>



                       Witness my hand and official seal.





                                       _________________________________________
                                       Notary Public
                                       Residing at______________________________



My commission expires:



                                      -3-
<PAGE>



STATE OF TEXAS    )
                  )  SS.
COUNTY OF HARRIS  )


     BE IT REMEMBERED  that I, , a Notary Public duly  qualified,  commissioned,
sworn and acting in and for the County and State aforesaid, hereby certify that,
on this day of , 2002,  there appeared before me severally each of the following
persons,  each  being  either a Trustee  or else the  designated  officer of the
corporation  or  association  set  opposite  his name,  and each  such  Trustee,
corporation and association being a party to the foregoing instrument:

     __________, the __________, and __________, the _____________ Secretary, of
Calpine  Corporation,  a Delaware  corporation,  [which has no corporate seal]11
whose address is__________;


     __________, Vice President, and __________,  Banking Officer/Clerk,  of THE
BANK OF NOVA SCOTIA, a Canadian  chartered bank, whose address is 580 California
Street, Suite 2100, San Francisco, CA 94111; and

     __________ and __________ whose addresses are 580 California Street,  Suite
2100, San Francisco, CA 94111, as Trustees.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO12     The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing


_______________
11   New Mexico and Wyoming requirement, if applicable.
12   Add blocks for Kansas and Montana.


                                      -1-
<PAGE>

               instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for the said county and state,  on this _____ day of  __________,
               2002,     within    my    jurisdiction     the    within    named
               _______________________________  who acknowledged  that (he)(she)
               is the  ___________________________  of  Calpine  Corporation,  a
               Delaware  corporation,  and  that  for  and  on  behalf  of  said
               corporation and as its act and deed (he)(she)  executed the above
               and foregoing  instrument after first having been duly authorized
               by said corporation so to do.

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.


                                      -2-
<PAGE>



                       Witness my hand and official seal.





                                       _________________________________________
                                       Notary Public
                                       Residing at______________________________



My commission expires:


                                      -3-
<PAGE>



STATE OF TEXAS    )
                  )  SS.
COUNTY OF HARRIS  )


     BE IT REMEMBERED  that I, , a Notary Public duly  qualified,  commissioned,
sworn and acting in and for the County and State aforesaid, hereby certify that,
on this day of , 2002,  there appeared before me severally each of the following
persons,  each  being  either a Trustee  or else the  designated  officer of the
corporation  or  association  set  opposite  his name,  and each  such  Trustee,
corporation and association being a party to the foregoing instrument:

     __________, the __________, and __________, the _____________ Secretary, of
Calpine  Corporation,  a Delaware  corporation,  [which has no corporate seal]13
whose address is ;

     __________, Vice President, and __________,  Banking Officer/Clerk,  of THE
BANK OF NOVA SCOTIA, a Canadian  chartered bank, whose address is 580 California
Street, Suite 2100, San Francisco, CA 94111; and

     __________ and __________ whose addresses are 580 California Street,  Suite
2100, San Francisco, CA 94111, as Trustees.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO14     The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing


_______________
13   New Mexico and Wyoming requirement, if applicable.
14   Add blocks for Kansas and Montana


                                      -1-
<PAGE>

               instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for the said county and state,  on this _____ day of  __________,
               2002,     within    my    jurisdiction     the    within    named
               _______________________________  who acknowledged  that (he)(she)
               is the  ___________________________  of  Calpine  Corporation,  a
               Delaware  corporation,  and  that  for  and  on  behalf  of  said
               corporation and as its act and deed (he)(she)  executed the above
               and foregoing  instrument after first having been duly authorized
               by said corporation so to do.

MONTANA        On this day before me personally  appeared each such person, each
 and           of whom is known to me to be the officer of the corporation  that
NEW MEXICO     executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
               each such person as the designated officers of the corporation or
               association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.


                                      -2-
<PAGE>



                       Witness my hand and official seal.





                                       _________________________________________
                                       Notary Public
                                       Residing at______________________________



My commission expires:


                                      -3-
<PAGE>



                EXHIBIT A To Mortgage, Deed of Trust, Assignment,
                ------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                   [Month] __, 2002, from CALPINE CORPORATION
                                   to       and
                           and THE BANK OF NOVA SCOTIA


                               List of Properties
                               ------------------

     1.  Depth  limitations,  unit  designations,  unit tract  descriptions  and
descriptions  (including  percentages,   decimals  or  fractions)  of  undivided
leasehold interests, well names, "Operating Interests",  "Working Interests" and
"Net  Revenue  Interests"  contained  in this  Exhibit A and the  listing of any
percentage, decimal or fractional interest in this Exhibit A shall not be deemed
to limit or  otherwise  diminish  the  interests  being  subjected  to the lien,
security interest and encumbrance of this Mortgage.

     2. Some of the land  descriptions  in this  Exhibit  A may refer  only to a
portion of the land covered by a particular  lease. This Mortgage is not limited
to the land described in Exhibit A but is intended to cover the entire  interest
of Mortgagor in any lease  described in Exhibit A even if such interest  relates
to land not described in Exhibit A.  Reference is made to the land  descriptions
contained in the documents of title  recorded as described in this Exhibit A. To
the  extent  that  the  land  descriptions  in this  Exhibit  A are  incomplete,
incorrect  or not legally  sufficient,  the land  descriptions  contained in the
documents so recorded are incorporated herein by this reference.

     3. References in Exhibit A to instruments on file in the public records are
made for all purposes.  Unless provided otherwise,  all recording  references in
Exhibit A are to the official  real  property  records of the county or counties
(or parish or parishes) in which the mortgaged  property is located and in which
records  such  documents  are or in the past  have  been  customarily  recorded,
whether Deed  Records,  Oil and Gas Records,  Oil and Gas Lease Records or other
records.

     4. A statement herein that a certain  interest  described herein is subject
to the terms of certain  described  or referred to  agreements,  instruments  or
other matters shall not operate to subject such interest to any such  agreement,
instrument or other matter except to the extent that such agreement,  instrument
or matter is otherwise  valid and presently  subsisting nor shall such statement
be deemed to  constitute  a  recognition  by the  parties  hereto  that any such
agreement, instrument or other matter is valid and presently subsisting.

                                                       [Do not detach this page]


                                      -1-
<PAGE>



               SCHEDULE I To Mortgage, Deed of Trust, Assignment,
               -------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                   [Month] __, 2002, from CALPINE CORPORATION
                                   to       and
                           and THE BANK OF NOVA SCOTIA


                          Prior Names of the Mortgagor
                          ----------------------------


Calpine Natural Gas Company L.P.
[List others]15


_______________
15   Calpine  needs to  complete  this page  (perhaps a  universal  list for all
     mortgages, or a separate list for each state, etc.)


                                      -2-
<PAGE>



                EXHIBIT B To Mortgage, Deed of Trust, Assignment,
                ------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                   [Month] __, 2002, from CALPINE CORPORATION
                                   to       and
                           and THE BANK OF NOVA SCOTIA

                             Permitted Encumbrances
                             ----------------------

          All initially-capitalized terms used in this Exhibit B, whether or not
     defined in this instrument,  shall have the respective  meanings given such
     terms in the Credit Agreements.

     (a) Liens securing payment of the Obligations  granted pursuant to any Loan
Document and Liens securing  payment of the obligations  granted pursuant to the
loan documents relating to the Existing Credit Agreement;

     (b)  Liens  granted  prior  to the  Effective  Date to  secure  payment  of
Indebtedness  of the type permitted and described in clause (a) of Section 8.2.2
of the Credit Agreements;

     (c) Liens granted to secure payment of  Indebtedness  of the type permitted
and  described  in clause (b) of Section  8.2.2 of the Credit  Agreements  where
recourse is limited as  described  in clause (b) of Section  8.2.2 of the Credit
Agreements;

     (d) Liens for taxes,  assessments or other  governmental  charges or levies
not at the time  delinquent  or  thereafter  payable  without  penalty  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (e) Liens of carriers,  warehousemen,  mechanics, materialmen and landlords
incurred  in the  ordinary  course of  business  for sums not  overdue  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (f) Liens  incurred in the ordinary  course of business in connection  with
workmen's  compensation,  unemployment  insurance or other forms of governmental
insurance  or  benefits,   or  to  secure  performance  of  tenders,   statutory
obligations,  leases and contracts  (other than for borrowed money) entered into
in the ordinary course of business or to secure  obligations on surety or appeal
bonds;

     (g) judgment  Liens in existence  less than 15 days after the entry thereof
or with  respect to which  execution  has been stayed or the payment of which is
covered in full (subject to a customary deductible) by insurance maintained with
responsible insurance companies;

     (h) Liens granted to secure payment of  Indebtedness  of the type permitted
and described in clauses (e) and (g) of Section  8.2.2 of the Credit  Agreements
where recourse is limited as described in clauses (e) or (g), as applicable,  of
Section 8.2.2 of the Credit Agreements;


                                      -3-
<PAGE>

     (i) Zoning restrictions, easements, rights of way, title irregularities and
other similar  encumbrances  which alone or in the  aggregate do not  materially
detract from the value of the property subject thereto;

     (j) Liens on the  property or assets of any  Subsidiary  of the Borrower in
favor of the Borrower;

     (k) Banker's Liens and similar Liens (including  set-off rights) in respect
of bank deposits;

     (l) Landlord's Liens and similar Liens in respect of leased property;

     (m) Liens securing  Attributable  Debt with respect to  outstanding  leases
entered into pursuant to Sale/Leaseback Transactions so long as, with respect to
Sale/Leaseback  Transactions  closing after January 1, 2002,  the amount thereof
does not exceed 10% of the consolidated  tangible assets of the Borrower and its
Subsidiaries; and

     (n) Liens incurred in connection with the extension, renewal or refinancing
of Indebtedness secured by Liens permitted and described in clauses (b), (c) and
(h) of Section 8.2.3 of the Credit Agreements;  provided, however, that (x) such
new Lien shall be limited to all or part of the same  property  that secured the
original Lien and (y) the Indebtedness  secured by such Lien at such time is not
increased (other than by an amount necessary to pay fees and expenses, including
premiums,  related  to  the  refinancing,   refunding,   extension,  renewal  or
replacement of such Indebtedness);  provided,  further, that the limitations set
forth in this clause (n) shall not apply to Liens which are otherwise  permitted
under  Section  8.2.3  of the  Credit  Agreements,  even  if such  Liens  secure
Indebtedness  issued to repay or refinance existing  Indebtedness  permitted and
described in clauses (b), (c) and (h) of Section 8.2.3 of the Credit Agreements.


                                      -4-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>ex10-18.txt
<TEXT>
                                                                   EXHIBIT 10.18



RECORDING REQUESTED BY AND
WHEN RECORDED AND/OR FILED
RETURN TO:

MAYER, BROWN, ROWE & MAW
350 South Grand Avenue
Suite 2500
Los Angeles, California  90071
Attn:  Kevin L. Shaw, Esq.

Instructions to County Recorder:
Index this document as:
(1) A deed of trust
(2) A fixture filing

================================================================================

           DEED OF TRUST WITH POWER OF SALE, ASSIGNMENT OF PRODUCTION,
           SECURITY AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING

                                      FROM

                              CALPINE CORPORATION,
                         a Delaware corporation, Trustor
                         (Taxpayer I.D. No. 77-0212977)

                                       TO

                    CHICAGO TITLE INSURANCE COMPANY, Trustee

                                       AND

                   THE BANK OF NOVA SCOTIA, for itself and as
                               Agent, Beneficiary
                         (Taxpayer I.D. No. 13-494-1099)
                             Dated as of May 1, 2002

================================================================================


"THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS."

"THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES."

"THE  OIL  AND  GAS  INTERESTS  AND  AS  EXTRACTED  COLLATERAL  INCLUDED  IN THE
ENCUMBERED  PROPERTY  WILL BE FINANCED AT THE  WELLHEADS OF THE WELLS LOCATED ON
THE PROPERTIES DESCRIBED IN EXHIBIT A HERETO, AND THIS FINANCING STATEMENT IS TO
BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS."


<PAGE>

"THE  TRUSTOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE  CONCERNED,  WHICH IS
DESCRIBED IN EXHIBIT A HERETO."

"SOME OF THE PERSONAL PROPERTY CONSTITUTING A PORTION OF THE ENCUMBERED PROPERTY
IS OR IS TO BE AFFIXED TO THE PROPERTIES DESCRIBED IN EXHIBIT A HERETO, AND THIS
FINANCING  STATEMENT AND FIXTURE  FILING IS TO BE FILED FOR RECORD,  AMONG OTHER
PLACES, IN THE REAL ESTATE RECORDS."

"THE  SECURED  PARTIES  ARE  NOT  SELLERS  OR  PURCHASE  MONEY  LENDERS  OF  THE
COLLATERAL."

"A POWER OF SALE HAS BEEN  GRANTED  IN THIS DEED OF  TRUST.  A POWER OF SALE MAY
ALLOW THE TRUSTEE TO TAKE THE  ENCUMBERED  PROPERTY AND SELL IT WITHOUT GOING TO
COURT IN A  FORECLOSURE  ACTION UPON  DEFAULT BY THE TRUSTOR  UNDER THIS DEED OF
TRUST."

"NOTICE TO JUNIOR  LIENHOLDERS:  THE OBLIGATIONS  SECURED HEREBY PROVIDE FOR THE
ACCRUAL OF INTEREST WHICH MAY RESULT IN INCREASES IN THE PRINCIPAL BALANCE ABOVE
THE FACE PRINCIPAL AMOUNT OF THE APPLICABLE NOTES."


<PAGE>

           DEED OF TRUST WITH POWER OF SALE, ASSIGNMENT OF PRODUCTION,
           SECURITY AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING

     THIS DEED OF TRUST WITH POWER OF SALE,  ASSIGNMENT OF PRODUCTION,  SECURITY
AGREEMENT,  FINANCING STATEMENT AND FIXTURE FILING,  dated as of May 1, 2002, is
from CALPINE CORPORATION, a Delaware corporation (herein called the "Trustor" or
"Borrower"),  to CHICAGO TITLE INSURANCE  COMPANY,  a Missouri  corporation,  as
trustee (herein, together with any successor hereto in such capacity, called the
"Trustee"),   and  THE  BANK  OF  NOVA  SCOTIA,   a  Canadian   chartered   bank
("Scotiabank"),  for itself and as agent for the Lenders and the Lender Parties,
as beneficiary (herein called the "Agent").

                            Recitals and Definitions
                            ------------------------

     Borrower, certain institutional lenders (individually,  a "2002 Lender" and
collectively,  the "2002  Lenders")  and  Scotiabank  have entered into a Credit
Agreement,  dated as of  March  8,  2002  (herein,  as the same may be  amended,
modified or supplemented  from time to time,  called the "2002 Loan Agreement"),
pursuant to which the 2002  Lenders  have  agreed to make loans to Borrower  and
issue or cause to be  issued  letters  of credit  for the  benefit  of  Borrower
(individually,  a "2002 Letter of Credit" and collectively, the "2002 Letters of
Credit")  in amounts not to exceed at any one time  outstanding  $1,600,000,000,
and Borrower,  to evidence its  indebtedness  to the 2002 Lenders under the 2002
Loan Agreement,  has executed and delivered (or will execute and deliver) to the
2002 Lenders its secured  promissory notes in the aggregate,  original principal
amount of $1,600,000,000, to mature not later than May 24, 2003 (individually, a
"2002 Loan Note" and collectively,  the "2002 Loan Notes"),  the 2002 Loan Notes
being payable to the order of the 2002 Lenders, bearing interest as provided for
therein,   and  containing   provisions  for  payment  of  attorneys'  fees  and
acceleration of maturity in the event of default, as therein set forth.

     Borrower, certain institutional lenders (individually, an "Existing Lender"
and collectively,  the "Existing  Lenders";  and together with the 2002 Lenders,
the "Lenders")  and  Scotiabank  have entered into a Second Amended and Restated
Credit  Agreement dated as of May 23, 2000 (herein,  as the same may be amended,
modified,  or  supplemented  from  time to time,  called  the  "Existing  Credit
Agreement")  pursuant to which the Existing Lenders have agreed to make loans to
Borrower  and issue or cause to be issued any  letters of credit for the benefit
of Borrower (individually,  an "Existing Letter of Credit" and collectively, the
"Existing  Letters  of  Credit")  in  amounts  not to  exceed  at any  one  time
$400,000,000, and Borrower, to evidence its indebtedness to the Existing Lenders
under the Existing Credit Agreement,  has executed and delivered to the Existing
Lenders  its  secured  promissory  notes to mature not later  than May 24,  2003
(individually,  an "Existing  Loan Note" and  collectively,  the "Existing  Loan
Notes"),  the  Existing  Loan Notes being  payable to the order of the  Existing
Lenders, bearing interest as provided for therein, and containing provisions for
payment of attorneys' fees and acceleration of maturity in the event of default,
as therein set forth.  The 2002 Loan Agreement and the Existing Credit Agreement
are herein collectively called the "Credit  Agreements." The 2002 Loan Notes and
the Existing Loan Notes are herein individually


                                        1                        [Deed of Trust]
<PAGE>

called a "Loan Note" and collectively  called the "Loan Notes". The 2002 Letters
of Credit and the Existing  Letters of Credit are herein  individually  called a
"Letter of Credit" and collectively called the "Letters of Credit".

     It is a condition  precedent to the obligation of the Lenders to make Loans
under the Credit  Agreements,  to issue or cause to be issued  Letters of Credit
under the Credit  Agreements and to the obligations of the Agent, the Lenders or
the Lender Parties (as the case may be), that the Trustor  executes and delivers
this instrument.

     For all purposes of this instrument, unless the context otherwise requires:

          "Affiliate"  of any Person means any other Person  which,  directly or
     indirectly, controls, is controlled by or is under common control with such
     Person  (excluding any trustee under, or any committee with  responsibility
     for  administering,  any Plan (as  defined  in the Credit  Agreements)).  A
     Person shall be deemed to be "controlled by" any other Person if such other
     Person possesses, directly or indirectly, power

          (a) to vote 10% or more of the  securities  (on a fully diluted basis)
          having ordinary voting power for the election of directors or managing
          general partners; or

          (b) to direct or cause the direction of the management and policies of
          such Person whether by contract or otherwise.

          "Agent" is defined in the Preamble of this instrument.

          "Applicable  Law"  means with  respect  to any  Person or matter,  any
     federal, state, regional, tribal or local statute, law, code, rule, treaty,
     convention,   application,   order,  decree,  consent  decree,  injunction,
     directive,  determination or other  requirement  (whether or not having the
     force of law) relating to such Person or matter and, where applicable,  any
     interpretation thereof by a Governmental Authority having jurisdiction with
     respect  thereto  or  charged  with the  administration  or  interpretation
     thereof.

          "Borrower" is defined in the Preamble of this instrument.

          "Credit Agreements" is defined in the recitals to this instrument.

          "Deed of Trust"  means  each  mortgage,  deed of trust,  or other real
     property collateral  security instrument in a form reasonably  satisfactory
     to the Agent,  executed and delivered pursuant to Section 8.1.8 of the 2002
     Credit Agreement, as amended, supplemented,  restated or otherwise modified
     from time to time, including, without limitation, this instrument.

          "Encumbered Property" shall mean the properties,  rights and interests
     hereinafter described and defined as the Encumbered Property.


                                        2
<PAGE>

          "Environmental  Laws" shall mean any and all present and future United
     States federal, tribal, state and local laws or regulations,  codes, plans,
     orders, decrees,  directives,  judgments,  injunctions and lawfully imposed
     requirements   issued,   promulgated  or  entered  thereunder  relating  to
     pollution or  protection  of the  environment,  including  laws relating to
     reclamation   of  land  and  waterways  and  laws  relating  to  emissions,
     discharges,  releases or threatened  releases of pollutants,  contaminants,
     chemicals, or industrial,  toxic or hazardous substances or wastes into the
     environment  (including,  without  limitation,  ambient air, surface water,
     ground water, land surface or subsurface  strata) or otherwise  relating to
     the  manufacture,   processing,   distribution,  use,  treatment,  storage,
     disposal, transport or handling of pollutants, contaminants,  chemicals, or
     industrial, toxic or hazardous substances or wastes.

          "Existing  Assignment  Agreement"  means that certain  Assignment  and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California limited  partnership,  pursuant to Section 6.1.3 of the Existing
     Credit  Agreement,  substantially  in the form of Exhibit F to the Existing
     Credit  Agreement,  as  amended,  supplemented,  amended  and  restated  or
     otherwise modified from time to time.

          "Existing  Credit  Agreement"  is  defined  in the  recitals  to  this
     instrument.

          "Existing Lenders" is defined in the recitals to this instrument.

          "Existing  Letters  of Credit"  is  defined  in the  recitals  to this
     instrument.

          "Existing Loan  Documents"  means the Existing Credit  Agreement,  the
     Existing  Loan Notes,  the Existing  Assignment  Agreement,  and each other
     relevant  agreement,  document  or  instrument  (including  the fee  letter
     described in Section 3.3.2 of the Existing Credit  Agreement)  delivered in
     connection therewith.

          "Existing Loan Notes" is defined in the recitals to this instrument.

          "Fee Letter" means the fee letter agreement described in Section 3.3.2
     of the 2002 Credit Agreement.

          "Governmental  Authority" means any and all courts, boards,  agencies,
     commissions,  offices  or  authorities  of any  nature  whatsoever  for any
     governmental unit (federal, state, county, district, municipal, city, tribe
     or  otherwise)  whether now or  hereafter  in  existence  charged  with the
     administration, interpretation or enforcement of any Applicable Law.

          "Guaranty" means the guaranty executed and delivered by the Guarantors
     pursuant to Section 6.1.3 of the 2002 Credit  Agreement,  substantially  in
     the form of  Exhibit H  thereto,  as  amended,  supplemented  or  otherwise
     modified from time to time.


                                        3
<PAGE>

          "Hazardous Materials Indemnity" means that certain hazardous materials
     undertaking and unsecured  indemnity executed and delivered by the Borrower
     pursuant  to  Section  8.1.8  of the 2002  Credit  Agreement,  as  amended,
     supplemented, restated or otherwise modified from time to time.

          "Hedging  Agreements" means: (a) interest rate swap agreements,  basis
     swap  agreements,  interest rate cap agreements,  forward rate  agreements,
     interest rate floor agreements and interest rate collar agreements, and all
     other  agreements or  arrangements  designed to protect such Person against
     fluctuations in interest rates or currency  exchange rates, and (b) forward
     contracts,  options, futures contracts,  futures options,  commodity swaps,
     commodity options,  commodity collars, commodity caps, commodity floors and
     all other  agreements  or  arrangements  designed  to protect  such  Person
     against fluctuations in the price of commodities.

          "Hedging   Obligations"   means  with  respect  to  any  Person,   all
     liabilities  (including  without  limitation  obligations  and  liabilities
     arising in connection with or as a result of early or premature termination
     of a Hedging  Agreement,  whether or not occurring as a result of a default
     thereunder) of such Person under a Hedging Agreement.

          "Hydrocarbons"  means  collectively,  oil, gas,  casinghead  gas, drip
     gasoline, natural gasoline, condensate,  distillate and all other liquid or
     gaseous  hydrocarbons and related minerals and all products  therefrom,  in
     each case whether in a natural or a processed state.

          "Indebtedness",  "Note" and "Notes" shall have the respective meanings
     set forth in Section 1.2 hereof.

          "Indemnification Claim" is defined in Section 3.6 of this instrument.

          "Indemnified  Person" means Agent and each of the Lender Parties,  and
     their respective employees, affiliates, agents and attorneys, and any other
     Person to be indemnified under this instrument.

          "Joint  Operating  Agreements"  shall mean,  with respect to the lands
     described in Exhibit A, the respective  operating  agreement  burdening the
     lands described in Exhibit A.

          "lands  described  in Exhibit A" shall  include  the real  property or
     other  interest  in any  lands  which are  either  described  in  Exhibit A
     attached hereto or the description of which is incorporated in Exhibit A by
     reference to an instrument or document containing in, or referring to, such
     a description,  and shall also include any lands now or hereafter  unitized
     or  pooled  with  lands  which are  either  described  in  Exhibit A or the
     description of which is incorporated in Exhibit A by reference and Fixtures
     and all rights,  titles and interests  appurtenant  thereto.  References to
     Exhibit A shall include, where applicable, Exhibit A-1 as well.


                                       4
<PAGE>

          "Leases" means any and all leases  (including  without  limitation oil
     and gas leases and oil, gas and other minerals  leases),  surface leases or
     easements,  subleases,  licenses,  concessions,  operating  rights or other
     agreements  (written or verbal,  now or hereafter in effect)  which grant a
     possessory  interest  in and to,  or the  right  to  explore,  use,  lease,
     license,  possess, produce, process, store and transport Hydrocarbons from,
     operate from, or otherwise  enjoy, the Encumbered  Property,  together with
     all amendments, modifications, extensions and renewals thereof.

          "Legal Requirements" means (i) any and all present and future judicial
     decisions,  statutes,  rulings, rules,  regulations,  licenses,  decisions,
     orders,  injunctions,  decrees, permits,  certificates or ordinances of any
     Governmental  Authority  in  any  way  applicable  to the  Trustor,  or the
     Encumbered Property,  including the ownership,  use, occupancy,  operation,
     maintenance, repair or reconstruction thereof, and any other Applicable Law
     enacted  by  any   Governmental   Authority   relating  to  health  or  the
     environment, (ii) the Trustor's presently or subsequently effective Organic
     Documents,  (iii) any and all  Leases,  (iv) any and all  leases  and other
     contracts  (written  or oral) of any  nature to which the  Trustor,  or the
     Encumbered  Property  may be  bound  and  (v)  any  and  all  restrictions,
     restrictive covenants or zoning,  present and future, as the same may apply
     to the Encumbered Property.

          "Lender Party" or "Lender  Parties" means, as the context may require,
     the Agent,  any Lender and any  Affiliate  of any Lender  that is an issuer
     under a  letter  of  credit,  and  each  of  their  respective  successors,
     transferees and assigns.

          "Loan  Documents"  means the Existing Loan Documents and the 2002 Loan
     Documents.

          "Loan Note" is defined in the recitals to this instrument.

          "Maximum Lawful Rate" means the maximum  nonusurious  rate of interest
     that may be received,  charged or contracted for under  Applicable Law from
     time to time in effect.

          "Obligations"  means  any  and  all  of  the  covenants,   warranties,
     representations   and   other   obligations   (other   than  to  repay  the
     Indebtedness) made or undertaken by the Trustor or others to the Agent, the
     Lender  Parties  or others as set forth in the Credit  Agreements  or other
     Loan Documents.

          "oil and gas  leases"  shall  include  oil,  gas and  mineral  leases,
     subleases and assignments thereof,  operating rights, servitudes, and shall
     also include subleases and assignments of operating rights.

          "Operating  Equipment" shall mean all surface or subsurface machinery,
     goods, equipment, fixtures, movable property attached to immovable property
     and  other  movable  property,  inventory,  facilities,  supplies  or other
     property of whatsoever  kind or nature  (excluding  drilling rigs,  trucks,
     automotive equipment


                                       5
<PAGE>

     or other  property  taken  to the  premises  to  drill a well or for  other
     similar  temporary  uses) now or  hereafter  located on or under any of the
     lands  described  in  Exhibit  A  which  are  useful  for  the  production,
     gathering, treatment, processing, storage or transportation of Hydrocarbons
     (together with all  accessions,  additions and attachments to any thereof),
     including,  but not by way of limitation,  all oil wells, gas wells,  water
     wells,  injection wells, casing, tubing, tubular goods, rods, pumping units
     and  engines,  christmas  trees,  platforms,  derricks,  separators,  steam
     generators,  compressors,  gun barrels, flow lines, tanks, gas systems (for
     gathering, treating and compression), pipelines (including gathering lines,
     laterals  and  trunklines),   chemicals,   solutions,  water  systems  (for
     treating,   disposal  and   injection),   power   plants,   poles,   lines,
     transformers,  starters  and  controllers,  supervisory  control  and  data
     acquisition  systems,  machine  shops,  tools,  storage yards and equipment
     stored  therein,  buildings  and  camps,  telegraph,  telephone  and  other
     communication  systems,  roads,  boats,  loading  docks,  loading racks and
     shipping facilities.

          "Organic  Documents" means the Articles of Incorporation,  Certificate
     of Incorporation,  limited  liability company  certificate of formation and
     regulations  or  operating  agreement,   partnership   agreement,   limited
     partnership  agreement,  joint venture agreement,  trust agreement or other
     similar  documents  governing the  organization and operation of a business
     association.

          "Permits" means all  authorizations,  approvals,  permits,  variances,
     land use entitlements, consents, licenses, franchises and agreements issued
     by or  entered  into  with  any  Governmental  Authority  now or  hereafter
     required for all stages of exploration, developing, operating, and plugging
     and  abandoning oil and gas wells  (including,  without  limitation,  those
     shown on Exhibit A) on all or any part of the lands  described in Exhibit A
     (or any other lands any production  from which, or profits or proceeds from
     such  production,  is attributed to any interest in the lands  described in
     Exhibit A).

          "Permitted  Encumbrances"  means  the  outstanding  liens,  easements,
     building  lines,  restrictions,   exceptions,   reservations,   conditions,
     limitations,  security interests and other matters (if any) as reflected on
     Exhibit "B" attached hereto and the lien and security  interests created by
     the Security Documents.

          "Person" means any natural person, corporation,  partnership,  limited
     liability  company,  firm,  association,  trust,  government,  governmental
     agency or any other entity,  whether acting in an individual,  fiduciary or
     other capacity.

          "Personalty" means all of the right, title and interest of the Trustor
     now  owned or  hereafter  acquired  in and to all  furniture,  furnishings,
     Equipment,   machinery,   Goods,  General  Intangibles,   money,  Accounts,
     receivables,  Contract  Rights,  Inventory,  all refundable,  returnable or
     reimbursable  fees,  deposits  or other  funds or  evidences  of  credit or
     indebtedness deposited by or on behalf of the Trustor with any Governmental
     Authority,  agencies, boards, corporations,  providers of utility services,
     public or private, including specifically, but without


                                       6
<PAGE>

     limitation,  all refundable,  returnable or reimbursable tap fees,  utility
     deposits,  commitment  fees and development  costs,  and all other personal
     property  (other than the  Fixtures) of any kind or character as defined in
     and subject to the provisions of Article 9 of the Uniform  Commercial Code,
     now or hereafter located upon, within or about, or used in connection with,
     the  lands   described  in  Exhibit  A,  together  with  all   accessories,
     replacements  and  substitutions  thereto  or  therefor  and  the  Proceeds
     thereof.

          "Pledge Agreements" means the pledge agreements executed and delivered
     pursuant to Section 6.1.4 of the 2002 Credit Agreement,  as such agreements
     may be amended,  supplemented,  restated or otherwise modified from time to
     time, which will be in substantially the form of Exhibit I thereto.

          "Production  Sale  Contracts"  shall mean contracts now in effect,  or
     hereafter  entered  into by the Trustor,  or entered into by the  Trustor's
     predecessors  in interest,  for the sale,  purchase,  exchange,  gathering,
     transportation,  treating or processing of  Hydrocarbons  produced from the
     lands described in Exhibit A attached hereto and made a part hereof.

          "Rents  and  Revenues"  means  all of  the  rents,  revenues,  income,
     proceeds,  profits  and other  benefits  paid or  payable by parties to the
     Leases other than the Trustor for using,  leasing,  licensing,  possessing,
     operating, selling or otherwise enjoying the Encumbered Property, including
     the proceeds from the sale of Hydrocarbons.

          "Security  Documents" means the Notes, this instrument,  the financing
     statements and any and all other  instruments now or hereafter  executed by
     the Trustor or any other  person or party to evidence or secure the payment
     of the Indebtedness or the performance and discharge of the Obligations, as
     any of the foregoing may be amended,  renewed or extended.  Notwithstanding
     that the  definition of Security  Documents  and various of the  components
     thereof include  documents that may be amended,  renewed or extended,  such
     definition  shall in no way be  construed  to  suggest  that any  party has
     agreed (or is obligated) to amend, renew or extend them.

          "2002 Assignment Agreement" means that certain Assignment and Security
     Agreement  referred to in Section  6.1.8 of the 2002 Credit  Agreement,  as
     amended, supplemented, amended and restated or otherwise modified from time
     to time.

          "2002 Loan Agreement" is defined in the recitals to this instrument.

          "2002 Lenders" is defined in the recitals to this instrument.

          "2002   Letters  of  Credit"  is  defined  in  the  recitals  to  this
     instrument.


                                       7
<PAGE>

          "2002 Loan Documents" means the 2002 Credit  Agreement,  the 2002 Loan
     Notes, the Pledge  Agreements,  the Guaranty,  the Deeds of Trust, the 2002
     Assignment  Agreement,  the Hazardous Materials Indemnity,  the Fee Letter,
     and each other  relevant  agreement,  document or  instrument  delivered in
     connection therewith.

          "2002 Loan Notes" is defined in the recitals to this instrument.

          "Taxes"  means  all  real  property  and  personal   property   taxes,
     production taxes, assessments,  permit fees, water, gas, sewer, electricity
     and other utility rates and charges,  charges for any easement,  license or
     agreement  maintained for the benefit of the Encumbered  Property,  and all
     other taxes,  charges and assessments and any interest,  costs or penalties
     with respect thereto,  of any kind and nature  whatsoever which at any time
     prior to or after the execution hereof may be charged,  assessed, levied or
     imposed  upon the  Encumbered  Property  or the Rents and  Revenues  or the
     ownership, use, occupancy or enjoyment thereof.

          "Transportation  Agreements"  shall mean any  contracts or  agreements
     entered  into  from time to time by the  Trustor,  or  entered  into by the
     Trustor's  predecessors  in  interest,  relating to the  transportation  of
     Hydrocarbons,   as  any  such   agreement   or  contract  may  be  amended,
     supplemented, restated or otherwise modified from time to time.

          "Uniform Commercial Code" shall mean the Uniform Commercial Code as in
     effect from time to time in the State of California or any other applicable
     state,  and  the  terms  "Accounts",   "Account   Debtor",   "As  Extracted
     Collateral,"  "Chattel  Paper",  "Contract  Rights",   "Deposit  Accounts",
     "Documents",  "General  Intangibles",  "Goods",  "Equipment",   "Fixtures",
     "Inventory",  "Instruments",  and  "Proceeds"  shall  have  the  respective
     meanings assigned to such terms in the Uniform Commercial Code.

          "Water  Rights"  shall  mean  (including   without   limitation  those
     described  in Exhibit A hereto) all now or  hereafter  existing or acquired
     water and water rights,  reservoirs and reservoir rights, ditches and ditch
     rights,  wells and well rights,  whether  evidenced or initiated by permit,
     decree,   well  registration,   appropriation  not  decreed,   water  court
     application,  shares  of  stock  or  other  interests  in  mutual  ditch or
     reservoir  companies or carrier ditch or reservoir  companies or otherwise,
     appertaining or appurtenant to or beneficially used or useful in connection
     with the lands  described  in Exhibit  A,  together  with all  pumps,  well
     casings,   wellheads,   electrical   installations,   pumphouses,   meters,
     monitoring wells and systems,  measuring  devices,  pipes,  pipelines,  and
     other structures or personal  property which are or may be used to produce,
     regulate, measure, distribute,  store, or use water from the said water and
     water rights,  reservoirs and reservoir  rights,  ditches and ditch rights,
     wells and well rights.

     NOW, THEREFORE,  the Trustor,  for and in consideration of the premises and
of the debts and trusts hereinafter  mentioned,  has granted,  bargained,  sold,
warranted,


                                       8
<PAGE>

     assigned,  transferred  and  conveyed,  and by these  presents  does grant,
     bargain,  sell, warrant,  assign,  transfer and convey unto the Trustee, IN
     TRUST WITH  POWER OF SALE,  for the use and  benefit of the Agent,  all the
     Trustor's  right,  title  and  interest,  whether  now  owned or  hereafter
     acquired, in and to all of the hereinafter described properties, rights and
     interests; and, insofar as such properties, rights and interests consist of
     equipment, general intangibles,  accounts, as extracted collateral, chattel
     paper, contract rights, deposit accounts,  documents,  goods,  instruments,
     inventory,  fixtures, proceeds of collateral or any other personal property
     of a kind or character  defined in or subject to the applicable  provisions
     of the California Uniform Commercial Code (as in effect from time to time),
     the Trustor  hereby grants to said Trustee,  for the use and benefit of the
     Agent,  a security  interest  therein to the full  extent of the  Trustor's
     legal and beneficial  interest  therein,  now owned or hereafter  acquired,
     namely:

          (1) the lands  described  in Exhibit A, and Leases,  profit a prendre,
     fee,  mineral,  overriding  royalty,  royalty and other interests which are
     described in Exhibit A,

          (2) the  presently  existing  and (subject to the terms of Section 6.1
     hereof) hereafter arising unitization, unit operating,  communitization and
     pooling agreements and the properties covered and the units created thereby
     (including, without limitation, all units formed under orders, regulations,
     rules,  approvals,  decisions or other  official  acts of any  Governmental
     Authority) which are specifically described in Exhibit A or which relate to
     any of the properties and interests specifically described in Exhibit A,

          (3) the  Hydrocarbons  which are in,  under,  upon,  produced or to be
     produced from or which are  attributed or allocated to the lands  described
     in Exhibit A,

          (4) the Permits,

          (5) the Production Sale Contracts,

          (6) the Joint Operating Agreements,

          (7) the Transportation Agreements,

          (8) the Hedging Agreements,

          (9) the Leases,

          (10) the Personalty,

          (11) the Rents and Revenues,

          (12) the Operating Equipment,

          (13) the Water Rights, and


                                       9
<PAGE>

          (14)  without  duplication  of any other  provision  of this  granting
     clause, Equipment, Fixtures and other Goods necessary or used in connection
     with,   and  Inventory,   Accounts,   As  Extracted   Collateral,   General
     Intangibles,  Contract  Rights,  Chattel Paper,  Electronic  Chattel Paper,
     Deposit  Accounts,  Documents,  Instruments  and Proceeds  arising from, or
     relating  to, the  properties  and other  interests  described in Exhibit A
     (including Exhibit A-1),

     together  with any and all  corrections  or  amendments  to,  or  renewals,
     extensions or ratifications  of, or replacements or substitutions  for, any
     of  the  same,  or any  instrument  relating  thereto,  and  all  accounts,
     contracts,  contract rights,  options,  nominee agreements,  unitization or
     pooling  agreements,  operating  agreements and unit operating  agreements,
     processing agreements, farmin agreements, farmout agreements, joint venture
     agreements,   partnership   agreements   (including  mining  partnerships),
     exploration  agreements,  bottom  hole  agreements,  dry  hole  agreements,
     support  agreements,  acreage  contribution  agreements,  surface  use  and
     surface  damage  agreements,  net profits  agreements,  production  payment
     agreements,  Hedging Agreements,  insurance policies, title opinions, title
     abstracts, title materials and information,  files, records, writings, data
     bases,  information,  systems, logs, well cores, fluid samples,  production
     data  and  reports,   well  testing  data  and  reports,   maps,   seismic,
     geophysical,  geological and chemical data and information,  interpretative
     and  analytical  reports  of  any  kind  or  nature   (including,   without
     limitation, reserve studies and reserve evaluations), computer hardware and
     software and all  documentation  therefor or relating  thereto  (including,
     without  limitation,  all licenses  relating to or covering  such  computer
     hardware,  software  and/or  documentation),   trade  secrets,  trademarks,
     service marks and business names and the goodwill of the business  relating
     thereto, copyrights, copyright registrations, unpatented inventions, patent
     applications  and patents,  rights-of-way,  franchises,  bonds,  easements,
     servitudes,  surface leases, permits, licenses,  tenements,  hereditaments,
     appurtenances,  concessions,  occupancy agreements, privileges, development
     rights,   condemnation  awards,  claims  against  third  parties,   general
     intangibles,  rents,  royalties,  issues,  profits,  products and proceeds,
     whether now or hereafter existing or arising,  used or useful in connection
     with, covering,  relating to, or arising from or in connection with, any of
     the  aforesaid  items (1) through (14),  inclusive in this granting  clause
     referenced,  and all other things of value and incident thereto (including,
     without limitation,  any and all liens, lien rights, security interests and
     other properties, rights and interests) which the Trustor might at any time
     have or be entitled to, but excluding any data or contracts with respect to
     which mortgaging or granting of a lien or a security interest is prohibited
     by existing third party agreements,

all the aforesaid properties,  rights and interests, together with any additions
thereto  which  may be  subjected  to the lien  and  security  interest  of this
instrument by means of supplements hereto or otherwise, being hereinafter called
the "Encumbered Property".

     Subject,  however, to (i) Permitted  Encumbrances  (including all presently
existing royalties,  overriding royalties,  payments out of production and other
burdens which are


                                       10
<PAGE>

referred to in Exhibit A and which are taken into consideration in computing any
percentage,  decimal or fractional interest as set forth in Exhibit A), (ii) the
assignment of production  contained in Article III hereof,  but only insofar and
so long as said assignment of production is not inoperative under the provisions
of Section 3.5 hereof,  and (iii) the  condition  that none of the Trustee,  the
Agent nor any of the other Lender Parties shall be liable in any respect for the
performance of any covenant or obligation (including without limitation measures
required  to comply  with  Environmental  Laws) of the Trustor in respect of the
Encumbered Property.

     TO HAVE AND TO HOLD the  Encumbered  Property  unto the Trustee  forever to
secure the  payment of the  Indebtedness  and to secure the  performance  of the
obligations of the Trustor herein contained.

     The Trustor,  in  consideration  of the premises and to induce the Agent to
make the loans  above  described,  hereby  covenants  and  agrees  with both the
Trustee and the Agent as follows:

                                   ARTICLE 1

                              Indebtedness Secured
                              --------------------

     1.1 Items of Indebtedness  Secured. The following items of indebtedness are
secured hereby:

          (a) The Loan Notes (including future advances to be made thereunder by
     the Agent or the Lenders), the Letter of Credit Outstandings (as defined in
     the Credit Agreements) and all other obligations and liabilities of Trustor
     under the Credit Agreements,  excluding, however, the Trustor's obligations
     and liabilities under the Hazardous Materials Indemnity;

          (b) All indebtedness  and future advances  evidenced by any promissory
     notes  evidencing any  additional  loans which the Agent or the Lenders may
     from time to time make to  Trustor,  if any,  the Agent and the Lenders not
     being obligated, however, to make such additional loans;

          (c) Any sums  advanced or expenses or costs  incurred by the Trustees,
     the Agent or the Lender Parties,  or by any receiver  appointed  hereunder,
     which are made or incurred  pursuant to, or permitted by, the terms hereof,
     plus  interest  thereon at the rate herein  specified or  otherwise  agreed
     upon,  from the date of the advances or the  incurring of such  expenses or
     costs until reimbursed;

          (d) Any and all other  indebtedness  of  Trustor or any  Affiliate  of
     Trustor to the Agent or any Lender  Party now or hereafter  owing,  whether
     direct or indirect,  primary or secondary,  fixed or  contingent,  joint or
     several,   regardless  of  how  evidenced  or  arising,  including  without
     limitation, all Letters of Credit; and


                                       11
<PAGE>

          (e) Any  extensions,  refinancings,  modifications  or renewals of all
     such indebtedness described in subparagraphs (a) through (d) above, whether
     or not Trustor executes any extension agreement or renewal instrument.

     1.2 Indebtedness and the Notes Defined. All the above items of indebtedness
described in subparagraphs (a) through (e) of Section 1.1 hereof are hereinafter
collectively  referred to as the "Indebtedness".  Any promissory note evidencing
any part of the Indebtedness,  including, without limitation, each Loan Note, is
hereinafter  referred  to  as a  "Note",  and  all  such  promissory  notes  are
hereinafter referred to collectively as the "Notes".

                                   ARTICLE 2

                       Particular Covenants and Warranties
                       -----------------------------------
                                 of the Trustor
                                 --------------

     2.1 Payment of the Indebtedness and Performance of Obligations. The Trustor
will duly and  punctually  pay the  Indebtedness,  as and when called for in the
Credit  Agreements  and the  Security  Documents  and on or before the due dates
thereof, and will timely perform and discharge all of the Obligations (including
each and every  obligation  owing on  account of the  Notes),  in full and on or
before the dates same are to be performed and discharged.

     2.2 Certain  Representations  and  Warranties.  The Trustor  represents and
warrants  (and  with  respect  to  those  matters  set  forth  in the  following
subsections  (b) and (f), as to those portions of the  Encumbered  Property that
are operated by persons other than Trustor,  Trustor makes such  representations
and warranty to the best of its knowledge) that

          (a) the oil and gas  leases  described  in Exhibit A hereto are valid,
     subsisting  leases,  superior and paramount to all other oil and gas leases
     respecting the properties to which they pertain,

          (b) all producing  wells  located on the lands  described in Exhibit A
     (including  Exhibit  A-1) have  been  drilled,  operated  and  produced  in
     conformity with all Applicable Laws of all Governmental  Authorities having
     jurisdiction,   and  are  subject  to  no  penalties  on  account  of  past
     production,  and such wells are in fact  bottomed  under and are  producing
     from, and the well bores are wholly within,  the lands described in Exhibit
     A or lands pooled or unitized therewith,

          (c) the Trustor,  to the extent of the interest specified in Exhibit A
     (including  Exhibit A-1), has valid and indefeasible title to each property
     right or interest constituting the Encumbered Property described in Exhibit
     A  (including  Exhibit  A-1) and has a good and  legal  right to grant  and
     convey the same to the Agent; such interest entitles Trustor to receive not
     less than the share of


                                       12
<PAGE>

     Hydrocarbons  from such property  indicated as its net revenue  interest or
     "NRI" share of such Hydrocarbons, and obligates Trustor to pay for not more
     than the share of  operating  and other  costs,  liabilities  and  expenses
     associated  with such  property  indicated as its working  interest or "WI"
     share of such costs, liabilities and expenses,

          (d) the  Encumbered  Property is free from all  encumbrances  or liens
     whatsoever,  except for the Permitted  Encumbrances  or as permitted by the
     provisions of Section 2.4(e) hereof,

          (e) the Trustor is not obligated,  by virtue of any  prepayment  under
     any contract  providing for the sale by the Trustor of  Hydrocarbons  which
     contains  a "take or pay"  clause  or under  any  similar  arrangement,  to
     deliver  Hydrocarbons  at some  future  time  without  then  or  thereafter
     receiving full payment therefor,

          (f) the Encumbered  Property is currently being  operated,  maintained
     and developed,  in all material respects, in accordance with all applicable
     currently  existing  Permits,  Legal  Requirements  and all Applicable Laws
     (including, without limitation, Environmental Laws),

          (g) the cover page to this instrument  lists the correct legal name of
     the Trustor and the Trustor has not been known by any legal name  different
     from the one set forth on the cover page of this instrument,  except as set
     forth on Schedule I to this instrument;  the Trustor is not now and has not
     been known by any trade name,  nor has the Trustor  been the subject of any
     merger or other corporate reorganization,

          (h) the  execution,  delivery  and  performance  by the Trustor of the
     Security  Documents and the borrowing  evidenced by the Loan Notes, (i) are
     within the Trustor's  corporate powers and have been duly authorized by the
     Trustor's  Board  of  Directors,   shareholders  and  all  other  requisite
     corporate  action,   (ii)  have  received  all  (if  any)  requisite  prior
     governmental  approval  and  consent  in order to be  legally  binding  and
     enforceable  in  accordance  with the terms  thereof,  and  (iii)  will not
     violate,  be in conflict with,  result in a breach or constitute  (with due
     notice or lapse of time, or both) a default under, any Legal Requirement or
     result in the creation or imposition of any lien,  charge or encumbrance of
     any nature whatsoever upon any of the Trustor's property or assets,  except
     as contemplated by the provisions of the Security  Documents.  The Security
     Documents  constitute  the  legal,  valid and  binding  obligations  of the
     Trustor and others obligated under the terms of the Security Documents,  in
     accordance with their respective terms, and

          (i) there are no  actions,  suits or  proceedings  pending,  or to the
     knowledge of the Trustor  threatened,  against or affecting  the Trustor or
     the Encumbered Property that could materially  adversely affect the Trustor
     or the Encumbered Property,  or involving the validity or enforceability of
     this instrument or the priority of the liens and security interests created
     by the Security


                                       13
<PAGE>

     Documents,  and no event has occurred (including specifically the Trustor's
     execution  of the  Security  Documents  and its  consummation  of the Loans
     described  therein) which will violate,  be in conflict with, result in the
     breach  of, or  constitute  (with due  notice or lapse of time,  or both) a
     material default under, any Legal  Requirement or result in the creation or
     imposition of any lien, charge or encumbrance of any nature whatsoever upon
     any of the Trustor's  property other than the liens and security  interests
     created by the Security Documents.

     2.3 Further  Assurances.  The Trustor will  warrant and forever  defend the
Encumbered  Property unto the Trustee against every person  whomsoever  lawfully
claiming the same or any part thereof,  subject to Permitted  Encumbrances,  and
the Trustor will  maintain and  preserve the lien and security  interest  hereby
created so long as any of the  Indebtedness  remains  unpaid.  The Trustor  will
execute and deliver  such other and further  instruments  and will do such other
and  further  acts as,  in the  opinion  of the  Trustee  or the  Agent,  may be
necessary  or  desirable  to carry out more  effectually  the  purposes  of this
instrument,  including,  without  limiting the generality of the foregoing,  (i)
prompt  correction  of any defect which may hereafter be discovered in the title
to the  Encumbered  Property  or in the  execution  and  acknowledgment  of this
instrument, any Note, or any other document executed in connection herewith, and
(ii)  prompt  execution  and  delivery  of all  notices  to  parties  operating,
purchasing  or  receiving  proceeds  of  production  of  Hydrocarbons  from  the
Encumbered  Property,  and all division orders or transfer orders, any of which,
in the opinion of the Agent,  is needed in order to transfer  effectually  or to
assist  in  transferring  effectually  to the  Agent the  assigned  proceeds  of
production from the Encumbered Property.

     2.4 Operation of the Encumbered  Property.  So long as the  Indebtedness or
any part thereof remains unpaid,  and whether or not the Trustor is the operator
of any particular  part of the Encumbered  Property,  the Trustor shall,  at the
Trustor's own expense:

          (a) Do all things necessary to keep unimpaired the Trustor's rights in
     the Encumbered Property and not, except in the ordinary course of business,
     abandon any well or  forfeit,  surrender  or release  any Lease  capable of
     producing  Hydrocarbons  in paying  quantities,  without the prior  written
     consent of the Agent;

          (b) Obtain  and  maintain  all  required  Permits  and cause the lands
     described  in  Exhibit A to be  maintained,  developed,  protected  against
     drainage,  and operated for the  production of  Hydrocarbons  in a good and
     workmanlike  manner as would a prudent  operator,  and in  accordance  with
     generally accepted industry practices,  Joint Operating Agreements, and all
     Applicable Laws, excepting those being contested in good faith;

          (c) Duly  pay and  discharge,  or  cause  to be paid  and  discharged,
     promptly as and when due and payable,  all rentals and royalties (including
     shut-in royalties) payable in respect of the Encumbered  Property,  and all
     expenses  incurred in or arising from the operation or  development  of the
     Encumbered  Property  not later than the due date  thereof,  or the day any
     fine, penalty, interest


                                       14
<PAGE>

     or cost may be added thereto or imposed,  or the day any lien may be filed,
     for the non-payment  thereof (if such day is used to determine the due date
     of the respective item);

          (d) Cause the  Operating  Equipment  to be kept in good and  effective
     operating  condition,  ordinary  wear and tear  excepted,  and all repairs,
     renewals,  replacements,  additions  and  improvements  thereof or thereto,
     needful to the  production  of  Hydrocarbons  from the lands  described  in
     Exhibit A, to be promptly made;

          (e) Not, without the prior written consent of the Agent, create, place
     or permit to be created or  placed,  or through  any act or failure to act,
     acquiesce in the placing of, or allow to remain, any mortgage, pledge, lien
     (statutory,  constitutional or contractual), security interest, encumbrance
     or  charge,  or  conditional  sale  or  other  title  retention  agreement,
     regardless  of whether same are expressly  subordinate  to the liens of the
     Security  Documents,  with respect to all or any portion of the  Encumbered
     Property, the Leases or the Rents and Revenues other than (1) the Permitted
     Encumbrances,  (2) Taxes  constituting a lien but not due and payable,  (3)
     defects or  irregularities  in title,  and liens,  charges or encumbrances,
     which,  in the Agent's  reasonable  opinion,  are not such as to  interfere
     materially  with the  development,  operation  or  value of the  Encumbered
     Property  and not such as to affect  materially  title  thereto,  (4) those
     being  contested  by the  Trustor  in good  faith in such  manner as not to
     jeopardize  the Trustee's and the Agent's  rights in and to the  Encumbered
     Property,  (5) those liens  permitted by each Section  8.2.3 of each of the
     Credit  Agreements,  and (6) those  consented  to in  writing by the Agent;

          (f) Carry with financially sound and reputable insurance companies and
     in amounts satisfactory to the Agent the following insurance: (1) workmen's
     compensation  insurance and public  liability and property damage insurance
     in respect of all  activities  in which the Trustor  might  incur  personal
     liability  for the death of or injury to an  employee or third  person,  or
     damage to or destruction of another's property;  and (2) to the extent such
     insurance is carried by similar companies  engaged in similar  undertakings
     in the same  general  areas in which the  Encumbered  Property  is located,
     insurance in respect of the Operating Equipment,  against loss or damage by
     fire, lightning, hail, tornado, explosion and other similar risks, hazards,
     casualties and contingencies  (including  business  interruption  insurance
     covering loss of Rents and Revenues); provided, that any such insurance may
     be provided by way of self  insurance to the extent that similar  companies
     engaged in similar undertakings in the same general areas also self-insure.
     Each insurance  policy issued in connection  therewith shall provide by way
     of  endorsements,  riders  or  otherwise  that (i) name the Agent as a loss
     payee on all property  insurance  policies and an additional insured on all
     liability insurance policies,  and provide that proceeds will be payable to
     the Agent as its = interest may appear,  which proceeds are hereby assigned
     to the Agent,  it being agreed by the Trustor that such  payments  shall be
     applied A) if there be no event of default  existing  or which  would exist
     but for due notice or lapse of time,


                                       15
<PAGE>

     or both,  to the  restoration,  repair  or  replacement  of the  Encumbered
     Property,  or B) if there be an event of default  existing,  or which would
     exist but for due  notice or lapse of time,  or both,  at the option of the
     Agent,  either for the above  stated  purpose or toward the  payment of the
     Indebtedness;  (ii) the  coverage  of the Agent  shall  not be  terminated,
     reduced or affected in any manner  regardless of any breach or violation by
     the Trustor of any  warranties,  declarations or conditions in such policy;
     (iii) no such  insurance  policy  shall be canceled,  endorsed,  altered or
     reissued  to effect a change in  coverage  for any reason and to any extent
     whatsoever unless such insurer shall have first given the Agent thirty (30)
     days prior written notice thereof; and (iv) the Agent may, but shall not be
     obligated   to,  make  premium   payments  to  prevent  any   cancellation,
     endorsement,  alteration or reissuance  and such payments shall be accepted
     by the  insurer  to  prevent  same.  The Agent  shall be  furnished  with a
     certificate  evidencing such coverage in form and content acceptable to the
     Agent. All policies to be maintained under this instrument are to be issued
     on forms and by companies  and with  endorsements  acceptable to the Agent.
     The Trustor shall maintain insurance in an amount sufficient to prevent the
     Trustor from becoming a co-insurer under any policy required hereunder.  If
     the Trustor  fails to maintain the level of insurance  required  under this
     instrument, then the Trustor shall and hereby agrees to indemnify the Agent
     to the extent that a casualty occurs and insurance proceeds would have been
     available had such insurance been maintained;

          (g) Furnish to the Agent as soon as possible  and in any event  within
     five (5) days after the  occurrence  from time to time of any change in the
     address of the  Trustor's  location  (as  described on the  signature  page
     hereto) or in the name of the Trustor, notice in writing of such change;

          (h) Not initiate or acquiesce in any change in any material  zoning or
     other land use or Water  Rights  classification  now or hereafter in effect
     and affecting the Encumbered Property or any part thereof;

          (i) Notify the Agent in writing as soon as  possible  and in any event
     within five (5) days after it shall become aware of the  occurrence  of any
     event of default  under  Section 4.1 or any event which,  with notice,  the
     passage of time or both would be such an event of default;

          (j) Appear and defend,  with  counsel  acceptable  to the Agent in its
     reasonable  discretion,  and hold the  Agent  harmless  from,  any  action,
     proceeding  or claim  affecting the  Encumbered  Property or the rights and
     powers of the Agent or the Trustee  under the Security  Documents,  and all
     costs and  expenses  incurred  by the  Agent in  protecting  its  interests
     hereunder in such an event  (including all court costs and attorneys' fees)
     shall be borne by the Trustor;  provided,  that such defense:  (1) shall be
     provided  by a lawyer or law firm  listed on a  schedule  delivered  to and
     approved in writing by the Agent,  from time to time (the "Approved Counsel
     List"), and (2) if the amount in controversy in such action,  proceeding or
     claim is in excess of $2,500,000 in actual or compensatory


                                       16
<PAGE>

     damages and/or liquidated damages (or is reasonably believed to exceed such
     amount if the demand involves unliquidated damages), such law firm shall be
     approved by the Agent,  in its reasonable  discretion,  for that particular
     action, proceeding or claim. As to actions, proceedings or claims involving
     a portion of the  Encumbered  Property in which the Trustor or a Subsidiary
     of the Trustor is not the  operator  and with  respect to which the Trustor
     does not have a majority net revenue interest and/or working interest,  the
     Trustor may elect,  in its  reasonable  judgment,  to allow counsel for the
     operator to appear for,  and defend the  Trustor in such  matter,  in which
     case,  selection of counsel by the  operator  shall not be governed by this
     Section 2.4 (j); and further  provided,  that nothing herein shall restrict
     or limit the right of the Agent or the  Lenders  to select its or their own
     counsel to defend, at the Trustor's cost and expense, any action proceeding
     or claim in which any of them are named as parties;

          (k) Subject to the Trustor's  right to contest the same,  promptly pay
     all Taxes  legally  imposed  upon this  instrument  or upon the  Encumbered
     Property or upon the income and profits  thereof,  or upon the  interest of
     the Agent or the other Lender  Parties  therein;  provided that the Trustor
     shall not be liable for taxes  accruing  after a transfer of the Encumbered
     Property following a foreclosure;

          (l) Comply with,  conform to and obey, in all material  respects,  all
     present  and future  Legal  Requirements  and not use,  maintain,  operate,
     occupy,  or allow the use,  maintenance,  operation  or  occupancy  of, the
     Encumbered Property in any manner which (a) violates any present and future
     Legal  Requirement,  (b) may be dangerous unless safeguarded as required by
     Applicable Law, (c)  constitutes a public or private  nuisance or (d) makes
     void,  voidable or  cancelable,  or increases the premium of, any insurance
     then in force with respect thereto; and

          (m) Not, without the prior written consent of the Agent, permit any of
     the  Fixtures  or  Personalty  to be  removed  at any time  from the  lands
     described in Exhibit A unless (i) the removed  item is removed  temporarily
     for maintenance and repair, (ii) if removed permanently,  is replaced by an
     article of equal  suitability  and value,  owned by the  Trustor,  free and
     clear of any lien or security interest except such as may be first approved
     in writing by the Agent or (iii) such Fixtures or Personalty are removed in
     connection  with the plugging and  abandoning of wells,  or  abandonment of
     other facilities, in each case as permitted by this instrument.

     2.5  Performance  of Leases.  The  Trustor  will:  (a) duly and  punctually
perform and comply with any and all representations,  warranties,  covenants and
agreements  expressed  as  binding  upon it under  each of the  Leases;  (b) not
voluntarily  terminate,  cancel or waive its  rights or the  obligations  of any
other party under any of the Leases;  (c) use all reasonable efforts to maintain
each of the Leases in force and effect  during  the full term  thereof;  and (d)
appear in and defend (or cause its  operator to appear in and defend) any action
or proceeding arising under or in any manner


                                       17
<PAGE>

connected with any of the Leases or the representations,  warranties,  covenants
and agreements of it or the other party or parties thereto.

     2.6  Recording,  etc.  The  Trustor  will  promptly,  and at the  Trustor's
expense, record,  register,  deposit and file this and every other instrument in
addition or supplemental hereto in such offices and places and at such times and
as often  as may be  necessary  to  preserve,  protect  and  renew  the lien and
security  interest  hereof  as a first  lien  on and  prior  perfected  security
interest  in real or personal  property,  as the case may be, and the rights and
remedies  of the  Trustee,  of the Agent and of the other  Lender  Parties,  and
otherwise will do and observe all things or matters necessary or expedient to be
done or observed by reason of any Applicable Law, for the purpose of effectively
creating,  maintaining  and preserving the lien and security  interest hereof on
and in the Encumbered Property.

     2.7 Sale or Mortgage of the Encumbered Property. Except (a) as set forth in
Section 6.1 of this instrument;  (b) as permitted by each Section 8.2.10 of each
of the Credit Agreements;  (c) for sales of severed Hydrocarbons in the ordinary
course of the  Trustor's  business;  (d) sales of or  dispositions  of  surplus,
obsolete or worn inventory or equipment;  and (e) the lien and security interest
created by this instrument, the Trustor will not sell, convey, mortgage, pledge,
hypothecate,  pool,  unitize or otherwise  dispose of or encumber the Encumbered
Property  nor any portion  thereof,  nor any of the  Trustor's  right,  title or
interest  therein,  without first securing the written consent of the Agent; and
the Trustor will not enter into any arrangement with any gas pipeline company or
other consumer of Hydrocarbons  regarding the Encumbered  Property  whereby said
gas pipeline  company or consumer  may set off any claim  against the Trustor by
withholding payment for any Hydrocarbons actually delivered.

     2.8 Records,  Statements and Reports. The Trustor will keep proper books of
record and account in which  complete  and correct  entries  will be made of the
Trustor's   transactions  in  accordance  with  generally  accepted   accounting
principles  and  will  furnish  or  cause  to be  furnished  to the  Agent  such
information  concerning  the business,  affairs and  financial  condition of the
Trustor as the Agent may from time to time reasonably request.  Without limiting
the generality of the foregoing, the Trustor shall furnish to the Agent upon its
request,  but not more than every six (6)  months,  (a)  reports  prepared by an
independent  petroleum  engineer  acceptable  to the  Agent  concerning  (1) the
quantity of  Hydrocarbons  recoverable  from the  Encumbered  Property,  (2) the
projected income and expense  attributable to the Encumbered  Property,  and (3)
the  expediency of any change in methods of treatment or operation of all or any
wells productive of Hydrocarbons, any new drilling or development, any method of
secondary  recovery  by  repressuring  or  otherwise,  or any other  action with
respect to the  Encumbered  Property,  the  decision as to which may increase or
reduce  the  quantity  of  Hydrocarbons  ultimately  recoverable  or the rate of
production thereof,  and (b) reports showing the gross proceeds from the sale of
Hydrocarbons  produced  from the lands  described  in Exhibit A  (including  any
thereof taken by the Trustor for the  Trustor's  own use),  the quantity of such
Hydrocarbons  sold, the severance,  gross production,  occupation,  or gathering
taxes deducted from or paid out of such proceeds,  the number of wells operated,
drilled or abandoned, and such other information as the


                                       18
<PAGE>

Agent may reasonably  request (upon request of the Agent,  such reports referred
to in clauses (a) and (b) above shall set forth such  information  on a lease or
unit  basis,  and  after the  occurrence  of an Event of  Default,  and upon the
Agent's request,  Trustor shall deliver the reports described in clause (b) on a
monthly basis).

     2.9 Right of Entry.

          (a) Upon at least  twenty-four  (24) hours notice to the Trustor,  the
     Trustor  will permit the Agent,  or its agents,  at the cost and expense of
     the Trustor,  to enter upon the Encumbered  Property and all parts thereof,
     for the purpose of investigating and inspecting the condition and operation
     thereof,  and shall permit reasonable access to the field offices and other
     offices  (to the fullest  extent that  Trustor may do so under the terms of
     the applicable Joint Operating  Agreements and other applicable  agreements
     affecting  the  Encumbered  Property),  including  the  principal  place of
     business, of the Trustor to inspect and examine the Encumbered Property and
     to inspect, review and reproduce as necessary any books, records, accounts,
     contracts or other documents of the Trustor.

          (b) Without limiting the generality of the foregoing,  the Agent shall
     have the right (to the  fullest  extent  that  Trustor  may do so under the
     terms of the applicable  Joint  Operating  Agreements and other  applicable
     agreements  affecting the Encumbered  Property),  on twenty-four (24) hours
     prior  notice to the  Trustor,  to cause such  persons and  entities as the
     Agent may  designate  to enter the  Encumbered  Property to conduct (at the
     cost and  expense of the  Trustor),  or to cause the Trustor to conduct (at
     the cost and expense of the Trustor),  such tests and investigations as the
     Agent deems necessary to determine whether any hazardous materials or solid
     waste is being generated, transported, stored, or disposed of in accordance
     with  applicable  Environmental  Laws.  Such tests and  investigations  may
     include, without limitation, underground borings, ground water analyses and
     borings from the floors,  ceilings and walls of any improvements located on
     the Encumbered Property.  This Section 2.9 shall not be construed to affect
     or limit the  obligations  of the  Trustor  pursuant to Section 2.4 hereof.

          (c) The Agent  shall have no duty to visit or observe  the  Encumbered
     Property, or to conduct tests, and no site visit, observation or testing by
     the Agent (or its  agents and  independent  contractors)  shall  impose any
     liability on the Agent or any other Lender Party,  nor shall the Trustor or
     any other obligor be entitled to rely on any visit,  observation or testing
     by the Agent in any respect. The Agent may, in its discretion,  disclose to
     the Trustor or any other Person,  including any Governmental Authority, any
     report or finding  made as a result  of, or in  connection  with,  any site
     visit,  observation  or testing by the Agent.  the Trustor  agrees that the
     Agent  makes no  warranty  or  representation  to the  Trustor or any other
     obligor regarding the truth, accuracy or completeness of any such report or
     findings  that may be so  disclosed.  The Trustor also  acknowledges  that,
     depending upon the results of any site visit, observation or testing by the
     Agent and disclosed to the Trustor, the Trustor may have a legal obligation
     to notify one


                                       19
<PAGE>

     or more  Governmental  Authorities  of such  results,  that such  reporting
     requirements  are  site-specific,  and are to be  evaluated  by the Trustor
     without advice or assistance from the Agent.

     2.10 Taxes. Subject to the Trustor's right to contest the same, the Trustor
will  promptly  pay all taxes,  assessments  and  governmental  charges  legally
imposed  upon  this  instrument  or upon the  Encumbered  Property,  or upon the
interest of the Agent therein, or upon the income and profits thereof.

     2.11 No Governmental  Approvals.  The Trustor  represents and warrants that
(a) no approval or consent of any  regulatory  or  administrative  commission or
authority,  or of any other  governmental  body,  is necessary to authorize  the
execution and delivery of this  instrument or of the Notes,  or to authorize the
observance or performance by the Trustor of the covenants herein or in the Notes
contained,  or that such approvals as are required have been obtained or will be
obtained  promptly  and (b) the  Trustor  has  obtained  all  Permits  which are
necessary for the operation of the Encumbered Property.

     2.12 Environmental  Laws. The Trustor represents and warrants,  to the best
of its knowledge after due inquiry, and except as set forth in each Item 7.12 of
the  Disclosure  Schedule  (including  Part B thereof)  attached  to each of the
Credit  Agreements  that:  the  Encumbered  Property is in  compliance  with all
applicable  Environmental Laws; there are no conditions existing currently which
would be likely to subject the Trustor to damages, penalties,  injunctive relief
or cleanup costs under any Environmental  Laws or assertions  thereof,  or which
require or are  likely to require  cleanup,  removal,  remedial  action or other
response  pursuant to  Environmental  Laws by the Trustor;  the Trustor is not a
party to any litigation or administrative proceedings, nor so far as is known by
the Trustor is any litigation or administrative  proceeding  threatened  against
it,  which  asserts or alleges  that the  Trustor has  violated or is  violating
Environmental  Laws or that the Trustor is required to clean up,  remove or take
remedial or other responsive action due to the disposal, depositing,  discharge,
leaking or other release of any hazardous  substances or materials;  neither the
Encumbered Property nor the Trustor is subject to any judgment, decree, order or
citation  related to or arising out of  Environmental  Laws and neither has been
named or listed as a potentially  responsible  party by any governmental body or
agency in a matter  arising under any  Environmental  Laws. The Trustor has also
obtained  all  permits,   licenses  or  approvals   required  under   applicable
Environmental  Laws which are  necessary for its current  exploration,  use, and
development  activities  at  the  Encumbered  Property;  and  to  the  Trustor's
knowledge after reasonable  investigation  all use,  generation,  manufacturing,
release, discharge,  storage, deposit,  treatment,  recycling or disposal of any
materials on, under or at the Encumbered  Property or transported to or from the
Encumbered  Property  (or  tanks or other  facilities  thereon  containing  such
materials)  are  being  and will be  conducted  in  accordance  with  applicable
Environmental Laws including without limitation those requiring cleanup, removal
or any other remedial action.


                                       20
<PAGE>

     2.13  Corporate  Status.  The Trustor will continue to be duly qualified to
transact business in California and each state where the conduct of its business
requires it to be qualified.

                                   ARTICLE 3

                            Assignment of Production
                            ------------------------

     3.1 Assignment.

          (a) The Trustor  hereby  absolutely  and  irrevocably  (a)  transfers,
     assigns, warrants and conveys to the Agent, effective as of May 1, 2002, at
     7:00 A.M., local time, all Hydrocarbons which are thereafter  produced from
     and which accrue to the Encumbered  Property,  and all proceeds  therefrom,
     and (b) gives to and confers upon the Agent the right,  power and authority
     to collect such Hydrocarbons and proceeds.  Subject to the terms of Section
     3.1(b),   all  parties   producing,   purchasing   or  receiving  any  such
     Hydrocarbons,  or having such, or proceeds  therefrom,  in their possession
     for which  they or  others  are  accountable  to the Agent by virtue of the
     provisions  of this Article III, are  authorized  and directed to treat and
     regard the Agent as the assignee and transferee of the Trustor and entitled
     in the  Trustor's  place and stead to  receive  such  Hydrocarbons  and all
     proceeds  therefrom;  and  said  parties  and  each of them  shall be fully
     protected  in so  treating  and  regarding  the Agent and shall be under no
     obligation to see to the  application  by the Agent of any such proceeds or
     payments  received by it;  provided,  however,  that, until the Agent shall
     have  instructed  such parties that an Event of Default has occurred and to
     deliver such Hydrocarbons and all proceeds therefrom directly to the Agent,
     such  parties  shall be  entitled  to  deliver  such  Hydrocarbons  and all
     proceeds therefrom directly to the Trustor.  So long as no Event of Default
     shall have occurred, the Agent agrees that the Trustor shall be entitled to
     receive directly from such parties,  and keep and retain, all such proceeds
     from the sale of such Hydrocarbons.

          (b) Upon the  occurrence  of an Event of Default (it being  understood
     that the  determination  of the  occurrence  of an Event of  Default by the
     Agent  shall be  conclusive  and  binding  as to all such  parties  for all
     purposes  hereof  and  that,  at the  time  the  Agent  gives  the  initial
     instruction  and notice under this Article III, such Event of Default shall
     then be continuing) said Hydrocarbons and products are to be delivered into
     pipelines  connected  with  the  oil and gas  leases,  or to the  purchaser
     thereof,  free and clear of all Taxes,  and the  proceeds  from the sale of
     such  Hydrocarbons  paid in accordance with Section 3.6 of this instrument.
     The  Trustor  agrees to  perform  all such acts,  and to  execute  all such
     further  assignments,  transfers and division orders, and other instruments
     as may be  required  or  desired by the Agent or any party in order to have
     said  revenues and proceeds so paid to the Agent,  as and when  provided in
     this  Article III.  With  respect to any funds  received by the Agent after
     notice of an Event of Default shall have been given under this Article III,
     the Agent is fully  authorized  to receive  and give  receipt  for any such
     revenues and proceeds that are received by


                                       21
<PAGE>

     Agent;  to endorse  and cash any and all  checks and drafts  payable to the
     order of the Trustor or the Agent for the  account of the Trustor  received
     from or in connection with said revenues or proceeds and apply the proceeds
     thereof in accordance with Section 3.2 hereof,  and to execute transfer and
     division orders in the name of the Trustor,  or otherwise,  with warranties
     binding the Trustor.  The  assignment of the  Hydrocarbons  and proceeds in
     this Section 3.1 is intended to be an absolute  assignment from the Trustor
     to the Agent and not  merely  the  passing  of a  security  interest.  Such
     Hydrocarbons and proceeds are hereby assigned  absolutely by the Trustor to
     the Agent.

     3.2 Application of Proceeds. All payments received by the Agent pursuant to
Section 3.1 hereof shall be placed in a cash collateral account at the Agent and
on the last business day of each calendar month applied as follows:

          First:  To the  payment  and  satisfaction  of all costs and  expenses
     incurred in connection  with the  collection of such  proceeds,  and to the
     payment of all items of the  Indebtedness and the Obligations not evidenced
     by any Note.

          Second:  To the payment of the  interest  on the Notes  accrued to the
     date of such payment.

          Third:  To the payment of the amounts of principal  then due and owing
     on the Notes.

          Fourth:  The  balance,  if any,  shall  either be  applied on the then
     unmatured principal amounts of the Notes, such application to be on such of
     the Notes and  installments  thereof  as the Agent may  select,  or, at the
     option of the Agent, released to the Trustor.

     3.3  Collection  Upon Default.  Upon the occurrence of any event of default
under Section 4.1 hereof,  the Agent may, at any time without notice,  either in
person,  by agent or by a receiver  appointed by a court,  and without regard to
the  adequacy  of any  security  for  the  Indebtedness,  enter  upon  and  take
possession of the Encumbered  Property,  or any part thereof, in its own name or
as agent or as  attorney-in-fact  for the Trustor sue for or  otherwise  collect
such rents, issues, profits, Hydrocarbons and proceeds, including those past due
and  unpaid  and apply the  same,  less  costs and  expenses  of  operation  and
collection, including attorneys' fees, upon any of the Indebtedness, and in such
order as the Agent may determine. The collection of such rents, issues, profits,
Hydrocarbons  and proceeds,  or the entering  upon and taking  possession of the
Encumbered Property, or the application thereof as aforesaid,  shall not cure or
waive any default or notice of default  hereunder or invalidate  any act done in
response to such default or pursuant to notice of default.

     3.4 No Liability of the Agent in Collecting.  The Agent is hereby  absolved
from all liability for failure to enforce collection of any proceeds so assigned
(and no such  failure  shall be  deemed to be a waiver of any right of the Agent
under this Article)


                                       22
<PAGE>

and  from  all  other  responsibility  in  connection   therewith,   except  the
responsibility to account to the Trustor for funds actually received.

     3.5  Assignment  Not a Restriction  on the Agent's  Rights.  Nothing herein
contained shall detract from or limit the absolute  obligation of the Trustor to
make payment of the Indebtedness  regardless of whether the proceeds assigned by
this Article are  sufficient to pay the same,  and the rights under this Article
shall be in addition to all other  security now or hereafter  existing to secure
the payment of the Indebtedness.

     3.6 Status of  Assignment.  Notwithstanding  the other  provisions  of this
Article,  and in addition to the other rights hereunder,  the Trustee, the Agent
or any receiver  appointed in judicial  proceedings  for the enforcement of this
instrument  shall  have the  right to  receive  all of the  Hydrocarbons  herein
assigned  and the  proceeds  therefrom  after  the  occurrence  and  during  the
continuance  of any Event of Default and, in any event,  after any Note or other
item of  Indebtedness  has been declared due and payable in accordance  with the
provisions  of Section 4.1 hereof and to apply all of said  proceeds as provided
in Section  3.2  hereof.  Upon any sale of the  Encumbered  Property or any part
thereof  pursuant  to Article V, the rents,  issues,  profits  and  Hydrocarbons
thereafter produced from the property so sold, and the proceeds therefrom, shall
be included in such sale and shall pass to the  purchaser  free and clear of the
assignment contained in this Article.

     3.7 Indemnification  Obligations.  The following provisions shall apply to,
and be deemed in each case to modify,  each of the provisions of this instrument
(except those set forth in Section 2.12 hereof) and the other Security Documents
(except to the extent otherwise  expressly provided therein) wherein the Trustor
is obligated to indemnify each of the Indemnified Persons:

          (a) Trustor  agrees to indemnify the Trustee and the Agent against all
     legal and administrative  proceedings for which a claim for indemnification
     may be  made  by  the  Indemnified  Person  (herein,  collectively,  called
     "Indemnification  Claims")  made against or incurred by them or any of them
     as a consequence  of the  assertion,  either before or after the payment in
     full of the  Indebtedness,  that they or any of them received  Hydrocarbons
     herein  assigned or the proceeds  thereof  claimed by third persons and the
     Agent and the  Trustee  shall  have the right to  defend  against  any such
     Indemnification Claims,  employing attorneys therefor, and unless furnished
     with reasonable indemnity,  they or any of them shall have the right to pay
     or compromise and adjust all such Indemnification  Claims. The Trustor will
     indemnify  and pay to the Trustee or the Agent any and all such  amounts as
     may be paid in respect thereof or as may be successfully  adjudged  against
     the Trustee and the Agent or any of them. The obligations of the Trustor as
     hereinabove  set  forth in this  Section  3.6  shall  survive  the  release
     termination,  foreclosure  or  assignment  of this  instrument  or any sale
     hereunder.

          (b) The Trustor  shall pay when due any  judgments  with respect to an
     Indemnification Claim against any of the Indemnified Persons and which are


                                       23
<PAGE>

     rendered  by a final order or decree of a court of  competent  jurisdiction
     from  which no further  appeal  may be taken or has been  taken  within the
     applicable  appeal period.  In the event that such payment is not made, any
     of the  Indemnified  Persons  at its  sole  discretion  may  pay  any  such
     judgments,  in whole or in part, and look to the Trustor for  reimbursement
     pursuant  to this  instrument,  or may  proceed  to file suit  against  the
     Trustor to compel such payment.

          (c) Any amount  which the  Trustor is  obligated  to pay to or for the
     benefit of an Indemnified Person with respect to an Indemnification  Claim,
     but which is not paid when due,  shall bear interest at the default or post
     maturity  rate of  interest  provided  for in the Note  from the date  such
     amount is due until such amount is paid.

                                   ARTICLE 4

                                Events of Default
                                -----------------

     4.1 Events of Default  Hereunder.  In case any one or more of the following
"events of default" shall occur and shall not have been remedied:

          (a) default in the payment of principal of or interest on any Note, or
     in the  payment  of  any  other  Indebtedness  or in  the  performance  and
     discharge of the Obligations secured hereby, when due;

          (b) the  occurrence of an event of default (other than any relating to
     non-payment  of  principal of or interest on the Loan Note) under the terms
     and provisions of either Credit Agreement and the continuance of such event
     of default for the applicable period of grace, if any;

          (c) any warranty or representation  made by Trustor herein shall prove
     to be untrue in any material respect as of the date made or deemed made; or

          (d) failure by Trustor, within the applicable period of grace, if any,
     to cure a default in the due  performance  or observance of any covenant or
     agreement  contained in this Mortgage and not constituting a default in the
     payment of principal of or interest  upon any Note or in the payment of any
     other Indebtedness;

then and in any such event the Agent,  at its  option,  may  declare  the entire
unpaid  principal  of and the  interest  accrued  on the  Notes  and  all  other
Indebtedness secured hereby to be forthwith due and payable,  without any notice
or demand of any kind, both of which are hereby expressly waived.


                                       24
<PAGE>

                                   ARTICLE 5

                           Enforcement of the Security
                           ---------------------------

     5.1 Acceleration Upon Default;  Additional Remedies. Upon the occurrence of
an event of default and declaration by the Agent of the entire unpaid  principal
of and the  interest  accrued  on the Notes and all other  Indebtedness  secured
hereby to be forthwith due and payable, the Agent may:

          (a) Commence an action to  foreclose  this  instrument  as a mortgage,
     appoint a receiver, or specifically enforce any of the covenants hereof.

          (b) Exercise any or all of the remedies  available to a secured  party
     under the Uniform  Commercial  Code of the State of California,  including,
     but not limited to:

               (i) Either personally or by means of a court appointed  receiver,
          take possession of all or any of the personal property  constituting a
          part of the Encumbered  Property and exclude therefrom the Trustor and
          all others  claiming under the Trustor,  and thereafter  hold,  store,
          use,   operate,   manage,   maintain   and  control,   make   repairs,
          replacements,  alterations, additions and improvements to and exercise
          all  rights and  powers of the  Trustor  in  respect of such  personal
          property  or any part  thereof.  In the  event the  Agent  demands  or
          attempts to take possession of such personal  property in the exercise
          of any rights under the Credit  Agreements or any document executed in
          connection therewith, the Trustor promises and agrees promptly to turn
          over and deliver complete possession thereof to the Agent;

               (ii)  Without  notice to or demand  upon the  Trustor,  make such
          payments  and do such acts as the Agent may deem  necessary to protect
          its security  interest in such personal  property,  including  without
          limitation,   paying,  purchasing,   contesting  or  compromising  any
          encumbrance,  charge  or lien  which is prior  to or  superior  to the
          security interest granted hereunder, and in exercising any such powers
          or authority to pay all expenses incurred in connection therewith;

               (iii) Require the Trustor to assemble  such personal  property or
          any portion thereof, at a place designated by the Agent and reasonably
          convenient  to both  parties,  and promptly to deliver  such  personal
          property to the Agent, or an agent or representative designated by it.
          The Agent, and its agents and representatives  shall have the right to
          enter  upon  any or all of the  Trustor's  premises  and  property  to
          exercise the Agent's rights hereunder;

               (iv)  Elect  to treat  the  fixtures  constituting  a part of the
          Encumbered Property as either real property collateral or personal



                                       25
<PAGE>

          property  collateral and then proceed to exercise such rights as apply
          to such type of collateral; and

               (v) Sell, lease or otherwise dispose of such personal property at
          public  sale,  with or without  having such  personal  property at the
          place of sale, and upon such terms and in such manner as the Agent may
          determine, and the Agent may be a purchaser at any such sale.

     Unless  such  personal  property  is  perishable  or  threatens  to decline
speedily in value or is of a type customarily sold on a recognized  market,  the
Agent shall give the Trustor at least ten (10) days prior written  notice of the
time and place of any public sale of such  personal  property or other  intended
disposition thereof. Such notice may be mailed to the Trustor at the address set
forth on the signature page(s) of this instrument.

          (c) Deliver to the Trustee a written declaration of default and demand
     for  sale,  and a written  notice  of  default  and  election  to cause the
     Trustor's interest in the Encumbered  Property to be sold, which notice the
     Trustee  or the  Agent  shall  cause to be duly  filed  for  record  in the
     Official Records of the county or counties in which the Encumbered Property
     is located.

          (d) Any other remedy permitted to be exercised by the beneficiary of a
     deed of trust or a  secured  party or both  under  the laws of the State of
     California.

     5.2  Foreclosure  By Power of Sale.  Should the Agent elect to foreclose by
exercise  of the power of sale  herein  contained,  the Agent  shall  notify the
Trustee and shall  deposit  with the Trustee this  instrument  and the Notes and
such  receipts  and  evidence of  expenditures  made and  secured  hereby as the
Trustee may require.

          (a) Upon  receipt of such  notice from the Agent,  the  Trustee  shall
     cause to be recorded, published and delivered to the Trustor such Notice of
     Default  and  Election  to  Sell  as  then  required  by law  and  by  this
     instrument.  The Trustee shall, without demand on the Trustor,  after lapse
     of such time as may then be required by law and after  recordation  of such
     Notice of Default and after Notice of Sale having been given as required by
     law, sell the Encumbered Property at the time and place of sale fixed by it
     in said Notice of Sale,  either as a whole,  or in separate lots or parcels
     or items as the Trustee shall deem  expedient,  and in such order as it may
     determine, at public auction to the highest bidder for cash in lawful money
     of the United States payable at the time of sale. The Trustee shall deliver
     to such  purchaser or purchasers  thereof its good and  sufficient  deed or
     deeds conveying the property so sold, but without any covenant or warranty,
     express or implied. The recitals in such deed of any matters or facts shall
     be conclusive proof of the  truthfulness  thereof.  Any person,  including,
     without limitation,  the Trustor, the Trustee or the Agent, may purchase at
     such sale and Trustor  hereby  covenants to warrant and defend the title of
     such purchaser or purchasers.


                                       26
<PAGE>

          (b) After deducting all costs, fees and expenses of the Trustee and of
     this Trust,  including  costs of evidence of title in connection with sale,
     the  Trustee  shall  apply the  proceeds  of sale to  payment  of: all sums
     expended under the terms hereof, not then repaid,  with accrued interest at
     the  highest  rate of  interest  from  time-to-time  accruing  under and as
     provided in the Credit  Agreements;  all other sums then secured hereby and
     the remainder, if any, to the person or persons legally entitled thereto.

          (c)  The  Trustee  may  postpone  sale  of all or any  portion  of the
     Encumbered  Property by public announcement at such time and place of sale,
     and  from  time  to time  thereafter  may  postpone  such  sale  by  public
     announcement   at  the  time  fixed  by  the  preceding   postponement   or
     subsequently noticed sale, and without further notice make such sale at the
     time fixed by the last postponement,  or may, in its discretion, give a new
     notice of sale.

     5.3  Appointment of Receiver.  If an event of default  described in Section
4.1 of this  instrument  shall have occurred and be continuing,  the Agent, as a
matter of right and without  notice to the Trustor or anyone  claiming under the
Trustor,  and without regard to the then value of the Encumbered Property or the
interest  of the  Trustor  therein,  shall  have the right to apply to any court
having  jurisdiction  to  appoint a  receiver  or  receivers  of the  Encumbered
Property,  and the Trustor hereby  irrevocably  consents to such appointment and
waives notice of any application therefor.  Any such receiver or receivers shall
have all the usual powers and duties of  receivers in like or similar  cases and
all the powers and duties of the Agent in case of entry as  provided  in Section
5.4 of this  instrument  and shall continue as such and exercise all such powers
until the date of  confirmation  of sale of the Encumbered  Property unless such
receivership is sooner terminated.

     5.4  Operation  of the  Encumbered  Property  by the Agent.  If an event of
default  described in Section 4.1 of this instrument  shall have occurred and be
continuing,  and in addition to all other rights herein  conferred on the Agent,
the Agent (or any person,  firm or  corporation  designated  by the Agent) shall
have the right and  power,  but shall not be  obligated,  to enter upon and take
possession of any of the Encumbered  Property,  and to exclude the Trustor,  and
the  Trustor's  agents  or  servants,   wholly  therefrom,  and  to  hold,  use,
administer,  manage and operate the same to the extent that the Trustor shall be
at the time entitled and in its place and stead. The Agent, or any person,  firm
or  corporation  designated  by the Agent,  may  operate  the same  without  any
liability  to the  Trustor in  connection  with such  operations,  except to use
ordinary care in the operation of such properties,  and the Agent or any person,
firm or  corporation  designated by the Agent,  shall have the right to collect,
receive and receipt for all rents,  issues,  profits and Hydrocarbons  from said
properties, to make repairs, purchase machinery and equipment, conduct work-over
operations,  drill  additional  wells and to  exercise  every  power,  right and
privilege of the Trustor with respect to the  Encumbered  Property.  When and if
the expenses of such operation and development  (including costs of unsuccessful
work-over  operations or additional  wells) have been paid and the  Indebtedness
paid,  said  properties  shall,  if there  has been no sale or  foreclosure,  be
returned to the Trustor.


                                       27
<PAGE>

     5.5 The Trustor's  Waiver of Rights.  The Trustor waives the benefit of all
laws  now  existing  or that  hereafter  may be  enacted  providing  for (i) any
appraisement before sale of any portion of the Encumbered Property, and (ii) the
benefit of all laws that may be hereafter  enacted in any way extending the time
for the enforcement of the collection of the Notes or the debt evidenced thereby
or creating or extending a period of redemption from any sale made in collecting
said debt. To the full extent the Trustor may do so, the Trustor agrees that the
Trustor  will not at any time insist upon,  plead,  claim or take the benefit or
advantage of any law now or hereafter in force  providing for any  appraisement,
valuation,  stay, extension or redemption, and the Trustor, for the Trustor, the
Trustor's heirs, devisees, representatives,  successors and assigns, and for any
and all persons ever claiming any interest in the  Encumbered  Property,  to the
extent  permitted by law,  hereby waives and releases all rights of  redemption,
valuation,  appraisement,  stay of  execution,  notice of  election to mature or
declare due the whole of the secured  indebtedness  and marshalling in the event
of  foreclosure  of the liens  hereby  created.  If any law  referred to in this
Section and now in force, of which the Trustor,  the Trustor's heirs,  devisees,
representatives,  successors  and assigns or other person  might take  advantage
despite this Section,  shall hereafter be repealed or cease to be in force, such
law shall not thereafter be deemed to preclude the  application of this Section.
The Trustor  expressly  waives and  relinquishes any and all rights and remedies
which  the  Trustor  may have or be able to  assert by reason of the laws of the
State of California pertaining to the rights and remedies of sureties.

     5.6 Remedies Not  Exclusive.  The Trustee and the Agent,  and each of them,
shall be entitled to enforce  payment and  performance  of any  Indebtedness  or
obligations  secured  hereby and to  exercise  all rights and powers  under this
instrument or under the Credit Agreements or other agreements or any laws now or
hereafter  in  force,  notwithstanding  some  or  all of  the  Indebtedness  and
obligations secured hereby may now or hereafter be otherwise secured, whether by
mortgage,  deed of trust,  pledge,  lien,  assignment or otherwise.  Neither the
acceptance of this  instrument  nor its  enforcement  whether by court action or
pursuant to the power of sale or other powers herein contained,  shall prejudice
or in any manner  affect the  Trustee's or the Agent's  right to realize upon or
enforce any other security now or hereafter held by the Trustee or the Agent, it
being agreed that the Trustee and the Agent, and each of them, shall be entitled
to enforce this  instrument  and any other security now or hereafter held by the
Agent or the  Trustee  in such order and manner as they or either of them may in
their absolute discretion determine. No remedy herein conferred upon or reserved
to the  Trustee or the Agent is  intended to be  exclusive  of any other  remedy
herein or by law provided or permitted,  but each shall be cumulative  and shall
be in  addition  to every  other  remedy  given  hereunder  or now or  hereafter
existing at law or in equity or by statute.  Every power or remedy  given by the
Credit  Agreements  or any  document  executed in  connection  therewith  to the
Trustee or the Agent or to which either of them may be otherwise  entitled,  may
be exercised,  concurrently or independently,  from time to time and as often as
may be deemed  expedient  by the  Trustee  or the  Agent and  either of them may
pursue inconsistent remedies.


                                       28
<PAGE>

                                   ARTICLE 6

                            Miscellaneous Provisions
                            ------------------------

     6.1  Pooling and  Unitization.  The  Trustor  shall have the right,  and is
hereby authorized,  to pool or unitize all or any part of the lands described in
Exhibit A, insofar as relates to the Encumbered  Property,  with adjacent lands,
leaseholds and other interests, when, in the reasonable judgment of the Trustor,
it is  necessary  or  advisable  to do so in  order  to form a  drilling  and/or
production  unit to  facilitate  the  orderly  development  of that  part of the
Encumbered  Property affected thereby, or to comply with the requirements of any
Applicable Law or  governmental  order or regulation  relating to the spacing of
wells or proration of the production therefrom; provided, however, that any unit
so formed for the  production of oil shall not  substantially  exceed 160 acres,
and any unit so formed for the production of gas shall not substantially  exceed
640 acres,  unless a larger area is required to conform to an Applicable  Law or
governmental  order or regulation  relating to the spacing of wells or to obtain
the maximum allowable  production under any Applicable Law or governmental order
or regulation  relating to the proration of  production  therefrom;  and further
provided  that  the  Hydrocarbons  produced  from any  unit so  formed  shall be
allocated among the separately owned tracts or interests  comprising the unit in
a uniform manner consistently  applied.  Any unit so formed may relate to one or
more zones or horizons,  and a unit formed for a particular zone or horizon need
not conform in area to any other unit  relating to a different  zone or horizon,
and a unit  formed for the  production  of oil need not conform in area with any
unit formed for the production of gas.  Immediately  after formation of any such
unit,  the Trustor shall furnish to the Trustee and the Agent a true copy of the
pooling  agreement,  declaration  of pooling or other  instrument  creating such
unit, in such number of  counterparts as the Trustee or the Agent may reasonably
request.  The interest in any such unit attributable to the Encumbered  Property
(or any part thereof)  included  therein  shall become a part of the  Encumbered
Property and shall be subject to the lien hereof in the same manner and with the
same effect as though such unit and the  interest  of the Trustor  therein  were
specifically  described  in Exhibit  A. The  Trustor  may enter into  pooling or
unitization  agreements not  hereinabove  authorized only with the prior written
consent of the Agent, which consent shall not be unreasonably withheld.

     6.2 No  Liability.  The  Trustee  and the Agent shall not be liable for any
error of judgment or act done by the Trustee and the Agent in good faith,  or be
otherwise responsible or accountable under any circumstances whatsoever,  except
for their  negligence  or bad  faith.  The  Trustee  and the Agent  shall not be
personally  liable in case of entry by them, or anyone entering by virtue of the
powers herein granted them, upon the Encumbered Property for debts contracted or
liability or damages  incurred in the  management or operation of the Encumbered
Property.  the  Trustee  and the  Agent  shall  have  the  right  to rely on any
instrument,  document or signature authorizing or supporting any action taken or
proposed  to be taken by them  hereunder,  believed  by them in good faith to be
genuine. The Trustee shall be entitled to reimbursement for expenses incurred by
them in the performance of their duties hereunder and to reasonable compensation
for such of their services hereunder as shall be rendered.


                                       29
<PAGE>

Trustor will, from time to time, pay the compensation due to the Trustee and the
Agent  hereunder  and  reimburse  the Trustee  and the Agent for,  and save them
harmless  against,  any and all liability and expenses  which may be incurred by
them in the performance of their duties.

     6.3 Successor Trustees.  Any Trustee may resign in writing addressed to the
Agent or be  removed  at any time  with or  without  cause by an  instrument  in
writing duly executed by the Agent.  In case of the  resignation or removal of a
Trustee,  one or more  successor  Trustees  may be  appointed  by the  Agent  by
instrument of  substitution  complying with any applicable  requirements of law,
and  in the  absence  of any  such  requirement  without  formality  other  than
appointment and designation in writing.  Such appointment and designation  shall
be full  evidence of the right and  authority  to make the same and of all facts
therein  recited,  and upon the making of any such  appointment  and designation
this conveyance  shall vest in the named  successor  Trustee or Trustees all the
estate and title of the prior Trustee in all of the Encumbered Property,  and he
or  they  shall  thereupon  succeed  to  all  the  rights,  powers,  privileges,
immunities and duties hereby  conferred  upon the prior Trustee.  All references
herein to the Trustee  shall be deemed to refer to the Trustee from time to time
acting hereunder.

     6.4  Actions  or  Advances  by the  Agent or the  Trustee.  Each and  every
covenant  herein  contained shall be performed and kept by the Trustor solely at
the  Trustor's  expense.  If  the  Trustor,  following  notice  and  demand  for
performance  from the Agent or the Trustee but without  prejudice to the Agent's
rights under Articles IV and V hereof,  shall fail to perform or keep any of the
covenants of whatsoever kind or nature contained in this instrument,  the Agent,
or the  Trustee  or any  receiver  appointed  hereunder,  may,  but shall not be
obligated  to,  take  action  and/or  make  advances  to perform the same in the
Trustor's  behalf,  and the Trustor  hereby  agrees to repay the expense of such
action and such  advances  upon demand plus  interest at an annual rate equal to
the Alternate  Base Rate (as defined in the Credit  Agreements) of interest from
time to time accruing on the Notes plus the Applicable Margin (as defined in the
Credit  Agreements)  plus two  percent  (2%)  until  paid or,  in the  event any
promissory  note  evidences  such  indebtedness,  upon the terms and  conditions
thereof.  No such  advance or action by the Agent,  the Trustee or any  receiver
appointed  hereunder  shall be deemed to relieve  the  Trustor  from any default
hereunder.

     6.5  Defense of Claims.  The  Trustor  will  notify the Agent,  in writing,
promptly of the  commencement  of any legal  proceedings  affecting the lien and
security interest hereof or the Encumbered  Property,  or any part thereof,  and
will take such action,  employing  attorneys as set forth in Section 2.4 (j), as
may be necessary or appropriate to preserve the Trustor's, the Trustee's and the
Agent's  rights  affected  thereby  and/or to hold  harmless the Trustee and the
Agent in respect of such  proceedings;  and should the Trustor fail or refuse to
take any such action,  the Trustee or the Agent may,  upon giving prior  written
notice thereof to the Trustor, take such action in behalf and in the name of the
Trustor  and at the  Trustor's  expense.  Moreover,  the Agent or the Trustee on
behalf of the Agent, may take such independent action in connection therewith as
the Agent may in its discretion  deem proper,  the Trustor hereby  agreeing that
all sums  advanced or all expenses  incurred in such actions plus interest at an
annual rate equal


                                       30
<PAGE>

to the  Alternate  Base Rate (as defined in the Credit  Agreements)  of interest
from  time to time  accruing  on the Loan Note plus the  Applicable  Margin  (as
defined in the Credit  Agreements)  plus two percent (2%) until paid,  will,  on
demand, be reimbursed, as appropriate, to the Agent, the Trustee or any receiver
appointed  hereunder or under  Applicable Law. The obligations of the Trustor as
hereinabove   set  forth  in  this  Section  6.3  shall   survive  the  release,
termination, foreclosure or assignment of this instrument or any sale hereunder.

     6.6 Trustee's Powers. At any time, or from time to time,  without liability
therefor and without notice,  upon written request of the Agent and presentation
of this  instrument  and the Notes secured hereby for  endorsement,  and without
affecting the Trustor's personal liability or the effect of this instrument upon
the remainder of the Encumbered Property,  the Trustee may (a) reconvey any part
of the Encumbered  Property,  (b) consent in writing to the making of any map or
plat  thereof,  (c) join in granting  any easement  thereon,  or (d) join in any
extension agreement or any agreement subordinating the lien or security interest
hereof.

     6.7 Agent's  Powers.  Without  affecting  the liability of any other person
liable  for the  payment  of the  Indebtedness  herein  mentioned,  and  without
affecting  perfection  or  priority  of the lien or  security  interest  of this
instrument  against or in any  portion of the  Encumbered  Property  not then or
theretofore  released as security for the full amount of all unpaid obligations,
the Agent may,  from time to time and  without  notice (a) release any person so
liable,  (b)  extend  the  maturity  or  alter  any of  the  terms  of any  such
obligation, (c) grant other indulgences, (d) release or reconvey, or cause to be
released or reconveyed at any time at the Agent's option, any parcel, portion or
all of the  Encumbered  Property,  (e) take or release  any other or  additional
security for any obligation herein mentioned,  or (f) make compositions or other
arrangements with debtors in relation thereto.

     6.8 Reconveyance by the Trustee.  Upon written request of the Agent stating
that all sums  secured  hereby  have  been  paid,  and  upon  surrender  of this
instrument and the Notes to the Trustee for  cancellation and retention and upon
payment by the Trustor of the Trustee's  fees, the Trustee shall reconvey to the
Trustor,   or  the  person  or  persons  legally   entitled   thereto,   without
representation  or warranty,  any portion of the  Encumbered  Property then held
hereunder.  The recitals in such  reconveyance  of any matters or facts shall be
conclusive  proof of the truthfulness  thereof.  The grantee in any reconveyance
may be described as "the person or persons legally entitled thereto".

     6.9  Effect  of  Partial  Release  or  Reconveyance.  If there is a partial
release  or  reconveyance  by the  Trustee  of  any  portion  of the  Encumbered
Property,  the Trustee and the Agent may look to the remainder of the Encumbered
Property  as  security  for  the  full  payment  of  the  Notes  and  all  other
Indebtedness secured by this instrument.

     6.10 Subrogation.  To the extent that proceeds of the Indebtedness are owed
to pay any outstanding lien, charge or prior encumbrance  against the Encumbered
Property,  such  proceeds  have  been or will be  advanced  by the  Agent at the
Trustor's


                                       31
<PAGE>

request and the Agent shall be  subrogated  to any and all rights and liens owed
by  any  owner  or  holder  of  such  outstanding   liens,   charges  and  prior
encumbrances,  irrespective of whether said liens,  charges or encumbrances  are
released.

     6.11 No Merger.  If both the lessor's and lessee's  estates under any lease
or any portion thereof which constitutes a part of the Encumbered Property shall
at any  time  become  vested  in one  owner,  this  instrument  and the lien and
security  interest  created  hereby  shall not be  destroyed  or  terminated  by
application  of the  doctrine  of merger  and,  in such  event,  the Agent shall
continue to have and enjoy all of the rights and  privileges  of the Agent as to
the separate estates. In addition, upon the foreclosure of the lien and security
interest created by this instrument on the Encumbered  Property  pursuant to the
provisions  hereof,  any leases or  subleases  then  existing and created by the
Trustor shall not be destroyed or terminated by application of the law of merger
or as a matter of law or as a result of such foreclosure unless the Agent or any
purchaser at any such foreclosure sale shall so elect. No act by or on behalf of
the Agent or any such purchaser  shall  constitute a termination of any lease or
sublease unless the Agent or such purchaser shall give written notice thereof to
such tenant or subtenant.

     6.12 Renewals,  Amendments and Other  Security.  Renewals and extensions of
the Indebtedness  and  modifications of any kind of the Obligations may be given
at any time and amendments may be made to agreements with third parties relating
to any part of such  Indebtedness  or the  Trustee and the Agent may take or may
now hold other security for the  Indebtedness,  all without notice to or consent
of the  Trustor.  If an  event  of  default  described  in  Section  4.1 of this
instrument  shall have  occurred and be  continuing,  amendments  may be made to
agreements  relating to any part of the Indebtedness or the Encumbered  Property
without notice to or consent of the Trustor. The Trustee or the Agent may resort
first to such other security or any part thereof or first to the security herein
given or any part thereof,  or from time to time to either or both,  even to the
partial or complete abandonment of either security, and such action shall not be
a waiver of any rights conferred by this  instrument,  which shall continue as a
first lien upon and prior perfected security interest in the Encumbered Property
not expressly released until the Notes and all other Indebtedness secured hereby
are fully paid.

     6.13 Construction of this Instrument as an Assignment, etc. This instrument
shall be deemed to be and may be  enforced  from time to time as an  assignment,
chattel mortgage,  contract,  deed of trust,  financing  statement,  real estate
mortgage,  or  security  agreement,  and  from  time  to time as any one or more
thereof.

     6.14 Limitation on Interest.  It is the intent of the Trustor and the Agent
in the  execution  of this  instrument  and the Notes and all other  instruments
securing  payment of the Notes to contract in strict  compliance  with the usury
laws of the State of California and any other jurisdiction whose laws may govern
the loan(s)  evidenced by the Notes. In furtherance  thereof,  the Agent and the
Trustor  stipulate and agree that none of the terms and provisions  contained in
the Credit  Agreements or any document  executed in connection  therewith  shall
ever be construed to create a contract for the use,  forbearance or detention of
money requiring payment of interest at a rate in excess of


                                       32
<PAGE>

the maximum  interest  rate  permitted to be charged by the laws of the State of
California or any other  jurisdiction  whose laws may govern the loans evidenced
by the Notes.  The  Trustor or any  guarantor,  endorser  or other  party now or
hereafter becoming liable for the payment of the Notes shall never be liable for
unearned  interest on the Notes and shall  never be required to pay  interest on
the Notes at a rate in  excess  of the  maximum  interest  that may be  lawfully
charged  under the laws of the  State of  California  or any other  jurisdiction
whose laws may govern the loans  evidenced  by the Notes and the  provisions  of
this Section shall control over all other  provisions of the Notes and any other
instrument  executed in connection  herewith  which may be in apparent  conflict
herewith.  In the event any holder of the Notes shall  collect  monies which are
deemed to  constitute  interest  which would  otherwise  increase the  effective
interest  rate on the Notes to a rate in excess of that  permitted to be charged
by the laws of the State of California or any other  jurisdiction whose laws may
govern the loans  evidenced  by the Notes,  all such sums  deemed to  constitute
interest  in excess of the  legal  rate  shall be  immediately  returned  to the
Trustor upon such determination.

     6.15 Unenforceable  Provisions.  If any provision hereof or of the Notes is
invalid or  unenforceable  in the State of California  or  otherwise,  the other
provisions hereof or of the Notes shall remain in full force and effect, and the
remaining provisions hereof shall be liberally construed in favor of the Trustee
and the Agent in order to effectuate the provisions hereof.

     6.16 Waiver by the Agent. Any and all covenants in this instrument may from
time to time by  instrument  in  writing  signed  by the Agent be waived to such
extent and in such manner as the Agent may desire, but no such waiver shall ever
affect or impair either the Trustee's or the Agent's rights or liens or security
interests  hereunder,  except to the extent  specifically stated in such written
instrument.

     6.17  Successors and Assigns.  This instrument is binding upon the Trustor,
the  Trustor's  successors  and  assigns,  and shall inure to the benefit of the
Trustee,  its  successors,  and the Agent,  its successors and assigns,  and the
provisions hereof shall likewise be covenants running with the land.

     6.18 Article and Section Headings. The article and section headings in this
instrument are inserted for convenience of reference and shall not be considered
a part of this instrument or used in its interpretation.

     6.19  Execution in  Counterparts.  This  instrument  may be executed in any
number of counterparts,  each of which shall for all purposes be deemed to be an
original and all of which are identical,  except that, to facilitate recordation
or filing,  in any  particular  counterpart  portions of Exhibit A hereto  which
describe  properties  situated in  counties  other than the county in which such
counterpart is to be recorded or filed may have been omitted.

     6.20 Special Filing as Financing Statement.  This instrument shall likewise
be a security  agreement and a financing  statement.  This  instrument  shall be
filed for record,  among other places, in the real estate records of each county
in which any part


                                       33
<PAGE>

of the real  property  covered by the oil and gas leases  described in Exhibit A
hereto is situated,  and,  when filed in such  counties  shall be effective as a
financing  statement covering fixtures located on oil and gas properties,  which
oil and gas properties  (and accounts  arising  therefrom) are to be financed at
the wellheads of the wells  located on the real property  described in Exhibit A
hereto. A portion of the goods encumbered hereby are, or are to become, fixtures
as that term is defined in Section  9313 of the Uniform  Commercial  Code of the
State of California. At the option of the Agent, a carbon, photographic or other
reproduction  of this  instrument  or of any  financing  statement  covering the
Encumbered  Property or any portion  thereof  shall be sufficient as a financing
statement and may be filed as such.

     6.21 Notices. Any notice,  request, demand or other instrument which may be
required or  permitted  to be given or served upon the Trustor  pursuant to this
instrument  shall  be  sufficiently  given  and  deemed  given  when  mailed  by
first-class  mail,  addressed  to the  Trustor at the  address  shown  below the
signatures  at the end of this  instrument or to such  different  address as the
Trustor shall have designated by written notice received by the Agent.

     6.22 Request for Notice.  The Trustor hereby  requests a copy of any notice
of default and that any notice of sale  hereunder be mailed to it at the address
set forth on the signature page(s) of this instrument.

     6.23  Statements  by the Trustor.  The Trustor,  within ten (10) days after
being  given  notice by mail,  will  furnish  to the  Agent a written  statement
stating the unpaid  principal of and interest on the Notes and any other amounts
secured by this  instrument  and stating  whether  any offset or defense  exists
against such principal and interest.

     6.24  Acceptance by the Trustee.  The Trustee  accepts this Trust when this
instrument, duly executed and acknowledged,  is made a public record as provided
by law.

     6.25 Release and Waiver. The Trustor hereby waives and releases any and all
rights of contribution,  reimbursement or indemnity it has or may hereafter have
against the Trustee and/or the Agent arising from or relating to this instrument
and/or  the  Encumbered   Property,   including  without  limitation  claims  or
liabilities  relating to  Environmental  Laws.  Notwithstanding  anything to the
contrary  set  forth  in  this  instrument  or  any  other  Loan  Document,  the
obligations  and  liabilities of the Trustor under and pursuant to the Hazardous
Materials   Undertaking  and  Unsecured   Indemnity  are  not  secured  by  this
instrument.

     6.26 No Partnership.  Nothing  contained in this instrument is intended to,
or shall be construed as,  creating to any extent and in any manner  whatsoever,
any partnership,  mining  partnership,  joint venture,  or association among the
Trustor,  the Trustee  and the Agent,  or in any way as to make the Agent or the
Trustee  co-principals  with  the  Trustor  with  reference  to  the  Encumbered
Property, and any inferences to the contrary are hereby expressly negated.


                                       34
<PAGE>

     6.27 Conflict with the Agreement.  In the case of  irreconcilable  conflict
between the provisions of this instrument and those of either Credit  Agreement,
the provisions of the applicable Credit Agreement shall control.

     6.28 The Agent as Agent.  As described  above,  certain  Affiliates  of the
Agent or a Lender,  are or may become parties to certain Hedging Agreements with
the Trustor  and/or  Affiliates  of the  Trustor.  This  instrument  secures the
obligations of the Trustor and such  Affiliates,  as the case may be, under such
Hedging Agreements,  and the parties acknowledge for all purposes that the Agent
acts for  itself and as agent on behalf of such  Affiliates  of the Agent or any
Lender which are so entitled to share in the rights and benefits accruing to the
Agent under this instrument in respect of the Encumbered Property.


                                       35
<PAGE>



     IN WITNESS WHEREOF,  the Trustor has executed or caused to be executed this
Deed of Trust with Power of Sale, Assignment of Production,  Security Agreement,
Financing  Statement and Fixtures  Filing on the day, month and year first above
written.

                               TRUSTOR AND DEBTOR


                                       CALPINE CORPORATION, a Delaware
                                       corporation



                                       By:______________________________________
                                          Title: _______________________________
                                          Printed Name: ________________________






The name and mailing address of the Trustor and Debtor is:

Calpine Corporation
1000 Louisiana Street, Suite 800
Houston, TX 77002


                                                              [CA Deed of Trust]
<PAGE>



                          BENEFICIARY AND SECURED PARTY
                          -----------------------------


                                       THE BANK OF NOVA SCOTIA, as Agent



                                       By:______________________________________
                                          Title:  Managing Director
                                          Printed Name:  Jon Burckin





The name and mailing address of the Secured Party and Beneficiary is:

The Bank of Nova Scotia, as Agent
580 California Street
Suite 2100
San Francisco, CA 94104






The mailing  address of the additional  Secured Party,  Chicago Title  Insurance
Company, as Trustee, is:

Chicago Title Insurance Company
5300 California Avenue
Bakersfield, California 93309
Attention:


                                                              [CA Deed of Trust]
<PAGE>



                                   CALIFORNIA
                                 ACKNOWLEDGMENT

STATE OF _____________________)

COUNTY OF ____________________)


On __________________ before me, __________________________,  a Notary Public in
and for said County and State,  personally appeared  __________________________,
personally  known to me (or proved to me on the basis of satisfactory  evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged  to  me  that  he/she/they   executed  the  same  in  his/her/their
authorized  capacity(ies),   and  that  by  his/her/their  signature(s)  on  the
instrument  the  person(s),  or the entity  upon  behalf of which the  person(s)
acted, executed the instrument.

WITNESS my hand and official seal.

(SEAL)

         Signature:________________________
                   Notary Public


                                                              [CA Deed of Trust]
<PAGE>



                                   CALIFORNIA
                                 ACKNOWLEDGMENT

STATE OF _____________________)

COUNTY OF ____________________)


On __________________ before me, __________________________,  a Notary Public in
and for said County and State, personally appeared Jon Burckin, personally known
to me  (or  proved  to me on  the  basis  of  satisfactory  evidence)  to be the
person(s)  whose  name(s)  is/are   subscribed  to  the  within  instrument  and
acknowledged  to  me  that  he/she/they   executed  the  same  in  his/her/their
authorized  capacity(ies),   and  that  by  his/her/their  signature(s)  on  the
instrument  the  person(s),  or the entity  upon  behalf of which the  person(s)
acted, executed the instrument.

WITNESS my hand and official seal.

(SEAL)

         Signature:________________________
                   Notary Public


                                                              [CA Deed of Trust]
<PAGE>



                 SCHEDULE I To Deed Of Trust With Power Of Sale,
                  Assignment Of Production, Security Agreement,
                     Financing Statement And Fixture Filing,
                             Dated May 1, 2002, From
                  Calpine Corporation, A Delaware Corporation ,
                                   As Trustor
                                       To
                  Chicago Title Insurance Company, As Trustee,
                   And The Bank Of Nova Scotia, As Beneficiary



                           Prior Names of the Trustor
                           --------------------------


Calpine Natural Gas Company L.P.
TGX Corporation
Sheridan Energy, Inc.
Sheridan California Energy, Inc.
Calpine Natural Gas California, Inc.
Calpine Natural Gas Company
Michael Petroleum Corporation


                                      -1-
<PAGE>

                 EXHIBIT A To Deed Of Trust With Power Of Sale,
                  Assignment Of Production, Security Agreement,
                     Financing Statement And Fixture Filing,
                             Dated May 1, 2002, From
                  Calpine Corporation, A Delaware Corporation ,
                                   As Trustor
                                       To
                  Chicago Title Insurance Company, As Trustee,
                   And The Bank Of Nova Scotia, As Beneficiary

                               List of Properties
                               ------------------

1.   Depth  limitations,   unit   designations,   unit  tract  descriptions  and
     descriptions  (including  percentages,  decimals or fractions) of undivided
     leasehold interests, well names, "Operating Interests", "Working Interests"
     and "Net Revenue Interests"  contained in this Exhibit A and the listing of
     any percentage,  decimal or fractional interest in this Exhibit A shall not
     be deemed to limit or otherwise  diminish the interests  being subjected to
     the lien, security interest and encumbrance of this instrument.

2.   Some of the land descriptions in this Exhibit A may refer only to a portion
     of the land covered by a particular  lease.  This instrument is not limited
     to the land  described  in  Exhibit A but is  intended  to cover the entire
     interest  of the Trustor in any lease  described  in Exhibit A even if such
     interest  relates to land not described in Exhibit A.  Reference is made to
     the land  descriptions  contained  in the  documents  of title  recorded as
     described  in this Exhibit A. To the extent that the land  descriptions  in
     this Exhibit A are  incomplete,  incorrect or not legally  sufficient,  the
     land  descriptions  contained in the documents so recorded are incorporated
     herein by this reference.

3.   References in Exhibit A to  instruments  on file in the public  records are
     made for all purposes.  Unless provided otherwise, all recording references
     in Exhibit A are to the  official  real  property  records of the county or
     counties in which the  encumbered  property is located and in which records
     such documents are or in the past have been customarily  recorded,  whether
     Deed  Records,  Oil and Gas Records,  Oil and Gas Lease  Records,  Official
     Records or other records.

4.   A statement herein that a certain  interest  described herein is subject to
     the terms of certain  described or referred to  agreements,  instruments or
     other  matters  shall not  operate to  subject  such  interest  to any such
     agreement,  instrument  or other  matter  except  to the  extent  that such
     agreement, instrument or matter is otherwise valid and presently subsisting
     nor shall such  statement  be deemed to  constitute  a  recognition  by the
     parties hereto that any such agreement, instrument or other matter is valid
     and presently subsisting.

                                                       [Do not detach this page]


                                      A-1
<PAGE>

                 EXHIBIT B To Deed Of Trust With Power Of Sale,
                  Assignment Of Production, Security Agreement,
                     Financing Statement And Fixture Filing,
                             Dated May 1, 2002, From
                  Calpine Corporation, A Delaware Corporation ,
                                   As Trustor
                                       To
                  Chicago Title Insurance Company, As Trustee,
                   And The Bank Of Nova Scotia, As Beneficiary


                             Permitted Encumbrances
                             ----------------------

          All initially-capitalized terms used in this Exhibit B, whether or not
     defined in this instrument, shall have the meanings given such terms in the
     Credit Agreements.

     (a) Liens securing payment of the Obligations  granted pursuant to any Loan
Document and Liens securing  payment of the obligations  granted pursuant to the
loan documents relating to the Existing Credit Agreement;

     (b)  Liens  granted  prior  to the  Effective  Date to  secure  payment  of
Indebtedness  of the type permitted and described in clause (a) of Section 8.2.2
of the Credit Agreements;

     (c) Liens granted to secure payment of  Indebtedness  of the type permitted
and  described  in clause (b) of Section  8.2.2 of the Credit  Agreements  where
recourse is limited as  described  in clause (b) of Section  8.2.2 of the Credit
Agreements;

     (d) Liens for taxes,  assessments or other  governmental  charges or levies
not at the time  delinquent  or  thereafter  payable  without  penalty  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (e) Liens of carriers,  warehousemen,  mechanics, materialmen and landlords
incurred  in the  ordinary  course of  business  for sums not  overdue  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (f) Liens  incurred in the ordinary  course of business in connection  with
workmen's  compensation,  unemployment  insurance or other forms of governmental
insurance  or  benefits,   or  to  secure  performance  of  tenders,   statutory
obligations,  leases and contracts  (other than for borrowed money) entered into
in the ordinary course of business or to secure  obligations on surety or appeal
bonds;

     (g) judgment  Liens in existence  less than 15 days after the entry thereof
or with  respect to which  execution  has been stayed or the payment of which is
covered in full (subject to a customary deductible) by insurance maintained with
responsible insurance companies;


                                      B-1
<PAGE>

     (h) Liens granted to secure payment of  Indebtedness  of the type permitted
and described in clauses (e) and (g) of Section  8.2.2 of the Credit  Agreements
where recourse is limited as described in clauses (e) or (g), as applicable,  of
Section 8.2.2 of the Credit Agreements;

     (i) Zoning restrictions, easements, rights of way, title irregularities and
other similar  encumbrances  which alone or in the  aggregate do not  materially
detract from the value of the property subject thereto;

     (j) Liens on the  property or assets of any  Subsidiary  of the Borrower in
favor of the Borrower;

     (k) Banker's Liens and similar Liens (including  set-off rights) in respect
of bank deposits;

     (l) Landlord's Liens and similar Liens in respect of leased property;

     (m) Liens securing  Attributable  Debt with respect to  outstanding  leases
entered into pursuant to Sale/Leaseback Transactions so long as, with respect to
Sale/Leaseback  Transactions  closing after January 1, 2002,  the amount thereof
does not exceed 10% of the consolidated  tangible assets of the Borrower and its
Subsidiaries; and

     (n) Liens incurred in connection with the extension, renewal or refinancing
of Indebtedness secured by Liens permitted and described in clauses (b), (c) and
(h) of Section 8.2.3 of the Credit Agreements;  provided, however, that (x) such
new Lien shall be limited to all or part of the same  property  that secured the
original Lien and (y) the Indebtedness  secured by such Lien at such time is not
increased (other than by an amount necessary to pay fees and expenses, including
premiums,  related  to  the  refinancing,   refunding,   extension,  renewal  or
replacement of such Indebtedness);  provided,  further, that the limitations set
forth in this clause (n) shall not apply to Liens which are otherwise  permitted
under  Section  8.2.3  of the  Credit  Agreements,  even  if such  Liens  secure
Indebtedness  issued to repay or refinance existing  Indebtedness  permitted and
described in clauses (b), (c) and (h) of Section 8.2.3 of the Credit Agreements.


                                      B-2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>ex10-19.txt
<TEXT>
                                                                   EXHIBIT 10.19










--------------------------------------------------------------------------------


                  MORTGAGE, DEED OF TRUST, ASSIGNMENT, SECURITY
                AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING

                                      FROM

                              CALPINE CORPORATION,
                             a Delaware corporation
                         (Taxpayer I.D. No. 77-0212977),
                              Trustor and Mortgagor

                                       TO

                              KEMP LEONARD, Trustee

                                       AND

                               JOHN QUICK, Trustee

                                       AND

                            THE BANK OF NOVA SCOTIA,
                        (Taxpayer I.D. No. 13-494-1099),
                            for itself and as Agent,
                                   Beneficiary

                             Dated as of May 1, 2002


--------------------------------------------------------------------------------

"THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS."

"THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES."

"THOSE  PORTIONS OF THE MORTGAGED  PROPERTY  WHICH ARE  AS-EXTRACTED  COLLATERAL
(INCLUDING, WITHOUT LIMITATION, OIL AND GAS), AND THE ACCOUNTS RELATING THERETO,
WILL BE  FINANCED  AT THE  WELLHEADS  OF THE  WELLS  LOCATED  ON THE  PROPERTIES
DESCRIBED IN EXHIBIT A HERETO,  AND THIS FINANCING  STATEMENT IS TO BE FILED FOR
RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS."


<PAGE>

"MORTGAGOR  HAS AN  INTEREST OF RECORD IN THE REAL  ESTATE  CONCERNED,  WHICH IS
DESCRIBED IN EXHIBIT A HERETO."

"SOME OF THE PERSONAL PROPERTY  CONSTITUTING A PORTION OF THE MORTGAGED PROPERTY
IS OR IS TO BE AFFIXED TO THE PROPERTIES  DESCRIBED IN EXHIBIT A HERETO AND THIS
FINANCING  STATEMENT IS TO BE FILED FOR RECORD,  AMONG OTHER PLACES, IN THE REAL
ESTATE RECORDS."

"A POWER OF SALE HAS BEEN  GRANTED IN THIS  MORTGAGE.  A POWER OF SALE MAY ALLOW
THE MORTGAGEE TO TAKE THE MORTGAGED  PROPERTY AND SELL IT WITHOUT GOING TO COURT
IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR UNDER THIS MORTGAGE."

"MORTGAGOR AGREES BY EXPRESS LANGUAGE IN THIS MORTGAGE TO SUBJECT THE TRUST REAL
ESTATE TO THE TERMS OF THE DEED OF TRUST ACT (SECTIONS  48-10-1  THROUGH 21 NMSA
(1978))."

THIS INSTRUMENT WAS PREPARED BY AND
WHEN RECORDED AND/OR FILED
RETURN TO:

Kevin L. Shaw, Esq.
Mayer, Brown, Rowe & Maw
350 South Grand Avenue
Suite 2500
Los Angeles, California  90071


<PAGE>


28528881.2 050302 1127P  96247903                         -29-

                  MORTGAGE, DEED OF TRUST, ASSIGNMENT, SECURITY
                AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING


     THIS MORTGAGE,  DEED OF TRUST,  ASSIGNMENT,  SECURITY AGREEMENT,  FINANCING
STATEMENT AND FIXTURE FILING (this "Mortgage"), dated as of May 1, 2002, is from
CALPINE CORPORATION,  a Delaware corporation (hereinafter called the "Mortgagor"
or  "Borrower"),  to KEMP  LEONARD  and JOHN QUICK,  as  Trustees  (hereinafter,
collectively,   called   the   "Trustees"),   and  THE   BANK  OF  NOVA   SCOTIA
("Scotiabank"),  a Canadian  chartered  bank  having  offices at 580  California
Street,  Suite  2100,  San  Francisco,   CA  94104,  for  itself  and  as  agent
(hereinafter called the "Agent") for the Lender Parties (as defined below).

                                   ARTICLE I

                            Recitals and Definitions
                            ------------------------

     1.1 Borrower, certain institutional lenders (individually,  a "2002 Lender"
and collectively,  the "2002 Lenders") and Scotiabank have entered into a Credit
Agreement,  dated as of  March  8,  2002  (herein,  as the same may be  amended,
modified or supplemented  from time to time,  called the "2002 Loan Agreement"),
pursuant to which the 2002  Lenders  have  agreed to make loans to Borrower  and
issue or cause to be  issued  letters  of credit  for the  benefit  of  Borrower
(individually,  a "2002 Letter of Credit" and collectively, the "2002 Letters of
Credit")  in amounts not to exceed at any one time  outstanding  $1,600,000,000,
and Borrower,  to evidence its  indebtedness  to the 2002 Lenders under the 2002
Loan Agreement,  has executed and delivered (or will execute and deliver) to the
2002 Lenders its secured  promissory notes in the aggregate,  original principal
amount of $1,600,000,000, to mature not later than May 24, 2003 (individually, a
"2002 Loan Note" and collectively,  the "2002 Loan Notes"),  the 2002 Loan Notes
being payable to the order of the 2002 Lenders, bearing interest as provided for
therein,   and  containing   provisions  for  payment  of  attorneys'  fees  and
acceleration of maturity in the event of default, as therein set forth.

     1.2 Borrower,  certain  institutional lenders  (individually,  an "Existing
Lender" and  collectively,  the "Existing  Lenders";  and together with the 2002
Lenders,  the "Lenders")  and Scotiabank  have entered into a Second Amended and
Restated Credit  Agreement dated as of May 23, 2000 (herein,  as the same may be
amended,  modified,  or  supplemented  from time to time,  called the  "Existing
Credit  Agreement")  pursuant to which the Existing  Lenders have agreed to make
loans to Borrower  and issue or cause to be issued any letters of credit for the
benefit  of  Borrower   (individually,   an  "Existing  Letter  of  Credit"  and
collectively,  the "Existing Letters of Credit") in amounts not to exceed at any
one time  $400,000,000,  and  Borrower,  to  evidence  its  indebtedness  to the
Existing Lenders under the Existing Credit Agreement, has executed and delivered
to the Existing  Lenders its secured  promissory  notes to mature not later than
May 24,  2003  (individually,  an  "Existing  Loan Note" and  collectively,  the
"Existing  Loan  Notes"),  the Existing Loan Notes being payable to the order of
the Existing Lenders,  bearing interest as provided for therein,  and containing
provisions for payment of attorneys' fees


                                      -1-
<PAGE>

and acceleration of maturity in the event of default,  as therein set forth. The
2002 Loan Agreement and the Existing  Credit  Agreement are herein  collectively
called the "Credit  Agreements." The 2002 Loan Notes and the Existing Loan Notes
are herein  individually  called a "Loan Note" and collectively called the "Loan
Notes". The 2002 Letters of Credit and the Existing Letters of Credit are herein
individually called a "Letter of Credit" and collectively called the "Letters of
Credit".

     1.3 It is a condition  precedent to the  obligation  of the Lenders to make
Loans  under the Credit  Agreements,  to issue or cause to be issued  Letters of
Credit under the Credit  Agreements  and to the  obligations  of the Agent,  the
Lenders or the Lender Parties (as the case may be), that the Mortgagor  executes
and delivers this instrument.

     1.4 For all  purposes  of  this  Mortgage,  unless  the  context  otherwise
requires:

          A. "Affiliate" of any Person means any other Person which, directly or
     indirectly, controls, is controlled by or is under common control with such
     Person  (excluding any trustee under, or any committee with  responsibility
     for  administering,  any Plan (as  defined  in the Credit  Agreements)).  A
     Person shall be deemed to be "controlled by" any other Person if such other
     Person possesses, directly or indirectly, power

               (a) to vote  10% or more of the  securities  (on a fully  diluted
          basis) having  ordinary  voting power for the election of directors or
          managing general partners; or

               (b) to  direct  or cause  the  direction  of the  management  and
          policies of such Person whether by contract or otherwise.

          B. "Agent" is defined in the Preamble of this Mortgage.

          C.  "Applicable  Law" means with respect to any Person or matter,  any
     federal, state, regional, tribal or local statute, law, code, rule, treaty,
     convention,   application,   order,  decree,  consent  decree,  injunction,
     directive,  determination or other  requirement  (whether or not having the
     force of law) relating to such Person or matter and, where applicable,  any
     interpretation thereof by a Governmental Authority having jurisdiction with
     respect  thereto  or  charged  with the  administration  or  interpretation
     thereof.

          D.  "Borrower" is defined in the Preamble of this  Mortgage.

          E. "Credit Agreements" is defined in Section 1.2 of this Mortgage.

          F. "Deed of Trust" means each mortgage,  deed of trust,  or other real
     property collateral  security instrument in a form reasonably  satisfactory
     to the Agent,  executed and delivered pursuant to Section 8.1.8 of the 2002
     Credit Agreement, as amended, supplemented,  restated or otherwise modified
     from time to time, including, without limitation, this Mortgage.


                                      -2-
<PAGE>

          G. "Event of Default"  means any happening or occurrence  described in
     Article V hereinbelow,  and any other happening or occurrence  specifically
     designated  herein or in any of the other  Security  Documents  (as defined
     herein) as constituting an event of default thereunder.

          H.  "Environmental   Laws"  means  any  and  all  present  and  future
     Applicable  Laws  issued,  promulgated  or entered  thereunder  relating to
     pollution or  protection  of the  environment,  including  laws relating to
     reclamation   of  land  and  waterways  and  laws  relating  to  emissions,
     discharges,  releases or threatened  releases of pollutants,  contaminants,
     chemicals, or industrial,  toxic or hazardous substances or wastes into the
     environment  (including,  without  limitation,  ambient air, surface water,
     ground water, land surface or subsurface  strata) or otherwise  relating to
     the  manufacture,   processing,   distribution,  use,  treatment,  storage,
     disposal, transport or handling of pollutants, contaminants,  chemicals, or
     industrial, toxic or hazardous substances or wastes.

          I. "Existing  Assignment  Agreement" means that certain Assignment and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California limited  partnership,  pursuant to Section 6.1.3 of the Existing
     Credit  Agreement,  substantially  in the form of Exhibit F to the Existing
     Credit  Agreement,  as  amended,  supplemented,  amended  and  restated  or
     otherwise modified from time to time.

          J.  "Existing  Credit  Agreement"  is defined  in Section  1.2 of this
     Mortgage.

          K. "Existing Lenders" is defined in Section 1.2 of this Mortgage.

          L.  "Existing  Letters of  Credit"  is defined in Section  1.2 of this
     Mortgage.

          M. "Existing Loan Documents" means the Existing Credit Agreement,  the
     Existing  Loan Notes,  the Existing  Assignment  Agreement,  and each other
     relevant  agreement,  document  or  instrument  (including  the fee  letter
     described in Section 3.3.2 of the Existing Credit  Agreement)  delivered in
     connection therewith.

          N. "Existing Loan Notes" is defined in Section 1.2 of this Mortgage.

          O. "Fee Letter"  means the fee letter  agreement  described in Section
     3.3.2 of the 2002 Credit Agreement.

          P.  "Governmental   Authority"  means  any  and  all  courts,  boards,
     agencies, commissions,  offices or authorities of any nature whatsoever for
     any governmental unit (federal, state, county, district,  municipal,  city,
     tribe or otherwise)  whether now or hereafter in existence charged with the
     administration, interpretation or enforcement of any Applicable Law.


                                      -3-
<PAGE>

          Q.  "Guaranty"  means  the  guaranty  executed  and  delivered  by the
     Guarantors  pursuant  to  Section  6.1.3  of  the  2002  Credit  Agreement,
     substantially in the form of Exhibit H thereto, as amended, supplemented or
     otherwise modified from time to time.

          R.  "Hazardous  Materials  Indemnity"  means  that  certain  hazardous
     materials  indemnity  executed and  delivered  by the Borrower  pursuant to
     Section  8.1.8 of the 2002  Credit  Agreement,  as  amended,  supplemented,
     restated or otherwise modified from time to time.

          S. "Hedging  Agreements"  means:  (a) interest  rate swap  agreements,
     basis  swap  agreements,   interest  rate  cap  agreements,   forward  rate
     agreements,  interest  rate  floor  agreements  and  interest  rate  collar
     agreements,  and all other  agreements or arrangements  designed to protect
     such Person against  fluctuations  in interest  rates or currency  exchange
     rates,  and (b) forward  contracts,  options,  futures  contracts,  futures
     options,  commodity swaps, commodity options,  commodity collars, commodity
     caps, commodity floors and all other agreements or arrangements designed to
     protect such Person against fluctuations in the price of commodities.

          T.  "Hedging  Obligations"  means  with  respect  to any  Person,  all
     liabilities  (including  without  limitation  obligations  and  liabilities
     arising in connection with or as a result of early or premature termination
     of a Hedging  Agreement,  whether or not occurring as a result of a default
     thereunder) of such Person under a Hedging Agreement.

          U. "Hydrocarbons"  means collectively,  oil, gas, casinghead gas, drip
     gasoline, natural gasoline, condensate,  distillate and all other liquid or
     gaseous  hydrocarbons and related minerals and all products  therefrom,  in
     each case whether in a natural or a processed state.

          V.  "Indebtedness",  "Note"  and  "Notes"  shall  have the  respective
     meanings set forth in Section 2.2 of this Mortgage.

          W. "Indemnification Claim" is defined in Section 4.6 of this Mortgage.

          X. "Indemnified Person" is defined in Section 3.10 of this Mortgage.

          Y. "Joint Operating  Agreements" shall mean, with respect to the lands
     described in Exhibit A, the respective  operating  agreement  burdening the
     lands described in Exhibit A.

          Z. "lands  described in Exhibit A" shall  include the real property or
     other  interest  in any  lands  which are  either  described  in  Exhibit A
     attached hereto or the description of which is incorporated in Exhibit A by
     reference to an instrument or document containing in, or referring to, such
     a description,  and shall also include any lands now or hereafter  unitized
     or  pooled  with  lands  which are  either  described  in  Exhibit A or the
     description of which is incorporated in


                                      -4-
<PAGE>

     Exhibit A by reference  and Fixtures and all rights,  titles and  interests
     appurtenant  thereto.   References  to  Exhibit  A  shall  include,   where
     applicable, Exhibit A-1 as well.

          AA. "Leases" means any and all leases  (including  without  limitation
     oil and gas leases and oil, gas and other minerals leases),  surface leases
     or easements, subleases, licenses,  concessions,  operating rights or other
     agreements  (written or verbal,  now or hereafter in effect)  which grant a
     possessory  interest  in and to,  or the  right  to  explore,  use,  lease,
     license,  possess, produce, process, store and transport Hydrocarbons from,
     operate from, or otherwise enjoy, the Mortgaged Property, together with all
     amendments, modifications, extensions and renewals thereof.

          BB.  "Legal  Requirements"  means (i) any and all  present  and future
     judicial  decisions,  statutes,  rulings,  rules,  regulations,   licenses,
     decisions,   orders,   injunctions,   decrees,  permits,   certificates  or
     ordinances  of  any  Governmental   Authority  in  any  way  applicable  to
     Mortgagor,  or  the  Mortgaged  Property,  including  the  ownership,  use,
     occupancy,  operation,  maintenance,  repair or reconstruction thereof, and
     any other Applicable Law enacted by any Governmental  Authority relating to
     health or the  environment,  (ii)  Mortgagor's  presently  or  subsequently
     effective  Organic  Documents,  (iii) any and all Leases,  (iv) any and all
     leases  and  other  contracts  (written  or  oral) of any  nature  to which
     Mortgagor,  or the  Mortgaged  Property  may be  bound  and (v) any and all
     restrictions,  restrictive covenants or zoning,  present and future, as the
     same may apply to the Mortgaged Property.

          CC.  "Lender  Party" or "Lender  Parties"  means,  as the  context may
     require,  the Agent,  any Lender and any Affiliate of any Lender that is an
     issuer under a letter of credit,  and each of their respective  successors,
     transferees and assigns.

          DD. "Loan  Documents"  means the Existing Loan  Documents and the 2002
     Loan Documents.

          EE. "Loan Note" is defined in Section 1.2 of this Mortgage.

          FF. "Losses" is defined in Section 3.10 of this Mortgage.

          GG.  "Maximum  Lawful  Rate"  means the  maximum  nonusurious  rate of
     interest that may be received,  charged or contracted for under  Applicable
     Law from time to time in effect.

          HH.  "Mortgaged  Property" means the properties,  rights and interests
     hereinafter described in Section 1.5 and defined as the Mortgaged Property.

          II. "Mortgagor" is defined in the Preamble of this Mortgage.


                                      -5-
<PAGE>

          JJ.  "Obligations"  means  any and all of the  covenants,  warranties,
     representations   and   other   obligations   (other   than  to  repay  the
     Indebtedness)  made or undertaken by Mortgagor or others to the Agent,  the
     Lender  Parties,  the  Trustees  or  others  as set  forth  in  the  Credit
     Agreements or other Loan Documents.

          KK. "oil and gas leases"  shall  include oil, gas and mineral  leases,
     subleases and assignments thereof, operating rights, and shall also include
     subleases and assignments of operating rights.

          LL. "Operating  Equipment" means all surface or subsurface  machinery,
     goods,  equipment,  fixtures,  inventory,  facilities,  supplies  or  other
     property of whatsoever  kind or nature  (excluding  drilling rigs,  trucks,
     automotive  equipment  or other  property  taken to the premises to drill a
     well or for other similar  temporary  uses) now or hereafter  located on or
     under any of the lands  described  in  Exhibit A which are  useful  for the
     production,  gathering, treatment, processing, storage or transportation of
     Hydrocarbons  (together with all  accessions,  additions and attachments to
     any thereof),  including, but not by way of limitation,  all oil wells, gas
     wells, water wells,  injection wells, casing,  tubing, tubular goods, rods,
     pumping  units  and  engines,   christmas   trees,   platforms,   derricks,
     separators,  compressors,  gun barrels, flow lines, tanks, gas systems (for
     gathering, treating and compression), pipelines (including gathering lines,
     laterals  and  trunklines),   chemicals,   solutions,  water  systems  (for
     treating, disposal and injection), steam generation and injection equipment
     and  systems,  power  plants,  poles,  lines,  transformers,  starters  and
     controllers,  machine  shops,  tools,  storage yards and  equipment  stored
     therein, buildings and camps, telegraph,  telephone and other communication
     systems, roads, loading docks, loading racks and shipping facilities.

          MM.  "Organic   Documents"   means  the  Articles  of   Incorporation,
     Certificate of  Incorporation,  limited  liability  company  certificate of
     formation and regulations or operating  agreement,  partnership  agreement,
     limited partnership agreement,  joint venture agreement, trust agreement or
     other  similar  documents  governing  the  organization  and operation of a
     business association.

          NN. "Permits" means all authorizations, approvals, permits, variances,
     land use entitlements, consents, licenses, franchises and agreements issued
     by or  entered  into  with  any  Governmental  Authority  now or  hereafter
     required for all stages of exploration, developing, operating, and plugging
     and  abandoning oil and gas wells  (including,  without  limitation,  those
     shown on Exhibit A) on all or any part of the lands  described in Exhibit A
     (or any other lands any production  from which, or profits or proceeds from
     such  production,  is attributed to any interest in the lands  described in
     Exhibit A).

          OO. "Permitted  Encumbrances" means the outstanding liens,  easements,
     building  lines,  restrictions,   exceptions,   reservations,   conditions,
     limitations,  security interests and other matters (if any) as reflected on
     Exhibit "B"


                                      -6-
<PAGE>

     attached hereto and the lien and security interests created by the Security
     Documents.

          PP.  "Person"  means any  natural  person,  corporation,  partnership,
     limited  liability   company,   firm,   association,   trust,   government,
     governmental  agency or any other entity,  whether acting in an individual,
     fiduciary or other capacity.

          QQ.  "Personalty"  means  all of the  right,  title  and  interest  of
     Mortgagor  now  owned  or  hereafter  acquired  in and  to  all  furniture,
     furnishings,  Equipment,  machinery,  Goods,  General  Intangibles,  money,
     Accounts,   receivables,   Contract  Rights,   Inventory,  all  refundable,
     returnable or  reimbursable  fees,  deposits or other funds or evidences of
     credit or  indebtedness  deposited  by or on behalf of  Mortgagor  with any
     Governmental  Authority,  agencies,  boards,  corporations,   providers  of
     utility services,  public or private,  including specifically,  but without
     limitation,  all refundable,  returnable or reimbursable tap fees,  utility
     deposits,  commitment  fees and development  costs,  and all other personal
     property  (other than the  Fixtures) of any kind or character as defined in
     and subject to the provisions of Article 9 of the Uniform  Commercial Code,
     now or hereafter located upon, within or about, or used in connection with,
     the  lands   described  in  Exhibit  A,  together  with  all   accessories,
     replacements  and  substitutions  thereto  or  therefor  and  the  Proceeds
     thereof.

          RR.  "Pledge  Agreements"  means the pledge  agreements  executed  and
     delivered  pursuant to Section 6.1.4 of the 2002 Credit Agreement,  as such
     agreements  may be amended,  supplemented,  restated or otherwise  modified
     from time to time.

          SS.  "Production  Sale Contracts"  means  contracts now in effect,  or
     hereafter  entered  into by  Mortgagor,  or  entered  into  by  Mortgagor's
     predecessors  in interest,  for the sale,  purchase,  exchange,  gathering,
     transportation,  treating or processing of  Hydrocarbons  produced from the
     lands described in Exhibit A.

          TT. "Rents and  Revenues"  means all of the rents,  revenues,  income,
     proceeds,  profits  and other  benefits  paid or  payable by parties to the
     Leases other than  Mortgagor  for using,  leasing,  licensing,  possessing,
     operating,  selling or otherwise enjoying the Mortgaged Property, including
     the proceeds from the sale of Hydrocarbons.

          UU. "Security Documents" means the Notes, this Mortgage, the financing
     statements and any and all other  instruments now or hereafter  executed by
     Mortgagor or any other person or party to evidence or secure the payment of
     the  Indebtedness or the performance and discharge of the  Obligations,  as
     any of the foregoing may be amended, renewed or


                                      -7-
<PAGE>

     extended.  Notwithstanding  that the  definition of Security  Documents and
     various of the components  thereof  include  documents that may be amended,
     renewed  or  extended,  such  definition  shall in no way be  construed  to
     suggest  that any party has agreed  (or is  obligated)  to amend,  renew or
     extend them.

          VV. "2002  Assignment  Agreement"  means that certain  Assignment  and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California  limited  partnership,  pursuant  to  Section  6.1.8 of the 2002
     Credit  Agreement,  substantially  in the  form of  Exhibit  K  hereto,  as
     amended, supplemented, amended and restated or otherwise modified from time
     to time.

          WW. "2002 Loan Agreement" is defined in Section 1.1 of this Mortgage.

          XX. "2002 Lenders" is defined in Section 1.1 of this Mortgage.

          YY.  "2002  Letters of  Credit"  is  defined  in  Section  1.1 of this
     Mortgage.

          ZZ. "2002 Loan Documents"  means the 2002 Credit  Agreement,  the 2002
     Loan Notes, the Pledge  Agreements,  the Guaranty,  the Deeds of Trust, the
     2002  Assignment  Agreement,  the Hazardous  Materials  Indemnity,  the Fee
     Letter, and each other relevant agreement, document or instrument delivered
     in connection therewith.

          AAA. "2002 Loan Notes" is defined in Section 1.1 of this Mortgage.

          BBB.  "Taxes"  means all real  property and personal  property  taxes,
     production taxes, assessments,  permit fees, water, gas, sewer, electricity
     and other utility rates and charges,  charges for any easement,  license or
     agreement  maintained  for the benefit of the Mortgaged  Property,  and all
     other taxes,  charges and assessments and any interest,  costs or penalties
     with respect thereto,  of any kind and nature  whatsoever which at any time
     prior to or after the execution hereof may be charged,  assessed, levied or
     imposed  upon the  Mortgaged  Property  or the  Rents and  Revenues  or the
     ownership, use, occupancy or enjoyment thereof.

          CCC.   "Transportation   Agreements"   shall  mean  any  contracts  or
     agreements entered into from time to time by Mortgagor,  or entered into by
     Mortgagor's  predecessors in interest,  relating to the  transportation  of
     Hydrocarbons,   as  any  such   agreement   or  contract  may  be  amended,
     supplemented, restated or otherwise modified from time to time.

          DDD.  "Trustees"  means the  Trustees  defined in the Preamble of this
     Mortgage and any  successor or substitute  trustee  appointed in accordance
     with the terms hereof.

          EEE.  "Water  Rights"  means  (including   without   limitation  those
     described  in Exhibit A hereto) all now or  hereafter  existing or acquired
     water and water rights,  reservoirs and reservoir rights, ditches and ditch
     rights,  wells and well rights,  whether  evidenced or initiated by permit,
     decree,   well  registration,   appropriation  not  decreed,   water  court
     application, shares of stock or other


                                      -8-
<PAGE>

     interests  in mutual  ditch or  reservoir  companies  or  carrier  ditch or
     reservoir  companies  or  otherwise,  appertaining  or  appurtenant  to  or
     beneficially  used or useful in  connection  with the  lands  described  in
     Exhibit A, together with all pumps,  well  casings,  wellheads,  electrical
     installations,  pumphouses, meters, monitoring wells and systems, measuring
     devices, pipes, pipelines,  and other structures or personal property which
     are or may be used to produce, regulate, measure, distribute, store, or use
     water  from the said  water  and water  rights,  reservoirs  and  reservoir
     rights, ditches and ditch rights, wells and well rights.

          FFF. "Uniform Commercial Code" means the Uniform Commercial Code as in
     effect  from time to time in the State of New York or any other  applicable
     state,  and  the  terms  "Accounts",   "Account   Debtor",   "As  Extracted
     Collateral",   "Chattel  Paper",  "Contract  Rights",  "Deposit  Accounts",
     "Documents",  "Electronic Chattel Paper",  "General Intangibles",  "Goods",
     "Equipment",  "Fixtures", "Inventory",  "Instruments", and "Proceeds" shall
     have  the  respective  meanings  assigned  to  such  terms  in the  Uniform
     Commercial Code.

     1.5 Grant. NOW, THEREFORE, Mortgagor, to secure the full and timely payment
of the  Indebtedness  and the full and timely  performance  and discharge of the
Obligations,  has granted,  bargained,  sold,  warranted,  mortgaged,  assigned,
transferred  and  conveyed,  and by these  presents does grant,  bargain,  sell,
warrant, mortgage, assign, pledge and hypothecate,  transfer and convey unto the
Trustees,  IN TRUST,  WITH POWER OF SALE,  for the use and benefit of the Agent,
for itself and as agent for the Lender Parties, all Mortgagor's right, title and
interest,  whether  now  owned  or  hereafter  acquired,  in  and  to all of the
hereinafter  described  properties,  rights and interests;  and, insofar as such
properties,  rights and  interests  consist of Equipment,  General  Intangibles,
Accounts,  As  Extracted  Collateral,   Contract  Rights,  Inventory,  Fixtures,
Proceeds of  collateral  or any other  personal  property of a kind or character
defined in, or subject to the applicable  provisions of, the Uniform  Commercial
Code  (as in  effect  from  time to time in the  appropriate  jurisdiction  with
respect to each of said  properties,  rights and  interests),  Mortgagor  hereby
grants to said Trustees, for the use and benefit of the Agent, for itself and as
agent for the Lender Parties,  a security interest therein to the full extent of
Mortgagor's  legal and  beneficial  interest  therein,  now  owned or  hereafter
acquired, namely:

          (a) the lands  described in Exhibit A, and Leases,  the fee,  mineral,
     overriding  royalty,  royalty and other  interests  which are  described in
     Exhibit A,

          (b) the  presently  existing  and (subject to the terms of Section 3.7
     hereof) hereafter arising unitization, unit operating,  communitization and
     pooling agreements and the properties covered and the units created thereby
     (including, without limitation, all units formed under orders, regulations,
     rules,  approvals,  decisions or other  official  acts of any  Governmental
     Authority) which are specifically described in Exhibit A or which relate to
     any of the properties and interests specifically described in Exhibit A,


                                      -9-
<PAGE>

          (c) the  Hydrocarbons  which are in,  under,  upon,  produced or to be
     produced from or which are  attributed or allocated to the lands  described
     in Exhibit A,

          (d) the Production Sale Contracts,

          (e) the Joint Operating Agreements,

          (f) the Transportation Agreements,

          (g) the Operating Equipment,

          (h) the Permits,

          (i) the Water Rights,

          (j) the Hedging Agreements,

          (k) the Leases,

          (l) the Personalty,

          (m) the Rents and Revenues,

          (n)  without  duplication  of any  other  provision  of this  granting
     clause, Equipment, Fixtures and other Goods necessary or used in connection
     with,   and  Inventory,   Accounts,   As  Extracted   Collateral,   General
     Intangibles,  Contract Rights, Chattel Paper, Deposit Accounts,  Documents,
     Electronic  Chattel  Paper,  Instruments  and  Proceeds  arising  from,  or
     relating  to, the  properties  and other  interests  described in Exhibit A
     (including Exhibit A-1),

          (o) any and all liens and security interests in Hydrocarbons  securing
     the payment of proceeds  from the sale of  Hydrocarbons,  including but not
     limited to those liens and security interests provided for in Section 9.343
     of the Texas  Business  and  Commerce  Code or  similar  statutes  of other
     jurisdictions or any successor statutes,

together with any and all corrections or amendments to, or renewals,  extensions
or ratifications  of, or replacements or substitutions  for, any of the same, or
any instrument relating thereto, and all accounts,  contracts,  contract rights,
options,  nominee  agreements,  unitization  or  pooling  agreements,  operating
agreements  and  unit  operating  agreements,   processing  agreements,   farmin
agreements, farmout agreements, joint venture agreements, partnership agreements
(including mining partnerships), exploration agreements, bottom hole agreements,
dry  hole  agreements,  support  agreements,  acreage  contribution  agreements,
surface use and surface damage agreements,  net profits  agreements,  production
payment  agreements,  Hedging Agreements,  insurance  policies,  title opinions,
title abstracts, title materials and information, files, records, writings, data
bases, information, systems, logs, well cores,


                                      -10-
<PAGE>

fluid samples, production data and reports, well testing data and reports, maps,
seismic  and   geophysical,   geological  and  chemical  data  and  information,
interpretative and analytical reports of any kind or nature (including,  without
limitation,  reserve  studies and reserve  evaluations),  computer  hardware and
software and all documentation therefor or relating thereto (including,  without
limitation,  all  licenses  relating  to or  covering  such  computer  hardware,
software and/or  documentation),  trade secrets,  trademarks,  service marks and
business names and the goodwill of the business  relating  thereto,  copyrights,
copyright registrations, unpatented inventions, patent applications and patents,
rights-of-way,   franchises,  bonds,  easements,   servitudes,  surface  leases,
permits,  licenses,  tenements,   hereditaments,   appurtenances,   concessions,
occupancy  agreements,  privileges,  development  rights,  condemnation  awards,
claims against third parties,  general intangibles,  rents,  royalties,  issues,
profits,  products and proceeds,  whether now or hereafter  existing or arising,
used or useful in connection with, covering,  relating to, or arising from or in
connection with, any of the aforesaid items (a) through (o), inclusive,  in this
granting clause  mentioned,  and all other things of value and incident  thereto
(including,  without  limitation,  any  and all  liens,  lien  rights,  security
interests and other  properties,  rights and interests) which Mortgagor might at
any time have or be  entitled  to,  but  excluding  any data or  contracts  with
respect to which  mortgaging  or  granting  of a lien or a security  interest is
prohibited by existing third party agreements,

all the aforesaid properties,  rights and interests, together with any additions
thereto  which  may be  subjected  to the lien  and  security  interest  of this
Mortgage by means of supplements hereto, being hereinafter, collectively, called
the "Mortgaged Property".

     Subject,  however, to (i) Permitted  Encumbrances  (including all presently
existing royalties,  overriding royalties,  payments out of production and other
burdens   which  are  referred  to  in  Exhibit  A  and  which  are  taken  into
consideration in computing any percentage, decimal or fractional interest as set
forth in Exhibit A), (ii) the  assignment of production  contained in Article IV
hereof,  but only insofar and so long as said  assignment  of  production is not
inoperative under the provisions of Section 4.5 hereof,  and (iii) the condition
that none of the Trustees,  the Agent nor any of the other Lender  Parties shall
be liable in any  respect for the  performance  of any  covenant  or  obligation
(including,  without limitation,  measures required to comply with Environmental
Laws) of Mortgagor in respect of the Mortgaged Property.

     TO HAVE AND TO HOLD  the  Mortgaged  Property  unto  the  Trustees  for the
benefit of the Agent, for itself and as agent for the Lender Parties, forever to
secure  the  payment  of the  Indebtedness  and to secure  the  performance  and
discharge of the Obligations of Mortgagor herein and therein contained.

     Mortgagor, in consideration of the premises and to induce the Agent and the
Lender  Parties,  as the case may be, to make the Loans and issue the Letters of
Credit, hereby covenants and agrees with each of the Trustees and the Agent, for
itself and as agent for the Lender Parties, as follows:


                                      -11-
<PAGE>

                                   ARTICLE II

                              Indebtedness Secured
                              --------------------

     2.1 Items of Indebtedness  Secured. The following items of indebtedness are
secured hereby:

          (a) The Loan Notes (including future advances to be made thereunder by
     the Agent or the Lenders), the Letter of Credit Outstandings (as defined in
     the  Credit  Agreements)  and all  other  obligations  and  liabilities  of
     Mortgagor under the Credit Agreements;

          (b) All indebtedness  and future advances  evidenced by any promissory
     notes  evidencing any  additional  loans which the Agent or the Lenders may
     from time to time make to Mortgagor,  if any, the Agent and the Lenders not
     being obligated, however, to make such additional loans;

          (c) Any sums  advanced or expenses or costs  incurred by the Trustees,
     the Agent or the Lender Parties,  or by any receiver  appointed  hereunder,
     which are made or incurred  pursuant to, or permitted by, the terms hereof,
     plus  interest  thereon at the rate herein  specified or  otherwise  agreed
     upon,  from the date of the advances or the  incurring of such  expenses or
     costs until reimbursed;

          (d) Any and all other  indebtedness  of Mortgagor or any  Affiliate of
     Mortgagor to the Agent or any Lender Party now or hereafter owing,  whether
     direct or indirect,  primary or secondary,  fixed or  contingent,  joint or
     several,   regardless  of  how  evidenced  or  arising,  including  without
     limitation, all Letters of Credit; and

          (e) Any  extensions,  refinancings,  modifications  or renewals of all
     such indebtedness described in subparagraphs (a) through (d) above, whether
     or not Mortgagor executes any extension agreement or renewal instrument.

     2.2 Indebtedness and the Notes Defined. All the above items of indebtedness
described in subparagraphs (a) through (e) of Section 2.1 hereof are hereinafter
collectively  referred to as the "Indebtedness".  Any promissory note evidencing
any part of the Indebtedness,  including,  without  limitation,  any of the Loan
Notes, is hereinafter referred to as a "Note", and all such promissory notes are
hereinafter referred to collectively as the "Notes".

     2.3 Maximum  Amount.  The maximum  amount of the  Indebtedness  that may be
outstanding  at any time, and from time to time, and secured by this Mortgage is
Three Billion Dollars ($3,000,000,000).


                                      -12-
<PAGE>

                                  ARTICLE III

                      Particular Covenants, Representations
                      -------------------------------------
                           and Warranties of Mortgagor
                           ---------------------------

     3.1 Payment of the Indebtedness  and Performance of Obligations.  Mortgagor
will duly and  punctually  pay the  Indebtedness,  as and when called for in the
Credit  Agreements  and the  Security  Documents  and on or before the due dates
thereof, and will timely perform and discharge all of the Obligations (including
each and every  obligation  owing on  account of the  Notes),  in full and on or
before the dates same are to be performed and discharged.

     3.2  Certain  Representations  and  Warranties.  Mortgagor  represents  and
warrants  (and  with  respect  to  those  matters  set  forth  in the  following
subsections (b) and (f), as to those portions of the Mortgaged Property that are
operated by persons other than Mortgagor or a Subsidiary of Mortgagor, Mortgagor
makes such representation and warranty to the best of its knowledge) that

          (a) the oil and gas  leases  described  in Exhibit A hereto are valid,
     subsisting  leases,  superior and paramount to all other oil and gas leases
     respecting the properties to which they pertain,

          (b) all producing  wells  located on the lands  described in Exhibit A
     (including  Exhibit  A-1) have  been  drilled,  operated  and  produced  in
     conformity with all Applicable Laws of all Governmental  Authorities having
     jurisdiction,   and  are  subject  to  no  penalties  on  account  of  past
     production,  and such wells are in fact  bottomed  under and are  producing
     from, and the well bores are wholly within,  the lands described in Exhibit
     A or lands pooled or unitized therewith,

          (c)  Mortgagor,  to the extent of the interest  specified in Exhibit A
     (including  Exhibit A-1), has valid and indefeasible title to each property
     right or interest  constituting the Mortgaged Property described in Exhibit
     A  (including  Exhibit  A-1) and has a good and  legal  right to grant  and
     convey  the same to the  Trustees;  such  interest  entitles  Mortgagor  to
     receive  not  less  than the  share  of  Hydrocarbons  from  such  property
     indicated as its net revenue interest or "NRI" share of such  Hydrocarbons,
     and obligates Mortgagor to pay for not more than the share of operating and
     other  costs,  liabilities  and  expenses  associated  with  such  property
     indicated as its working interest or "WI" share of such costs,  liabilities
     and expenses,

          (d) the  Mortgaged  Property  is free from all  encumbrances  or liens
     whatsoever,  except for the Permitted  Encumbrances  or as permitted by the
     provisions of Section 3.4(e) hereof,

          (e) Mortgagor is not obligated,  by virtue of any prepayment under any
     contract providing for the sale by Mortgagor of Hydrocarbons which contains
     a


                                      -13-
<PAGE>

     "take  or  pay"  clause  or  under  any  similar  arrangement,  to  deliver
     Hydrocarbons at some future time without then or thereafter  receiving full
     payment therefor,

          (f) the Mortgaged Property is currently being operated, maintained and
     developed,  in all material  respects,  in accordance  with all  applicable
     currently  existing  Permits,  Legal  Requirements  and all Applicable Laws
     (including, without limitation, Environmental Laws),

          (g) the cover page to this  Mortgage  lists the correct  legal name of
     Mortgagor and Mortgagor has not been known by any legal name different from
     the one set forth on the cover page of this  Mortgage,  except as set forth
     on Schedule I to this Mortgage; Mortgagor is not now and has not been known
     by any trade  name,  nor has  Mortgagor  been the  subject of any merger or
     other corporate reorganization,

          (h) the  execution,  delivery  and  performance  by  Mortgagor  of the
     Security  Documents and the borrowing  evidenced by the Loan Notes, (i) are
     within  Mortgagor's  corporate  powers  and have  been duly  authorized  by
     Mortgagor's  Board  of  Directors,  shareholders  and all  other  requisite
     corporate  action,   (ii)  have  received  all  (if  any)  requisite  prior
     governmental  approval  and  consent  in order to be  legally  binding  and
     enforceable  in  accordance  with the terms  thereof,  and  (iii)  will not
     violate,  be in conflict with,  result in a breach or constitute  (with due
     notice or lapse of time, or both) a default under, any Legal Requirement or
     result in the creation or imposition of any lien,  charge or encumbrance of
     any nature whatsoever upon any of Mortgagor's property or assets, except as
     contemplated  by the  provisions  of the Security  Documents.  The Security
     Documents  constitute the legal, valid and binding obligations of Mortgagor
     and  others  obligated  under  the  terms  of the  Security  Documents,  in
     accordance with their respective terms, and

          (i) there are no  actions,  suits or  proceedings  pending,  or to the
     knowledge of Mortgagor  threatened,  against or affecting  Mortgagor or the
     Mortgaged Property that could materially  adversely affect Mortgagor or the
     Mortgaged  Property,  or involving the validity or  enforceability  of this
     Mortgage or the priority of the liens and security interests created by the
     Security  Documents,  and no event  has  occurred  (including  specifically
     Mortgagor's execution of the Security Documents and its consummation of the
     Loans described therein) which will violate, be in conflict with, result in
     the breach of, or constitute  (with due notice or lapse of time, or both) a
     material default under, any Legal  Requirement or result in the creation or
     imposition of any lien, charge or encumbrance of any nature whatsoever upon
     any of  Mortgagor's  property  other than the liens and security  interests
     created by the Security Documents.

     3.3 Further  Assurances.  Mortgagor  will  warrant  and forever  defend the
Mortgaged  Property unto the Trustees against every person  whomsoever  lawfully
claiming the same or any part thereof,  subject to Permitted  Encumbrances,  and
Mortgagor  will  maintain and preserve  the lien and  security  interest  hereby
created so


                                      -14-
<PAGE>

long as any of the  Indebtedness  remains  unpaid.  Mortgagor  will  execute and
deliver  such other and further  instruments  and will do such other and further
acts as, in the  opinion of the  Trustees  or the  Agent,  may be  necessary  or
desirable  to  carry  out  more  effectually  the  purposes  of  this  Mortgage,
including,  without  limiting  the  generality  of  the  foregoing,  (i)  prompt
correction  of any defect which may  hereafter be discovered in the title to the
Mortgaged Property or in the execution and acknowledgment of this Mortgage,  any
Note, or any other  document  executed in connection  herewith,  and (ii) prompt
execution  and  delivery  of all  notices to parties  operating,  purchasing  or
receiving  proceeds of production of Hydrocarbons  from the Mortgaged  Property,
and all division orders or transfer orders,  any of which, in the opinion of the
Agent,  is needed in order to transfer  effectually or to assist in transferring
effectually to the Agent the assigned  proceeds of production from the Mortgaged
Property.

     3.4 Operation of the Mortgaged Property. So long as the Indebtedness or any
part thereof remains unpaid, and whether or not Mortgagor is the operator of any
particular part of the Mortgaged  Property,  Mortgagor shall, at Mortgagor's own
expense:

          (a) Do all things necessary to keep unimpaired  Mortgagor's  rights in
     the Mortgaged  Property and not, except in the ordinary course of business,
     abandon any well or  forfeit,  surrender  or release  any Lease  capable of
     producing  Hydrocarbons  in paying  quantities,  without the prior  written
     consent of the Agent;

          (b) Obtain  and  maintain  all  required  Permits  and cause the lands
     described  in  Exhibit A to be  maintained,  developed,  protected  against
     drainage,  and operated for the  production of  Hydrocarbons  in a good and
     workmanlike  manner as would a prudent  operator,  and in  accordance  with
     generally accepted industry practices,  Joint Operating Agreements, and all
     Applicable Laws, excepting those being contested in good faith;

          (c) Duly  pay and  discharge,  or  cause  to be paid  and  discharged,
     promptly as and when due and payable,  all rentals and royalties (including
     shut-in  royalties) payable in respect of the Mortgaged  Property,  and all
     expenses  incurred in or arising from the operation or  development  of the
     Mortgaged  Property  not later  than the due date  thereof,  or the day any
     fine, penalty, interest or cost may be added thereto or imposed, or the day
     any lien may be filed, for the non-payment  thereof (if such day is used to
     determine the due date of the respective item);

          (d) Cause the  Operating  Equipment  to be kept in good and  effective
     operating  condition,  ordinary  wear and tear  excepted,  and all repairs,
     renewals,  replacements,  additions  and  improvements  thereof or thereto,
     needful to the  production  of  Hydrocarbons  from the lands  described  in
     Exhibit A, to be promptly made;

          (e) Not, without the prior written consent of the Agent, create, place
     or permit to be created or  placed,  or through  any act or failure to act,
     acquiesce in the placing of, or allow to remain, any mortgage, pledge, lien
     (statutory,


                                      -15-
<PAGE>

     constitutional or contractual),  security interest,  encumbrance or charge,
     or  conditional  sale or other title  retention  agreement,  regardless  of
     whether  same  are  expressly  subordinate  to the  liens  of the  Security
     Documents,  with respect to all or any portion of the  Mortgaged  Property,
     the  Leases  or the  Rents  and  Revenues  other  than  (1)  the  Permitted
     Encumbrances,  (2) Taxes  constituting a lien but not due and payable,  (3)
     defects or  irregularities  in title,  and liens,  charges or encumbrances,
     which,  in the Agent's  reasonable  opinion,  are not such as to  interfere
     materially  with the  development,  operation  or  value  of the  Mortgaged
     Property  and not such as to affect  materially  title  thereto,  (4) those
     being  contested  by  Mortgagor  in good  faith  in such  manner  as not to
     jeopardize  the  Trustees'  and the Agent's  rights in and to the Mortgaged
     Property,  (5) those liens  permitted by each Section  8.2.3 of each of the
     Credit Agreements, and (6) those consented to in writing by the Agent;

          (f) Carry with financially sound and reputable insurance companies and
     in amounts satisfactory to the Agent the following insurance: (1) workmen's
     compensation  insurance and public  liability and property damage insurance
     in  respect of all  activities  in which  Mortgagor  might  incur  personal
     liability  for the death of or injury to an  employee or third  person,  or
     damage to or destruction of another's property;  and (2) to the extent such
     insurance is carried by similar companies  engaged in similar  undertakings
     in the same  general  areas in which the  Mortgaged  Property  is  located,
     insurance in respect of the Operating Equipment,  against loss or damage by
     fire, lightning, hail, tornado, explosion and other similar risks, hazards,
     casualties and contingencies  (including  business  interruption  insurance
     covering loss of Rents and Revenues); provided, that any such insurance may
     be provided by way of self  insurance to the extent that similar  companies
     engaged in similar undertakings in the same general areas also self-insure.
     Each insurance  policy issued in connection  therewith shall provide by way
     of  endorsements,  riders  or  otherwise  that (i) name the Agent as a loss
     payee on all property  insurance  policies and an additional insured on all
     liability  insurance  policies,  and provide that  proceeds  from  property
     insurance policies will be payable to the Agent as its interest may appear,
     which  proceeds  are  hereby  assigned  to the  Agent,  it being  agreed by
     Mortgagor  that such  payments  shall be applied A) if there be no Event of
     Default  existing or which would exist but for due notice or lapse of time,
     or  both,  to the  restoration,  repair  or  replacement  of the  Mortgaged
     Property,  or B) if there be an Event of Default  existing,  or which would
     exist but for due  notice or lapse of time,  or both,  at the option of the
     Agent,  either for the above  stated  purpose or toward the  payment of the
     Indebtedness;  (ii) the  coverage  of the Agent  shall  not be  terminated,
     reduced or affected in any manner  regardless of any breach or violation by
     Mortgagor of any  warranties,  declarations  or  conditions in such policy;
     (iii) no such  insurance  policy  shall be canceled,  endorsed,  altered or
     reissued  to effect a change in  coverage  for any reason and to any extent
     whatsoever unless such insurer shall have first given the Agent thirty (30)
     days prior written notice thereof; and (iv) the Agent may, but shall not be
     obligated   to,  make  premium   payments  to  prevent  any   cancellation,
     endorsement,  alteration or reissuance  and such payments shall be accepted
     by the insurer to prevent same. The Agent shall be furnished with a


                                      -16-
<PAGE>

     certificate  evidencing such coverage in form and content acceptable to the
     Agent.  All policies to be maintained  under this Mortgage are to be issued
     on forms and by companies  and with  endorsements  acceptable to the Agent.
     Mortgagor  shall  maintain  insurance  in an amount  sufficient  to prevent
     Mortgagor from becoming a co-insurer  under any policy required  hereunder.
     If Mortgagor  fails to maintain the level of insurance  required under this
     Mortgage,  then Mortgagor shall and hereby agrees to indemnify the Agent to
     the extent that a casualty  occurs and insurance  proceeds  would have been
     available had such insurance been maintained;

          (g) Furnish to the Agent as soon as possible  and in any event  within
     five (5) days after the  occurrence  from time to time of any change in the
     address of Mortgagor's location (as described on the signature page hereto)
     or in the name of Mortgagor, notice in writing of such change;

          (h) Not initiate or acquiesce in any change in any material  zoning or
     other land use or Water  Rights  classification  now or hereafter in effect
     and affecting the Mortgaged Property or any part thereof;

          (i) Notify the Agent in writing as soon as  possible  and in any event
     within five (5) days after it shall become aware of the  occurrence  of any
     Event of Default  under  Section 5.1 or any event which,  with notice,  the
     passage of time or both would be such an Event of Default;

          (j) Appear and defend,  and hold the Agent  harmless from, any action,
     proceeding  or claim  affecting  the  Mortgaged  Property or the rights and
     powers of the Agent or any of the Trustees  under the  Security  Documents,
     and all  costs  and  expenses  incurred  by the  Agent  in  protecting  its
     interests  hereunder  in such an  event  (including  all  court  costs  and
     attorneys' fees) shall be borne by Mortgagor;  provided, that such defense:
     (1)  shall  be  provided  by a  lawyer  or law firm  listed  on a  schedule
     delivered to and  approved in writing by the Agent,  from time to time (the
     "Approved  Counsel  List"),  and (2) if the amount in  controversy  in such
     action,  proceeding  or claim is in  excess  of  $2,500,000  in  actual  or
     compensatory  damages and/or liquidated damages (or is reasonably  believed
     to exceed such amount if the demand involves  unliquidated  damages),  such
     law firm shall be approved by the Agent, in its reasonable discretion,  for
     that particular action, proceeding or claim. As to actions,  proceedings or
     claims involving a portion of the Mortgaged  Property in which Mortgagor or
     a  Subsidiary  of  Mortgagor  is not the operator and with respect to which
     Mortgagor  does not have a majority  net revenue  interest  and/or  working
     interest, Mortgagor may elect, in its reasonable judgment, to allow counsel
     for the  operator to appear for, and defend  Mortgagor  in such matter,  in
     which case,  selection of counsel by the operator  shall not be governed by
     this  Section 3.4 (j);  and further  provided,  that  nothing  herein shall
     restrict  or limit the right of the Agent,  the  Trustees or the Lenders to
     select its or their own counsel to defend, at Mortgagor's cost and expense,
     any action proceeding or claim in which any of them are named as parties;


                                      -17-
<PAGE>

          (k) Subject to Mortgagor's right to contest the same, promptly pay all
     Taxes legally imposed upon this  instrument or upon the Mortgaged  Property
     or upon  the  income  and  profits  thereof,  or upon the  interest  of the
     Trustees, the Agent or the other Lender Parties therein;  provided that the
     Mortgagor  shall not be liable for taxes  accruing  after a transfer of the
     Mortgaged Property following a foreclosure;

          (l) Comply with,  conform to and obey, in all material  respects,  all
     present  and future  Legal  Requirements  and not use,  maintain,  operate,
     occupy,  or allow the use,  maintenance,  operation  or  occupancy  of, the
     Mortgaged  Property in any manner which (a) violates any present and future
     Legal  Requirement,  (b) may be dangerous unless safeguarded as required by
     Applicable Law, (c)  constitutes a public or private  nuisance or (d) makes
     void,  voidable or  cancelable,  or increases the premium of, any insurance
     then in force with respect thereto; and

          (m) Not, without the prior written consent of the Agent, permit any of
     the  Fixtures  or  Personalty  to be  removed  at any time  from the  lands
     described in Exhibit A unless (i) the removed  item is removed  temporarily
     for maintenance and repair, (ii) if removed permanently,  is replaced by an
     article of equal suitability and value, owned by Mortgagor,  free and clear
     of any lien or security  interest  except such as may be first  approved in
     writing by the Agent or (iii) such  Fixtures or  Personalty  are removed in
     connection  with the plugging and  abandoning of wells,  or  abandonment of
     other facilities, in each case as permitted by this Mortgage.

     3.5 Performance of Leases.  Mortgagor will: (a) duly and punctually perform
and  comply  with  any  and  all  representations,   warranties,  covenants  and
agreements  expressed  as  binding  upon it under  each of the  Leases;  (b) not
voluntarily  terminate,  cancel or waive its  rights or the  obligations  of any
other party under any of the Leases;  (c) use all reasonable efforts to maintain
each of the Leases in force and effect  during  the full term  thereof;  and (d)
appear in and defend (or cause its  operator to appear in and defend) any action
or proceeding arising under or in any manner connected with any of the Leases or
the  representations,  warranties,  covenants and  agreements of it or the other
party or parties thereto.

     3.6 Recording,  etc. Mortgagor will promptly,  and at Mortgagor's  expense,
record,  register,  deposit and file this and every other instrument in addition
or supplemental hereto in such offices and places and at such times and as often
as may be  necessary  to  preserve,  protect  and  renew  the lien and  security
interest hereof as a first lien on and prior perfected security interest in real
or  personal  property,  as the case may be, and the rights and  remedies of the
Trustees,  of the Agent and of the other Lender  Parties,  and otherwise will do
and observe all things or matters  necessary or expedient to be done or observed
by reason of any  Applicable  Law,  for the  purpose  of  effectively  creating,
maintaining  and preserving the lien and security  interest hereof on and in the
Mortgaged Property.


                                      -18-
<PAGE>

     3.7 Sale or Mortgage of the Mortgaged Property.  Except (a) as set forth in
Section 7.1 of this Mortgage;  (b) as permitted by Section 8.2.10 of each of the
Credit Agreements;  (c) for sales of severed Hydrocarbons in the ordinary course
of Mortgagor's  business;  (d) sales of or dispositions of surplus,  obsolete or
worn inventory or equipment;  and (e) the lien and security  interest created by
this Mortgage,  Mortgagor will not sell, convey, mortgage, pledge,  hypothecate,
pool, unitize or otherwise dispose of or encumber the Mortgaged Property nor any
portion  thereof,  nor any of  Mortgagor's  right,  title or  interest  therein,
without first securing the written consent of the Agent;  and Mortgagor will not
enter into any  arrangement  with any gas pipeline  company or other consumer of
Hydrocarbons  regarding the Mortgaged Property whereby said gas pipeline company
or consumer may set off any claim against  Mortgagor by withholding  payment for
any Hydrocarbons actually delivered.

     3.8 Records,  Statements  and Reports.  Mortgagor will keep proper books of
record  and  account  in which  complete  and  correct  entries  will be made of
Mortgagor's  transactions  in  accordance  with  generally  accepted  accounting
principles  and  will  furnish  or  cause  to be  furnished  to the  Agent  such
information  concerning  the  business,   affairs  and  financial  condition  of
Mortgagor as the Trustees or the Agent may from time to time reasonably request.
Without limiting the generality of the foregoing, Mortgagor shall furnish to the
Agent upon its  request,  but not more than every six (6)  months:  (a)  reports
prepared by an independent petroleum engineer acceptable to the Agent concerning
(1) the quantity of Hydrocarbons  recoverable from the Mortgaged  Property,  (2)
the projected income and expense attributable to the Mortgaged Property, and (3)
the  expediency of any change in methods of treatment or operation of all or any
wells productive of Hydrocarbons, any new drilling or development, any method of
secondary  recovery  by  repressuring  or  otherwise,  or any other  action with
respect to the  Mortgaged  Property,  the  decision as to which may  increase or
reduce  the  quantity  of  Hydrocarbons  ultimately  recoverable  or the rate of
production  thereof,  and (b)  reports  for the prior  period  showing the gross
proceeds  from the sale of  Hydrocarbons  produced  from the lands  described in
Exhibit A (including  any thereof taken by Mortgagor for  Mortgagor's  own use),
the  quantity  of such  Hydrocarbons  sold,  the  severance,  gross  production,
occupation,  or gathering taxes deducted from or paid out of such proceeds,  the
number of wells operated,  drilled or abandoned,  and such other  information as
the Agent may  reasonably  request  (upon  request  of the Agent,  such  reports
referred to in clauses (a) and (b) above shall set forth such  information  on a
lease or unit basis,  and after the occurrence of an Event of Default,  and upon
the Agent's request, Mortgagor shall deliver the reports described in clause (b)
on a monthly basis).

     3.9 Right of Entry.

          (a)  Upon  at  least  twenty-four  (24)  hours  notice  to  Mortgagor,
     Mortgagor will permit the Trustees or the Agent, or the agents of either of
     them,  at the cost and expense of  Mortgagor,  to enter upon the  Mortgaged
     Property  and all parts  thereof,  for the  purpose  of  investigating  and
     inspecting the condition and operation thereof, and shall permit reasonable
     access to the field offices and other  offices (to the fullest  extent that
     Mortgagor may do so under the terms of


                                      -19-
<PAGE>

     the applicable Joint Operating  Agreements and other applicable  agreements
     affecting  the  Mortgaged  Property),  including  the  principal  place  of
     business, of Mortgagor to inspect and examine the Mortgaged Property and to
     inspect,  review and reproduce as necessary any books,  records,  accounts,
     contracts or other documents of Mortgagor.

          (b) Without limiting the generality of the foregoing,  the Agent shall
     have the right (to the fullest  extent that  Mortgagor  may do so under the
     terms of the applicable  Joint  Operating  Agreements and other  applicable
     agreements  affecting the Mortgaged  Property),  on twenty-four  (24) hours
     prior notice to Mortgagor,  to cause such persons and entities as the Agent
     may designate to enter the  Mortgaged  Property to conduct (at the cost and
     expense of  Mortgagor),  or to cause  Mortgagor to conduct (at the cost and
     expense of  Mortgagor),  such tests and  investigations  as the Agent deems
     necessary to determine  whether any  hazardous  materials or solid waste is
     being  generated,  transported,  stored,  or disposed of in accordance with
     applicable  Environmental  Laws. Such tests and investigations may include,
     without limitation,  underground borings, ground water analyses and borings
     from the  floors,  ceilings  and walls of any  improvements  located on the
     Mortgaged  Property.  This  Section 3.9 shall not be construed to affect or
     limit the obligations of Mortgagor pursuant to Section 3.4 hereof.

          (c) The Agent  shall  have no duty to visit or observe  the  Mortgaged
     Property, or to conduct tests, and no site visit, observation or testing by
     the Agent (or its  agents and  independent  contractors)  shall  impose any
     liability on the Agent or any other Lender  Party,  nor shall  Mortgagor or
     any other obligor be entitled to rely on any visit,  observation or testing
     by the Agent in any respect. The Agent may, in its discretion,  disclose to
     Mortgagor or any other Person,  including any Governmental  Authority,  any
     report or finding  made as a result  of, or in  connection  with,  any site
     visit, observation or testing by the Agent. Mortgagor agrees that the Agent
     makes no warranty  or  representation  to  Mortgagor  or any other  obligor
     regarding  the  truth,  accuracy  or  completeness  of any such  report  or
     findings  that  may be so  disclosed.  Mortgagor  also  acknowledges  that,
     depending upon the results of any site visit, observation or testing by the
     Agent and disclosed to Mortgagor,  Mortgagor may have a legal obligation to
     notify one or more  Governmental  Authorities  of such  results,  that such
     reporting  requirements  are  site-specific,  and  are to be  evaluated  by
     Mortgagor without advice or assistance from the Agent.

     3.10 Environmental Laws.

          (a) Mortgagor  represents  and warrants,  to the best of its knowledge
     after  due  inquiry,  and  except  as set  forth in each  Item  7.12 of the
     Disclosure  Schedule  (including  Part B thereof)  attached  to each of the
     Credit Agreements that:

               (i) the  Mortgaged  Property  is in  compliance  in all  material
          respects  with all  applicable  Environmental  Laws and  there  are no



                                      -20-
<PAGE>

          conditions  existing  currently  which  would  be  likely  to  subject
          Mortgagor to damages,  penalties,  injunctive  relief or cleanup costs
          under any Environmental Laws or assertions  thereof,  or which require
          or are likely to require  cleanup,  removal,  remedial action or other
          response  pursuant to  Environmental  Laws by Mortgagor;  and all use,
          generation,   manufacturing,  release,  discharge,  storage,  deposit,
          treatment,  recycling or disposal of any materials on, under or at the
          Mortgaged  Property or transported  to or from the Mortgaged  Property
          (or tanks or other facilities  thereon  containing such materials) are
          being and will be conducted  in  accordance  in all material  respects
          with applicable  Environmental Laws including without limitation those
          requiring cleanup, removal or any other remedial action;

               (ii) Mortgagor is not a party to any litigation or administrative
          proceedings,  nor so far as is known by Mortgagor is any litigation or
          administrative  proceeding  threatened  against it,  which  asserts or
          alleges that Mortgagor has violated or is violating Environmental Laws
          or that  Mortgagor is required to clean up, remove or take remedial or
          other responsive  action due to the disposal,  depositing,  discharge,
          leaking or other  release of any  hazardous  substances  or materials;
          neither  the  Mortgaged  Property  nor  Mortgagor  is  subject  to any
          judgment,  decree,  order or  citation  related to or  arising  out of
          Environmental  Laws  and  neither  has  been  named  or  listed  as  a
          potentially  responsible  party  by any  Governmental  Authority  in a
          matter arising under any Environmental Laws; and

               (iii)  Mortgagor  has also  obtained all Permits  required  under
          applicable  Environmental  Laws which are  necessary  for its  current
          exploration, production, transportation, storage, use, and development
          activities at the Mortgaged Property.

          (b) Mortgagor  shall not use or permit the  Mortgaged  Property or any
     part thereof to be used to generate, manufacture, refine, transport, treat,
     store,  handle,  dispose,   transfer,  produce  or  process  any  hazardous
     materials,  except in strict  compliance with all applicable  Environmental
     Laws, nor shall Mortgagor  cause or permit,  as a result of any intentional
     or unintentional  act or omission on the part of Mortgagor or any tenant or
     subtenant, a release of any hazardous materials onto the Mortgaged Property
     or onto  any  other  property.  Mortgagor  shall  comply,  in all  material
     respects,  with all  applicable  Environmental  Laws and shall  obtain  and
     comply with any and all  registrations or Permits required  thereunder.  To
     the extent any  hazardous  materials  are released or  discharged  onto the
     Mortgaged  Property on or after the date of this Mortgage,  Mortgagor shall
     conduct and complete all investigations,  studies,  sampling,  and testing,
     and all  remedial,  removal,  and other  actions  necessary to clean up and
     remove all such  hazardous  materials  on, from, or affecting the Mortgaged
     Property  or  any  part  thereof  (i) in  accordance  with  all  applicable
     Environmental  Laws; (ii) to the  satisfaction  of the Agent;  and (iii) in
     accordance with the orders and directives of


                                      -21-
<PAGE>

     all  Governmental   Authorities  having  jurisdiction  over  the  Mortgaged
     Property.  Mortgagor  shall promptly notify the Agent of its receipt of any
     notice of a violation of any Environmental Laws.

          (c) Regardless of whether any site assessments are conducted  pursuant
     to this Mortgage,  and without  limiting the liability of Mortgagor for the
     breach of any warranty,  representation or covenant  contained herein or in
     any  other  Security  Document,   and  notwithstanding  any  limitation  of
     liability  contained  in the Note or other  Security  Documents,  Mortgagor
     hereby agrees to unconditionally and absolutely defend,  indemnify and hold
     harmless  the Agent and each of the Lender  Parties,  and their  respective
     employees,  affiliates,  agents and  attorneys,  and the Trustees under the
     Mortgage and any  successors or substitute  trustee under the Mortgage (any
     person to be  indemnified  being herein called the  "Indemnified  Person"),
     from  and  against,  and  be  responsible  for,  any  and  all  liabilities
     (including strict liability),  actions, demands,  penalties,  fines, taxes,
     assessments, losses (including, without limitation, diminution in the value
     of  the  Mortgaged  Property),  costs  and  expenses  (including,   without
     limitation,  attorneys',  paralegals',  accountants' and other experts' and
     consultants'  fees and expenses,  and remedial  costs,  including,  without
     limitation,  costs  of  monitoring),  suits,  damages,  including,  without
     limitation,    punitive   damages   and   foreseeable   and   unforeseeable
     consequential  damages,  costs of any  settlement  or  judgment  and claims
     (including,  without limitation,  third-party claims for personal injury or
     real  or  personal  property  damage)  of any  and  every  kind  whatsoever
     (hereinafter,  collectively,  called the "Losses"), which may now or in the
     future  (whether before or after the release,  or other  termination of the
     Mortgage and the other Security  Documents) be paid, imposed upon, incurred
     or  suffered  by or  asserted  or awarded  against  any of the  Indemnified
     Persons or the Mortgaged  Property by any person or entity or  Governmental
     Authority  for, with respect to, arising out of, or as a direct or indirect
     result of, any one or more of the following:  (i) the presence or suspected
     presence, release or suspected release of any hazardous materials at, upon,
     under, within, above, from, by or in connection with the Mortgaged Property
     or any portion thereof,  or elsewhere in connection with the transportation
     of  hazardous  materials  to or from  the  Mortgaged  Property  (including,
     without limitation, in the air, soil, groundwater or surface water), or the
     escape, seepage, leakage, spillage, discharge, emission or release from the
     Mortgaged Property of any hazardous  materials;  (ii) any violations of any
     Environmental Laws at, upon, under,  within, from, by or in connection with
     the Mortgaged Property;  (iii) the environmental condition of the Mortgaged
     Property;  (iv) the imposition by any Governmental Authority of any lien or
     so-called "super priority lien" upon the Mortgaged  Property as a result of
     the presence or release of  hazardous  materials,  or any  violation of any
     Environmental  Laws, at, upon, under,  within,  from, by or connection with
     the Mortgaged  Property;  (v) obligations to remediate  hazardous materials
     contamination,  or to remediate any condition which constitutes a violation
     of any  Environmental  Laws;  (vi) any site  assessments  of the  Mortgaged
     Property;  (vii) liability for personal injury or property damage or damage
     to the environment or fines, penalties and punitive damages, resulting from
     the presence or release of hazardous materials or any


                                      -22-
<PAGE>

     violations of any Environmental Laws, at, upon, under,  within, from, by or
     in connection  with the Mortgaged  Property;  and (viii) any  environmental
     matter described in this Mortgage,  including, without limitation,  matters
     arising out of any breach of the covenants,  representations and warranties
     set forth herein in each  instance  described in (i) through  (viii) hereof
     regardless  of  whether  any such  Losses  arise out of or result  from any
     breach of the  covenants,  representations  and  warranties  pertaining  to
     environmental  matters  set forth in this  Mortgage  or the other  Security
     Documents, and regardless of whether or not caused by or within the control
     of Mortgagor or any Indemnified  Person;  or whether any such matters arise
     before,  during or after any foreclosure of the Mortgage or other taking of
     title to all or any portion of the Mortgaged Property or the enforcement of
     any other remedies under the Security Documents (if any such event occurs).
     WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED
     PERSON  WITH  RESPECT TO LOSSES  WHICH IN WHOLE OR IN PART ARE CAUSED BY OR
     ARISE OUT OF THE SOLE,  CONCURRENT OR COMPARATIVE  NEGLIGENCE OR THE STRICT
     LIABILITY OF ANY SUCH INDEMNIFIED  PERSON,  BUT NOT THE GROSS NEGLIGENCE OR
     WILLFUL MISCONDUCT OF ANY SUCH INDEMNIFIED PERSON.

          (d)  Notwithstanding  the foregoing or any contrary  provision hereof,
     Mortgagor's  indemnification  obligations  set forth in this  Section  3.10
     shall  not  extend to any such  Losses  which  are  attributable  solely to
     contamination  by hazardous  materials  first  introduced  to the Mortgaged
     Property  after a foreclosure  of this Mortgage or other taking of title to
     the Mortgaged Property by any of Indemnified Persons.

          (e)  The   indemnification   provided  in  this   Section  3.10  shall
     specifically apply to and include claims or actions brought by or on behalf
     of tenants or employees of Mortgagor.  Mortgagor  hereby  expressly  waives
     (with respect to any claims of any  Indemnified  Person  arising under this
     Section  3.10) any immunity to which  Mortgagor  may  otherwise be entitled
     under any industrial or worker's compensation laws.

          (f) In the event any of the Indemnified  Persons shall suffer or incur
     any such Losses,  Mortgagor shall pay to such Indemnified Persons the total
     of all such Losses  suffered or incurred  within ten (10) days after demand
     therefore.

          (g) Mortgagor agrees that the representations,  covenants,  warranties
     and  indemnifications  contained in this Mortgage shall survive the release
     of the  Mortgage,  the  foreclosure  or the  taking  of a deed  in  lieu of
     foreclosure, other termination of the lien of the Mortgage, or the exercise
     by the  Agent of any  other  remedies  under the  Security  Documents,  the
     discharge  of  Mortgagor's  Obligations  under  any of the  other  Security
     Documents,  or any transfer of the Mortgaged Property, even if as a part of
     such foreclosure,  deed in lieu of foreclosure or other enforcement action,
     the Indebtedness is satisfied in full.


                                      -23-
<PAGE>

     3.11 Corporate  Mortgagor.  Mortgagor will continue to be duly qualified to
transact business in each state where the conduct of its business requires it to
be  qualified,  and will not,  without the prior  written  consent of the Agent,
consolidate or merge with any other partnership,  company,  corporation or other
Person.

     3.12 Taxpayer I.D. Number. The taxpayer  identification number of Mortgagor
is 77-0212977. The taxpayer identification number of the Agent is 13-494-1099.

                                   ARTICLE IV

                            Assignment of Production
                            ------------------------

     4.1 Assignment.

          (a)  Mortgagor  hereby   absolutely  and  irrevocably  (a)  transfers,
     assigns, warrants and conveys to the Agent, effective as of May 1, 2002, at
     7:00 A.M., local time, all Hydrocarbons which are thereafter  produced from
     and which accrue to the Mortgaged Property, and all proceeds therefrom, and
     (b) gives to and confers upon the Agent the right,  power and  authority to
     collect such  Hyrdrocarbons  and proceeds.  Subject to the terms of Section
     4.1(b),   all  parties   producing,   purchasing   or  receiving  any  such
     Hydrocarbons,  or having such, or proceeds  therefrom,  in their possession
     for which  they or  others  are  accountable  to the Agent by virtue of the
     provisions  of this  Article IV, are  authorized  and directed to treat and
     regard the Agent as the assignee and  transferee  of Mortgagor and entitled
     in  Mortgagor's  place  and  stead to  receive  such  Hydrocarbons  and all
     proceeds  therefrom;  and  said  parties  and  each of them  shall be fully
     protected  in so  treating  and  regarding  the Agent and shall be under no
     obligation to see to the  application  by the Agent of any such proceeds or
     payments  received by it;  provided,  however,  that, until the Agent shall
     have  instructed  such parties that an Event of Default has occurred and to
     deliver such Hydrocarbons and all proceeds therefrom directly to the Agent,
     such  parties  shall be  entitled  to  deliver  such  Hydrocarbons  and all
     proceeds  therefrom  directly to Mortgagor.  So long as no Event of Default
     shall have  occurred and the Agent has not yet given such  instruction  and
     notice  thereof,  the Agent  agrees  that  Mortgagor  shall be  entitled to
     receive directly from such parties,  and keep and retain, all such proceeds
     from the sale of such Hydrocarbons.

          (b) Upon the  occurrence  of an Event of Default (it being  understood
     and agreed that the  determination of the occurrence of an Event of Default
     by the Agent shall be conclusive and binding as to all such parties for all
     purposes  hereof  and  that,  at the  time  the  Agent  gives  the  initial
     instruction  and notice under this Article IV, such Event of Default  shall
     then be  continuing)  the  Agent  may at any time  (and  from time to time)
     thereafter  give  notice  thereof  to any party  producing,  purchasing  or
     receiving any such Hydrocarbons,  or having such, or proceeds therefrom, in
     their  possession  for which they or others are  accountable  to the Agent,
     directing  that said  Hydrocarbons  and products  are to be delivered  into
     pipelines  connected  with  the  oil and gas  leases,  or to the  purchaser
     thereof,


                                      -24-
<PAGE>

     free  and  clear  of all  Taxes,  and the  proceeds  from  the sale of such
     Hydrocarbons  paid directly to the Agent in accordance  with Section 4.5 of
     this  Mortgage.  Mortgagor  agrees to perform all such acts, and to execute
     all such further  assignments,  transfers  and division  orders,  and other
     instruments  as may be  required  or  desired  by the Agent or any party in
     order to have said revenues and proceeds so paid to the Agent,  as and when
     provided  in this  Article IV.  With  respect to any funds  received by the
     Agent after notice of an Event of Default  shall have been given under this
     Article IV, the Agent is fully  authorized  to receive and give receipt for
     any such revenues and proceeds  that are received by the Agent;  to endorse
     and cash any and all checks and drafts payable to the order of Mortgagor or
     the Agent for the account of Mortgagor  received from or in connection with
     said revenues or proceeds and apply the proceeds thereof in accordance with
     Section 4.2 hereof, and to execute transfer and division orders in the name
     of  Mortgagor,  or  otherwise,   with  warranties  binding  Mortgagor.  The
     assignment of the Hydrocarbons and proceeds in this Section 4.1 is intended
     to be an absolute assignment from Mortgagor to the Agent and not merely the
     passing of a security  interest.  Such Hydrocarbons and proceeds are hereby
     assigned absolutely by Mortgagor to the Agent.

     4.2 Application of Proceeds. All payments received by the Agent pursuant to
Section 4.1 hereof shall be placed in a cash collateral account at the Agent and
on the last business day of each calendar month applied as follows:

          First:  To the  payment  and  satisfaction  of all costs and  expenses
     incurred in connection  with the  collection of such  proceeds,  and to the
     payment of all items of the  Indebtedness and the Obligations not evidenced
     by any Note.

          Second:  To the payment of the  interest  on the Notes  accrued to the
     date of such payment.

          Third:  To the payment of the amounts of principal  then due and owing
     on the Notes.

          Fourth:  The  balance,  if any,  shall  either be  applied on the then
     unmatured principal amounts of the Notes, such application to be on such of
     the Notes and  installments  thereof  as the Agent may  select,  or, at the
     option of the Agent, released to Mortgagor.

     4.3 No Liability of the Agent in Collecting.  The Agent is hereby  absolved
from all liability for failure to enforce collection of any proceeds so assigned
(and no such  failure  shall be  deemed to be a waiver of any right of the Agent
under  this  Article  IV)  and  from  all  other  responsibility  in  connection
therewith,  except the responsibility to account to Mortgagor for funds actually
received.

     4.4  Assignment  Not a Restriction  on the Agent's  Rights.  Nothing herein
contained  shall  detract from or limit the absolute  obligation of Mortgagor to
make payment of the Indebtedness  regardless of whether the proceeds assigned by
this


                                      -25-
<PAGE>

Article IV are  sufficient to pay the same, and the rights under this Article IV
shall be in addition to all other  security now or hereafter  existing to secure
the payment of the Indebtedness.

     4.5 Status of  Assignment.  Notwithstanding  the other  provisions  of this
Article IV and in addition to the other  rights  hereunder,  the  Trustees,  the
Agent or any receiver  appointed in judicial  proceedings for the enforcement of
this  Mortgage  shall have the right to receive all of the  Hydrocarbons  herein
assigned  and the  proceeds  therefrom  after  the  occurrence  and  during  the
continuance  of any Default  and, in any event,  after any Note or other item of
Indebtedness has been declared due and payable in accordance with the provisions
of Section  5.1 hereof and to apply all of said  proceeds as provided in Section
4.2 hereof. Upon any sale of the Mortgaged Property or any part thereof pursuant
to Article VI, the Hydrocarbons  thereafter  produced from the property so sold,
and the proceeds therefrom, shall be included in such sale and shall pass to the
purchaser free and clear of the assignment contained in this Article IV.

     4.6 Indemnification  Obligations.  The following provisions shall apply to,
and be deemed in each case to modify,  each of the  provisions  of this Mortgage
(except those set forth in Section 3.10 hereof) and the other Security Documents
(except to the extent otherwise expressly provided therein) wherein Mortgagor is
obligated to indemnify each of the Indemnified Persons:

          (a)  Mortgagor  agrees to indemnify the Trustees and the Agent against
     all  legal   and   administrative   proceedings   for  which  a  claim  for
     indemnification   may  be  made   by  the   Indemnified   Person   (herein,
     collectively,  called "Indemnification Claims") made against or incurred by
     them or any of them as a  consequence  of the  assertion,  either before or
     after the  payment  in full of the  Indebtedness,  that they or any of them
     received  Hydrocarbons  herein assigned or the proceeds  thereof claimed by
     third persons and the Trustees and the Agent shall have the right to defend
     against any such Indemnification Claims,  employing attorneys therefor, and
     unless furnished with reasonable indemnity,  they or any of them shall have
     the right to pay or compromise and adjust all such Indemnification  Claims.
     Mortgagor  will  indemnify and pay to the Trustees or the Agent any and all
     such  amounts as may be paid in respect  thereof or as may be  successfully
     adjudged against the Trustees and the Agent or any of them. The obligations
     of Mortgagor as hereinabove set forth in this Section 4.6 shall survive the
     release termination, foreclosure or assignment of this Mortgage or any sale
     hereunder.

          (b)  Mortgagor  shall pay when due any  judgments  with  respect to an
     Indemnification  Claim against any of the Indemnified Persons and which are
     rendered  by a final order or decree of a court of  competent  jurisdiction
     from  which no further  appeal  may be taken or has been  taken  within the
     applicable  appeal period.  In the event that such payment is not made, any
     of the  Indemnified  Persons  at its  sole  discretion  may  pay  any  such
     judgments,  in whole or in part,  and look to Mortgagor  for  reimbursement
     pursuant to this Mortgage, or may proceed to file suit against Mortgagor to
     compel such payment.


                                      -26-
<PAGE>

          (c) Any  amount  which  Mortgagor  is  obligated  to pay to or for the
     benefit of an Indemnified Person with respect to an Indemnification  Claim,
     but which is not paid when due,  shall bear interest at the default or post
     maturity  rate of  interest  provided  for in the Note  from the date  such
     amount is due until such amount is paid.

                                   ARTICLE V

                                Events of Default
                                -----------------

     5.1 Events of Default  Hereunder.  In case any one or more of the following
events of default (each,  an "Event of Default")  shall occur and shall not have
been remedied:

          (a) default in the payment of principal of or interest on any Note, or
     in the  payment  of  any  other  Indebtedness  or in  the  performance  and
     discharge of the Obligations secured hereby, when due;

          (b) the  occurrence of an event of default (other than any relating to
     non-payment  of  principal  of or interest on any Note) under the terms and
     provisions of either Credit  Agreement and the continuance of such event of
     default for the applicable period of grace, if any;

          (c) any  warranty or  representation  made by  Mortgagor  herein shall
     prove to be untrue in any  material  respect  as of the date made or deemed
     made; or

          (d) failure by Mortgagor,  within the applicable  period of grace,  if
     any, to cure a default in the due performance or observance of any covenant
     or agreement  contained in this Mortgage and not  constituting a default in
     the payment of principal of or interest  upon any Note or in the payment of
     any other Indebtedness;

then and in any such event the Agent,  at its  option,  may  enforce  any of the
provisions of Article VI hereof,  without any notice or demand of any kind, both
of which are hereby expressly waived.

                                   ARTICLE VI

                           Enforcement of the Security
                           ---------------------------

     6.1  Acceleration.  Upon the  occurrence of an Event of Default and if such
Event of Default  shall be  continuing,  the  Trustees  shall have the right and
power to declare  the then  unpaid  principal  balance on the Note,  the accrued
interest  and any other  accrued but unpaid  portion of the  Indebtedness  to be
immediately  due and payable,  without  further  notice,  presentment,  protest,
demand or action of any nature  whatsoever  (each of which  hereby is  expressly
waived by  Mortgagor),  whereupon  the same  shall  become  immediately  due and
payable.


                                      -27-
<PAGE>

     6.2 Title  Examination.  Upon the  occurrence of an Event of Default and if
such Event of Default shall be continuing, the Trustees shall have the right and
power to cause to be brought down to date a title  examination and tax histories
of the  Mortgaged  Property,  procure  title  opinions  or title  reports or, if
necessary, procure new abstracts and tax histories.

     6.3 Environmental  Audit. Upon the occurrence of an Event of Default and if
such Event of Default shall be continuing, the Trustees shall have the right and
power to procure an updated or entirely new environmental audit of the Mortgaged
Property  including the lands  described in Exhibit A, buildings,  soil,  ground
water and subsurface investigations; have the buildings inspected by an engineer
or other qualified inspector;  enter upon the Mortgaged Property at any time and
from time to time to show the  Mortgaged  Property to potential  purchasers  and
potential  bidders at foreclosure  sale; make available to potential  purchasers
and potential bidders all information obtained pursuant to the foregoing and any
other  information  in the  possession  of the  Agent  regarding  the  Mortgaged
Property.

     6.4 Power of Sale of Real  Property  Constituting  a Part of the  Mortgaged
Property.  Upon  the  occurrence  of an Event of  Default  and if such  Event of
Default  shall be  continuing,  the  Trustees  shall have the right and power to
sell,  to the extent  permitted by Applicable  Law, at one or more sales,  as an
entirety or in parcels, as they may elect, the real property constituting a part
of the Mortgaged Property,  at such place or places and otherwise in such manner
and upon such notice as may be required by Applicable Law, or, in the absence of
any  such  requirement,  as the  Trustees  may  deem  appropriate,  and to  make
conveyance to the purchaser or purchasers;  and Mortgagor shall warrant title to
such real property to such  purchaser or  purchasers.  The Trustees may postpone
the sale of all or any portion of such real property by public  announcement  at
the time and place of such sale,  and from time to time  thereafter  may further
postpone such sale by public  announcement made at the time of sale fixed by the
preceding  postponement.  The right of sale hereunder  shall not be exhausted by
one or any sale, and the Trustees may make other and successive  sales until all
of the trust estate be legally sold.  With respect to that  portion,  if any, of
the Mortgaged  Property  situated in the State of Wyoming,  this Mortgage may be
foreclosed by advertisement and sale as provided by applicable Wyoming statutes.
With respect to that portion,  if any, of the Mortgaged Property situated in the
State of  Oklahoma,  the Agent  shall  have the right and power at its option to
declare the  Indebtedness  secured hereby due and payable and to sell, or direct
the  Trustees  to sell,  the "real  estate,"  as such term is defined  under the
provisions of 46 O.S. Supp.  1986,  ss.42,  constituting a part of the Mortgaged
Property,  all under the terms of 46 O.S. Supp.  1986, ss.40 et seq., and shall,
to the extent  permitted by Applicable  Law, have the other rights  conferred on
the Trustees under the provisions of this Mortgage.

     6.5 Rights of the Trustees with Respect to Personal Property Constituting a
Part of the Mortgaged  Property.  Upon the occurrence of an Event of Default and
if such Event of Default shall be continuing,  the Trustees will have all rights
and  remedies  granted  by  Applicable  Law,  and  particularly  by the  Uniform
Commercial Code, including,  but not limited to, the right to take possession of
all personal property constituting a part


                                      -28-
<PAGE>

of the  Mortgaged  Property,  and for this purpose the Trustees or the Agent may
enter  upon  any  premises  on which  any or all of such  personal  property  is
situated  and take  possession  of and operate  such  personal  property (or any
portion  thereof) or remove it therefrom.  The Trustees or the Agent may require
Mortgagor  to assemble  such  personal  property  and make it  available  to the
Trustees or the Agent at a place to be  designated  by the Trustees or the Agent
which is reasonably convenient to all parties.  Unless such personal property is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a  recognized  market,  the  Trustees  or the Agent will give  Mortgagor
reasonable  notice of the time and place of any public sale or of the time after
which any private sale or other  disposition of such personal  property is to be
made. This requirement of sending reasonable notice will be met if the notice is
mailed by first-class mail,  postage prepaid,  to Mortgagor at the address shown
below the  signatures  at the end of this Mortgage at least five (5) days before
the time of the sale or disposition.

     6.6 Rights with Respect to Fixtures  Constituting  a Part of the  Mortgaged
Property.  Upon  the  occurrence  of an Event of  Default  and if such  Event of
Default  shall be  continuing,  the  Trustees  may elect to treat  the  fixtures
constituting a part of the Mortgaged Property as either real property collateral
or personal  property  collateral  and then  proceed to exercise  such rights as
apply to such type of collateral.

     6.7 Judicial Proceedings. Upon the occurrence of an Event of Default and if
such  Event of  Default  shall be  continuing,  the  Trustees,  in lieu of or in
addition to exercising  any power of sale  hereinabove  given,  may proceed by a
suit or suits in equity or at law, whether for a foreclosure  hereunder for each
or upon credit in one or more  parcels or portions  under  executory or ordinary
process, at the Agent's sole option,  without  appraisement  (appraisement being
expressly  waived),  or for  the  sale  of the  Mortgaged  Property,  or for the
specific  performance of any covenant or agreement herein contained or in aid of
the execution of any power herein granted,  or for the appointment of a receiver
pending any foreclosure  hereunder or the sale of the Mortgaged Property, or for
the enforcement of any other appropriate  legal or equitable  remedy.  Mortgagor
hereby acknowledges the Indebtedness secured hereby,  whether now existing or to
arise  hereafter,  and  confesses  judgment  thereon  in the full  amount of the
Indebtedness in favor of the Agent and any future holder or holders of the Notes
if such obligations are not paid at maturity.

     6.8 Possession of the Mortgaged Property. It shall not be necessary for the
Trustees  or the Agent to have  physically  present or  constructively  in their
possession  at any sale  held by the  Trustees  or the  Agent  or by any  court,
receiver or public officer any or all of the Mortgaged  Property;  and Mortgagor
shall  deliver to the  purchasers at such sale on the date of sale the Mortgaged
Property  purchased  by  such  purchasers  at such  sale,  and if it  should  be
impossible or  impracticable  for any of such purchasers to take actual delivery
of the  Mortgaged  Property,  then the  title  and  right of  possession  to the
Mortgaged Property shall pass to such purchaser at such sale as completely as if
the same had been actually present and delivered.

     6.9 Certain Aspects of a Sale. The Agent shall have the right to become the
purchaser at any sale held by the  Trustees or by any court,  receiver or public
officer,


                                      -29-
<PAGE>

and the Agent  shall  have the right to credit  upon the  amount of the bid made
therefor the amount payable out of the net proceeds of such sale to it. Recitals
contained in any  conveyance  made to any  purchaser at any sale made  hereunder
shall  conclusively  establish  the truth and  accuracy of the  matters  therein
stated, including, without limiting the generality of the foregoing,  nonpayment
of the unpaid  principal sum of, and the interest  accrued on, the Notes,  after
the same have become due and payable,  advertisement and conduct of such sale in
the manner provided herein or appointment of any successor Trustee hereunder.

     6.10 Receipt to Purchaser.  Upon any sale,  whether made under the power of
sale herein  granted and  conferred  or by virtue of judicial  proceedings,  the
receipt  of  the  Trustees,  or  of  the  officer  making  sale  under  judicial
proceedings, shall be sufficient discharge to the purchaser or purchasers at any
sale for his or their purchase money,  and such purchaser or purchasers,  or his
or their  assigns or  personal  representatives,  shall not,  after  paying such
purchase  money and  receiving  such  receipt of the Trustees or of such officer
therefor,  be obliged to see to the application of such purchase money, or be in
anywise answerable for any loss, misapplication or nonapplication thereof.

     6.11 Effect of Sale. Any sale or sales of the Mortgaged  Property,  whether
under the power of sale herein  granted and  conferred  or by virtue of judicial
proceedings,  shall  operate  to divest all right,  title,  interest,  claim and
demand  whatsoever  either at law or in equity,  of Mortgagor  of, in and to the
premises and the property sold, and shall be a perpetual bar, both at law and in
equity,  against Mortgagor,  and Mortgagor's  successors or assigns, and against
any and all  persons  claiming or who shall  thereafter  claim all or any of the
property  sold from,  through or under  Mortgagor or  Mortgagor's  successors or
assigns. Nevertheless, Mortgagor, if requested by the Agent so to do, shall join
in the  execution  and  delivery  of all  proper  conveyances,  assignments  and
transfers of the properties so sold.

     6.12  Application  of Proceeds.  The proceeds of any sale of, and the Rents
and Revenues and other amounts generated by the holding,  leasing,  operation or
other use of,  the  Mortgaged  Property  shall be  applied  by the Agent (or the
receiver,  if one is  appointed)  to the  extent  that  funds  are so  available
therefrom in the following orders of priority:

          (a)  first,  to the  payment  of the  costs  and  expenses  of  taking
     possession  of the  Mortgaged  Property  and of  holding,  using,  leasing,
     repairing,  improving and selling the same, including,  without limitation,
     (i) trustees' and receivers'  fees, (ii) court costs,  (iii) attorneys' and
     accountants' fees, (iv) costs of advertisement,  and (v) the payment of any
     and all  Taxes,  liens,  security  interests  or  other  rights,  title  or
     interests  equal or  superior  to the lien and  security  interest  of this
     Mortgage  (except  those to which  the  Mortgaged  Property  has been  sold
     subject to and without in any way implying the Agent's prior consent to the
     creation thereof);

          (b)  second,  to the  payment  of all  amounts,  other than the unpaid
     principal  balance and accrued but unpaid  interest due on the Note,  which
     may be


                                      -30-
<PAGE>

     due to the Agent or the Lenders under the Security Documents, together with
     interest thereon as provided therein;

          (c) third,  to the payment of all accrued but unpaid  interest  due on
     the Note;

          (d) fourth,  to the payment of the unpaid principal balance due on the
     Note in the inverse order of maturity,  and interest  shall cease as to the
     amount so paid;

          (e) fifth, to the extent funds are available  therefor out of the sale
     proceeds or the Rents and Revenues and to the extent known by the Agent, to
     the payment of any  indebtedness  or  obligation  secured by a  subordinate
     Mortgage on or security interest in the Mortgaged Property; and

          (f) sixth, to Mortgagor or Mortgagor's successors or assigns, as their
     interests shall appear.

     6.13  Mortgagor's  Waiver of  Appraisement,  Marshalling  and Other Rights.
Mortgagor  agrees, to the full extent that Mortgagor may lawfully so agree, that
Mortgagor  will not at any time insist  upon or plead or in any manner  whatever
claim the benefit of any appraisement,  valuation, stay, extension or redemption
law now or hereafter in force,  in order to prevent or hinder the enforcement or
foreclosure  of this Mortgage or the absolute sale of the Mortgaged  Property or
the  possession  thereof  by any  purchaser  at any sale  made  pursuant  to any
provision  hereof,  or  pursuant  to  the  decree  of  any  court  of  competent
jurisdiction;  but  Mortgagor,  for  Mortgagor  and all who may claim through or
under  Mortgagor,  so far as  Mortgagor  or  those  claiming  through  or  under
Mortgagor now or hereafter  lawfully may,  hereby waives the benefit of all such
laws;  provided,  however,  that  appraisement of any of the Mortgaged  Property
located  in the State of  Oklahoma  is hereby  expressly  waived or not,  at the
option of the Trustees,  such option to be exercised prior to or at the time the
judgment is rendered in any foreclosure hereof. Mortgagor, for Mortgagor and all
who may claim through or under Mortgagor,  waives,  to the extent that Mortgagor
may lawfully do so, any and all right to have the Mortgaged Property  marshalled
upon any foreclosure of the lien hereof, or sold in inverse order of alienation,
and agrees that the  Trustees,  the Agent or any court  having  jurisdiction  to
foreclose such lien may sell the Mortgaged  Property as an entirety.  Mortgagor,
for Mortgagor and all who may claim through or under Mortgagor,  further waives,
to the full extent  that  Mortgagor  may  lawfully  do so, any  requirement  for
posting a receiver's  bond or replevin bond or other similar type of bond if the
Trustees  or the Agent  commence an action for  appointment  of a receiver or an
action for replevin to recover possession of any of the Mortgaged  Property.  If
any law in this paragraph  referred to and now in force,  of which  Mortgagor or
Mortgagor's  successor or successors might take advantage despite the provisions
hereof,  shall hereafter be repealed or cease to be in force, such law shall not
thereafter be deemed to constitute any part of the contract herein  contained or
to preclude the operation or application  of the  provisions of this  paragraph.
Pursuant to Section  39-5-19,  New Mexico  Statutes,  Annotated,  1978 Comp., as
amended, Mortgagor agrees that as to the Mortgaged


                                      -31-
<PAGE>

Property  situated in the State of New Mexico,  the  redemption  period shall be
shortened to one (1) month.  Mortgagor hereby waives all rights of appraisement,
sale,  homestead  or  redemption  allowed  under any law or laws of the State of
Arkansas, and especially redemption under the Act of the General Assembly of the
State of  Arkansas  approved  May 8,  1899,  and  acts  amendatory  thereto.  If
Mortgagor is an individual,  Mortgagor  waives and releases all rights of dower,
courtesy and homestead in the Mortgaged  Property  insofar as such rights may in
any way affect the purposes of this Mortgage.

     6.14 Costs and Expenses. All costs and expenses (including attorneys' fees)
incurred by the Trustees or the Agent in protecting  and enforcing  their rights
hereunder shall  constitute a demand  obligation owing by Mortgagor to the party
incurring  such costs and  expenses  and shall draw  interest  at an annual rate
equal to the  highest  rate of interest  from time to time  accruing on the Loan
Note plus one percent (1%) until paid,  all of which shall  constitute a portion
of the Indebtedness.

     6.15 Sale of the Mortgaged  Property in Texas. If any Note is not paid when
due,  whether by acceleration or otherwise,  the Trustees are hereby  authorized
and empowered to sell any part of the Mortgaged Property located in the State of
Texas at public  sale to the  highest  bidder for cash in the area at the county
courthouse  of the county in Texas in which the Texas  portion of the  Mortgaged
Property or any part thereof is situated,  as herein  described,  designated  by
such county's  commissioner's  court for such  proceedings,  or if no area is so
designated,  at the door of the  county  courthouse  of said  county,  at a time
between the hours of 10:00 A.M.  and 4:00 P.M.  which is no later than three (3)
hours after the time  stated in the notice  described  immediately  below as the
earliest  time at which such sale would occur on the first Tuesday of any month,
after  advertising the earliest time at which said sale would occur,  the place,
and terms of said sale, and the portion of the Mortgaged Property to be sold, by
(a) posting (or by having some person or persons  acting for the Trustees  post)
for at least  twenty-one  (21) days  preceding the date of the sale,  written or
printed  notice of the proposed  sale at the  courthouse  door of said county in
which the sale is to be made; and if such portion of the Mortgaged Property lies
in more  than one  county,  one such  notice  of sale  shall  be  posted  at the
courthouse  door of each county in which such part of the Mortgaged  Property is
situated and such part of the Mortgaged  Property may be sold in the area at the
county  courthouse  of any  one of such  counties  designated  by such  county's
commissioner's  court for such proceedings,  or if no area is so designated,  at
the courthouse door of such county,  and the notice so posted shall designate in
which county such  property  shall be sold,  and (b) filing in the office of the
county  clerk of each  county  in which  any part of the  Texas  portion  of the
Mortgaged  Property  which is to be sold at such sale is  situated a copy of the
notice posted in accordance  with the preceding  clause (a). In addition to such
posting  and filing of  notice,  the Agent or other  holder of the  Indebtedness
shall, at least  twenty-one (21) days preceding the date of sale, serve or cause
to be served  written notice of the proposed sale by certified mail on Mortgagor
and on each other debtor, if any, obligated to pay the Indebtedness according to
the records of the Agent or other  holder of the  Indebtedness.  Service of such
notice  shall be completed  upon  deposit of the notice,  enclosed in a postpaid
wrapper  properly  addressed to Mortgagor  and such other  debtors at their most
recent address or addresses as shown by the records of the Agent or other holder
of the


                                      -32-
<PAGE>

Indebtedness in a post office or official  depository under the care and custody
of the  United  States  Postal  Service.  The  affidavit  of any  person  having
knowledge of the facts to the effect that such a service was completed  shall be
prima facie evidence of the fact of service.  Mortgagor agrees that no notice of
any sale, other than as set out in this Section,  need be given by the Trustees,
the Agent or any other person, except as may otherwise be required by Applicable
Law.  Mortgagor hereby  designates as its address for the purpose of such notice
the address set out on the signature  page hereof;  and agrees that such address
shall be changed only by depositing notice of such change enclosed in a postpaid
wrapper in a post  office or official  depository  under the care and custody of
the United  States Postal  Service,  certified  mail,  postage  prepaid,  return
receipt requested, addressed to the Agent or other holder of the Indebtedness at
the address for the Agent set out herein (or to such other  address as the Agent
or other holder of the Indebtedness may have designated by notice given as above
provided  to  Mortgagor  and such other  debtors).  Any such notice of change of
address of Mortgagor or other  debtors or of the Agent or of other holder of the
Indebtedness  shall be effective  three (3) business  days after such deposit if
such post  office  or  official  depository  is  located  in the State of Texas,
otherwise to be effective  upon receipt.  Mortgagor  authorizes and empowers the
Trustees to sell the Texas portion of the Mortgaged  Property in lots or parcels
or in its  entirety as the  Trustees  shall deem  expedient;  and to execute and
deliver to the  purchaser or  purchasers  thereof good and  sufficient  deeds of
conveyance  thereto by fee simple title,  with  evidence of general  warranty by
Mortgagor,  and the title of such  purchaser or  purchasers  when so made by the
Trustees,  Mortgagor binds itself to warrant and forever defend.  Where portions
of the Mortgaged Property lie in different counties,  sales in such counties may
be conducted in any order that the Trustees may deem expedient;  and one or more
such sales may be conducted  in the same month,  or in  successive  or different
months as the  Trustees  may deem  expedient.  Notwithstanding  anything  to the
contrary  contained  herein,  the Trustees may postpone the sale provided for in
this Section 6.15 at any time  without the  necessity of a public  announcement.
The provisions  hereof with respect to the posting and giving of notices of sale
are  intended to comply with the  provisions  of Section  51.002 of the Property
Code of the State of Texas,  effective  January  1,  1984,  and in the event the
requirements,  or any notice,  under such Section 51.002 of the Property Code of
the State of Texas shall be eliminated or the  prescribed  manner of giving such
notices modified by future amendment to, or adoption of any statute superseding,
Section 51.002 of the Property Code of the State of Texas,  the  requirement for
such  particular  notices  shall be deemed  stricken  from or  modified  in this
Mortgage in conformity with such amendment or superseding statute,  effective as
of the effective date thereof.

     6.16 Fair Market  Value.  It is expressly  agreed by Mortgagor  that to the
extent  Section  51.003 of the Texas  Property  Code, or any amendment  thereto,
requires  that the  "fair  market  value"  of the  Mortgaged  Property  shall be
determined as of the foreclosure  date in order to enforce a deficiency  against
Mortgagor or any other party liable for repayment of the Indebtedness,  the term
"fair market value" shall include those matters  required by Applicable  Law and
shall also include the additional factors set forth below:


                                      -33-
<PAGE>

          (a) The  Mortgaged  Property  is to be  valued  "AS IS" and  "WITH ALL
     FAULTS" and there shall be no assumption of restoration of or refurbishment
     of improvements, if any, after the date of the foreclosure;

          (b) An offset to the fair market value of the Mortgaged  Property,  as
     determined  hereunder,  shall be made by  deducting  from  such  value  the
     reasonable  estimated  closing costs  relating to the sale of the Mortgaged
     Property,  including  but  not  limited  to  brokerage  commissions,  title
     examination and curative expenses,  tax prorations,  escrow fees, and other
     common charges which are incurred by a seller of property; and

          (c) After  consideration of the factors required by Applicable Law and
     those required  above,  an additional  discount  factor shall be calculated
     based  upon the  estimated  time it will take to  effectuate  a sale of the
     Mortgaged  Property so that the "fair  market  value" as so  determined  is
     discounted  to be as of the date of the  foreclosure  sale of the Mortgaged
     Property.

     6.17 Operation of the Mortgaged Property by the Trustees or the Agent. Upon
the  occurrence of an Event of Default and during the  continuance of such Event
of Default and in addition to all other rights herein conferred on the Trustees,
the Trustees or the Agent (or any person, firm or corporation  designated by the
Trustees  or the  Agent)  shall  have the  right  and  power,  but  shall not be
obligated,  to enter upon and take possession of any of the Mortgaged  Property,
and to exclude Mortgagor, and Mortgagor's agents or servants,  wholly therefrom,
and to hold,  use,  administer,  manage and  operate the same to the extent that
Mortgagor  shall  be at the  time  entitled  and in its  place  and  stead.  The
Trustees,  the Agent,  or any  person,  firm or  corporation  designated  by the
Trustees or the Agent,  may operate the same without any  liability to Mortgagor
in connection with such operations, except to use ordinary care in the operation
of  such  properties,  and  the  Trustees,  the  Agent  or any  person,  firm or
corporation  designated  by the  Trustees or the Agent,  shall have the right to
collect,  receive and receipt for all  Hydrocarbons  produced and sold from said
properties, to make repairs, purchase machinery and equipment, conduct work-over
operations,  drill  additional  wells and to  exercise  every  power,  right and
privilege of Mortgagor with respect to the Mortgaged  Property.  When and if the
expenses of such  operation and  development  (including  costs of  unsuccessful
work-over  operations or additional  wells) paid by the Trustees or the Agent or
attributable to Mortgagor's  undivided interest therein and withheld,  or offset
against,  by an operator or other party have been paid or  reimbursed in full by
Mortgagor and the Indebtedness paid, said properties shall, if there has been no
sale or foreclosure, be returned to Mortgagor.

     6.18  Separate  Sales.  The  Mortgaged  Property may be sold in one or more
parcels and in such manner and order as the Agent, in its sole  discretion,  may
elect, it being  expressly  understood and agreed that the right of sale arising
out of any Event of Default  shall not be exhausted by any one or more sales but
other and successive  sales may be made until all of the Mortgaged  Property has
been sold or until the Indebtedness has been fully satisfied.


                                      -34-
<PAGE>

     6.19 Remedies  Cumulative,  Concurrent and  Non-Exclusive.  The Agent shall
have all rights,  remedies and recourses  granted in the Security  Documents and
available at law or equity (including  specifically those granted by the Uniform
Commercial  Code in effect and  applicable  to the  Mortgaged  Property,  or any
portion  thereof),  and same (a) shall be cumulative and concurrent,  (b) may be
pursued  separately,  successively  or  concurrently  against any one or more of
Mortgagor,  any Guarantor,  or others  obligated  under the Note, or against the
Mortgaged Property, at the sole discretion of the Agent, (c) may be exercised as
often as occasion  therefor  shall arise,  it being agreed by Mortgagor that the
exercise or failure to exercise  any of same shall in no event be construed as a
waiver or release thereof or of any other right, remedy or recourse, and (d) are
intended to be, and shall be, non-exclusive.

     6.20 Release of and Resort to Collateral. The Agent may release, regardless
of  consideration,  any  part  of  the  Mortgaged  Property  without,  as to the
remainder, in any way impairing, affecting,  subordinating or releasing the lien
or security interests created in or evidenced by the Security Documents or their
stature as a first and prior lien and security  interest in and to the Mortgaged
Property.  For  payment of the  Indebtedness,  the Agent may resort to any other
security  therefor  held by  Trustees  in such order and manner as the Agent may
elect.

     6.21 Discontinuance of Proceedings.  In case the Agent shall have proceeded
to invoke any right,  remedy or recourse  permitted under the Security Documents
and shall  thereafter  elect to discontinue or abandon same for any reason,  the
Agent shall have the unqualified right so to do and, in such an event, Mortgagor
and the Agent shall be restored to their  former  positions  with respect to the
Indebtedness,  the Obligations,  the Security Documents,  the Mortgaged Property
and otherwise, and the rights, remedies, recourses and powers of the Agent shall
continue as if same had never been invoked.

     6.22  Uniform  Commercial  Code  Remedies.  The Agent (or  Trustees  in the
Agent's  behalf) shall have all the rights,  remedies and recourses with respect
to the Personalty,  Fixtures,  Leases and Rents and Revenues  afforded a Secured
Party by the aforesaid  Uniform  Commercial  Code (being  Chapter 9 of the Texas
Business and Commerce Code, as to property within the scope thereof and situated
in the State of Texas) in  addition  to,  and not in  limitation  of,  the other
rights,  remedies  and  recourses  afforded  the Agent  and/or  Trustees  by the
Security Documents.

     6.23 No Obligation of Trustees or the Agent.  The  assignment  and security
interest  herein  granted  shall not be deemed or  construed  (a) to  constitute
Trustees or the Agent as a trustee in possession  of the  Mortgaged  Property or
(b) to  obligate  Trustees or the Agent to (i) lease the  Mortgaged  Property or
attempt to do same, (ii) take any action, (iii) incur any expenses or perform or
discharge any obligation,  duty or liability  whatsoever under any of the Leases
or otherwise.


                                      -35-
<PAGE>

                                  ARTICLE VII

                            Miscellaneous Provisions
                            ------------------------

     7.1 Pooling and Unitization.  Mortgagor shall have the right, and is hereby
authorized, to pool or unitize all or any part of the lands described in Exhibit
A, insofar as relates to the Mortgaged Property, with adjacent lands, leaseholds
and other  interests,  when,  in the  reasonable  judgment of  Mortgagor,  it is
necessary or advisable  to do so in order to form a drilling  and/or  production
unit  to  facilitate  the  orderly  development  of that  part of the  Mortgaged
Property affected thereby,  or to comply with the requirements of any Applicable
Law or  governmental  order or  regulation  relating  to the spacing of wells or
proration  of the  production  therefrom;  provided,  however,  that any unit so
formed for the production of oil shall not  substantially  exceed 160 acres, and
any unit so formed for the production of gas shall not substantially  exceed 640
acres,  unless a larger  area is  required  to conform to an  Applicable  Law or
governmental  order or regulation  relating to the spacing of wells or to obtain
the maximum allowable  production under any Applicable Law or governmental order
or regulation  relating to the proration of  production  therefrom;  and further
provided  that  the  Hydrocarbons  produced  from any  unit so  formed  shall be
allocated among the separately owned tracts or interests  comprising the unit in
a uniform manner consistently  applied.  Any unit so formed may relate to one or
more zones or horizons,  and a unit formed for a particular zone or horizon need
not conform in area to any other unit  relating to a different  zone or horizon,
and a unit  formed for the  production  of oil need not conform in area with any
unit formed for the production of gas.  Immediately  after formation of any such
unit,  Mortgagor  shall furnish to the Trustees and the Agent a true copy of the
pooling  agreement,  declaration  of pooling or other  instrument  creating such
unit, in such number of counterparts as the Trustees may reasonably request. The
interest in any such unit  attributable  to the Mortgaged  Property (or any part
thereof)  included  therein  shall become a part of the  Mortgaged  Property and
shall be subject to the lien  hereof in the same manner and with the same effect
as though such unit and the  interest of  Mortgagor  therein  were  specifically
described  in  Exhibit  A.  Mortgagor  may enter  into  pooling  or  unitization
agreements not hereinabove authorized only with the prior written consent of the
Agent, which consent shall not be unreasonably withheld.

     7.2 No Liability.  Trustees and the Agent shall not be liable for any error
of judgment or act done by Trustees and the Agent in good faith, or be otherwise
responsible or accountable under any circumstances whatsoever,  except for their
negligence or bad faith.  Trustees and the Agent shall not be personally  liable
in case of entry by them,  or anyone  entering  by virtue of the  powers  herein
granted them, upon the Mortgaged  Property for debts  contracted or liability or
damages  incurred in the  management  or  operation of the  Mortgaged  Property.
Trustees and the Agent shall have the right to rely on any instrument,  document
or signature  authorizing or supporting any action taken or proposed to be taken
by them hereunder,  believed by them in good faith to be genuine. Trustees shall
be entitled to reimbursement for expenses incurred by them in the performance of
their duties hereunder and to reasonable compensation for such of their services
hereunder  as shall be  rendered.  Mortgagor  will,  from time to time,  pay the
compensation due to Trustees and the Agent


                                      -36-
<PAGE>

hereunder  and  reimburse  Trustees  and the Agent for,  and save them  harmless
against, any and all liability and expenses which may be incurred by them in the
performance of their duties.

     7.3 Successor Trustees.  Any Trustee may resign in writing addressed to the
Agent or may be removed at any time with or without  cause by an  instrument  in
writing duly executed by the Agent. In case of the death, resignation or removal
of a Trustee,  one or more  successor  Trustees may be appointed by the Agent by
instrument  of  substitution  complying  with  any  applicable  requirements  of
Applicable  Law, and in the absence of any such  requirement  without  formality
other  than  appointment  and  designation  in  writing.  Such  appointment  and
designation  shall be full  evidence of the right and authority to make the same
and of all facts therein  recited,  and upon the making of any such  appointment
and  designation  this conveyance  shall vest in the named successor  Trustee or
Trustees,  all the estate and title of the prior Trustee in all of the Mortgaged
Property,  and he or they shall  thereupon  succeed to all the  rights,  powers,
privileges,  immunities and duties hereby conferred upon the prior Trustee.  All
references  herein to the Trustees shall be deemed to refer to the Trustees from
time to time acting hereunder.

     7.4  Actions  or  Advances  by the  Agent or the  Trustees.  Each and every
covenant  herein  contained  shall be performed and kept by Mortgagor  solely at
Mortgagor's  expense.  If  Mortgagor  shall  fail to  perform or keep any of the
covenants of whatsoever kind or nature contained in this Mortgage, the Agent, or
the Trustees or any receiver  appointed  hereunder or under Applicable Law, may,
but shall not be obligated  to, take action  and/or make advances to perform the
same in Mortgagor's  behalf, and Mortgagor hereby agrees to repay the expense of
such action and such  advances upon demand plus interest at an annual rate equal
to the  Alternate  Base Rate (as defined in the Credit  Agreements)  of interest
from  time to time  accruing  on the Loan Note plus the  Applicable  Margin  (as
defined in the Credit  Agreements)  plus two percent  (2%) until paid or, in the
event  any  promissory  note  evidences  such  indebtedness,  upon the terms and
conditions  thereof. No such advance or action by the Agent, the Trustees or any
receiver  appointed  hereunder  shall be deemed to  relieve  Mortgagor  from any
default hereunder.

     7.5 No Waiver.  Any  failure  by  Trustees  or the Agent to insist,  or any
election  by Trustees or the Agent not to insist,  upon  strict  performance  by
Mortgagor  of  any  of the  terms,  provisions  or  conditions  of the  Security
Documents  shall not be  deemed  to be a waiver  of same or of any  other  term,
provision or condition  thereof,  and Trustees or the Agent shall have the right
at any time or times  thereafter to insist upon strict  performance by Mortgagor
of any and all of such terms, provisions and conditions.

     7.6 Defense of Claims. Mortgagor will notify the Trustees and the Agent, in
writing,  promptly of the  commencement of any legal  proceedings  affecting the
lien or security interest hereof or the Mortgaged Property, or any part thereof,
and will take such action,  employing  attorneys as set forth in Section 3.4(j),
as may be necessary or  appropriate to preserve  Mortgagor's,  the Trustees' and
the Agent's rights  affected  thereby and/or to hold harmless the Trustees,  the
Agent and the Lender Parties in


                                      -37-
<PAGE>

respect of such  proceedings;  and should  Mortgagor  fail or refuse to take any
such action,  the Trustees or the Agent may,  upon giving prior  written  notice
thereof to  Mortgagor,  take such action in behalf and in the name of  Mortgagor
and at Mortgagor's expense. Moreover, the Agent or the Trustees on behalf of the
Agent,  may take such independent  action in connection  therewith as it or they
may in its or their  discretion deem proper,  Mortgagor hereby agreeing that all
sums  advanced or all  expenses  incurred in such  actions  plus  interest at an
annual  rate  equal  to the  Alternate  Base  Rate  (as  defined  in the  Credit
Agreements)  of  interest  from time to time  accruing on the Loan Note plus the
Applicable  Margin (as defined in the Credit  Agreements)  plus two percent (2%)
until paid, will, on demand,  be reimbursed,  as appropriate,  to the Agent, the
Trustees or any  receiver  appointed  hereunder  or under  Applicable  Law.  The
obligations  of  Mortgagor  as  hereinabove  set forth in this Section 7.6 shall
survive the release, termination,  foreclosure or assignment of this Mortgage or
any sale hereunder.

     7.7 The Mortgaged  Property to Revert.  If the Indebtedness  shall be fully
paid and the covenants herein contained shall be well and truly performed,  then
all of the Mortgaged  Property  shall revert to Mortgagor and the entire estate,
right,  title and interest of the Trustees and the Agent shall thereupon  cease;
and the Trustees and the Agent in such case shall, upon the request of Mortgagor
and at Mortgagor's  cost and expense,  deliver to Mortgagor  proper  instruments
acknowledging satisfaction of this Mortgage.

     7.8  Covenants  Running with the Land.  All  Obligations  contained in this
Mortgage are intended by the parties to be, and shall be construed as, covenants
running with the Mortgaged Property.

     7.9 Renewals, Amendments and Other Security. Renewals and extensions of the
Indebtedness  and  modifications  of any kind of the Obligations may be given at
any time and amendments may be made to agreements with third parties relating to
any part of such Indebtedness or the Mortgaged Property and the Trustees and the
Agent may take or may now hold other security from others for the  Indebtedness,
all without  notice to or consent of  Mortgagor.  The  Trustees or the Agent may
resort first to such other security or any part thereof or first to the security
herein given or any part thereof,  or from time to time to either or both,  even
to the partial or complete abandonment of either security, and such action shall
not be a waiver of any rights  conferred by this Mortgage,  which shall continue
as a first lien upon and prior  perfected  security  interest  in the  Mortgaged
Property  not  expressly  released  until the  Notes and all other  Indebtedness
secured hereby are fully paid.

     7.10 Mortgage, Assignment, etc. This Mortgage shall be deemed to be and may
be enforced from time to time as an assignment, chattel mortgage, contract, deed
of trust, financing statement,  real estate mortgage, or security agreement, and
from time to time as any one or more thereof.

     7.11 Limitation on Interest. No provision of this Mortgage or of the Notes,
the Credit  Agreements or any other Loan  Document  shall require the payment or
permit the  collection of interest in excess of the Maximum Lawful Rate or which
is otherwise


                                      -38-
<PAGE>

contrary to Applicable  Law. If any excess of interest in such respect is herein
or in the Notes, the Credit  Agreements or any other Loan Document provided for,
or shall be adjudicated to be so provided for herein or in the Notes, the Credit
Agreements or any other Loan Document,  Mortgagor  shall not be obligated to pay
such excess.

     7.12  Severability.  The Security Documents are intended to be performed in
accordance  with,  and only to the extent  permitted  by, all  applicable  Legal
Requirements.  If  any  provision  of  any  of  the  Security  Documents  or the
application  thereof to any person or circumstance  shall, for any reason and to
any extent, be invalid or unenforceable, neither the remainder of the instrument
in which such  provision is contained nor the  application  of such provision to
other persons or circumstances nor the other instruments referred to hereinabove
shall be affected  thereby,  but rather shall be enforced to the greatest extent
permitted by Applicable Law. It is hereby expressly  stipulated and agreed to be
the intent of Mortgagor and the Agent at all times to comply with the usury, and
all  other,  laws  relating  to the  Security  Documents.  If, at any time,  the
applicable  Legal  Requirements  render  usurious  any amount  called for in any
Security  Document,  then it is  Mortgagor's,  Trustees' and the Agent's express
intent  that such  document  be  immediately  deemed  reformed  and the  amounts
collectible reduced, without the necessity of the execution of any new document,
so as to comply with the then Applicable Law but so as to permit the recovery of
the fullest amount otherwise called for in such Security Documents.

     7.13 Waiver by the  Trustees.  Any and all  covenants in this  Mortgage may
from time to time by instrument in writing  signed by the Trustees and the Agent
be waived to such  extent and in such manner as the  Trustees  and the Agent may
desire,  but no such waiver shall ever affect or impair  either the Trustees' or
the  Agent's  rights or liens or  security  interests  hereunder,  except to the
extent specifically stated in such written instrument.

     7.14 Action by  Individual  Trustee.  Any Trustee from time to time serving
hereunder shall have the absolute right, acting individually, to take any action
and to give any consent and to exercise any right, remedy,  power,  privilege or
authority  conferred  upon the Trustees,  and any action taken by either Trustee
from time to time serving  hereunder shall be binding upon the other Trustee and
no person dealing with either Trustee from time to time serving  hereunder shall
be obligated  to confirm the power and  authority of such Trustee to act without
the concurrence of the other Trustee. In this Mortgage, the term "Trustee" means
the Trustees hereinabove named, or either of them, as the context requires,  and
any successor Trustee.

     7.15 No Partnership.  Nothing contained in this Mortgage is intended to, or
shall be construed as, creating to any extent and in any manner whatsoever,  any
partnership,  joint venture, or association among Mortgagor,  the Trustees,  the
Agent and their respective Affiliates, or in any way as to make the Agent or the
Trustee's co-principals with Mortgagor with reference to the Mortgaged Property,
and any inferences to the contrary are hereby expressly negated.


                                      -39-
<PAGE>

     7.16  Successors  and Assigns.  This  Mortgage is binding  upon  Mortgagor,
Mortgagor's  successors  and  assigns,  and shall  inure to the  benefit  of the
Trustees,  their successors,  and the Agent, its successors and assigns, and the
provisions hereof shall likewise be covenants running with the land.

     7.17 Article and Section Headings. The article and section headings in this
Mortgage are inserted for convenience of reference and shall not be considered a
part of this Mortgage or used in its interpretation.

     7.18 Execution in Counterparts. This Mortgage may be executed in any number
of  counterparts,  each of which  shall  for all  purposes  be  deemed  to be an
original and all of which are identical,  except that, to facilitate recordation
or filing,  in any  particular  counterpart  portions of Exhibit A hereto  which
describe  properties  situated in parishes or counties  other than the parish or
county  in which  such  counterpart  is to be  recorded  or filed  may have been
omitted.

     7.19 Special Filing as Financing Statement. This Mortgage shall likewise be
a Security Agreement and a Financing Statement. This Mortgage shall be filed for
record,  among other places, in the real estate records of each county or parish
in which any  portion  of the real  property  covered  by the oil and gas leases
described in Exhibit A hereto is situated,  and,  when filed in such counties or
parishes shall be effective as a financing  statement  covering Fixtures located
on oil and gas properties,  which oil and gas properties  (and accounts  arising
therefrom) are to be financed at the wellheads of the wells located on the lands
described in Exhibit A. At the option of the Agent,  a carbon,  photographic  or
other  reproduction of this Mortgage or of any financing  statement covering the
Mortgaged  Property or any portion  thereof  shall be  sufficient as a financing
statement and may be filed as such.

     7.20 Notices. Except as otherwise required by Sections 6.5 and 6.15 hereof,
any notice, request, demand or other Mortgage which may be required or permitted
to be given or served upon Mortgagor shall be sufficiently  given when mailed by
first-class  mail,  addressed  to  Mortgagor  at the  address  shown  below  the
signatures at the end of this Mortgage or to such different address as Mortgagor
shall have designated by written notice received by the Agent or the Trustees.

     7.21  Reliance.   Notwithstanding   any  reference  herein  to  the  Credit
Agreements,  the  Notes  or the  Letters  of  Credit,  no party  shall  have any
obligation to inquire into the terms or conditions of any such documents and all
parties shall be fully  authorized to rely upon any statement,  certificate,  or
affidavit of Agent or any future holder of any portion of the Indebtedness as to
the occurrence of any event such as the occurrence of any event of default.

     7.22 The Agent as Agent for the Lender Parties. As described above, certain
Affiliates  of the Agent and the  Lenders  are or may become  parties to certain
Hedging Agreements with Mortgagor and/or Affiliates of Mortgagor.  This Mortgage
secures the  obligations of Mortgagor and such  Affiliates,  as the case may be,
under such Hedging Agreements, and the parties acknowledge for all purposes that
the Agent acts for itself


                                      -40-
<PAGE>

and as agent on behalf of such  Affiliates  of the Agent and such Lenders  which
are so entitled to share in the rights and benefits  accruing to the Agent under
this Mortgage in respect of the Mortgaged Property.

     7.23 Applicable Law. As to any tract or parcel of land comprising a portion
of the  Mortgaged  Property,  this  Mortgage  shall be governed by and construed
according to the Applicable Laws of the State where such tract or parcel of land
is situated.

     7.24 Subrogation.  If any or all of the proceeds of the Note have been used
to extinguish,  extend or renew any indebtedness heretofore existing against the
Mortgaged Property,  then, to the extent of such funds so used, the Indebtedness
and this  Mortgage  shall be  subrogated  to all of the rights,  claims,  liens,
titles and  interests  heretofore  existing  against the  Mortgaged  Property to
secure the  indebtedness  so  extinguished,  extended  or renewed and the former
rights,  claims, liens, titles and interests,  if any, are not waived but rather
are continued in full force and effect in favor of the Agent and are merged with
the lien and security  interest  created  herein as cumulative  security for the
repayment of the Indebtedness and the satisfaction of the Obligations.

     7.25  Fixture  Filing.  Portions of the  Mortgaged  Property  are or are to
become  fixtures  relating to the above  described  real estate,  and  Mortgagor
herein  expressly  covenants  and agrees that the filing of this Mortgage in the
Real Estate Records in the county where the Mortgaged  Property is located shall
also operate from the time of filing therein as a financing statement filed as a
fixture  filing in accordance  with Section  9.502(c) of the Uniform  Commercial
Code - Secured Transactions of the State of Texas.

     7.26  Subordination by The Agent.  From time to time at the Agent's option,
by instrument  executed by the Agent and recorded in the real  property  records
where  this  Mortgage  has been  recorded,  the Agent may  subordinate  the lien
created by this  Mortgage to any interest in the  Mortgaged  Property.  Any such
subordination  shall be solely at the Agent's option,  and in no event shall the
Agent be obligated to subordinate the lien or security  interest created by this
Mortgage.


                                      -41-
<PAGE>



     IN WITNESS  WHEREOF,  Mortgagor  has executed or caused to be executed this
Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and
Fixture  Filing in the presence of the  undersigned  Notary Public on this _____
day of ______________, 2002.



                              MORTGAGOR AND DEBTOR
                              --------------------




                                       CALPINE CORPORATION, a Delaware
                                       corporation


                                       By:______________________________________
                                       Title:___________________________________
                                       Printed Name:____________________________

ATTEST:


_______________________________________
Secretary
Printed Name:__________________________



The name and mailing address of Mortgagor is:


Calpine Corporation
1000 Louisiana Street, Suite 800
Houston, TX  77002


                                                           [Multistate Mortgage]
<PAGE>



                                  SECURED PARTY
                                  -------------




                                       THE BANK OF NOVA SCOTIA, as Agent


                                       By:______________________________________
                                       Title: Director
                                       Printed Name: Kemp Leonard

ATTEST:


______________________________________
Banking Officer/Clerk
Printed Name: John Quick


                           ADDITIONAL SECURED PARTIES
                           --------------------------





                                       _________________________________________
                                       Kemp Leonard, Trustee


                                       _________________________________________
                                       John Quick, Trustee


The name and mailing address of the Secured Party is:

The Bank of Nova Scotia, as Agent
580 California Street
Suite 2100
San Francisco, CA 94104

The mailing address of the additional Secured Parties, Kemp Leonard, as Trustee,
and John Quick, as Trustee, is:

The Bank of Nova Scotia
580 California Street
Suite 2100
San Francisco, CA 94104
Attention:        Kemp Leonard
                  John Quick


                                                           [Multistate Mortgage]
<PAGE>



STATE OF _______________________)
                                )  SS.
COUNTY OF ______________________)

     BE IT REMEMBERED that I,  _______________________________,  a Notary Public
duly qualified,  commissioned,  sworn and acting in and for the County and State
aforesaid,  hereby certify that, on this _____ day of ____________,  2002, there
appeared before me severally each of the following persons,  each being either a
Trustee or else the designated  officer of the  corporation  or association  set
opposite his name, and each such Trustee,  corporation and  association  being a
party to the foregoing instrument:

     __________, the ___________, and ___________, the ______________ Secretary,
of Calpine Corporation, a Delaware corporation,  whose address is 1000 Louisiana
Street, Suite 800, Houston, TX 77002.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO       The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for  the  said  county  and  state,   on  this  day,   within  my
               jurisdiction   the  within  named   persons,   who   acknowledged
               themselves  to hold the  offices  in the  corporation  set  forth
               opposite their name above (or, in the case of the Trustees,  were
               validly appointed  Trustees),  and that for and on behalf of said
               corporation  (or as Trustees,  as the case may be),  executed the
               above and  foregoing  instrument  after


                                                           [Multistate Mortgage]
<PAGE>

               first having been duly authorized by said corporation so to do.

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.

                       Witness my hand and official seal.




                                        ________________________________________
                                        Notary Public
                                        Residing at_____________________________



My commission expires:


                                                           [Multistate Mortgage]
<PAGE>


STATE OF _______________________)
                                )  SS.
COUNTY OF ______________________)

     BE IT REMEMBERED that I,  _______________________________,  a Notary Public
duly qualified,  commissioned,  sworn and acting in and for the County and State
aforesaid,  hereby certify that, on this _____ day of ____________,  2002, there
appeared before me severally each of the following persons,  each being either a
Trustee or else the designated  officer of the  corporation  or association  set
opposite his name, and each such Trustee,  corporation and  association  being a
party to the foregoing instrument:

     Kemp Leonard, Director, and John Quick, Banking Officer/Clerk,  of THE BANK
OF NOVA SCOTIA,  a Canadian  chartered  bank,  whose  address is 580  California
Street, Suite 2100, San Francisco, CA 94104.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO       The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for  the  said  county  and  state,   on  this  day,   within  my
               jurisdiction   the  within  named   persons,   who   acknowledged
               themselves  to hold the  offices  in the  corporation  set  forth
               opposite their name above (or, in the case of the Trustees,  were
               validly appointed  Trustees),  and that for and on behalf of said
               corporation  (or as Trustees,  as the case may be),  executed the
               above and  foregoing  instrument  after  first  having  been duly
               authorized by said corporation so to do.


                                                           [Multistate Mortgage]
<PAGE>

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.

                       Witness my hand and official seal.




                                        ________________________________________
                                        Notary Public
                                        Residing at_____________________________


My commission expires:


                                                           [Multistate Mortgage]
<PAGE>


STATE OF _______________________)
                                )  SS.
COUNTY OF ______________________)

     BE IT REMEMBERED that I,  _______________________________,  a Notary Public
duly qualified,  commissioned,  sworn and acting in and for the County and State
aforesaid,  hereby certify that, on this _____ day of ____________,  2002, there
appeared before me severally each of the following persons,  each being either a
Trustee or else the designated  officer of the  corporation  or association  set
opposite his name, and each such Trustee,  corporation and  association  being a
party to the foregoing instrument:

     Kemp  Leonard and John Quick whose  addresses  are 580  California  Street,
Suite 2100, San Francisco, CA 94104, as Trustees.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO       The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for  the  said  county  and  state,   on  this  day,   within  my
               jurisdiction   the  within  named   persons,   who   acknowledged
               themselves  to hold the  offices  in the  corporation  set  forth
               opposite their name above (or, in the case of the Trustees,  were
               validly appointed  Trustees),  and that for and on behalf of said
               corporation  (or as Trustees,  as the case may be),  executed the
               above and  foregoing  instrument  after  first  having  been duly
               authorized by said corporation so to do.


                                                           [Multistate Mortgage]
<PAGE>

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 abd           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.

                       Witness my hand and official seal.




                                        ________________________________________
                                        Notary Public
                                        Residing at_____________________________


My commission expires:


                                                           [Multistate Mortgage]
<PAGE>



               SCHEDULE I To Mortgage, Deed of Trust, Assignment,
               -------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                      May 1, 2002, from CALPINE CORPORATION
                         to KEMP LEONARD and JOHN QUICK
                           and THE BANK OF NOVA SCOTIA


                          Prior Names of the Mortgagor
                          ----------------------------


Calpine Natural Gas Company L.P.
TGX Corporation
Sheridan Energy, Inc.
Sheridan California Energy, Inc.
Calpine Natural Gas California, Inc.
Calpine Natural Gas Company
Michael Petroleum Corporation


                                      -1-
<PAGE>



                EXHIBIT A To Mortgage, Deed of Trust, Assignment,
                ------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                      May 1, 2002, from CALPINE CORPORATION
                         to KEMP LEONARD AND JOHN QUICK
                           and THE BANK OF NOVA SCOTIA

                               List of Properties
                               ------------------


     1.  Depth  limitations,  unit  designations,  unit tract  descriptions  and
descriptions  (including  percentages,   decimals  or  fractions)  of  undivided
leasehold interests, well names, "Operating Interests",  "Working Interests" and
"Net  Revenue  Interests"  contained  in this  Exhibit A and the  listing of any
percentage, decimal or fractional interest in this Exhibit A shall not be deemed
to limit or  otherwise  diminish  the  interests  being  subjected  to the lien,
security interest and encumbrance of this Mortgage.

     2. Some of the land  descriptions  in this  Exhibit  A may refer  only to a
portion of the land covered by a particular  lease. This Mortgage is not limited
to the land described in Exhibit A but is intended to cover the entire  interest
of Mortgagor in any lease  described in Exhibit A even if such interest  relates
to land not described in Exhibit A.  Reference is made to the land  descriptions
contained in the documents of title  recorded as described in this Exhibit A. To
the  extent  that  the  land  descriptions  in this  Exhibit  A are  incomplete,
incorrect  or not legally  sufficient,  the land  descriptions  contained in the
documents so recorded are incorporated herein by this reference.

     3. References in Exhibit A to instruments on file in the public records are
made for all purposes.  Unless provided otherwise,  all recording  references in
Exhibit A are to the official  real  property  records of the county or counties
(or parish or parishes) in which the mortgaged  property is located and in which
records  such  documents  are or in the past  have  been  customarily  recorded,
whether Deed  Records,  Oil and Gas Records,  Oil and Gas Lease Records or other
records.

     4. A statement herein that a certain  interest  described herein is subject
to the terms of certain  described  or referred to  agreements,  instruments  or
other matters shall not operate to subject such interest to any such  agreement,
instrument or other matter except to the extent that such agreement,  instrument
or matter is otherwise  valid and presently  subsisting nor shall such statement
be deemed to  constitute  a  recognition  by the  parties  hereto  that any such
agreement, instrument or other matter is valid and presently subsisting.

                                                       [Do not detach this page]


                                      A-1
<PAGE>



                EXHIBIT B To Mortgage, Deed of Trust, Assignment,
                ------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                      May 1, 2002, from CALPINE CORPORATION
                         to KEMP LEONARD AND JOHN QUICK
                           and THE BANK OF NOVA SCOTIA

                             Permitted Encumbrances
                             ----------------------

          All initially-capitalized terms used in this Exhibit B, whether or not
     defined in this instrument,  shall have the respective  meanings given such
     terms in the Credit Agreements.

     (a) Liens securing payment of the Obligations  granted pursuant to any Loan
Document and Liens securing  payment of the obligations  granted pursuant to the
loan documents relating to the Existing Credit Agreement;

     (b)  Liens  granted  prior  to the  Effective  Date to  secure  payment  of
Indebtedness  of the type permitted and described in clause (a) of Section 8.2.2
of the Credit Agreements;

     (c) Liens granted to secure payment of  Indebtedness  of the type permitted
and  described  in clause (b) of Section  8.2.2 of the Credit  Agreements  where
recourse is limited as  described  in clause (b) of Section  8.2.2 of the Credit
Agreements;

     (d) Liens for taxes,  assessments or other  governmental  charges or levies
not at the time  delinquent  or  thereafter  payable  without  penalty  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (e) Liens of carriers,  warehousemen,  mechanics, materialmen and landlords
incurred  in the  ordinary  course of  business  for sums not  overdue  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (f) Liens  incurred in the ordinary  course of business in connection  with
workmen's  compensation,  unemployment  insurance or other forms of governmental
insurance  or  benefits,   or  to  secure  performance  of  tenders,   statutory
obligations,  leases and contracts  (other than for borrowed money) entered into
in the ordinary course of business or to secure  obligations on surety or appeal
bonds;

     (g) judgment  Liens in existence  less than 15 days after the entry thereof
or with  respect to which  execution  has been stayed or the payment of which is
covered in full (subject to a customary deductible) by insurance maintained with
responsible insurance companies;

     (h) Liens granted to secure payment of  Indebtedness  of the type permitted
and described in clauses (e) and (g) of Section  8.2.2 of the Credit  Agreements
where recourse is limited as described in clauses (e) or (g), as applicable,  of
Section 8.2.2 of the Credit Agreements;


                                      B-1
<PAGE>

          (i)   Zoning   restrictions,   easements,   rights   of   way,   title
     irregularities  and  other  similar  encumbrances  which  alone  or in  the
     aggregate do not materially  detract from the value of the property subject
     thereto;

          (j) Liens on the property or assets of any  Subsidiary of the Borrower
     in favor of the Borrower;

          (k) Banker's  Liens and similar Liens  (including  set-off  rights) in
     respect of bank deposits;

          (l) Landlord's Liens and similar Liens in respect of leased property;

          (m) Liens  securing  Attributable  Debt with  respect  to  outstanding
     leases  entered into pursuant to  Sale/Leaseback  Transactions  so long as,
     with respect to Sale/Leaseback  Transactions closing after January 1, 2002,
     the amount thereof does not exceed 10% of the consolidated  tangible assets
     of the Borrower and its Subsidiaries; and

          (n) Liens  incurred  in  connection  with the  extension,  renewal  or
     refinancing  of  Indebtedness  secured by Liens  permitted and described in
     clauses  (b),  (c) and  (h) of  Section  8.2.3  of the  Credit  Agreements;
     provided,  however,  that (x) such new Lien shall be limited to all or part
     of  the  same   property  that  secured  the  original  Lien  and  (y)  the
     Indebtedness secured by such Lien at such time is not increased (other than
     by an  amount  necessary  to pay fees  and  expenses,  including  premiums,
     related to the refinancing, refunding, extension, renewal or replacement of
     such Indebtedness);  provided,  further,  that the limitations set forth in
     this  clause  (n) shall not apply to Liens  which are  otherwise  permitted
     under  Section  8.2.3 of the Credit  Agreements,  even if such Liens secure
     Indebtedness issued to repay or refinance existing  Indebtedness  permitted
     and  described in clauses  (b), (c) and (h) of Section  8.2.3 of the Credit
     Agreements.


                                      B-2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>9
<FILENAME>ex10-20.txt
<TEXT>
                                                                   EXHIBIT 10.20



                         MORTGAGE, ASSIGNMENT, SECURITY
                        AGREEMENT AND FINANCING STATEMENT

                                      FROM

                        CALPINE CORPORATION, as Mortgagor

                          (Taxpayer I.D. No.77-0212977)

                                       TO

                            THE BANK OF NOVA SCOTIA,
                            for itself and as Agent,
                                  as Mortgagee

                         (Taxpayer I.D. No. 13-494-1099)

                             Dated as of May 1, 2002

--------------------------------------------------------------------------------

"THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES."

"THIS FINANCING STATEMENT COVERS AS-EXTRACTED  COLLATERAL WHICH WILL BE FINANCED
AT THE WELLHEADS OF THE WELLS LOCATED ON THE  PROPERTIES  DESCRIBED IN EXHIBIT A
HERETO."

"THE  MORTGAGOR HAS AN INTEREST OF RECORD IN THE IMMOVABLE  PROPERTY  CONCERNED,
WHICH IS DESCRIBED IN EXHIBIT A HERETO."

"SOME OF THE PERSONAL PROPERTY  CONSTITUTING A PORTION OF THE MORTGAGED PROPERTY
IS TO BE  AFFIXED  TO THE  PROPERTIES  DESCRIBED  IN  EXHIBIT A HERETO  AND THIS
FINANCING  STATEMENT  IS TO BE FILED AS A FIXTURE  FILING AS DEFINED IN LA. REV.
STAT. SECTION 10:9-102(a)(40)."

THIS INSTRUMENT WAS PREPARED BY:

Kevin L. Shaw, Esq.
Mayer, Brown, Rowe & Maw
700 Louisiana Street, 36th Floor
Houston, TX  77002


<PAGE>



MORTGAGE, ASSIGNMENT,                  *     UNITED STATES OF AMERICA
SECURITY AGREEMENT
AND FINANCING STATEMENT                *     STATE OF CALIFORNIA

                          BY           *     COUNTY OF SANTA CLARA

CALPINE CORPORATION,                   *
a Delaware corporation                       STATE OF CALIFORNIA
in Favor of                            *
THE BANK OF NOVA SCOTIA,                     COUNTY OF SAN FRANCISCO
a Canadian chartered bank              *

*  *  *  *  *  *  *  *  *  *  *  *  *  *



          BE IT  KNOWN,  that on  this  2nd day of May,  2002,  before  me,  the
undersigned  Notary Public duly  commissioned and qualified in and for the State
and County first written above, and in the presence of the undersigned witnesses
personally came and appeared:

CALPINE  CORPORATION,  a Delaware  corporation  having a mailing address of 1000
Louisiana  Street,   Suite  800,  Houston  TX  77002,  and  a  federal  taxpayer
identification  number of 77-0212977,  appearing herein through Robert D. Kelly,
its Executive  Vice  President,  duly  authorized by resolutions of the Board of
Directors of said  corporation,  a certified copy of which is attached hereto as
Exhibit B (herein called the "Mortgagor" or the  "Borrower"),  who declared that
Mortgagor does by these presents  declare and acknowledge an  indebtedness  unto
Scotiabank (as hereinafter defined)




          BE IT  KNOWN,  that on  this  1ST day of May,  2002,  before  me,  the
undersigned  Notary Public duly  commissioned and qualified in and for the State
and  County  second  written  above,  and in  the  presence  of the  undersigned
witnesses personally came and appeared:

     THE BANK OF NOVA SCOTIA, a Canadian chartered bank ("Scotiabank"), having a
     mailing  address of 580 California  Street,  Suite 2100, San Francisco,  CA
     94119,  and  a  federal  taxpayer  identification  number  of  13-494-1099,
     appearing  herein through its undersigned  representative,  duly authorized
     hereunto

(herein called the "Agent"), here present who accepts this instrument.


                                      -1-
<PAGE>

Borrower and Agent declare as follows:



                                    RECITALS

Borrower,  certain  institutional  lenders  (individually,  a "2002  Lender" and
collectively,  the "2002  Lenders")  and  Scotiabank  have entered into a Credit
Agreement,  dated as of  March  8,  2002  (herein,  as the same may be  amended,
modified or supplemented  from time to time,  called the "2002 Loan Agreement"),
pursuant to which the 2002  Lenders  have  agreed to make loans to Borrower  and
issue or cause to be  issued  letters  of credit  for the  benefit  of  Borrower
(individually,  a "2002 Letter of Credit" and collectively, the "2002 Letters of
Credit")  in amounts not to exceed at any one time  outstanding  $1,600,000,000,
and Borrower,  to evidence its  indebtedness  to the 2002 Lenders under the 2002
Loan Agreement,  has executed and delivered (or will execute and deliver) to the
2002 Lenders its secured  promissory notes in the aggregate,  original principal
amount of $1,600,000,000, to mature not later than May 24, 2003 (individually, a
"2002 Loan Note" and collectively,  the "2002 Loan Notes"),  the 2002 Loan Notes
being payable to the order of the 2002 Lenders, bearing interest as provided for
therein,   and  containing   provisions  for  payment  of  attorneys'  fees  and
acceleration of maturity in the event of default, as therein set forth.

Borrower, certain institutional lenders (individually,  an "Existing Lender" and
collectively,  the "Existing Lenders";  and together with the 2002 Lenders,  the
"Lenders") and Scotiabank have entered into a Second Amended and Restated Credit
Agreement  dated  as of May  23,  2000  (herein,  as the  same  may be  amended,
modified,  or  supplemented  from  time to time,  called  the  "Existing  Credit
Agreement")  pursuant to which the Existing Lenders have agreed to make loans to
Borrower  and issue or cause to be issued any  letters of credit for the benefit
of Borrower (individually,  an "Existing Letter of Credit" and collectively, the
"Existing  Letters  of  Credit")  in  amounts  not to  exceed  at any  one  time
$400,000,000, and Borrower, to evidence its indebtedness to the Existing Lenders
under the Existing Credit Agreement,  has executed and delivered to the Existing
Lenders  its  secured  promissory  notes to mature not later  than May 24,  2003
(individually,  an "Existing  Loan Note" and  collectively,  the "Existing  Loan
Notes"),  the  Existing  Loan Notes being  payable to the order of the  Existing
Lenders, bearing interest as provided for therein, and containing provisions for
payment of attorneys' fees and acceleration of maturity in the event of default,
as therein set forth.  The 2002 Loan Agreement and the Existing Credit Agreement
are herein collectively called the "Credit  Agreements." The 2002 Loan Notes and
the  Existing  Loan  Notes  are  herein  individually  called a "Loan  Note" and
collectively  called  the "Loan  Notes".  The 2002  Letters  of  Credit  and the
Existing Letters of Credit are herein  individually  called a "Letter of Credit"
and collectively called the "Letters of Credit".

It is a condition precedent to the obligation of the Lenders to make Loans under
the Credit  Agreements,  to issue or cause to be issued  Letters of Credit under
the Credit  Agreements and to the  obligations of the Agent,  the Lenders or the
Lender  Parties (as the case may be), that the  Mortgagor  executes and delivers
this instrument.


                                      -2-
<PAGE>

For all purposes of this instrument, unless the context otherwise requires:

          A. "Affiliate" of any Person means any other Person which, directly or
     indirectly, controls, is controlled by or is under common control with such
     Person  (excluding any trustee under, or any committee with  responsibility
     for  administering,  any Plan (as  defined  in the Credit  Agreements)).  A
     Person shall be deemed to be "controlled by" any other Person if such other
     Person possesses, directly or indirectly, power

               (a) to vote  10% or more of the  securities  (on a fully  diluted
          basis) having  ordinary  voting power for the election of directors or
          managing general partners; or

               (b) to  direct  or cause  the  direction  of the  management  and
          policies of such Person whether by contract or otherwise.

          B. "Agent" is defined in the Preamble of this instrument.

          C.  "Applicable  Law" means with respect to any Person or matter,  any
     federal, state, regional, tribal or local statute, law, code, rule, treaty,
     convention,   application,   order,  decree,  consent  decree,  injunction,
     directive,  determination or other  requirement  (whether or not having the
     force of law) relating to such Person or matter and, where applicable,  any
     interpretation thereof by a Governmental Authority having jurisdiction with
     respect  thereto  or  charged  with the  administration  or  interpretation
     thereof.

          D. "Borrower" is defined in the Preamble of this instrument.

          E. "Credit Agreements" is defined in Recital 2 to this instrument.

          F. "Deed of Trust" means each mortgage,  deed of trust,  or other real
     property collateral  security instrument in a form reasonably  satisfactory
     to the Agent,  executed and delivered pursuant to Section 8.1.8 of the 2002
     Credit Agreement, as amended, supplemented,  restated or otherwise modified
     from time to time, including, without limitation, this instrument.

          G.  "Environmental  Laws"  shall mean any and all  present  and future
     United States federal,  state and local laws or regulations,  codes, plans,
     orders, decrees,  judgments,  injunctions and lawfully imposed requirements
     issued,   promulgated  or  entered  thereunder  relating  to  pollution  or
     protection of the  environment,  including  laws relating to reclamation of
     land and waterways and laws relating to emissions,  discharges, releases or
     threatened releases of pollutants, contaminants,  chemicals, or industrial,
     toxic or hazardous  substances or wastes into the  environment  (including,
     without limitation,  ambient air, surface water, ground water, land surface
     or subsurface strata) or otherwise relating to the manufacture, processing,
     distribution,  use, treatment,  storage, disposal, transport or handling of
     pollutants,  contaminants,  chemicals,  or  industrial,  toxic or hazardous
     substances or wastes.


                                      -3-
<PAGE>

          H. "Existing  Assignment  Agreement" means that certain Assignment and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California limited  partnership,  pursuant to Section 6.1.3 of the Existing
     Credit  Agreement,  substantially  in the form of Exhibit F to the Existing
     Credit  Agreement,  as  amended,  supplemented,  amended  and  restated  or
     otherwise modified from time to time.

          I.  "Existing  Credit  Agreement"  is  defined  in  Recital  2 to this
     instrument.

          J. "Existing Lenders" is defined in Recital 2 to this instrument.

          K.  "Existing  Letters  of  Credit"  is  defined  in Recital 2 to this
     instrument.

          L. "Existing Loan Documents" means the Existing Credit Agreement,  the
     Existing  Loan Notes,  the Existing  Assignment  Agreement,  and each other
     relevant  agreement,  document  or  instrument  (including  the fee  letter
     described in Section 3.3.2 of the Existing Credit  Agreement)  delivered in
     connection therewith.

          M. "Existing Loan Notes" is defined in Recital 2 to this instrument.

          N. "Fee Letter"  means the fee letter  agreement  described in Section
     3.3.2 of the 2002 Credit Agreement.

          O.  "Governmental   Authority"  means  any  and  all  courts,  boards,
     agencies, commissions,  offices or authorities of any nature whatsoever for
     any governmental unit (federal, state, county, district,  municipal,  city,
     tribe or otherwise)  whether now or hereafter in existence charged with the
     administration, interpretation or enforcement of any Applicable Law.

          P.  "Guaranty"  means  the  guaranty  executed  and  delivered  by the
     Guarantors  pursuant  to  Section  6.1.3  of  the  2002  Credit  Agreement,
     substantially in the form of Exhibit H thereto, as amended, supplemented or
     otherwise modified from time to time.

          Q.  "Hazardous  Materials  Indemnity"  means  that  certain  hazardous
     materials  indemnity  executed and  delivered  by the Borrower  pursuant to
     Section  8.1.8 of the 2002  Credit  Agreement,  as  amended,  supplemented,
     restated or otherwise modified from time to time.

          R. "Hedging  Agreements"  means:  (a) interest  rate swap  agreements,
     basis  swap  agreements,   interest  rate  cap  agreements,   forward  rate
     agreements,  interest  rate  floor  agreements  and  interest  rate  collar
     agreements,  and all other  agreements or arrangements  designed to protect
     such Person against  fluctuations  in interest  rates or currency  exchange
     rates,  and (b) forward  contracts,  options,  futures  contracts,  futures
     options,  commodity swaps, commodity options,  commodity collars, commodity
     caps, commodity floors and


                                      -4-
<PAGE>

     all other  agreements  or  arrangements  designed  to protect  such  Person
     against fluctuations in the price of commodities.

          S.  "Hedging  Obligations"  means  with  respect  to any  Person,  all
     liabilities  (including  without  limitation  obligations  and  liabilities
     arising in connection with or as a result of early or premature termination
     of a Hedging  Agreement,  whether or not occurring as a result of a default
     thereunder) of such Person under a Hedging Agreement.

          T. "Hydrocarbons"  means collectively,  oil, gas, casinghead gas, drip
     gasoline, natural gasoline, condensate,  distillate and all other liquid or
     gaseous  hydrocarbons and related minerals and all products  therefrom,  in
     each case whether in a natural or a processed state.

          U.  "Indebtedness",  "Note"  and  "Notes"  shall  have the  respective
     meanings set forth in Section 1.2 hereof.

          V.  "Indemnification   Claim"  is  defined  in  Section  3.6  of  this
     instrument.

          W.  "Indemnified  Person" means Agent and each of the Lender  Parties,
     and their respective employees,  affiliates,  agents and attorneys, and any
     other Person to be indemnified under this instrument.

          X. "Joint Operating  Agreements" shall mean, with respect to the lands
     described in Exhibit A, the respective  operating  agreement  burdening the
     lands described in Exhibit A.

          Y. "lands  described in Exhibit A" shall  include the real property or
     other  interest  in any  lands  which are  either  described  in  Exhibit A
     attached hereto or the description of which is incorporated in Exhibit A by
     reference to an instrument or document containing in, or referring to, such
     a description,  and shall also include any lands now or hereafter  unitized
     or  pooled  with  lands  which are  either  described  in  Exhibit A or the
     description of which is incorporated in Exhibit A by reference and Fixtures
     and all rights,  titles and interests  appurtenant  thereto.  References to
     Exhibit A shall include, where applicable, Exhibit A-1 as well.

          Z. "Leases" means any and all leases (including without limitation oil
     and gas leases and oil, gas and other minerals  leases),  surface leases or
     easements,  subleases,  licenses,  concessions,  operating  rights or other
     agreements  (written or verbal,  now or hereafter in effect)  which grant a
     possessory  interest  in and to,  or the  right  to  explore,  use,  lease,
     license,  possess, produce, process, store and transport Hydrocarbons from,
     operate from, or otherwise enjoy, the Mortgaged Property, together with all
     amendments, modifications, extensions and renewals thereof.

          AA.  "Legal  Requirements"  means (i) any and all  present  and future
     judicial  decisions,  statutes,  rulings,  rules,  regulations,   licenses,
     decisions, orders,


                                      -5-
<PAGE>

     injunctions,   decrees,   permits,   certificates   or  ordinances  of  any
     Governmental  Authority  in any way  applicable  to the  Mortgagor,  or the
     Mortgaged Property,  including the ownership,  use,  occupancy,  operation,
     maintenance, repair or reconstruction thereof, and any other Applicable Law
     enacted  by  any   Governmental   Authority   relating  to  health  or  the
     environment,  (ii) the  Mortgagor's  presently  or  subsequently  effective
     Organic  Documents,  (iii) any and all Leases,  (iv) any and all leases and
     other contracts (written or oral) of any nature to which the Mortgagor,  or
     the  Mortgaged  Property  may be  bound  and (v) any and all  restrictions,
     restrictive covenants or zoning,  present and future, as the same may apply
     to the Mortgaged Property.

          BB.  "Lender  Party" or "Lender  Parties"  means,  as the  context may
     require,  the Agent,  any Lender and any Affiliate of any Lender that is an
     issuer under a letter of credit,  and each of their respective  successors,
     transferees and assigns.

          CC. "Loan  Documents"  means the Existing Loan  Documents and the 2002
     Loan Documents.

          DD. "Loan Note" is defined in Recital 2 to this instrument.

          EE.  "Maximum  Lawful  Rate"  means the  maximum  nonusurious  rate of
     interest that may be received,  charged or contracted for under  Applicable
     Law from time to time in effect.

          FF.  "Mortgaged  Property"  shall  mean  the  properties,  rights  and
     interests hereinafter described and defined as the Mortgaged Property.

          GG.  "Obligations"  means  any and all of the  covenants,  warranties,
     representations   and   other   obligations   (other   than  to  repay  the
     Indebtedness)  made or  undertaken by the Mortgagor or others to the Agent,
     the Lender Parties or others as set forth in the Credit Agreements or other
     Loan Documents.

          HH. "oil and gas leases"  shall  include oil, gas and mineral  leases,
     subleases and assignments thereof,  operating rights, servitudes, and shall
     also include subleases and assignments of operating rights.

          II.  "Operating  Equipment"  shall  mean  all  surface  or  subsurface
     machinery,  goods,  equipment,   fixtures,  movable  property  attached  to
     immovable  property  and other  movable  property,  inventory,  facilities,
     supplies or other property of whatsoever kind or nature (excluding drilling
     rigs, trucks,  automotive equipment or other property taken to the premises
     to drill a well or for  other  similar  temporary  uses)  now or  hereafter
     located  on or under  any of the  lands  described  in  Exhibit A which are
     useful for the production,  gathering,  treatment,  processing,  storage or
     transportation of Hydrocarbons (together with all accessions, additions and
     attachments to any thereof),  including, but not by way of limitation,  all
     oil wells, gas wells, water wells, injection wells, casing, tubing, tubular
     goods, rods, pumping units and engines, christmas trees, platforms,



                                      -6-
<PAGE>

     derricks,  separators,  steam generators,  compressors,  gun barrels,  flow
     lines,  tanks,  gas systems  (for  gathering,  treating  and  compression),
     pipelines (including gathering lines, laterals and trunklines),  chemicals,
     solutions,  water systems (for  treating,  disposal and  injection),  power
     plants, poles, lines, transformers,  starters and controllers,  supervisory
     control and data acquisition  systems,  machine shops, tools, storage yards
     and equipment stored therein, buildings and camps, telegraph, telephone and
     other communication systems, roads, boats, loading docks, loading racks and
     shipping facilities.

          JJ.  "Organic   Documents"   means  the  Articles  of   Incorporation,
     Certificate of  Incorporation,  limited  liability  company  certificate of
     formation and regulations or operating  agreement,  partnership  agreement,
     limited partnership agreement,  joint venture agreement, trust agreement or
     other  similar  documents  governing  the  organization  and operation of a
     business association.

          KK. "Permits" means all authorizations, approvals, permits, variances,
     land use entitlements, consents, licenses, franchises and agreements issued
     by or  entered  into  with  any  Governmental  Authority  now or  hereafter
     required for all stages of exploration, developing, operating, and plugging
     and  abandoning oil and gas wells  (including,  without  limitation,  those
     shown on Exhibit A) on all or any part of the lands  described in Exhibit A
     (or any other lands any production  from which, or profits or proceeds from
     such  production,  is attributed to any interest in the lands  described in
     Exhibit A).

          LL. "Permitted  Encumbrances" means the outstanding liens,  easements,
     building  lines,  restrictions,   exceptions,   reservations,   conditions,
     limitations,  security interests and other matters (if any) as reflected on
     Exhibit C attached  hereto and the lien and security  interests  created by
     the Security Documents.

          MM.  "Person"  means any  natural  person,  corporation,  partnership,
     limited  liability   company,   firm,   association,   trust,   government,
     governmental  agency or any other entity,  whether acting in an individual,
     fiduciary or other capacity.

          NN.  "Personalty"  means all of the right,  title and  interest of the
     Mortgagor  now  owned  or  hereafter  acquired  in and  to  all  furniture,
     furnishings,  Equipment,  machinery,  Goods,  General  Intangibles,  money,
     Accounts,   receivables,   Contract  Rights,   Inventory,  all  refundable,
     returnable or  reimbursable  fees,  deposits or other funds or evidences of
     credit or indebtedness  deposited by or on behalf of the Mortgagor with any
     Governmental  Authority,  agencies,  boards,  corporations,   providers  of
     utility services,  public or private,  including specifically,  but without
     limitation,  all refundable,  returnable or reimbursable tap fees,  utility
     deposits,  commitment  fees and development  costs,  and all other personal
     property  (other than the  Fixtures) of any kind or character as defined in
     and subject to the provisions of Article 9 of the Uniform  Commercial Code,
     now or hereafter located upon, within or about, or used in connection with,


                                      -7-
<PAGE>

     the  lands   described  in  Exhibit  A,  together  with  all   accessories,
     replacements  and  substitutions  thereto  or  therefor  and  the  Proceeds
     thereof.

          OO.  "Pledge  Agreements"  means the pledge  agreements  executed  and
     delivered  pursuant to Section 6.1.4 of the 2002 Credit Agreement,  as such
     agreements  may be amended,  supplemented,  restated or otherwise  modified
     from time to time,  which  will be in  substantially  the form of Exhibit I
     thereto.

          PP. "Production Sale Contracts" shall mean contracts now in effect, or
     hereafter entered into by the Mortgagor, or entered into by the Mortgagor's
     predecessors  in interest,  for the sale,  purchase,  exchange,  gathering,
     transportation,  treating or processing of  Hydrocarbons  produced from the
     lands described in Exhibit A attached hereto and made a part hereof.

          QQ. "Rents and  Revenues"  means all of the rents,  revenues,  income,
     proceeds,  profits  and other  benefits  paid or  payable by parties to the
     Leases other than the Mortgagor for using, leasing, licensing,  possessing,
     operating,  selling or otherwise enjoying the Mortgaged Property, including
     the proceeds from the sale of Hydrocarbons.

          RR.  "Security  Documents"  means  the  Notes,  this  instrument,  the
     financing  statements  and any and all other  instruments  now or hereafter
     executed  by the  Mortgagor  or any other  person or party to  evidence  or
     secure the payment of the  Indebtedness or the performance and discharge of
     the  Obligations,  as any of the  foregoing  may  be  amended,  renewed  or
     extended.  Notwithstanding  that the  definition of Security  Documents and
     various of the components  thereof  include  documents that may be amended,
     renewed  or  extended,  such  definition  shall in no way be  construed  to
     suggest  that any party has agreed  (or is  obligated)  to amend,  renew or
     extend them.

          SS. "2002  Assignment  Agreement"  means that certain  Assignment  and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California  limited  partnership,  pursuant  to  Section  6.1.8 of the 2002
     Credit  Agreement,  substantially  in the  form of  Exhibit  K  hereto,  as
     amended, supplemented, amended and restated or otherwise modified from time
     to time.

          TT. "2002 Loan Agreement" is defined in Recital 1 to this instrument.

          UU. "2002 Lenders" is defined in Recital 1 to this instrument.

          VV.  "2002  Letters  of  Credit"  is  defined  in  Recital  1 to  this
     instrument.

          WW. "2002 Loan Documents"  means the 2002 Credit  Agreement,  the 2002
     Loan Notes, the Pledge  Agreements,  the Guaranty,  the Deeds of Trust, the
     2002  Assignment  Agreement,  the Hazardous  Materials  Indemnity,  the Fee
     Letter, and each other relevant agreement, document or instrument delivered
     in connection therewith.


                                      -8-
<PAGE>

          XX. "2002 Loan Notes" is defined in Recital 1 to this instrument.

          YY.  "Taxes"  means all real  property  and personal  property  taxes,
     production taxes, assessments,  permit fees, water, gas, sewer, electricity
     and other utility rates and charges,  charges for any easement,  license or
     agreement  maintained  for the benefit of the Mortgaged  Property,  and all
     other taxes,  charges and assessments and any interest,  costs or penalties
     with respect thereto,  of any kind and nature  whatsoever which at any time
     prior to or after the execution hereof may be charged,  assessed, levied or
     imposed  upon the  Mortgaged  Property  or the  Rents and  Revenues  or the
     ownership, use, occupancy or enjoyment thereof.

          ZZ. "Transportation Agreements" shall mean any contracts or agreements
     entered  into from time to time by the  Mortgagor,  or entered  into by the
     Mortgagor's  predecessors in interest,  relating to the  transportation  of
     Hydrocarbons,   as  any  such   agreement   or  contract  may  be  amended,
     supplemented, restated or otherwise modified from time to time.

          AAA. "Uniform  Commercial Code" shall mean the Uniform Commercial Code
     as in  effect  from  time to  time in the  State  of  Louisiana  (Louisiana
     Commercial  Laws -  Louisiana  Revised  Statutes  Title  10)  or any  other
     applicable state, and the terms "Accounts", "Account Debtor", "As Extracted
     Collateral",  "Deposit  Account",  "Chattel Paper",  "Documents",  "General
     Intangibles", "Goods", "Equipment", "Fixtures", "Inventory", "Instruments",
     and "Proceeds" shall have the respective meanings assigned to such terms in
     the Uniform Commercial Code.

          BBB. "Water Rights" shall mean  (including  without  limitation  those
     described  in Exhibit A hereto) all now or  hereafter  existing or acquired
     water and water rights,  reservoirs and reservoir rights, ditches and ditch
     rights,  wells and well rights,  whether  evidenced or initiated by permit,
     decree,   well  registration,   appropriation  not  decreed,   water  court
     application,  shares  of  stock  or  other  interests  in  mutual  ditch or
     reservoir  companies or carrier ditch or reservoir  companies or otherwise,
     appertaining or appurtenant to or beneficially used or useful in connection
     with the lands  described  in Exhibit  A,  together  with all  pumps,  well
     casings,   wellheads,   electrical   installations,   pumphouses,   meters,
     monitoring wells and systems,  measuring  devices,  pipes,  pipelines,  and
     other structures or personal  property which are or may be used to produce,
     regulate, measure, distribute,  store, or use water from the said water and
     water rights,  reservoirs and reservoir  rights,  ditches and ditch rights,
     wells and well rights.

                                      GRANT

     NOW, THEREFORE, the Mortgagor, for and in consideration of the premises and
as security for the  Indebtedness  as described  below,  by these  presents does
specially mortgage,  collaterally assign,  pledge, affect and hypothecate,  unto
and in favor of the Agent, individually and as agent for the Lender Parties, all
the  Mortgagor's  right,  title and  interest,  whether  now owned or  hereafter
acquired, in and to all of the hereinafter


                                      -9-
<PAGE>

described  properties,  rights and interests;  and,  insofar as such properties,
rights  and  interests  consist of  Equipment,  General  Intangibles,  Accounts,
Deposit Accounts, As Extracted Collateral, Contract Rights, Inventory, Fixtures,
Proceeds of  collateral  or any other  personal  property of a kind or character
defined in or subject to the  applicable  provisions  of the Uniform  Commercial
Code  (as in  effect  from  time to time in the  appropriate  jurisdiction  with
respect to each of said properties,  rights and interests), the Mortgagor hereby
grants  to the  Agent,  individually  and as agent  for the  Lender  Parties,  a
continuing security interest therein; namely:

          (a) the lands  described  in  Exhibit  A, and  Leases,  fee,  mineral,
     overriding  royalty,  royalty and other  interests  which are  described in
     Exhibit A,

          (b) the  presently  existing  and (subject to the terms of Section 6.1
     hereof) hereafter arising unitization, unit operating,  communitization and
     pooling agreements and the properties covered and the units created thereby
     (including, without limitation, all units formed under orders, regulations,
     rules,  approvals,  decisions or other  official  acts of any  Governmental
     Authority having jurisdiction) which are specifically  described in Exhibit
     A or which  relate  to any of the  properties  and  interests  specifically
     described in Exhibit A,

          (c) the  Hydrocarbons  which are in,  under,  upon,  produced or to be
     produced from, or which are attributed or allocated to, the lands described
     in Exhibit A,

          (d) the Permits,

          (e) the Production Sale Contracts,

          (f) the Joint Operating Agreements,

          (g) the Transportation Agreements,

          (h) the Hedging Agreements,

          (i) the Leases,

          (j) the Personalty,

          (k) the Rents and Revenues,

          (l) the Operating Equipment,

          (m) the Water Rights, and

          (n)  without  duplication  of any  other  provision  of this  granting
     clause,  all of the Mortgagor's now owned or hereafter  arising or acquired
     Equipment,  Fixtures and other Goods necessary or used in connection  with,
     and Inventory, Accounts, As Extracted Collateral, Deposit Accounts, General
     Intangibles,


                                      -10-
<PAGE>

     Contract  Rights,  Chattel  Paper,  Electronic  Chattel  Paper,  Documents,
     Instruments,  and Proceeds arising from, or relating to, the properties and
     lands described in Exhibit A (including Exhibit A-1),

     together  with any and all  corrections  or  amendments  to,  or  renewals,
     extensions or ratifications  of, or replacements or substitutions  for, any
     of  the  same,  or any  instrument  relating  thereto,  and  all  accounts,
     contracts,   contract  rights,   "take-or-pay"  settlements,   buy-outs  or
     buy-downs, gas balancing claims, options,  nominee agreements,  unitization
     and pooling agreements, operating agreements and unit operating agreements,
     processing agreements,  salt water disposal agreements,  farmin agreements,
     farmout  agreements,  joint  venture  agreements,   partnership  agreements
     (including  mining  partnerships),   exploration  agreements,  bottom  hole
     agreements, dry hole agreements,  support agreements,  acreage contribution
     agreements,   surface  use  and  surface  damage  agreements,  net  profits
     agreements,  production payment agreements,  Hedging Agreements,  insurance
     policies, title opinions, title abstracts, title materials and information,
     files, records,  writings,  data bases,  information,  systems,  logs, well
     cores,  fluid samples,  production data and reports,  well testing data and
     reports,  maps,  seismic and geophysical,  geological and chemical data and
     information,  interpretative  and analytical  reports of any kind or nature
     (including,  without limitation,  reserve studies and reserve evaluations),
     computer hardware and software and all  documentation  therefor or relating
     thereto  (including,  without  limitation,  all  licenses  relating  to  or
     covering such computer  hardware,  software  and/or  documentation),  trade
     secrets,  trademarks,  service marks and business names and the goodwill of
     the  business  relating  thereto,   copyrights,   copyright  registrations,
     unpatented inventions, patent applications and patents, accounting records,
     rights-of-way,  franchises, bonds, easements,  servitudes,  surface leases,
     permits, licenses, tenements,  hereditaments,  appurtenances,  concessions,
     occupancy leases,  privileges,  development  rights,  condemnation  awards,
     claims  against  third  parties,  general  intangibles,  rents,  royalties,
     issues, profits,  products and proceeds,  whether now or hereafter existing
     or arising,  used or useful in connection with,  covering,  relating to, or
     arising from or in connection  with, any of the aforesaid items (a) through
     (n), inclusive, in this granting clause mentioned,  and all other things of
     value and incident  thereto  (including,  without  limitation,  any and all
     liens, lien rights,  security  interests and other  properties,  rights and
     interests)  which the  Mortgagor  might at any time have or be entitled to,
     but  excluding  any data or contracts  with respect to which  mortgaging or
     granting of a lien or a security  interest is prohibited by existing  third
     party agreements,

all the aforesaid properties,  rights and interests, together with any additions
thereto  which  may be  subjected  to the lien  and  security  interest  of this
instrument  by  means  of  supplements  hereto,  being  hereinafter  called  the
"Mortgaged Property."

     Subject,  however, to (i) Permitted  Encumbrances  (including all presently
existing royalties,  overriding royalties,  payments out of production and other
burdens   which  are  referred  to  in  Exhibit  A  and  which  are  taken  into
consideration in computing any percentage, decimal or fractional interest as set
forth in Exhibit A), (ii) the assignment of


                                      -11-
<PAGE>

production contained in Article III hereof, but only insofar and so long as said
assignment of production is not inoperative  under the provisions of Section 3.5
hereof,  and (iii) the  condition  that  neither  the Agent nor any of the other
Lender  Parties  shall be  liable  in any  respect  for the  performance  of any
covenant or obligation (including without limitation measures required to comply
with Environmental Laws) of the Mortgagor in respect of the Mortgaged Property.

     The Mortgaged  Property is to remain so specially  mortgaged,  affected and
hypothecated  unto and in favor of the  Agent  for  itself  and as agent for the
Lender  Parties  to  secure  the  payment  of the  Indebtedness  (including  the
performance of the obligations of the Mortgagor herein contained) until the full
and final payment or discharge of the Indebtedness,  and the Mortgagor is herein
and hereby bound and obligated not to sell or alienate the Mortgaged Property to
the prejudice of this act.

     The Mortgagor, in consideration of the premises and to induce the Agent and
the Lender Parties,  as the case may be, to make the Loans and issue the Letters
of Credit,  hereby  covenants and agrees with the Agent, for itself and as agent
for the Lender Parties, as follows:

                                   ARTICLE I

                              Indebtedness Secured
                              --------------------

     1.1 Items of Indebtedness  Secured. The following items of indebtedness are
secured hereby:

          (a) The Loan Notes (including future advances to be made thereunder by
     the Agent or the Lenders), the Letter of Credit Outstandings (as defined in
     the Credit  Agreements)  and all other  obligations  and liabilities of the
     Mortgagor under the Credit Agreements;

          (b) All indebtedness  and future advances  evidenced by any promissory
     notes  evidencing any  additional  loans which the Agent or the Lenders may
     from time to time make to the Mortgagor,  if any, the Agent and the Lenders
     not being obligated, however, to make such additional loans;

          (c) Any sums  advanced or  expenses or costs  incurred by the Agent or
     the Lender Parties, or by any keeper or receiver appointed hereunder, which
     are made or incurred  pursuant to, or permitted by, the terms hereof,  plus
     interest  thereon at the rate herein  specified or  otherwise  agreed upon,
     from the date of the advances or the  incurring  of such  expenses or costs
     until reimbursed;

          (d) Any and all other  indebtedness  of the Mortgagor or any Affiliate
     of the  Mortgagor to the Agent or any Lender Party now or hereafter  owing,
     whether  direct or indirect,  primary or  secondary,  fixed or  contingent,
     joint or several, regardless of how evidenced or arising, including without
     limitation, all Letters of Credit; and


                                      -12-
<PAGE>

          (e) Any  extensions,  refinancings,  modifications  or renewals of all
     such indebtedness described in subparagraphs (a) through (d) above, whether
     or  not  the  Mortgagor   executes  any  extension   agreement  or  renewal
     instruments. The indebtedness secured hereby further continues with respect
     to any new obligation  arising from any novation  (subjective or objective)
     of the foregoing  indebtedness as permitted by Louisiana Civil Code Article
     1884.  Pursuant to Louisiana Revised Statutes 9:5390, this instrument shall
     automatically  secure payment of any renewal or  refinancing  note or notes
     delivered in substitution for or exchange of the note or notes then secured
     by this instrument evidencing any part of the Indebtedness.

     1.2 Indebtedness and the Notes Defined. All the above items of indebtedness
are hereinafter  collectively  referred to as the "Indebtedness." Any promissory
note evidencing any part of the Indebtedness, including, without limitation, any
of the  Loan  Notes,  is  hereinafter  referred  to as a  "Note,"  and all  such
promissory notes are hereinafter referred to collectively as the "Notes."

     1.3 Maximum  Amount.  The maximum  amount of the  Indebtedness  that may be
outstanding  at any time and from  time to time that  this  instrument  secures,
including without limitation as a mortgage and as a collateral  assignment,  and
including  without  limitation  any expenses,  advances or costs incurred by the
Agent and all other amounts included within the  Indebtedness,  is Three Billion
($3,000,000,000.00) dollars.

     1.4 No Paraph.  The  Mortgagor  and the Agent  acknowledge  that no Note or
other evidence of Indebtedness  has been paraphed for  identification  with this
instrument.

                                   ARTICLE II

                       Particular Covenants and Warranties
                       -----------------------------------
                                of the Mortgagor
                                ----------------

     2.1  Payment  of the  Indebtedness  and  Performance  of  Obligations.  The
Mortgagor will duly and punctually pay the Indebtedness,  as and when called for
in the Credit  Agreements  and the Security  Documents  and on or before the due
dates  thereof,  and will timely  perform and discharge  all of the  Obligations
(including each and every obligation owing on account of the Notes), in full and
on or before the dates same are to be performed and discharged.

     2.2 Certain  Representations and Warranties.  The Mortgagor  represents and
warrants  (and  with  respect  to  those  matters  set  forth  in the  following
subsections (b) and (f), as to those portions of the Mortgaged Property that are
operated by persons other than Mortgagor,  Mortgagor  makes such  representation
and warranty to the best of its knowledge) that


                                      -13-
<PAGE>

          (a) the oil and gas  leases  described  in Exhibit A hereto are valid,
     subsisting  leases,  superior and paramount to all other oil and gas leases
     respecting the properties to which they pertain,

          (b) all producing  wells  located on the lands  described in Exhibit A
     (including  Exhibit  A-1) have  been  drilled,  operated  and  produced  in
     conformity with all Applicable Laws of all Governmental  Authorities having
     jurisdiction,   and  are  subject  to  no  penalties  on  account  of  past
     production,  and such wells are in fact  bottomed  under and are  producing
     from, and the well bores are wholly within,  the lands described in Exhibit
     A or lands pooled or unitized therewith,

          (c) the Mortgagor,  to the extent of the interest specified in Exhibit
     A  (including  Exhibit  A-1),  has  valid  and  indefeasible  title to each
     property right or interest constituting the Mortgaged Property described in
     Exhibit A  (including  Exhibit A-1) and has a good and legal right to grant
     and convey the same to the  Agent;  such  interest  entitles  Mortgagor  to
     receive  not  less  than the  share  of  Hydrocarbons  from  such  property
     indicated as its net revenue interest or "NRI" share of such  Hydrocarbons,
     and obligates Mortgagor to pay for not more than the share of operating and
     other  costs,  liabilities  and  expenses  associated  with  such  property
     indicated as its working interest or "WI" share of such costs,  liabilities
     and expenses,

          (d) the  Mortgaged  Property  is free from all  encumbrances  or liens
     whatsoever,  except for the Permitted  Encumbrances  or as permitted by the
     provisions of Section 2.4(e) hereof,

          (e) the Mortgagor is not obligated,  by virtue of any prepayment under
     any contract  providing for the sale by the Mortgagor of Hydrocarbons which
     contains  a "take or pay"  clause  or under  any  similar  arrangement,  to
     deliver  Hydrocarbons  at some  future  time  without  then  or  thereafter
     receiving full payment therefor,

          (f) the Mortgaged Property is currently being operated, maintained and
     developed,  in all material  respects,  in accordance  with all  applicable
     currently  existing  Permits,  Legal  Requirements  and all Applicable Laws
     (including, without limitation, Environmental Laws),

          (g) the cover page to this instrument  lists the correct legal name of
     the  Mortgagor  and the  Mortgagor  has not been  known by any  legal  name
     different  from the one set  forth on the  cover  page of this  instrument,
     except as set forth on Schedule I to this instrument;  the Mortgagor is not
     now and has not been known by any trade name,  nor has the  Mortgagor  been
     the subject of any merger or other corporate reorganization,

          (h) the  execution,  delivery and  performance by the Mortgagor of the
     Security Documents and the borrowing evidenced by the Notes, (i) are within
     the  Mortgagor's  corporate  powers  and have been duly  authorized  by the
     Mortgagor's


                                      -14-
<PAGE>

     Board of Directors,  shareholders and all other requisite corporate action,
     (ii) have received all (if any) requisite prior  governmental  approval and
     consent in order to be legally  binding and  enforceable in accordance with
     the terms thereof,  and (iii) will not violate, be in conflict with, result
     in a breach or  constitute  (with due  notice or lapse of time,  or both) a
     default  under,  any  Legal  Requirement  or  result  in  the  creation  or
     imposition of any lien, charge or encumbrance of any nature whatsoever upon
     any of the  Mortgagor's  property or assets,  except as contemplated by the
     provisions of the Security Documents. The Security Documents constitute the
     legal, valid and binding  obligations of the Mortgagor and others obligated
     under  the  terms of the  Security  Documents,  in  accordance  with  their
     respective terms, and

          (i) there are no  actions,  suits or  proceedings  pending,  or to the
     knowledge of the Mortgagor  threatened,  against or affecting the Mortgagor
     or the  Mortgaged  Property  that  could  materially  adversely  affect the
     Mortgagor  or  the  Mortgaged  Property,   or  involving  the  validity  or
     enforceability of this instrument or the priority of the liens and security
     interests  created by the  Security  Documents,  and no event has  occurred
     (including specifically the Mortgagor's execution of the Security Documents
     and its consummation of the Loans described therein) which will violate, be
     in conflict with,  result in the breach of, or constitute  (with due notice
     or lapse of time, or both) a material default under, any Legal  Requirement
     or result in the creation or imposition of any lien,  charge or encumbrance
     of any nature  whatsoever upon any of the  Mortgagor's  property other than
     the liens and security interests created by the Security Documents.

     2.3 Further  Assurances.  The Mortgagor will warrant and forever defend the
Mortgaged  Property  unto the Agent  against  every person  whomsoever  lawfully
claiming the same or any part thereof,  subject to Permitted  Encumbrances,  and
Mortgagor  will  maintain and preserve  the lien and  security  interest  hereby
created so long as any of the  Indebtedness  remains unpaid.  The Mortgagor will
execute and deliver  such other and further  instruments  and will do such other
and further acts as, in the opinion of the Agent,  may be necessary or desirable
to carry  out more  effectually  the  purposes  of this  instrument,  including,
without limiting the generality of the foregoing,  (i) prompt  correction of any
defect which may hereafter be discovered in the title to the Mortgaged  Property
or in the  execution and  acknowledgment  of this  instrument,  any Note, or any
other document  executed in connection  herewith,  and (ii) prompt execution and
delivery of all notices to parties  operating,  purchasing or receiving proceeds
of production of  Hydrocarbons  from the  Mortgaged  Property,  and all division
orders or transfer orders,  any of which, in the opinion of the Agent, is needed
in order to transfer effectually or to assist in transferring effectually to the
Agent the assigned proceeds of production from the Mortgaged Property.

     2.4 Operation of the Mortgaged Property. So long as the Indebtedness or any
part thereof remains unpaid, and whether or not the Mortgagor is the operator of
any  particular  part of the Mortgaged  Property,  the Mortgagor  shall,  at the
Mortgagor's own expense:


                                      -15-
<PAGE>

          (a) Do all things necessary to keep unimpaired the Mortgagor's  rights
     in the  Mortgaged  Property  and not,  except  in the  ordinary  course  of
     business,  abandon  any well or  forfeit,  surrender  or release  any Lease
     capable of producing  Hydrocarbons in paying quantities,  without the prior
     written consent of the Agent;

          (b) Obtain  and  maintain  all  required  Permits  and cause the lands
     described  in  Exhibit A to be  maintained,  developed,  protected  against
     drainage, and continuously operated for the production of Hydrocarbons in a
     good and workmanlike manner as would a prudent operator,  and in accordance
     with generally accepted industry practices, Joint Operating Agreements, and
     all Applicable Laws, excepting those being contested in good faith;

          (c) Duly  pay and  discharge,  or  cause  to be paid  and  discharged,
     promptly as and when due and payable,  all rentals and royalties (including
     shut-in  royalties) payable in respect of the Mortgaged  Property,  and all
     expenses  incurred in or arising from the operation or  development  of the
     Mortgaged  Property  not later  than the due date  thereof,  or the day any
     fine, penalty, interest or cost may be added thereto or imposed, or the day
     any lien may be filed, for the non-payment  thereof (if such day is used to
     determine the due date of the respective item);

          (d) Cause the  Operating  Equipment  to be kept in good and  effective
     operating  condition,  ordinary  wear and tear  excepted,  and all repairs,
     renewals,  replacements,  additions  and  improvements  thereof or thereto,
     needful to the  production  of  Hydrocarbons  from the lands  described  in
     Exhibit A, to be promptly made;

          (e) Not, without the prior written consent of the Agent, create, place
     or permit to be created or  placed,  or through  any act or failure to act,
     acquiesce in the placing of, or allow to remain, any mortgage, pledge, lien
     (statutory,  constitutional or contractual), security interest, encumbrance
     or  charge,  or  conditional  sale  or  other  title  retention  agreement,
     regardless  of whether same are expressly  subordinate  to the liens of the
     Security  Documents,  with  respect to all or any portion of the  Mortgaged
     Property, the Leases or the Rents and Revenues other than (1) the Permitted
     Encumbrances,  (2) Taxes  constituting a lien but not due and payable,  (3)
     defects or  irregularities  in title,  and liens,  charges or encumbrances,
     which,  in the Agent's  reasonable  opinion,  are not such as to  interfere
     materially  with the  development,  operation  or  value  of the  Mortgaged
     Property  and not such as to affect  materially  title  thereto,  (4) those
     being  contested  by the  Mortgagor  in good faith in such manner as not to
     jeopardize the Agent's rights in and to the Mortgaged  Property,  (5) those
     liens permitted by each Section 8.2.3 of each of the Credit Agreements, and
     (6) those consented to in writing by the Agent;

          (f) Carry with financially sound and reputable insurance companies and
     in amounts satisfactory to the Agent the following insurance: (1) workmen's
     compensation  insurance and public  liability and property damage insurance
     in


                                      -16-
<PAGE>

     respect of all  activities  in which the  Mortgagor  might  incur  personal
     liability  for the death of or injury to an  employee or third  person,  or
     damage to or destruction of another's property;  and (2) to the extent such
     insurance is carried by similar companies  engaged in similar  undertakings
     in the same  general  areas in which the  Mortgaged  Property  is  located,
     insurance in respect of the Operating Equipment,  against loss or damage by
     fire, lightning, hail, tornado, explosion and other similar risks, hazards,
     casualties and contingencies  (including  business  interruption  insurance
     covering loss of Rents and Revenues); provided, that any such insurance may
     be provided by way of self  insurance to the extent that similar  companies
     engaged in similar undertakings in the same general areas also self-insure.
     Each insurance  policy issued in connection  therewith shall provide by way
     of  endorsements,  riders  or  otherwise  that (i) name the Agent as a loss
     payee on all property  insurance  policies and an additional insured on all
     liability insurance policies,  and provide that proceeds will be payable to
     the Agent as its interest may appear, which proceeds are hereby assigned to
     the Agent,  it being agreed by the Mortgagor  that such  payments  shall be
     applied A) if there be no event of default  existing  or which  would exist
     but for due notice or lapse of time, or both, to the restoration, repair or
     replacement  of the  Mortgaged  Property,  or B) if  there  be an  event of
     default existing, or which would exist but for due notice or lapse of time,
     or both, at the option of the Agent, either for the above stated purpose or
     toward the  payment of the  Indebtedness;  (ii) the  coverage  of the Agent
     shall not be  terminated,  reduced or affected in any manner  regardless of
     any breach or violation by the Mortgagor of any warranties, declarations or
     conditions  in  such  policy;  (iii)  no such  insurance  policy  shall  be
     canceled,  endorsed, altered or reissued to effect a change in coverage for
     any reason and to any extent  whatsoever  unless  such  insurer  shall have
     first given the Agent thirty (30) days prior written  notice  thereof;  and
     (iv) the Agent may, but shall not be obligated to, make premium payments to
     prevent any  cancellation,  endorsement,  alteration or reissuance and such
     payments  shall be accepted by the insurer to prevent same. The Agent shall
     be  furnished  with a  certificate  evidencing  such  coverage  in form and
     content  acceptable to the Agent.  All policies to be maintained under this
     instrument are to be issued on forms and by companies and with endorsements
     acceptable  to the Agent.  The  Mortgagor  shall  maintain  insurance in an
     amount sufficient to prevent the Mortgagor from becoming a co-insurer under
     any policy required hereunder. If the Mortgagor fails to maintain the level
     of insurance  required under this instrument,  then the Mortgagor shall and
     hereby agrees to indemnify  the Agent to the extent that a casualty  occurs
     and insurance  proceeds  would have been  available had such insurance been
     maintained;

          (g) Furnish to the Agent as soon as possible  and in any event  within
     five (5) days after the  occurrence  from time to time of any change in the
     address of the  Mortgagor's  location (as described on the  signature  page
     hereto) or in the name of the Mortgagor, notice in writing of such change;


                                      -17-
<PAGE>

          (h) Not initiate or acquiesce in any change in any material  zoning or
     other land use or Water  Rights  classification  now or hereafter in effect
     and affecting the Mortgaged Property or any part thereof;

          (i) Notify the Agent in writing as soon as  possible  and in any event
     within five (5) days after it shall become aware of the  occurrence  of any
     event of default  under  Section 4.1 or any event which,  with notice,  the
     passage of time or both would be such an event of default;

          (j) Appear and defend,  with  counsel  acceptable  to the Agent in its
     reasonable  discretion,  and hold the  Agent  harmless  from,  any  action,
     proceeding  or claim  affecting  the  Mortgaged  Property or the rights and
     powers  of the  Agent  under  the  Security  Documents,  and all  costs and
     expenses  incurred by the Agent in protecting  its  interests  hereunder in
     such an event  (including  all court  costs and  attorneys'  fees) shall be
     borne by the Mortgagor;  provided, that such defense: (1) shall be provided
     by a lawyer or law firm listed on a schedule  delivered  to and approved in
     writing by the Agent, from time to time (the "Approved Counsel List"),  and
     (2) if the amount in controversy in such action,  proceeding or claim is in
     excess of $2,500,000 in actual or  compensatory  damages and/or  liquidated
     damages  (or is  reasonably  believed  to exceed  such amount if the demand
     involves  unliquidated  damages),  such law firm shall be  approved  by the
     Agent, in its reasonable discretion, for that particular action, proceeding
     or claim. As to actions,  proceedings or claims  involving a portion of the
     Mortgaged  Property in which  Mortgagor or a Subsidiary of Mortgagor is not
     the operator and with respect to which  Mortgagor  does not have a majority
     net revenue interest and/or working  interest,  Mortgagor may elect, in its
     reasonable  judgment,  to allow counsel for the operator to appear for, and
     defend Mortgagor in such matter, in which case, selection of counsel by the
     operator  shall  not be  governed  by this  Section  2.4 (j);  and  further
     provided,  that  nothing  herein  shall  restrict or limit the right of the
     Agent or the  Lenders  to select its or their own  counsel  to  defend,  at
     Mortgagor's cost and expense,  any action  proceeding or claim in which any
     of them are named as parties;

          (k) Subject to the Mortgagor's right to contest the same, promptly pay
     all Taxes  legally  imposed  upon  this  instrument  or upon the  Mortgaged
     Property or upon the income and profits  thereof,  or upon the  interest of
     the Agent or the other Lender Parties therein;  provided that the Mortgagor
     shall not be liable for taxes  accruing  after a transfer of the  Mortgaged
     Property following a foreclosure;

          (l) Comply with,  conform to and obey, in all material  respects,  all
     present  and future  Legal  Requirements  and not use,  maintain,  operate,
     occupy,  or allow the use,  maintenance,  operation  or  occupancy  of, the
     Mortgaged  Property in any manner which (a) violates any present and future
     Legal  Requirement,  (b) may be dangerous unless safeguarded as required by
     Applicable Law, (c)  constitutes a public or private  nuisance or (d) makes
     void,  voidable or  cancelable,  or increases the premium of, any insurance
     then in force with respect thereto; and


                                      -18-
<PAGE>

          (m) Not, without the prior written consent of the Agent, permit any of
     the  Fixtures  or  Personalty  to be  removed  at any time  from the  lands
     described in Exhibit A unless (i) the removed  item is removed  temporarily
     for maintenance and repair, (ii) if removed permanently,  is replaced by an
     article of equal  suitability and value,  owned by the Mortgagor,  free and
     clear of any lien or security interest except such as may be first approved
     in writing by the Agent or (iii) such Fixtures or Personalty are removed in
     connection  with the plugging and  abandoning of wells,  or  abandonment of
     other facilities, in each case as permitted by this Mortgage.

     2.5  Performance  of Leases.  The Mortgagor  will:  (a) duly and punctually
perform and comply with any and all representations,  warranties,  covenants and
agreements  expressed  as  binding  upon it under  each of the  Leases;  (b) not
voluntarily  terminate,  cancel or waive its  rights or the  obligations  of any
other party under any of the Leases;  (c) use all reasonable efforts to maintain
each of the Leases in force and effect  during  the full term  thereof;  and (d)
appear in and defend (or cause its  operator to appear in and defend) any action
or proceeding arising under or in any manner connected with any of the Leases or
the  representations,  warranties,  covenants and  agreements of it or the other
party or parties thereto.

     2.6 Recording,  etc. The Mortgagor will  promptly,  and at the  Mortgagor's
expense, record,  register,  deposit and file this and every other instrument in
addition or supplemental hereto in such offices and places and at such times and
as often  as may be  necessary  to  preserve,  protect  and  renew  the lien and
security  interest  hereof  as a first  lien  on and  prior  perfected  security
interest  in real or personal  property,  as the case may be, and the rights and
remedies of the Agent and of the other Lender Parties, and otherwise will do and
observe all things or matters  necessary  or expedient to be done or observed by
reason  of  any  Applicable  Law,  for  the  purpose  of  effectively  creating,
maintaining  and preserving the lien and security  interest hereof on and in the
Mortgaged Property.

     2.7 Sale or Mortgage of the Mortgaged Property.  Except (a) as set forth in
Section 6.1 of this instrument;  (b) as permitted by each Section 8.2.10 of each
of the Credit Agreements;  (c) for sales of severed Hydrocarbons in the ordinary
course of the  Mortgagor's  business;  (d) sales of or  dispositions of surplus,
obsolete or worn inventory or equipment;  and (e) the lien and security interest
created by this  instrument,  the  Mortgagor  will not sell,  convey,  mortgage,
pledge,  hypothecate,  pool,  unitize or  otherwise  dispose of or encumber  the
Mortgaged  Property nor any portion thereof,  nor any of the Mortgagor's  right,
title or interest  therein,  without first  securing the written  consent of the
Agent;  and the  Mortgagor  will not  enter  into any  arrangement  with any gas
pipeline  company or other  consumer of  Hydrocarbons  regarding  the  Mortgaged
Property  whereby  said gas  pipeline  company or consumer may set off any claim
against the  Mortgagor  by  withholding  payment for any  Hydrocarbons  actually
delivered.

     2.8 Records,  Statements and Reports.  The Mortgagor will keep proper books
of record and account in which complete and correct  entries will be made of the
Mortgagor's  transactions  in  accordance  with  generally  accepted  accounting
principles


                                      -19-
<PAGE>

and  will  furnish  or cause  to be  furnished  to the  Agent  such  information
concerning the business, affairs and financial condition of the Mortgagor as the
Agent may from time to time reasonably request.  Without limiting the generality
of the foregoing,  the Mortgagor  shall furnish to the Agent,  upon its request,
but not more than every six (6) months,  (a) reports  prepared by an independent
petroleum  engineer  acceptable  to the Agent  concerning  (1) the  quantity  of
Hydrocarbons  recoverable from the Mortgaged Property,  (2) the projected income
and expense  attributable to the Mortgaged  Property,  and (3) the expediency of
any change in methods of treatment  or operation of all or any wells  productive
of  Hydrocarbons,  any new  drilling  or  development,  any method of  secondary
recovery by repressuring  or otherwise,  or any other action with respect to the
Mortgaged Property, the decision as to which may increase or reduce the quantity
of Hydrocarbons  ultimately  recoverable or the rate of production thereof,  and
(b) reports for the prior  period  showing the gross  proceeds  from the sale of
Hydrocarbons  produced  from the lands  described  in Exhibit A  (including  any
thereof  taken by the Mortgagor for the  Mortgagor's  own use),  the quantity of
such  Hydrocarbons  sold,  the  severance,  gross  production,   occupation,  or
gathering taxes deducted from or paid out of such proceeds,  the number of wells
operated,  drilled or  abandoned,  and such other  information  as the Agent may
reasonably  request  (upon  request of the Agent,  such  reports  referred to in
clauses  (a) and (b) above shall set forth such  information  on a lease or unit
basis,  and after the  occurrence  of an Event of Default,  and upon the Agent's
request,  Mortgagor  shall  deliver  the  reports  described  in clause (b) on a
monthly basis).

     2.9 Right of Entry.

          (a) Upon at least twenty-four (24) hours notice to the Mortgagor,  the
     Mortgagor will permit the Agent, or its agents,  at the cost and expense of
     the Mortgagor,  to enter upon the Mortgaged Property and all parts thereof,
     for the purpose of investigating and inspecting the condition and operation
     thereof,  and shall permit reasonable access to the field offices and other
     offices (to the fullest  extent that Mortgagor may do so under the terms of
     the applicable Joint Operating  Agreements and other applicable  agreements
     affecting  the  Mortgaged  Property),  including  the  principal  place  of
     business,  of the Mortgagor to inspect and examine the  Mortgaged  Property
     and to inspect,  review and  reproduce  as  necessary  any books,  records,
     accounts, contracts or other documents of the Mortgagor.

          (b) Without limiting the generality of the foregoing,  the Agent shall
     have the right (to the fullest  extent that  Mortgagor  may do so under the
     terms of the applicable  Joint  Operating  Agreements and other  applicable
     agreements  affecting the Mortgaged  Property),  on twenty-four  (24) hours
     prior  notice to the  Mortgagor,  to cause such persons and entities as the
     Agent may designate to enter the Mortgaged Property to conduct (at the cost
     and expense of the Mortgagor), or to cause the Mortgagor to conduct (at the
     cost and expense of the Mortgagor),  such tests and  investigations  as the
     Agent deems necessary to determine whether any hazardous materials or solid
     waste is being generated, transported, stored, or disposed of in accordance
     with applicable Environmental


                                      -20-
<PAGE>

     Laws.  Such  tests and  investigations  may  include,  without  limitation,
     underground  borings,  ground  water  analyses and borings from the floors,
     ceilings and walls of any improvements  located on the Mortgaged  Property.
     This Section 2.9 shall not be construed to affect or limit the  obligations
     of the Mortgagor pursuant to Section 2.4 hereof.

          (c) The Agent  shall  have no duty to visit or observe  the  Mortgaged
     Property, or to conduct tests, and no site visit, observation or testing by
     the Agent (or its  agents and  independent  contractors)  shall  impose any
     liability on the Agent or any other Lender  Party,  nor shall the Mortgagor
     or any other  obligor  be  entitled  to rely on any visit,  observation  or
     testing  by the Agent in any  respect.  The Agent may,  in its  discretion,
     disclose to the Mortgagor or any other Person,  including any  Governmental
     Authority,  any  report or finding  made as a result  of, or in  connection
     with, any site visit,  observation  or testing by the Agent.  the Mortgagor
     agrees that the Agent makes no warranty or  representation to the Mortgagor
     or any other obligor  regarding the truth,  accuracy or completeness of any
     such  report or  findings  that may be so  disclosed.  The  Mortgagor  also
     acknowledges   that,   depending  upon  the  results  of  any  site  visit,
     observation  or testing by the Agent and  disclosed to the  Mortgagor,  the
     Mortgagor may have a legal  obligation  to notify one or more  Governmental
     Authorities  of  such  results,   that  such  reporting   requirements  are
     site-specific,  and are to be evaluated by the Mortgagor  without advice or
     assistance from the Agent.

     2.10  Taxes.  Subject to the  Mortgagor's  right to contest  the same,  the
Mortgagor  will promptly pay all taxes,  assessments  and  governmental  charges
legally imposed upon this instrument or upon the Mortgaged Property, or upon the
interest of the Agent therein, or upon the income and profits thereof.

     2.11 No Governmental Approvals.  The Mortgagor represents and warrants that
(a) no approval or consent of any  regulatory  or  administrative  commission or
authority,  or of any other  governmental  body,  is necessary to authorize  the
execution and delivery of this  instrument or of the Notes,  or to authorize the
observance or  performance  by the  Mortgagor of the covenants  herein or in the
Notes  contained,  or that such  approvals as are required have been obtained or
will be obtained  promptly and (b) the  Mortgagor has obtained all Permits which
are necessary for the operation of the Mortgaged Property.

     2.12 Environmental Laws. The Mortgagor represents and warrants, to the best
of its knowledge after due inquiry, and except as set forth in each Item 7.12 of
the  Disclosure  Schedule  (including  Part B thereof)  attached  to each of the
Credit  Agreements,  that:  the  Mortgaged  Property is in  compliance  with all
applicable  Environmental Laws; there are no conditions existing currently which
would be likely to subject  the  Mortgagor  to  damages,  penalties,  injunctive
relief or cleanup costs under any Environmental Laws or assertions  thereof,  or
which  require or are likely to require  cleanup,  removal,  remedial  action or
other response pursuant to Environmental Laws by the Mortgagor; the Mortgagor is
not a party to any litigation or  administrative  proceedings,  nor so far as is
known by the Mortgagor is any litigation or administrative proceeding threatened
against it, which asserts or alleges that the Mortgagor has


                                      -21-
<PAGE>

violated or is violating Environmental Laws or that the Mortgagor is required to
clean  up,  remove  or take  remedial  or  other  responsive  action  due to the
disposal,  depositing,  discharge,  leaking or other  release  of any  hazardous
substances  or materials;  neither the  Mortgaged  Property nor the Mortgagor is
subject to any judgment,  decree, order or citation related to or arising out of
Environmental  Laws and  neither  has  been  named or  listed  as a  potentially
responsible  party by any governmental  body or agency in a matter arising under
any Environmental Laws. The Mortgagor has also obtained all permits, licenses or
approvals  required under applicable  Environmental Laws which are necessary for
its current  exploration,  use,  and  development  activities  at the  Mortgaged
Property;  and to the Mortgagor's  knowledge after reasonable  investigation all
use, generation, manufacturing, release, discharge, storage, deposit, treatment,
recycling or disposal of any materials on, under or at the Mortgaged Property or
transported  to or from the  Mortgaged  Property  (or tanks or other  facilities
thereon containing such materials) are being and will be conducted in accordance
with applicable  Environmental Laws including without limitation those requiring
cleanup, removal or any other remedial action.

     2.13 Corporate Mortgagor.  The Mortgagor will continue to be duly qualified
to transact business in each state where the conduct of its business requires it
to be qualified,  and will not,  without the prior written consent of the Agent,
consolidate or merge with any other partnership,  company,  corporation or other
Person.

     2.14  Taxpayer  I.D.  Number.  The  taxpayer  identification  number of the
Mortgagor  is  77-0212977.  The taxpayer  identification  number of the Agent is
13-494-1099.

                                  ARTICLE III

                            Assignment of Production
                            ------------------------

     3.1 Assignment.

          (a) The Mortgagor hereby transfers,  assigns,  warrants and conveys to
     the Agent,  effective  as of May 1, 2002,  at 7:00 A.M.,  local  time,  all
     Hydrocarbons  which are  thereafter  produced  from and which accrue to the
     Mortgaged  Property,  and all proceeds  therefrom.  Subject to the terms of
     Section  3.1(b),  all parties  producing,  purchasing or receiving any such
     Hydrocarbons,  or having such, or proceeds  therefrom,  in their possession
     for which  they or  others  are  accountable  to the Agent by virtue of the
     provisions  of this Article III, are  authorized  and directed to treat and
     regard  the Agent as the  assignee  and  transferee  of the  Mortgagor  and
     entitled in the  Mortgagor's  place and stead to receive such  Hydrocarbons
     and all  proceeds  therefrom;  and said  parties  and each of them shall be
     fully  protected in so treating and  regarding the Agent and shall be under
     no obligation to see to the  application  by the Agent of any such proceeds
     or payments received by it; provided,  however, that, until the Agent shall
     have  instructed  such parties that an Event of Default has occurred and to
     deliver such Hydrocarbons and all proceeds therefrom directly to the Agent,
     such parties shall


                                      -22-
<PAGE>

     be  entitled  to  deliver  such  Hydrocarbons  and all  proceeds  therefrom
     directly  to the  Mortgagor.  So long as no Event  of  Default  shall  have
     occurred,  the Agent  agrees  that  Mortgagor  shall be entitled to receive
     directly from such parties, and keep and retain, all such proceeds from the
     sale of such Hydrocarbons.

          (b) Upon the  occurrence  of an Event of Default (it being  understood
     that the  determination  of the  occurrence  of an Event of  Default by the
     Agent  shall be  conclusive  and  binding  as to all such  parties  for all
     purposes  hereof  and  that,  at the  time  the  Agent  gives  the  initial
     instruction  and notice under this Article III, such Event of Default shall
     be then continuing) said Hydrocarbons and products are to be delivered into
     pipelines  connected  with  the  oil and gas  leases,  or to the  purchaser
     thereof,  free and clear of all Taxes,  and the  proceeds  from the sale of
     such  Hydrocarbons  paid in accordance with Section 3.5 of this instrument.
     The  Mortgagor  agrees to perform  all such acts,  and to execute  all such
     further  assignments,  transfers and division orders, and other instruments
     as may be  required  or  desired by the Agent or any party in order to have
     said  revenues and proceeds so paid to the Agent,  as and when  provided in
     this  Article III.  With  respect to any funds  received by the Agent after
     notice of an Event of Default shall have been given under this Article III,
     the Agent is fully  authorized  to receive  and give  receipt  for any such
     revenues and proceeds  that are received by the Agent;  to endorse and cash
     any and all checks and drafts  payable to the order of the Mortgagor or the
     Agent for the account of the Mortgagor  received from or in connection with
     said revenues or proceeds and apply the proceeds thereof in accordance with
     Section 3.2 hereof, and to execute transfer and division orders in the name
     of the Mortgagor, or otherwise, with warranties binding the Mortgagor.

     3.2 Application of Proceeds. All payments received by the Agent pursuant to
Section 3.1 hereof shall be placed in a cash collateral account at the Agent and
on the last business day of each calendar month applied as follows:

          First:  To the  payment  and  satisfaction  of all costs and  expenses
     incurred in connection  with the  collection of such  proceeds,  and to the
     payment of all items of the  Indebtedness and the Obligations not evidenced
     by any Note.

          Second:  To the payment of the  interest  on the Notes  accrued to the
     date of such payment.

          Third:  To the payment of the amounts of principal  then due and owing
     on the Notes.

          Fourth:  The  balance,  if any,  shall  either be  applied on the then
     unmatured principal amounts of the Notes, such application to be on such of
     the Notes and  installments  thereof  as the Agent may  select,  or, at the
     option of the Agent, released to the Mortgagor.


                                      -23-
<PAGE>

     3.3 No Liability of the Agent in Collecting.  The Agent is hereby  absolved
from all liability for failure to enforce collection of any proceeds so assigned
(and no such  failure  shall be  deemed to be a waiver of any right of the Agent
under this Article) and from all other  responsibility in connection  therewith,
except  the  responsibility  to  account  to the  Mortgagor  for funds  actually
received.

     3.4  Assignment  Not a Restriction  on the Agent's  Rights.  Nothing herein
contained  shall detract from or limit the absolute  obligation of the Mortgagor
to make payment of the Indebtedness  regardless of whether the proceeds assigned
by this  Article  are  sufficient  to pay the same,  and the  rights  under this
Article shall be in addition to all other security now or hereafter  existing to
secure the payment of the Indebtedness.

     3.5 Status of  Assignment.  Notwithstanding  the other  provisions  of this
Article and in addition to the other rights hereunder, the Agent or any receiver
or  keeper  appointed  in  judicial  proceedings  for  the  enforcement  of this
instrument  shall  have the  right to  receive  all of the  Hydrocarbons  herein
assigned  and the  proceeds  therefrom  after  the  occurrence  and  during  the
continuance  of any Event of Default and, in any event,  after any Note or other
item of  Indebtedness  has been declared due and payable in accordance  with the
provisions  of Section 4.1 hereof and to apply all of said  proceeds as provided
in Section  3.2  hereof.  Upon any sale of the  Mortgaged  Property  or any part
thereof  pursuant to Article V, the  Hydrocarbons  thereafter  produced from the
property so sold, and the proceeds therefrom, shall be included in such sale and
shall pass to the purchaser free and clear of the  assignment  contained in this
Article.

     3.6 Indemnification  Obligations.  The following provisions shall apply to,
and be deemed in each case to modify,  each of the provisions of this instrument
(except those set forth in Sections 2.12 and 6.11 hereof) and the other Security
Documents  (except to the extent otherwise  expressly  provided therein) wherein
the Mortgagor is obligated to indemnify each of the Indemnified Persons:

          (a)  Mortgagor  agrees to  indemnify  the Agent  against all legal and
     administrative  proceedings  for which a claim for  indemnification  may be
     made   by   the   Indemnified   Person   (herein,   collectively,    called
     "Indemnification  Claims")  made against or incurred by them or any of them
     as a consequence  of the  assertion,  either before or after the payment in
     full of the  Indebtedness,  that they or any of them received  Hydrocarbons
     herein  assigned or the proceeds  thereof  claimed by third persons and the
     Agent  shall  have the right to  defend  against  any such  Indemnification
     Claims,  employing attorneys therefor, and unless furnished with reasonable
     indemnity,  they or any of them shall  have the right to pay or  compromise
     and adjust all such  Indemnification  Claims.  The Mortgagor will indemnify
     and pay to the Agent  any and all such  amounts  as may be paid in  respect
     thereof  or  as  may  be  successfully  adjudged  against  the  Agent.  The
     obligations of the Mortgagor as  hereinabove  set forth in this Section 3.6
     shall survive the release  termination,  foreclosure  or assignment of this
     instrument or any sale hereunder.


                                      -24-
<PAGE>

          (b) The Mortgagor  shall pay when due any judgments with respect to an
     Indemnification  Claim against any of the Indemnified Persons and which are
     rendered  by a final order or decree of a court of  competent  jurisdiction
     from  which no further  appeal  may be taken or has been  taken  within the
     applicable  appeal period.  In the event that such payment is not made, any
     of the  Indemnified  Persons  at its  sole  discretion  may  pay  any  such
     judgments, in whole or in part, and look to the Mortgagor for reimbursement
     pursuant  to this  instrument,  or may  proceed  to file suit  against  the
     Mortgagor to compel such payment.

          (c) Any amount  which the  Mortgagor is obligated to pay to or for the
     benefit of an Indemnified Person with respect to an Indemnification  Claim,
     but which is not paid when due,  shall bear interest at the default or post
     maturity  rate of  interest  provided  for in the Note  from the date  such
     amount is due until such amount is paid.

                                   ARTICLE IV

                                Events of Default
                                -----------------

     4.1 Events of Default  Hereunder.  In case any one or more of the following
"events of default" shall occur and shall not have been remedied:

          (a) default in the payment of principal of or interest on any Note, or
     in the  payment  of  any  other  Indebtedness  or in  the  performance  and
     discharge of the Obligations secured hereby, when due;

          (b) the  occurrence of an event of default (other than any relating to
     non-payment  of  principal  of or interest on any Note) under the terms and
     provisions of either Credit  Agreement and the continuance of such event of
     default for the applicable period of grace, if any;

          (c) any  warranty or  representation  made by  Mortgagor  herein shall
     prove to be untrue in any  material  respect  as of the date made or deemed
     made; or

          (d) failure by Mortgagor,  within the applicable  period of grace,  if
     any, to cure a default in the due performance or observance of any covenant
     or agreement contained in this instrument and not constituting a default in
     the payment of principal of or interest  upon any Note or in the payment of
     any other Indebtedness;

then and in any such event the Agent,  at its  option,  may  declare  the entire
unpaid  principal  of and the  interest  accrued  on the  Notes  and  all  other
Indebtedness secured hereby to be forthwith due and payable,  without any notice
or demand of any kind, both of which are hereby expressly waived.


                                      -25-
<PAGE>

                                   ARTICLE V

                           Enforcement of the Security
                           ---------------------------

     5.1 Rights of the Agent with Respect to Personal  Property  Constituting  a
Part of the Mortgaged  Property.  Upon the occurrence of an event of default and
if such event shall be  continuing,  the Agent will have all rights and remedies
granted by law, and particularly by the Uniform Commercial Code, including,  but
not  limited  to,  the  right  to  take  possession  of  all  personal  property
constituting  a part of the Mortgaged  Property,  and for this purpose the Agent
may enter upon any  premises  on which any or all of such  personal  property is
situated  and take  possession  of and operate  such  personal  property (or any
portion thereof) or remove it therefrom.  The Agent may require the Mortgagor to
assemble such personal property and make it available to the Agent at a place to
be designated by the Agent which is reasonably convenient to all parties. Unless
such personal  property is perishable or threatens to decline  speedily in value
or is of a type customarily sold on a recognized market, the Agent will give the
Mortgagor  reasonable  notice of the time and place of any public sale or of the
time after which any private sale or other disposition of such personal property
is to be made. This requirement of sending  reasonable notice will be met if the
notice is mailed by first-class mail,  postage prepaid,  to the Mortgagor at the
address shown below the  signatures at the end of this  instrument at least five
(5) days before the time of the sale or disposition.  Further,  Agent shall have
the right to utilize executory  process,  as more fully set forth in Section 5.4
hereof and the right to  appointment  of a keeper,  as set forth in Section  5.3
hereof.

     5.2 Rights of the Agent with Respect to Fixtures Constituting a Part of the
Mortgaged Property. Upon the occurrence of an event of default and if such event
shall be  continuing,  the Agent may elect to treat the fixtures  constituting a
part of the Mortgaged  Property as either real  property  collateral or personal
property  collateral  and then proceed to exercise  such rights as apply to such
type of collateral.

     5.3 Judicial Proceedings. Upon the occurrence of an event of default and if
such event shall be  continuing,  the Agent may proceed by a suit or suits for a
foreclosure hereunder for cash or upon credit in one or more parcels or portions
under  executory  or ordinary  process,  at the  Agent's  sole  option,  without
appraisement,   appraisement   being  expressly  waived,  or  for  the  specific
performance  of any  covenant or  agreement  herein  contained  or in aid of the
execution of any power herein  granted,  or for the  appointment  of a keeper or
receiver  pending  any  foreclosure  hereunder  or the  sale  of  the  Mortgaged
Property,  or for the  enforcement of any other  appropriate  legal or equitable
remedy.

     5.4 Other Remedies.  The Mortgagor  hereby  acknowledges  the  Indebtedness
secured hereby, whether now existing or to arise hereafter, and, for the purpose
of  foreclosure  under  Louisiana's  executory  process  procedures,   confesses
judgment  thereon in the full amount of the  Indebtedness  in favor of the Agent
and any future holder or holders of the Indebtedness if such obligations are not
paid at  maturity.  The  Mortgagor in  accordance  with the terms hereof and the
Credit Agreements does by


                                      -26-
<PAGE>

these  presents  consent,  agree and stipulate  that,  upon the occurrence of an
event of default  hereunder or under either Credit  Agreement,  the Agent or any
future holder or holders of any of the  Indebtedness,  at its (or their) option,
without making demand and without  notice or putting in default,  the same being
hereby  expressly  waived,  cause all and singular the property of the Mortgagor
herein  mortgaged  to be  seized  and sold by  executory  process  issued by any
competent  court,  or to proceed with the  enforcement  of this  instrument  and
pledge of  production  in any manner  prescribed  by law, the  Mortgagor  hereby
waiving  notice of demand or delay  stipulated  in  Article  2639 of the Code of
Civil  Procedure  of  Louisiana  and the benefit of any laws,  or parts of laws,
relating to the  appraisement  of the property  seized and sold under  executory
process or other legal  process,  and  consenting  that the  Mortgaged  Property
situated in the State of Louisiana be sold without  appraisement  to the highest
bidder for cash.

     5.5 Certain Aspects of a Sale. The Agent shall have the right to become the
purchaser  at any sale held by any court,  receiver or public  officer,  and the
Agent  shall have the right to credit  upon the amount of the bid made  therefor
the  amount  payable  out of the  net  proceeds  of such  sale  to it.  Recitals
contained in any  conveyance  made to any  purchaser at any sale made  hereunder
shall  conclusively  establish  the truth and  accuracy of the  matters  therein
stated, including, without limiting the generality of the foregoing,  nonpayment
of the unpaid  principal sum of, and the interest  accrued on, the Notes,  after
the same have become due and payable,  advertisement and conduct of such sale in
the manner provided herein.

     5.6 Receipt to Purchaser.  Upon any sale, the receipt of the officer making
sale under judicial proceedings,  shall be sufficient discharge to the purchaser
or purchasers at any sale for his or their purchase money, and such purchaser or
purchasers,  or his or their  assigns or  personal  representatives,  shall not,
after  paying such  purchase  money and  receiving  such receipt of such officer
therefor,  be obliged to see to the application of such purchase money, or be in
anywise answerable for any loss, misapplication or nonapplication thereof.

     5.7  Effect  of Sale.  Any sale or sales of the  Mortgaged  Property  shall
operate to divest all right, title, interest, claim and demand whatsoever either
at law or in  equity,  of the  Mortgagor  of,  in and to the  premises  and  the
property sold, and shall be a perpetual bar, both at law and in equity,  against
the Mortgagor,  and the Mortgagor's  successors or assigns,  and against any and
all persons  claiming or who shall  thereafter  claim all or any of the property
sold from,  through or under the  Mortgagor  or the  Mortgagor's  successors  or
assigns.  Nevertheless, the Mortgagor, if requested by the Agent so to do, shall
join in the execution and delivery of all proper  conveyances,  assignments  and
transfers of the properties so sold.

     5.8  Application  of Proceeds.  The  proceeds of any sale of the  Mortgaged
Property,  or any part thereof,  whether under the power of sale herein  granted
and conferred or by virtue of judicial proceedings, shall be applied as follows:

          First:  To the  payment  and  satisfaction  of all costs and  expenses
     incurred by the Agent in such proceedings  including,  without limiting the
     generality of the


                                      -27-
<PAGE>

     foregoing,  a  commission  of five percent (5%) to the keeper and costs and
     expenses  of  any  entry,  or  taking  of  possession,   of  any  sale,  or
     advertisement  thereof,  and of  conveyances,  and as  well,  court  costs,
     compensation of agents and employees and legal fees.

          Second:  To the payment of the  interest  on the Notes  accrued to the
     date of such payment.

          Third:  To the payment of the amounts of principal of the Notes and of
     the other items of Indebtedness due and owing at the time of such payment.

          Fourth:  Any  surplus  thereafter  remaining  shall  be  paid  to  the
     Mortgagor or the  Mortgagor's  successors  or assigns,  as their  interests
     shall appear.

     5.9 The Mortgagor's  Waiver of Appraisement,  Marshalling and Other Rights.
The  Mortgagor  agrees,  to the full extent that the  Mortgagor  may lawfully so
agree,  that the  Mortgagor  will not at any time insist upon or plead or in any
manner  whatever  claim  the  benefit  of  any  appraisement,  valuation,  stay,
extension or  redemption  law now or hereafter in force,  in order to prevent or
hinder the enforcement or foreclosure of this instrument or the absolute sale of
the Mortgaged  Property or the  possession  thereof by any purchaser at any sale
made pursuant to any provision hereof, or pursuant to the decree of any court of
competent  jurisdiction;  but the  Mortgagor,  for the Mortgagor and all who may
claim through or under the Mortgagor,  so far as the Mortgagor or those claiming
through or under the Mortgagor now or hereafter  lawfully may, hereby waives the
benefit of all such laws. The Mortgagor, for the Mortgagor and all who may claim
through or under the  Mortgagor,  waives,  to the extent that the  Mortgagor may
lawfully do so, any and all right to have the Mortgaged Property marshalled upon
any foreclosure of the lien hereof, or sold in inverse order of alienation,  and
agrees that the Agent or any court having  jurisdiction  to foreclose  such lien
may sell the Mortgaged Property as an entirety. The Mortgagor, for the Mortgagor
and all who may claim through or under the  Mortgagor,  further  waives,  to the
full extent that the Mortgagor may lawfully do so, any requirement for posting a
receiver's  bond or  replevin  bond or other  similar  type of bond if the Agent
commence an action for  appointment  of a receiver or an action for  replevin to
recover  possession  of any of  the  Mortgaged  Property.  If  any  law in  this
paragraph  referred  to  and  now  in  force,  of  which  the  Mortgagor  or the
Mortgagor's  successor or successors might take advantage despite the provisions
hereof,  shall hereafter be repealed or cease to be in force, such law shall not
thereafter be deemed to constitute any part of the contract herein  contained or
to preclude the operation or application of the provisions of this paragraph. If
the Mortgagor is an individual,  the Mortgagor waives and releases all rights of
dower,  courtesy and homestead in the Mortgaged  Property insofar as such rights
may in any way affect the purposes of this instrument.

     5.10 Costs and Expenses. All costs and expenses (including attorneys' fees)
incurred by the Agent in protecting  and enforcing  its rights  hereunder  shall
constitute a demand  obligation  owing by the  Mortgagor to the party  incurring
such costs and expenses  and shall draw  interest at an annual rate equal to the
highest rate of interest


                                      -28-
<PAGE>

from time to time  accruing on the Loan Note plus three percent (3%) until paid,
all of which shall constitute a portion of the Indebtedness.

     5.11 Operation of the Mortgaged  Property by the Agent. Upon the occurrence
of an event of default and in addition to all other rights  herein  conferred on
the Agent,  the Agent (or any  person,  firm or  corporation  designated  by the
Agent) shall have the right and power, but shall not be obligated, to enter upon
and  take  possession  of any of the  Mortgaged  Property,  and to  exclude  the
Mortgagor,  and the Mortgagor's  agents or servants,  wholly  therefrom,  and to
hold,  use,  administer,  manage and  operate  the same to the  extent  that the
Mortgagor  shall be at the time entitled and in its place and stead.  The Agent,
or any person, firm or corporation designated by the Agent, may operate the same
without any  liability to the  Mortgagor  in  connection  with such  operations,
except to use ordinary care in the operation of such  properties,  and the Agent
or any person, firm or corporation designated by the Agent, shall have the right
to collect, receive and receipt for all Hydrocarbons produced and sold from said
properties, to make repairs, purchase machinery and equipment, conduct work-over
operations,  drill  additional  wells and to  exercise  every  power,  right and
privilege of the Mortgagor with respect to the Mortgaged  Property.  When and if
the expenses of such operation and development  (including costs of unsuccessful
work-over  operations or additional  wells) have been paid and the  Indebtedness
paid,  said  properties  shall,  if there  has been no sale or  foreclosure,  be
returned  to the  Mortgagor.  Further,  in the event  that any of the  Mortgaged
Property  is  seized as an  incident  to an action  for the  recognition  or the
enforcement of this instrument,  whether by executory process, ordinary process,
writ of fieri facias,  sequestration,  or otherwise, the court issuing the order
under which the seizure is to be effected shall, if such order is petitioned for
by the holder or holders of the Notes or other Indebtedness,  direct the sheriff
or other  officer  making the  seizure  to  appoint  as keeper of the  Mortgaged
Property,  in accordance  with Louisiana  Revised  Statutes  9:5131 through 5135
and/or 9:5136 through 5140.2, as the same may be amended,  such person as may be
named by the Agent at the time the seizure is effected.

                                   ARTICLE VI

                            Miscellaneous Provisions
                            ------------------------

     6.1 Pooling and  Unitization.  The Mortgagor  shall have the right,  and is
hereby  authorized,  to  pool or  unitize  all or any  part of any of the  lands
described  in Exhibit A,  insofar as  relates to the  Mortgaged  Property,  with
adjacent lands, leaseholds and other interests, when, in the reasonable judgment
of the  Mortgagor,  it is  necessary  or  advisable  to do so in order to form a
drilling and/or  production  unit to facilitate the orderly  development of that
part  of  the  Mortgaged  Property  affected  thereby,  or to  comply  with  the
requirements of any Applicable Law or governmental order or regulation  relating
to the spacing of wells or  proration  of the  production  therefrom;  provided,
however,  that  any  unit  so  formed  for  the  production  of  oil  shall  not
substantially exceed 160 acres, and any unit so formed for the production of gas
shall not  substantially  exceed 640 acres,  unless a larger area is required to
conform to an Applicable Law or governmental order or regulation relating to the
spacing of wells or to obtain the


                                      -29-
<PAGE>

maximum allowable  production under any Applicable Law or governmental  order or
regulation  relating  to the  proration  of  production  therefrom;  and further
provided  that  the  Hydrocarbons  produced  from any  unit so  formed  shall be
allocated among the separately owned tracts or interests  comprising the unit in
a uniform manner consistently  applied.  Any unit so formed may relate to one or
more zones or horizons,  and a unit formed for a particular zone or horizon need
not conform in area to any other unit  relating to a different  zone or horizon,
and a unit  formed for the  production  of oil need not conform in area with any
unit formed for the production of gas.  Immediately  after formation of any such
unit,  the  Mortgagor  shall  furnish  to the Agent a true  copy of the  pooling
agreement,  declaration  of pooling or other  instrument  creating such unit, in
such number of counterparts as the Agent may reasonably request. The interest in
any such unit  attributable  to the  Mortgaged  Property  (or any part  thereof)
included  therein  shall  become a part of the  Mortgaged  Property and shall be
subject to the lien hereof in the same manner and with the same effect as though
such unit and the interest of the Mortgagor therein were specifically  described
in Exhibit A. The Mortgagor may enter into pooling or unitization agreements not
hereinabove  authorized only with the prior written consent of the Agent,  which
consent will not be unreasonably withheld.

     6.2  Actions or  Advances  by the  Agent.  Each and every  covenant  herein
contained shall be performed and kept by the Mortgagor solely at the Mortgagor's
expense.  If the Mortgagor shall fail to perform or keep any of the covenants of
whatsoever kind or nature contained in this instrument, the Agent, or any keeper
or receiver appointed hereunder, may, but shall not be obligated to, take action
and/or  make  advances to perform the same in the  Mortgagor's  behalf,  and the
Mortgagor  hereby  agrees to repay the expense of such action and such  advances
upon demand plus interest at an annual rate equal to the Alternate Base Rate (as
defined in the Credit  Agreements) of interest from time to time accruing on the
Loan Note plus the Applicable Margin (as defined in the Credit  Agreements) plus
two percent (2%) until paid or, in the event any promissory  note evidences such
indebtedness,  upon the terms and conditions  thereof. No such advance or action
by the Agent or any keeper or receiver  appointed  hereunder  shall be deemed to
relieve the Mortgagor from any default hereunder.

     6.3 Defense of Claims.  The  Mortgagor  will notify the Agent,  in writing,
promptly of the  commencement  of any legal  proceedings  affecting  the lien or
security  interest hereof or the Mortgaged  Property,  or any part thereof,  and
will take such action,  employing  attorneys as set forth in Section 2.4(j),  as
may be necessary or  appropriate  to preserve  the  Mortgagor's  and the Agent's
rights affected thereby and/or to hold harmless the Agent and the Lender Parties
in respect of such proceedings;  and should the Mortgagor fail or refuse to take
any such action,  the Agent may, upon giving prior written notice thereof to the
Mortgagor,  take such action in behalf and in the name of the  Mortgagor  and at
the Mortgagor's expense. Moreover, the Agent may take such independent action in
connection  therewith as it may in its  discretion  deem proper,  the  Mortgagor
hereby agreeing that all sums advanced or all expenses  incurred in such actions
plus interest at an annual rate equal to the Alternate  Base Rate (as defined in
the Credit  Agreements)  of interest from time to time accruing on the Loan Note
plus the  Applicable  Margin  (as  defined in the  Credit  Agreements)  plus two
percent (2%) until


                                      -30-
<PAGE>

paid,  will, on demand,  be reimbursed,  as  appropriate,  to the Agent,  or any
keeper or receiver  appointed  hereunder.  The  obligations  of the Mortgagor as
hereinabove   set  forth  in  this  Section  6.3  shall   survive  the  release,
termination, foreclosure or assignment of this instrument or any sale hereunder.

     6.4 The Mortgaged  Property to Revert.  If the Indebtedness  shall be fully
paid and the covenants herein contained shall be well and truly performed,  then
all of the  Mortgaged  Property  shall  revert to the  Mortgagor  and the entire
estate,  right,  title and interest of the Agent shall thereupon  cease; and the
Agent  in  such  case  shall,  upon  the  request  of the  Mortgagor  and at the
Mortgagor's  cost and  expense,  deliver  to the  Mortgagor  proper  instruments
acknowledging release and satisfaction of this instrument.

     6.5 Renewals, Amendments and Other Security. Renewals and extensions of the
Indebtedness  and  modifications  of any kind of the Obligations may be given at
any time and amendments may be made to agreements with third parties relating to
any part of such  Indebtedness or the Mortgaged  Property and the Agent may take
or may now hold other  security  from others for the  Indebtedness,  all without
notice to or consent of the Mortgagor.  The Agent may resort first to such other
security or any part thereof or first to the  security  herein given or any part
thereof, or from time to time to either or both, even to the partial or complete
abandonment  of either  security,  and such action  shall not be a waiver of any
rights conferred by this  instrument,  which shall continue as a first lien upon
and prior perfected  security  interest in the Mortgaged  Property not expressly
released  until the Notes and all other  Indebtedness  secured  hereby are fully
paid.

     6.6 Instrument an Assignment,  etc. This  instrument  shall be deemed to be
and may be  enforced  from  time to time  as an  assignment,  chattel  mortgage,
contract,  financing statement,  real estate (immovable  property) mortgage,  or
security agreement, and from time to time as any one or more thereof.

     6.7  Limitation  on Interest.  No provision  of this  instrument  or of the
Notes,  the Credit  Agreements  or any other Loan  Document  shall  require  the
payment or permit the  collection  of interest  in excess of the Maximum  Lawful
Rate or which is otherwise contrary to Applicable Law. If any excess of interest
in such respect is herein or in the Notes,  the Credit  Agreements  or any other
Loan Document provided for, or shall be adjudicated to be so provided for herein
or in the Notes, the Credit Agreements or any other Loan Document, the Mortgagor
shall not be obligated to pay such excess.

     6.8 Unenforceable or Inapplicable Provisions. If any provision hereof or of
the Notes is invalid or unenforceable in any jurisdiction,  the other provisions
hereof  or of  the  Notes  shall  remain  in  full  force  and  effect  in  such
jurisdiction,  and the remaining  provisions hereof shall be liberally construed
in favor of the Agent in order to  effectuate  the  provisions  hereof,  and the
invalidity  of any  provision  hereof in any  jurisdiction  shall not affect the
validity or enforceability of any such provision in any other jurisdiction.  Any
reference  herein  contained  to a statute or law of a state in which no part of
the


                                      -31-
<PAGE>

Mortgaged Property is situated shall be deemed inapplicable to, and not used in,
the interpretation hereof.

     6.9 Rights Cumulative.  Each and every right, power and remedy herein given
to the Agent shall be cumulative  and not  exclusive;  and each and every right,
power and remedy whether  specifically herein given or otherwise existing may be
exercised  from  time to time and so often  and in such  order as may be  deemed
expedient by the Agent,  as the case may be, and the exercise,  or the beginning
of the exercise, of any such right, power or remedy shall not be deemed a waiver
of the right to exercise, at the same time or thereafter, any other right, power
or remedy. No delay or omission by the Agent in the exercise of any right, power
or remedy  shall  impair any such right,  power or remedy or operate as a waiver
thereof or of any other right, power or remedy then or thereafter existing.

     6.10 Waiver by the Agent. Any and all covenants in this instrument may from
time to time by  instrument  in  writing  signed  by the Agent be waived to such
extent and in such manner as the Agent may desire, but no such waiver shall ever
affect or impair the Agent's  rights or liens or security  interests  hereunder,
except to the extent specifically stated in such written instrument.

     6.11 Environmental  Indemnification.  The Mortgagor will indemnify and hold
the Agent harmless from and against and reimburse the Agent with respect to, any
and all claims, demands, causes of action, losses, damages,  liabilities,  costs
and expenses (including  reasonable  attorney's fees and court costs) of any and
every kind or character, known or unknown, fixed or contingent, out-of-pocket or
consequential,  asserted  against  or by the  Agent at any time and from time to
time by reason of or arising  out of any  violation  of any  Environmental  Laws
applicable  to the  Mortgagor  and/or  the  Mortgaged  Property  and any and all
matters  arising out of any act,  omission,  event or  circumstance  existing or
occurring (including, without limitation, the presence on the Mortgaged Property
or release from the  Mortgaged  Property of hazardous  substances or solid waste
disposed of or otherwise  released),  regardless  of whether the act,  omission,
event or circumstance  constituted a violation of any  Environmental  Law at the
time of its  existence  or  occurrence.  The  terms  "hazardous  substance"  and
"release"  shall  have  the  meanings  specified  in the  Federal  Comprehensive
Environmental Response,  Compensation and Liability Act of 1980, as subsequently
modified,  supplemented or amended (herein called "CERCLA"), and for purposes of
RCRA (as defined below)  compliance the terms "solid waste" and "disposed" shall
have the meanings  specified in the Federal  Resource  Conservation and Recovery
Act of 1976, as  subsequently  modified,  supplemented or amended (herein called
"RCRA");  provided,  in the event that either CERCLA or RCRA is amended so as to
broaden the meaning of any term  defined  thereby,  such broader  meaning  shall
apply  subsequent to the effective date of such amendment and provided  further,
to the extent  the laws of any  jurisdiction  where the  Mortgaged  Property  is
located on the date  hereof or on any  subsequent  date  establish a meaning for
"hazardous  substance," "release," "solid waste," or "disposal" which is broader
than that specified in either CERCLA or RCRA,  such broader meaning shall apply.
If and to the extent that the foregoing undertaking may be unenforceable for any
reason,  the  Mortgagor  hereby agrees to make the maximum  contribution  to the


                                      -32-
<PAGE>

payment and satisfaction of the indemnified claims,  demands,  causes of action,
losses,  damages,  liabilities,  costs,  expenses and fees which is  permissible
under  applicable law. The obligations of the Mortgagor as hereinabove set forth
in this Section  6.11 shall  survive the release,  termination,  foreclosure  or
assignment of this instrument or any sale hereunder.

     6.12 No Partnership.  Nothing  contained in this instrument is intended to,
or shall be construed as,  creating to any extent and in any manner  whatsoever,
any  partnership,  joint  venture,  or  association  among the Mortgagor and the
Agent, or in any way as to make the Agent a co-principal with the Mortgagor with
reference to the  Mortgaged  Property,  and any  inferences  to the contrary are
hereby expressly negated.

     6.13 Successors and Assigns. This instrument is binding upon the Mortgagor,
the  Mortgagor's  successors and assigns,  and shall inure to the benefit of the
Agent, its successors and assigns,  and the provisions  hereof shall likewise be
covenants running with the land.

     6.14 Article and Section Headings. The article and section headings in this
instrument are inserted for convenience of reference and shall not be considered
a part of this instrument or used in its interpretation.

     6.15  Execution in  Counterparts.  This  instrument  may be executed in any
number of counterparts,  each of which shall for all purposes be deemed to be an
original and all of which are identical,  except that, to facilitate recordation
or filing,  in any  particular  counterpart  portions of Exhibit A hereto  which
describe  properties  situated in  parishes  other than the parish in which such
counterpart is to be recorded or filed may have been omitted.

     6.16 Special Filing as Financing Statement.  This instrument shall likewise
be a Security  Agreement and a Financing  Statement.  This  instrument  shall be
filed for record,  among  other  places,  in the real estate  records and in the
Uniform  Commercial  Code  records  of each  parish in which any  portion of the
immovable  property  covered  by the oil and gas leases  described  in Exhibit A
hereto is situated,  and,  when filed in such  parishes  shall be effective as a
financing  statement  covering  Fixtures  located on oil and gas  properties and
as-extracted collateral, which as-extracted collateral are to be financed at the
wellheads  of the wells  located  on the lands  described  in  Exhibit A. At the
option  of the  Agent,  a carbon,  photographic  or other  reproduction  of this
instrument or of any financing  statement covering the Mortgaged Property or any
portion thereof shall be sufficient as a financing statement and may be filed as
such.

     6.17 Notices. Any notice,  request, demand or other instrument which may be
required  or  permitted  to be  given or  served  upon  the  Mortgagor  shall be
sufficiently  given when mailed by first-class mail,  addressed to the Mortgagor
at the address shown below the  signatures  at the end of this  instrument or to
such different  address as the Mortgagor shall have designated by written notice
received by the Agent.


                                      -33-
<PAGE>

     6.18  Waivers.  The  parties  hereto  expressly  waive  the  production  of
mortgage,  conveyance, tax research or other certificates and hereby release and
hold the Notary Public whose name is hereunder signed harmless for and by reason
of the nonproduction and nonannexation thereof to this instrument. The Mortgagor
waives  in  favor  of the  Agent  any and all  homestead  exemptions  and  other
exemptions  of seizure or  otherwise  to which  Mortgagor  is or may be entitled
under the  constitution  and statutes of the State of  Louisiana  insofar as the
Mortgaged  Property is concerned.  Mortgagor further waives:  (a) the benefit of
appraisement  as provided in Louisiana  Code of Civil  Procedure  Articles 2332,
2336,  2723 and 2724, and all other laws conferring the same; (b) the demand and
three days delay accorded by Louisiana Code of Civil Procedure Articles 2639 and
2721; (c) the notice of seizure  required by Louisiana  Code of Civil  Procedure
2293 and 2721;  (d) the three days delay  provided  by  Louisiana  Code of Civil
Procedure Articles 2331 and 2722; and (e) the benefit of the other provisions of
Louisiana Code of Civil Procedure Articles 2331, 2722 and 2723, not specifically
mentioned above.

     6.19 Transfer of the Notes without  Notarial Act. The parties  hereto agree
that the Notes may be  transferred  without the  necessity for a notarial act of
transfer  thereof,  and that any such transfer  without notarial act shall carry
with it into the hands of any  future  holder or  holders  of the Notes full and
entire  subrogation  of title  in and to the  Notes  to any and all  rights  and
privileges  under this instrument  herein granted to the Agent, as holder of the
Notes. This instrument is for the benefit of the Agent, the Lenders,  the Lender
Parties and for such other  person or persons as may from time to time become or
be the  holders  of any  of the  Indebtedness,  and  this  instrument  shall  be
transferable  and  negotiable,  with the same  force and  effect and to the same
extent as the Indebtedness  may be transferable,  it being understood that, upon
the  transfer  or  assignment  by the  Agent,  the  Lenders or any of the Lender
Parties of any of the Indebtedness,  the legal holder of such Indebtedness shall
have all of the rights granted to the Agent under this instrument. The Mortgagor
specifically  agrees  that  upon  any  transfer  of all or  any  portion  of the
Indebtedness,  this  instrument  shall  secure  with  retroactive  rank the then
existing  Indebtedness  of the  Mortgagor  to the  transferee  and  any  and all
Indebtedness to such transferee thereafter arising.

     6.20  Authentic  Evidence.  Any  and  all  declarations  of  facts  made by
authentic  act before a notary  public in the  presence  of two  witnesses  by a
person  declaring  that such facts lie within his  knowledge,  shall  constitute
authentic  evidence  of such facts for the  purpose of  executory  process.  The
Mortgagor  specifically agrees that such an affidavit by a representative of the
Agent as to the existence, amount, terms and maturity of the Indebtedness and of
a default  thereunder shall constitute  authentic evidence of such facts for the
purpose of executory process.

     6.21  Reliance.   Notwithstanding   any  reference  herein  to  the  Credit
Agreements,  the  Notes  or the  Letters  of  Credit,  no party  shall  have any
obligation to inquire into the terms or conditions of any such documents and all
parties shall be fully  authorized to rely upon any statement,  certificate,  or
affidavit of Agent or any future holder of any portion of the Indebtedness as to
the occurrence of any event such as the occurrence of any Event of Default.


                                      -34-
<PAGE>

     6.22 Governing Law. THIS INSTRUMENT IS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE  WITH THE LAWS OF THE  UNITED  STATES  OF  AMERICA  AND THE  STATE OF
LOUISIANA.

     6.23  Acceptance.  Pursuant  to  Louisiana  Civil Code  Article  3289,  the
Mortgagor  acknowledges  that this  instrument  need not be signed by the Agent,
whose consent is presumed and is hereby acknowledged by the Mortgagor.

     6.24 No Liability.  The Agent shall not be liable for any error of judgment
or act  done  by the  Agent  in  good  faith,  or be  otherwise  responsible  or
accountable under any circumstances  whatsoever,  except for their negligence or
bad faith.  The Agent shall not be personally  liable in case of entry by it, or
anyone  entering by virtue of the powers herein granted them, upon the Mortgaged
Property for debts contracted or liability or damages incurred in the management
or operation of the Mortgaged  Property.  The Agent shall have the right to rely
on any  instrument,  document or signature  authorizing or supporting any action
taken or proposed to be taken by them hereunder, believed by it in good faith to
be genuine.  The Mortgagor will, from time to time, pay the  compensation due to
the Agent  hereunder and reimburse the Agent for, and save it harmless  against,
any  and  all  liability  and  expenses  which  may  be  incurred  by it in  the
performance of its duties.

     6.25  Covenants  Running with the Land. All  Obligations  contained in this
instrument  are intended by the parties to be, and shall be  construed  as, real
rights and covenants running with the Mortgaged Property.

     6.26 The Agent as Agent for the Lender Parties. As described above, certain
Affiliates  of the Agent and the  Lenders  are or may become  parties to certain
Hedging  Agreements with the Mortgagor and/or Affiliates of the Mortgagor.  This
instrument secures the obligations of the Mortgagor and such Affiliates,  as the
case may be, under such Hedging Agreements,  and the parties acknowledge for all
purposes  that  the  Agent  acts for  itself  and as  agent  on  behalf  of such
Affiliates  of the Agent and such Lenders  which are so entitled to share in the
rights and benefits  accruing to the Agent under this  instrument  in respect of
the Mortgaged Property.

     6.27 Subrogation.  If any or all of the proceeds of the Note have been used
to extinguish,  extend or renew any indebtedness heretofore existing against the
Mortgaged Property,  then, to the extent of such funds so used, the Indebtedness
and this  instrument  shall be subrogated to all of the rights,  claims,  liens,
titles and  interests  heretofore  existing  against the  Mortgaged  Property to
secure the  indebtedness  so  extinguished,  extended  or renewed and the former
rights,  claims, liens, titles and interests,  if any, are not waived but rather
are continued in full force and effect in favor of the Agent and are merged with
the lien and security  interest  created  herein as cumulative  security for the
repayment of the Indebtedness and the satisfaction of the Obligations.

     6.28  Subordination by The Agent.  From time to time at the Agent's option,
by instrument  executed by the Agent and recorded in the real  property  records
where this


                                      -35-
<PAGE>

instrument has been recorded, the Agent may subordinate the lien created by this
instrument to any interest in the  Mortgaged  Property.  Any such  subordination
shall be  solely  at the  Agent's  option,  and in no event  shall  the Agent be
obligated  to  subordinate  the  lien  or  security  interest  created  by  this
instrument.


                                      -36-
<PAGE>



     THUS  DONE  AND  PASSED  IN  MULTIPLE  ORIGINALS  on the  _______  date  of
_____________,  2002 in the presence of the undersigned competent witnesses, who
hereunto sign their names,  together with  Mortgagor and me,  Notary,  after due
reading of the whole.



                                       CALPINE CORPORATION,
                                       a Delaware corporation

                                       By:______________________________________
                                       Title:___________________________________
                                       Printed Name:____________________________




The name and address of the Mortgagor and Debtor is:

Calpine Corporation
1000 Louisiana Street, Suite 800
Houston, TX  77002



WITNESSES TO SIGNATURE:


_______________________________________

_______________________________________



                                       _________________________________________
                                       NOTARY PUBLIC
                                       Residing at______________________________
                                       My Commission Expires____________________


                                                                   [LA Mortgage]
<PAGE>



     THUS  DONE  AND  PASSED  IN  MULTIPLE  ORIGINALS  on  the  ________date  of
_____________,  2002 in the presence of the undersigned competent witnesses, who
hereunto sign their names, together with Agent and me, Notary, after due reading
of the whole.



                                        THE BANK OF NOVA SCOTIA, as Agent

                                        By:_____________________________________
                                        Title: Director
                                        Printed Name: Kemp Leonard




The name and mailing address of the Secured Party and Agent is:

The Bank of Nova Scotia, as Agent
580 California Street
Suite 2100
San Francisco, CA  94119





WITNESSES TO SIGNATURE:


__________________________________
John Quick
__________________________________



                                       _________________________________________
                                       NOTARY PUBLIC
                                       Residing at______________________________
                                       My Commission Expires____________________


                                                                   [LA Mortgage]
<PAGE>



This Instrument Was Prepared By:

Kevin L. Shaw, Esq.
Mayer, Brown, Rowe & Maw
700 Louisiana Street, 36th Floor
Houston, TX  77002




<PAGE>



                       SCHEDULE I To Mortgage, Assignment,
                   Security Agreement and Financing Statement,
                               dated May 1, 2002,
               from CALPINE CORPORATION to THE BANK OF NOVA SCOTIA



                          Prior Names of the Mortgagor
                          ----------------------------


Calpine Natural Gas Company L.P.
TGX Corporation
Sheridan Energy, Inc.
Sheridan California Energy, Inc.
Calpine Natural Gas California, Inc.
Calpine Natural Gas Company
Michael Petroleum Corporation


                                      -1-
<PAGE>



                       EXHIBIT A To Mortgage, Assignment,
                   Security Agreement and Financing Statement,
                               dated May 1, 2002,
               from CALPINE CORPORATION to THE BANK OF NOVA SCOTIA

                               List of Properties
                               ------------------

     1.  Depth  limitations,  unit  designations,  unit tract  descriptions  and
descriptions  (including  percentages,   decimals  or  fractions)  of  undivided
leasehold interests, well names, "Operating Interests",  "Working Interests" and
"Net  Revenue  Interests"  contained  in this  Exhibit A and the  listing of any
percentage, decimal or fractional interest in this Exhibit A shall not be deemed
to limit or  otherwise  diminish  the  interests  being  subjected  to the lien,
security interest and encumbrance of this instrument.

     2. Some of the land  descriptions  in this  Exhibit  A may refer  only to a
portion of the land  covered  by a  particular  lease.  This  instrument  is not
limited to the land  described  in Exhibit A but is intended to cover the entire
interest  of the  Mortgagor  in any lease  described  in  Exhibit A even if such
interest  relates to land not  described in Exhibit A.  Reference is made to the
land  descriptions  contained in the documents of title recorded as described in
this Exhibit A. To the extent that the land  descriptions  in this Exhibit A are
incomplete, incorrect or not legally sufficient, the land descriptions contained
in the documents so recorded are incorporated herein by this reference.

     3. References in Exhibit A to instruments on file in the public records are
made for all purposes.  Unless provided otherwise,  all recording  references in
Exhibit A are to the official real property records of the parish or parishes in
which the mortgaged  property is located and in which records such documents are
or in the past have been customarily  recorded,  whether Conveyance Records, Oil
and Gas Records, Oil and Gas Lease Records or other records.

     4. A statement herein that a certain  interest  described herein is subject
to the terms of certain  described  or referred to  agreements,  instruments  or
other matters shall not operate to subject such interest to any such  agreement,
instrument or other matter except to the extent that such agreement,  instrument
or matter is otherwise  valid and presently  subsisting nor shall such statement
be deemed to  constitute  a  recognition  by the  parties  hereto  that any such
agreement, instrument or other matter is valid and presently subsisting.


                                      A-1
<PAGE>



                       EXHIBIT B To Mortgage, Assignment,
                   Security Agreement and Financing Statement,
                               dated May 1, 2002,
               from CALPINE CORPORATION to THE BANK OF NOVA SCOTIA

                         Certified Copies of Resolutions
                         -------------------------------


                                      B-1
<PAGE>



                       EXHIBIT C To Mortgage, Assignment,
                   Security Agreement and Financing Statement,
                               dated May 1, 2002,
               from CALPINE CORPORATION to THE BANK OF NOVA SCOTIA

                             Permitted Encumbrances
                             ----------------------

     All  initially-capitalized  terms used in this  Exhibit  C,  whether or not
defined  in this  instrument,  shall have the  meanings  given such terms in the
Credit Agreements.

     (a) Liens securing payment of the Obligations  granted pursuant to any Loan
Document and Liens securing  payment of the obligations  granted pursuant to the
loan documents relating to the Existing Credit Agreement;

     (b)  Liens  granted  prior  to the  Effective  Date to  secure  payment  of
Indebtedness  of the type permitted and described in clause (a) of Section 8.2.2
of the Credit Agreements;

     (c) Liens granted to secure payment of  Indebtedness  of the type permitted
and  described  in clause (b) of Section  8.2.2 of the Credit  Agreements  where
recourse is limited as  described  in clause (b) of Section  8.2.2 of the Credit
Agreements;

(d) Liens for taxes,  assessments or other governmental charges or levies not at
the time delinquent or thereafter  payable  without penalty or being  diligently
contested  in good  faith by  appropriate  proceedings  and for  which  adequate
reserves in accordance with GAAP shall have been set aside on its books;

     (e) Liens of carriers,  warehousemen,  mechanics, materialmen and landlords
incurred  in the  ordinary  course of  business  for sums not  overdue  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (f) Liens  incurred in the ordinary  course of business in connection  with
workmen's  compensation,  unemployment  insurance or other forms of governmental
insurance  or  benefits,   or  to  secure  performance  of  tenders,   statutory
obligations,  leases and contracts  (other than for borrowed money) entered into
in the ordinary course of business or to secure  obligations on surety or appeal
bonds;

     (g) judgment  Liens in existence  less than 15 days after the entry thereof
or with  respect to which  execution  has been stayed or the payment of which is
covered in full (subject to a customary deductible) by insurance maintained with
responsible insurance companies;

     (h) Liens granted to secure payment of  Indebtedness  of the type permitted
and described in clauses (e) and (g) of Section  8.2.2 of the Credit  Agreements
where recourse is limited as described in clauses (e) or (g), as applicable,  of
Section 8.2.2 of the Credit Agreements;


                                       C-1
<PAGE>

     (i) Zoning restrictions, easements, rights of way, title irregularities and
other similar  encumbrances  which alone or in the  aggregate do not  materially
detract from the value of the property subject thereto;

     (j) Liens on the  property or assets of any  Subsidiary  of the Borrower in
favor of the Borrower;

     (k) Banker's Liens and similar Liens (including  set-off rights) in respect
of bank deposits;

     (l) Landlord's Liens and similar Liens in respect of leased property;

     (m) Liens securing  Attributable  Debt with respect to  outstanding  leases
entered into pursuant to Sale/Leaseback Transactions so long as, with respect to
Sale/Leaseback  Transactions  closing after January 1, 2002,  the amount thereof
does not exceed 10% of the consolidated  tangible assets of the Borrower and its
Subsidiaries; and

     (n) Liens incurred in connection with the extension, renewal or refinancing
of Indebtedness secured by Liens permitted and described in clauses (b), (c) and
(h) of Section 8.2.3 of the Credit Agreements;  provided, however, that (x) such
new Lien shall be limited to all or part of the same  property  that secured the
original Lien and (y) the Indebtedness  secured by such Lien at such time is not
increased (other than by an amount necessary to pay fees and expenses, including
premiums,  related  to  the  refinancing,   refunding,   extension,  renewal  or
replacement of such Indebtedness);  provided,  further, that the limitations set
forth in this clause (n) shall not apply to Liens which are otherwise  permitted
under  Section  8.2.3  of the  Credit  Agreements,  even  if such  Liens  secure
Indebtedness  issued to repay or refinance existing  Indebtedness  permitted and
described in clauses (b), (c) and (h) of Section 8.2.3 of the Credit Agreements.


                                       C-2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<FILENAME>ex10-21.txt
<TEXT>
                                                                   EXHIBIT 10.21











--------------------------------------------------------------------------------


                  MORTGAGE, DEED OF TRUST, ASSIGNMENT, SECURITY
                AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING

                                      FROM

                              CALPINE CORPORATION,
                             a Delaware corporation
                         (Taxpayer I.D. No. 77-0212977),
                              Trustor and Mortgagor

                                       TO

                              KEMP LEONARD, Trustee

                                       AND

                               JOHN QUICK, Trustee

                                       AND

                            THE BANK OF NOVA SCOTIA,
                        (Taxpayer I.D. No. 13-494-1099),
                            for itself and as Agent,
                                   Beneficiary

                             Dated as of May 1, 2002


--------------------------------------------------------------------------------

"THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS."

"THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES."

"THOSE  PORTIONS OF THE MORTGAGED  PROPERTY  WHICH ARE  AS-EXTRACTED  COLLATERAL
(INCLUDING, WITHOUT LIMITATION, OIL AND GAS), AND THE ACCOUNTS RELATING THERETO,
WILL BE  FINANCED  AT THE  WELLHEADS  OF THE  WELLS  LOCATED  ON THE  PROPERTIES
DESCRIBED IN EXHIBIT A HERETO,  AND THIS FINANCING  STATEMENT IS TO BE FILED FOR
RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS."


<PAGE>

"MORTGAGOR  HAS AN  INTEREST OF RECORD IN THE REAL  ESTATE  CONCERNED,  WHICH IS
DESCRIBED IN EXHIBIT A HERETO."

"SOME OF THE PERSONAL PROPERTY  CONSTITUTING A PORTION OF THE MORTGAGED PROPERTY
IS OR IS TO BE AFFIXED TO THE PROPERTIES  DESCRIBED IN EXHIBIT A HERETO AND THIS
FINANCING  STATEMENT IS TO BE FILED FOR RECORD,  AMONG OTHER PLACES, IN THE REAL
ESTATE RECORDS."

"A POWER OF SALE HAS BEEN  GRANTED IN THIS  MORTGAGE.  A POWER OF SALE MAY ALLOW
THE MORTGAGEE TO TAKE THE MORTGAGED  PROPERTY AND SELL IT WITHOUT GOING TO COURT
IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR UNDER THIS MORTGAGE."

"MORTGAGOR AGREES BY EXPRESS LANGUAGE IN THIS MORTGAGE TO SUBJECT THE TRUST REAL
ESTATE TO THE TERMS OF THE DEED OF TRUST ACT (SECTIONS  48-10-1  THROUGH 21 NMSA
(1978))."

THIS INSTRUMENT WAS PREPARED BY AND
WHEN RECORDED AND/OR FILED
RETURN TO:

Kevin L. Shaw, Esq.
Mayer, Brown, Rowe & Maw
350 South Grand Avenue
Suite 2500
Los Angeles, California  90071


<PAGE>

                  MORTGAGE, DEED OF TRUST, ASSIGNMENT, SECURITY
                AGREEMENT, FINANCING STATEMENT AND FIXTURE FILING


     THIS MORTGAGE,  DEED OF TRUST,  ASSIGNMENT,  SECURITY AGREEMENT,  FINANCING
STATEMENT AND FIXTURE FILING (this "Mortgage"), dated as of May 1, 2002, is from
CALPINE CORPORATION,  a Delaware corporation (hereinafter called the "Mortgagor"
or  "Borrower"),  to KEMP  LEONARD  and JOHN QUICK,  as  Trustees  (hereinafter,
collectively,   called   the   "Trustees"),   and  THE   BANK  OF  NOVA   SCOTIA
("Scotiabank"),  a Canadian  chartered  bank  having  offices at 580  California
Street,  Suite  2100,  San  Francisco,   CA  94104,  for  itself  and  as  agent
(hereinafter called the "Agent") for the Lender Parties (as defined below).

                                   ARTICLE I

                            Recitals and Definitions
                            ------------------------

     1.1 Borrower, certain institutional lenders (individually,  a "2002 Lender"
and collectively,  the "2002 Lenders") and Scotiabank have entered into a Credit
Agreement,  dated as of  March  8,  2002  (herein,  as the same may be  amended,
modified or supplemented  from time to time,  called the "2002 Loan Agreement"),
pursuant to which the 2002  Lenders  have  agreed to make loans to Borrower  and
issue or cause to be  issued  letters  of credit  for the  benefit  of  Borrower
(individually,  a "2002 Letter of Credit" and collectively, the "2002 Letters of
Credit")  in amounts not to exceed at any one time  outstanding  $1,600,000,000,
and Borrower,  to evidence its  indebtedness  to the 2002 Lenders under the 2002
Loan Agreement,  has executed and delivered (or will execute and deliver) to the
2002 Lenders its secured  promissory notes in the aggregate,  original principal
amount of $1,600,000,000, to mature not later than May 24, 2003 (individually, a
"2002 Loan Note" and collectively,  the "2002 Loan Notes"),  the 2002 Loan Notes
being payable to the order of the 2002 Lenders, bearing interest as provided for
therein,   and  containing   provisions  for  payment  of  attorneys'  fees  and
acceleration of maturity in the event of default, as therein set forth.

     1.2 Borrower,  certain  institutional lenders  (individually,  an "Existing
Lender" and  collectively,  the "Existing  Lenders";  and together with the 2002
Lenders,  the "Lenders")  and Scotiabank  have entered into a Second Amended and
Restated Credit  Agreement dated as of May 23, 2000 (herein,  as the same may be
amended,  modified,  or  supplemented  from time to time,  called the  "Existing
Credit  Agreement")  pursuant to which the Existing  Lenders have agreed to make
loans to Borrower  and issue or cause to be issued any letters of credit for the
benefit  of  Borrower   (individually,   an  "Existing  Letter  of  Credit"  and
collectively,  the "Existing Letters of Credit") in amounts not to exceed at any
one time  $400,000,000,  and  Borrower,  to  evidence  its  indebtedness  to the
Existing Lenders under the Existing Credit Agreement, has executed and delivered
to the Existing  Lenders its secured  promissory  notes to mature not later than
May 24,  2003  (individually,  an  "Existing  Loan Note" and  collectively,  the
"Existing  Loan  Notes"),  the Existing Loan Notes being payable to the order of
the Existing Lenders,  bearing interest as provided for therein,  and containing
provisions for payment of attorneys' fees


                                      -1-
<PAGE>

and acceleration of maturity in the event of default,  as therein set forth. The
2002 Loan Agreement and the Existing  Credit  Agreement are herein  collectively
called the "Credit  Agreements." The 2002 Loan Notes and the Existing Loan Notes
are herein  individually  called a "Loan Note" and collectively called the "Loan
Notes". The 2002 Letters of Credit and the Existing Letters of Credit are herein
individually called a "Letter of Credit" and collectively called the "Letters of
Credit".

     1.3 It is a condition  precedent to the  obligation  of the Lenders to make
Loans  under the Credit  Agreements,  to issue or cause to be issued  Letters of
Credit under the Credit  Agreements  and to the  obligations  of the Agent,  the
Lenders or the Lender Parties (as the case may be), that the Mortgagor  executes
and delivers this instrument.

     1.4 For all  purposes  of  this  Mortgage,  unless  the  context  otherwise
requires:

          A. "Affiliate" of any Person means any other Person which, directly or
     indirectly, controls, is controlled by or is under common control with such
     Person  (excluding any trustee under, or any committee with  responsibility
     for  administering,  any Plan (as  defined  in the Credit  Agreements)).  A
     Person shall be deemed to be "controlled by" any other Person if such other
     Person possesses, directly or indirectly, power

               (a) to vote  10% or more of the  securities  (on a fully  diluted
          basis) having  ordinary  voting power for the election of directors or
          managing general partners; or

               (b) to  direct  or cause  the  direction  of the  management  and
          policies of such Person whether by contract or otherwise.

          B. "Agent" is defined in the Preamble of this Mortgage.

          C.  "Applicable  Law" means with respect to any Person or matter,  any
     federal, state, regional, tribal or local statute, law, code, rule, treaty,
     convention,   application,   order,  decree,  consent  decree,  injunction,
     directive,  determination or other  requirement  (whether or not having the
     force of law) relating to such Person or matter and, where applicable,  any
     interpretation thereof by a Governmental Authority having jurisdiction with
     respect  thereto  or  charged  with the  administration  or  interpretation
     thereof.

          D. "Borrower" is defined in the Preamble of this Mortgage.

          E. "Credit Agreements" is defined in Section 1.2 of this Mortgage.

          F. "Deed of Trust" means each mortgage,  deed of trust,  or other real
     property collateral  security instrument in a form reasonably  satisfactory
     to the Agent,  executed and delivered pursuant to Section 8.1.8 of the 2002
     Credit Agreement, as amended, supplemented,  restated or otherwise modified
     from time to time, including, without limitation, this Mortgage.


                                      -2-
<PAGE>

          G. "Event of Default"  means any happening or occurrence  described in
     Article V hereinbelow,  and any other happening or occurrence  specifically
     designated  herein or in any of the other  Security  Documents  (as defined
     herein) as constituting an event of default thereunder.

          H.  "Environmental   Laws"  means  any  and  all  present  and  future
     Applicable  Laws  issued,  promulgated  or entered  thereunder  relating to
     pollution or  protection  of the  environment,  including  laws relating to
     reclamation   of  land  and  waterways  and  laws  relating  to  emissions,
     discharges,  releases or threatened  releases of pollutants,  contaminants,
     chemicals, or industrial,  toxic or hazardous substances or wastes into the
     environment  (including,  without  limitation,  ambient air, surface water,
     ground water, land surface or subsurface  strata) or otherwise  relating to
     the  manufacture,   processing,   distribution,  use,  treatment,  storage,
     disposal, transport or handling of pollutants, contaminants,  chemicals, or
     industrial, toxic or hazardous substances or wastes.

          I. "Existing  Assignment  Agreement" means that certain Assignment and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California limited  partnership,  pursuant to Section 6.1.3 of the Existing
     Credit  Agreement,  substantially  in the form of Exhibit F to the Existing
     Credit  Agreement,  as  amended,  supplemented,  amended  and  restated  or
     otherwise modified from time to time.

          J.  "Existing  Credit  Agreement"  is defined  in Section  1.2 of this
     Mortgage.

          K. "Existing Lenders" is defined in Section 1.2 of this Mortgage.

          L.  "Existing  Letters of  Credit"  is defined in Section  1.2 of this
     Mortgage.

          M. "Existing Loan Documents" means the Existing Credit Agreement,  the
     Existing  Loan Notes,  the Existing  Assignment  Agreement,  and each other
     relevant  agreement,  document  or  instrument  (including  the fee  letter
     described in Section 3.3.2 of the Existing Credit  Agreement)  delivered in
     connection therewith.

          N. "Existing Loan Notes" is defined in Section 1.2 of this Mortgage.

          O. "Fee Letter"  means the fee letter  agreement  described in Section
     3.3.2 of the 2002 Credit Agreement.

          P.  "Governmental   Authority"  means  any  and  all  courts,  boards,
     agencies, commissions,  offices or authorities of any nature whatsoever for
     any governmental unit (federal, state, county, district,  municipal,  city,
     tribe or otherwise)  whether now or hereafter in existence charged with the
     administration, interpretation or enforcement of any Applicable Law.


                                      -3-
<PAGE>

          Q.  "Guaranty"  means  the  guaranty  executed  and  delivered  by the
     Guarantors  pursuant  to  Section  6.1.3  of  the  2002  Credit  Agreement,
     substantially in the form of Exhibit H thereto, as amended, supplemented or
     otherwise modified from time to time.

          R.  "Hazardous  Materials  Indemnity"  means  that  certain  hazardous
     materials  indemnity  executed and  delivered  by the Borrower  pursuant to
     Section  8.1.8 of the 2002  Credit  Agreement,  as  amended,  supplemented,
     restated or otherwise modified from time to time.

          S. "Hedging  Agreements"  means:  (a) interest  rate swap  agreements,
     basis  swap  agreements,   interest  rate  cap  agreements,   forward  rate
     agreements,  interest  rate  floor  agreements  and  interest  rate  collar
     agreements,  and all other  agreements or arrangements  designed to protect
     such Person against  fluctuations  in interest  rates or currency  exchange
     rates,  and (b) forward  contracts,  options,  futures  contracts,  futures
     options,  commodity swaps, commodity options,  commodity collars, commodity
     caps, commodity floors and all other agreements or arrangements designed to
     protect such Person against fluctuations in the price of commodities.

          T.  "Hedging  Obligations"  means  with  respect  to any  Person,  all
     liabilities  (including  without  limitation  obligations  and  liabilities
     arising in connection with or as a result of early or premature termination
     of a Hedging  Agreement,  whether or not occurring as a result of a default
     thereunder) of such Person under a Hedging Agreement.

          U. "Hydrocarbons"  means collectively,  oil, gas, casinghead gas, drip
     gasoline, natural gasoline, condensate,  distillate and all other liquid or
     gaseous  hydrocarbons and related minerals and all products  therefrom,  in
     each case whether in a natural or a processed state.

          V.  "Indebtedness",  "Note"  and  "Notes"  shall  have the  respective
     meanings set forth in Section 2.2 of this Mortgage.

          W. "Indemnification Claim" is defined in Section 4.6 of this Mortgage.

          X. "Indemnified Person" is defined in Section 3.10 of this Mortgage.

          Y. "Joint Operating  Agreements" shall mean, with respect to the lands
     described in Exhibit A, the respective  operating  agreement  burdening the
     lands described in Exhibit A.

          Z. "lands  described in Exhibit A" shall  include the real property or
     other  interest  in any  lands  which are  either  described  in  Exhibit A
     attached hereto or the description of which is incorporated in Exhibit A by
     reference to an instrument or document containing in, or referring to, such
     a description,  and shall also include any lands now or hereafter  unitized
     or  pooled  with  lands  which are  either  described  in  Exhibit A or the
     description of which is incorporated in


                                      -4-
<PAGE>

     Exhibit A by reference  and Fixtures and all rights,  titles and  interests
     appurtenant  thereto.   References  to  Exhibit  A  shall  include,   where
     applicable, Exhibit A-1 as well.

          AA. "Leases" means any and all leases  (including  without  limitation
     oil and gas leases and oil, gas and other minerals leases),  surface leases
     or easements, subleases, licenses,  concessions,  operating rights or other
     agreements  (written or verbal,  now or hereafter in effect)  which grant a
     possessory  interest  in and to,  or the  right  to  explore,  use,  lease,
     license,  possess, produce, process, store and transport Hydrocarbons from,
     operate from, or otherwise enjoy, the Mortgaged Property, together with all
     amendments, modifications, extensions and renewals thereof.

          BB.  "Legal  Requirements"  means (i) any and all  present  and future
     judicial  decisions,  statutes,  rulings,  rules,  regulations,   licenses,
     decisions,   orders,   injunctions,   decrees,  permits,   certificates  or
     ordinances  of  any  Governmental   Authority  in  any  way  applicable  to
     Mortgagor,  or  the  Mortgaged  Property,  including  the  ownership,  use,
     occupancy,  operation,  maintenance,  repair or reconstruction thereof, and
     any other Applicable Law enacted by any Governmental  Authority relating to
     health or the  environment,  (ii)  Mortgagor's  presently  or  subsequently
     effective  Organic  Documents,  (iii) any and all Leases,  (iv) any and all
     leases  and  other  contracts  (written  or  oral) of any  nature  to which
     Mortgagor,  or the  Mortgaged  Property  may be  bound  and (v) any and all
     restrictions,  restrictive covenants or zoning,  present and future, as the
     same may apply to the Mortgaged Property.

          CC.  "Lender  Party" or "Lender  Parties"  means,  as the  context may
     require,  the Agent,  any Lender and any Affiliate of any Lender that is an
     issuer under a letter of credit,  and each of their respective  successors,
     transferees and assigns.

          DD. "Loan  Documents"  means the Existing Loan  Documents and the 2002
     Loan Documents.

          EE. "Loan Note" is defined in Section 1.2 of this Mortgage.

          FF. "Losses" is defined in Section 3.10 of this Mortgage.

          GG.  "Maximum  Lawful  Rate"  means the  maximum  nonusurious  rate of
     interest that may be received,  charged or contracted for under  Applicable
     Law from time to time in effect.

          HH.  "Mortgaged  Property" means the properties,  rights and interests
     hereinafter described in Section 1.5 and defined as the Mortgaged Property.

          II. "Mortgagor" is defined in the Preamble of this Mortgage.


                                      -5-
<PAGE>

          JJ.  "Obligations"  means  any and all of the  covenants,  warranties,
     representations   and   other   obligations   (other   than  to  repay  the
     Indebtedness)  made or undertaken by Mortgagor or others to the Agent,  the
     Lender  Parties,  the  Trustees  or  others  as set  forth  in  the  Credit
     Agreements or other Loan Documents.

          KK. "oil and gas leases"  shall  include oil, gas and mineral  leases,
     subleases and assignments thereof, operating rights, and shall also include
     subleases and assignments of operating rights.

          LL. "Operating  Equipment" means all surface or subsurface  machinery,
     goods,  equipment,  fixtures,  inventory,  facilities,  supplies  or  other
     property of whatsoever  kind or nature  (excluding  drilling rigs,  trucks,
     automotive  equipment  or other  property  taken to the premises to drill a
     well or for other similar  temporary  uses) now or hereafter  located on or
     under any of the lands  described  in  Exhibit A which are  useful  for the
     production,  gathering, treatment, processing, storage or transportation of
     Hydrocarbons  (together with all  accessions,  additions and attachments to
     any thereof),  including, but not by way of limitation,  all oil wells, gas
     wells, water wells,  injection wells, casing,  tubing, tubular goods, rods,
     pumping  units  and  engines,   christmas   trees,   platforms,   derricks,
     separators,  compressors,  gun barrels, flow lines, tanks, gas systems (for
     gathering, treating and compression), pipelines (including gathering lines,
     laterals  and  trunklines),   chemicals,   solutions,  water  systems  (for
     treating, disposal and injection), steam generation and injection equipment
     and  systems,  power  plants,  poles,  lines,  transformers,  starters  and
     controllers,  machine  shops,  tools,  storage yards and  equipment  stored
     therein, buildings and camps, telegraph,  telephone and other communication
     systems, roads, loading docks, loading racks and shipping facilities.

          MM.  "Organic   Documents"   means  the  Articles  of   Incorporation,
     Certificate of  Incorporation,  limited  liability  company  certificate of
     formation and regulations or operating  agreement,  partnership  agreement,
     limited partnership agreement,  joint venture agreement, trust agreement or
     other  similar  documents  governing  the  organization  and operation of a
     business association.

          NN. "Permits" means all authorizations, approvals, permits, variances,
     land use entitlements, consents, licenses, franchises and agreements issued
     by or  entered  into  with  any  Governmental  Authority  now or  hereafter
     required for all stages of exploration, developing, operating, and plugging
     and  abandoning oil and gas wells  (including,  without  limitation,  those
     shown on Exhibit A) on all or any part of the lands  described in Exhibit A
     (or any other lands any production  from which, or profits or proceeds from
     such  production,  is attributed to any interest in the lands  described in
     Exhibit A).

          OO. "Permitted  Encumbrances" means the outstanding liens,  easements,
     building  lines,  restrictions,   exceptions,   reservations,   conditions,
     limitations,  security interests and other matters (if any) as reflected on
     Exhibit "B"


                                      -6-
<PAGE>

     attached hereto and the lien and security interests created by the Security
     Documents.

          PP.  "Person"  means any  natural  person,  corporation,  partnership,
     limited  liability   company,   firm,   association,   trust,   government,
     governmental  agency or any other entity,  whether acting in an individual,
     fiduciary or other capacity.

          QQ.  "Personalty"  means  all of the  right,  title  and  interest  of
     Mortgagor  now  owned  or  hereafter  acquired  in and  to  all  furniture,
     furnishings,  Equipment,  machinery,  Goods,  General  Intangibles,  money,
     Accounts,   receivables,   Contract  Rights,   Inventory,  all  refundable,
     returnable or  reimbursable  fees,  deposits or other funds or evidences of
     credit or  indebtedness  deposited  by or on behalf of  Mortgagor  with any
     Governmental  Authority,  agencies,  boards,  corporations,   providers  of
     utility services,  public or private,  including specifically,  but without
     limitation,  all refundable,  returnable or reimbursable tap fees,  utility
     deposits,  commitment  fees and development  costs,  and all other personal
     property  (other than the  Fixtures) of any kind or character as defined in
     and subject to the provisions of Article 9 of the Uniform  Commercial Code,
     now or hereafter located upon, within or about, or used in connection with,
     the  lands   described  in  Exhibit  A,  together  with  all   accessories,
     replacements  and  substitutions  thereto  or  therefor  and  the  Proceeds
     thereof.

          RR.  "Pledge  Agreements"  means the pledge  agreements  executed  and
     delivered  pursuant to Section 6.1.4 of the 2002 Credit Agreement,  as such
     agreements  may be amended,  supplemented,  restated or otherwise  modified
     from time to time.

          SS.  "Production  Sale Contracts"  means  contracts now in effect,  or
     hereafter  entered  into by  Mortgagor,  or  entered  into  by  Mortgagor's
     predecessors  in interest,  for the sale,  purchase,  exchange,  gathering,
     transportation,  treating or processing of  Hydrocarbons  produced from the
     lands described in Exhibit A.

          TT. "Rents and  Revenues"  means all of the rents,  revenues,  income,
     proceeds,  profits  and other  benefits  paid or  payable by parties to the
     Leases other than  Mortgagor  for using,  leasing,  licensing,  possessing,
     operating,  selling or otherwise enjoying the Mortgaged Property, including
     the proceeds from the sale of Hydrocarbons.

          UU. "Security Documents" means the Notes, this Mortgage, the financing
     statements and any and all other  instruments now or hereafter  executed by
     Mortgagor or any other person or party to evidence or secure the payment of
     the  Indebtedness or the performance and discharge of the  Obligations,  as
     any of the foregoing may be amended,  renewed or extended.  Notwithstanding
     that the  definition of Security  Documents  and various of the  components
     thereof include documents that may be amended, renewed or


                                      -7-
<PAGE>

     extended,  such definition shall in no way be construed to suggest that any
     party has agreed (or is obligated) to amend, renew or extend them.

          VV. "2002  Assignment  Agreement"  means that certain  Assignment  and
     Security  Agreement executed and delivered by Calpine Gilroy Cogen, L.P., a
     California  limited  partnership,  pursuant  to  Section  6.1.8 of the 2002
     Credit  Agreement,  substantially  in the  form of  Exhibit  K  hereto,  as
     amended, supplemented, amended and restated or otherwise modified from time
     to time.

          WW. "2002 Loan Agreement" is defined in Section 1.1 of this Mortgage.

          XX. "2002 Lenders" is defined in Section 1.1 of this Mortgage.

          YY.  "2002  Letters of  Credit"  is  defined  in  Section  1.1 of this
     Mortgage.

          ZZ. "2002 Loan Documents"  means the 2002 Credit  Agreement,  the 2002
     Loan Notes, the Pledge  Agreements,  the Guaranty,  the Deeds of Trust, the
     2002  Assignment  Agreement,  the Hazardous  Materials  Indemnity,  the Fee
     Letter, and each other relevant agreement, document or instrument delivered
     in connection therewith.

          AAA. "2002 Loan Notes" is defined in Section 1.1 of this Mortgage.

          BBB.  "Taxes"  means all real  property and personal  property  taxes,
     production taxes, assessments,  permit fees, water, gas, sewer, electricity
     and other utility rates and charges,  charges for any easement,  license or
     agreement  maintained  for the benefit of the Mortgaged  Property,  and all
     other taxes,  charges and assessments and any interest,  costs or penalties
     with respect thereto,  of any kind and nature  whatsoever which at any time
     prior to or after the execution hereof may be charged,  assessed, levied or
     imposed  upon the  Mortgaged  Property  or the  Rents and  Revenues  or the
     ownership, use, occupancy or enjoyment thereof.

          CCC.   "Transportation   Agreements"   shall  mean  any  contracts  or
     agreements entered into from time to time by Mortgagor,  or entered into by
     Mortgagor's  predecessors in interest,  relating to the  transportation  of
     Hydrocarbons,   as  any  such   agreement   or  contract  may  be  amended,
     supplemented, restated or otherwise modified from time to time.

          DDD.  "Trustees"  means the  Trustees  defined in the Preamble of this
     Mortgage and any  successor or substitute  trustee  appointed in accordance
     with the terms hereof.

          EEE.  "Water  Rights"  means  (including   without   limitation  those
     described  in Exhibit A hereto) all now or  hereafter  existing or acquired
     water and water rights,  reservoirs and reservoir rights, ditches and ditch
     rights,  wells and well rights,  whether  evidenced or initiated by permit,
     decree,   well  registration,   appropriation  not  decreed,   water  court
     application, shares of stock or other


                                      -8-
<PAGE>

     interests  in mutual  ditch or  reservoir  companies  or  carrier  ditch or
     reservoir  companies  or  otherwise,  appertaining  or  appurtenant  to  or
     beneficially  used or useful in  connection  with the  lands  described  in
     Exhibit A, together with all pumps,  well  casings,  wellheads,  electrical
     installations,  pumphouses, meters, monitoring wells and systems, measuring
     devices, pipes, pipelines,  and other structures or personal property which
     are or may be used to produce, regulate, measure, distribute, store, or use
     water  from the said  water  and water  rights,  reservoirs  and  reservoir
     rights, ditches and ditch rights, wells and well rights.

          FFF. "Uniform Commercial Code" means the Uniform Commercial Code as in
     effect  from time to time in the State of New York or any other  applicable
     state,  and  the  terms  "Accounts",   "Account   Debtor",   "As  Extracted
     Collateral",   "Chattel  Paper",  "Contract  Rights",  "Deposit  Accounts",
     "Documents",  "Electronic Chattel Paper",  "General Intangibles",  "Goods",
     "Equipment",  "Fixtures", "Inventory",  "Instruments", and "Proceeds" shall
     have  the  respective  meanings  assigned  to  such  terms  in the  Uniform
     Commercial Code.

     1.5 Grant. NOW, THEREFORE, Mortgagor, to secure the full and timely payment
of the  Indebtedness  and the full and timely  performance  and discharge of the
Obligations,  has granted,  bargained,  sold,  warranted,  mortgaged,  assigned,
transferred  and  conveyed,  and by these  presents does grant,  bargain,  sell,
warrant, mortgage, assign, pledge and hypothecate,  transfer and convey unto the
Trustees,  IN TRUST,  WITH POWER OF SALE,  for the use and benefit of the Agent,
for itself and as agent for the Lender Parties, all Mortgagor's right, title and
interest,  whether  now  owned  or  hereafter  acquired,  in  and  to all of the
hereinafter  described  properties,  rights and interests;  and, insofar as such
properties,  rights and  interests  consist of Equipment,  General  Intangibles,
Accounts,  As  Extracted  Collateral,   Contract  Rights,  Inventory,  Fixtures,
Proceeds of  collateral  or any other  personal  property of a kind or character
defined in, or subject to the applicable  provisions of, the Uniform  Commercial
Code  (as in  effect  from  time to time in the  appropriate  jurisdiction  with
respect to each of said  properties,  rights and  interests),  Mortgagor  hereby
grants to said Trustees, for the use and benefit of the Agent, for itself and as
agent for the Lender Parties,  a security interest therein to the full extent of
Mortgagor's  legal and  beneficial  interest  therein,  now  owned or  hereafter
acquired, namely:

          (a) the lands  described in Exhibit A, and Leases,  the fee,  mineral,
     overriding  royalty,  royalty and other  interests  which are  described in
     Exhibit A,

          (b) the  presently  existing  and (subject to the terms of Section 3.7
     hereof) hereafter arising unitization, unit operating,  communitization and
     pooling agreements and the properties covered and the units created thereby
     (including, without limitation, all units formed under orders, regulations,
     rules,  approvals,  decisions or other  official  acts of any  Governmental
     Authority) which are specifically described in Exhibit A or which relate to
     any of the properties and interests specifically described in Exhibit A,


                                      -9-
<PAGE>

          (c) the  Hydrocarbons  which are in,  under,  upon,  produced or to be
     produced from or which are  attributed or allocated to the lands  described
     in Exhibit A,

          (d) the Production Sale Contracts,

          (e) the Joint Operating Agreements,

          (f) the Transportation Agreements,

          (g) the Operating Equipment,

          (h) the Permits,

          (i) the Water Rights,

          (j) the Hedging Agreements,

          (k) the Leases,

          (l) the Personalty,

          (m) the Rents and Revenues,

          (n)  without  duplication  of any  other  provision  of this  granting
     clause, Equipment, Fixtures and other Goods necessary or used in connection
     with,   and  Inventory,   Accounts,   As  Extracted   Collateral,   General
     Intangibles,  Contract Rights, Chattel Paper, Deposit Accounts,  Documents,
     Electronic  Chattel  Paper,  Instruments  and  Proceeds  arising  from,  or
     relating  to, the  properties  and other  interests  described in Exhibit A
     (including Exhibit A-1),

          (o) any and all liens and security interests in Hydrocarbons  securing
     the payment of proceeds  from the sale of  Hydrocarbons,  including but not
     limited to those liens and security interests provided for in Section 9.343
     of the Texas  Business  and  Commerce  Code or  similar  statutes  of other
     jurisdictions or any successor statutes,

together with any and all corrections or amendments to, or renewals,  extensions
or ratifications  of, or replacements or substitutions  for, any of the same, or
any instrument relating thereto, and all accounts,  contracts,  contract rights,
options,  nominee  agreements,  unitization  or  pooling  agreements,  operating
agreements  and  unit  operating  agreements,   processing  agreements,   farmin
agreements, farmout agreements, joint venture agreements, partnership agreements
(including mining partnerships), exploration agreements, bottom hole agreements,
dry  hole  agreements,  support  agreements,  acreage  contribution  agreements,
surface use and surface damage agreements,  net profits  agreements,  production
payment  agreements,  Hedging Agreements,  insurance  policies,  title opinions,
title abstracts, title materials and information, files, records, writings, data
bases, information, systems, logs, well cores,


                                      -10-
<PAGE>

fluid samples, production data and reports, well testing data and reports, maps,
seismic  and   geophysical,   geological  and  chemical  data  and  information,
interpretative and analytical reports of any kind or nature (including,  without
limitation,  reserve  studies and reserve  evaluations),  computer  hardware and
software and all documentation therefor or relating thereto (including,  without
limitation,  all  licenses  relating  to or  covering  such  computer  hardware,
software and/or  documentation),  trade secrets,  trademarks,  service marks and
business names and the goodwill of the business  relating  thereto,  copyrights,
copyright registrations, unpatented inventions, patent applications and patents,
rights-of-way,   franchises,  bonds,  easements,   servitudes,  surface  leases,
permits,  licenses,  tenements,   hereditaments,   appurtenances,   concessions,
occupancy  agreements,  privileges,  development  rights,  condemnation  awards,
claims against third parties,  general intangibles,  rents,  royalties,  issues,
profits,  products and proceeds,  whether now or hereafter  existing or arising,
used or useful in connection with, covering,  relating to, or arising from or in
connection with, any of the aforesaid items (a) through (o), inclusive,  in this
granting clause  mentioned,  and all other things of value and incident  thereto
(including,  without  limitation,  any  and all  liens,  lien  rights,  security
interests and other  properties,  rights and interests) which Mortgagor might at
any time have or be  entitled  to,  but  excluding  any data or  contracts  with
respect to which  mortgaging  or  granting  of a lien or a security  interest is
prohibited by existing third party agreements,

all the aforesaid properties,  rights and interests, together with any additions
thereto  which  may be  subjected  to the lien  and  security  interest  of this
Mortgage by means of supplements hereto, being hereinafter, collectively, called
the "Mortgaged Property".

     Subject,  however, to (i) Permitted  Encumbrances  (including all presently
existing royalties,  overriding royalties,  payments out of production and other
burdens   which  are  referred  to  in  Exhibit  A  and  which  are  taken  into
consideration in computing any percentage, decimal or fractional interest as set
forth in Exhibit A), (ii) the  assignment of production  contained in Article IV
hereof,  but only insofar and so long as said  assignment  of  production is not
inoperative under the provisions of Section 4.5 hereof,  and (iii) the condition
that none of the Trustees,  the Agent nor any of the other Lender  Parties shall
be liable in any  respect for the  performance  of any  covenant  or  obligation
(including,  without limitation,  measures required to comply with Environmental
Laws) of Mortgagor in respect of the Mortgaged Property.

     TO HAVE AND TO HOLD  the  Mortgaged  Property  unto  the  Trustees  for the
benefit of the Agent, for itself and as agent for the Lender Parties, forever to
secure  the  payment  of the  Indebtedness  and to secure  the  performance  and
discharge of the Obligations of Mortgagor herein and therein contained.

     Mortgagor, in consideration of the premises and to induce the Agent and the
Lender  Parties,  as the case may be, to make the Loans and issue the Letters of
Credit, hereby covenants and agrees with each of the Trustees and the Agent, for
itself and as agent for the Lender Parties, as follows:


                                      -11-
<PAGE>

                                   ARTICLE II

                              Indebtedness Secured
                              --------------------

     2.1 Items of Indebtedness  Secured. The following items of indebtedness are
secured hereby:

          (a) The Loan Notes (including future advances to be made thereunder by
     the Agent or the Lenders), the Letter of Credit Outstandings (as defined in
     the  Credit  Agreements)  and all  other  obligations  and  liabilities  of
     Mortgagor under the Credit Agreements;

          (b) All indebtedness  and future advances  evidenced by any promissory
     notes  evidencing any  additional  loans which the Agent or the Lenders may
     from time to time make to Mortgagor,  if any, the Agent and the Lenders not
     being obligated, however, to make such additional loans;

          (c) Any sums  advanced or expenses or costs  incurred by the Trustees,
     the Agent or the Lender Parties,  or by any receiver  appointed  hereunder,
     which are made or incurred  pursuant to, or permitted by, the terms hereof,
     plus  interest  thereon at the rate herein  specified or  otherwise  agreed
     upon,  from the date of the advances or the  incurring of such  expenses or
     costs until reimbursed;

          (d) Any and all other  indebtedness  of Mortgagor or any  Affiliate of
     Mortgagor to the Agent or any Lender Party now or hereafter owing,  whether
     direct or indirect,  primary or secondary,  fixed or  contingent,  joint or
     several,   regardless  of  how  evidenced  or  arising,  including  without
     limitation, all Letters of Credit; and

          (e) Any  extensions,  refinancings,  modifications  or renewals of all
     such indebtedness described in subparagraphs (a) through (d) above, whether
     or not Mortgagor executes any extension agreement or renewal instrument.

     2.2 Indebtedness and the Notes Defined. All the above items of indebtedness
described in subparagraphs (a) through (e) of Section 2.1 hereof are hereinafter
collectively  referred to as the "Indebtedness".  Any promissory note evidencing
any part of the Indebtedness,  including,  without  limitation,  any of the Loan
Notes, is hereinafter referred to as a "Note", and all such promissory notes are
hereinafter referred to collectively as the "Notes".

     2.3 Maximum  Amount.  The maximum  amount of the  Indebtedness  that may be
outstanding  at any time, and from time to time, and secured by this Mortgage is
Three Billion Dollars ($3,000,000,000).


                                      -12-
<PAGE>

                                  ARTICLE III

                      Particular Covenants, Representations
                      -------------------------------------
                           and Warranties of Mortgagor
                           ---------------------------

     3.1 Payment of the Indebtedness  and Performance of Obligations.  Mortgagor
will duly and  punctually  pay the  Indebtedness,  as and when called for in the
Credit  Agreements  and the  Security  Documents  and on or before the due dates
thereof, and will timely perform and discharge all of the Obligations (including
each and every  obligation  owing on  account of the  Notes),  in full and on or
before the dates same are to be performed and discharged.

     3.2  Certain  Representations  and  Warranties.  Mortgagor  represents  and
warrants  (and  with  respect  to  those  matters  set  forth  in the  following
subsections (b) and (f), as to those portions of the Mortgaged Property that are
operated by persons other than Mortgagor or a Subsidiary of Mortgagor, Mortgagor
makes such representation and warranty to the best of its knowledge) that

          (a) the oil and gas  leases  described  in Exhibit A hereto are valid,
     subsisting  leases,  superior and paramount to all other oil and gas leases
     respecting the properties to which they pertain,

          (b) all producing  wells  located on the lands  described in Exhibit A
     (including  Exhibit  A-1) have  been  drilled,  operated  and  produced  in
     conformity with all Applicable Laws of all Governmental  Authorities having
     jurisdiction,   and  are  subject  to  no  penalties  on  account  of  past
     production,  and such wells are in fact  bottomed  under and are  producing
     from, and the well bores are wholly within,  the lands described in Exhibit
     A or lands pooled or unitized therewith,

          (c)  Mortgagor,  to the extent of the interest  specified in Exhibit A
     (including  Exhibit A-1), has valid and indefeasible title to each property
     right or interest  constituting the Mortgaged Property described in Exhibit
     A  (including  Exhibit  A-1) and has a good and  legal  right to grant  and
     convey  the same to the  Trustees;  such  interest  entitles  Mortgagor  to
     receive  not  less  than the  share  of  Hydrocarbons  from  such  property
     indicated as its net revenue interest or "NRI" share of such  Hydrocarbons,
     and obligates Mortgagor to pay for not more than the share of operating and
     other  costs,  liabilities  and  expenses  associated  with  such  property
     indicated as its working interest or "WI" share of such costs,  liabilities
     and expenses,

          (d) the  Mortgaged  Property  is free from all  encumbrances  or liens
     whatsoever,  except for the Permitted  Encumbrances  or as permitted by the
     provisions of Section 3.4(e) hereof,

          (e) Mortgagor is not obligated,  by virtue of any prepayment under any
     contract providing for the sale by Mortgagor of Hydrocarbons which contains
     a


                                      -13-
<PAGE>

     "take  or  pay"  clause  or  under  any  similar  arrangement,  to  deliver
     Hydrocarbons at some future time without then or thereafter  receiving full
     payment therefor,

          (f) the Mortgaged Property is currently being operated, maintained and
     developed,  in all material  respects,  in accordance  with all  applicable
     currently  existing  Permits,  Legal  Requirements  and all Applicable Laws
     (including, without limitation, Environmental Laws),

          (g) the cover page to this  Mortgage  lists the correct  legal name of
     Mortgagor and Mortgagor has not been known by any legal name different from
     the one set forth on the cover page of this  Mortgage,  except as set forth
     on Schedule I to this Mortgage; Mortgagor is not now and has not been known
     by any trade  name,  nor has  Mortgagor  been the  subject of any merger or
     other corporate reorganization,

          (h) the  execution,  delivery  and  performance  by  Mortgagor  of the
     Security  Documents and the borrowing  evidenced by the Loan Notes, (i) are
     within  Mortgagor's  corporate  powers  and have  been duly  authorized  by
     Mortgagor's  Board  of  Directors,  shareholders  and all  other  requisite
     corporate  action,   (ii)  have  received  all  (if  any)  requisite  prior
     governmental  approval  and  consent  in order to be  legally  binding  and
     enforceable  in  accordance  with the terms  thereof,  and  (iii)  will not
     violate,  be in conflict with,  result in a breach or constitute  (with due
     notice or lapse of time, or both) a default under, any Legal Requirement or
     result in the creation or imposition of any lien,  charge or encumbrance of
     any nature whatsoever upon any of Mortgagor's property or assets, except as
     contemplated  by the  provisions  of the Security  Documents.  The Security
     Documents  constitute the legal, valid and binding obligations of Mortgagor
     and  others  obligated  under  the  terms  of the  Security  Documents,  in
     accordance with their respective terms, and

          (i) there are no  actions,  suits or  proceedings  pending,  or to the
     knowledge of Mortgagor  threatened,  against or affecting  Mortgagor or the
     Mortgaged Property that could materially  adversely affect Mortgagor or the
     Mortgaged  Property,  or involving the validity or  enforceability  of this
     Mortgage or the priority of the liens and security interests created by the
     Security  Documents,  and no event  has  occurred  (including  specifically
     Mortgagor's execution of the Security Documents and its consummation of the
     Loans described therein) which will violate, be in conflict with, result in
     the breach of, or constitute  (with due notice or lapse of time, or both) a
     material default under, any Legal  Requirement or result in the creation or
     imposition of any lien, charge or encumbrance of any nature whatsoever upon
     any of  Mortgagor's  property  other than the liens and security  interests
     created by the Security Documents.

     3.3 Further  Assurances.  Mortgagor  will  warrant  and forever  defend the
Mortgaged  Property unto the Trustees against every person  whomsoever  lawfully
claiming the same or any part thereof,  subject to Permitted  Encumbrances,  and
Mortgagor  will  maintain and preserve  the lien and  security  interest  hereby
created so


                                      -14-
<PAGE>

long as any of the  Indebtedness  remains  unpaid.  Mortgagor  will  execute and
deliver  such other and further  instruments  and will do such other and further
acts as, in the  opinion of the  Trustees  or the  Agent,  may be  necessary  or
desirable  to  carry  out  more  effectually  the  purposes  of  this  Mortgage,
including,  without  limiting  the  generality  of  the  foregoing,  (i)  prompt
correction  of any defect which may  hereafter be discovered in the title to the
Mortgaged Property or in the execution and acknowledgment of this Mortgage,  any
Note, or any other  document  executed in connection  herewith,  and (ii) prompt
execution  and  delivery  of all  notices to parties  operating,  purchasing  or
receiving  proceeds of production of Hydrocarbons  from the Mortgaged  Property,
and all division orders or transfer orders,  any of which, in the opinion of the
Agent,  is needed in order to transfer  effectually or to assist in transferring
effectually to the Agent the assigned  proceeds of production from the Mortgaged
Property.

     3.4 Operation of the Mortgaged Property. So long as the Indebtedness or any
part thereof remains unpaid, and whether or not Mortgagor is the operator of any
particular part of the Mortgaged  Property,  Mortgagor shall, at Mortgagor's own
expense:

          (a) Do all things necessary to keep unimpaired  Mortgagor's  rights in
     the Mortgaged  Property and not, except in the ordinary course of business,
     abandon any well or  forfeit,  surrender  or release  any Lease  capable of
     producing  Hydrocarbons  in paying  quantities,  without the prior  written
     consent of the Agent;

          (b) Obtain  and  maintain  all  required  Permits  and cause the lands
     described  in  Exhibit A to be  maintained,  developed,  protected  against
     drainage,  and operated for the  production of  Hydrocarbons  in a good and
     workmanlike  manner as would a prudent  operator,  and in  accordance  with
     generally accepted industry practices,  Joint Operating Agreements, and all
     Applicable Laws, excepting those being contested in good faith;

          (c) Duly  pay and  discharge,  or  cause  to be paid  and  discharged,
     promptly as and when due and payable,  all rentals and royalties (including
     shut-in  royalties) payable in respect of the Mortgaged  Property,  and all
     expenses  incurred in or arising from the operation or  development  of the
     Mortgaged  Property  not later  than the due date  thereof,  or the day any
     fine, penalty, interest or cost may be added thereto or imposed, or the day
     any lien may be filed, for the non-payment  thereof (if such day is used to
     determine the due date of the respective item);

          (d) Cause the  Operating  Equipment  to be kept in good and  effective
     operating  condition,  ordinary  wear and tear  excepted,  and all repairs,
     renewals,  replacements,  additions  and  improvements  thereof or thereto,
     needful to the  production  of  Hydrocarbons  from the lands  described  in
     Exhibit A, to be promptly made;

          (e) Not, without the prior written consent of the Agent, create, place
     or permit to be created or  placed,  or through  any act or failure to act,
     acquiesce in the placing of, or allow to remain, any mortgage, pledge, lien
     (statutory,


                                      -15-
<PAGE>

     constitutional or contractual),  security interest,  encumbrance or charge,
     or  conditional  sale or other title  retention  agreement,  regardless  of
     whether  same  are  expressly  subordinate  to the  liens  of the  Security
     Documents,  with respect to all or any portion of the  Mortgaged  Property,
     the  Leases  or the  Rents  and  Revenues  other  than  (1)  the  Permitted
     Encumbrances,  (2) Taxes  constituting a lien but not due and payable,  (3)
     defects or  irregularities  in title,  and liens,  charges or encumbrances,
     which,  in the Agent's  reasonable  opinion,  are not such as to  interfere
     materially  with the  development,  operation  or  value  of the  Mortgaged
     Property  and not such as to affect  materially  title  thereto,  (4) those
     being  contested  by  Mortgagor  in good  faith  in such  manner  as not to
     jeopardize  the  Trustees'  and the Agent's  rights in and to the Mortgaged
     Property,  (5) those liens  permitted by each Section  8.2.3 of each of the
     Credit Agreements, and (6) those consented to in writing by the Agent;

          (f) Carry with financially sound and reputable insurance companies and
     in amounts satisfactory to the Agent the following insurance: (1) workmen's
     compensation  insurance and public  liability and property damage insurance
     in  respect of all  activities  in which  Mortgagor  might  incur  personal
     liability  for the death of or injury to an  employee or third  person,  or
     damage to or destruction of another's property;  and (2) to the extent such
     insurance is carried by similar companies  engaged in similar  undertakings
     in the same  general  areas in which the  Mortgaged  Property  is  located,
     insurance in respect of the Operating Equipment,  against loss or damage by
     fire, lightning, hail, tornado, explosion and other similar risks, hazards,
     casualties and contingencies  (including  business  interruption  insurance
     covering loss of Rents and Revenues); provided, that any such insurance may
     be provided by way of self  insurance to the extent that similar  companies
     engaged in similar undertakings in the same general areas also self-insure.
     Each insurance  policy issued in connection  therewith shall provide by way
     of  endorsements,  riders  or  otherwise  that (i) name the Agent as a loss
     payee on all property  insurance  policies and an additional insured on all
     liability  insurance  policies,  and provide that  proceeds  from  property
     insurance policies will be payable to the Agent as its interest may appear,
     which  proceeds  are  hereby  assigned  to the  Agent,  it being  agreed by
     Mortgagor  that such  payments  shall be applied A) if there be no Event of
     Default  existing or which would exist but for due notice or lapse of time,
     or  both,  to the  restoration,  repair  or  replacement  of the  Mortgaged
     Property,  or B) if there be an Event of Default  existing,  or which would
     exist but for due  notice or lapse of time,  or both,  at the option of the
     Agent,  either for the above  stated  purpose or toward the  payment of the
     Indebtedness;  (ii) the  coverage  of the Agent  shall  not be  terminated,
     reduced or affected in any manner  regardless of any breach or violation by
     Mortgagor of any  warranties,  declarations  or  conditions in such policy;
     (iii) no such  insurance  policy  shall be canceled,  endorsed,  altered or
     reissued  to effect a change in  coverage  for any reason and to any extent
     whatsoever unless such insurer shall have first given the Agent thirty (30)
     days prior written notice thereof; and (iv) the Agent may, but shall not be
     obligated   to,  make  premium   payments  to  prevent  any   cancellation,
     endorsement,  alteration or reissuance  and such payments shall be accepted
     by the  insurer  to  prevent  same.  The Agent  shall be  furnished  with a


                                      -16-
<PAGE>

     certificate  evidencing such coverage in form and content acceptable to the
     Agent.  All policies to be maintained  under this Mortgage are to be issued
     on forms and by companies  and with  endorsements  acceptable to the Agent.
     Mortgagor  shall  maintain  insurance  in an amount  sufficient  to prevent
     Mortgagor from becoming a co-insurer  under any policy required  hereunder.
     If Mortgagor  fails to maintain the level of insurance  required under this
     Mortgage,  then Mortgagor shall and hereby agrees to indemnify the Agent to
     the extent that a casualty  occurs and insurance  proceeds  would have been
     available had such insurance been maintained;

          (g) Furnish to the Agent as soon as possible  and in any event  within
     five (5) days after the  occurrence  from time to time of any change in the
     address of Mortgagor's location (as described on the signature page hereto)
     or in the name of Mortgagor, notice in writing of such change;

          (h) Not initiate or acquiesce in any change in any material  zoning or
     other land use or Water  Rights  classification  now or hereafter in effect
     and affecting the Mortgaged Property or any part thereof;

          (i) Notify the Agent in writing as soon as  possible  and in any event
     within five (5) days after it shall become aware of the  occurrence  of any
     Event of Default  under  Section 5.1 or any event which,  with notice,  the
     passage of time or both would be such an Event of Default;

          (j) Appear and defend,  and hold the Agent  harmless from, any action,
     proceeding  or claim  affecting  the  Mortgaged  Property or the rights and
     powers of the Agent or any of the Trustees  under the  Security  Documents,
     and all  costs  and  expenses  incurred  by the  Agent  in  protecting  its
     interests  hereunder  in such an  event  (including  all  court  costs  and
     attorneys' fees) shall be borne by Mortgagor;  provided, that such defense:
     (1)  shall  be  provided  by a  lawyer  or law firm  listed  on a  schedule
     delivered to and  approved in writing by the Agent,  from time to time (the
     "Approved  Counsel  List"),  and (2) if the amount in  controversy  in such
     action,  proceeding  or claim is in  excess  of  $2,500,000  in  actual  or
     compensatory  damages and/or liquidated damages (or is reasonably  believed
     to exceed such amount if the demand involves  unliquidated  damages),  such
     law firm shall be approved by the Agent, in its reasonable discretion,  for
     that particular action, proceeding or claim. As to actions,  proceedings or
     claims involving a portion of the Mortgaged  Property in which Mortgagor or
     a  Subsidiary  of  Mortgagor  is not the operator and with respect to which
     Mortgagor  does not have a majority  net revenue  interest  and/or  working
     interest, Mortgagor may elect, in its reasonable judgment, to allow counsel
     for the  operator to appear for, and defend  Mortgagor  in such matter,  in
     which case,  selection of counsel by the operator  shall not be governed by
     this  Section 3.4 (j);  and further  provided,  that  nothing  herein shall
     restrict  or limit the right of the Agent,  the  Trustees or the Lenders to
     select its or their own counsel to defend, at Mortgagor's cost and expense,
     any action proceeding or claim in which any of them are named as parties;


                                      -17-
<PAGE>

          (k) Subject to Mortgagor's right to contest the same, promptly pay all
     Taxes legally imposed upon this  instrument or upon the Mortgaged  Property
     or upon  the  income  and  profits  thereof,  or upon the  interest  of the
     Trustees, the Agent or the other Lender Parties therein;  provided that the
     Mortgagor  shall not be liable for taxes  accruing  after a transfer of the
     Mortgaged Property following a foreclosure;

(l)      Comply with, conform to and obey, in all material respects, all present
         and future Legal Requirements and not use, maintain, operate, occupy,
         or allow the use, maintenance, operation or occupancy of, the Mortgaged
         Property in any manner which (a) violates any present and future Legal
         Requirement, (b) may be dangerous unless safeguarded as required by
         Applicable Law, (c) constitutes a public or private nuisance or (d)
         makes void, voidable or cancelable, or increases the premium of, any
         insurance then in force with respect thereto; and

(m)      Not, without the prior written consent of the Agent, permit any of the
         Fixtures or Personalty to be removed at any time from the lands
         described in Exhibit A unless (i) the removed item is removed
         temporarily for maintenance and repair, (ii) if removed permanently, is
         replaced by an article of equal suitability and value, owned by
         Mortgagor, free and clear of any lien or security interest except such
         as may be first approved in writing by the Agent or (iii) such Fixtures
         or Personalty are removed in connection with the plugging and
         abandoning of wells, or abandonment of other facilities, in each case
         as permitted by this Mortgage.

     3.5 Performance of Leases.  Mortgagor will: (a) duly and punctually perform
and  comply  with  any  and  all  representations,   warranties,  covenants  and
agreements  expressed  as  binding  upon it under  each of the  Leases;  (b) not
voluntarily  terminate,  cancel or waive its  rights or the  obligations  of any
other party under any of the Leases;  (c) use all reasonable efforts to maintain
each of the Leases in force and effect  during  the full term  thereof;  and (d)
appear in and defend (or cause its  operator to appear in and defend) any action
or proceeding arising under or in any manner connected with any of the Leases or
the  representations,  warranties,  covenants and  agreements of it or the other
party or parties thereto.

     3.6 Recording,  etc. Mortgagor will promptly,  and at Mortgagor's  expense,
record,  register,  deposit and file this and every other instrument in addition
or supplemental hereto in such offices and places and at such times and as often
as may be  necessary  to  preserve,  protect  and  renew  the lien and  security
interest hereof as a first lien on and prior perfected security interest in real
or  personal  property,  as the case may be, and the rights and  remedies of the
Trustees,  of the Agent and of the other Lender  Parties,  and otherwise will do
and observe all things or matters  necessary or expedient to be done or observed
by reason of any  Applicable  Law,  for the  purpose  of  effectively  creating,
maintaining  and preserving the lien and security  interest hereof on and in the
Mortgaged Property.


                                      -18-
<PAGE>

     3.7 Sale or Mortgage of the Mortgaged Property.  Except (a) as set forth in
Section 7.1 of this Mortgage;  (b) as permitted by Section 8.2.10 of each of the
Credit Agreements;  (c) for sales of severed Hydrocarbons in the ordinary course
of Mortgagor's  business;  (d) sales of or dispositions of surplus,  obsolete or
worn inventory or equipment;  and (e) the lien and security  interest created by
this Mortgage,  Mortgagor will not sell, convey, mortgage, pledge,  hypothecate,
pool, unitize or otherwise dispose of or encumber the Mortgaged Property nor any
portion  thereof,  nor any of  Mortgagor's  right,  title or  interest  therein,
without first securing the written consent of the Agent;  and Mortgagor will not
enter into any  arrangement  with any gas pipeline  company or other consumer of
Hydrocarbons  regarding the Mortgaged Property whereby said gas pipeline company
or consumer may set off any claim against  Mortgagor by withholding  payment for
any Hydrocarbons actually delivered.

     3.8 Records,  Statements  and Reports.  Mortgagor will keep proper books of
record  and  account  in which  complete  and  correct  entries  will be made of
Mortgagor's  transactions  in  accordance  with  generally  accepted  accounting
principles  and  will  furnish  or  cause  to be  furnished  to the  Agent  such
information  concerning  the  business,   affairs  and  financial  condition  of
Mortgagor as the Trustees or the Agent may from time to time reasonably request.
Without limiting the generality of the foregoing, Mortgagor shall furnish to the
Agent upon its  request,  but not more than every six (6)  months:  (a)  reports
prepared by an independent petroleum engineer acceptable to the Agent concerning
(1) the quantity of Hydrocarbons  recoverable from the Mortgaged  Property,  (2)
the projected income and expense attributable to the Mortgaged Property, and (3)
the  expediency of any change in methods of treatment or operation of all or any
wells productive of Hydrocarbons, any new drilling or development, any method of
secondary  recovery  by  repressuring  or  otherwise,  or any other  action with
respect to the  Mortgaged  Property,  the  decision as to which may  increase or
reduce  the  quantity  of  Hydrocarbons  ultimately  recoverable  or the rate of
production  thereof,  and (b)  reports  for the prior  period  showing the gross
proceeds  from the sale of  Hydrocarbons  produced  from the lands  described in
Exhibit A (including  any thereof taken by Mortgagor for  Mortgagor's  own use),
the  quantity  of such  Hydrocarbons  sold,  the  severance,  gross  production,
occupation,  or gathering taxes deducted from or paid out of such proceeds,  the
number of wells operated,  drilled or abandoned,  and such other  information as
the Agent may  reasonably  request  (upon  request  of the Agent,  such  reports
referred to in clauses (a) and (b) above shall set forth such  information  on a
lease or unit basis,  and after the occurrence of an Event of Default,  and upon
the Agent's request, Mortgagor shall deliver the reports described in clause (b)
on a monthly basis).

     3.9 Right of Entry.

          (a)  Upon  at  least  twenty-four  (24)  hours  notice  to  Mortgagor,
     Mortgagor will permit the Trustees or the Agent, or the agents of either of
     them,  at the cost and expense of  Mortgagor,  to enter upon the  Mortgaged
     Property  and all parts  thereof,  for the  purpose  of  investigating  and
     inspecting the condition and operation thereof, and shall permit reasonable
     access to the field offices and other  offices (to the fullest  extent that
     Mortgagor may do so under the terms of


                                      -19-
<PAGE>

     the applicable Joint Operating  Agreements and other applicable  agreements
     affecting  the  Mortgaged  Property),  including  the  principal  place  of
     business, of Mortgagor to inspect and examine the Mortgaged Property and to
     inspect,  review and reproduce as necessary any books,  records,  accounts,
     contracts or other documents of Mortgagor.

          (b) Without limiting the generality of the foregoing,  the Agent shall
     have the right (to the fullest  extent that  Mortgagor  may do so under the
     terms of the applicable  Joint  Operating  Agreements and other  applicable
     agreements  affecting the Mortgaged  Property),  on twenty-four  (24) hours
     prior notice to Mortgagor,  to cause such persons and entities as the Agent
     may designate to enter the  Mortgaged  Property to conduct (at the cost and
     expense of  Mortgagor),  or to cause  Mortgagor to conduct (at the cost and
     expense of  Mortgagor),  such tests and  investigations  as the Agent deems
     necessary to determine  whether any  hazardous  materials or solid waste is
     being  generated,  transported,  stored,  or disposed of in accordance with
     applicable  Environmental  Laws. Such tests and investigations may include,
     without limitation,  underground borings, ground water analyses and borings
     from the  floors,  ceilings  and walls of any  improvements  located on the
     Mortgaged  Property.  This  Section 3.9 shall not be construed to affect or
     limit the obligations of Mortgagor pursuant to Section 3.4 hereof.

          (c) The Agent  shall  have no duty to visit or observe  the  Mortgaged
     Property, or to conduct tests, and no site visit, observation or testing by
     the Agent (or its  agents and  independent  contractors)  shall  impose any
     liability on the Agent or any other Lender  Party,  nor shall  Mortgagor or
     any other obligor be entitled to rely on any visit,  observation or testing
     by the Agent in any respect. The Agent may, in its discretion,  disclose to
     Mortgagor or any other Person,  including any Governmental  Authority,  any
     report or finding  made as a result  of, or in  connection  with,  any site
     visit, observation or testing by the Agent. Mortgagor agrees that the Agent
     makes no warranty  or  representation  to  Mortgagor  or any other  obligor
     regarding  the  truth,  accuracy  or  completeness  of any such  report  or
     findings  that  may be so  disclosed.  Mortgagor  also  acknowledges  that,
     depending upon the results of any site visit, observation or testing by the
     Agent and disclosed to Mortgagor,  Mortgagor may have a legal obligation to
     notify one or more  Governmental  Authorities  of such  results,  that such
     reporting  requirements  are  site-specific,  and  are to be  evaluated  by
     Mortgagor without advice or assistance from the Agent.

     3.10 Environmental Laws.

          (a) Mortgagor  represents  and warrants,  to the best of its knowledge
     after  due  inquiry,  and  except  as set  forth in each  Item  7.12 of the
     Disclosure  Schedule  (including  Part B thereof)  attached  to each of the
     Credit Agreements that:

               (i) the  Mortgaged  Property  is in  compliance  in all  material
          respects with all applicable Environmental Laws and there are no


                                      -20-
<PAGE>

          conditions  existing  currently  which  would  be  likely  to  subject
          Mortgagor to damages,  penalties,  injunctive  relief or cleanup costs
          under any Environmental Laws or assertions  thereof,  or which require
          or are likely to require  cleanup,  removal,  remedial action or other
          response  pursuant to  Environmental  Laws by Mortgagor;  and all use,
          generation,   manufacturing,  release,  discharge,  storage,  deposit,
          treatment,  recycling or disposal of any materials on, under or at the
          Mortgaged  Property or transported  to or from the Mortgaged  Property
          (or tanks or other facilities  thereon  containing such materials) are
          being and will be conducted  in  accordance  in all material  respects
          with applicable  Environmental Laws including without limitation those
          requiring cleanup, removal or any other remedial action;

               (ii) Mortgagor is not a party to any litigation or administrative
          proceedings,  nor so far as is known by Mortgagor is any litigation or
          administrative  proceeding  threatened  against it,  which  asserts or
          alleges that Mortgagor has violated or is violating Environmental Laws
          or that  Mortgagor is required to clean up, remove or take remedial or
          other responsive  action due to the disposal,  depositing,  discharge,
          leaking or other  release of any  hazardous  substances  or materials;
          neither  the  Mortgaged  Property  nor  Mortgagor  is  subject  to any
          judgment,  decree,  order or  citation  related to or  arising  out of
          Environmental  Laws  and  neither  has  been  named  or  listed  as  a
          potentially  responsible  party  by any  Governmental  Authority  in a
          matter arising under any Environmental Laws; and

               (iii)  Mortgagor  has also  obtained all Permits  required  under
          applicable  Environmental  Laws which are  necessary  for its  current
          exploration, production, transportation, storage, use, and development
          activities at the Mortgaged Property.

          (b) Mortgagor  shall not use or permit the  Mortgaged  Property or any
     part thereof to be used to generate, manufacture, refine, transport, treat,
     store,  handle,  dispose,   transfer,  produce  or  process  any  hazardous
     materials,  except in strict  compliance with all applicable  Environmental
     Laws, nor shall Mortgagor  cause or permit,  as a result of any intentional
     or unintentional  act or omission on the part of Mortgagor or any tenant or
     subtenant, a release of any hazardous materials onto the Mortgaged Property
     or onto  any  other  property.  Mortgagor  shall  comply,  in all  material
     respects,  with all  applicable  Environmental  Laws and shall  obtain  and
     comply with any and all  registrations or Permits required  thereunder.  To
     the extent any  hazardous  materials  are released or  discharged  onto the
     Mortgaged  Property on or after the date of this Mortgage,  Mortgagor shall
     conduct and complete all investigations,  studies,  sampling,  and testing,
     and all  remedial,  removal,  and other  actions  necessary to clean up and
     remove all such  hazardous  materials  on, from, or affecting the Mortgaged
     Property  or  any  part  thereof  (i) in  accordance  with  all  applicable
     Environmental  Laws; (ii) to the  satisfaction  of the Agent;  and (iii) in
     accordance with the orders and directives of


                                      -21-
<PAGE>

     all  Governmental   Authorities  having  jurisdiction  over  the  Mortgaged
     Property.  Mortgagor  shall promptly notify the Agent of its receipt of any
     notice of a violation of any Environmental Laws.

          (c) Regardless of whether any site assessments are conducted  pursuant
     to this Mortgage,  and without  limiting the liability of Mortgagor for the
     breach of any warranty,  representation or covenant  contained herein or in
     any  other  Security  Document,   and  notwithstanding  any  limitation  of
     liability  contained  in the Note or other  Security  Documents,  Mortgagor
     hereby agrees to unconditionally and absolutely defend,  indemnify and hold
     harmless  the Agent and each of the Lender  Parties,  and their  respective
     employees,  affiliates,  agents and  attorneys,  and the Trustees under the
     Mortgage and any  successors or substitute  trustee under the Mortgage (any
     person to be  indemnified  being herein called the  "Indemnified  Person"),
     from  and  against,  and  be  responsible  for,  any  and  all  liabilities
     (including strict liability),  actions, demands,  penalties,  fines, taxes,
     assessments, losses (including, without limitation, diminution in the value
     of  the  Mortgaged  Property),  costs  and  expenses  (including,   without
     limitation,  attorneys',  paralegals',  accountants' and other experts' and
     consultants'  fees and expenses,  and remedial  costs,  including,  without
     limitation,  costs  of  monitoring),  suits,  damages,  including,  without
     limitation,    punitive   damages   and   foreseeable   and   unforeseeable
     consequential  damages,  costs of any  settlement  or  judgment  and claims
     (including,  without limitation,  third-party claims for personal injury or
     real  or  personal  property  damage)  of any  and  every  kind  whatsoever
     (hereinafter,  collectively,  called the "Losses"), which may now or in the
     future  (whether before or after the release,  or other  termination of the
     Mortgage and the other Security  Documents) be paid, imposed upon, incurred
     or  suffered  by or  asserted  or awarded  against  any of the  Indemnified
     Persons or the Mortgaged  Property by any person or entity or  Governmental
     Authority  for, with respect to, arising out of, or as a direct or indirect
     result of, any one or more of the following:  (i) the presence or suspected
     presence, release or suspected release of any hazardous materials at, upon,
     under, within, above, from, by or in connection with the Mortgaged Property
     or any portion thereof,  or elsewhere in connection with the transportation
     of  hazardous  materials  to or from  the  Mortgaged  Property  (including,
     without limitation, in the air, soil, groundwater or surface water), or the
     escape, seepage, leakage, spillage, discharge, emission or release from the
     Mortgaged Property of any hazardous  materials;  (ii) any violations of any
     Environmental Laws at, upon, under,  within, from, by or in connection with
     the Mortgaged Property;  (iii) the environmental condition of the Mortgaged
     Property;  (iv) the imposition by any Governmental Authority of any lien or
     so-called "super priority lien" upon the Mortgaged  Property as a result of
     the presence or release of  hazardous  materials,  or any  violation of any
     Environmental  Laws, at, upon, under,  within,  from, by or connection with
     the Mortgaged  Property;  (v) obligations to remediate  hazardous materials
     contamination,  or to remediate any condition which constitutes a violation
     of any  Environmental  Laws;  (vi) any site  assessments  of the  Mortgaged
     Property;  (vii) liability for personal injury or property damage or damage
     to the environment or fines, penalties and punitive damages, resulting from
     the presence or release of hazardous materials or any


                                      -22-
<PAGE>

     violations of any Environmental Laws, at, upon, under,  within, from, by or
     in connection  with the Mortgaged  Property;  and (viii) any  environmental
     matter described in this Mortgage,  including, without limitation,  matters
     arising out of any breach of the covenants,  representations and warranties
     set forth herein in each  instance  described in (i) through  (viii) hereof
     regardless  of  whether  any such  Losses  arise out of or result  from any
     breach of the  covenants,  representations  and  warranties  pertaining  to
     environmental  matters  set forth in this  Mortgage  or the other  Security
     Documents, and regardless of whether or not caused by or within the control
     of Mortgagor or any Indemnified  Person;  or whether any such matters arise
     before,  during or after any foreclosure of the Mortgage or other taking of
     title to all or any portion of the Mortgaged Property or the enforcement of
     any other remedies under the Security Documents (if any such event occurs).
     WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED
     PERSON  WITH  RESPECT TO LOSSES  WHICH IN WHOLE OR IN PART ARE CAUSED BY OR
     ARISE OUT OF THE SOLE,  CONCURRENT OR COMPARATIVE  NEGLIGENCE OR THE STRICT
     LIABILITY OF ANY SUCH INDEMNIFIED  PERSON,  BUT NOT THE GROSS NEGLIGENCE OR
     WILLFUL  MISCONDUCT OF ANY SUCH  INDEMNIFIED  PERSON.  The following  shall
     apply to that portion of the Mortgaged Property located in the State of New
     Mexico: To the extent the foregoing indemnity is governed by Section 56-7-1
     NMSA (1978), said indemnity shall not extend to liability, claims, damages,
     losses  or  expenses,  including  attorneys  fees,  arising  out of (a) the
     preparation  or approval of maps,  drawings,  opinions,  reports,  surveys,
     change orders,  designs or specifications by an Indemnified  Person, or (b)
     the  giving of or the  failure to give  directions  or  instructions  by an
     Indemnified  Person  where such  giving or failure  to give  directions  or
     instructions  is the primary cause of bodily injury to persons or damage to
     property.  To the extent the  foregoing  indemnity  is  governed by Section
     56-7-2  NMSA  (1978),  said  indemnity  shall not extend to (a) the sole or
     concurrent  negligence of an Indemnified Person, (b) the sole or concurrent
     negligence of an independent  contractor who is directly  responsible to an
     Indemnified  Person,  or (c) an accident that occurs in operations  carried
     on, at the direction,  or under the supervision of an Indemnified Person or
     in accordance with methods and means specified by an Indemnified Person.

          (d)  Notwithstanding  the foregoing or any contrary  provision hereof,
     Mortgagor's  indemnification  obligations  set forth in this  Section  3.10
     shall  not  extend to any such  Losses  which  are  attributable  solely to
     contamination  by hazardous  materials  first  introduced  to the Mortgaged
     Property  after a foreclosure  of this Mortgage or other taking of title to
     the Mortgaged Property by any of Indemnified Persons.

          (e)  The   indemnification   provided  in  this   Section  3.10  shall
     specifically apply to and include claims or actions brought by or on behalf
     of tenants or employees of Mortgagor.  Mortgagor  hereby  expressly  waives
     (with respect to any claims of any  Indemnified  Person  arising under this
     Section 3.10) any


                                      -23-
<PAGE>

     immunity to which  Mortgagor may otherwise be entitled under any industrial
     or worker's compensation laws.

          (f) In the event any of the Indemnified  Persons shall suffer or incur
     any such Losses,  Mortgagor shall pay to such Indemnified Persons the total
     of all such Losses  suffered or incurred  within ten (10) days after demand
     therefore.

          (g) Mortgagor agrees that the representations,  covenants,  warranties
     and  indemnifications  contained in this Mortgage shall survive the release
     of the  Mortgage,  the  foreclosure  or the  taking  of a deed  in  lieu of
     foreclosure, other termination of the lien of the Mortgage, or the exercise
     by the  Agent of any  other  remedies  under the  Security  Documents,  the
     discharge  of  Mortgagor's  Obligations  under  any of the  other  Security
     Documents,  or any transfer of the Mortgaged Property, even if as a part of
     such foreclosure,  deed in lieu of foreclosure or other enforcement action,
     the Indebtedness is satisfied in full.

     3.11 Corporate  Mortgagor.  Mortgagor will continue to be duly qualified to
transact business in each state where the conduct of its business requires it to
be  qualified,  and will not,  without the prior  written  consent of the Agent,
consolidate or merge with any other partnership,  company,  corporation or other
Person.

     3.12 Taxpayer I.D. Number. The taxpayer  identification number of Mortgagor
is 77-0212977. The taxpayer identification number of the Agent is 13-494-1099.

                                   ARTICLE IV

                            Assignment of Production
                            ------------------------

     4.1 Assignment.

          (a) Mortgagor hereby transfers,  assigns,  warrants and conveys to the
     Agent,  effective  as of May  1,  2002,  at  7:00  A.M.,  local  time,  all
     Hydrocarbons  which are  thereafter  produced  from and which accrue to the
     Mortgaged  Property,  and all proceeds  therefrom.  Subject to the terms of
     Section  4.1(b),  all parties  producing,  purchasing or receiving any such
     Hydrocarbons,  or having such, or proceeds  therefrom,  in their possession
     for which  they or  others  are  accountable  to the Agent by virtue of the
     provisions  of this  Article IV, are  authorized  and directed to treat and
     regard the Agent as the assignee and  transferee  of Mortgagor and entitled
     in  Mortgagor's  place  and  stead to  receive  such  Hydrocarbons  and all
     proceeds  therefrom;  and  said  parties  and  each of them  shall be fully
     protected  in so  treating  and  regarding  the Agent and shall be under no
     obligation to see to the  application  by the Agent of any such proceeds or
     payments  received by it;  provided,  however,  that, until the Agent shall
     have  instructed  such parties that an Event of Default has occurred and to
     deliver such Hydrocarbons and all proceeds therefrom directly to the Agent,
     such  parties  shall be  entitled  to  deliver  such  Hydrocarbons  and all
     proceeds  therefrom  directly to Mortgagor.  So long as no Event of Default
     shall have occurred and the Agent


                                      -24-
<PAGE>

     has not yet given such  instruction  and notice  thereof,  the Agent agrees
     that Mortgagor shall be entitled to receive directly from such parties, and
     keep and retain, all such proceeds from the sale of such Hydrocarbons.

          (b) Upon the  occurrence  of an Event of Default (it being  understood
     and agreed that the  determination of the occurrence of an Event of Default
     by the Agent shall be conclusive and binding as to all such parties for all
     purposes  hereof  and  that,  at the  time  the  Agent  gives  the  initial
     instruction  and notice under this Article IV, such Event of Default  shall
     then be  continuing)  the  Agent  may at any time  (and  from time to time)
     thereafter  give  notice  thereof  to any party  producing,  purchasing  or
     receiving any such Hydrocarbons,  or having such, or proceeds therefrom, in
     their  possession  for which they or others are  accountable  to the Agent,
     directing  that said  Hydrocarbons  and products  are to be delivered  into
     pipelines  connected  with  the  oil and gas  leases,  or to the  purchaser
     thereof,  free and clear of all Taxes,  and the  proceeds  from the sale of
     such Hydrocarbons paid directly to the Agent in accordance with Section 4.5
     of this Mortgage. Mortgagor agrees to perform all such acts, and to execute
     all such further  assignments,  transfers  and division  orders,  and other
     instruments  as may be  required  or  desired  by the Agent or any party in
     order to have said revenues and proceeds so paid to the Agent,  as and when
     provided  in this  Article IV.  With  respect to any funds  received by the
     Agent after notice of an Event of Default  shall have been given under this
     Article IV, the Agent is fully  authorized  to receive and give receipt for
     any such revenues and proceeds  that are received by the Agent;  to endorse
     and cash any and all checks and drafts payable to the order of Mortgagor or
     the Agent for the account of Mortgagor  received from or in connection with
     said revenues or proceeds and apply the proceeds thereof in accordance with
     Section 4.2 hereof, and to execute transfer and division orders in the name
     of Mortgagor, or otherwise, with warranties binding Mortgagor.

     4.2 Application of Proceeds. All payments received by the Agent pursuant to
Section 4.1 hereof shall be placed in a cash collateral account at the Agent and
on the last business day of each calendar month applied as follows:

          First:  To the  payment  and  satisfaction  of all costs and  expenses
     incurred in connection  with the  collection of such  proceeds,  and to the
     payment of all items of the  Indebtedness and the Obligations not evidenced
     by any Note.

          Second:  To the payment of the  interest  on the Notes  accrued to the
     date of such payment.

          Third:  To the payment of the amounts of principal  then due and owing
     on the Notes.

          Fourth:  The  balance,  if any,  shall  either be  applied on the then
     unmatured principal amounts of the Notes, such application to be on such of
     the Notes and  installments  thereof  as the Agent may  select,  or, at the
     option of the Agent, released to Mortgagor.


                                      -25-
<PAGE>

     4.3 No Liability of the Agent in Collecting.  The Agent is hereby  absolved
from all liability for failure to enforce collection of any proceeds so assigned
(and no such  failure  shall be  deemed to be a waiver of any right of the Agent
under  this  Article  IV)  and  from  all  other  responsibility  in  connection
therewith,  except the responsibility to account to Mortgagor for funds actually
received.

     4.4  Assignment  Not a Restriction  on the Agent's  Rights.  Nothing herein
contained  shall  detract from or limit the absolute  obligation of Mortgagor to
make payment of the Indebtedness  regardless of whether the proceeds assigned by
this  Article  IV are  sufficient  to pay the same,  and the  rights  under this
Article IV shall be in addition to all other security now or hereafter  existing
to secure the payment of the Indebtedness.

     4.5 Status of  Assignment.  Notwithstanding  the other  provisions  of this
Article IV and in addition to the other  rights  hereunder,  the  Trustees,  the
Agent or any receiver  appointed in judicial  proceedings for the enforcement of
this  Mortgage  shall have the right to receive all of the  Hydrocarbons  herein
assigned  and the  proceeds  therefrom  after  the  occurrence  and  during  the
continuance  of any Default  and, in any event,  after any Note or other item of
Indebtedness has been declared due and payable in accordance with the provisions
of Section  5.1 hereof and to apply all of said  proceeds as provided in Section
4.2 hereof. Upon any sale of the Mortgaged Property or any part thereof pursuant
to Article VI, the Hydrocarbons  thereafter  produced from the property so sold,
and the proceeds therefrom, shall be included in such sale and shall pass to the
purchaser free and clear of the assignment contained in this Article IV.

     4.6 Indemnification  Obligations.  The following provisions shall apply to,
and be deemed in each case to modify,  each of the  provisions  of this Mortgage
(except those set forth in Section 3.10 hereof) and the other Security Documents
(except to the extent otherwise expressly provided therein) wherein Mortgagor is
obligated to indemnify each of the Indemnified Persons:

          (a)  Mortgagor  agrees to indemnify the Trustees and the Agent against
     all  legal   and   administrative   proceedings   for  which  a  claim  for
     indemnification   may  be  made   by  the   Indemnified   Person   (herein,
     collectively,  called "Indemnification Claims") made against or incurred by
     them or any of them as a  consequence  of the  assertion,  either before or
     after the  payment  in full of the  Indebtedness,  that they or any of them
     received  Hydrocarbons  herein assigned or the proceeds  thereof claimed by
     third persons and the Trustees and the Agent shall have the right to defend
     against any such Indemnification Claims,  employing attorneys therefor, and
     unless furnished with reasonable indemnity,  they or any of them shall have
     the right to pay or compromise and adjust all such Indemnification  Claims.
     Mortgagor  will  indemnify and pay to the Trustees or the Agent any and all
     such  amounts as may be paid in respect  thereof or as may be  successfully
     adjudged against the Trustees and the Agent or any of them. The obligations
     of Mortgagor as hereinabove set forth in this Section 4.6 shall survive the
     release termination, foreclosure or assignment of this Mortgage or any sale
     hereunder.


                                      -26-
<PAGE>

          (b)  Mortgagor  shall pay when due any  judgments  with  respect to an
     Indemnification  Claim against any of the Indemnified Persons and which are
     rendered  by a final order or decree of a court of  competent  jurisdiction
     from  which no further  appeal  may be taken or has been  taken  within the
     applicable  appeal period.  In the event that such payment is not made, any
     of the  Indemnified  Persons  at its  sole  discretion  may  pay  any  such
     judgments,  in whole or in part,  and look to Mortgagor  for  reimbursement
     pursuant to this Mortgage, or may proceed to file suit against Mortgagor to
     compel such payment.

          (c) Any  amount  which  Mortgagor  is  obligated  to pay to or for the
     benefit of an Indemnified Person with respect to an Indemnification  Claim,
     but which is not paid when due,  shall bear interest at the default or post
     maturity  rate of  interest  provided  for in the Note  from the date  such
     amount is due until such amount is paid.

                                   ARTICLE V

                                Events of Default
                                -----------------

     5.1 Events of Default  Hereunder.  In case any one or more of the following
events of default (each,  an "Event of Default")  shall occur and shall not have
been remedied:

          (a) default in the payment of principal of or interest on any Note, or
     in the  payment  of  any  other  Indebtedness  or in  the  performance  and
     discharge of the Obligations secured hereby, when due;

          (b) the  occurrence of an event of default (other than any relating to
     non-payment  of  principal  of or interest on any Note) under the terms and
     provisions of either Credit  Agreement and the continuance of such event of
     default for the applicable period of grace, if any;

          (c) any  warranty or  representation  made by  Mortgagor  herein shall
     prove to be untrue in any  material  respect  as of the date made or deemed
     made; or

          (d) failure by Mortgagor,  within the applicable  period of grace,  if
     any, to cure a default in the due performance or observance of any covenant
     or agreement  contained in this Mortgage and not  constituting a default in
     the payment of principal of or interest  upon any Note or in the payment of
     any other Indebtedness;

then and in any such event the Agent,  at its  option,  may  enforce  any of the
provisions of Article VI hereof,  without any notice or demand of any kind, both
of which are hereby expressly waived.


                                      -27-
<PAGE>

                                   ARTICLE VI

                           Enforcement of the Security
                           ---------------------------

     6.1  Acceleration.  Upon the  occurrence of an Event of Default and if such
Event of Default  shall be  continuing,  the  Trustees  shall have the right and
power to declare  the then  unpaid  principal  balance on the Note,  the accrued
interest  and any other  accrued but unpaid  portion of the  Indebtedness  to be
immediately  due and payable,  without  further  notice,  presentment,  protest,
demand or action of any nature  whatsoever  (each of which  hereby is  expressly
waived by  Mortgagor),  whereupon  the same  shall  become  immediately  due and
payable.

     6.2 Title  Examination.  Upon the  occurrence of an Event of Default and if
such Event of Default shall be continuing, the Trustees shall have the right and
power to cause to be brought down to date a title  examination and tax histories
of the  Mortgaged  Property,  procure  title  opinions  or title  reports or, if
necessary, procure new abstracts and tax histories.

     6.3 Environmental  Audit. Upon the occurrence of an Event of Default and if
such Event of Default shall be continuing, the Trustees shall have the right and
power to procure an updated or entirely new environmental audit of the Mortgaged
Property  including the lands  described in Exhibit A, buildings,  soil,  ground
water and subsurface investigations; have the buildings inspected by an engineer
or other qualified inspector;  enter upon the Mortgaged Property at any time and
from time to time to show the  Mortgaged  Property to potential  purchasers  and
potential  bidders at foreclosure  sale; make available to potential  purchasers
and potential bidders all information obtained pursuant to the foregoing and any
other  information  in the  possession  of the  Agent  regarding  the  Mortgaged
Property.

     6.4 Power of Sale of Real  Property  Constituting  a Part of the  Mortgaged
Property.  Upon  the  occurrence  of an Event of  Default  and if such  Event of
Default  shall be  continuing,  the  Trustees  shall have the right and power to
sell,  to the extent  permitted by Applicable  Law, at one or more sales,  as an
entirety or in parcels, as they may elect, the real property constituting a part
of the Mortgaged Property,  at such place or places and otherwise in such manner
and upon such notice as may be required by Applicable Law, or, in the absence of
any  such  requirement,  as the  Trustees  may  deem  appropriate,  and to  make
conveyance to the purchaser or purchasers;  and Mortgagor shall warrant title to
such real property to such  purchaser or  purchasers.  The Trustees may postpone
the sale of all or any portion of such real property by public  announcement  at
the time and place of such sale,  and from time to time  thereafter  may further
postpone such sale by public  announcement made at the time of sale fixed by the
preceding  postponement.  The right of sale hereunder  shall not be exhausted by
one or any sale, and the Trustees may make other and successive  sales until all
of the trust estate be legally sold.  With respect to that  portion,  if any, of
the Mortgaged  Property  situated in the State of Wyoming,  this Mortgage may be
foreclosed by advertisement and sale as provided by applicable Wyoming statutes.
With respect to that portion,  if any, of the Mortgaged Property situated in the
State of Oklahoma, the


                                      -28-
<PAGE>

Agent shall have the right and power at its option to declare  the  Indebtedness
secured  hereby due and payable and to sell, or direct the Trustees to sell, the
"real  estate," as such term is defined under the  provisions  of 46 O.S.  Supp.
1986, ss.42,  constituting a part of the Mortgaged Property, all under the terms
of 46 O.S.  Supp.  1986,  ss.40 et seq., and shall,  to the extent  permitted by
Applicable  Law,  have the other  rights  conferred  on the  Trustees  under the
provisions of this Mortgage.

     6.5 Rights of the Trustees with Respect to Personal Property Constituting a
Part of the Mortgaged  Property.  Upon the occurrence of an Event of Default and
if such Event of Default shall be continuing,  the Trustees will have all rights
and  remedies  granted  by  Applicable  Law,  and  particularly  by the  Uniform
Commercial Code, including,  but not limited to, the right to take possession of
all personal  property  constituting a part of the Mortgaged  Property,  and for
this  purpose the Trustees or the Agent may enter upon any premises on which any
or all of such personal  property is situated and take possession of and operate
such  personal  property (or any portion  thereof) or remove it  therefrom.  The
Trustees or the Agent may require  Mortgagor to assemble such personal  property
and make it available  to the Trustees or the Agent at a place to be  designated
by the  Trustees or the Agent which is  reasonably  convenient  to all  parties.
Unless such personal  property is perishable or threatens to decline speedily in
value or is of a type customarily sold on a recognized  market,  the Trustees or
the Agent  will give  Mortgagor  reasonable  notice of the time and place of any
public sale or of the time after which any private sale or other  disposition of
such personal  property is to be made.  This  requirement of sending  reasonable
notice will be met if the notice is mailed by first-class mail, postage prepaid,
to  Mortgagor  at the  address  shown  below the  signatures  at the end of this
Mortgage at least five (5) days before the time of the sale or disposition.

     6.6 Rights with Respect to Fixtures  Constituting  a Part of the  Mortgaged
Property.  Upon  the  occurrence  of an Event of  Default  and if such  Event of
Default  shall be  continuing,  the  Trustees  may elect to treat  the  fixtures
constituting a part of the Mortgaged Property as either real property collateral
or personal  property  collateral  and then  proceed to exercise  such rights as
apply to such type of collateral.

     6.7 Judicial Proceedings. Upon the occurrence of an Event of Default and if
such  Event of  Default  shall be  continuing,  the  Trustees,  in lieu of or in
addition to exercising  any power of sale  hereinabove  given,  may proceed by a
suit or suits in equity or at law, whether for a foreclosure  hereunder for each
or upon credit in one or more  parcels or portions  under  executory or ordinary
process, at the Agent's sole option,  without  appraisement  (appraisement being
expressly  waived),  or for  the  sale  of the  Mortgaged  Property,  or for the
specific  performance of any covenant or agreement herein contained or in aid of
the execution of any power herein granted,  or for the appointment of a receiver
pending any foreclosure  hereunder or the sale of the Mortgaged Property, or for
the enforcement of any other appropriate  legal or equitable  remedy.  Mortgagor
hereby acknowledges the Indebtedness secured hereby,  whether now existing or to
arise  hereafter,  and  confesses  judgment  thereon  in the full  amount of the
Indebtedness in favor of the Agent and any future holder or holders of the Notes
if such obligations are not paid at maturity.


                                      -29-
<PAGE>

     6.8 Possession of the Mortgaged Property. It shall not be necessary for the
Trustees  or the Agent to have  physically  present or  constructively  in their
possession  at any sale  held by the  Trustees  or the  Agent  or by any  court,
receiver or public officer any or all of the Mortgaged  Property;  and Mortgagor
shall  deliver to the  purchasers at such sale on the date of sale the Mortgaged
Property  purchased  by  such  purchasers  at such  sale,  and if it  should  be
impossible or  impracticable  for any of such purchasers to take actual delivery
of the  Mortgaged  Property,  then the  title  and  right of  possession  to the
Mortgaged Property shall pass to such purchaser at such sale as completely as if
the same had been actually present and delivered.

     6.9 Certain Aspects of a Sale. The Agent shall have the right to become the
purchaser at any sale held by the  Trustees or by any court,  receiver or public
officer, and the Agent shall have the right to credit upon the amount of the bid
made  therefor  the amount  payable out of the net  proceeds of such sale to it.
Recitals  contained  in any  conveyance  made to any  purchaser at any sale made
hereunder  shall  conclusively  establish  the truth and accuracy of the matters
therein  stated,  including,  without  limiting the generality of the foregoing,
nonpayment  of the unpaid  principal  sum of, and the  interest  accrued on, the
Notes, after the same have become due and payable,  advertisement and conduct of
such sale in the manner provided herein or appointment of any successor  Trustee
hereunder.

     6.10 Receipt to Purchaser.  Upon any sale,  whether made under the power of
sale herein  granted and  conferred  or by virtue of judicial  proceedings,  the
receipt  of  the  Trustees,  or  of  the  officer  making  sale  under  judicial
proceedings, shall be sufficient discharge to the purchaser or purchasers at any
sale for his or their purchase money,  and such purchaser or purchasers,  or his
or their  assigns or  personal  representatives,  shall not,  after  paying such
purchase  money and  receiving  such  receipt of the Trustees or of such officer
therefor,  be obliged to see to the application of such purchase money, or be in
anywise answerable for any loss, misapplication or nonapplication thereof.

     6.11 Effect of Sale. Any sale or sales of the Mortgaged  Property,  whether
under the power of sale herein  granted and  conferred  or by virtue of judicial
proceedings,  shall  operate  to divest all right,  title,  interest,  claim and
demand  whatsoever  either at law or in equity,  of Mortgagor  of, in and to the
premises and the property sold, and shall be a perpetual bar, both at law and in
equity,  against Mortgagor,  and Mortgagor's  successors or assigns, and against
any and all  persons  claiming or who shall  thereafter  claim all or any of the
property  sold from,  through or under  Mortgagor or  Mortgagor's  successors or
assigns. Nevertheless, Mortgagor, if requested by the Agent so to do, shall join
in the  execution  and  delivery  of all  proper  conveyances,  assignments  and
transfers of the properties so sold.

     6.12  Application  of Proceeds.  The proceeds of any sale of, and the Rents
and Revenues and other amounts generated by the holding,  leasing,  operation or
other use of,  the  Mortgaged  Property  shall be  applied  by the Agent (or the
receiver,  if one is  appointed)  to the  extent  that  funds  are so  available
therefrom in the following orders of priority:


                                      -30-
<PAGE>

          (a)  first,  to the  payment  of the  costs  and  expenses  of  taking
     possession  of the  Mortgaged  Property  and of  holding,  using,  leasing,
     repairing,  improving and selling the same, including,  without limitation,
     (i) trustees' and receivers'  fees, (ii) court costs,  (iii) attorneys' and
     accountants' fees, (iv) costs of advertisement,  and (v) the payment of any
     and all  Taxes,  liens,  security  interests  or  other  rights,  title  or
     interests  equal or  superior  to the lien and  security  interest  of this
     Mortgage  (except  those to which  the  Mortgaged  Property  has been  sold
     subject to and without in any way implying the Agent's prior consent to the
     creation thereof);

          (b)  second,  to the  payment  of all  amounts,  other than the unpaid
     principal  balance and accrued but unpaid  interest due on the Note,  which
     may be due to the  Agent  or the  Lenders  under  the  Security  Documents,
     together with interest thereon as provided therein;

          (c) third,  to the payment of all accrued but unpaid  interest  due on
     the Note;

          (d) fourth,  to the payment of the unpaid principal balance due on the
     Note in the inverse order of maturity,  and interest  shall cease as to the
     amount so paid;

          (e) fifth, to the extent funds are available  therefor out of the sale
     proceeds or the Rents and Revenues and to the extent known by the Agent, to
     the payment of any  indebtedness  or  obligation  secured by a  subordinate
     Mortgage on or security interest in the Mortgaged Property; and

          (f) sixth, to Mortgagor or Mortgagor's successors or assigns, as their
     interests shall appear.

     6.13  Mortgagor's  Waiver of  Appraisement,  Marshalling  and Other Rights.
Mortgagor  agrees, to the full extent that Mortgagor may lawfully so agree, that
Mortgagor  will not at any time insist  upon or plead or in any manner  whatever
claim the benefit of any appraisement,  valuation, stay, extension or redemption
law now or hereafter in force,  in order to prevent or hinder the enforcement or
foreclosure  of this Mortgage or the absolute sale of the Mortgaged  Property or
the  possession  thereof  by any  purchaser  at any sale  made  pursuant  to any
provision  hereof,  or  pursuant  to  the  decree  of  any  court  of  competent
jurisdiction;  but  Mortgagor,  for  Mortgagor  and all who may claim through or
under  Mortgagor,  so far as  Mortgagor  or  those  claiming  through  or  under
Mortgagor now or hereafter  lawfully may,  hereby waives the benefit of all such
laws;  provided,  however,  that  appraisement of any of the Mortgaged  Property
located  in the State of  Oklahoma  is hereby  expressly  waived or not,  at the
option of the Trustees,  such option to be exercised prior to or at the time the
judgment is rendered in any foreclosure hereof. Mortgagor, for Mortgagor and all
who may claim through or under Mortgagor,  waives,  to the extent that Mortgagor
may lawfully do so, any and all right to have the Mortgaged Property  marshalled
upon any foreclosure of the lien hereof, or sold in inverse order of alienation,
and agrees that the Trustees, the Agent or any court


                                      -31-
<PAGE>

having jurisdiction to foreclose such lien may sell the Mortgaged Property as an
entirety.  Mortgagor,  for  Mortgagor  and all who may  claim  through  or under
Mortgagor, further waives, to the full extent that Mortgagor may lawfully do so,
any  requirement for posting a receiver's bond or replevin bond or other similar
type of bond if the Trustees or the Agent commence an action for  appointment of
a  receiver  or an action  for  replevin  to  recover  possession  of any of the
Mortgaged  Property.  If any law in this paragraph referred to and now in force,
of which Mortgagor or Mortgagor's  successor or successors  might take advantage
despite the  provisions  hereof,  shall  hereafter be repealed or cease to be in
force,  such law shall not  thereafter be deemed to  constitute  any part of the
contract  herein  contained or to preclude the operation or  application  of the
provisions of this paragraph.  Pursuant to Section 39-5-19, New Mexico Statutes,
Annotated,  1978 Comp.,  as amended,  Mortgagor  agrees that as to the Mortgaged
Property  situated in the State of New Mexico,  the  redemption  period shall be
shortened to one (1) month.  Mortgagor hereby waives all rights of appraisement,
sale,  homestead  or  redemption  allowed  under any law or laws of the State of
Arkansas, and especially redemption under the Act of the General Assembly of the
State of  Arkansas  approved  May 8,  1899,  and  acts  amendatory  thereto.  If
Mortgagor is an individual,  Mortgagor  waives and releases all rights of dower,
courtesy and homestead in the Mortgaged  Property  insofar as such rights may in
any way affect the purposes of this Mortgage.

     6.14 Costs and Expenses. All costs and expenses (including attorneys' fees)
incurred by the Trustees or the Agent in protecting  and enforcing  their rights
hereunder shall  constitute a demand  obligation owing by Mortgagor to the party
incurring  such costs and  expenses  and shall draw  interest  at an annual rate
equal to the  highest  rate of interest  from time to time  accruing on the Loan
Note plus one percent (1%) until paid,  all of which shall  constitute a portion
of the Indebtedness.

     6.15 Sale of the Mortgaged  Property in Texas. If any Note is not paid when
due,  whether by acceleration or otherwise,  the Trustees are hereby  authorized
and empowered to sell any part of the Mortgaged Property located in the State of
Texas at public  sale to the  highest  bidder for cash in the area at the county
courthouse  of the county in Texas in which the Texas  portion of the  Mortgaged
Property or any part thereof is situated,  as herein  described,  designated  by
such county's  commissioner's  court for such  proceedings,  or if no area is so
designated,  at the door of the  county  courthouse  of said  county,  at a time
between the hours of 10:00 A.M.  and 4:00 P.M.  which is no later than three (3)
hours after the time  stated in the notice  described  immediately  below as the
earliest  time at which such sale would occur on the first Tuesday of any month,
after  advertising the earliest time at which said sale would occur,  the place,
and terms of said sale, and the portion of the Mortgaged Property to be sold, by
(a) posting (or by having some person or persons  acting for the Trustees  post)
for at least  twenty-one  (21) days  preceding the date of the sale,  written or
printed  notice of the proposed  sale at the  courthouse  door of said county in
which the sale is to be made; and if such portion of the Mortgaged Property lies
in more  than one  county,  one such  notice  of sale  shall  be  posted  at the
courthouse  door of each county in which such part of the Mortgaged  Property is
situated and such part of the Mortgaged  Property may be sold in the area at the
county  courthouse  of any  one of such  counties  designated  by such  county's
commissioner's  court  for such  proceedings,  or  if no  area is so designated,


                                      -32-
<PAGE>

at the courthouse door of such county,  and the notice so posted shall designate
in which county such property shall be sold, and (b) filing in the office of the
county  clerk of each  county  in which  any part of the  Texas  portion  of the
Mortgaged  Property  which is to be sold at such sale is  situated a copy of the
notice posted in accordance  with the preceding  clause (a). In addition to such
posting  and filing of  notice,  the Agent or other  holder of the  Indebtedness
shall, at least  twenty-one (21) days preceding the date of sale, serve or cause
to be served  written notice of the proposed sale by certified mail on Mortgagor
and on each other debtor, if any, obligated to pay the Indebtedness according to
the records of the Agent or other  holder of the  Indebtedness.  Service of such
notice  shall be completed  upon  deposit of the notice,  enclosed in a postpaid
wrapper  properly  addressed to Mortgagor  and such other  debtors at their most
recent address or addresses as shown by the records of the Agent or other holder
of the  Indebtedness in a post office or official  depository under the care and
custody of the United States Postal Service.  The affidavit of any person having
knowledge of the facts to the effect that such a service was completed  shall be
prima facie evidence of the fact of service.  Mortgagor agrees that no notice of
any sale, other than as set out in this Section,  need be given by the Trustees,
the Agent or any other person, except as may otherwise be required by Applicable
Law.  Mortgagor hereby  designates as its address for the purpose of such notice
the address set out on the signature  page hereof;  and agrees that such address
shall be changed only by depositing notice of such change enclosed in a postpaid
wrapper in a post  office or official  depository  under the care and custody of
the United  States Postal  Service,  certified  mail,  postage  prepaid,  return
receipt requested, addressed to the Agent or other holder of the Indebtedness at
the address for the Agent set out herein (or to such other  address as the Agent
or other holder of the Indebtedness may have designated by notice given as above
provided  to  Mortgagor  and such other  debtors).  Any such notice of change of
address of Mortgagor or other  debtors or of the Agent or of other holder of the
Indebtedness  shall be effective  three (3) business  days after such deposit if
such post  office  or  official  depository  is  located  in the State of Texas,
otherwise to be effective  upon receipt.  Mortgagor  authorizes and empowers the
Trustees to sell the Texas portion of the Mortgaged  Property in lots or parcels
or in its  entirety as the  Trustees  shall deem  expedient;  and to execute and
deliver to the  purchaser or  purchasers  thereof good and  sufficient  deeds of
conveyance  thereto by fee simple title,  with  evidence of general  warranty by
Mortgagor,  and the title of such  purchaser or  purchasers  when so made by the
Trustees,  Mortgagor binds itself to warrant and forever defend.  Where portions
of the Mortgaged Property lie in different counties,  sales in such counties may
be conducted in any order that the Trustees may deem expedient;  and one or more
such sales may be conducted  in the same month,  or in  successive  or different
months as the  Trustees  may deem  expedient.  Notwithstanding  anything  to the
contrary  contained  herein,  the Trustees may postpone the sale provided for in
this Section 6.15 at any time  without the  necessity of a public  announcement.
The provisions  hereof with respect to the posting and giving of notices of sale
are  intended to comply with the  provisions  of Section  51.002 of the Property
Code of the State of Texas,  effective  January  1,  1984,  and in the event the
requirements,  or any notice,  under such Section 51.002 of the Property Code of
the State of Texas shall be eliminated or the  prescribed  manner of giving such
notices modified by future amendment to, or adoption of any statute superseding,


                                      -33-
<PAGE>

Section 51.002 of the Property Code of the State of Texas,  the  requirement for
such  particular  notices  shall be deemed  stricken  from or  modified  in this
Mortgage in conformity with such amendment or superseding statute,  effective as
of the effective date thereof.

     6.16 Fair Market  Value.  It is expressly  agreed by Mortgagor  that to the
extent  Section  51.003 of the Texas  Property  Code, or any amendment  thereto,
requires  that the  "fair  market  value"  of the  Mortgaged  Property  shall be
determined as of the foreclosure  date in order to enforce a deficiency  against
Mortgagor or any other party liable for repayment of the Indebtedness,  the term
"fair market value" shall include those matters  required by Applicable  Law and
shall also include the additional factors set forth below:

          (a) The  Mortgaged  Property  is to be  valued  "AS IS" and  "WITH ALL
     FAULTS" and there shall be no assumption of restoration of or refurbishment
     of improvements, if any, after the date of the foreclosure;

          (b) An offset to the fair market value of the Mortgaged  Property,  as
     determined  hereunder,  shall be made by  deducting  from  such  value  the
     reasonable  estimated  closing costs  relating to the sale of the Mortgaged
     Property,  including  but  not  limited  to  brokerage  commissions,  title
     examination and curative expenses,  tax prorations,  escrow fees, and other
     common charges which are incurred by a seller of property; and

          (c) After  consideration of the factors required by Applicable Law and
     those required  above,  an additional  discount  factor shall be calculated
     based  upon the  estimated  time it will take to  effectuate  a sale of the
     Mortgaged  Property so that the "fair  market  value" as so  determined  is
     discounted  to be as of the date of the  foreclosure  sale of the Mortgaged
     Property.

     6.17 Operation of the Mortgaged Property by the Trustees or the Agent. Upon
the  occurrence of an Event of Default and during the  continuance of such Event
of Default and in addition to all other rights herein conferred on the Trustees,
the Trustees or the Agent (or any person, firm or corporation  designated by the
Trustees  or the  Agent)  shall  have the  right  and  power,  but  shall not be
obligated,  to enter upon and take possession of any of the Mortgaged  Property,
and to exclude Mortgagor, and Mortgagor's agents or servants,  wholly therefrom,
and to hold,  use,  administer,  manage and  operate the same to the extent that
Mortgagor  shall  be at the  time  entitled  and in its  place  and  stead.  The
Trustees,  the Agent,  or any  person,  firm or  corporation  designated  by the
Trustees or the Agent,  may operate the same without any  liability to Mortgagor
in connection with such operations, except to use ordinary care in the operation
of  such  properties,  and  the  Trustees,  the  Agent  or any  person,  firm or
corporation  designated  by the  Trustees or the Agent,  shall have the right to
collect,  receive and receipt for all  Hydrocarbons  produced and sold from said
properties, to make repairs, purchase machinery and equipment, conduct work-over
operations,  drill  additional  wells and to  exercise  every  power,  right and
privilege of Mortgagor with respect to the Mortgaged  Property.  When and if the
expenses of such operation and


                                      -34-
<PAGE>

development  (including costs of unsuccessful work-over operations or additional
wells)  paid  by the  Trustees  or the  Agent  or  attributable  to  Mortgagor's
undivided  interest therein and withheld,  or offset against,  by an operator or
other  party  have  been  paid  or  reimbursed  in  full  by  Mortgagor  and the
Indebtedness  paid,  said  properties  shall,  if  there  has  been  no  sale or
foreclosure, be returned to Mortgagor.

     6.18  Separate  Sales.  The  Mortgaged  Property may be sold in one or more
parcels and in such manner and order as the Agent, in its sole  discretion,  may
elect, it being  expressly  understood and agreed that the right of sale arising
out of any Event of Default  shall not be exhausted by any one or more sales but
other and successive  sales may be made until all of the Mortgaged  Property has
been sold or until the Indebtedness has been fully satisfied.

     6.19 Remedies  Cumulative,  Concurrent and  Non-Exclusive.  The Agent shall
have all rights,  remedies and recourses  granted in the Security  Documents and
available at law or equity (including  specifically those granted by the Uniform
Commercial  Code in effect and  applicable  to the  Mortgaged  Property,  or any
portion  thereof),  and same (a) shall be cumulative and concurrent,  (b) may be
pursued  separately,  successively  or  concurrently  against any one or more of
Mortgagor,  any Guarantor,  or others  obligated  under the Note, or against the
Mortgaged Property, at the sole discretion of the Agent, (c) may be exercised as
often as occasion  therefor  shall arise,  it being agreed by Mortgagor that the
exercise or failure to exercise  any of same shall in no event be construed as a
waiver or release thereof or of any other right, remedy or recourse, and (d) are
intended to be, and shall be, non-exclusive.

     6.20 Release of and Resort to Collateral. The Agent may release, regardless
of  consideration,  any  part  of  the  Mortgaged  Property  without,  as to the
remainder, in any way impairing, affecting,  subordinating or releasing the lien
or security interests created in or evidenced by the Security Documents or their
stature as a first and prior lien and security  interest in and to the Mortgaged
Property.  For  payment of the  Indebtedness,  the Agent may resort to any other
security  therefor  held by  Trustees  in such order and manner as the Agent may
elect.

     6.21 Discontinuance of Proceedings.  In case the Agent shall have proceeded
to invoke any right,  remedy or recourse  permitted under the Security Documents
and shall  thereafter  elect to discontinue or abandon same for any reason,  the
Agent shall have the unqualified right so to do and, in such an event, Mortgagor
and the Agent shall be restored to their  former  positions  with respect to the
Indebtedness,  the Obligations,  the Security Documents,  the Mortgaged Property
and otherwise, and the rights, remedies, recourses and powers of the Agent shall
continue as if same had never been invoked.

     6.22  Uniform  Commercial  Code  Remedies.  The Agent (or  Trustees  in the
Agent's  behalf) shall have all the rights,  remedies and recourses with respect
to the Personalty,  Fixtures,  Leases and Rents and Revenues  afforded a Secured
Party by the aforesaid  Uniform  Commercial  Code (being  Chapter 9 of the Texas
Business and Commerce Code, as to property within the scope thereof and situated
in the State of


                                      -35-
<PAGE>

Texas) in addition to, and not in limitation of, the other rights,  remedies and
recourses afforded the Agent and/or Trustees by the Security Documents.

     6.23 No Obligation of Trustees or the Agent.  The  assignment  and security
interest  herein  granted  shall not be deemed or  construed  (a) to  constitute
Trustees or the Agent as a trustee in possession  of the  Mortgaged  Property or
(b) to  obligate  Trustees or the Agent to (i) lease the  Mortgaged  Property or
attempt to do same, (ii) take any action, (iii) incur any expenses or perform or
discharge any obligation,  duty or liability  whatsoever under any of the Leases
or otherwise.

                                  ARTICLE VII

                            Miscellaneous Provisions
                            ------------------------

     7.1 Pooling and Unitization.  Mortgagor shall have the right, and is hereby
authorized, to pool or unitize all or any part of the lands described in Exhibit
A, insofar as relates to the Mortgaged Property, with adjacent lands, leaseholds
and other  interests,  when,  in the  reasonable  judgment of  Mortgagor,  it is
necessary or advisable  to do so in order to form a drilling  and/or  production
unit  to  facilitate  the  orderly  development  of that  part of the  Mortgaged
Property affected thereby,  or to comply with the requirements of any Applicable
Law or  governmental  order or  regulation  relating  to the spacing of wells or
proration  of the  production  therefrom;  provided,  however,  that any unit so
formed for the production of oil shall not  substantially  exceed 160 acres, and
any unit so formed for the production of gas shall not substantially  exceed 640
acres,  unless a larger  area is  required  to conform to an  Applicable  Law or
governmental  order or regulation  relating to the spacing of wells or to obtain
the maximum allowable  production under any Applicable Law or governmental order
or regulation  relating to the proration of  production  therefrom;  and further
provided  that  the  Hydrocarbons  produced  from any  unit so  formed  shall be
allocated among the separately owned tracts or interests  comprising the unit in
a uniform manner consistently  applied.  Any unit so formed may relate to one or
more zones or horizons,  and a unit formed for a particular zone or horizon need
not conform in area to any other unit  relating to a different  zone or horizon,
and a unit  formed for the  production  of oil need not conform in area with any
unit formed for the production of gas.  Immediately  after formation of any such
unit,  Mortgagor  shall furnish to the Trustees and the Agent a true copy of the
pooling  agreement,  declaration  of pooling or other  instrument  creating such
unit, in such number of counterparts as the Trustees may reasonably request. The
interest in any such unit  attributable  to the Mortgaged  Property (or any part
thereof)  included  therein  shall become a part of the  Mortgaged  Property and
shall be subject to the lien  hereof in the same manner and with the same effect
as though such unit and the  interest of  Mortgagor  therein  were  specifically
described  in  Exhibit  A.  Mortgagor  may enter  into  pooling  or  unitization
agreements not hereinabove authorized only with the prior written consent of the
Agent, which consent shall not be unreasonably withheld.

     7.2 No Liability.  Trustees and the Agent shall not be liable for any error
of judgment or act done by Trustees and the Agent in good faith, or be otherwise
responsible or accountable under any circumstances whatsoever,  except for their


                                      -36-
<PAGE>

negligence or bad faith.  Trustees and the Agent shall not be personally  liable
in case of entry by them,  or anyone  entering  by virtue of the  powers  herein
granted them, upon the Mortgaged  Property for debts  contracted or liability or
damages  incurred in the  management  or  operation of the  Mortgaged  Property.
Trustees and the Agent shall have the right to rely on any instrument,  document
or signature  authorizing or supporting any action taken or proposed to be taken
by them hereunder,  believed by them in good faith to be genuine. Trustees shall
be entitled to reimbursement for expenses incurred by them in the performance of
their duties hereunder and to reasonable compensation for such of their services
hereunder  as shall be  rendered.  Mortgagor  will,  from time to time,  pay the
compensation due to Trustees and the Agent hereunder and reimburse  Trustees and
the Agent  for,  and save  them  harmless  against,  any and all  liability  and
expenses which may be incurred by them in the performance of their duties.

     7.3 Successor Trustees.  Any Trustee may resign in writing addressed to the
Agent or may be removed at any time with or without  cause by an  instrument  in
writing duly executed by the Agent. In case of the death, resignation or removal
of a Trustee,  one or more  successor  Trustees may be appointed by the Agent by
instrument  of  substitution  complying  with  any  applicable  requirements  of
Applicable  Law, and in the absence of any such  requirement  without  formality
other  than  appointment  and  designation  in  writing.  Such  appointment  and
designation  shall be full  evidence of the right and authority to make the same
and of all facts therein  recited,  and upon the making of any such  appointment
and  designation  this conveyance  shall vest in the named successor  Trustee or
Trustees,  all the estate and title of the prior Trustee in all of the Mortgaged
Property,  and he or they shall  thereupon  succeed to all the  rights,  powers,
privileges,  immunities and duties hereby conferred upon the prior Trustee.  All
references  herein to the Trustees shall be deemed to refer to the Trustees from
time to time acting hereunder.

     7.4  Actions  or  Advances  by the  Agent or the  Trustees.  Each and every
covenant  herein  contained  shall be performed and kept by Mortgagor  solely at
Mortgagor's  expense.  If  Mortgagor  shall  fail to  perform or keep any of the
covenants of whatsoever kind or nature contained in this Mortgage, the Agent, or
the Trustees or any receiver  appointed  hereunder or under Applicable Law, may,
but shall not be obligated  to, take action  and/or make advances to perform the
same in Mortgagor's  behalf, and Mortgagor hereby agrees to repay the expense of
such action and such  advances upon demand plus interest at an annual rate equal
to the  Alternate  Base Rate (as defined in the Credit  Agreements)  of interest
from  time to time  accruing  on the Loan Note plus the  Applicable  Margin  (as
defined in the Credit  Agreements)  plus two percent  (2%) until paid or, in the
event  any  promissory  note  evidences  such  indebtedness,  upon the terms and
conditions  thereof. No such advance or action by the Agent, the Trustees or any
receiver  appointed  hereunder  shall be deemed to  relieve  Mortgagor  from any
default hereunder.

     7.5 No Waiver.  Any  failure  by  Trustees  or the Agent to insist,  or any
election  by Trustees or the Agent not to insist,  upon  strict  performance  by
Mortgagor  of  any  of the  terms,  provisions  or  conditions  of the  Security
Documents shall not be deemed to be


                                      -37-
<PAGE>

a waiver of same or of any other  term,  provision  or  condition  thereof,  and
Trustees  or the Agent shall have the right at any time or times  thereafter  to
insist  upon  strict  performance  by  Mortgagor  of any and all of such  terms,
provisions and conditions.

     7.6 Defense of Claims. Mortgagor will notify the Trustees and the Agent, in
writing,  promptly of the  commencement of any legal  proceedings  affecting the
lien or security interest hereof or the Mortgaged Property, or any part thereof,
and will take such action,  employing  attorneys as set forth in Section 3.4(j),
as may be necessary or  appropriate to preserve  Mortgagor's,  the Trustees' and
the Agent's rights  affected  thereby and/or to hold harmless the Trustees,  the
Agent  and the  Lender  Parties  in  respect  of such  proceedings;  and  should
Mortgagor fail or refuse to take any such action, the Trustees or the Agent may,
upon giving  prior  written  notice  thereof to  Mortgagor,  take such action in
behalf and in the name of Mortgagor and at Mortgagor's  expense.  Moreover,  the
Agent or the Trustees on behalf of the Agent, may take such  independent  action
in  connection  therewith  as it or they  may in its or  their  discretion  deem
proper,  Mortgagor  hereby  agreeing  that all  sums  advanced  or all  expenses
incurred in such actions plus  interest at an annual rate equal to the Alternate
Base Rate (as defined in the Credit  Agreements)  of interest  from time to time
accruing on the Loan Note plus the  Applicable  Margin (as defined in the Credit
Agreements) plus two percent (2%) until paid, will, on demand, be reimbursed, as
appropriate,  to the Agent, the Trustees or any receiver appointed  hereunder or
under  Applicable  Law. The obligations of Mortgagor as hereinabove set forth in
this  Section  7.6  shall  survive  the  release,  termination,  foreclosure  or
assignment of this Mortgage or any sale hereunder.

     7.7 The Mortgaged  Property to Revert.  If the Indebtedness  shall be fully
paid and the covenants herein contained shall be well and truly performed,  then
all of the Mortgaged  Property  shall revert to Mortgagor and the entire estate,
right,  title and interest of the Trustees and the Agent shall thereupon  cease;
and the Trustees and the Agent in such case shall, upon the request of Mortgagor
and at Mortgagor's  cost and expense,  deliver to Mortgagor  proper  instruments
acknowledging satisfaction of this Mortgage.

     7.8  Covenants  Running with the Land.  All  Obligations  contained in this
Mortgage are intended by the parties to be, and shall be construed as, covenants
running with the Mortgaged Property.

     7.9 Renewals, Amendments and Other Security. Renewals and extensions of the
Indebtedness  and  modifications  of any kind of the Obligations may be given at
any time and amendments may be made to agreements with third parties relating to
any part of such Indebtedness or the Mortgaged Property and the Trustees and the
Agent may take or may now hold other security from others for the  Indebtedness,
all without  notice to or consent of  Mortgagor.  The  Trustees or the Agent may
resort first to such other security or any part thereof or first to the security
herein given or any part thereof,  or from time to time to either or both,  even
to the partial or complete abandonment of either security, and such action shall
not be a waiver of any rights  conferred by this Mortgage,  which shall continue
as a first lien upon and prior perfected security interest


                                      -38-
<PAGE>

in the Mortgaged  Property not expressly  released until the Notes and all other
Indebtedness secured hereby are fully paid.

     7.10 Mortgage, Assignment, etc. This Mortgage shall be deemed to be and may
be enforced from time to time as an assignment, chattel mortgage, contract, deed
of trust, financing statement,  real estate mortgage, or security agreement, and
from time to time as any one or more thereof.

     7.11 Limitation on Interest. No provision of this Mortgage or of the Notes,
the Credit  Agreements or any other Loan  Document  shall require the payment or
permit the  collection of interest in excess of the Maximum Lawful Rate or which
is  otherwise  contrary  to  Applicable  Law.  If any excess of interest in such
respect  is herein or in the  Notes,  the  Credit  Agreements  or any other Loan
Document  provided for, or shall be  adjudicated to be so provided for herein or
in the Notes, the Credit Agreements or any other Loan Document,  Mortgagor shall
not be obligated to pay such excess.

     7.12  Severability.  The Security Documents are intended to be performed in
accordance  with,  and only to the extent  permitted  by, all  applicable  Legal
Requirements.  If  any  provision  of  any  of  the  Security  Documents  or the
application  thereof to any person or circumstance  shall, for any reason and to
any extent, be invalid or unenforceable, neither the remainder of the instrument
in which such  provision is contained nor the  application  of such provision to
other persons or circumstances nor the other instruments referred to hereinabove
shall be affected  thereby,  but rather shall be enforced to the greatest extent
permitted by Applicable Law. It is hereby expressly  stipulated and agreed to be
the intent of Mortgagor and the Agent at all times to comply with the usury, and
all  other,  laws  relating  to the  Security  Documents.  If, at any time,  the
applicable  Legal  Requirements  render  usurious  any amount  called for in any
Security  Document,  then it is  Mortgagor's,  Trustees' and the Agent's express
intent  that such  document  be  immediately  deemed  reformed  and the  amounts
collectible reduced, without the necessity of the execution of any new document,
so as to comply with the then Applicable Law but so as to permit the recovery of
the fullest amount otherwise called for in such Security Documents.

     7.13 Waiver by the  Trustees.  Any and all  covenants in this  Mortgage may
from time to time by instrument in writing  signed by the Trustees and the Agent
be waived to such  extent and in such manner as the  Trustees  and the Agent may
desire,  but no such waiver shall ever affect or impair  either the Trustees' or
the  Agent's  rights or liens or  security  interests  hereunder,  except to the
extent specifically stated in such written instrument.

     7.14 Action by  Individual  Trustee.  Any Trustee from time to time serving
hereunder shall have the absolute right, acting individually, to take any action
and to give any consent and to exercise any right, remedy,  power,  privilege or
authority  conferred  upon the Trustees,  and any action taken by either Trustee
from time to time serving  hereunder shall be binding upon the other Trustee and
no person dealing with either Trustee from time to time serving  hereunder shall
be obligated  to confirm the power and  authority of such Trustee to act without
the concurrence of the other Trustee.


                                      -39-
<PAGE>

In this Mortgage,  the term "Trustee" means the Trustees  hereinabove  named, or
either of them, as the context requires, and any successor Trustee.

     7.15 No Partnership.  Nothing contained in this Mortgage is intended to, or
shall be construed as, creating to any extent and in any manner whatsoever,  any
partnership,  joint venture, or association among Mortgagor,  the Trustees,  the
Agent and their respective Affiliates, or in any way as to make the Agent or the
Trustee's co-principals with Mortgagor with reference to the Mortgaged Property,
and any inferences to the contrary are hereby expressly negated.

     7.16  Successors  and Assigns.  This  Mortgage is binding  upon  Mortgagor,
Mortgagor's  successors  and  assigns,  and shall  inure to the  benefit  of the
Trustees,  their successors,  and the Agent, its successors and assigns, and the
provisions hereof shall likewise be covenants running with the land.

     7.17 Article and Section Headings. The article and section headings in this
Mortgage are inserted for convenience of reference and shall not be considered a
part of this Mortgage or used in its interpretation.

     7.18 Execution in Counterparts. This Mortgage may be executed in any number
of  counterparts,  each of which  shall  for all  purposes  be  deemed  to be an
original and all of which are identical,  except that, to facilitate recordation
or filing,  in any  particular  counterpart  portions of Exhibit A hereto  which
describe  properties  situated in parishes or counties  other than the parish or
county  in which  such  counterpart  is to be  recorded  or filed  may have been
omitted.

     7.19 Special Filing as Financing Statement. This Mortgage shall likewise be
a Security Agreement and a Financing Statement. This Mortgage shall be filed for
record,  among other places, in the real estate records of each county or parish
in which any  portion  of the real  property  covered  by the oil and gas leases
described in Exhibit A hereto is situated,  and,  when filed in such counties or
parishes shall be effective as a financing  statement  covering Fixtures located
on oil and gas properties,  which oil and gas properties  (and accounts  arising
therefrom) are to be financed at the wellheads of the wells located on the lands
described in Exhibit A. At the option of the Agent,  a carbon,  photographic  or
other  reproduction of this Mortgage or of any financing  statement covering the
Mortgaged  Property or any portion  thereof  shall be  sufficient as a financing
statement and may be filed as such.

     7.20 Notices. Except as otherwise required by Sections 6.5 and 6.15 hereof,
any notice, request, demand or other Mortgage which may be required or permitted
to be given or served upon Mortgagor shall be sufficiently  given when mailed by
first-class  mail,  addressed  to  Mortgagor  at the  address  shown  below  the
signatures at the end of this Mortgage or to such different address as Mortgagor
shall have designated by written notice received by the Agent or the Trustees.

     7.21  Reliance.   Notwithstanding   any  reference  herein  to  the  Credit
Agreements,  the  Notes  or the  Letters  of  Credit,  no party  shall  have any
obligation to inquire into the


                                      -40-
<PAGE>

terms  or  conditions  of any  such  documents  and all  parties  shall be fully
authorized to rely upon any statement, certificate, or affidavit of Agent or any
future  holder of any portion of the  Indebtedness  as to the  occurrence of any
event such as the occurrence of any event of default.

     7.22 The Agent as Agent for the Lender Parties. As described above, certain
Affiliates  of the Agent and the  Lenders  are or may become  parties to certain
Hedging Agreements with Mortgagor and/or Affiliates of Mortgagor.  This Mortgage
secures the  obligations of Mortgagor and such  Affiliates,  as the case may be,
under such Hedging Agreements, and the parties acknowledge for all purposes that
the Agent acts for itself and as agent on behalf of such Affiliates of the Agent
and such  Lenders  which are so  entitled  to share in the rights  and  benefits
accruing to the Agent under this Mortgage in respect of the Mortgaged Property.

     7.23 Applicable Law. As to any tract or parcel of land comprising a portion
of the  Mortgaged  Property,  this  Mortgage  shall be governed by and construed
according to the Applicable Laws of the State where such tract or parcel of land
is situated.

     7.24 Subrogation.  If any or all of the proceeds of the Note have been used
to extinguish,  extend or renew any indebtedness heretofore existing against the
Mortgaged Property,  then, to the extent of such funds so used, the Indebtedness
and this  Mortgage  shall be  subrogated  to all of the rights,  claims,  liens,
titles and  interests  heretofore  existing  against the  Mortgaged  Property to
secure the  indebtedness  so  extinguished,  extended  or renewed and the former
rights,  claims, liens, titles and interests,  if any, are not waived but rather
are continued in full force and effect in favor of the Agent and are merged with
the lien and security  interest  created  herein as cumulative  security for the
repayment of the Indebtedness and the satisfaction of the Obligations.

     7.25  Fixture  Filing.  Portions of the  Mortgaged  Property  are or are to
become  fixtures  relating to the above  described  real estate,  and  Mortgagor
herein  expressly  covenants  and agrees that the filing of this Mortgage in the
Real Estate Records in the county where the Mortgaged  Property is located shall
also operate from the time of filing therein as a financing statement filed as a
fixture  filing in accordance  with Section  9.502(c) of the Uniform  Commercial
Code - Secured Transactions of the State of Texas.

     7.26  Subordination by The Agent.  From time to time at the Agent's option,
by instrument  executed by the Agent and recorded in the real  property  records
where  this  Mortgage  has been  recorded,  the Agent may  subordinate  the lien
created by this  Mortgage to any interest in the  Mortgaged  Property.  Any such
subordination  shall be solely at the Agent's option,  and in no event shall the
Agent be obligated to subordinate the lien or security  interest created by this
Mortgage.


                                      -41-
<PAGE>



     IN WITNESS  WHEREOF,  Mortgagor  has executed or caused to be executed this
Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and
Fixture  Filing in the presence of the  undersigned  Notary Public on this _____
day of ______________, 2002.



                              MORTGAGOR AND DEBTOR
                              --------------------




                                       CALPINE CORPORATION, a Delaware
                                       corporation


                                       By:______________________________________
                                       Title:___________________________________
                                       Printed Name:____________________________


ATTEST:


_______________________________________
Secretary
Printed Name:__________________________



The name and mailing address of Mortgagor is:


Calpine Corporation
1000 Louisiana Street, Suite 800
Houston, TX  77002


                                                           [Multistate Mortgage]
<PAGE>



                                  SECURED PARTY
                                  -------------




                                       THE BANK OF NOVA SCOTIA, as Agent


                                       By:______________________________________
                                       Title: Director
                                       Printed Name: Kemp Leonard

ATTEST:


_______________________________________
Banking Officer/Clerk
Printed Name: John Quick



                           ADDITIONAL SECURED PARTIES
                           --------------------------




                                       _________________________________________
                                       Kemp Leonard, Trustee

                                       _________________________________________
                                       John Quick, Trustee


The name and mailing address of the Secured Party is:

The Bank of Nova Scotia, as Agent
580 California Street
Suite 2100
San Francisco, CA 94104

The mailing address of the additional Secured Parties, Kemp Leonard, as Trustee,
and John Quick, as Trustee, is:

The Bank of Nova Scotia
580 California Street
Suite 2100
San Francisco, CA 94104
Attention:        Kemp Leonard
                  John Quick


                                                           [Multistate Mortgage]
<PAGE>



STATE OF _______________________)
                                )  SS.
COUNTY OF ______________________)

     BE IT REMEMBERED that I,  _______________________________,  a Notary Public
duly qualified,  commissioned,  sworn and acting in and for the County and State
aforesaid,  hereby certify that, on this _____ day of ____________,  2002, there
appeared before me severally each of the following persons,  each being either a
Trustee or else the designated  officer of the  corporation  or association  set
opposite his name, and each such Trustee,  corporation and  association  being a
party to the foregoing instrument:

     ___________________________,      the      ______________________,      and
___________________________,  the  ______________________  Secretary, of Calpine
Corporation,  a Delaware  corporation,  whose address is 1000 Louisiana  Street,
Suite 800, Houston, TX 77002.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO       The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for  the  said  county  and  state,   on  this  day,   within  my
               jurisdiction   the  within  named   persons,   who   acknowledged
               themselves  to hold the  offices  in the  corporation  set  forth
               opposite their name above (or, in the case of the Trustees,  were
               validly appointed  Trustees),  and that for and on behalf of said
               corporation  (or as Trustees,  as the case may be),  executed the
               above and foregoing instrument after


                                                           [Multistate Mortgage]
<PAGE>

               first  having  been duly authorized by said corporation so to do.

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.

                       Witness my hand and official seal.



                                       _________________________________________
                                       Notary Public
                                       Residing at______________________________



My commission expires:


                                                           [Multistate Mortgage]
<PAGE>



STATE OF _______________________)
                                )  SS.
COUNTY OF ______________________)

     BE IT REMEMBERED that I,  _______________________________,  a Notary Public
duly qualified,  commissioned,  sworn and acting in and for the County and State
aforesaid,  hereby certify that, on this _____ day of ____________,  2002, there
appeared before me severally each of the following persons,  each being either a
Trustee or else the designated  officer of the  corporation  or association  set
opposite his name, and each such Trustee,  corporation and  association  being a
party to the foregoing instrument:

     Kemp Leonard, Director, and John Quick, Banking Officer/Clerk,  of THE BANK
OF NOVA SCOTIA,  a Canadian  chartered  bank,  whose  address is 580  California
Street, Suite 2100, San Francisco, CA 94104.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO       The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for  the  said  county  and  state,   on  this  day,   within  my
               jurisdiction   the  within  named   persons,   who   acknowledged
               themselves  to hold the  offices  in the  corporation  set  forth
               opposite their name above (or, in the case of the Trustees,  were
               validly appointed  Trustees),  and that for and on behalf of said
               corporation  (or as Trustees,  as the case may be),  executed the
               above and  foregoing  instrument  after  first  having  been duly
               authorized by said corporation so to do.


                                                           [Multistate Mortgage]
<PAGE>

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.

                       Witness my hand and official seal.



                                       _________________________________________
                                       Notary Public
                                       Residing at______________________________



My commission expires:


                                                           [Multistate Mortgage]
<PAGE>



STATE OF _______________________)
                                )  SS.
COUNTY OF ______________________)

     BE IT REMEMBERED that I,  _______________________________,  a Notary Public
duly qualified,  commissioned,  sworn and acting in and for the County and State
aforesaid,  hereby certify that, on this _____ day of ____________,  2002, there
appeared before me severally each of the following persons,  each being either a
Trustee or else the designated  officer of the  corporation  or association  set
opposite his name, and each such Trustee,  corporation and  association  being a
party to the foregoing instrument:

     Kemp  Leonard and John Quick whose  addresses  are 580  California  Street,
Suite 2100, San Francisco, CA 94104, as Trustees.

ARKANSAS       Before  me on this day  appeared  in  person  the  aforementioned
               persons,  to me personally well known,  who stated that they held
               the offices in the  corporation or association set forth opposite
               their names above (or, in the case of the Trustees,  were validly
               appointed  Trustees) and were duly authorized in their respective
               capacities  to execute the  foregoing  instrument  for and in the
               name and on  behalf of said  corporation  or  association  (or as
               Trustees,   as  the  case  may  be),   and  further   stated  and
               acknowledged that they had so signed, executed and delivered said
               foregoing  instrument  for the  consideration,  uses and purposes
               therein mentioned and set forth.

COLORADO       The foregoing  instrument was acknowledged  before me this day by
               each such person on behalf of said corporation or association, or
               himself, as a Trustee, as the case may be.

KANSAS         On this day  before me  personally  appeared  the  aforementioned
               persons,  who acknowledged  themselves to hold the offices in the
               corporation set forth opposite their names above (or, in the case
               of the  Trustees,  were validly  appointed  Trustees) and as such
               officers or Trustees,  hereby  authorized to do so,  executed the
               foregoing instrument for the purposes therein contained.

MISSISSIPPI    Personally  appeared before me, the undersigned  authority in and
               for  the  said  county  and  state,   on  this  day,   within  my
               jurisdiction   the  within  named   persons,   who   acknowledged
               themselves  to hold the  offices  in the  corporation  set  forth
               opposite their name above (or, in the case of the Trustees,  were
               validly appointed  Trustees),  and that for and on behalf of said
               corporation  (or as Trustees,  as the case may be),  executed the
               above and  foregoing  instrument  after  first  having  been duly
               authorized by said corporation so to do.


                                                           [Multistate Mortgage]
<PAGE>

MONTANA        On this day before me personally  appeared each such person, each
               of whom is known to me to be the officer of the corporation  that
               executed  the within  instrument  (or a Trustee,  as the case may
               be), and acknowledged to me that such corporation (or Trustee, as
               the case may be) executed the same.

NEBRASKA       The foregoing  instrument was acknowledged  before me this day by
 and           each such person as the designated officers of the corporation or
NEW MEXICO     association set opposite their names (or as Trustees, as the case
               may be) on behalf of said corporation or association,  or himself
               as a Trustee, as the case may be.

OKLAHOMA       Before  me on this day  personally  appeared  the  aforementioned
               persons,  to me known to be the identical  persons who subscribed
               the  names of the  respective  makers  thereof  to the  foregoing
               instrument in the capacities set forth opposite the names of such
               persons above,  and each such person  acknowledged  to me that he
               executed the same as his free and  voluntary  act and deed and as
               the  free  and  voluntary  act  and  deed of the  corporation  or
               association  set opposite his name (or of himself as Trustee,  as
               the case may be) for the uses and purposes therein set forth.

TEXAS          This  instrument was  acknowledged  before me on this day by each
               such  person as the  designated  officer  of the  corporation  or
               association set opposite his name (or a Trustee,  as the case may
               be), on behalf of said  corporation or  association  set opposite
               his name (or of himself as Trustee, as the case may be).

WYOMING        The foregoing  instrument was acknowledged before me by the above
               individuals on this day.

                       Witness my hand and official seal.



                                       _________________________________________
                                       Notary Public
                                       Residing at______________________________



My commission expires:


                                                           [Multistate Mortgage]
<PAGE>



               SCHEDULE I To Mortgage, Deed of Trust, Assignment,
               -------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                      May 1, 2002, from CALPINE CORPORATION
                         to KEMP LEONARD and JOHN QUICK
                           and THE BANK OF NOVA SCOTIA


                          Prior Names of the Mortgagor
                          ----------------------------


Calpine Natural Gas Company L.P.
TGX Corporation
Sheridan Energy, Inc.
Sheridan California Energy, Inc.
Calpine Natural Gas California, Inc.
Calpine Natural Gas Company
Michael Petroleum Corporation


                                      -1-
<PAGE>



                EXHIBIT A To Mortgage, Deed of Trust, Assignment,
                ------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                      May 1, 2002, from CALPINE CORPORATION
                         to KEMP LEONARD AND JOHN QUICK
                           and THE BANK OF NOVA SCOTIA

                               List of Properties
                               ------------------

     1.  Depth  limitations,  unit  designations,  unit tract  descriptions  and
descriptions  (including  percentages,   decimals  or  fractions)  of  undivided
leasehold interests, well names, "Operating Interests",  "Working Interests" and
"Net  Revenue  Interests"  contained  in this  Exhibit A and the  listing of any
percentage, decimal or fractional interest in this Exhibit A shall not be deemed
to limit or  otherwise  diminish  the  interests  being  subjected  to the lien,
security interest and encumbrance of this Mortgage.

     2. Some of the land  descriptions  in this  Exhibit  A may refer  only to a
portion of the land covered by a particular  lease. This Mortgage is not limited
to the land described in Exhibit A but is intended to cover the entire  interest
of Mortgagor in any lease  described in Exhibit A even if such interest  relates
to land not described in Exhibit A.  Reference is made to the land  descriptions
contained in the documents of title  recorded as described in this Exhibit A. To
the  extent  that  the  land  descriptions  in this  Exhibit  A are  incomplete,
incorrect  or not legally  sufficient,  the land  descriptions  contained in the
documents so recorded are incorporated herein by this reference.

     3. References in Exhibit A to instruments on file in the public records are
made for all purposes.  Unless provided otherwise,  all recording  references in
Exhibit A are to the official  real  property  records of the county or counties
(or parish or parishes) in which the mortgaged  property is located and in which
records  such  documents  are or in the past  have  been  customarily  recorded,
whether Deed  Records,  Oil and Gas Records,  Oil and Gas Lease Records or other
records.

     4. A statement herein that a certain  interest  described herein is subject
to the terms of certain  described  or referred to  agreements,  instruments  or
other matters shall not operate to subject such interest to any such  agreement,
instrument or other matter except to the extent that such agreement,  instrument
or matter is otherwise  valid and presently  subsisting nor shall such statement
be deemed to  constitute  a  recognition  by the  parties  hereto  that any such
agreement, instrument or other matter is valid and presently subsisting.

                                                       [Do not detach this page]


                                      A-1
<PAGE>



                EXHIBIT B To Mortgage, Deed of Trust, Assignment,
                ------------------------------------------------
        Security Agreement, Financing Statement and Fixture Filing, dated
                      May 1, 2002, from CALPINE CORPORATION
                         to KEMP LEONARD AND JOHN QUICK
                           and THE BANK OF NOVA SCOTIA

                             Permitted Encumbrances
                             ----------------------

          All initially-capitalized terms used in this Exhibit B, whether or not
     defined in this instrument,  shall have the respective  meanings given such
     terms in the Credit Agreements.

     (a) Liens securing payment of the Obligations  granted pursuant to any Loan
Document and Liens securing  payment of the obligations  granted pursuant to the
loan documents relating to the Existing Credit Agreement;

     (b)  Liens  granted  prior  to the  Effective  Date to  secure  payment  of
Indebtedness  of the type permitted and described in clause (a) of Section 8.2.2
of the Credit Agreements;

     (c) Liens granted to secure payment of  Indebtedness  of the type permitted
and  described  in clause (b) of Section  8.2.2 of the Credit  Agreements  where
recourse is limited as  described  in clause (b) of Section  8.2.2 of the Credit
Agreements;

     (d) Liens for taxes,  assessments or other  governmental  charges or levies
not at the time  delinquent  or  thereafter  payable  without  penalty  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (e) Liens of carriers,  warehousemen,  mechanics, materialmen and landlords
incurred  in the  ordinary  course of  business  for sums not  overdue  or being
diligently  contested  in good faith by  appropriate  proceedings  and for which
adequate  reserves  in  accordance  with GAAP  shall  have been set aside on its
books;

     (f) Liens  incurred in the ordinary  course of business in connection  with
workmen's  compensation,  unemployment  insurance or other forms of governmental
insurance  or  benefits,   or  to  secure  performance  of  tenders,   statutory
obligations,  leases and contracts  (other than for borrowed money) entered into
in the ordinary course of business or to secure  obligations on surety or appeal
bonds;

     (g) judgment  Liens in existence  less than 15 days after the entry thereof
or with  respect to which  execution  has been stayed or the payment of which is
covered in full (subject to a customary deductible) by insurance maintained with
responsible insurance companies;

     (h) Liens granted to secure payment of  Indebtedness  of the type permitted
and described in clauses (e) and (g) of Section  8.2.2 of the Credit  Agreements
where recourse is limited as described in clauses (e) or (g), as applicable,  of
Section 8.2.2 of the Credit Agreements;


                                      B-1
<PAGE>

     (i) Zoning restrictions, easements, rights of way, title irregularities and
other similar  encumbrances  which alone or in the  aggregate do not  materially
detract from the value of the property subject thereto;

     (j) Liens on the  property or assets of any  Subsidiary  of the Borrower in
favor of the Borrower;

     (k) Banker's Liens and similar Liens (including  set-off rights) in respect
of bank deposits;

     (l) Landlord's Liens and similar Liens in respect of leased property;

     (m) Liens securing  Attributable  Debt with respect to  outstanding  leases
entered into pursuant to Sale/Leaseback Transactions so long as, with respect to
Sale/Leaseback  Transactions  closing after January 1, 2002,  the amount thereof
does not exceed 10% of the consolidated  tangible assets of the Borrower and its
Subsidiaries; and

     (n) Liens incurred in connection with the extension, renewal or refinancing
of Indebtedness secured by Liens permitted and described in clauses (b), (c) and
(h) of Section 8.2.3 of the Credit Agreements;  provided, however, that (x) such
new Lien shall be limited to all or part of the same  property  that secured the
original Lien and (y) the Indebtedness  secured by such Lien at such time is not
increased (other than by an amount necessary to pay fees and expenses, including
premiums,  related  to  the  refinancing,   refunding,   extension,  renewal  or
replacement of such Indebtedness);  provided,  further, that the limitations set
forth in this clause (n) shall not apply to Liens which are otherwise  permitted
under  Section  8.2.3  of the  Credit  Agreements,  even  if such  Liens  secure
Indebtedness  issued to repay or refinance existing  Indebtedness  permitted and
described in clauses (b), (c) and (h) of Section 8.2.3 of the Credit Agreements.


                                      B-2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>11
<FILENAME>ex99-1.txt
<TEXT>
                                                                    EXHIBIT 99.1


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly  Report of Calpine  Corporation (the "Company")
on Form 10-Q for the period ending June 30, 2002,  as filed with the  Securities
and Exchange Commission on the date hereof (the "Report"),  I, Peter Cartwright,
Chairman,  President  and Chief  Executive  Officer  of the  Company,  do hereby
certify,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon
a review of the Report:

     (1) The Report fully  complies  with the  requirements  of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of  operation of the
Company.



/s/  PETER CARTWRIGHT

Peter Cartwright
Chairman, President and Chief
Executive Officer
Calpine Corporation
August 9, 2002

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>12
<FILENAME>ex99-2.txt
<TEXT>
                                                                    EXHIBIT 99.2


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly  Report of Calpine  Corporation (the "Company")
on Form 10-Q for the period ending June 30, 2002,  as filed with the  Securities
and Exchange  Commission on the date hereof (the "Report"),  I, Robert D. Kelly,
Executive Vice President and Chief Financial  Officer of the Company,  do hereby
certify,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon
a review of the Report:

     (1) The Report fully  complies  with the  requirements  of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of  operation of the
Company.



/s/  ROBERT D. KELLY

Robert D. Kelly
Executive Vice President and
Chief Financial Officer
Calpine Corporation
August 9, 2002

</TEXT>
</DOCUMENT>
</SUBMISSION>
